<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Internet America, Inc.
-----------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
-----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ X ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction
applies: Common Stock
2) Aggregate number of securities to which transaction applies:
2,425,000
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing is calculated and state how it was
determined): $11.78 (this price is the average of the high and
low prices per share reported on the Nasdaq National Market as
of October 5, 1999).
4) Proposed maximum aggregate value of transaction:
$28,566,500.00
5) Total Fee Paid: $5,713.30
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 2
INTERNET AMERICA, INC.
350 NORTH ST. PAUL, SUITE 3000
DALLAS, TEXAS 75201
(214) 861-2500
_____________________, 1999
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
of Internet America, Inc., a Texas corporation, to be held at _______ a.m.,
local time, on _________________, 1999, at ________________________. All
shareholders of record as of October 5, 1999, are entitled to vote at the
Special Meeting. I urge you to be present in person or represented by proxy at
the Special Meeting.
The attached Notice of Special Meeting and Proxy Statement fully
describe the formal business to be transacted at the Special Meeting, which
includes the approval of the Agreement and Plan of Merger between Internet
America and PDQ.Net, Incorporated and the transactions contemplated therein and
approval of the Internet America, Inc. Employee and Consultant Stock Option
Plan.
Internet America's Board of Directors believes that a favorable vote on
each of the matters to be considered at the Special Meeting is in the best
interest of Internet America and its shareholders and unanimously recommends a
vote "FOR" each such matter. Accordingly, we urge you to review the attached
material carefully and to return the enclosed proxy promptly.
Directors and officers of Internet America will be present to help host
the Special Meeting and to respond to any questions that our shareholders may
have. I hope that you will be able to attend. Even if you expect to attend the
Special Meeting, please complete, sign, date and return your proxy in the
enclosed envelope without delay. If you attend the Special Meeting, you may vote
in person even if you have previously mailed your proxy.
On behalf of your Board of Directors, thank you for your support.
Sincerely,
MICHAEL T. MAPLES
President, Chief Executive Officer
and Director
<PAGE> 3
INTERNET AMERICA, INC.
350 NORTH ST. PAUL, SUITE 3000
DALLAS, TEXAS 75201
(214) 861-2500
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ____________, 1999
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of
Internet America, Inc. will be held at _____ a.m., local time, on _____________,
1999, at ____________________________________, for the purpose of considering
and acting upon:
o A proposal to approve the Agreement and Plan of Merger between
Internet America and PDQ.Net, Incorporated and the
transactions contemplated therein. If the merger is approved
and completed, PDQ will become a wholly owned subsidiary of
Internet America; Internet America will issue 2,425,000 shares
of its Common Stock to the former shareholders of PDQ, who
will then own approximately 26% of the outstanding Common
Stock of Internet America;
o A proposal to approve the Internet America, Inc. Employee and
Consultant Stock Option Plan; and
o Such other matters as may properly come before the Special
Meeting or any adjournments thereof.
The close of business on October 5, 1999, has been fixed as the record
date for determining shareholders entitled to notice of and to vote at the
Special Meeting or any adjournments thereof. For a period of at least 10 days
prior to the Special Meeting, a complete list of shareholders entitled to vote
at the Special Meeting will be open for examination by any shareholder during
ordinary business hours at the offices of Internet America at One Dallas Centre,
350 North St. Paul, Suite 3000, Dallas, Texas 75201. Information concerning the
matters to be acted upon at the Special Meeting is set forth in the accompanying
Proxy Statement.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE
(WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES). EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE SPECIAL
MEETING. HOWEVER, IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE SPECIAL MEETING, YOU MUST OBTAIN FROM THE
RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
By Order Of The Board Of Directors
ELIZABETH PALMER DAANE
Secretary
Dallas, Texas
____________________, 1999
<PAGE> 4
INTERNET AMERICA, INC.
350 NORTH ST. PAUL, SUITE 3000
DALLAS, TEXAS 75201
(214) 861-2500
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _____________, 1999
This Proxy Statement is being first mailed on or about
__________________, 1999, to shareholders of Internet America, Inc., a Texas
corporation, by the Board of Directors to solicit proxies for use at the Special
Meeting of Shareholders to be held at _______ a.m., local time, on
_______________, 1999, at ________________________________, or at such other
time and place to which the Special Meeting may be adjourned.
The purpose of the Special Meeting is to consider and act upon: (1) the
approval of the Agreement and Plan of Merger (the "Merger Agreement") between
Internet America and PDQ.Net, Incorporated ("PDQ") and the transactions
contemplated therein; (2) the approval of the Internet America, Inc. Employee
and Consultant Stock Option Plan (the "Option Plan"); and (3) such other matters
as may properly come before the Special Meeting or any adjournments thereof.
All shares represented by valid proxies, unless the shareholder
otherwise specifies, will be voted: (1) FOR the approval of the Merger Agreement
and the transactions contemplated therein; (2) FOR the Option Plan; and (3) at
the discretion of the proxy holders with regard to any other matter that may
properly come before the Special Meeting or any adjournments thereof.
Where a shareholder has appropriately specified how a proxy is to be
voted, it will be voted accordingly. A proxy may be revoked by providing written
notice of such revocation to our stock transfer agent, ChaseMellon Shareholder
Services, L.L.C., 2323 Bryan Street, Suite 2300, Dallas, Texas 75201, Attention:
Tim Oliver, which notice must be received prior to the Special Meeting. If
notice of revocation is not received before the Special Meeting, a shareholder
may nevertheless revoke a proxy by attending the Special Meeting and voting in
person; however, if your shares are held of record by a broker, bank or other
nominee and you wish to vote at the Special Meeting, you must obtain from the
record holder a proxy issued in your name.
1
<PAGE> 5
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
RECORD DATE AND VOTING SECURITIES.................................................................................4
QUORUM AND VOTING.................................................................................................4
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS.........................................................4
PROPOSAL NO. 1 - APPROVAL OF THE MERGER...........................................................................5
THE MERGER...................................................................................................6
History of the Merger ..................................................................................6
Reasons for the Merger .................................................................................7
Interest of Certain Persons in the Merger Agreement.....................................................8
Accounting Treatment of the Merger......................................................................8
Regulatory Approvals ...................................................................................8
Certain Federal Income Tax Consequences.................................................................9
SUMMARY OF THE MERGER AGREEMENT..............................................................................9
The Merger ............................................................................................10
Effective Time of the Merger...........................................................................10
Conversion of Shares - Exchange Ratio..................................................................10
Creation of Escrow ....................................................................................10
Treatment of PDQ Stock Options.........................................................................10
Representations and Warranties.........................................................................11
Covenants .............................................................................................12
Conditions Precedent ..................................................................................13
Registration Rights ...................................................................................13
Appointment of Directors ..............................................................................14
Indemnification .......................................................................................15
Termination ...........................................................................................15
Voting Agreement ......................................................................................15
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION.........................................................17
Pro Forma Condensed Balance Sheet......................................................................17
Pro Forma Condensed Statements of Operations...........................................................18
Notes to Pro Forma Condensed Financial Statements......................................................18
DESCRIPTION OF INTERNET AMERICA..................................................................................19
BUSINESS ...................................................................................................19
General ...............................................................................................19
Recent Acquisitions ...................................................................................20
Services ..............................................................................................20
Customer Care .........................................................................................21
Marketing .............................................................................................22
Infrastructure ........................................................................................22
Technology and Development ............................................................................23
Proprietary Rights ....................................................................................24
Competition ...........................................................................................24
Government Regulation .................................................................................25
Employees .............................................................................................26
Properties ............................................................................................27
Legal Proceedings .....................................................................................27
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS.....................................................27
</TABLE>
2
<PAGE> 6
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................28
Overview ...............................................................................................28
Recent Acquisitions ....................................................................................29
Statement of Operations ................................................................................29
Results of Operations ..................................................................................30
Year Ended June 30, 1999 Compared to June 30, 1998......................................................31
Liquidity and Capital Resources.........................................................................32
Year 2000 ..............................................................................................33
DIRECTOR AND EXECUTIVE COMPENSATION .........................................................................35
Summary Compensation Table .............................................................................36
Option Exercises in Fiscal 1999 and Fiscal Year-End Option Values.......................................37
DESCRIPTION OF PDQ................................................................................................37
BUSINESS ....................................................................................................37
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS......................................................37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................38
Overview ...............................................................................................38
Recent Acquisitions ....................................................................................38
Statement of Operations ................................................................................38
Results of Operations ..................................................................................39
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998...............................41
Liquidity and Capital Resources.........................................................................42
Year 2000 ..............................................................................................43
PROPOSAL NO. 2 - APPROVAL OF THE INTERNET AMERICA, INC.
EMPLOYEE AND CONSULTANT STOCK OPTION PLAN....................................................................45
Introduction............................................................................................45
Summary of Terms and Provisions of the Option Plan......................................................45
Grants Under the Option Plan............................................................................46
Certain U.S. Federal Income Tax Consequences of the Option Plan.........................................46
INDEPENDENT AUDITORS..............................................................................................47
SHAREHOLDER PROPOSALS.............................................................................................47
OTHER MATTERS.....................................................................................................47
MISCELLANEOUS.....................................................................................................48
FINANCIAL STATEMENTS OF INTERNET AMERICA, INC....................................................................F-1
FINANCIAL STATEMENTS OF PDQ.NET, INCORPORATED...................................................................F-16
APPENDIX A - AGREEMENT AND PLAN OF MERGER........................................................................A-1
APPENDIX B - VOTING AGREEMENT....................................................................................B-1
APPENDIX C - INTERNET AMERICA, INC.
EMPLOYEE AND CONSULTANT STOCK OPTION PLAN........................................................................C-1
</TABLE>
3
<PAGE> 7
RECORD DATE AND VOTING SECURITIES
The record date for determining the shareholders entitled to vote at
the Special Meeting is the close of business on October 5, 1999 (the "Record
Date"), at which time we had issued and outstanding 7,062,439 shares of Common
Stock, par value $.01 per share (the "Common Stock"). Common Stock is our only
class of outstanding voting securities.
QUORUM AND VOTING
The presence at the Special Meeting, in person or by proxy, of the
holders of a majority of the issued and outstanding shares of Common Stock is
necessary to constitute a quorum to transact business. Each share represented at
the Special Meeting in person or by proxy will be counted toward a quorum. In
deciding all questions and other matters, a holder of Common Stock on the Record
Date shall be entitled to cast one vote for each share of Common Stock
registered in such holder's name.
The approval of the Merger Agreement requires the affirmative vote of
two-thirds of the shares of Common Stock present or represented at the Special
Meeting and entitled to vote thereon. In order to comply with certain rules of
the Nasdaq National Market, approval of the Option Plan requires the affirmative
vote of a majority of the shares of Common Stock present or represented at the
Special Meeting and entitled to vote thereon, provided a quorum is present. The
election inspectors will treat shares referred to as "broker non-votes" (i.e.,
shares held by brokers or nominees as to which they have no discretionary power
to vote on a particular matter and have received no instructions from the
beneficial owners or persons entitled to vote thereon), if any, as shares that
are present and entitled to vote for purposes of determining the presence of a
quorum. However, for purposes of determining the outcome of any matter requiring
discretionary voting, broker non-votes will be treated as not present and not
entitled to vote with respect to that matter (even though those shares are
considered entitled to vote for quorum purposes and may be entitled to vote on
other matters). Brokers or nominees do not have discretionary power to vote with
respect to either proposal. Accordingly, abstentions and broker non-votes on
these proposals will have the same effect as a vote against them. Therefore,
your failure to submit a proxy or a vote at the Special Meeting will have the
same effect as a vote against approval of the Merger Agreement and the Option
Plan.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS
The following table sets forth information as of September 15, 1999,
regarding the beneficial ownership of Common Stock of (1) each person or group
known by us to beneficially own 5% or more of the outstanding shares of Common
Stock, (2) each director, our Chief Executive Officer and other most highly
4
<PAGE> 8
compensated executive officer (the "Named Executive Officers") and (3) all
executive officers and directors as a group. 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>
NAME AND ADDRESS OF AMOUNT AND NATURE
BENEFICIAL OWNER OR GROUP(1) OF BENEFICIAL OWNERSHIP PERCENT OF CLASS
---------------------------- ----------------------- ----------------
<S> <C> <C>
Michael T. Maples 190,563(2) 2.7%
Douglas L. Davis 151,690 2.1%
William O. Hunt 973,063(2)(3) 13.7%
Jack T. Smith 467,811(2) 6.6%
Gary L. Corona 66,999(2) *
All directors and executive
officers as a group (nine
persons) 1,880,856 25.7%
</TABLE>
- ----------
* Less than one percent.
(1) The address of each officer and director is in care of Internet America
at One Dallas Centre, 350 North St. Paul, Suite 3000, Dallas, Texas
75201.
(2) Includes options to purchase 106,875, 45,000, 45,000 and 45,000 shares
of Common Stock granted to Messrs. Maples, Hunt, Smith and Corona,
respectively, that are exercisable within 60 days of September 15,
1999.
(3) Includes 464,678 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 463,385 shares of Common Stock owned by the William O.
Hunt Rollover IRA, of which Mr. Hunt is the beneficiary.
PROPOSAL NO. 1
APPROVAL OF THE MERGER
On September 12, 1999, Internet America, a wholly-owned subsidiary of
Internet America, PDQ and certain shareholders of PDQ entered into the Merger
Agreement, whereby Internet America's wholly-owned subsidiary will merge with
and into PDQ. PDQ will survive the merger and will be a wholly-owned subsidiary
of Internet America. Holders of PDQ capital stock who do not exercise
dissenters' rights will be entitled to receive shares of Internet America Common
Stock in the merger. We will issue up to an aggregate of 2,425,000 shares of
Common Stock to such holders, who will then own collectively approximately 26%
of the issued and outstanding shares of Common Stock. In addition, we will
assume all outstanding options to purchase shares of PDQ capital stock. On
September 10, 1999, the last trading day before the Merger Agreement was signed,
the closing price per share of Common Stock was $13.25. Based on that price per
share, the value of the transaction is approximately $32 million.
The merger is subject to the approval of the shareholders of both
Internet America and PDQ. Shareholders of Internet America holding approximately
23% of Internet America's outstanding voting stock and shareholders of PDQ
holding approximately 68% of PDQ's outstanding voting stock have entered into
5
<PAGE> 9
a Voting Agreement under which they agreed to vote their respective shares of
voting stock in favor of the merger. The Voting Agreement is described more
fully below under "Summary of the Merger Agreement - Voting Agreement."
This section of the Proxy Statement describes aspects of the Merger
Agreement and the proposed merger. The discussion of the merger in this document
and the discussion of the principal terms of the Merger Agreement are qualified
in their entirety by the terms of the Merger Agreement, a copy of which is
attached to this Proxy Statement as Appendix A. Capitalized terms used and not
otherwise defined in this portion of this Proxy Statement have the respective
meanings ascribed to such terms in the Merger Agreement. Although the discussion
that follows is materially complete, we encourage you to read the Merger
Agreement and the other appendices to this Proxy Statement in their entirety.
Our Board of Directors unanimously recommends that you vote FOR
approval of the merger.
THE MERGER
HISTORY OF THE MERGER
We are regularly involved in the review of companies which we may
acquire to further our objectives in the Internet service provider ("ISP")
market. During the course of the past two years, Internet America and PDQ made
various informal contacts with each other regarding the possibility of a
combination, but no formal discussions ensued until recently. On May 18, 1999,
Michael T. Maples, our Chief Executive Officer, met with two of our directors,
Jack T. Smith and Gary L. Corona, to discuss our acquisition strategy, including
a potential combination with PDQ, but no offers were immediately pursued. During
June 1999, Mr. Maples had several telephone discussions with PDQ's President,
William E. Ladin, Jr., and PDQ's Chief Financial Officer, Ernest D. Rapp,
regarding a possible combination.
On July 22, 1999, at the quarterly meeting of our Board of Directors,
Mr. Maples updated the Board on the status of discussions with PDQ to enter into
a business combination. Mr. Maples and Mr. Smith noted that the parties were
still discussing the form of a potential transaction, the post-transaction
structure of the combined entity and valuations. The Board discussed the
financial status of PDQ, current valuations in the ISP industry and the possible
use of an investment banker in the transaction. The Board informally directed
management to continue to pursue the transaction.
On July 26 and 27, 1999, Messrs. Smith and Maples traveled to PDQ's
offices in Houston, Texas to further discuss with Messrs. Ladin and Rapp the
form of a potential transaction, post-transaction structure and valuations. On
August 2, 1999, Mr. Ladin met with the Chairman of our Board of Directors,
William O. Hunt, regarding the proposed transaction and the composition of the
Board of Directors of Internet America after the combination. On August 3, 1999,
Messrs. Ladin and Rapp and Marc Ladin, PDQ's marketing director, met with
Messrs. Maples and Smith regarding due diligence issues, PDQ's business and
marketing strategies and post-transaction synergies.
On August 9 and 10, 1999, Messrs. Smith and Maples, along with our
Chief Operating Officer, Douglas L. Davis, traveled to Houston to PDQ's offices
to conduct operational due diligence as well as to have further discussions with
Messrs. Ladin and Rapp regarding the form of the transaction. On August 19,
1999, Messrs. Ladin and Rapp and Howard Loewenberg, PDQ's representative from
Deutsche Banc Alex. Brown, met with Messrs. Maples and Smith in Dallas, Texas to
discuss valuations and the purchase price of the merger. Throughout August 1999,
Internet America and PDQ exchanged due diligence materials for review and
examination.
6
<PAGE> 10
On August 24, 1999, our Board of Directors, along with our Chief
Financial Officer, James T. Chaney, our General Counsel, Elizabeth Palmer Daane,
and our outside counsel, Richard F. Dahlson of Jackson Walker LLP, met
informally to discuss the proposed merger. The Board reviewed with management
information regarding the strategic fit between the two companies, due diligence
assessments and remaining issues to be negotiated or addressed prior to
execution of the definitive merger agreement. Counsel advised the Board with
respect to the structure and material terms of the proposed merger, as well as
legal requirements. The Board informally endorsed continuing with the
negotiations.
On September 1 through 3, 1999, the parties met in Houston at PDQ's
offices to continue due diligence reviews and to further discuss the terms of
the merger and the Merger Agreement. On September 8 and 9, 1999, Messrs. Ladin
and Rapp came to our Dallas offices to conduct further due diligence reviews and
discussions regarding the post-transaction synergies and operations of the
combined companies.
The parties continued to discuss and negotiate the terms of the merger,
Merger Agreement and Voting Agreement via telephone during the week of September
6, 1999. By written consent dated September 10, 1999, the Board approved the
Merger Agreement and recommended that it be submitted to the vote of the
shareholders. The Merger Agreement and Voting Agreement were finalized and
signed on September 12, 1999, and the parties publicly announced the merger on
September 13, 1999.
REASONS FOR THE MERGER
Internet America's business plan is to rapidly build market share in
specific regions to create a user-dense customer base and realize economies of
scale. A primary element of our growth strategy is acquisitions. We began
negotiations on the merger as part of implementing our plan to increase our
market share. Our Board of Directors has determined that the terms of the Merger
Agreement and the merger are fair to and in the best interests of Internet
America and our shareholders. In reaching this decision, our Board of Directors
identified several potential benefits of the merger, including:
o the combined company will have an increased market presence
and should be able to achieve greater operating efficiencies,
marketing efficiencies and economies of scale;
o the combined experience, financial resources and breadth of
service of the combined company may allow it to respond more
quickly and effectively to technological change and
competitive pressures; and
o the size of the combined company may allow it to compete more
effectively in a rapidly consolidating market.
The Board also recognized that the potential benefits of the merger may not be
realized and that there are a number of risks and uncertainties related to any
acquisition, including the merger. Some of those risks are:
o the difficulty of assimilating acquired operations and
personnel of PDQ;
o the potential disruption of our business that might result
from employee and customer uncertainty as a result of the
merger and during the combination of operations of the two
companies;
o dilution caused by the issuance of Common Stock and the
potential negative effect on our operating results due to the
incurrence of additional debt and the amortization of expenses
related to goodwill and other intangible assets; and
o the possibility that the merger might not be completed and the
public's potentially negative response to such situation.
7
<PAGE> 11
After considering the foregoing factors, our Board of Directors
unanimously approved the Merger Agreement and the merger, and recommended that
our shareholders vote "FOR" the approval and adoption of the Merger Agreement
and the merger.
INTEREST OF CERTAIN PERSONS IN THE MERGER AGREEMENT
We entered into a letter agreement with Carl Westcott LLC under which
we pay a fee to Carl Westcott LLC to act as our financial advisor in connection
with certain acquisitions. Messrs. Smith and Corona , two of our directors, are
employed by Carl Westcott LLC. Carl Westcott LLC acted as a financial advisor to
us in connection with the merger. In accordance with the letter agreement, after
the merger, we will pay a fee to Carl Westcott LLC of up to $75,000. The letter
agreement is more fully described in the following paragraph.
On April 20, 1999, we entered into the letter agreement with Carl
Westcott LLC by which we retained Carl Westcott LLC as our non-exclusive
financial advisor. Under the letter agreement, Carl Westcott LLC assists us in
identifying and contacting potential acquisition or business combination
candidates, evaluates and values such candidate businesses, assists in
structuring transaction proposals, develops strategies for successful
consummation of transactions, analyzes the economic effects to us of a
transaction, assists in the negotiation of transaction proposals and preparation
of documents, assists in the due diligence process and completes other matters
related to closing such transactions. As compensation for rendering such
services, we pay Carl Westcott LLC a fee equal to two percent of the estimated
annual revenue, for the twelve months after a closing, of a company acquired by
us due to Carl Westcott LLC's performance of services under the letter
agreement; provided, however, that in no event is such fee for any acquisition
less than $25,000 nor more than $75,000. We also agreed to reimburse Carl
Westcott LLC for all reasonable expenses, and agreed to indemnify Carl Westcott
LLC for damages relating to any transaction contemplated by the engagement of
Carl Westcott LLC under the letter agreement. The letter agreement is effective
until terminated by either party upon thirty days written notice.
ACCOUNTING TREATMENT OF THE MERGER
The parties intend that the merger will be accounted for using the
purchase method of accounting for business combinations. Under the purchase
accounting method, the merger will be treated as an acquisition of PDQ by us and
we will allocate the total acquisition cost among the acquired assets and
liabilities based on their fair values as of the date the merger is completed.
Our reported income will include the operations of PDQ after the merger and the
effect of amortization of intangible assets arising from the acquisition.
REGULATORY APPROVALS
At any time before or after the completion of the merger, the Antitrust
Division of the Justice Department, the Federal Trade Commission or another
third party could seek to enjoin or rescind the merger on antitrust grounds. In
addition, at any time before or after the completion of the merger, any state
could take action under state antitrust laws that it deems necessary or
desirable in the public interest. We believe that the merger will not violate
any antitrust laws, that no federal or state regulatory requirements must be
complied with and that no federal or state regulatory approval must be obtained
in connection with the merger. However, we cannot assure you that there will be
no challenge to the merger on antitrust grounds, or if such a challenge is made,
what the result will be.
8
<PAGE> 12
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences
of the merger, based on the Internal Revenue Code of 1986, as amended (the
"Code"), the corresponding Treasury Regulations, administrative rulings and
court decisions, all as in effect as of the date of this Proxy Statement and all
of which are subject to change at any time, possibly with retroactive effect.
This summary does not address any applicable foreign, state or local laws. In
addition, this summary does not address tax considerations that may be relevant
to shareholders subject to special treatment under federal income tax law, such
as non-United States citizens, financial institutions, dealers in securities,
insurance companies, tax exempt entities and shareholders subject to the
alternative minimum tax provisions of the Code. Shareholders should consult
their own tax advisors regarding the specific tax consequences of the merger to
him or her, including the effect of foreign, state and local law.
The merger is intended to qualify as a tax-free reorganization under
Section 368 of the Code, with the following consequences:
o neither Internet America nor our shareholders will recognize
gain or loss for federal income tax purposes solely as a
result of the merger;
o PDQ will not recognize gain or loss solely as a result of the
merger;
o no gain or loss will be recognized by holders of PDQ capital
stock solely upon their receipt of Internet America Common
Stock in the merger, except to the extent of cash received
instead of a fractional share of Internet America Common
Stock; and
o the aggregate tax basis of the Internet America Common Stock
received in the merger by a PDQ shareholder will be the same
as the aggregate tax basis of PDQ capital stock surrendered in
exchange for the Internet America Common Stock.
The parties are not requesting a ruling from the Internal Revenue
Service in connection with the merger. It is a condition to PDQ's obligations
under the Merger Agreement that PDQ receive a legal opinion from its counsel,
Andrews & Kurth L.L.P., confirming that, based on certain assumptions and
subject to certain qualifications, the merger will constitute a reorganization
within the meaning of Section 368 of the Code. However, nothing binds the IRS to
this position or prevents the IRS from adopting a contrary position. A
successful IRS challenge to the reorganization status of the merger would result
in a PDQ shareholder recognizing gain or loss with respect to each surrendered
share equal to the difference between the shareholder's basis in such share and
the fair market value, as of the effective time of the merger, of the Internet
America Common Stock received in exchange. If there were a successful IRS
challenge, a PDQ shareholder's aggregate basis in the Internet America Common
Stock so received would equal its fair market value and the holding period for
such stock would begin the day after the merger.
SUMMARY OF THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy Statement.
The summary is qualified in its entirety by the terms of the Merger Agreement.
Capitalized terms used and not otherwise defined in this portion of this Proxy
Statement have the respective meanings ascribed to such terms in the Merger
Agreement.
9
<PAGE> 13
THE MERGER
According to the terms of the Merger Agreement, at the effective time
of the merger, a wholly owned subsidiary of Internet America will be merged with
PDQ. PDQ will be the surviving corporation and become a wholly owned subsidiary
of Internet America.
EFFECTIVE TIME OF THE MERGER
The closing of the transactions contemplated by the Merger Agreement
will take place as soon as practicable after the date of the Merger Agreement,
but no later than December 15, 1999. The closing cannot take place until after
shareholders of Internet America and PDQ approve the merger. See "The Merger
Agreement - Conditions to the Merger" for a description of the conditions that
Internet America and PDQ must satisfy prior to completion of the merger.
As soon as practicable after the closing, a plan of merger will be
filed with the Secretary of State of the State of Texas as provided in the Texas
Business Corporation Act. The time at which the plan of merger is filed in Texas
is referred to as the "effective time" of the merger.
CONVERSION OF SHARES - EXCHANGE RATIO
We will issue a total of 2,425,000 shares of Common Stock in the
merger. As a result of the merger, each share of PDQ common stock will be
automatically converted into 0.37205 shares of Common Stock (the "Exchange
Ratio"). The Exchange Ratio is based on 6,517,923 shares of PDQ capital stock
outstanding at the time of the merger. After the merger is completed, former
holders of PDQ capital stock will own approximately 26% of our issued and
outstanding Common Stock. The Common Stock is not entitled to preemptive rights.
CREATION OF ESCROW
By approving the merger, the PDQ shareholders will authorize the
creation of an escrow, and the appointment of William E. Ladin, Jr. as their
representative, with respect to indemnification matters. At the closing of the
merger, 240,000 of the 2,425,000 shares of Common Stock to be issued to the PDQ
shareholders will be placed in escrow subject to an Escrow Agreement, the form
of which is attached as an exhibit to the Merger Agreement. The Escrow Agreement
will govern the terms under which shares of Common Stock issued to PDQ
shareholders in the merger may be returned to us in the event of certain
breaches of representations and warranties by PDQ and the PDQ shareholders. For
more information on indemnification, see "The Merger Agreement -
Indemnification," below.
TREATMENT OF PDQ STOCK OPTIONS
As of the effective time of the merger, each outstanding PDQ incentive
stock option will be exchanged for an incentive stock option to purchase the
number of shares of Common Stock equal to the Exchange Ratio multiplied by the
number of shares underlying the PDQ incentive stock option. The exercise price
of the substituted options to purchase Common Stock will be equal to the
exercise price of the options to purchase PDQ common stock divided by the
Exchange Ratio. These stock options will be issued under the Internet America,
Inc. Employee and Consultant Stock Option Plan, approval of which is sought by
Proposal 2 of this Proxy Statement. See "Proposal No. 2 - Approval of the
Internet America, Inc. Employee and Consultant Stock Option Plan," below, for a
description of the plan. As soon as practicable after the closing of the Merger
10
<PAGE> 14
Agreement, but no later than fifteen days after the closing, we will register
all of the shares of Common Stock underlying the above referenced stock options.
As of the effective time of the merger, each outstanding PDQ
nonqualified stock option will be exchanged for a nonqualified stock option to
purchase the number of shares of Internet America Common Stock equal to the
Exchange Ratio multiplied by the number of shares underlying the PDQ
nonqualified stock option. The exercise price of the substituted options to
purchase Internet America Common Stock will be equal to the exercise price of
the options to purchase PDQ common stock divided by the Exchange Ratio. These
stock options will be issued under the Internet America, Inc. 1998 Nonqualified
Stock Option Plan. The shares of Common Stock subject to this plan have been
registered under the Exchange Act of 1933, as amended.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations and warranties by
certain shareholders of PDQ (the "Principal Shareholders") relating to, among
other things:
o the ownership of their PDQ capital stock;
o no commitments to sell or otherwise transfer their PDQ capital
stock;
o the authorization, execution, delivery and enforceability of
the Merger Agreement;
o required consents and approvals and the absence of violations
of any organizational document of a Principal Shareholder or
applicable law;
o the absence of material investments in competitors of Internet
America by a Principal Shareholder; and
o the status of the Principal Shareholders as accredited
investors.
The Merger Agreement contains certain representations and warranties by
PDQ relating to, among other things:
o the ownership of the PDQ capital stock;
o PDQ's organization, good standing and qualification;
o PDQ's capital structure and corporate records;
o the authorization, execution, delivery and enforceability of
the Merger Agreement;
o PDQ's subsidiaries;
o required consents and approvals and the absence of violations
of PDQ's articles of incorporation, bylaws, agreements and
applicable law;
o financial statements, assets, liabilities and obligations;
o employment matters and employee benefit plans;
o the absence of certain changes or events;
o material contracts and agreements;
o insurance;
o intellectual property and proprietary rights;
o taxes;
o compliance with laws, including environmental laws;
o finders' fees;
o litigation;
o subscribers;
o interested party transactions;
o accounts receivable; and
11
<PAGE> 15
o the accuracy of the PDQ disclosures.
The Merger Agreement contains certain representations and warranties by
Internet America relating to, among other things:
o Internet America's organization and good standing;
o the authorization, execution, delivery and enforceability of
the Merger Agreement;
o required consents and approvals;
o the absence of violations of Internet America's articles of
incorporation, bylaws, agreements and applicable law;
o the authorization of issuance of the Common Stock in the
merger;
o Internet America's SEC reports and Nasdaq listing; and
o the accuracy of the Internet America disclosures.
COVENANTS
Internet America and PDQ have agreed that prior to the closing of the
merger they will, among other things:
o use their best efforts to cause the consummation of the
merger;
o use their best efforts to secure all necessary approvals and
consents of third parties to the merger agreement;
o not take any action that would cause the merger to fail to
qualify as a tax free reorganization under the Code; and
o not agree or commit to take any action prohibited by the
Merger Agreement.
Internet America agreed that prior to the closing of the merger it will
use its best efforts to obtain approval of Nasdaq for the listing of the Common
Stock to be issued in connection with the merger.
PDQ agreed that prior to the closing of the merger it will, among other
things:
o conduct its business only in the ordinary course consistent
with past practice;
o use its reasonable best efforts to preserve its business and
retain its customers, suppliers, creditors, officers and
employees;
o permit Internet America to have full access to the business
and assets of PDQ; and
o notify Internet America of any material change in its
condition, operations, assets, liabilities, business or
prospects.
PDQ agreed that prior to the closing of the merger it will not, among
other things:
o make certain changes in employee compensation, policies and
benefit plans;
o cancel or modify any contract without Internet America's
consent except in the ordinary course of business;
o incur indebtedness other than in the ordinary course of
business, acquire or dispose of certain assets, prepay or
discharge indebtedness, discharge or satisfy certain liens or
pay or perform certain liabilities;
o enter into any mortgages or permit any liens except in the
ordinary course of business;
o participate in negotiations with any third party regarding the
sale of PDQ's business;
o declare or pay any dividends;
12
<PAGE> 16
o make any offerings, grants or issuances of its capital stock
or other securities;
o amend its articles of incorporation or bylaws;
o adopt a plan or agreement of liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other
reorganization;
o split, combine, reclassify or take similar action with respect
to its capital stock; and
o change any tax election or take action that would increase its
tax liability or reduce its tax assets.
CONDITIONS PRECEDENT
Internet America's and PDQ's obligations under the Merger Agreement are
subject, among other things, to the following:
o obtaining approval of the shareholders of Internet America and
PDQ;
o the absence of any injunction (or threat of an injunction)
prohibiting consummation of the merger;
o no material adverse change in the condition, operations,
assets, liabilities, business or prospects of the other party
shall have occurred;
o all applicable waiting periods under the Hart-Scott-Rodino
Act, if applicable, shall have expired or been terminated;
o each of the parties shall have performed its obligations under
the Merger Agreement prior to closing;
o the representations and warranties of the other party shall be
true and correct in all material respects as of the date of
closing; and
o each party shall have received the closing deliveries of the
other party.
In addition to the mutual conditions described above, Internet
America's obligations under the Merger Agreement are subject to the following:
o each of PDQ's officers and directors shall have resigned;
o each of PDQ's shareholders shall have delivered to Internet
America a tax affidavit to the effect that such shareholder is
not a foreign person and providing tax identification numbers;
o none of PDQ's shareholders shall have demanded dissenters'
rights under the TBCA; and
o the merger shall have become effective under the TBCA.
In addition to the mutual conditions described above, PDQ's obligations
under the Merger Agreement are subject to the following:
o the shares of Common Stock to be issued under the Merger
Agreement shall have been approved for listing on the Nasdaq
National Market System; and
o PDQ shall have received a legal opinion from its tax counsel
to the effect that the merger will constitute a tax free
reorganization under Section 368(a) of the Code.
REGISTRATION RIGHTS
We have agreed to grant certain registration rights to the shareholders
of PDQ receiving Common Stock in the merger.
Shelf Registration. Within 60 days after the closing of the Merger
Agreement, we will file a shelf registration statement to register the resale of
350,000 shares of the Common Stock issued in the merger.
13
<PAGE> 17
Demand Registration. After six months following the closing of the
Merger Agreement, the holders of at least 55% of the Common Stock issued in the
merger (and not already registered pursuant to the shelf registration) may cause
us to register all of such holders' shares of Common Stock. We are not obligated
to effect such registration for a period of 180 days after such demand if it
would materially adversely affect (a) a pending or proposed public offering of
the Common Stock or business combination or (b) our business or prospects in
view of the disclosures that may be required thereby of information about our
business, assets, liabilities or operations. We are not obligated to effect such
registration more than one time or if less than $1 million of securities are to
be sold in such registration.
Piggyback Registration. If we propose to file a registration statement
for any of our Common Stock (except in connection with employee benefit plans or
a Rule 145 transaction), then the holders of the Common Stock issued in the
merger may request us to register their shares on the same registration
statement. In that event, we must use all reasonable efforts to do so, subject
to certain limitations.
All expenses incurred in connection with the above registration
statements must be borne by us. We must keep the shelf registration statement
effective until the shares registered are sold or until six months after the
anniversary of the closing of the Merger Agreement, whichever is earlier. We
must keep other registration statements effective for a period of twelve months.
In connection with any underwritten offering, we are not obligated to include
shares of Common Stock issued in the merger unless the holders accept the terms
of the underwriting between Internet America and the underwriters, and then only
to the extent the underwriters determine will not materially jeopardize or
reduce the success of the offering by Internet America.
We have agreed to indemnify certain parties, including the holders of
stock registered under the registration rights granted in the Merger Agreement,
for losses arising out of untrue statements of material facts contained in the
applicable registration statement, omission of material facts in such
registration statement and violations of securities laws by us; provided,
however, that this indemnity shall not apply to losses arising out of written
information supplied by the indemnified party to us for use in the registration
statement. The holders of stock to be registered under the registration rights
granted in the Merger Agreement must indemnify us for losses arising out of
untrue statements of material facts contained in the applicable registration
statement, omission of material facts in such registration statement and
violations of securities laws by us, if the foregoing arise out of written
information supplied by the holder to us for use in the registration statement.
We agreed to keep public information available, as defined in Rule 144,
at all times after the closing of the Merger Agreement, to timely file all
required SEC reports and to furnish certain information to holders in connection
with sales of Common Stock under Rule 144. A holder's registration rights
granted under the Merger Agreement terminate upon the earlier of two years after
the closing of the Merger Agreement and such time as the holder is able to sell
all of such holder's securities in a single three-month period under Rule 144.
Until the registration rights granted in the Merger Agreement
terminate, we may not grant superior registration rights to any other person or
entity.
APPOINTMENT OF DIRECTORS
As part of the merger, we agreed to cause William E. Ladin, Jr., an
officer, director and major shareholder of PDQ, to be appointed to the Board of
Directors and to be elected as Vice Chairman of the Board after the closing of
the Merger Agreement. We agreed to use our reasonable best efforts to elect Mr.
Ladin to the Board for so long as he and John N. Palmer, a director and major
shareholder of PDQ, collectively own 5% or more of our outstanding voting stock.
In addition, after the closing, we will use
14
<PAGE> 18
reasonable efforts to cause Mr. Palmer to become a director of Internet America.
Should Mr. Palmer decline to become a director of Internet America, then Mr.
Ladin may nominate another person to the Board, whose election will be subject
to the approval of the Board. As part of the merger, the parties have agreed to
attempt to identify up to two outside persons to add as members of the Board
after the closing of the Merger Agreement.
INDEMNIFICATION
We agreed to indemnify PDQ and its shareholders for damages arising
from any breach of a representation, warranty or covenant of Internet America,
but only to the extent such damages in the aggregate exceed $100,000. PDQ and
its shareholders have agreed to indemnify us for damages arising from any breach
of a representation, warranty or covenant of PDQ, but only to the extent such
damages in the aggregate exceed $100,000. Notwithstanding the foregoing, (a) the
indemnifying shareholders' liability to us for indemnification shall be limited
to the shares of Common Stock held in escrow under the Escrow Agreement and
shall be payable only by return of such shares, except with respect to breaches
of certain representations regarding the PDQ shareholders' ownership of their
shares of PDQ capital stock and ability to transfer them, (b) damages arising
out of a breach of certain representations regarding the PDQ shareholders'
ownership of their shares of PDQ capital stock and ability to transfer them
shall be the obligation of only the indemnifying shareholder breaching such
representations and (c) the Principal Shareholders' obligations to indemnify us
for breaches of representations and warranties in Article II of the Merger
Agreement shall be the obligation of only the Principal Shareholder breaching
the representation or warranty.
TERMINATION
The Merger Agreement will terminate if the closing has not occurred by
December 15, 1999. Internet America or PDQ may terminate and abandon the Merger
Agreement at any time prior to the closing, whether before or after the approval
of shareholders of Internet America and PDQ:
o by mutual written consent of all parties to the Merger
Agreement;
o by either Internet America or PDQ if there has been a material
breach of a representation, warranty or covenant of the other
party; and
o by either Internet America or PDQ if any of their respective
conditions precedent do not occur.
Additionally, PDQ may terminate the Merger Agreement if (a) the closing
price per share of the Common Stock on the Nasdaq National Market System on the
date preceding closing is less than $9.875 and (b) in comparison with an index
group of six other ISPs, the decrease in the stock price of the Common Stock
from the day before the Merger Agreement to the day before closing is 15% more
than the average decrease in the stock prices of the index group for the same
period.
VOTING AGREEMENT
Internet America, PDQ, officers and directors of Internet America
holding approximately 23% of Internet America's outstanding voting stock and
officers and directors of PDQ holding approximately 68% of PDQ's outstanding
voting stock entered into a Voting Agreement in connection with the Merger
Agreement. In the Voting Agreement, the officers and directors of Internet
America and PDQ agreed to vote their shares of Internet America stock and PDQ
stock, respectively, in favor of the merger and against any action that would
constitute a breach of any representation, warranty, covenant or other
obligation under the Merger Agreement. They also agreed not to transfer or
otherwise dispose of their shares during the term of
15
<PAGE> 19
the Voting Agreement, except that our officers and directors may dispose of up
to 5% of their respective shares. The Voting Agreement terminates upon the
earlier of the termination of the Merger Agreement and the effective time of the
merger.
The above summary of the provisions of the Voting Agreement is
qualified in its entirety by the terms of the Voting Agreement, a copy of which
is attached as Appendix B to this Proxy Statement.
16
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited condensed pro forma balance sheet as of June 30,
1999 and the unaudited condensed pro forma statements of operations for the year
ended June 30, 1999 reflect the proposed acquisition of PDQ by Internet America.
The combination will be accounted for as a purchase under the provisions of
Accounting Principles Board Opinion No. 16, "Business Combinations." The results
of operations for the periods presented include the results of operations of PDQ
assuming the transaction was consummated at the beginning of the earliest period
presented. Also, net assets of PDQ are recorded at their fair value to Internet
America as of June 30, 1999.
The condensed pro forma financial statements are not necessarily indicative
of our results of operations that might have occurred had the acquisition been
completed at the beginning of the periods presented, or indicative of our
consolidated financial position or results of operations for any future date or
period.
These unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and notes thereto of PDQ
included elsewhere in this document and the financial statements of Internet
America as filed previously under Form 10-KSB.
INTERNET AMERICA, INC.
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL
------------------------- PRO FORMA
INTERNET PRO FORMA INTERNET
AMERICA PDQ ADJUSTMENTS AMERICA
----------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 5,845,562 $ 446,487 $ 6,292,049
Trade receivables, net............... 1,122,894 238,656 1,361,550
Prepaid expenses and other current
assets............................ 126,433 -- 126,433
----------- ---------- -----------
Total current assets......... 7,094,889 685,143 7,780,032
PROPERTY AND EQUIPMENT, net............ 2,622,637 702,878 3,325,515
OTHER ASSETS, net...................... 9,195,878 550,302 21,333,333(1) 31,079,513
----------- ---------- -----------
$18,913,404 $1,938,323 $42,185,060
=========== ========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable............... $ 2,131,201 $ 312,551 $ 2,443,752
Accrued liabilities.................. 1,068,774 147,788 1,216,562
Deferred revenue..................... 3,358,347 1,509,603 4,867,950
Current maturities of long-term
debt.............................. 434,934 99,918 534,852
Current maturities of capital lease
obligations....................... 41,195 59,848 101,043
----------- ---------- -----------
Total current liabilities.... 7,034,451 2,129,708 9,164,159
CAPITAL LEASE OBLIGATIONS, net of
current portion...................... 102,246 30,577 132,823
LONG-TERM DEBT, net of current
portion.............................. 151,997 24,438 176,435
----------- ---------- -----------
Total liabilities............ 7,288,694 2,184,723 9,473,417
----------- ---------- -----------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock......................... 69,130 65,180 24,250(2) 158,560
Additional paid-in capital........... 24,231,065 2,292,848 31,975,750(2) 58,499,663
Treasury stock....................... -- --
Accumulated deficit.................. (12,675,485) (2,604,428) (10,666,667)(3) (25,946,580)
----------- ---------- -----------
Total shareholders' equity
(deficit).................. 11,624,710 (246,400) 32,711,643
----------- ---------- -----------
$18,913,404 $1,938,323 $42,185,060
=========== ========== ===========
</TABLE>
17
<PAGE> 21
INTERNET AMERICA, INC.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
--------------------------- ----------- -------------
INTERNET INTERNET
AMERICA PDQ AMERICA
----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Access............................... $15,911,844 $6,001,313 $ 21,913,157
Business services.................... 2,097,774 888,884 2,986,658
Other................................ 109,412 10,498 119,910
----------- ---------- ------------
Total........................ 18,119,030 6,900,695 25,019,725
----------- ---------- ------------
OPERATING COSTS AND EXPENSES:
Connectivity and operations.......... 8,800,924 3,761,451 12,562,375
Sales and marketing.................. 6,044,762 1,675,086 7,719,848
General and administrative........... 4,244,557 1,939,970 6,184,527
Depreciation and amortization........ 1,685,097 274,113 10,666,667(3) 12,625,877
----------- ---------- ------------
Total........................ 20,775,340 7,650,620 39,092,627
----------- ---------- ------------
OPERATING LOSS......................... (2,656,310) (749,925) (14,072,902)
INTEREST (INCOME) EXPENSE, NET......... (185,105) 29,523 (155,582)
----------- ---------- ------------
LOSS BEFORE INCOME TAX................. (2,471,205) (779,448) (13,917,320)
INCOME TAX BENEFIT..................... (7,787) -- (7,787)
----------- ---------- ------------
NET LOSS............................... $(2,463,418) $ (779,448) $(13,909,533)
=========== ========== ============
NET LOSS PER COMMON SHARE:
BASIC................................ $ (0.45) $ (1.75)
=========== ============
DILUTED.............................. $ (0.45) $ (1.75)
=========== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC................................ 5,533,670 2,425,000(2) 7,958,670
DILUTED.............................. 5,533,670 2,425,000(2) 7,958,670
</TABLE>
INTERNET AMERICA, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(1) Represents subscriber acquisition costs and goodwill associated with
the purchase of PDQ.
(2) Represents shares of Common Stock issued to effect the purchase of PDQ.
(3) Represents the amortization of subscriber acquisition costs and
goodwill for the year ended June 30, 1999 based upon an amortization
period of three years.
18
<PAGE> 22
DESCRIPTION OF INTERNET AMERICA
BUSINESS
GENERAL
Internet America is an ISP that provides a wide array of Internet
services tailored to meet the needs of individual and business subscribers. As
of June 30, 1999, we served approximately 100,000 subscribers in the
southwestern United States. Our business model is to create high user density in
each geographic area we serve, which allows us to realize substantial marketing
and operating efficiencies.
Internet America was incorporated in 1994 and has operated as an ISP
since inception. Our subscriber base has grown from 47,900 at June 30, 1997, to
61,600 at June 30, 1998, and to 100,000 at June 30, 1999.
Our highest priority is to rapidly build market share in specific
regions, instead of deploying extensive network infrastructure with a
substantial number of underutilized points of presence ("POPs"). Our growth
strategy focuses on continuing to add customers in existing markets and quickly
building a critical mass of subscribers in new markets.
Elements of our growth strategy include:
o Strategic and Add-On Acquisitions to Rapidly Acquire a
Critical Mass of Subscribers. We pursue strategic acquisitions
to launch our entry into new markets and pursue add-on
acquisitions in our existing markets.
o Aggressive Use of Advertising to Build the Internet America
Brand. We use two of the more effective and efficient
advertising media - television and outdoor billboards - to
acquire subscribers quickly and build brand awareness.
o Cost-Effective Development of Network Infrastructure. We will
continue to deploy network infrastructure in a disciplined
manner to achieve substantial economies of scope and scale.
With our "Virtual POP" architecture, we can provide local
access services without investing in physical infrastructure.
See "Business - Infrastructure," below, for a further
discussion of the Virtual POP architecture.
o Development of Value-Added Revenue Streams. We will continue
to develop value-added revenue streams such as dedicated
broadband connectivity, news access and Web hosting. In
addition, we continue to evaluate and develop
19
<PAGE> 23
other value-added service opportunities such as Internet
telephony. We believe that a user dense, regional customer
base provides an excellent platform for the introduction of
new value-added services, taking advantage of existing brand
awareness and economies of scale.
RECENT ACQUISITIONS
On June 30, 1999, we acquired all the outstanding common stock of
NeoSoft, Inc., an ISP in Houston, Texas, for $8.3 million. Assets of NeoSoft
include approximately 9,500 individual and corporate Internet access accounts,
including customer support and network operations facilities in Houston and New
Orleans.
On July 26, 1999, we acquired the subscribers of King Dinosaur, Inc.
d/b/a KDI Internet Solutions, a Texas corporation ("KDi"), under the terms of an
Asset Purchase Agreement. Under this agreement, we agreed to pay up to $464,800,
half of which was paid at the closing. The remaining payment is contingent upon
the actual number of KDi subscribers that successfully transition to Internet
America's service by November 25, 1999.
On July 28, 1999, we acquired the subscribers of INTX Networking,
L.L.C., a Texas limited liability company ("INTX"), under the terms of an Asset
Purchase Agreement. Under this agreement, we agreed to pay up to $380,600 in
cash, half of which was paid at the closing. The remaining payment is contingent
upon the actual number of INTX subscribers that successfully transition to
Internet America's service by November 27, 1999.
On August 9, 1999, we acquired the Texas dial-up subscribers of Pointe
Communications Corporation, a Nevada corporation ("PointeCom"), under the terms
of an Asset Purchase Agreement. Under this agreement, we agreed to pay up to
$2,000,000 in cash, half of which was paid at the closing. The remaining payment
is contingent upon the actual number of PointeCom subscribers that successfully
transition to Internet America's service by December 8, 1999.
SERVICES
Internet America offers Internet services tailored to meet the needs of
both individual and business subscribers. Our primary service offering is
dial-up and broadband Internet access and related value-added services. For our
business subscribers, we offer dedicated high speed Internet access, Web hosting
and other services. The services we provide are offered in various prices and
packages so that subscribers may customize their subscription.
The majority of our subscribers have month-to-month subscriptions. We
currently offer a 60-day money-back satisfaction guarantee for new subscribers.
Most subscribers are billed through automatic charges to their credit cards or
bank account. We offer discounts ranging from 10% to 20% on most of our services
for subscribers who prepay.
Internet Access. Our primary service is a dial-up Internet access
package, which includes unlimited Internet access and related 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 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.
USENET. Our Airnews.net product provides access to Internet America's
newsgroup services for subscribers of other Internet services and on a wholesale
basis to other businesses or ISPs. There were
20
<PAGE> 24
approximately 4,500 Airnews.net subscribers as of June 30, 1999. The service is
included in our primary dial-up access package, but costs $9.95 per month for
other retail subscribers.
High Speed Connectivity. In addition to offering dial-up and dedicated
analog access, we also offer dedicated ISDN access, DSL (Digital Subscriber
Line) service for consumers and business, as well as full and partial T-1
connectivity, which can service hundreds of users at once. T-1 connections have
a setup fee of $995 and monthly fees ranging from $470 to $1,295, 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. We offer Web hosting through our 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. Web hosting subscribers are responsible for building their own Web
sites and then uploading the pages to an Internet America Web server. This Web
hosting service features state-of-the-art 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. We currently offer price plans for Web hosting subscribers
beginning at $19.95 per month.
DSL Service. Our Expresslane DSL product provides high-speed Internet
access over existing telephone lines and allows subscribers to simultaneously
use a single telephone line for voice service and for access to the Internet. In
addition, the product is an "always on" connection thereby removing wait times
associated with dialing into a network. We offer an array of Expresslane DSL
bandwidth options to consumers at prices ranging from $9.95 per month to $99.95
per month. The Expresslane DSL product offers our subscribers a cost-effective
way of substantially increasing bandwidth in residences and businesses.
CUSTOMER CARE
Our goal of 100% customer satisfaction begins with providing superior
systems and network performance. We focus on scalability, reliability and speed
in the technical design and maintenance of our systems. In addition to the
provision of superior systems and network performance, we emphasize high quality
customer care and technical support. We strive to retain our subscribers by
prompt response to customer problems.
Individuals accessing the Internet have many different hardware
configurations and varying levels of computer sophistication. Consequently, our
customer care department must be able to efficiently and effectively address:
o problems affecting a variety of hardware systems;
o start-up or other basic problems of new subscribers or new
Internet users; and
o highly technical issues that sophisticated users may
encounter.
Our customer care department consisted of approximately 90 employees,
or 47% of all employees as of June 30, 1999. 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. Our customer
care department answers approximately 7,300 calls per week. During the fourth
quarter of fiscal 1999, the average "hold" time was less than 52 seconds, and
approximately 55% of all calls were resolved within 4 minutes 30 seconds of the
caller's initial contact with a technician. In addition to diagnosing and
resolving subscribers' technical problems, our customer care department answers
questions about account status, responds to software requests and provides
configuration information.
21
<PAGE> 25
Subscribers can access customer support services through a local
telephone number or by e-mail. We maintain on our Web site a comprehensive
description of our customer care services, as well as troubleshooting tips and
configuration information. Additionally, we offer our subscribers free
educational classes, which are held weekly in our Dallas office. Subscribers can
also obtain recorded system and network status reports at any time and review
extensive system and network performance on the World Wide Web.
MARKETING
Our marketing strategy focuses on rapid penetration of a given market
in order to acquire a critical mass of subscribers to support profitable
operations. Our approach combines direct response with brand building
advertising. We make extensive use of television and outdoor billboard displays,
rather than print, radio or direct mail, and we continually evaluate the
effectiveness of our marketing methods.
Our direct response television advertising campaign emphasizes the
quality and reliability of our Internet services and our responsiveness to
customer needs and problems. The television commercials prompt customers to
contact us by a telephone call to 1-800-Be-A-Geek. Television advertising also
helps reinforce brand awareness.
We reinforce the subscriber's purchase decision and stimulate referral
business by sending the subscriber a welcome letter along with our start-up
package. In addition, subscribers that refer others to our service receive
Internet America "geek gear" which consists of t-shirts, caps, mugs, bags and
other marketing material adorned with the Internet America logo.
INFRASTRUCTURE
Our network provides subscribers with local dial-up access in all major
metropolitan areas of Texas, as well as several smaller communities. Our systems
and network infrastructure is designed to provide subscribers with reliability
and speed. Reliability is 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.
Physical and Virtual POPs. Subscribers dial a local phone number and
connect to one of our POPs, consisting of inbound telephone lines, modems and
related computer equipment. The POPs are either facilities owned by Internet
America or "Virtual POPs" owned by telecommunication companies. Virtual POP
architecture allows us 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 us to more precisely match capacity needs to actual
sales in that market. As of June 30, 1999, approximately 90% of our customer
base was serviced by Virtual POPs.
The Virtual POP architecture enables subscribers to dial a local phone
number and connect to a modem owned and housed by a telecommunications provider.
The subscriber's data call is then routed across leased lines to our internal
network. Unlike simply leasing network capacity from a third party provider, the
Virtual POP architecture allows us to maintain substantial control over quality
of service and capacity. Other regional and national ISPs commonly use leased
network capacity, which can result in subscribers' Internet experiences being
almost entirely outside of the ISP's control. In fact, utilizing a leased
network may cause the subscriber to compete with subscribers of other ISPs for
access and bandwidth. In contrast, our Virtual POP architecture uses private
networks to carry subscriber data calls back to our network and application
servers. In this manner, we maintain strict quality control over our
subscribers' Internet experiences, leading
22
<PAGE> 26
to higher levels of customer satisfaction.
Our Virtual POP architecture and user density business model allow us
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 us 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.
Internal Network Infrastructure. Subscribers enter our network from
either the physical POP or Virtual POP. Our primary internal network is designed
to maximize sustained high-speed traffic (at rates of up to 100 million bits per
second) and provide both resiliency to failure and redundancy. Our network's
level of redundancy substantially reduces potential data loss and avoids
congestion that is common with other network architectures.
Our network incorporates safety features to separate internal data from
external sources and provides protection against catastrophic network failure.
Our facilities are powered by a computer controlled uninterruptible power supply
that provides battery backup, surge protection and power conditioning. An
automatic onsite diesel generator provides power for prolonged power outages.
We also maintain a Network Operations 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 our infrastructure. The NOCC is responsible for operational
communications among our internal departments and is also responsible for
communication with our external service providers. Sophisticated historical and
statistical analysis software used in the NOCC provides data about the quality
of service our subscribers are experiencing, as well as information to help
control costs by purchasing additional bandwidth and services only when needed.
We maintain our 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 which are connected directly to our internal
network backbone and to our high-availability network file server. This direct
connection minimizes the feedback time for subscribers accessing these
applications. We deploy 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.
Management Information Systems. Our 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 our 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. We are currently transitioning to an integrated
financial and information reporting system that will automate many additional
functions and provide financial, marketing and management reports.
TECHNOLOGY AND DEVELOPMENT
We continuously evaluate new technology and applications for possible
introduction. In the fourth quarter of fiscal 1999, we deployed Expresslane DSL,
a high-speed connectivity technology, in our established markets. Expresslane
DSL uses existing twisted copper pair wire running from a local exchange
carrier's
23
<PAGE> 27
central office to a subscriber's home or office to provide high-speed
connectivity. We believe that we are well positioned to efficiently market and
deploy our DSL product due to the high density of our subscriber base.
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, we believe that our user density business model
is particularly well suited to the marketing and deployment of these services.
PROPRIETARY RIGHTS
General. We believe that our success is more dependent upon technical,
marketing and customer service expertise than upon our proprietary rights.
However, our success and ability to compete are dependent in part upon
proprietary rights. We rely 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," "Expresslane DSL,"
their respective logos and the Internet America logo.
Licenses. We have obtained authorization to use the products of each
manufacturer of software that we bundle in our 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. We intend
to maintain or negotiate renewals of all existing software licenses and
authorizations as necessary. We may also want or need to license other
applications in the future. Other applications included in the Internet America
start-up package are shareware applications that we have 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 we expect that competition will continue to intensify. We believe
that the primary competitive factors determining success in this market are:
o a reputation for reliability and service;
o access speed;
o effective customer support;
o pricing;
o access to capital;
o creative marketing;
o easy-to-use software; and
o geographic coverage.
Our current and prospective competitors include many large companies
that have substantially greater market presence and financial, technical,
marketing and other resources than we have. We currently compete or expect to
compete with the following types of Internet access providers:
o commercial online service providers, such as America
Online;
o national ISPs, such as MindSpring Enterprises,
EarthLink Network and FlashNet Communications;
o numerous regional and local ISPs;
24
<PAGE> 28
o computer hardware and software companies, and other
technology companies, such as IBM and Microsoft;
o national telecommunications providers, such as AT&T
and Sprint;
o regional telecommunications providers, such as SBC
Communications;
o cable operators, such as Time Warner, Inc. and AT&T;
o wireless communications companies;
o satellite companies; and
o nonprofit or educational Internet access providers.
We believe that new competitors, including large computer hardware and
software, media and telecommunications companies, will continue to enter the
Internet services 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. 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 us at a significant competitive disadvantage.
All of the major long-distance companies offer Internet access services
and compete with us. Local exchange carriers, including regional Bell operating
companies and competitive local exchange carriers, have also entered the ISP
market. We believe long-distance and local carriers are moving toward horizontal
integration through acquisitions of, and joint ventures with, ISPs. Accordingly,
we expect to experience increased competition from the traditional
telecommunications carriers for both customers and potential acquisitions. Many
of these telecommunications carriers have greater coverage and market presence,
as well as substantial financial, technical and marketing resources. These
telecommunications providers may have the ability to bundle Internet access with
basic local and long-distance voice services. This bundling of services may make
it difficult for us to compete effectively and may cause us to lower our prices.
We expect 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, cable
television operators offer Internet access through their cable facilities at
significantly faster rates than existing analog modem speeds. These companies
include Internet access in the basic bundle of services, or offer such access
for a nominal additional charge, and could prevent us from delivering Internet
access through wire and cable connections owned by these competitors. This could
negatively affect our business, financial condition and results of operations.
To date, the Federal Communications Commission ("FCC") has not elected
to force cable television companies to give ISPs access to their broadband
facilities, though a few local governments have voted to impose such a
requirement. Our ability to compete with cable television companies may depend
on future legislation or regulations guaranteeing open access to their broadband
networks.
GOVERNMENT REGULATION
We provide Internet access through transmissions over public telephone
lines. These transmissions are governed by state and federal regulatory policies
establishing charges and terms for communications. We are not currently subject
to direct regulation by 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. This finding is important because it means that we are not subject to
regulations that apply to telephone companies and similar
25
<PAGE> 29
carriers. In addition, we are not required to contribute to the universal
service fund, which subsidizes telephone 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 we 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 asserting that the rates are substantially
in excess of cost and local telephone companies arguing that access rates are
justified to subsidize below-cost local telephone rates to end users and other
purposes. Both local and long distance companies, however, contend that
Internet-based telephony should be subject to these charges. We do not offer
telephony services currently, and so we are not directly affected by these
policies. If we offer telephony in the future, we may be affected by these
issues. Additionally, we cannot predict whether these debates will cause the FCC
to reconsider its current policy of not regulating Internet access providers.
In a Notice of Proposed Rulemaking Adopted on August 6, 1998, the FCC
proposed that if an incumbent local exchange carrier ("LEC") established a
separate affiliate to pursue the deployment of advanced telecommunications
services such as xDSL and that affiliate interconnected with the LEC's network
on the same terms and conditions as the LEC's competitors did, then the
affiliate would not be subject to the unbundling requirement that applied to the
LEC. If the FCC ultimately adopts this proposal or similar proposals, our access
to xDSL and other high-speed data transmission methods could be curtailed. This
could have a material adverse effect on our business, financial condition and
results of operations.
Currently, our services are subject to Texas state sales taxes at a
rate of 8.25% of gross receipts. Accordingly, we are responsible for collecting
and remitting the taxes to the state. Due to new Texas sales tax statutes,
effective on October 1, 1999, the first $25 per month of the Internet access
service fee collected from each customer is exempt from sales taxes.
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. We
cannot predict the impact, if any, that future regulatory changes or
developments may have on our 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
our business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1999, we employed approximately 190 people, which
includes 90 customer care employees. We anticipate that the development of our
business will require that we hire additional employees.
26
<PAGE> 30
None of our current employees are represented by a labor organization, and we
consider employee relations to be good.
PROPERTIES
Our corporate headquarters are located in downtown Dallas at One Dallas
Center, 350 N. St. Paul, Suite 3000, where all executive functions exist and
substantially all systems, sales and technical support functions exist. We lease
approximately 31,000 square feet in Dallas, Texas under multiple leases that
terminate November 1, 2001, and we lease approximately 10,400 square feet in
Houston, Texas under a lease that terminates in February 2003. We also lease
small equipment room facilities for each of our other physical POPs in Texas and
Louisiana. We do not own any real estate. We believe that all of our facilities
are adequately maintained and suitable for their present use.
LEGAL PROCEEDINGS
We are not involved in any material pending legal proceedings.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock began trading on the Nasdaq National Market System on
December 10, 1998 under the symbol "GEEK." Before that date, there was no
established public trading market for our Common Stock. The following table
shows for the period indicated the high and low sales prices per share of the
Common Stock as reported by the Nasdaq National Market System:
<TABLE>
<CAPTION>
High Low
----------- -----------
<S> <C> <C>
Fiscal Year Ended June 30, 1999:
Second Quarter (beginning December 10, 1998) $ 61.00 $ 11.50
Third Quarter $ 44.00 $ 22.38
Fourth Quarter $ 35.00 $ 15.00
Fiscal Year Ending June 30, 2000:
First Quarter $ 22.25 $ 11.69
</TABLE>
On September 10, 1999, the last trading day prior to the public
announcement of the Merger Agreement, the high and low sale prices per share of
our Common Stock as reported on the Nasdaq National Market System were $14.75
and $12.50, respectively. The last reported sale price of our Common Stock on
the Nasdaq National Market System on September 10, 1999 was $13.25 per share. At
September 15, 1999, there were 157 holders of record of our common stock.
We have neither declared nor paid any cash dividends on our capital
stock and do not anticipate paying cash dividends in the foreseeable future. Our
current policy is to retain any earnings in order to finance the expansion of
our operations. Our Board of Directors will determine future declaration and
payment of dividends, if any, in light of the then-current conditions they deem
relevant.
27
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Internet America is an ISP that provides a wide array of Internet
services tailored to meet the needs of individual and business subscribers. We
afford our subscribers a high quality Internet experience with fast, reliable
service and responsive customer care.
The rapid growth of the Internet has resulted in increased competition
for existing services and increased demand for new products and services.
Increases in demand and a surge in Internet users has fostered an increase in
the number of ISPs providing access to the Internet. Our competitors have begun
to advertise in our existing markets with aggressive new promotions. We believe
that we are well positioned to deal with these competitive forces by continuing
to build high user density and maintaining a rational business plan.
Rapid growth and high user density are the cornerstones of our business
strategy. We will continue to pursue an ambitious growth strategy, but in a
controlled and rational manner. Our goal is to rapidly create user density in
specific regions with a view towards positive EBITDA (earnings before interest,
taxes, depreciation and amortization) in the near term and sustained
profitability for the long term. We do not intend to add subscribers at any cost
using promotions or strategic alliances based on questionable economics.
Recent technological developments have allowed for the propagation of
broadband, a transmission medium that can carry numerous voice, video and data
channels simultaneously. The emergence of low-cost broadband solutions will
significantly impact the ability of many ISPs to compete. We are committed to
being a leader in offering high-speed connectivity to individuals and
businesses. We began offering aDSL (asymmetric Digital Subscriber Line)
high-speed connectivity in the fourth quarter of fiscal 1999. 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 applications. We believe
that we are well positioned to efficiently market and deploy our DSL product due
to the high density of our subscriber base. Broadband revenue is not expected to
be material to total revenue for several quarters, but management believes that
rapid growth will occur as more high-speed applications are developed and made
commercially available.
The emergence of broadband is also expected to have a major impact on
how businesses use the Internet. Our business services revenue totaled 11.6% of
total revenues for the fiscal year ending June 30, 1999. We anticipate that our
percentage of business services revenue will increase as we acquire other ISPs
with significant business customers and concentrate more of our marketing
efforts on emerging applications for small to mid-size businesses.
Given the increased level of competition in the industry for new
subscribers, we will be more selective with regard to investing in direct
response advertising, and we will place more emphasis on our acquisition
strategy. We plan to concentrate our direct response advertising more heavily in
markets where we have established branding than in new markets. We have found
that the most effective way to initially penetrate new markets is through an
aggressive acquisition strategy. Management believes that the level of
consolidation in the industry will escalate, and that a viable acquisition
strategy is the most efficient way to rapidly build market share.
The execution of our acquisition strategy will cause an increase in our
amortization expense as the cost of purchasing the subscriber bases are written
off. In the coming fiscal years we expect to report net losses, primarily due to
amortization expense, while generating positive EBITDA. There can be no
assurance that we will be able to achieve or sustain net income in the future.
We expect general and administrative costs to increase to support our
growth. Connectivity costs will increase after acquisitions as a percentage of
revenue, since there is some duplication of inbound telephone
28
<PAGE> 32
connectivity and Internet connectivity during the transition period. However, we
believe we can quickly transition even sizable acquisitions and realize
connectivity and networking economies of scale within two quarters of the
acquisition.
We have increased our subscriber base from 61,600 at June 30, 1998, to
100,000 at June 30, 1999. We have achieved this growth by direct marketing to
consumers and by three acquisitions. During the fiscal year, we expanded
marketing activities into six new markets, continuing to implement our user
density strategy of achieving a critical mass of subscribers in targeted
regions.
We have an accumulated deficit of $12.7 million at June 30, 1999, and
have had annual operating losses since inception as a result of building network
infrastructure and rapidly increasing market share. Since our initial public
offering in December 1998, we have committed substantial resources to marketing
and acquisition efforts, resulting in operating cash outflows of approximately
$1.2 million and the cash purchase of NeoSoft totaling approximately $8 million.
RECENT ACQUISITIONS
Upon completing our initial public offering in December 1998, we
quickly began executing our growth strategy, completing two acquisitions in the
third fiscal quarter (CompuNet, Inc. and CyberRamp, L.L.C.) and one acquisition
in the fourth quarter (NeoSoft, Inc.). These acquisitions enabled us to rapidly
expand our market share in our existing markets. The combinations with CompuNet
and CyberRamp were accounted for as poolings of interests and the acquisition of
NeoSoft was accounted for as a purchase.
The acquisition of all the issued and outstanding securities of
NeoSoft occurred on June 30, 1999. The purchase price, including closing costs,
was $8.3 million. Assets of NeoSoft include approximately 9,500 individual and
corporate Internet access and web hosting accounts. We also acquired various
assets used in servicing those accounts, including a customer support and
network operations facility in Houston and a network operations facility in New
Orleans. We added approximately 35 new employees with the acquisition of
NeoSoft.
STATEMENT OF OPERATIONS
Access revenues are derived primarily from individual dial-up Internet
access, whether analog or ISDN, and value-added services, such as multiple
e-mail boxes and personalized e-mail addresses. Business services revenues are
derived primarily from dedicated connectivity, bulk dial-up access and Web
services.
A brief description of each element of our operating expenses follows:
Connectivity and operations expenses consist primarily of
setup costs for new subscribers, telecommunication costs and wages of
network operations and customer support personnel. Connectivity costs
include (i) fees paid to telephone companies for subscribers' dial-up
connections to our network and (ii) fees paid to backbone providers for
connections from our network to the Internet.
Sales and marketing expenses consist primarily of creative,
media and production costs, and call center employee wages. These
expenses include the cost of our television and billboard campaigns and
other advertising. Advertising costs are expensed as incurred.
29
<PAGE> 33
General and administrative expenses consist primarily of
accounting and administrative wages, professional services, rent and
other general business expenses.
Depreciation is computed using the straight line method over
the estimated useful life of the assets. Our data communications
equipment, computers, data server and office equipment are depreciated
over three years. We depreciate our furniture, fixtures and leasehold
improvements over five years. Acquisition costs are allocated among
acquired subscriber bases and goodwill, both of which are amortized
over three years.
Our business is not subject to any significant seasonal influences.
RESULTS OF OPERATIONS
The following table shows financial data for the years ended June 30,
1999 and 1998. All amounts have been restated to reflect the poolings of
interests with CompuNet and CyberRamp. Operating results for any period are not
necessarily indicative of results for any future period. Dollar amounts are
shown in thousands (except per share data).
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30 , 1999 JUNE 30, 1998
------------------------------ ------------------------------
% of % of
(000's) Revenue (000's) Revenue
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Access ...................................... $ 15,912 87.8% $ 12,118 86.1%
Business services ........................... 2,098 11.6 1,919 13.6
Other ....................................... 109 0.6 41 0.3
------------ ------------ ------------ ------------
Total ................................... 18,119 100.0 14,078 100.0
------------ ------------ ------------ ------------
Operating costs and expenses:
Connectivity and operations ................. 8,801 48.6 7,418 52.7
Sales and marketing ......................... 6,045 33.4 1,925 13.7
General and administrative .................. 4,245 23.4 2,948 20.9
Depreciation and amortization ............... 1,685 9.3 1,739 12.4
------------ ------------ ------------ ------------
Total ................................... 20,776 114.7 14,030 99.7
------------ ------------ ------------ ------------
Operating income (loss) .......................... (2,657) (14.7) 48 0.3
Interest income (expense), net ................... 185 1.0 (670) (4.8)
------------ ------------ ------------ ------------
Loss before income tax ........................... (2,472) (13.6) (622) (4.4)
Income tax benefit (expense) ..................... 8 0.0 (24) (0.2)
------------ ------------ ------------ ------------
Net loss ......................................... $ (2,464) (13.6)% $ (646) (4.6)%
============ ============ ============ ============
Net loss per common share:
Basic ....................................... $ (0.45) $ (0.16)
============ ============
Diluted ..................................... $ (0.45) $ (0.16)
============ ============
Weighted average common shares outstanding:
Basic ....................................... 5,533,670 3,914,856
Diluted ..................................... 5,533,670 3,914,856
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
OTHER DATA:
Subscribers at end of period................................. 100,000 61,600
Number of employees at end of year........................... 190 90
EBITDA (1)................................................... $ (971) $ 1,787
EBITDA margin (1)............................................ (5.4)% 12.7%
CASH FLOW DATA:
Cash flow from (used in) operations.......................... $ (659) $ 2,025
Cash flow used in investing activities....................... $ (11,366) $ (897)
Cash flow from (used in) financing activities................ $ 17,253 $ (531)
</TABLE>
1) EBITDA (earnings before interest, taxes, depreciation and
amortization) consists of revenue less connectivity and operating
expense, sales and marketing expense and general and administrative
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 our
operating results and is not intended to represent cash flows or
results of operations in accordance with GAAP for the periods
indicated. EBITDA is not a measurement under GAAP and is not
necessarily comparable with similarly titled measures for other
companies. EBITDA margin represents EBITDA as a percentage of total
revenue.
YEAR ENDED JUNE 30, 1999 COMPARED TO JUNE 30, 1998
Total revenue. Total revenue increased by $4.0 million, or 28.7%, to
$18.1 million in fiscal 1999 from $14.1 million in fiscal 1998. The majority of
the increase in total revenue is attributable to the increase in access revenue
of $3.8 million, or 31.3%, to $15.9 million in fiscal 1999 from $12.1 million in
the prior year. The increase in access revenue is attributable to an increase in
the number of subscribers from 61,600 at June 30, 1998, to 100,000 at June 30,
1999. Business services revenue increased by $178,000, or 9.3%, to $2.1 million
for fiscal 1999 from $1.9 million for the prior year. This increase is due to
increased fees associated with an increase in the number of business services
subscribers for a large range of products, including high speed connectivity and
web hosting services. We anticipate that business services revenue will increase
as a percentage of total revenue as an increasing number of businesses are
finding uses for Internet services. We will begin marketing our Expresslane DSL
products to businesses in the coming year, as well as leveraging the higher
business services mix of NeoSoft and other recent acquisitions. Other revenue
increased by $68,000, or 165%, to $109,000 for the current year from $41,000 for
the prior year. The increase in other revenue is primarily due to the increased
advertising revenue generated from our web site.
Connectivity and operations. Connectivity and operations expenses
increased by $1.4 million, or 18.6%, to $8.8 million for fiscal 1999 from $7.4
million for fiscal 1998. As a percentage of total revenue, connectivity and
operations expenses decreased to 48.6% for the current year from 52.7% for the
previous year. The decrease as a percentage of revenue is primarily due to cost
efficiencies achieved for wages and connectivity resulting from greater user
density in existing markets.
Sales and marketing. Sales and marketing expenses increased by $4.1
million, or 214%, to $6.0 million for fiscal 1999 from $1.9 million for the
prior year. This increase is due to continued marketing efforts in our existing
markets and entry into six new markets during the second and third quarters of
fiscal 1999. Total sales and marketing expenses of $6.0 million for fiscal 1999
included $4.8 million in television and billboard advertising. Approximately
half of this television, print and billboard advertising was expended in
31
<PAGE> 35
new markets. We expect that television and billboard advertising will decline as
a percentage of total revenue in the coming fiscal year as we place more
emphasis on alternative media for broadband services for businesses and scale
back advertising in new markets until we obtain a strategic number of customers
in these markets from acquisitions.
General and administrative. General and administrative expenses
increased by $1.3 million, or 44.0%, to $4.2 million for fiscal 1999 from $2.9
million for fiscal 1998. General and administrative expenses as a percentage of
total revenue increased to 23.4% in fiscal 1999 from 20.9% in the prior year,
primarily due to professional service fees associated with the combinations with
CompuNet and CyberRamp and with administrative support related to our growth
strategy.
Depreciation and amortization. Depreciation and amortization expense
decreased by $54,000, or 3.1%, to $1.7 million for fiscal 1999 from $1.7 million
for fiscal 1998. This decrease is due to computer and systems equipment that was
purchased more than three years ago and is therefore fully depreciated.
Depreciation expense is expected to increase in the coming fiscal year due to
the addition of broadband facilities and upgrades to our news servers.
Amortization expense will increase substantially due to future amortization of
intangible costs related to the purchase of NeoSoft and possible future
acquisitions.
Interest income. We realized $405,000 of interest income for fiscal
1999, generated from the investment of proceeds from our December 1998 initial
public offering. We had no interest income for the fiscal year ended June 30,
1998.
Interest expense. Interest expense decreased by $450,000, or 67.1%, to
$220,000 for fiscal 1999 from $670,000 for the prior year. Upon completion of
our initial public offering, we repaid substantially all outstanding
indebtedness, resulting in a reduction in interest expense during the period.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through (i) public
and private sales of equity securities, (ii) loans from shareholders and third
parties and (iii) cash flows from operations. We completed an initial public
offering in December 1998, issuing 1,700,000 shares of Common Stock at a price
of $13 per share. The proceeds to us of the offering were approximately $19.8
million, net of underwriting discounts and expenses. Upon completion of the
offering, we repaid the remaining balances of shareholder notes and related
accrued interest which totaled $1.4 million. In addition, we repaid certain
other notes and capital lease obligations totaling $625,000.
Cash used in operations totaled $1.9 million for fiscal 1999. During
fiscal 1999, we incurred $6.0 million in sales and marketing expenses, including
$4.8 million in television and billboard advertising. Additionally, cash used in
operations included approximately $300,000 in acquisition related expenses
relating to the combinations with CompuNet and CyberRamp. During fiscal 1998,
cash provided by operations was $2.0 million, resulting primarily from more
modest advertising expenses.
Cash used in investing activities was $11.2 million for fiscal 1999,
and consisted of $8.3 million related to the purchase of NeoSoft, Inc. on June
30, 1999, and $3.4 million related to routine purchases of property and
equipment to maintain network reliability.
For fiscal 1999, cash provided by financing activities totaled $16.9
million, which consisted of proceeds from the initial public offering of
approximately $19.8 million and proceeds from the exercise of
32
<PAGE> 36
stock options by option holders, less payments of $4.0 million to service and
retire shareholder notes, long-term obligations and capital lease obligations.
Cash on hand as of June 30, 1999 was $5.8 million, after considering
the $8.3 million cash outlay for the NeoSoft acquisition on that date. We
estimate that cash on hand will be sufficient for meeting our working capital
needs for fiscal 2000 with regard to continuing operations in existing markets.
Additional financing will be required to fund expansion through acquisitions and
marketing.
The availability of additional capital from public debt and equity
markets is currently limited due to a decline in stock prices for the entire
Internet sector. We are currently in discussions with various lenders concerning
a possible credit facility, but there can be no assurance that we will enter
into any facility, and if so, on what terms. In addition, we are currently
investigating capital financing arrangements to help fund a portion of equipment
purchases during the coming year which are estimated to total approximately $1.1
million. There can be no assurance that we will enter into any such capital
equipment financing, and if so, on what terms.
If additional capital financing arrangements, including public or
private sales of debt or equity securities, or additional borrowings from
commercial banks, are insufficient or unavailable, or if we experience
shortfalls in anticipated revenues or increases in anticipated expenses, we will
have to modify our operations and growth strategies to match available funding.
In such case, it is likely that our advertising expenditures would be downscaled
to a level where positive cash flows are generated from operations. We have no
long term advertising commitments, and our scheduled television commercials may
be cancelled with less than two weeks notice.
YEAR 2000
The Year 2000 issue relates to computer programs that use two digits
rather than four digits to define an applicable year. Software may recognize a
date as the year 1900 rather than the year 2000, which could result in system
failures or miscalculations, causing disruptions of operations. This could cause
a temporary inability to process transactions, send invoices, route our
subscribers' Internet traffic or engage in similar normal business activities.
We have developed a Year 2000 Plan (the "Plan") which is designed to
address Year 2000 issues so that we will be prepared for any problems arising
from the arrival of the Year 2000. The Plan covers: (i) internally developed and
vendor supplied software products which are provided to our subscribers; (ii)
network software and hardware, including routing and server components and
telephony systems; (iii) network operations and network support systems; (iv)
software and hardware components used by our customer care and sales
departments; and (v) other office infrastructure components. Additionally, the
Plan is designed to identify and assess our third party network service
providers and major vendors ("Third Party Systems") in order to develop and
implement action and contingency plans where appropriate in connection with
these Third Party Systems.
For the internal systems described above, the Plan requires that we
1) investigate our internal software and hardware components in
order to assess the current state of Year 2000 readiness,
2) prepare an evaluation of the resources necessary to upgrade
our components to become Year 2000 ready,
33
<PAGE> 37
3) develop and execute action plans to procure the necessary
resources and implement fixes to the problems that exist,
4) re-evaluate the upgraded components, and
5) repeat steps 2 through 4, if necessary.
For our Third Party Systems, the plan requires that we
1) investigate the products and services provided by Third Party
Systems in order to assess the current state of Year 2000
readiness with respect to these external suppliers, including
a survey of the publicly available statements issued by
vendors of those systems,
2) inquire of our Third Party Systems as to their plans to remedy
any issues outstanding relating to Year 2000 issues,
3) evaluate alternatives to existing Third Party Systems
relationships in cases where Year 2000 readiness is
questionable, and
4) take the appropriate steps to become Year 2000 ready.
In addition to the preparation work on both internal and external systems, the
Plan also details contingency plans which are designed to deal with
unanticipated Year 2000 issues, should they arise.
State of Readiness
We supply our subscribers with a software package that, among other
things, allows subscribers to access our services. The software package consists
of internally developed software which is bundled with third party software
(collectively, the "Installation Package"). We believe that the current version
of our software package is Year 2000 ready. In addition, we believe that
substantially all of our customer base is presently using a version of the
Installation Package that is Year 2000 ready.
Our network components consist primarily of routers and servers.
Routers function as network traffic coordinators and determine the paths that
individual packets of data will take to get from point A to point B. The primary
component of router functionality is the software which manages the data
traffic. We believe that the current version of the software within the routers
is Year 2000 ready. Servers act as the processing centers for the management of
information. Our servers, generally, utilize the UNIX operating system or
internally developed systems, all of which we believe are currently Year 2000
ready. We have recently upgraded the software components of our telephone
system, which manages all inbound and outbound phone and fax capabilities and
which we believe is currently Year 2000 ready.
Our NOCC monitors the internal and external network operations using
specialized software provided by Third Party Systems. We are currently in the
evaluation phase of the Plan for network operations software and we do not
anticipate any significant issues in making this software Year 2000 ready.
Our customer care and sales departments utilize standardized desktop
computers to interact with our internal data systems. We do not believe that
significant issues exist relating to our customer care and sales departments'
systems. Other office infrastructure includes, among others, our administrative
computer systems, fax machines and copiers. We do not expect significant Year
2000 issues to exist with these devices.
34
<PAGE> 38
Costs
We have incurred expenses of approximately $50,000 in connection with
the implementation of the Plan. We estimate that an additional $40,000 to
$50,000 will be incurred through the remainder of the execution of the Plan.
Risks
Our failure to correct a material Year 2000 problem could result in a
complete failure or degradation of the performance of our network or other
systems, including the disruption of operations, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities. Presently, however, we believe that our most reasonably likely worst
case scenario related to the Year 2000 is associated with potential concerns
with third party services. Specifically, we are heavily dependent on a
significant number of third party vendors to provide network services. A
significant Year 2000-related disruption of the network services provided by
Third Party Systems could cause subscribers to seek alternative providers or
cause an unmanageable burden on operations, liquidity and financial condition.
We are not presently aware of any Third Party Systems issue that is likely to
result in such a disruption. Although there is inherent uncertainty in the Year
2000 issue, we expect that as we progress with the Plan, the level of
uncertainty about the impact of the Year 2000 issue will be reduced and we
should be better positioned to identify the nature and extent of material risk
as a result of any Year 2000 disruptions.
Contingency Plans
Due to the current stage of our Plan, we are currently unable to fully
assess our risks and determine what contingency plans, if any, need to be
implemented. As we progress with our Plan and identify specific risks areas, we
intend to timely implement appropriate remedial actions and contingency plans.
The estimates and conclusions herein contain forward-looking statements
and are based on our best estimates of future events. Our expectations about
risks, future costs and the timely completion of our Year 2000 efforts are
subject to uncertainties that could cause actual results to differ materially
from what has been discussed above. Factors that could influence risks, amount
of future costs and the effective timing of remediation efforts include our
success in identifying and correcting potential Year 2000 issues and the ability
of Third Party Systems to appropriately address their Year 2000 issues.
DIRECTOR AND EXECUTIVE COMPENSATION
Upon consummation of our initial public offering in December 1998,
directors who were not also our employees ("Independent Directors") received 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 of our directors are reimbursed for travel,
lodging and other out-of-pocket expenses in connection with their attendance at
Board and committee meetings. Each Independent Director, upon election to the
Board will receive a nonqualified option to purchase 22,500 shares of Common
Stock (which will be immediately exercisable), and following the first
anniversary of his election to the Board, and only if such Independent Director
continues to be a member of the Board, such director will receive a nonqualified
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 status as a member of to the Board, and further subject to the terms
and provisions
35
<PAGE> 39
of the 1998 Nonqualified Stock Option Plan). Each Independent Director holding
office at the time of consummation of our initial public offering received such
options as if he had been initially elected as of such date. All other options
issued to Independent Directors will be issued pursuant to the 1998 Nonqualified
Stock Option Plan.
On April 20, 1999, we entered into a Consulting Agreement with Mr.
Corona, one of our directors, as an independent contractor for his services in
identifying and contacting potential acquisition candidates for us, as well as
such other advisory and management services as our Chief Executive Officer may
request from time-to-time. The Consulting Agreement is for a term of four years,
but may be terminated by either party upon thirty days prior written notice. As
compensation under the Consulting Agreement, we granted Mr. Corona an option to
purchase 75,000 shares of our Common Stock at an exercise price of $25.00 per
share. In addition, we agreed to reimburse Mr. Corona for all reasonable and
necessary travel and other expenses incurred by him in performing his duties
under the Consulting Agreement.
Also on April 20, 1999, we entered into a letter agreement with Carl
Westcott LLC by which we retained Carl Westcott LLC as our non-exclusive
financial advisor. Messrs. Smith and Corona, two of our directors, are employed
by Carl Westcott LLC. Under the letter agreement, Carl Westcott LLC assists us
in identifying and contacting potential acquisition or business combination
candidates, evaluates and values such candidate businesses, assists in
structuring transaction proposals, develops strategies for successful
consummation of transactions, analyzes the economic effects to us of a
transaction, assists in the negotiation of transaction proposals and preparation
of documents, assists in the due diligence process and completes other matters
related to closing such transactions. As compensation for rendering such
services, we pay Carl Westcott LLC a fee equal to two percent of the estimated
annual revenue, for the twelve months after a closing, of a company acquired by
us due to Carl Westcott LLC's performance of services under the letter
agreement; provided, however, that in no event is such fee for any acquisition
less than $25,000 nor more than $75,000. We also agreed to reimburse Carl
Westcott LLC for all reasonable expenses, and agreed to indemnify Carl Westcott
LLC for damages relating to any transaction contemplated by the engagement of
Carl Westcott LLC under the letter agreement. The letter agreement is effective
until terminated by either party upon thirty days written notice.
SUMMARY COMPENSATION TABLE
The following table sets forth the information regarding compensation
paid (on an annualized basis) for the Named Executive Officers for the periods
indicated. No other executive officers were compensated over $100,000 in fiscal
1999.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY COMPENSATION OPTION
--------------------------- ---- ------ ------------ -------------
<S> <C> <C> <C> <C>
Michael T. Maples, 1999 $115,400 -- --
Chief Executive Officer........... 1998 108,333 -- 157,500(1)
Douglas L. Davis, 1999 119,200 -- --
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 $1.67 per share on March 24, 1998.
36
<PAGE> 40
OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the information regarding the value of
stock options outstanding at June 30, 1999 held by each of the Named Executive
Officers. No stock options were exercised by the Named Executive Officers in
fiscal 1999. There have been no option grants to the Named Executive Officers
during the last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY END(#) AT FY END ($)(1)
----------------------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael T. Maples 67,500 157,500 $1,161,675 $ 2,710,575
Douglas L. Davis 112,500 -- 1,936,125 --
</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 $18.88 (which was
the closing sales price per share of the Common Stock on June 30, 1999
as reported on Nasdaq) multiplied by the number of shares of Common
Stock underlying the option.
DESCRIPTION OF PDQ
BUSINESS
PDQ is the largest Houston-based ISP serving the Houston metropolitan
area. PDQ offers a full range of Internet service to individuals and corporate
and institutional customers. PDQ's services include home dial-up and DSL
service, corporate connectivity, Web hosting, Web site design and network
consulting. As of June 30, 1999, PDQ had approximately 40,400 subscribers, which
represents an estimated 10% of the total market of Houston area Internet users.
Founded in 1996, PDQ acquired its initial customer base from
Houston-based Cybersim Systems, Inc. ("Cybersim") through an acquisition in
January 1997. PDQ completed several additional acquisitions during 1998, as well
as an April 1999 merger with Entrepreneurial Information Systems, Inc.
("Entech"), a full-service, commercial ISP that serves Houston's small to
mid-size business community. PDQ's principal executive offices are located at 20
East Greenway, Suite 600, Houston, Texas 77046, and its telephone number at that
office is (713) 830-3100. PDQ's World Wide Web home page is at
http://www.pdq.net.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
There is no public trading market for PDQ's common stock, par value
$0.01 per share. At September 15, 1999, there were 25 holders of record of PDQ's
common stock, of which 6,517,923 shares were issued and outstanding. PDQ has
neither declared nor paid any cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future. PDQ's current policy
is to retain any earnings in order to finance the expansion of its operations.
The Merger Agreement restricts PDQ from paying dividends prior to closing.
37
<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PDQ is a privately-held, Texas-based ISP serving the Houston, Texas
metropolitan area. As of June 30, 1999, PDQ served approximately 40,400
individual and corporate subscribers. PDQ believes that its Houston subscriber
base represents an estimated 10% of the total market of Houston area Internet
users.
PDQ has experienced rapid growth since the last quarter of fiscal 1998
by aggressive marketing and through its acquisition strategy. PDQ's initial 500
subscribers were acquired from Cybersim in January 1997, and during 1998, PDQ
acquired several small customer bases. In April 1999, PDQ acquired Entech, a
Houston-based ISP. The combination with Entech has provided a solid base of
corporate customers, corporate services capabilities, and high levels of
technical expertise, allowing PDQ to increase its ability to service the
expanding business market.
RECENT ACQUISITIONS
On April 2, 1999, PDQ acquired Entech in a business combination
accounted for as a purchase. The purchase price of $412,208 exceeded the fair
value of the net assets of Entech by $23,385, which will be amortized on the
straight line method over four years. The results of operations of Entech are
included with the results of PDQ from April 2, 1999.
STATEMENT OF OPERATIONS
Access revenues are derived primarily from individual dial-up Internet
access, whether analog or ISDN, and value-added services, such as multiple
e-mail boxes and personalized e-mail addresses. Business services revenues are
derived primarily from dedicated connectivity, bulk dial-up access and Web
services.
A brief description of each element of PDQ's operating expenses
follows:
Connectivity and operations expenses consist primarily of
setup costs for new subscribers, telecommunication costs and wages of
network operations and customer support personnel. Connectivity costs
include (i) fees paid to telephone companies for subscribers' dial-up
connections to PDQ's network and (ii) fees paid to backbone providers
for connections from PDQ's network to the Internet.
Marketing expenses consist primarily of creative, media and
production costs. These expenses include the cost of television and
billboard campaigns and other advertising. Advertising costs are
expensed as incurred.
General and administrative expenses consist primarily of
accounting and administrative wages, professional services, rent and
other general business expenses.
Depreciation is computed using the straight line method over
the estimated useful life of the assets. PDQ's data communications
equipment, computers and data server are depreciated over three to five
years. PDQ depreciates its furniture, fixtures and leasehold
improvements over four to seven years. Acquisition costs are allocated
among various intangibles, including assembled workforce,
38
<PAGE> 42
acquired subscriber bases and goodwill. The amortization of these
intangibles is based upon management's estimates of their useful lives
ranging from one to fifteen years.
PDQ's business is not subject to any significant seasonal influences.
RESULTS OF OPERATIONS
The following table shows financial data of PDQ for the years ended
December 31, 1998 and 1997. Operating results for any period are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- --------------------------
Dollars in % of Dollars in % of
000's Revenue 000's Revenue
------------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Access.................................................. $ 4,338 95.9% $ 1,082 84.6%
Business services....................................... 186 4.1 197 15.4
------------- --------- -------------- ------
Total............................................... 4,524 100.0 1,279 100.0
------------- --------- -------------- -------
Operating costs and expenses:
Connectivity and operations............................. 2,491 55.1 1,013 79.2
Sales and marketing..................................... 1,180 26.1 821 64.2
General and administrative.............................. 1,391 30.7 776 60.7
Depreciation and amortization........................... 113 2.5 27 2.1
------------- --------- -------------- -------
Total............................................... 5,175 114.4 2,637 206.2
------------- --------- -------------- -------
Operating loss............................................... (651) (14.4) (1,358) (106.2)
Interest expense, net........................................ (18) (0.4) - 0.0
------------- --------- -------------- -------
Net loss..................................................... $ (669) (14.8)% $ (1,358) (106.2)%
============= ========= ============== =======
OTHER DATA:
Subscribers at end of year................................... 30,239 13,323
Number of employees at end of year........................... 120 71
EBITDA (1)................................................... $ (538) $ (1,331)
EBITDA margin (1)............................................ (11.9)% (104.1)%
</TABLE>
- -------------
1) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of revenue less connectivity and operating expense, sales and
marketing expense and general and administrative 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 operating results and is not
intended to represent cash flows or results of operations in accordance
with generally accepted accounting principles (GAAP) for the periods
indicated. EBITDA is not a measurement under GAAP and is not
necessarily comparable with similarly titled measures for other
companies. EBITDA margin represents EBITDA as a percentage of total
revenue.
Total revenue. Total revenue increased by $3.2 million, or 254%, to
$4.5 million in 1998 from $1.3 million in 1997. The majority of the increase in
total revenue is attributable to the increase in
39
<PAGE> 43
access revenue of $3.2 million, or 301%, to $4.3 million in 1998 from
$1.1 million in the prior year. The increase in access revenues is attributable
to an increase in the number of subscribers from 13,323 at December 31, 1997, to
30,239 at December 31, 1998. Business services revenue decreased by $11,000, or
6%, to $186,000 for fiscal 1998 from $197,000 for the prior year. This decrease
is due to the strategic focus on the consumer business sector during the year.
PDQ anticipates that the business services revenue will significantly increase
due to the April 1999 merger with Entech, whose customer base is primarily
business connectivity and services, as well as increased fees associated with an
increase in the number of business services subscribers for a large range of
products, including high speed connectivity and web hosting services.
Connectivity and operations. Connectivity and operations expense
increased by $1.5 million, or 146%, to $2.5 million for 1998 from $1.0 million
for 1997. As a percentage of total revenue, connectivity and operations expenses
decreased to 55.1% for 1998 from 79.2% for the previous year. The decrease as a
percentage of revenue is primarily due to cost efficiencies achieved for wages
and connectivity resulting from greater user density in existing markets.
Sales and marketing. Sales and marketing expense increased by
$360,000, or 44%, to $1.2 million for 1998 from $821,000 for the prior year.
This increase is due to PDQ's continued marketing efforts in its existing
markets. Total sales and marketing expenses of $1.2 million for 1998 included
$677,000 in television, newsprint and billboard advertising.
General and administrative. General and administrative expense
increased by $616,000, or 79%, to $1.4 million for 1998 from $776,000 for 1997.
General and administrative expenses as a percentage of total revenue decreased
to 30.8% in 1998 from 60.6% in the prior year, primarily due to cost savings
arising from increases in user density in the Houston market.
Depreciation and amortization. Depreciation and amortization expense
increased by $85,000, or 312%, to $113,000 for 1998 from $27,000 for 1997.
Depreciation expense is expected to increase in the coming year due to the
addition of broadband facilities and upgrades to servers. Amortization expense
will increase substantially due to periodic write-offs of intangible costs
related to the purchase of Entech.
Interest expense. Interest expense increased to $18,300 for 1998 from
$0 for the prior year. The increase was due to additional interest incurred on
notes and capital leases executed during the year.
40
<PAGE> 44
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
The following table shows financial data for the six months ended June
30, 1999 and 1998. Operating results for any period are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
----------------------------- ----------------------------
(unaudited) (unaudited)
Dollars in % of Dollars in % of
000's Revenue 000's Revenue
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Access ...................... $ 3,309 81.2% $ 1,646 96.8%
Business services ........... 758 18.6 55 3.2
Other ....................... 10 0.2 -- 0.0
-------- --------- -------- ---------
Total ................... 4,077 100.0 1,701 100.0
-------- --------- -------- ---------
Operating costs and expenses:
Connectivity and operations . 2,298 56.4 1,027 60.4
Sales and marketing ......... 1,018 25.0 523 30.7
General and administrative .. 1,151 28.2 603 35.4
Depreciation and amortization 182 4.4 20 1.2
-------- --------- -------- ---------
Total ................... 4,649 114.0 2,173 127.7
-------- --------- -------- ---------
Operating loss ................... (572) (14.0) (472) (27.7)
Interest expense, net ............ (13) (0.3) (2) (0.1)
-------- --------- -------- ---------
Loss before income tax ........... (585) (14.3) (474) (27.9)
Income tax expense ............... -- 0.0 -- 0.0
-------- --------- -------- ---------
Net loss ......................... $ (585) (14.3)% $ (474) (27.9)%
======== ========= ======== =========
OTHER DATA:
Subscribers at end of period ..... 40,394 21,371
Number of employees at end of
period ....................... 121 72
EBITDA (1) ....................... $ (390) $ (452)
EBITDA margin (1) ................ (9.6)% (26.6)%
</TABLE>
- ---------------
(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of revenue less connectivity and operating expense, sales and
marketing expense and general and administrative 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 operating results and is not
intended to represent cash flows or results of operations in accordance
with GAAP for the periods indicated. EBITDA is not a measurement under
GAAP and is not necessarily comparable with similarly titled measures
for other companies. EBITDA margin represents EBITDA as a percentage of
total revenue.
Total revenue. Total revenue increased by $2.4 million, or 140%, to
$4.1 million in the six month period ended June 30, 1999 from $1.7 million in
the six month period ended June 30, 1998. The majority of the increase in total
revenue is attributable to the increase in access revenue of $1.7 million, or
101%, to $3.3 million in the six month period ended June 30, 1999 from $1.6
million in the same period of the prior year. The increase in access revenue is
attributable to an increase in the number of subscribers from 21,400 at June
41
<PAGE> 45
30, 1998, to 40,400 at June 30, 1999. Business services revenue increased by
$703,000, or 1,278%, to $758,000 for the six month period ended June 30, 1999
from $55,000 for the same period of the prior year. This increase is due to the
merger with Entech effective April 2, 1999, whose customer base is primarily
business connectivity and services, as well as increased fees associated with an
increase in the number of business services subscribers for a large range of
products, including high speed connectivity and web hosting services. PDQ
anticipates that business services revenue will increase as a percentage of
total revenue as an increasing number of businesses are finding uses for
Internet services. PDQ will begin marketing its DSL products to businesses in
the coming year as well as leveraging the higher business services mix of
Entech.
Connectivity and operations. Connectivity and operations expense
increased by $1.3 million, or 123%, to $2.3 million for the six month period
ended June 30, 1999 from $1.0 million for the same period of the prior year. As
a percentage of total revenue, connectivity and operations expenses decreased to
56.4% for the six month period ended June 30, 1999 from 60.4% for the same
period of the prior year. The decrease as a percentage of revenue is primarily
due to cost efficiencies achieved for wages and connectivity resulting from
greater user density in existing markets.
Sales and marketing. Sales and marketing expense increased by
$495,000, or 95%, to $1.0 million for the six month period ended June 30, 1999
from $523,000 for the same period of the prior year. This increase is due to
PDQ's continued marketing efforts in its existing markets. Total sales and
marketing expenses of $1.0 million for the six month period ended June 30, 1999
included approximately $550,000 in television, newsprint and billboard
advertising.
General and administrative. General and administrative expense
increased by $548,000, or 91%, to $1.2 million for the six month period ended
June 30, 1999 from $603,000 for the same period of the prior year. General and
administrative expenses as a percentage of total revenue decreased to 28.2% in
the six month period ended June 30, 1999 from 35.4% in the same period of the
prior year, primarily due to costs savings arising from increases in user
density in the Houston market.
Depreciation and amortization. Depreciation and amortization expense
increased by $162,000, or 810%, to $182,000 for the six month period ended June
30, 1999 from $20,000 for the same period of the prior year. Depreciation
expense is expected to increase in the coming fiscal year due to the addition of
broadband facilities and upgrades to servers. Amortization expense will increase
substantially due to periodic write-offs of intangible costs related to the
purchase of Entech.
Interest expense. Interest expense increased by $11,000, or 550%, to
$13,000 for the six month period ended June 30, 1999 from $2,000 for the same
period of the prior year. The increase was due to additional interest incurred
on capital leases entered into during the period.
LIQUIDITY AND CAPITAL RESOURCES
PDQ has financed its operations to date through private sales of equity
securities and cash flows from operations. Proceeds from private sales of common
stock totaled $1.1 million for the year ended December 31, 1998 and $830,000 for
the year ended December 31, 1997.
Cash provided by operations totaled $150,000 for fiscal 1998, compared
to cash used in operations of $630,000 for fiscal 1997. The improvement in
operating cash flow is primarily due to the reduction of general and
administrative expenses which was the result of increases in operational
efficiency.
42
<PAGE> 46
Cash used in investing activities was $183,000 for fiscal 1998 for the
purchase of property and equipment.
Cash on hand as of December 31, 1998 was $1.1 million. Additional
financing will be required to continue pursuing PDQ's current acquisition and
marketing strategies. If additional capital financing arrangements, including
public or private sales of debt or equity securities, or additional borrowings
from commercial banks are insufficient or unavailable, or if PDQ experiences
shortfalls in anticipated revenues or increases in anticipated expenses, PDQ
will have to modify its operations and growth strategies to match available
funding. In such case, it is likely that PDQ's advertising expenditures would be
downscaled to a level where positive cash flows are generated from operations.
PDQ has no long term advertising commitments, and its scheduled television
commercials may be cancelled with less than two weeks notice.
YEAR 2000
The Year 2000 issue relates to computer programs that use two digits
rather than four digits to define an applicable year. Software may recognize a
date as the year 1900 rather than the year 2000, which could result in system
failures or miscalculations, causing disruptions of operations. This could cause
a temporary inability to process transactions, send invoices, route our
subscribers' Internet traffic or engage in similar normal business activities.
PDQ has developed a Year 2000 Plan (the "PDQ Plan") which is designed
to address Year 2000 issues so that it will be prepared for any problems arising
from the arrival of the Year 2000. The PDQ Plan covers: (i) internally developed
and vendor supplied software products which are provided to PDQ's subscribers,
(ii) network software and hardware, including routing and server components, and
telephony systems, (iii) network operations and network support systems, (iv)
software and hardware components used by PDQ's customer care and sales
departments, and (v) other office infrastructure components. Additionally, the
PDQ Plan is designed to identify and assess PDQ's third party network service
providers and major vendors ("PDQ Third Party Systems") in order to develop and
implement action and contingency plans where appropriate in connection with
these PDQ Third Party Systems.
For the internal systems described above, the Plan requires that PDQ:
(1) investigate its internal software and hardware components in
order to assess the current state of Year 2000 readiness;
(2) prepare an evaluation of the resources necessary to upgrade
its components to become Year 2000 ready;
(3) develop and execute action plans to procure the necessary
resources and implement fixes to the problems that exist;
(4) re-evaluate the upgraded components; and
(5) repeat steps 2 through 4, if necessary.
For PDQ Third Party Systems, the plan requires that PDQ:
(1) investigate the products and services provided by PDQ Third
Party Systems in order to assess the
43
<PAGE> 47
current state of Year 2000 readiness with respect to these
external suppliers, including a survey of the publicly
available statements issued by vendors of those systems;
(2) inquire of PDQ Third Party Systems as to their plans to
remedy any issues outstanding relating to Year 2000 issues;
(3) evaluate alternatives to existing PDQ Third Party Systems
relationships in cases where Year 2000 readiness is
questionable; and
(4) take the appropriate steps to become Year 2000 ready.
State of Readiness
PDQ supplies its subscribers with a software package that, among other
things, allows subscribers to access PDQ's services. The software package
consists of third party software (the "PDQ Installation Package"). PDQ believes
that the current version of the PDQ Installation Package is Year 2000 ready. In
addition, PDQ believes that substantially all of its customer base is presently
using a version of the PDQ Installation Package that is Year 2000 ready.
PDQ's network components consist primarily of routers and servers.
Routers function as network traffic coordinators and determine the paths that
individual packets of data will take to get from point A to point B. The primary
component of router functionality is the software which manages the data
traffic. PDQ believes that the current version of the software within the
routers is Year 2000 ready. Servers act as the processing centers for the
management of information. PDQ's servers, generally, utilize the UNIX operating
system or Microsoft Windows NT operating system, all of which PDQ believes are
currently Year 2000 ready. PDQ's telephone system which manages all inbound and
outbound phone and fax capabilities for its corporate business services is
currently not Year 2000 ready. PDQ is in the process of upgrading the software
component of the system and expects that this upgrade will be completed by
December 1999. PDQ's phone system which handles sales and customer service calls
is presently Year 2000 compliant.
PDQ's customer care and sales departments utilize standardized desktop
computers to interact with PDQ's internal data systems. PDQ has evaluated and
made any necessary changes to make these desktop systems Year 2000 compliant.
Risks
PDQ's failure to correct a material Year 2000 problem could result in a
complete failure or degradation of the performance of its network or other
systems, including the disruption of operations, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities. Presently, however, PDQ believes that its most reasonably likely
worst case scenario related to the Year 2000 is associated with potential
concerns with third party services. Specifically, PDQ is heavily dependent on a
significant number of third party vendors to provide network services. A
significant Year 2000-related disruption of the network services provided by PDQ
Third Party Systems could cause subscribers to seek alternative providers or
cause an unmanageable burden on operations, liquidity and financial condition.
PDQ is not presently aware of any PDQ Third Party Systems issue that is likely
to result in such a disruption. Although there is inherent uncertainty in the
Year 2000 issue, PDQ expects that as it progresses with the PDQ Plan, the level
of uncertainty about the impact of the Year 2000 issue will be reduced and PDQ
should be better positioned to identify the nature and extent of material risk
as a result of any Year 2000 disruptions.
44
<PAGE> 48
Contingency Plans
Due to the current stage of the PDQ Plan, PDQ is currently unable to
fully assess its risks and determine what contingency plans, if any, need to be
implemented. As PDQ progresses with the PDQ Plan and identifies specific risks
areas, PDQ intends to timely implement appropriate remedial actions and
contingency plans. The estimates and conclusions herein contain forward-looking
statements and are based on PDQ's best estimates of future events. PDQ's
expectations about risks, future costs, and the timely completion of its Year
2000 efforts are subject to uncertainties that could cause actual results to
differ materially from what has been discussed above. Factors that could
influence risks, amount of future costs and the effective timing of remediation
efforts include PDQ's success in identifying and correcting potential Year 2000
issues and the ability of PDQ Third Party Systems to appropriately address their
Year 2000 issues.
PROPOSAL NO. 2
APPROVAL OF THE INTERNET AMERICA, INC.
EMPLOYEE AND CONSULTANT STOCK OPTION PLAN
INTRODUCTION
Under the Merger Agreement, we agreed that each outstanding PDQ
incentive stock option will be exchanged for an incentive stock option to
purchase the number of shares of Internet America Common Stock equal to the
Exchange Ratio multiplied by the number of shares underlying the PDQ incentive
stock option. These stock options will be issued under the Internet America,
Inc. Employee and Consultant Stock Option Plan (the "Option Plan"). The Option
Plan is newly created for the sole purpose of accommodating the outstanding PDQ
incentive stock options and we do not intend to issue further options under the
Option Plan. There are PDQ incentive stock options outstanding to purchase
699,000 shares of PDQ common stock. At the closing of the Merger Agreement,
these options will be canceled and reissued under the Option Plan as incentive
stock options to purchase 260,063 shares of Common Stock.
The Option Plan is an integral part of the Merger Agreement and should
the merger occur, we will be obligated under the Merger Agreement to issue the
incentive stock options described herein. Thus, the Board believes that approval
of the Option Plan is in Internet America's and our shareholders' best interests
and unanimously recommends a vote "FOR" approval of the Option Plan.
SUMMARY OF TERMS AND PROVISIONS OF THE OPTION PLAN
The following summary of the Option Plan is qualified in its entirety
by the terms of the Option Plan, as amended, a copy of which is attached as
Appendix C to this Proxy Statement. Capitalized terms used and not otherwise
defined in this portion of this Proxy Statement have the respective meanings
ascribed to such terms in the Option Plan.
Pursuant to the Option Plan, we may grant incentive stock options or
nonstatutory (nonqualified) stock options to our employees, directors,
consultants and advisors. A total of 260,063 shares of Common Stock are
currently reserved for issuance under the Option Plan, all of which shall be
issued to the current holders of PDQ incentive stock options.
With respect to grants of options to employees who are also officers or
directors of Internet America, the Option Plan is administered by the Board of
Directors or a committee designated by the Board of Directors
45
<PAGE> 49
to administer the Option Plan, which committee is constituted in such a manner
as to permit the Option Plan to comply with Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with respect to a plan
intended to qualify as a discretionary plan. With respect to grants of options
to employees, consultants or advisors who are not directors or officers of
Internet America, the Option Plan is administered by the Board of Directors or a
committee designated by the Board of Directors, which committee is constituted
in such a manner as to satisfy the legal requirements relating to the
administration of an incentive stock option plan of applicable corporate and
securities laws and the Internal Revenue Code of 1986, as amended.
The Administrator has the authority to select the employees, directors
and advisors to whom stock options are granted. Subject to the limitations set
forth in the Option Plan, the Administrator has the authority in its discretion
to determine the persons to whom options shall be granted and the number of
shares covered by each option, to interpret the Option Plan, to establish
vesting schedules, to specify the type of consideration to be paid upon exercise
and, subject to certain restrictions, to specify other terms of the options.
The maximum term of options granted under the Option Plan is ten years,
except that the term of an incentive stock option granted to an optionee owning
more than ten percent of the voting stock of Internet America may not exceed
five years. Options granted under the Option Plan are in most cases
nontransferable and generally expire within 90 days after the termination of the
optionee's services. In general, if an optionee is disabled or dies, such option
may be exercised up to 12 months following such disability or death.
GRANTS UNDER THE OPTION PLAN
PDQ has outstanding incentive stock options to purchase 699,000 shares
of PDQ common stock. Under the Merger Agreement, these PDQ options will be
canceled and we are obligated to issue replacement incentive stock options under
the Option Plan. Thus, we intend to issue replacement incentive stock options to
purchase 260,063 shares of Common Stock under the Option Plan to the officers,
directors, employees, consultants and advisors of PDQ currently holding PDQ
incentive stock options. Options to purchase 61,388 shares of Common Stock will
be issued at an exercise price of $1.23 per share, options to purchase 39,065
shares of Common Stock will be issued at an exercise price of $1.12 per share,
options to purchase 110,871 shares of Common Stock will be issued at an exercise
price of $1.48 per share and options to purchase 48,739 shares of Common Stock
will be issued at an exercise price of $2.69 per share.
The Option Plan is designed to accommodate only those existing PDQ
incentive stock options (we have reserved only 260,063 shares of Common Stock
for issuance under the Option Plan). We do not intend to issue any other
incentive stock options under the Option Plan.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE OPTION PLAN
The following summary is intended only as a general guide as to the
United States federal income tax consequences under current law of the grant of
an option under the Option Plan (an "Option") and does not attempt to describe
all possible federal tax consequences or any foreign, state, local or other tax
consequences or tax consequences based on particular circumstances.
The holder of an Option (an "Optionee") will not recognize taxable
income and we will not be entitled to a tax deduction upon either the grant or
exercise of an Option. If an Optionee holds Common Stock purchased upon the
exercise of an Option until a date that is more than one year after the date the
Option is exercised and more than two years after the date the Option is granted
(the "holding period"), upon sale of the Common Stock, the Optionee will
recognize long-term capital gain or loss equal to the difference between the
46
<PAGE> 50
amount realized on the sale of the Common Stock and the exercise price. No tax
deduction will be available to us.
If Common Stock purchased upon the exercise of an Option is sold prior
to the expiration of the holding period, the Optionee will recognize ordinary
taxable income equal to the lesser of (a) the excess, if any, of the fair market
value of the Common Stock on the date of exercise over the exercise price and
(b) the excess, if any, of the amount realized on the sale over the exercise
price. We will be entitled to a corresponding tax deduction. In addition, the
Optionee will recognize capital gain or loss equal to the difference between (i)
the amount realized on the sale of the Common Stock and (ii) the sum of the
exercise price and any amount recognized by the Optionee as ordinary taxable
income. The capital gain or loss will be long-term capital gain or loss if the
Optionee held the Common Stock for more than one year. Otherwise the capital
gain or loss will be short-term capital gain or loss. Other rules apply if an
Option is exercised by tendering Common Stock.
The difference between (a) the fair market value, on the date of
exercise, of Common Stock purchased upon the exercise of an Option and (b) the
exercise price of the Option increases income for alternative minimum tax
purposes. Additional rules apply if the Common Stock is sold prior to expiration
of the holding period.
INDEPENDENT AUDITORS
Representatives of Deloitte & Touche LLP, who served as our independent
auditors for the year ended June 30, 1999, will be present at the Special
Meeting and will have an opportunity to make a statement if they so desire and
to answer any appropriate questions.
SHAREHOLDER PROPOSALS
Shareholders may submit proposals on matters appropriate for
shareholder action at our annual meetings consistent with Rule 14a-8 promulgated
under the Exchange Act. Any proposal which a shareholder intends to present at
the 2000 Annual Meeting of Shareholders must be received by us at our principal
executive office no later than June 3, 2000 in order to be included in the proxy
material for such meeting. Notice of a shareholder proposal submitted outside
the process of Rule 14a-8 must be made by August 17, 1999. Such proposals should
be sent to Internet America, Inc., Attention: Secretary, 350 North St. Paul,
Suite 3000, Dallas, Texas 75201.
OTHER MATTERS
As of the date of this Proxy Statement, we know of no other business to
be presented for action at the Special Meeting. As to any business which would
properly come before the Special Meeting, the proxies confer discretionary
authority in the persons named therein and those persons will vote or act in
accordance with their best judgment with respect thereto.
47
<PAGE> 51
MISCELLANEOUS
All costs of solicitation of proxies will be borne by us. In addition
to solicitation by mail, our officers, employees or agents may solicit proxies
by telephone or personally, without additional compensation. We may also make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries for the forwarding of solicitation materials to the beneficial
owners of shares of Common Stock held of record by such persons, and we may
reimburse them for their out-of-pocket expenses incurred in connection
therewith.
By Order of the Board of Directors
Elizabeth Palmer Daane,
Secretary
Dallas, Texas
, 1999
- ------------
48
<PAGE> 52
INTERNET AMERICA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Equity
(Deficit).............................................. F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Internet America, Inc. and subsidiary
We have audited the consolidated balance sheets of Internet America, Inc.
and subsidiary as of June 30, 1999 and 1998 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Internet
America, Inc. and subsidiary as of June 30, 1999 and 1998, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
August 13, 1999
(Except for fourth paragraph of
Note 12, as to which the date is
September 10, 1999)
Dallas, Texas
F-2
<PAGE> 54
INTERNET AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,845,562 $ 618,290
Accounts receivable, net of allowance for uncollectible
accounts of $366,940 and $198,155 in 1999 and 1998,
respectively........................................... 1,122,894 494,961
Prepaid expenses and other current assets................. 126,433 30,824
------------ ------------
Total current assets.............................. 7,094,889 1,144,075
PROPERTY AND EQUIPMENT -- Net............................... 2,622,637 2,132,131
OTHER ASSETS -- Net......................................... 9,195,878 785,634
------------ ------------
Total............................................. $ 18,913,404 $ 4,061,840
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable.................................... $ 2,131,201 $ 1,153,728
Accrued liabilities....................................... 1,068,774 1,322,356
Deferred revenue.......................................... 3,358,347 3,660,006
Current portion of capital lease obligations.............. 41,195 358,645
Current maturities of long-term debt...................... 434,934 686,302
Advances under line of credit............................. -- 225,000
Notes payable to shareholders............................. -- 2,017,713
------------ ------------
Total current liabilities......................... 7,034,451 9,423,750
CAPITAL LEASE OBLIGATIONS, net of current portion........... 102,246 143,915
LONG-TERM DEBT, net of current portion...................... 151,997 1,182,273
------------ ------------
Total liabilities................................. 7,288,694 10,749,938
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock, $.01 par value;
400,000 shares authorized, 379,672 issued and
outstanding in 1998.................................... -- 3,796
Series B convertible preferred stock, $.01 par value,
300,000 shares authorized, 73,667 issued and
outstanding in 1998.................................... -- 737
Common stock, $.01 par value; 40,000,000 shares
authorized, 6,912,930 and 3,914,840 issued and
outstanding in 1999 and 1998, respectively............. 69,130 39,148
Additional paid-in capital................................ 24,231,065 3,480,288
Accumulated deficit....................................... (12,675,485) (10,212,067)
------------ ------------
Total shareholders' equity (deficit).............. 11,624,710 (6,688,098)
------------ ------------
Total............................................. $ 18,913,404 $ 4,061,840
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 55
INTERNET AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Access.................................................... $15,911,844 $12,117,587
Business services......................................... 2,097,774 1,919,326
Other..................................................... 109,412 41,312
----------- -----------
Total............................................. 18,119,030 14,078,225
----------- -----------
OPERATING COSTS AND EXPENSES:
Connectivity and operations............................... 8,800,924 7,417,819
Sales and marketing....................................... 6,044,762 1,925,180
General and administrative................................ 4,244,557 2,947,828
Depreciation and amortization............................. 1,685,097 1,739,301
----------- -----------
Total............................................. 20,775,340 14,030,128
----------- -----------
INCOME (LOSS) FROM OPERATIONS............................... (2,656,310) 48,097
INTEREST INCOME............................................. 405,287 --
INTEREST EXPENSE............................................ (220,182) (670,035)
INCOME TAX BENEFIT (EXPENSE)................................ 7,787 (24,000)
----------- -----------
NET LOSS.................................................... $(2,463,418) $ (645,938)
=========== ===========
NET LOSS PER COMMON SHARE:
BASIC..................................................... $ (0.45) $ (0.16)
=========== ===========
DILUTED................................................... $ (0.45) $ (0.16)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC..................................................... 5,533,670 3,914,856
=========== ===========
DILUTED................................................... 5,533,670 3,914,856
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 56
INTERNET AMERICA, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------- ------ --------- ------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1997.......... 453,339 $4,533 3,942,965 $39,429 $ 3,584,507
Purchase of stock options...... -- -- -- -- (92,000)
Cancellation of treasury
stock........................ -- -- (28,125) (281) (12,219)
Net loss....................... -- -- -- -- --
-------- ------ --------- ------- -----------
BALANCE, JUNE 30, 1998......... 453,339 4,533 3,914,840 39,148 3,480,288
Conversion of preferred
stock........................ (453,339) (4,533) 1,020,013 10,200 (5,667)
Issuance of common stock:
For initial public offering,
net proceeds............... -- -- 1,700,000 17,000 19,742,714
Other........................ -- -- 278,077 2,782 702,544
Contribution of capital in
exchange for note payable.... -- -- -- -- 311,186
Net loss....................... -- -- -- -- --
-------- ------ --------- ------- -----------
BALANCE, June 30, 1999......... -- $ -- 6,912,930 $69,130 $24,231,065
======== ====== ========= ======= ===========
<CAPTION>
TOTAL
TREASURY STOCK SHAREHOLDERS'
------------------ ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
------- -------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, JULY 1, 1997.......... 28,125 $(12,500) $(9,566,129) $(5,950,160)
Purchase of stock options...... -- -- -- (92,000)
Cancellation of treasury
stock........................ (28,125) 12,500 -- --
Net loss....................... -- -- (645,938) (645,938)
------- -------- ------------ -----------
BALANCE, JUNE 30, 1998......... -- -- (10,212,067) (6,688,098)
Conversion of preferred
stock........................ -- -- -- --
Issuance of common stock:
For initial public offering,
net proceeds............... -- -- -- 19,759,714
Other........................ -- -- -- 705,326
Contribution of capital in
exchange for note payable.... -- -- -- 311,186
Net loss....................... -- -- (2,463,418) (2,463,418)
------- -------- ------------ -----------
BALANCE, June 30, 1999......... -- $ -- $(12,675,485) $11,624,710
======= ======== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 57
INTERNET AMERICA, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1999 1998
------------ ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (2,463,418) $ (645,938)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 1,685,097 1,739,301
Changes in operating assets and liabilities:
Accounts receivable, net............................. (858,500) (152,529)
Prepaid expenses and other current assets............ (114,905) 32,432
Other assets......................................... (126,580) 21,511
Accounts payable and accrued liabilities............. 1,360,104 (198,356)
Deferred revenue..................................... (140,836) 1,228,363
------------ ----------
Net cash provided by (used in) operating
activities...................................... (659,038) 2,024,784
------------ ----------
INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (3,395,765) (846,725)
Purchase of subscribers, net of cash acquired............. (7,970,442) (50,000)
------------ ----------
Net cash used in investing activities............. (11,366,207) (896,725)
------------ ----------
FINANCING ACTIVITIES:
Proceeds from issuance of common equity................... 21,025,726 --
Purchase of stock options................................. -- (92,000)
Proceeds from issuance of long term debt.................. -- 311,186
Principal payments of notes payable to shareholders....... (2,017,713) --
Principal payments under capital lease obligations........ (359,119) (436,850)
Principal payments of long-term debt...................... (1,171,377) (295,679)
Payments on line of credit................................ (225,000) (18,000)
------------ ----------
Net cash provided by (used in) financing
activities...................................... 17,252,517 (531,343)
------------ ----------
NET INCREASE IN CASH........................................ 5,227,272 596,716
CASH, BEGINNING OF PERIOD................................... 618,290 21,574
------------ ----------
CASH, END OF PERIOD......................................... $ 5,845,562 $ 618,290
============ ==========
SUPPLEMENTAL INFORMATION:
Cash paid for interest.................................... $ 156,630 $ 750,522
Equipment acquired under capital leases................... $ -- $ 127,500
Subscriber purchase assumption of service obligations..... $ 183,457 $ 412,422
Contribution of capital in exchange for note payable...... $ 311,186 $ --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 58
INTERNET AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999 AND 1998
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- Internet America, Inc. 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.
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.
The financial statements have been restated to reflect the combinations
during 1999 of CompuNet, Inc. ("CompuNet") and CyberRamp, L.L.C. ("CyberRamp")
as if the combinations occurred at the beginning of the earliest period
presented. The combinations have been accounted for as poolings of interests
under the provisions of Accounting Principles Board Opinion No. 16, "Business
Combinations." (See note 11.)
On June 30, 1999, Internet America acquired for cash all the issued and
outstanding securities of NeoSoft, Inc., a Texas corporation ("NeoSoft"). As a
result of the purchase, NeoSoft became a wholly owned subsidiary of the Company,
and the Company became the indirect owner of all of the assets of NeoSoft,
including its customer base and the computer equipment used to service such
customer base. The acquisition has been accounted for as a purchase, and is
included in the balance sheet as of June 30, 1999.
Revenue Recognition -- Revenues 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 and
the use of preapproved charges to customer credit cards. 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 fair values for debt and lease
obligations, which have fixed interest rates, do not differ materially from
their carrying values.
Cash and Cash Equivalents -- Cash and cash equivalents consist of cash on
hand, cash deposited in money market accounts, and investments in high grade
commercial paper or treasury notes having maturities of three months or less
when purchased. Cash and cash equivalents are stated at cost, which approximates
fair value.
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 three 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.
F-7
<PAGE> 59
INTERNET AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets -- Other assets consist primarily of subscriber acquisition
costs and goodwill related to the acquisition of NeoSoft. The Company allocates
the purchase price to acquired subscriber bases and goodwill based on reasonable
allocation methods at the time of acquisition. Amortization of subscriber
acquisition costs and goodwill are provided using the straight-line method over
three years commencing upon completion of the transaction.
The carrying values of subscriber acquisition costs and goodwill are
periodically reviewed and impairments, if any, are recognized when expected
future benefit to be derived from individual intangible assets is less than its
carrying value.
Long-Lived Assets -- The Company periodically reviews the values assigned
to long-lived assets, such as property and equipment to determine if any
impairments have occurred. 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.
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 expenses advertising production costs
in the period in which the advertisement is first aired. All other advertising
costs are expensed as incurred. Advertising expenses for the years ended June
30, 1999 and 1998 were $4,751,092 and $1,657,849, 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.
Basic and Diluted Net Loss 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 and for the shares issued in connection with the business
combinations that occurred during the year. 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. Due to the net losses reported for
the periods presented herein, all of the Company's stock options and warrants
are antidilutive, and basic and diluted loss per share amounts are therefore the
same for all periods presented.
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.
F-8
<PAGE> 60
INTERNET AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Data communications and office equipment................... $ 7,522,836 $ 4,530,373
Leasehold improvements..................................... 513,937 450,360
Furniture and fixtures..................................... 315,919 307,404
Computer software.......................................... 424,156 249,484
----------- -----------
8,776,848 5,537,621
Less accumulated depreciation and amortization............. (6,154,211) (3,405,490)
----------- -----------
$ 2,622,637 $ 2,132,131
=========== ===========
</TABLE>
Depreciation and amortization expense charged to operations was $1,685,097
and $1,739,301, for the years ended June 30, 1999 and 1998, respectively.
3. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Goodwill.................................................... $5,432,658 $ --
Acquired subscribers........................................ 4,382,057 1,072,462
Loan origination costs...................................... 20,889 20,353
Deposits.................................................... 76,037 61,811
Other....................................................... 17,500 50,925
---------- ----------
9,929,141 1,205,551
Less accumulated amortization............................... (733,263) (419,917)
---------- ----------
$9,195,878 $ 785,634
========== ==========
</TABLE>
In June 1999, the Company acquired approximately 9,500 subscribers of
NeoSoft, Inc. for approximately $8.3 million, including acquisition costs, which
was allocated to subscriber acquisition costs and goodwill based on the fair
value of customers acquired at June 30, 1999.
4. LINE OF CREDIT AGREEMENTS
Through December 15, 1998 or upon the effective date of a defined
securities registration, the Company could borrow, subject to the approval of a
Director of the Company, up to $350,000 under a revolving credit agreement.
Interest on borrowings under the agreement was at the bank's prime rate (8.5% at
June 30, 1999 and 1998) and was guaranteed by a Director. The Director received
guaranty fees, payable on demand, equal to 18% of the outstanding borrowings,
less interest paid to the bank. The outstanding borrowings at June 30, 1998 were
$225,000. The balance was repaid in December 1998 from the proceeds from the
Company's initial public offering.
F-9
<PAGE> 61
INTERNET AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1999 1998
--------- ----------
<S> <C> <C>
Note payable in connection with equipment acquisitions, due
at varying dates from July 2000 to November 2001, bearing
interest at 7% and 8%, with principal and interest due
monthly................................................... $ 397,251 $ 448,481
Other notes payable due from March 2000 through October
2001, with interest ranging from the prime rate to 16%.... 134,413 --
Note payable to unrelated third party bearing interest at
the prime rate, interest payable annually................. 55,267 --
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......... -- 79,773
Note payable to a related party maturing December 31, 1999
bearing interest at 15%. All outstanding principal and
interest on the note was paid in December 1998............ -- 231,186
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. All outstanding
principal and interest on the note paid in December
1998...................................................... -- 352,125
Note payable to a financial institution maturing December
31, 2003, bearing interest at 10.5%, with principal and
interest payable monthly. All outstanding principal and
interest on the note was paid in December 1998............ -- 473,126
Note payable in connection with the acquisition of a
subscriber base, due December 31, 2003, bearing interest
at 8%. All outstanding principal and interest was paid in
December 1998............................................. -- 178,000
Note payable to a related party maturing December 31, 1999
bearing interest at 8%. All outstanding principal and
interest on the note was paid in December 1998............ -- 80,000
--------- ----------
586,931 1,868,575
Less current portion........................................ (434,934) (686,302)
--------- ----------
$ 151,997 $1,182,273
========= ==========
</TABLE>
6. NOTES PAYABLE TO SHAREHOLDERS
During fiscal 1997, the Company entered into two loan agreements with
entities acting as nominees for current shareholders, with borrowings of
$1,767,713 and $250,000. Interest of 10% and 18%, respectively, was payable
monthly on the notes. The notes were due September 25, 1997 and April 1, 1997,
respectively. The assets of the Company collateralized the notes. On June 30,
1998, the loan agreements, which were in default, were restructured at the prime
rate (8.5% as of June 30, 1998), with borrowings due in monthly payments
approximating $129,000 or upon the effective date of a defined securities
registration. The balance was repaid in December 1998 using proceeds from the
Company's initial public offering.
F-10
<PAGE> 62
INTERNET AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities under operating leases. Rental
expense under these leases was approximately $601,000 and $574,000 for the years
ended June 30, 1999 and 1998, respectively. At June 30, 1999, future minimum
lease payments on capital and operating leases were approximately as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
2000........................................................ $ 73,398 $ 635,870
2001........................................................ 49,183 352,196
2002........................................................ 39,959 37,048
2003........................................................ 20,148 --
2004........................................................ -- --
-------- ----------
Total minimum lease payments...................... 182,688 $1,025,114
==========
Less amounts representing interest.......................... (39,247)
--------
Present value of minimum capitalized lease payments......... 143,441
Less current portion........................................ (41,195)
--------
Long-term capitalized lease obligations..................... $102,246
========
</TABLE>
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)
Earnings Per Share -- Potentially dilutive securities have been excluded
from the computation of earnings per share for the years ended June 30, 1999 and
1998 as their effect is antidilutive. Had the Company been in a net income
position, diluted earnings per share would have included an additional 704,779
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 the year ended June 30, 1999.
Common Stock -- The Company has authorized 40,000,000 shares of $0.01 par
value common stock. During the year ended June 30, 1997, the Company issued
544,149 shares of its common stock in exchange for cash of $232,287. The Company
also issued 15,001 shares of common stock in exchange for services provided by
one of the Company's employees. The shares issued were recorded at $25,000, the
value of the services provided.
During December 1998, the Company completed an initial public offering (the
"Offering") of its common stock and sold 1,700,000 shares at a price of $13 per
share. Proceeds from the Offering, net of underwriting discounts and offering
expenses, were approximately $19.8 million. Part of these proceeds were used to
pay certain indebtedness of $2.1 million.
Preferred Stock -- The Company authorized 5,000,000 shares of preferred
stock issuable in series. The Company authorized 400,000 shares of $0.01 par
value Series A Preferred Stock. Each share of the Series A Preferred Stock was
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 was automatically converted into 2.25 shares of the Company's
common stock 30 days following the public offering of shares of common stock of
the Company.
The Company authorized 300,000 shares of $0.01 par value Series B Preferred
Stock. Each share of Series B Preferred Stock was convertible at any time into
2.25 shares of the Company's common stock. The
F-11
<PAGE> 63
INTERNET AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Series B Preferred Stock automatically converted to common stock 30 days
following the public offering of shares of the Company's common stock. The
Series A and Series B Preferred Stock had no specific dividend rate and the
holders of each class of preferred stock are entitled to receive the same
dividends as holders of common stock.
Employee Stock Purchase Plan -- Effective April 30, 1999, the Company's
Board of Directors adopted the Employee Stock Purchase Plan (the "Purchase
Plan"), which provides for the issuance of a maximum of 200,000 shares of Common
Stock. Eligible employees can have up to 15% of their earnings withheld, up to
certain maximums, to be used to purchase shares of the Company's Common Stock on
every July 1, October 1, January 1 and April 1. The price of the Common Stock
purchased under the Purchase Plan will be equal to 85% of the lower of the fair
market value of the Common Stock on the commencement date of each three-month
offering period or the specified purchase date. During 1999, 1,069 shares were
purchased at $16.05 per share. At June 30, 1999, 198,931 shares were available
under the Purchase Plan for future issuance. The Purchase Plan is subject to
shareholder approval.
Stock Option Plans -- The Company's 1996 Nonqualified Stock Option Plan
(the "1996 Option Plan") was adopted by the Board of Directors and the Company's
shareholders in December 1996. Pursuant to the 1996 Option Plan, the Company may
grant incentive and nonqualified stock options to key employees of the Company.
A total of 225,000 shares of common stock have been reserved for issuance under
the 1996 Option Plan.
The maximum term of options granted under the 1996 Option Plan is ten
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per incidence. The exercise price of incentive stock options
must be equal or greater than the fair market value of common stock on the date
of grant. The exercise price of incentive stock options granted to any person
who at the time of grant owns stock possessing more than 10% of the total
combined voting power of all classes of stock must be at least 110% of the fair
market value of such stock on the date of grant, and the term of these options
cannot exceed five years. The Company currently has 41,891 options outstanding
to its employees under the 1996 Option Plan. These options are exercisable at
$1.67 per share of common stock.
In connection with a note payable for $79,773, the Company issued
detachable warrants during 1996 to purchase 33,750 shares of common stock at
$1.67 per share. The fair value of the warrants has not been reflected in the
financial statements, as the amount was immaterial. The warrants are exercisable
from January 1, 1998 through December 31, 1999. All outstanding principal and
interest on the note was paid in December 1998.
The Company's 1998 Nonqualified Stock Option Plan (the "1998 Option Plan")
was adopted by the Board of Directors and the Company's shareholders in July
1998. A total of 400,000 shares of common stock have been reserved for issuance
under the 1998 Option Plan.
During December 1998, 109,000 options to purchase shares of common stock
were granted to certain directors and employees of the Company under the 1998
Option Plan at an exercise price ranging from $8.00 to $13.00. During April
1999, an option to purchase 75,000 shares of common stock at an exercise price
of $25.00 per share was granted to a director of the Company under the terms of
a consulting agreement.
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 there were no arm's length transactions on or around the date of an
option grant, the Board of Directors determined the value. No compensation
expense has been charged against operations for the years ended June 30, 1999
and 1998.
F-12
<PAGE> 64
INTERNET AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1999 1998
----------- ---------
<S> <C> <C> <C>
Net loss....................................... As reported $(2,463,418) $(645,938)
Pro Forma (3,475,067) (660,400)
Basic and Diluted loss per share............... As reported $ (0.45) $ (0.16)
Pro Forma $ (0.63) $ (0.17)
</TABLE>
A summary of the status of the Company's stock options as of June 30, 1999
and 1998, and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period... 1,189,976 $ 1.59 1,260,364 $1.85
Granted.............................. 184,000 17.28 393,750 1.67
Exercised............................ (244,338) 1.57 -- --
Forfeited............................ (108,929) 2.16 (205,388) 2.43
Purchased............................ -- -- (258,750) 0.09
--------- ---------
Outstanding at end of period......... 1,020,709 4.42 1,189,976 1.59
========= =========
Options exercisable at year end...... 627,166 3.21 733,793 1.55
========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------------
NUMBER WEIGHTED-AVERAGE NUMBER NUMBER
RANGE OF OUTSTANDING REMAINING CONTRACTUAL EXERCISABLE EXERCISABLE
EXERCISE PRICES AT 6/30/99 LIFE AS OF 6/30/99 (YEARS) AT 6/30/99 AT 6/30/98
- --------------- ----------- -------------------------- ----------- -----------
<S> <C> <C> <C> <C>
$ 0.09 55,000 6.1 55,000 78,750
1.67 781,709 7.3 474,666 655,043
8.00 22,500 9.0 22,500 --
13.00 86,500 9.0 67,500 --
25.00 75,000 9.8 75,000 --
</TABLE>
The Black-Scholes value of each option granted is estimated using the
Black-Scholes pricing model with the following assumptions: option term until
exercise ranging from 3 to 6 years, volatility of 50%, risk-free interest rate
of 5.0% and an expected dividend yield of zero. The weighted average grant date
fair value of options granted was $7.01 and $0.90 for the years ended June 30,
1999 and 1998, respectively.
9. INCOME TAXES
No provision for income taxes has been recognized for the year ended June
30, 1999 as the Company has incurred net operating losses for income tax
purposes and has no carryback potential. A current tax provision of $24,000 was
recognized for the year ended June 30, 1998 related to the federal corporate
alternative minimum tax.
F-13
<PAGE> 65
INTERNET AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities as of June 30, 1999 and 1998, consist
of:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 4,695,000 $ 2,195,000
Stock options granted at a discount...................... -- 31,000
Deferred revenue......................................... 113,000 44,000
Allowance for doubtful accounts.......................... -- 124,000
Impairment of equipment.................................. 89,000 67,000
Depreciation and amortization............................ 428,000 387,000
Other.................................................... 44,000 44,000
----------- -----------
Total deferred tax assets........................ 5,369,000 2,892,000
Valuation allowance........................................ (5,369,000) (2,892,000)
----------- -----------
Net deferred tax assets.................................... $ -- $ --
=========== ===========
</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, 1999, the Company has net operating loss carryforwards of
approximately $13.8 million for federal income tax purposes. These net operating
loss carryforwards may be carried forward in varying amounts until 2019 and may
be limited in their use due to significant changes in the Company's ownership.
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the years ended June 30, 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Federal income tax benefit at statutory rate................ (34)% (34)%
State tax benefit, net of federal benefit................... (3) (3)
Valuation allowance......................................... 37 37
Alternative minimum tax..................................... 0 4
--- ---
Total income tax provision........................ 0% 4%
=== ===
</TABLE>
10. EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) plan for the benefit of its employees.
Employees may contribute to the plan up to 15% of their salary, pursuant to a
salary reduction agreement, upon meeting age requirements. The Company made no
discretionary contributions to the Plan through June 30, 1999.
11. BUSINESS COMBINATIONS
On January 29, 1999, the Company exchanged 16,910 shares of its common
stock and assumed liabilities of approximately $1.4 million, for substantially
all of the net assets of CompuNet. On February 18, 1999, the Company exchanged
365,725 shares of its common stock for all the members' interest of CyberRamp.
These combinations were accounted for as poolings of interests. Accordingly, the
financial statements included herein have been restated to include CompuNet and
CyberRamp as of the beginning of the earliest period presented. There were no
intercompany transactions prior to their combination. No significant adjustments
F-14
<PAGE> 66
INTERNET AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
were required to adopt the same accounting practices. The following summarizes
the results of operations for the year ended June 30, 1998 for each of the
combining companies prior to the combinations:
<TABLE>
<S> <C>
Revenue:
Internet America.......................................... $10,643,272
CompuNet.................................................. 1,271,534
CyberRamp................................................. 2,163,419
-----------
Total............................................. $14,078,225
===========
Net income (loss):
Internet America.......................................... $ 1,006,002
CompuNet.................................................. (684,251)
CyberRamp................................................. (967,689)
-----------
Total............................................. $ (645,938)
===========
</TABLE>
12. SUBSEQUENT EVENTS
On July 26, 1999, the Company acquired the subscribers of KDi, Inc., a
Texas corporation ("KDi"), under the terms of an Asset Purchase Agreement.
According to the agreement, the Company agreed to pay up to $464,800, half of
which was paid upon closing. The remaining payment is contingent on the actual
number of KDi subscribers that successfully transition to Internet America's
service by November 25, 1999.
On July 28, 1999, the Company acquired the subscribers of INTX-NET, Inc., a
Texas corporation ("INTX"), under the terms of an Asset Purchase Agreement.
According to the agreement, the Company agreed to pay up to $380,600 in cash,
half of which was paid upon closing. The remaining payment is contingent on the
actual number of INTX subscribers that successfully transition to Internet
America's service by November 27, 1999.
On August 9, 1999, the Company acquired the Texas dial-up subscribers of
PointeCom, Inc., a Texas corporation ("PointeCom"), under the terms of an Asset
Purchase Agreement. According to the agreement, the Company agreed to pay up to
$2,000,000 in cash, half of which was paid upon closing. The remaining payment
is contingent on the actual number of PointeCom subscribers that successfully
transition to Internet America's service by December 8, 1999.
On September 13, 1999, the Company announced a definitive agreement to
acquire all of the outstanding shares of PDQ.net, a Houston-based ISP ("PDQ"),
in a stock-for-stock transaction. According to the agreement, the Company will
issue 2,425,000 shares of its common stock in exchange for all the outstanding
stock of PDQ. The value of the transaction is approximately $32 million based on
the September 10, 1999 closing price for Internet America's common stock. The
transaction will close upon approval of Internet America and PDQ shareholders
and is expected to be accounted for as a purchase.
F-15
<PAGE> 67
PDQ.NET, INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-17
Balance Sheets.............................................. F-18
Statements of Operations.................................... F-19
Statement of Stockholders' Deficit.......................... F-20
Statements of Cash Flows.................................... F-21
Notes to Financial Statements............................... F-22
</TABLE>
F-16
<PAGE> 68
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
PDQ.Net, Incorporated
We have audited the accompanying balance sheets of PDQ.Net, Incorporated (a
Texas corporation) as of December 31, 1998 and 1997 and the related statements
of operations, stockholders' 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, the financial statements referred to above present fairly,
in all material respects, the financial position of PDQ.Net, Incorporated as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Grant Thornton, LLP
Houston, Texas
August 25, 1999
F-17
<PAGE> 69
PDQ.NET, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1999 1998 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 446,487 $ 1,108,364 $ 59,996
Accounts receivable................................. 238,656 9,234 1,457
----------- ----------- -----------
Total current assets........................ 685,143 1,117,598 61,453
PROPERTY AND EQUIPMENT -- net......................... 702,878 386,540 154,429
OTHER ASSETS
Prepaid expenses and deposits....................... 182,462 92,771 19,526
Identifiable intangibles............................ 332,172 -- --
Goodwill, net....................................... 35,668 17,333 18,667
----------- ----------- -----------
Total other assets.......................... 550,302 110,104 38,193
----------- ----------- -----------
$ 1,938,323 $ 1,614,242 $ 254,075
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............ $ 460,339 $ 336,462 $ 158,354
Current maturities of long-term debt................ 99,918 20,888 13,079
Current maturities of capital lease obligations..... 59,848 65,709 --
Deferred revenue.................................... 1,509,603 1,178,639 573,032
----------- ----------- -----------
Total current liabilities................... 2,129,708 1,601,698 744,465
LONG-TERM DEBT, net of current portion................ 24,438 30,417 23,932
CAPITAL LEASE OBLIGATIONS, net of current portion..... 30,577 56,199 --
COMMITMENTS AND CONTINGENCIES......................... -- -- --
STOCKHOLDERS' DEFICIT:
Preferred stock, $10 par value, 1,000,000 shares
authorized, no shares issued or outstanding...... -- -- --
Common stock, $.01 par value, 8,000,000 shares
authorized; 5,768,454 and 3,555,534 shares issued
and outstanding in 1998 and 1997................. 65,180 57,685 35,555
Additional paid-in capital.......................... 2,292,848 1,888,135 800,669
Accumulated deficit................................. (2,604,428) (2,019,892) (1,350,546)
----------- ----------- -----------
Total stockholders' deficit................. (246,400) (74,072) (514,322)
----------- ----------- -----------
$ 1,938,323 $ 1,614,242 $ 254,075
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE> 70
PDQ.NET, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- ------------------------
1999 1998 1998 1997
----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Consumer connectivity..................... $3,309,333 $1,645,941 $4,337,921 $ 1,081,902
Business connectivity..................... 757,602 54,624 185,906 197,386
Other..................................... 10,498 -- -- --
---------- ---------- ---------- -----------
4,077,433 1,700,565 4,523,827 1,279,288
---------- ---------- ---------- -----------
Operating costs and expenses
Connectivity and operations............... 2,297,686 1,026,900 2,490,665 1,012,798
Sales and marketing....................... 1,017,909 523,075 1,180,252 820,661
General and administrative................ 1,151,464 602,879 1,391,385 775,525
Depreciation and amortization............. 181,892 20,341 112,562 27,337
---------- ---------- ---------- -----------
4,648,951 2,173,195 5,174,864 2,636,321
---------- ---------- ---------- -----------
Operating loss......................... (571,518) (472,630) (651,037) (1,357,033)
Interest expense............................ 13,018 1,804 18,309 --
---------- ---------- ---------- -----------
Net loss.................................... $ (584,536) $ (474,434) $ (669,346) $(1,357,033)
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE> 71
PDQ.NET, INCORPORATED
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997.......... $ -- $ 1,016 $ -- $ 6,487 $ 7,503
Sale of stock....................... -- 34,539 800,669 -- 835,208
Net loss............................ -- -- -- (1,357,033) (1,357,033)
------- ------- ---------- ----------- -----------
Balance at December 31, 1997........ -- 35,555 800,669 (1,350,546) (514,322)
Sale of stock....................... -- 22,130 1,087,466 -- 1,109,596
Net loss............................ -- -- -- (669,346) (669,346)
------- ------- ---------- ----------- -----------
Balance at December 31, 1998........ -- 57,685 1,888,135 (2,019,892) (74,072)
Issuance of common stock in
connection with Entech acquisition
(Unaudited)....................... -- 7,495 404,713 -- 412,208
Net loss (Unaudited)................ -- -- -- (584,536) (584,536)
------- ------- ---------- ----------- -----------
Balance at June 30, 1999
(Unaudited)....................... $ -- $65,180 $2,292,848 $(2,604,428) $ (246,400)
======= ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-20
<PAGE> 72
PDQ.NET, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- ------------------------
1999 1998 1998 1997
----------- ----------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $ (584,536) $(474,434) $ (669,346) $(1,357,033)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization......... 181,892 21,008 113,896 27,337
Changes in operating assets and
liabilities, net of the effects
resulting from the acquisitions in
1997 and 1999
Decrease (increase) in accounts
receivable....................... 23,384 115 (7,777) (1,457)
Increase in prepaid expenses and
deposits......................... (86,166) (25,118) (73,245) (19,526)
Increase in accounts payable and
accrued liabilities.............. 39,544 4,274 178,108 158,354
Decrease in bank overdraft.......... -- -- -- (7,466)
Increase in deferred revenue........ 233,477 492,064 605,607 573,032
----------- --------- ---------- -----------
Net cash (used in) provided by
operating activities........... (192,405) 17,909 147,243 (626,759)
----------- --------- ---------- -----------
Cash flows from investing activities:
Net increase (decrease) in cash resulting
from acquisition......................... 16,305 -- -- (20,000)
Purchases of property and equipment...... (394,119) (32,263) (182,855) (128,453)
----------- --------- ---------- -----------
Net cash used in investing
activities..................... (377,814) (32,263) (182,855) (148,453)
----------- --------- ---------- -----------
Cash flows from financing activities:
Long-term borrowings..................... -- -- 28,760 --
Repayment of long-term debt.............. (60,175) (6,428) (14,466) --
Payments of capital lease obligations.... (31,483) -- (39,910) --
Proceeds from sale of common stock....... -- 223,206 1,109,596 835,208
----------- --------- ---------- -----------
Net cash (used in) provided by
financing activities........... (91,658) 216,778 1,083,980 835,208
----------- --------- ---------- -----------
Net (decrease) increase in cash and cash
equivalents.............................. (661,877) 202,424 1,048,368 59,996
Cash and cash equivalents at beginning of
period................................... 1,108,364 59,996 59,996 --
----------- --------- ---------- -----------
Cash and cash equivalents at end of
period................................... $ 446,487 $ 262,420 $1,108,364 $ 59,996
=========== ========= ========== ===========
Supplemental schedule of noncash investing
and financing activities:
Equipment acquired under capital
leases................................ $ -- $ -- $ 161,818 $ --
Acquisitions of property plant and
equipment with debt................... $ -- $ -- $ -- $ 37,011
Issuance of common stock in connection
with Entech acquisition............... $ 412,208 $ -- $ -- $ --
Cash paid for interest..................... $ 13,018 $ 1,804 $ 18,309 $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE> 73
PDQ.NET, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PDQ.Net, Incorporated (the Company) was incorporated on December 11, 1996.
The Company's primary service is to provide internet connections to customers in
the Houston area.
A summary of significant accounting policies applied in the preparation of
the accompanying financial statements follows.
1. CASH AND CASH EQUIVALENTS
The Company's liquid debt instruments with a maturity of three months or
less at the date of purchase are deemed cash equivalents.
The Company maintains cash balances at a financial institution which are
insured by the Federal Deposit Insurance Corporation up to $100,000. At December
31, 1998, uninsured amounts held at this financial institution total $957,458.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash and cash equivalents.
2. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
service lives of the related assets.
3. 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.
4. GOODWILL
Goodwill was acquired through a business acquisition accounted for as a
purchase in 1997 and is being amortized on a straight-line basis over fifteen
years.
5. INCOME TAXES
The Company made an election under the Subchapter S provisions of the
Internal Revenue Code. Accordingly, the income tax consequences from the
Company's activities are reflected in the individual returns of the shareholders
and no provision for federal income taxes is included in the accompanying
financial statements.
6. ADVERTISING
The Company expenses the production costs of advertising as incurred.
Advertising expense was approximately $677,000 and $518,000 in 1998 and 1997.
7. STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic method, as prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the fair market value of the Company's stock at the date of the grant
over the amount the employee must pay to
F-22
<PAGE> 74
PDQ.NET, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
acquire the stock, and is recognized over the related vesting period. The
Company provides supplemental disclosure of the effect on net loss as if the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, had been
applied in measuring compensation expense.
8. LONG LIVED ASSETS
The Company reviews the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying value
amount. The Company has not identified any such impairment losses.
9. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
10. RECLASSIFICATIONS
Certain of the 1997 amounts have been reclassified to conform to the 1998
presentation.
11. UNAUDITED INTERIM INFORMATION
The financial information for the six months ended June 30, 1998 and 1999
has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
management of the Company, the unaudited interim financial information includes
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the respective full
fiscal years.
NOTE B -- ACQUISITIONS
In 1997, the Company made an acquisition accounted for as a purchase. The
purchase price was allocated based on the fair value of the assets acquired, and
the excess of the cost over the fair value of the assets acquired is being
amortized over fifteen years using the straight-line method. The Company made
two acquisitions in 1998 accounted for as purchases, which in the aggregate are
not material.
F-23
<PAGE> 75
PDQ.NET, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31,:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Computer hardware...................................... $ 134,342 $ 68,516
Computer software...................................... 81,148 17,650
Computer equipment under capital leases................ 161,818 --
Leasehold improvements................................. 42,135 43,156
Office furniture and equipment......................... 71,583 51,111
Vehicles............................................... 34,958 --
--------- --------
525,984 180,433
Less accumulated depreciation........................ (139,444) (26,004)
--------- --------
$ 386,540 $154,429
========= ========
</TABLE>
The useful lives of property and equipment for purposes of depreciation
are:
<TABLE>
<S> <C> <C>
Computer hardware.......................................... 5 years
Computer software.......................................... 3 years
Leasehold improvements..................................... 4 years
Office furniture and equipment............................. 7 years
Vehicles................................................... 5 years
</TABLE>
Accumulated depreciation for computer equipment under capital leases was
$37,512 at December 31, 1998.
NOTE D -- LONG-TERM DEBT
The Company had the following long-term debt as of December 31,:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Non-interest bearing note payable to a company with an
imputed interest rate at 8.5%. The note is payable in
monthly installments of $1,288 which includes
interest. The note matures on June 1, 2001, and is
unsecured............................................. $ 24,043 $ 37,011
Note payable to a bank bearing interest at 9.0%. The
note is payable in monthly installments of $423 which
includes interest. The note matures on July 14, 2002,
and is secured by a van............................... 15,418 --
Note payable to a bank bearing interest at 8.5%. The
note is payable in monthly installments of $333 which
includes interest. The note matures on May 18, 2002,
and is secured by a van............................... 11,844 --
-------- --------
51,305 37,011
Less current maturities............................... (20,888) (13,079)
-------- --------
$ 30,417 $ 23,932
======== ========
</TABLE>
F-24
<PAGE> 76
PDQ.NET, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ -------
<S> <C>
1999........................................................ $20,888
2000........................................................ 17,681
2001........................................................ 8,273
2002........................................................ 4,463
-------
$51,305
=======
</TABLE>
NOTE E -- COMMON STOCK
The Board of Directors has authorized a three for one split of common stock
and an increase in the number of shares authorized to 8,000,000. Ratification of
the board's action was obtained by the stockholders in February 1999. Per-share
amounts in the accompanying financial statements have been restated for the
stock split.
NOTE F -- COMMITMENTS
The Company leases equipment and office space under monthly operating lease
agreements. Rent expense for the years ended December 31, 1998 and 1997 was
$622,559 and $289,403.
The minimum rental commitments under operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
<S> <C>
1999........................................................ $628,088
2000........................................................ 820,886
2001........................................................ 703,016
2002........................................................ 289,565
2003........................................................ 12,919
</TABLE>
NOTE G -- OBLIGATIONS UNDER CAPITAL LEASES
The Company is the lessee of computer equipment under capital leases
expiring in various years through 2001. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included in depreciation expense
for 1998.
Minimum future lease payments under capital leases as of December 31, 1998
for each of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
<S> <C>
1999...................................................... $ 84,282
2000...................................................... 58,102
2001...................................................... 4,566
--------
Total minimum lease payments................................ 146,950
Less: Amount representing interest.......................... (25,042)
--------
Present value of minimum lease payments..................... $121,908
========
</TABLE>
F-25
<PAGE> 77
PDQ.NET, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest rates on capitalized leases approximate 20% and are imputed based
on the lower of the Company's incremental borrowing rate at the inception of
each lease or the lessor's implicit rate of return.
NOTE H -- STOCK OPTION PLAN
In 1998, the Company adopted an employee stock option plan. Under the plan,
the Company may grant options for up to 1.4 million shares of common stock. The
exercise price of each option is to be equal to or greater than the market price
of the Company's stock on the date of grant. The maximum term of an option is
ten years, and the vesting of each option is 25% after the first anniversary of
the grantee's date of employment and the remainder vests at a rate of 1/12th of
such amount at the end of each three month period thereafter.
The Company applies APB Opinion 25 in accounting for stock options issued
to employees. Accordingly, no compensation cost has been recognized for the plan
in 1998. Had compensation cost been determined on the basis of fair value
pursuant to FASB Statement No. 123, net loss would have been increased to
$689,360 on a pro forma basis. The fair value of stock options granted was
estimated on the date of grant using the minimum value method. An expected life
of 5 years, risk-free rate of return of 5.5%, and a dividend yield of 0% was
assumed in estimating fair value.
Following is a summary of the status of the options during 1998 and 1997:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
PRICE AVERAGE
NUMBER OF RANGE EXERCISE
SHARES PER SHARE PRICE
--------- ----------- --------
<S> <C> <C> <C>
Outstanding at January 1, 1997............ -- -- --
Granted................................. 210,000 $0.42 $0.42
-------
Outstanding at December 31, 1997.......... 210,000 $0.42 $0.42
Granted................................. 379,000 $0.42-$0.55 $0.47
-------
Outstanding at December 31, 1998.......... 589,000 $0.42-$0.55 $0.46
Exercisable at
December 31, 1997.................... 84,600 $0.42
December 31, 1998.................... 386,688 $0.44
</TABLE>
Following is a summary of the status of options outstanding at December 31,
1998:
<TABLE>
<CAPTION>
OUTSTANDING
---------------------
WEIGHTED
AVERAGE
REMAINING
EXERCISE CONTRACTUAL EXERCISABLE
PRICE NUMBER LIFE NUMBER
-------- ------- ----------- -----------
<S> <C> <C> <C>
$0.42........................................ 315,000 5.5 years 262,500
$0.46........................................ 165,000 4.5 years 82,500
$0.55........................................ 109,000 9.8 years 41,688
------- -------
589,000 386,688
======= =======
</TABLE>
NOTE I -- SUBSEQUENT EVENTS
Effective January 1, 1999, the Company revoked its election under the
Subchapter S provisions of the Internal Revenue Code and became a C corporation.
In February 1999, the shareholders ratified an increase in the number of
common stock shares authorized to 16,000,000.
F-26
<PAGE> 78
PDQ.NET, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On April 2, 1999, the Company acquired Entrepreneurial Technologies, Inc.
(ETI) in a business combination accounted for as a purchase. The purchase price
of $412,208 exceeded the fair value of the net assets of ETI by $23,385, which
will be amortized on the straight-line method over 4 years. The results of
operations of ETI will be included with the results of the Company from April 2,
1999.
(UNAUDITED)
On September 13, 1999, Internet America, Inc. (IA) announced a definitive
agreement to acquire all of the outstanding shares of the Company in a
stock-for-stock transaction. According to the agreement, IA will issue 2,425,000
shares of its common stock in exchange for all the outstanding stock of the
Company. The value of the transaction is approximately $32 million based upon
the September 10, 1999 closing price for IA's common stock. The transaction will
close upon approval of IA and the Company's shareholders and is expected to be
accounted for as a purchase.
F-27
<PAGE> 79
APPENDIX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated as of September
12, 1999, is by and among PDQ.Net, Incorporated, a Texas corporation (the
"Company"), William E. Ladin, Jr. ("Ladin") and J.N. Palmer Family Partnership
("Palmer"), principal shareholders of the Company, Internet America, Inc., a
Texas corporation ("Parent") and GEEK Houston II, Inc., a Texas corporation and
wholly owned subsidiary of Parent (the "Merger Sub"). Ladin and Palmer are
referred to collectively as the "Principal Shareholders."
WITNESSETH:
WHEREAS, the Company is in the business of providing Internet access to
customers, both individuals and businesses, in the Texas market;
WHEREAS, the respective Boards of Directors of the Company, Merger Sub and
Parent have adopted resolutions approving and adopting the proposed merger (the
"Merger") of Merger Sub with and into the Company upon the terms and conditions
hereinafter set forth in this Agreement; and
WHEREAS, Parent, Merger Sub, the Company and the Principal Shareholders
intend that the Merger of Merger Sub with and into the Company qualify as a
tax-free reorganization under the provisions of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code") and the Treasury Regulations
promulgated thereunder; and
WHEREAS, the Principal Shareholders, who together own approximately 59% of
the outstanding common stock of the Company, desire to enter into this Agreement
for the purpose of evidencing their consent to the consummation of the Merger
and for the purpose of making certain representations, warranties, covenants and
agreements. Certain terms used in this Agreement are defined in Exhibit A
attached hereto; and
WHEREAS, as a condition and inducement of the Company and Parent entering
into this Agreement and incurring the obligations set forth herein, certain
shareholders of the Company and Parent have entered into a Voting Agreement, in
substantially the form attached hereto as Exhibit B (the "Voting Agreement").
NOW, THEREFORE, in consideration of the mutual representations, warranties
and covenants herein contained, and on the terms and subject to the conditions
herein set forth, the parties hereby agree as follows:
ARTICLE I.
THE MERGER
SECTION 1.01. The Merger. Subject to the terms and conditions of this
Agreement, Merger Sub will be merged with and into the Company and the separate
corporate existence of Merger Sub shall thereupon cease. The Company (sometimes
referred to herein as the "Surviving Corporation") shall be the surviving
corporation in the Merger. The Merger shall have the effects set forth in
Article 5.06 of the Texas Business Corporation Act (the "TBCA").
SECTION 1.02. Effective Time of the Merger. The parties hereto shall cause
Articles of Merger (the "Articles of Merger") that meet the requirements of the
applicable provisions of the TBCA to be properly executed and filed with the
Secretary of State of Texas on the Closing Date. The Merger shall be effective
at the time of acceptance of the filing of the Articles of Merger with the
Secretary of State of the State of Texas in accordance with the TBCA or at such
later time which the parties hereto shall have agreed upon and designated in
such filing as the effective time of the Merger (the "Effective Time").
A-1
<PAGE> 80
SECTION 1.03. The Surviving Corporation.
(a) Articles of Incorporation. The Articles of Incorporation of the
Company shall be the Articles of Incorporation of the Surviving
Corporation.
(b) Bylaws. The Bylaws of the Company as in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation.
(c) Directors and Officers. The directors and officers of the Company
shall be as set forth on Schedule 1.03 from the Effective Time until their
respective successors are duly elected or appointed and qualify in the
manner provided in the Articles of Incorporation and Bylaws of the
Surviving Corporation, or as otherwise provided by law.
SECTION 1.04. Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of Company, Parent, Merger Sub or any
holder of capital stock of any of them, subject to the limitations contained
herein:
(a) Subject to Section 1.06, each share of common stock of the Company
(the "Company Common Stock") issued and outstanding immediately prior to
the Effective Time shall be automatically converted into the right to
receive shares of fully paid and nonassessable common stock of Parent (the
"Parent Common Stock") in the amount equal to the Exchange Ratio; provided,
however, that of the shares of Parent Common Stock to be issued hereunder,
240,000 of such shares (the "Escrowed Shares") shall be held in an escrow
account pursuant to an escrow agreement, the form of which is attached
hereto as Exhibit E (the "Escrow Agreement"), for indemnification purposes.
The Escrowed Shares shall be apportioned among the holders of Company
Common Stock in accordance with their pro rata portion of the aggregate
shares of Company Common Stock. By approving this Agreement at a vote of
shareholders of the Company or by written consent, such shareholders agree
(i) to the terms of the Escrow Agreement, (ii) to the appointment of Ladin
as their representative for purposes of the Escrow Agreement, (iii) that
the Escrow Agreement cannot be terminated or amended without the prior
written consent of Parent, except as provided in the Escrow Agreement and
(iv) to the indemnification provisions contained in Section 11.01 herein.
The shares of Parent Common Stock shall be issued to the Company's
shareholders as set forth on Schedule 1.04(a).
(b) Each Company Incentive Stock Option outstanding immediately prior
to the Effective Time shall be exchanged for an option to purchase Parent
Common Stock in the amount of the Exchange Ratio (the "Parent Incentive
Stock Options") under a substantially similar Incentive Stock Option Plan
to be adopted by Parent prior to Closing, and each Company Incentive Stock
Option shall be deemed to be canceled as of the Closing Date. The Parent
Incentive Stock Options shall be issued as set forth on Schedule 1.04(b).
(c) Each Company Non-Qualified Stock Option outstanding immediately
prior to the Effective Time shall be exchanged for an option to purchase
Parent Common Stock in the amount of the Exchange Ratio (the "Parent
Nonqualified Stock Options", and together with the Parent Incentive Stock
Options, the "Parent Options") under a substantially similar Non-Qualified
Stock Option Plan to be adopted by Parent prior to Closing, and each
Company Non-Qualified Stock Option shall be deemed canceled as of the
Closing Date. The Parent Non-Qualified Stock Options shall be issued as set
forth on Schedule 1.04(c).
(d) Each share of common stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall automatically be converted
into and become one share of Common Stock of the Surviving Corporation and
shall constitute the only outstanding shares of capital stock of the
Surviving Corporation.
SECTION 1.05. Stock Certificates. At or following the Effective Time, each
holder of an outstanding certificate or certificates representing Company Common
Stock shall surrender the same to the Parent and the Parent shall, in exchange
therefor, issue to the holder of such certificate(s) shares of Parent Common
Stock in
A-2
<PAGE> 81
accordance with Section 1.04, and the surrendered certificate(s) shall be
canceled. From and after the Effective Time, all shares of the Company Common
Stock converted in accordance with Section 1.04 shall no longer be outstanding
and shall automatically be canceled and retired and shall cease to exist. Until
surrendered and exchanged, each certificate of Company Common Stock shall
represent solely the right to receive Parent Common Stock in accordance with
Section 1.04, without interest and less any tax withholding. From and after the
Effective Time, all certificates representing the common stock of Merger Sub
shall be deemed for all purposes to represent the number of shares of common
stock of the Surviving Corporation into which they are converted in accordance
with Section 1.04.
SECTION 1.06. Dissenting Shares. Each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time not voted in favor of
the Merger, the holder of which has given written notice of the exercise of
dissenter's rights and has perfected such rights as required by the TBCA, is
herein called a "Dissenting Share." Dissenting Shares shall not be converted
into or represent the right to receive Parent Common Stock pursuant to Section
1.04 and shall be entitled only to such rights as are available to such holder
pursuant to the TBCA, unless the holder thereof shall have withdrawn or
forfeited his dissenter's rights. Each holder of Dissenting Shares shall be
entitled to receive the value of such Dissenting Shares held by him in
accordance with the applicable provisions of the TBCA. The Company will pay to
any holder of Dissenting Shares such amount as such holder shall be entitled to
receive in accordance with the applicable provisions of the TBCA. If any holder
of Dissenting Shares shall effectively withdraw or forfeit his dissenter's
rights under the TBCA, such Dissenting Shares shall be converted into the right
to receive Parent Common Stock in accordance with Section 1.04.
SECTION 1.07. Tax-Free Reorganization. The parties hereto intend that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code. The parties hereto adopt this Agreement as a "plan of reorganization"
within the meaning of Section 1.368-2(g) and 1.368-3(a) of the Treasury
Regulations promulgated thereunder.
SECTION 1.08. Further Documents. Each party hereto will, either prior to or
after the Effective Time, execute such further documents, instruments, deeds,
bills of sale, assignments and assurances and take such further actions as may
reasonably be requested by one or more of the other parties to consummate the
Merger, to vest the Surviving Corporation with full title to all assets,
properties, privileges, rights, approvals, immunities and franchises of Merger
Sub or the Company, or to effect the other purposes of this Agreement.
SECTION 1.09. Adjustment of Exchange Ratio. The Exchange Ratio shall be
adjusted in the event of any consolidation, reorganization, recapitalization,
stock split, stock dividend or other like event which occurs, between the date
of this Agreement and the Closing Date, with respect to the Parent Common Stock.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PRINCIPAL SHAREHOLDERS
Each of the Principal Shareholders, severally and not jointly, represents
and warrants that the following are true and correct as of the date hereof and
will be true and correct through the Closing Date as if made on that date:
SECTION 2.01. Ownership of the Stock. Such Principal Shareholder owns,
beneficially and of record, good and marketable title to the shares of Company
Common Stock set forth opposite such Principal Shareholder's name on Schedule
3.01, free and clear of all security interests, liens, adverse claims,
encumbrances, equities, proxies, options and shareholders' agreements, except as
set forth in Schedule 3.01. At the Closing, such Principal Shareholder will
convey to Parent or tender in exchange for the Parent Common Stock good and
marketable title to all of the shares of Company Common Stock set forth opposite
such Principal Shareholder's name on Schedule 3.01, free and clear of any
security interests, liens, adverse claims, encumbrances, equities, proxies,
options or shareholders' agreements, except as set forth in Schedule 3.01.
A-3
<PAGE> 82
SECTION 2.02. No Other Commitments. Except as set forth in Schedule 2.02,
such Principal Shareholder is not party to or bound by, nor does such Principal
Shareholder have any knowledge of, any agreement, instrument, arrangement,
contract, obligation, commitment or understanding of any character, whether
written or oral, express or implied, relating to the sale, assignment,
encumbrance, conveyance, transfer or delivery of any capital stock of the
Company owned by such Principal Shareholder or any securities of any Subsidiary.
SECTION 2.03. Authority and Validity. Such Principal Shareholder has full
power and authority to execute, deliver and perform this Agreement and the
agreements set forth in Schedule 2.03 (the "Related Agreements") to which such
Principal Shareholder is or shall be a party, and to consummate the transactions
contemplated hereby and thereby. This Agreement and the Related Agreements have
been or will be as of the Closing Date duly executed and delivered by such
Principal Shareholder, and constitute or will constitute at Closing the legal,
valid and binding obligations of such Principal Shareholder, enforceable against
such Principal Shareholder in accordance with their respective terms, except as
may be limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies.
SECTION 2.04. No Violation. Except as set forth in Schedule 2.02, neither
the execution, delivery or performance of this Agreement or the Related
Agreements, nor the consummation of the transactions contemplated hereby or
thereby, will (a) conflict with, or result in a violation or breach of the
terms, conditions or provisions of, or constitute a default under, any
organizational document of such Principal Shareholder or any agreement,
indenture or other instrument under which such Principal Shareholder is bound or
to which the shares of Company Common Stock owned by such Principal Shareholder
are subject, or result in the creation or imposition of any security interest,
lien, charge or encumbrance upon the shares of Company Common Stock owned by
such Principal Shareholder, or (b) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or public, governmental
or regulatory agency or body having jurisdiction over such Principal Shareholder
or the shares of Company Common Stock owned by such Principal Shareholder.
SECTION 2.05. Compliance with Laws. There are no existing violations by
such Principal Shareholder of any federal, state or local law or regulation that
could affect the property or business of the Company. Such Principal Shareholder
is not subject to, or in default with respect to, any continuing court or
administrative order, writ, injunction or decree applicable specifically to the
Company or to its business, assets, operations or employees.
SECTION 2.06. Investments in Competitors. Such Principal Shareholder does
not own directly or indirectly any interests or any investment in any
corporation, business or other person that is a Competitor of the Company or any
Subsidiary, other than a passive investment consisting of an aggregate interest
of up to 5% in any such Competitor which is a reporting company under the
Securities Exchange Act of 1934, as amended.
SECTION 2.07. Consents. Except as set forth in Schedule 2.02, no consent,
authorization, approval, permit or license of, or filing with, any governmental
or public body or authority, any lender or lessor or any other person or entity
is required to authorize, or is required in connection with, the execution,
delivery and performance of this Agreement or the Related Agreements by such
Principal Shareholder.
SECTION 2.08. Status of Principal Shareholders. Such Principal Shareholder
is a sophisticated investor with such knowledge and experience in financial and
business matters that such Principal Shareholder is capable of evaluating the
merits and risks of an investment in Parent, and is able to bear the economic
risk of loss of such Principal Shareholder's investment in Parent. Such
Principal Shareholder is an "accredited investor," as that term is defined in
Rule 501(a) of Regulation D under the Securities Act. Such Principal Shareholder
is acting on its own behalf in connection with the investigation and examination
of Parent and its decision to execute these documents and consummate the
transactions contemplated herein. Such Principal Shareholder is acquiring its
portion of the Parent Common Stock for its own account and not with a view to
distribution. Such Principal Shareholder acknowledges that the Parent Common
Stock is not and will not be registered except as provided in Article X and may
not be sold or transferred in the absence of registration
A-4
<PAGE> 83
under the Securities Act and applicable state securities laws, unless an
exemption exists therefor (including, without limitation, Rule 144 under the
Securities Act).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND LADIN
The Company and Ladin represent and warrant that the following are true and
correct as of the date hereof and will be true and correct through the Closing
Date as if made on that date (it being acknowledged and agreed that
indemnification for any breaches of the representations and warranties set forth
in this Article III shall be as provided in Article XI below):
SECTION 3.01. Ownership of the Stock. The shareholders listed on Schedule
3.01 own, beneficially and of record, good and marketable title to the shares of
Company Common Stock set forth opposite such shareholders' names on Schedule
3.01, which constitutes all of the issued and outstanding capital stock of the
Company, and to the knowledge of the Company and Ladin, free and clear of all
security interests, liens, adverse claims, encumbrances, equities, proxies,
options or shareholders' agreements, except as set forth in Schedule 3.01. At
the Closing, the shareholders of the Company will convey to Parent good and
marketable title to all of the issued and outstanding capital stock of the
Company, free and clear of any security interests, liens, adverse claims,
encumbrances, equities, proxies, options, shareholders' agreements or
restrictions, except as set forth in Schedule 3.01.
SECTION 3.02. Organization and Good Standing; Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation, with all requisite corporate power and
authority to carry on the business in which it is engaged, to own the properties
it owns, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The Company is duly qualified and licensed to
do business and is in good standing in all jurisdictions where the nature of its
business makes such qualification necessary, which jurisdictions are listed on
Schedule 3.02. The Company does not have any assets, employees or offices in any
state other than the states listed on Schedule 3.02.
SECTION 3.03. Capitalization. The authorized capital stock of the Company
consists of (a) 16,000,000 shares of common stock, par value $0.01 per share, of
which 6,517,923 shares are issued and outstanding, and (b) 1,000,000 shares of
preferred stock, par value $10.00 per share, of which no shares are issued and
outstanding, and no shares of such capital stock are held in the treasury of the
Company. All of the issued and outstanding shares of capital stock of the
Company are duly authorized, validly issued, fully paid and nonassessable.
Except as set forth on Schedule 3.03, there exist no options, warrants,
subscriptions or other rights to purchase, or securities convertible into or
exchangeable for, the capital stock of the Company. Except as set forth in
Schedule 3.01, neither the Company nor, to the Company's or Ladin's knowledge,
the shareholders of the Company are parties to or bound by, nor do they have any
knowledge of, any agreement, instrument, arrangement, contract, obligation,
commitment or understanding of any character, whether written or oral, express
or implied, relating to the sale, assignment, encumbrance, conveyance, transfer
or delivery of any capital stock of the Company. No shares of capital stock of
the Company have been issued or disposed of in violation of the preemptive
rights of any of the Company's shareholders. Any accrued dividends on the
capital stock of the Company, whether or not declared, have been paid in full.
SECTION 3.04. Corporate Records. The copies of the Company's Articles of
Incorporation and Bylaws, and all amendments thereto, that have been delivered
to Parent are true, correct and complete copies thereof, as in effect on the
date hereof. The minute books of the Company, copies of which have been
delivered to Parent, contain accurate minutes of all meetings of, and accurate
consents to all actions taken without meetings by, the Board of Directors (and
any committees thereof) and the shareholders of the Company since the formation
of the Company.
SECTION 3.05. Authorization and Validity. The execution, delivery and
performance by the Company of this Agreement and the other agreements
contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby, have been or will be upon approval by the necessary vote of
shareholders of the Company duly authorized by all director and shareholder
action required by the Company. This
A-5
<PAGE> 84
Agreement and the Related Agreements have been or will be as of the Closing Date
duly executed and delivered by the Company and constitute or will constitute
legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms, except as may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally or the availability of equitable remedies, subject to approval by the
shareholders of the Company. The merger of Merger Sub with and into the Company
as set forth herein will not impair the ability or authority of the Company to
carry on its business as now conducted in any respect.
SECTION 3.06. Subsidiaries. Except as set forth on Schedule 3.06, the
Company does not own, directly or indirectly, any of the capital stock of any
other corporation or any equity, profit sharing, participation or other interest
in any corporation, partnership, joint venture or other entity. Each Subsidiary
is duly organized and validly existing in good standing under the laws of the
state in which it is incorporated, and is duly qualified to do business and in
good standing in each jurisdiction wherein failure to qualify to do business
could adversely affect the Subsidiary. The Company has delivered to Parent true,
complete and correct copies of the Articles of Incorporation and Bylaws of each
Subsidiary, as in effect on the date hereof. The authorized capital stock of
each Subsidiary is set forth in Schedule 3.06. All issued and outstanding shares
of capital stock of each Subsidiary are duly authorized and validly issued and
outstanding, fully paid and nonassessable and are owned by the Company free and
clear of all security interests, liens, adverse claims, encumbrances, equities,
proxies, options or shareholders' agreements. There are in existence no options,
warrants or similar rights granted by any Subsidiary, or any agreements to which
any Subsidiary is a party, for the issuance or sale by it of any securities
except to the Company. Each Subsidiary has obtained or duly applied for all such
material licenses, permits and certificates from government agencies and
authorities as are necessary to the conduct of its business, and the
consummation of the transactions contemplated hereby will not result in the loss
or impairment of, or any default under, any such license, permit or certificate.
SECTION 3.07. No Violation. Neither the execution, delivery or performance
of this Agreement or the Related Agreements nor the consummation of the
transactions contemplated hereby or thereby will (a) conflict with, or result in
a violation or breach of the terms, conditions or provisions of, or constitute a
default under, the Articles of Incorporation or Bylaws of the Company or any
agreement, indenture or other instrument under which the Company is bound or to
which the Company Common Stock or any of the assets of the Company or any
Subsidiary are subject, or result in the creation or imposition of any security
interest, lien, charge or encumbrance upon the Company Common Stock or any of
the assets of the Company or any Subsidiary, or (b) violate or conflict with any
judgment, decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the Company,
the Company Common Stock or the assets of the Company or any Subsidiary.
SECTION 3.08. Consents. Except as set forth in Schedule 3.08, no consent,
authorization, approval, permit or license of, or filing with, any governmental
or public body or authority, any lender or lessor or any other person or entity
is required to authorize, or is required in connection with, the execution,
delivery and performance of this Agreement or the Related Agreements on the part
of the Company.
SECTION 3.09. Financial Statements. The Company has furnished to Parent the
audited consolidated balance sheet and related audited consolidated statements
of income, retained earnings and cash flows for the twelve-month periods ended
December 31, 1998 and December 31, 1997, including the notes thereto (the
"Audited Financial Statements"), as well as unaudited consolidated balance
sheets and related unaudited consolidated statements of income, retained
earnings and cash flows for each month ended thereafter through July 31, 1999
(the "Unaudited Financial Statements," and together with the Audited Financial
Statements, the "Financial Statements"). The Audited Financial Statements are
true, correct and complete, are in accordance with the books and records of the
Company and the Subsidiaries, fairly present the consolidated financial
condition and results of operations of the Company and the Subsidiaries as of
the dates and for the periods indicated and have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis with
prior periods. The Unaudited Financial Statements are in accordance with the
books and records of the Company and the Subsidiaries, and fairly present the
consolidated financial condition and results of operations of the Company and
the Subsidiaries as of the dates and for the periods indicated, except for the
absence of notes thereto and subject to normal year-end audit adjustments which
are not material. The
A-6
<PAGE> 85
books of account of the Company and the Subsidiaries have been kept accurately
in the ordinary course of business, the transactions entered therein represent
bona fide transactions and the revenues, expenses, assets and liabilities of the
Company and the Subsidiaries have been properly recorded in such books.
SECTION 3.10. Liabilities and Obligations. The Financial Statements reflect
all liabilities of the Company and the Subsidiaries, accrued, contingent or
otherwise (known or unknown and asserted or unasserted), arising out of
transactions effected or events occurring on or prior to the date hereof. All
reserves shown in the Financial Statements are appropriate, reasonable and
sufficient to provide for losses thereby contemplated. Except as set forth in
the Financial Statements, neither the Company nor any Subsidiary is liable upon
or with respect to, or obligated in any other way to provide funds in respect of
or to guarantee or assume in any manner, any debt, obligation or dividend of any
person, corporation, association, partnership, joint venture, trust or other
entity, and neither the Company, any Subsidiary nor Ladin know of any basis for
the assertion of any other claims or liabilities of any nature or in any amount.
SECTION 3.11. Employee Matters.
(a) Cash Compensation. Schedule 3.11(a) contains a complete and
accurate list of the names, titles and cash compensation, including without
limitation wages, salaries, bonuses (discretionary and formula) and other
cash compensation (the "Cash Compensation") of all employees of the Company
and the Subsidiaries. Except as set forth on Schedule 3.11(a), there have
been no promised increases in Cash Compensation of employees of the Company
and the Subsidiaries that have not yet been effected.
(b) Compensation Plans. Schedule 3.11(b) contains a complete and
accurate list of all compensation plans, arrangements or practices (the
"Compensation Plans") sponsored by the Company and/or the Subsidiaries or
to which the Company or any Subsidiary contributes on behalf of its
employees, other than Employee Benefit Plans listed in Schedule 3.12(a).
The Compensation Plans include without limitation plans, arrangements or
practices that provide for severance pay, deferred compensation, incentive,
bonus or performance awards, and stock ownership or stock options. The
Company has provided Parent a copy of each written Compensation Plan and a
written description of each unwritten Compensation Plan. Each of the
Compensation Plans can be terminated or amended at will by the Company.
(c) Employment Agreements. Schedule 3.11(c) contains a complete and
accurate list of all employment agreements (the "Employment Agreements") to
which the Company and/or any Subsidiary is a party with respect to its
employees. The Employment Agreements include without limitation employee
leasing agreements, employee services agreements and noncompetition
agreements. The Company has provided Parent a copy of each written
Employment Agreement and a written description of each unwritten Employment
Agreement.
(d) Employee Policies and Procedures. Schedule 3.11(d) contains a
complete and accurate list of all employee manuals, policies, procedures
and work-related rules (the "Employee Policies and Procedures") that apply
to employees of the Company and/or any Subsidiary. The Company has provided
or made available to Parent a copy of all written Employee Policies and
Procedures and a written description of all unwritten Employee Policies and
Procedures. Each of the Employee Policies and Procedures can be amended or
terminated at will by the Company or the appropriate Subsidiary, as the
case may be.
(e) Unwritten Amendments. No unwritten amendments have been made,
whether by oral communication, pattern of conduct or otherwise, with
respect to any Compensation Plans, Employment Agreements or Employee
Policies and Procedures.
(f) Labor Compliance. The Company and each Subsidiary (i) has been and
is in compliance with all laws, rules, regulations and ordinances
respecting employment and employment practices, terms and conditions of
employment and wages and hours, and (ii) is not liable for any arrears of
wages or penalties for failure to comply with any of the foregoing. Neither
the Company nor any Subsidiary has engaged in any unfair labor practice or
discriminated on the basis of race, color, religion, sex, national origin,
age or handicap in its employment conditions or practices. There are no (i)
unfair labor practice charges or
A-7
<PAGE> 86
complaints or racial, color, religious, sex, national origin, age or
handicap discrimination charges or complaints pending or, to the knowledge
of Company and Ladin, threatened, against the Company or any Subsidiary
before any federal, state or local court, board, department, commission or
agency nor, to the knowledge of the Company and Ladin, does any basis
therefor exist or (ii) existing or, to the knowledge of Company and Ladin,
threatened, labor strikes, disputes, grievances, controversies or other
labor troubles affecting the Company or any Subsidiary, nor, to the
knowledge of the Company and Ladin, does any basis therefor exist.
(g) Unions. Neither the Company nor any Subsidiary has ever been a
party to any agreement with any union, labor organization or collective
bargaining unit. No employees of the Company or any Subsidiary are
represented by any union, labor organization or collective bargaining unit.
To the knowledge of the Company and Ladin, the employees of the Company and
the Subsidiaries have no intention to and have not threatened to organize
or join a union, labor organization or collective bargaining unit.
(h) Aliens. All employees of the Company and the Subsidiaries are
citizens of, or are authorized to be employed in, the United States.
SECTION 3.12. Employee Benefit Plans.
(a) Identification. Schedule 3.12(a) contains a complete and accurate
list of all employee benefit plans (the "Employee Benefit Plans") (within
the meaning of Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA")) sponsored by the Company or any Subsidiary
or to which the Company or any Subsidiary contributes on behalf of its
employees and all Employee Benefit Plans previously sponsored or
contributed to on behalf of its employees within the three years preceding
the date hereof. The Company has provided Parent with or made available to
Parent, copies of all plan documents, determination letters, pending
determination letter applications, trust instruments, insurance contracts,
administrative services contracts, annual reports, actuarial valuations,
summary plan descriptions, summaries of material modifications,
administrative forms and other documents that constitute a part of or are
incident to the administration of the Employee Benefit Plans. In addition,
the Company has provided Parent a written description of all existing
practices engaged in by the Company or any Subsidiary that constitute
Employee Benefit Plans. Each of the Employee Benefit Plans can be
terminated or amended at will by the Company or the appropriate Subsidiary,
as the case may be. No unwritten amendment exists with respect to any
Employee Benefit Plan.
(b) Administration. Each Employee Benefit Plan has been administered
and maintained in compliance with all laws, rules and regulations. No
Employee Benefit Plan is currently the subject of an audit, investigation,
enforcement action or other similar proceeding conducted by any state or
federal agency. No prohibited transactions (within the meaning of Section
4975 of the Code) have occurred with respect to any Employee Benefit Plan.
No threatened or pending claims, suits or other proceedings exist with
respect to any Employee Benefit Plan other than normal benefit claims filed
by participants or beneficiaries.
(c) Qualification. The Company has received a favorable determination
letter or ruling from the Internal Revenue Service for each Employee
Benefit Plan intended to be qualified within the meaning of Section 401(a)
of the Code and/or tax-exempt within the meaning of Section 501(a) of the
Code. No proceedings exist or have been threatened that could result in the
revocation of any such favorable determination letter or ruling.
(d) Funding Status. No accumulated funding deficiency (within the
meaning of Section 412 of the Code), whether waived or unwaived, exists
with respect to any Employee Benefit Plan or any plan sponsored by any
member of a controlled group (within the meaning of Section 412(n)(6)(B) of
the Code) in which the Company or any Subsidiary is a member (a "Controlled
Group"). With respect to each Employee Benefit Plan subject to Title IV of
ERISA, the assets of each such plan are at least equal in value to the
present value of accrued benefits determined on an ongoing basis as of the
date hereof. With respect to each Employee Benefit Plan described in
Section 501(c)(9) of the Code, the assets of
A-8
<PAGE> 87
each such plan are at least equal in value to the present value of accrued
benefits as of the date hereof. Schedule 3.12(d) contains a complete and
accurate statement of all actuarial assumptions applied to determine the
present value of accrued benefits under all Employee Benefit Plans subject
to actuarial assumptions. Neither the Company nor any Subsidiary or any
member of a Controlled Group has any liability to pay excise taxes with
respect to any Employee Benefit Plan under applicable provisions of the
Code or ERISA.
(e) Multiemployer Plans. Neither the Company nor any Subsidiary nor
any member of a Controlled Group is or ever has been obligated to
contribute to a multiemployer plan within the meaning of Section 3(37) of
ERISA.
(f) PBGC. No facts or circumstances exist that would result in the
imposition of liability against Parent by the Pension Benefit Guaranty
Company as a result of any act or omission by the Company, any Subsidiary
or any member of a Controlled Group. No reportable event (within the
meaning of Section 4043 of ERISA) for which the notice requirement has not
been waived has occurred with respect to any Employee Benefit Plan subject
to the requirements of Title IV of ERISA.
(g) Medical and Dental Care Claims. To the Company's and Ladin's
knowledge, Schedule 3.12(g) contains a complete and accurate list of all
claims made (without identifying specific individuals) under any medical or
dental care plan or commitment offered by the Company or any Subsidiary to
its employees involving hospitalization, medical or dental care claims that
have exceeded $80,000 per year for an individual during the Company's
current fiscal year or the last fiscal year preceding the date hereof.
Neither the Company nor any Subsidiary has any obligation or commitment to
provide medical, dental or life insurance benefits to or on behalf of any
of its employees who may retire or any of its former employees who have
retired from employment with the Company or any Subsidiary, except as
otherwise required by part 6 of Subtitle B of Title I of ERISA.
SECTION 3.13. Absence of Certain Changes. Except as set forth in Schedule
3.13, since July 31, 1999, neither the Company nor any Subsidiary has
(a) suffered any material adverse change in its condition (financial
or otherwise), operations, assets, liabilities, business or prospects;
(b) contracted for the purchase of any capital assets having a cost in
excess of $60,000 or paid any capital expenditures in excess of $60,000;
(c) incurred any indebtedness for borrowed money or issued or sold any
debt securities;
(d) incurred or discharged any liabilities or obligations except in
the ordinary course of business;
(e) paid any amount on any indebtedness prior to the due date,
forgiven or canceled any debts or claims or released or waived any rights
or claims;
(f) mortgaged, pledged or subjected to any security interest, lien,
lease or other charge or encumbrance any of its properties or assets;
(g) suffered any damage or destruction to or loss of any assets
(whether or not covered by insurance) that has materially and adversely
affected, or that the Company or Ladin reasonably expect to materially and
adversely affect, its business;
(h) acquired or disposed of any assets except in the ordinary course
of business;
(i) written up or written down the carrying value of any of its
assets;
(j) changed the costing system or depreciation methods of accounting
for its assets;
(k) waived any material rights or forgiven any material claims;
A-9
<PAGE> 88
(l) lost or terminated any employee, customer or supplier, the loss or
termination of which has materially and adversely affected, or that the
Company or Ladin reasonably expect to materially and adversely affect, its
business or assets;
(m) increased the compensation of any director or officer;
(n) increased the compensation of any employee except in the ordinary
course of business;
(o) made any payments to or loaned any money to any person or entity
referred to in Section 3.29;
(p) formed or acquired or disposed of any interest in any corporation,
partnership, joint venture or other entity;
(q) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any of its capital stock or
securities or any rights to acquire such capital stock or securities, or
agreed to change the terms and conditions of any such rights;
(r) entered into, adopted or amended any Employee Benefit Plan; or
(s) entered into any other commitment or transaction or experienced
any other event that is material to this Agreement or to any of the Related
Agreements or to the transactions contemplated hereby or thereby, or that
has materially and adversely affected, or could materially and adversely
affect, the condition (financial or otherwise), operations, assets,
liabilities, business or prospects of the Company or its Subsidiaries.
SECTION 3.14. Title; Leased Assets.
(a) Real Property. The Company and the Subsidiaries own no real
property. The leased real property referred to in Section 3.14(c)
constitutes the only real property used in the conduct of the business of
the Company and the Subsidiaries.
(b) Personal Property. Except as set forth in Schedule 3.14(b), the
Company and the Subsidiaries have good, valid and marketable title to all
tangible and intangible personal property owned by them (collectively, the
"Personal Property"). The Personal Property and the leased personal
property referred to in Section 3.14(c) constitute the only personal
property used in the conduct of the business of the Company and the
Subsidiaries.
(c) Leases. A list and brief description of all leases of real and
personal property to which the Company or any Subsidiary is a party, either
as lessor or lessee, are set forth in Schedule 3.14(c). All such leases are
valid and enforceable in accordance with their respective terms except as
may be limited by applicable bankruptcy, insolvency or similar laws
affecting creditors' rights generally or the availability of equitable
remedies.
(d) Right to Use Assets. Except for those assets acquired since July
31, 1999, which are listed in Schedule 3.14(d), all tangible and intangible
assets used in the conduct of the business of the Company and the
Subsidiaries are reflected in the Financial Statements in a manner that is
in conformity with generally accepted accounting principles applied on a
consistent basis with prior periods. Either the Company or a Subsidiary
owns, leases or otherwise possesses a right to use all assets used in the
conduct of the business of the Company or such Subsidiary, which will not
be impaired by the consummation of the transactions contemplated hereby.
SECTION 3.15. Commitments.
(a) Commitments; Defaults. Except as set forth in Schedule 3.15,
neither the Company nor any Subsidiary has entered into, nor are the
Company Common Stock, the assets or the business of the Company or any
Subsidiary bound by, whether or not in writing, any
(i) partnership or joint venture agreement;
(ii) deed of trust or other security agreement;
A-10
<PAGE> 89
(iii) guaranty or suretyship, indemnification or contribution
agreement or performance bond;
(iv) employment, consulting or compensation agreement or
arrangement, including the election or retention in office of any
director or officer;
(v) labor or collective bargaining agreement;
(vi) debt instrument, loan agreement or other obligation relating
to indebtedness for borrowed money or money lent or to be lent to
another;
(vii) deed or other document evidencing an interest in or contract
to purchase or sell real property;
(viii) agreement with dealers or sales or commission agents, public
relations or advertising agencies, accountants or attorneys;
(ix) lease of real or personal property, whether as lessor, lessee,
sublessor or sublessee;
(x) agreement between the Company and any affiliate of the Company;
(xi) agreement relating to any material matter or transaction in
which an interest is held by a person or entity that is an affiliate of
the Company;
(xii) any agreement for the acquisition of services, supplies,
equipment or other personal property and involving more than $60,000 in
the aggregate;
(xiii) powers of attorney;
(xiv) contracts containing noncompetition covenants;
(xv) any other contract or arrangement that involves either an
unperformed commitment in excess of $60,000 or that terminates more than
30 days after the date hereof;
(xvi) agreement relating to any material matter or transaction in
which an interest is held by any person or entity referred to in Section
3.29;
(xvii) agreement providing for the purchase from a supplier of all
or substantially all of the requirements of the Company or any
Subsidiary of a particular product or service; or
(xviii) any other agreement or commitment not made in the ordinary
course of business or that is material to the business or financial
condition of the Company or any Subsidiary.
All of the foregoing are hereinafter collectively referred to as the
"Commitments." True, correct and complete copies of the written Commitments, and
true, correct and complete written descriptions of the oral Commitments, have
heretofore been delivered or made available to Parent. There are no existing
defaults, events of default or events, occurrences, acts or omissions that, with
the giving of notice or lapse of time or both, would constitute defaults by the
Company or any Subsidiary, and no penalties have been incurred nor are
amendments pending, with respect to the Commitments. The Commitments are in full
force and effect and are valid and enforceable obligations of the parties
thereto in accordance with their respective terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency or similar laws
affecting creditors' rights generally or the availability of equitable remedies,
and no defenses, off-sets or counterclaims have been asserted or, to the
knowledge of the Company and Ladin, may be made by any party thereto, nor has
the Company or any Subsidiary waived any rights thereunder. Neither the Company
nor any Subsidiary has received notice of any default with respect to any
Commitment.
(b) No Cancellation or Termination of Commitment. Except as
contemplated hereby, neither the Company nor any Subsidiary nor Ladin has
received notice of any plan or intention of any other party to any
Commitment to exercise any right to cancel or terminate any Commitment or
agreement, and neither the Company nor any Subsidiary nor Ladin knows of
any fact that would justify the exercise of such a right. Neither the
Company nor any Subsidiary nor Ladin currently contemplates, or has reason
to believe any other person or entity currently contemplates, any amendment
or change to any
A-11
<PAGE> 90
Commitment. Except as listed in Schedule 3.15, none of the customers or
suppliers of the Company or any Subsidiary has refused, or communicated
that it will or may refuse, to purchase or supply goods or services, as the
case may be, or has communicated that it will or may substantially reduce
the amounts of goods or services that it is willing to purchase from, or
sell to, the Company or any Subsidiary.
SECTION 3.16. Adverse Agreements. Neither the Company nor any Subsidiary is
a party to any agreement or instrument or subject to any charter or other
corporate restriction or any judgment, order, writ, injunction, decree, rule or
regulation that materially and adversely affects, or may in the future
materially and adversely affect, the condition (financial or otherwise),
operations, assets, liabilities, business or prospects of the Company or any
Subsidiary.
SECTION 3.17. Insurance. The Company and the Subsidiaries carry property,
liability, workers' compensation and such other types of insurance as is
customary in the industry of the insured. A list and brief description of all
insurance policies of the Company and the Subsidiaries are set forth in Schedule
3.17. All of such policies are valid and enforceable policies, issued by
insurers of recognized responsibility in amounts and against such risks and
losses as is customary in the industry of the insured. Such insurance shall be
outstanding and duly in force without interruption up to and including the
Closing Date.
SECTION 3.18. Patents, Trade-marks, Service Marks and Copyrights.
(a) Ownership. The Company and each Subsidiary own all patents,
trade-marks, service marks and copyrights, if any, necessary to conduct its
business, or possesses adequate licenses or other rights, if any, therefor.
Set forth in Schedule 3.18 is a true and correct description of the
following (the "Proprietary Rights"):
(i) all trade-marks, trade-names, service marks and other trade
designations, including common law rights, registrations and
applications therefor, and all patents, copyrights and applications
currently owned, in whole or in part, by the Company or any Subsidiary
with respect to the business of the Company and the Subsidiaries, and
all licenses, royalties, assignments and other similar agreements
relating to the foregoing to which the Company or any Subsidiary is a
party (including expiration date if applicable); and
(ii) all agreements relating to technology, know-how or processes
that the Company or any Subsidiary is licensed or authorized to use by
others, or which it licenses or authorizes others to use.
(b) Conflicting Rights of Third Parties. The Company has the sole and
exclusive right, excluding all Proprietary Rights which the Company has the
right to use under a "shrink-wrap" or similar mass marketing license, to
use the Proprietary Rights without infringing or violating the rights of
any third parties. Use of the Proprietary Rights does not require the
consent of any other person and the Proprietary Rights are freely
transferable. No claim has been asserted by any person to the ownership of
or right to use any Proprietary Right or challenging or questioning the
validity or effectiveness of any license or agreement constituting a part
of any Proprietary Right, and neither the Company nor Ladin knows of any
valid basis for any such claim. Each of the Proprietary Rights is valid and
subsisting, has not been canceled, abandoned or otherwise terminated and,
if applicable, has been duly issued or filed.
(c) Claims of Other Persons. The Company and Ladin have no knowledge
of any claim that, or inquiry as to whether, any product, activity or
operation of the Company or any Subsidiary infringes upon or involves, or
has resulted in the infringement of, any proprietary right of any other
person, corporation or other entity; and no proceedings have been
instituted, are pending or, to the knowledge of the Company and Ladin, are
threatened, that challenge the rights of the Company or any Subsidiary with
respect thereto. The Company has not given and is not bound by any
agreement of indemnification for any Proprietary Right as to any property
or service manufactured, used or sold by it.
SECTION 3.19. Trade Secrets and Customer Lists. Either the Company or the
appropriate Subsidiary has the right to use, free and clear of any claims or
rights of others all trade secrets, customer lists and proprietary information
required for the marketing of all merchandise and services formerly or presently
sold
A-12
<PAGE> 91
or marketed by the Company or its Subsidiaries. Neither the Company nor any
Subsidiary is using or in any way making use of any confidential information or
trade secrets of any third party, including without limitation any past or
present employee of the Company or any Subsidiary.
SECTION 3.20. Taxes.
(a) All Returns required to have been filed by the Company or a
Subsidiary have been timely filed (taking into account duly granted
extensions) and are true, correct and complete in all respects. Neither the
Company nor a Subsidiary is currently the beneficiary of any extension of
time within which to file any Return, and no claim has ever been made by
any governmental authority in a jurisdiction where the Company or a
Subsidiary do not file Returns that the Company or a Subsidiary is or may
be subject to taxation by that jurisdiction, which claim has not been
resolved as of the date hereof.
(b) All Taxes of the Company and Subsidiaries which have become due
(without regard to any extension of the time for payment and whether or not
shown on any Return) have been paid. The Company and the Subsidiaries have
withheld and paid over all Taxes required to have been withheld and paid
over by them and have complied with all information reporting and back-up
withholding requirements relating to Taxes. There are no liens with respect
to Taxes on any of the assets of the Company or a Subsidiary, other than
liens for Taxes not yet due and payable, and for which adequate reserves
have been established in the Financial Statements.
(c) No deficiencies exist or have been asserted (verbally or in
writing) with respect to Taxes of the Company or a Subsidiary and neither
the Company nor the Subsidiaries have received notice (verbally or in
writing) that they have not filed a Return or paid any Taxes required to be
filed or paid by them. Other than a Texas sales tax audit, no audit,
examination, investigation, action, suit, claim or proceeding relating to
the determination, assessment or collection of any Tax of the Company or a
Subsidiary is currently in process, pending or, to the knowledge of Ladin
or the Company, threatened (verbally or in writing). No waiver or extension
of any statute of limitations relating to the assessment or collection of
any Tax of the Company or a Subsidiary is in effect. There are no
outstanding requests for rulings with any Tax authority relating to Taxes
of the Company or a Subsidiary.
(d) Neither the Company nor any Subsidiary is or has ever been (i) a
party to any tax sharing agreement or arrangement (formal or informal,
verbal or in writing), or (ii) a member of an affiliated group of
corporations (within the meaning of Internal Revenue Code Section 1504)
filing a consolidated federal income Return, or any similar group under
analogous provisions of other law.
(e) Neither the Company nor any Subsidiary is liable for the unpaid
Taxes of any person other than such Company or Subsidiary under Treasury
Regulation Section 1.1502-6 or any similar provision of state, local or
foreign law, or by contract or otherwise. The Company has delivered to
Parent true and complete copies of all federal, state, local and foreign
income Returns filed by the Company and Subsidiaries for their two (2) most
recently ended taxable years, together with all related examination
reports, statements of deficiencies and closing and other agreements.
(f) Neither the Company nor any Subsidiary (i) has filed a consent
under Internal Revenue Code Section 341(f) concerning collapsible
corporations; (ii) has made any payments, obligated itself to make any
payments or become a party to any agreement that under any circumstance
could obligate it or any successor or assignee of it to make any payments
that are not or will not be deductible under Code Section 280G, or that
would be subject to excise Tax under Internal Revenue Code Section 4999;
(iii) is a "foreign person" as defined in Internal Revenue Code Section
1445(f)(3); (iv) is or has been a United States real property holding
corporation within the meaning of Internal Revenue Code Section 897(c)(2)
during the applicable period specified in Internal Revenue Code Section
897(c)(1)(A)(ii); (v) owns or has owned any interest in any "controlled
foreign corporation" as defined in Internal Revenue Code Section 957 or
"passive foreign investment company" as defined in Internal Revenue Code
Section 1296; (vi) is or has been a party to any agreement or arrangement
for which partnership Returns are required to be filed; (vii) owns any
asset that is subject to a "safe harbor lease" within the meaning of
Internal Revenue Code Section 168(f)(8), as in effect prior to amendment
A-13
<PAGE> 92
by the Tax Equity and Fiscal Responsibility Act of 1982; (viii) to the
knowledge of the Company and Ladin, owns any "tax-exempt use property"
within the meaning of Internal Revenue Code Section 168(h) or "tax exempt
bond financed property" within the meaning of Internal Revenue Code Section
168(g)(5); and (ix) has agreed to and is required to make any adjustment
under Internal Revenue Code Section 481(a) by reason of a change in
accounting method or otherwise.
(g) Prior to January 1, 1999, the Company was a validly electing S
Corporation within the meaning of Internal Revenue Code Sections 1361 and
1362.
SECTION 3.21. Compliance with Laws. The Company and each of the
Subsidiaries have complied with all laws, regulations and licensing requirements
and have filed with the proper authorities all necessary statements and reports.
There are no existing violations by the Company, any Subsidiaries or Ladin of
any federal, state or local law or regulation that could affect the property or
business of the Company or the Subsidiaries. The Company and each of the
Subsidiaries possess all necessary licenses, franchises, permits and
governmental authorizations to conduct its business as now conducted.
SECTION 3.22. Finder's Fee. Except as set forth on Schedule 3.22, neither
the Company nor any Subsidiary nor Ladin has incurred any obligation for any
finder's, broker's or agent's fee in connection with the transactions
contemplated hereby.
SECTION 3.23. Litigation. Except as described in Schedule 3.23, there are
no legal actions or administrative proceedings or investigations instituted or,
to the knowledge of the Company and Ladin, threatened, against or affecting, or
that could affect, the Company, any Subsidiary, any of the Company Common Stock,
or the business of the Company or any Subsidiary. Neither the Company nor any
Subsidiary nor Ladin is (a) subject to any continuing court or administrative
order, writ, injunction or decree applicable specifically to the Company or any
Subsidiary or to their respective business, assets, operations or employees or
(b) in default with respect to any such order, writ, injunction or decree.
Neither the Company, any Subsidiary nor Ladin knows of any basis for any such
action, proceeding or investigation.
SECTION 3.24. Accuracy of Information Furnished. All information furnished
to Parent by the Company, any Subsidiary or Ladin hereby or in connection with
the transactions contemplated hereby is true, correct and complete in all
material respects. Such information states all material facts required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements are made, not misleading.
SECTION 3.25. Condition of Fixed Assets. All of the equipment owned by the
Company and the Subsidiaries is in good condition and repair for its intended
use, normal wear and tear and normal obsolescence excepted, in the ordinary
course of business and conforms in all material respects with all applicable
ordinances, regulations and other laws and there are no known defects therein.
SECTION 3.26. Accounts Receivable. Schedule 3.26 sets forth the accounts
receivable of the Company and the Subsidiaries as of July 31, 1999. All such
accounts receivable have arisen from bona fide transactions in the ordinary
course of business and are valid and enforceable claims subject to no right of
set-off or counterclaim, except for reasonable reserves for bad debts.
SECTION 3.27 Subscribers. A complete and accurate list of the Company's and
each Subsidiary's standard prices and subscribers, showing with respect to each,
the name, billing address, pricing, sales records and any applicable discounts
related to such subscriber has been previously provided to Parent. A copy of the
form of the Company's service agreement with each such subscriber has been
previously provided to Parent.
SECTION 3.28. Banking Relations. Set forth in Schedule 3.28 is a complete
and accurate list of all arrangements that the Company and the Subsidiaries have
with any bank or other financial institution, indicating with respect to each
relationship the type of arrangement maintained (such as checking account,
borrowing arrangements, safe deposit box, etc.), account number and the person
or persons authorized in respect thereof.
A-14
<PAGE> 93
SECTION 3.29. Ownership Interests of Interested Persons. Except as set
forth on Schedule 3.29, no officer, supervisory employee, director or
shareholder of the Company or any Subsidiary, or their respective spouses or
children, owns directly or indirectly, on an individual or joint basis, any
material interest in, or serves as an officer or director of, any customer or
supplier of the Company or any Subsidiary, or any organization that has a
material contract or arrangement with the Company or any Subsidiary.
SECTION 3.30. Environmental Matters.
(a) Environmental Laws. Neither the Company nor any Subsidiary nor any
of their respective assets is currently in violation of, or subject to any
existing, pending or threatened investigation or inquiry by any
governmental authority or to any remedial obligations under, any laws or
regulations pertaining to health or the environment (hereinafter sometimes
collectively called "Environmental Laws"), including without limitation (i)
the Comprehensive Environmental Response, Compensation and Liability Act of
1980 (42 U.S.C. sec. 9601 et seq.), as amended from time to time ("CERCLA")
(including without limitation as amended pursuant to the Superfund
Amendments and Reauthorization Act of 1986), and regulations promulgated
under CERCLA, (ii) the Resource Conservation and Recovery Act of 1976 (42
U.S.C. sec. 6901 et seq.), as amended from time to time ("RCRA"), and
regulations promulgated thereunder, (iii) statutes, rules or regulations,
whether federal, state or local, relating to asbestos or polychlorinated
biphenyls, and (iv) the provisions of applicable Texas law, and this
representation and warranty would continue to be true and correct following
disclosure to the applicable governmental authorities of all relevant
facts, conditions and circumstances, if any, pertaining to the assets and
operations of the Company and the Subsidiaries.
(b) Use of Assets. To the knowledge of the Company and Ladin, the
assets of the Company and the Subsidiaries have never been used in a manner
that would be in violation of any of the Environmental Laws, including
without limitation CERCLA, RCRA, and applicable Texas laws.
(c) Permits. Neither the Company nor any Subsidiary has obtained or is
required to obtain, and neither the Company nor any Subsidiary has any
knowledge of any reason Parent will be required to obtain, any permits,
licenses or similar authorizations to construct, occupy, operate or use any
buildings, improvements, fixtures and equipment owned or leased by the
Company or any Subsidiary by reason of any Environmental Laws.
(d) Superfund List. To the knowledge of the Company and Ladin, none of
the assets owned or leased by the Company or any Subsidiary are on any
federal or state "Superfund" list or subject to any environmentally related
liens.
SECTION 3.31. Certain Payments. Neither the Company nor Ladin nor any
director, officer or, to the knowledge of the Company and Ladin, employee, of
the Company or any Subsidiary has paid or caused to be paid, directly or
indirectly, in connection with the business of the Company or any Subsidiary (a)
to any government or agency thereof or any agent of any supplier or customer any
bribe, kick-back or other similar payment; or (b) any contribution to any
political party or candidate (other than from personal funds of directors,
officers or employees not reimbursed by their respective employers or as
otherwise permitted by applicable law).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub jointly and severally represent and warrant that the
following are true and correct as of the date hereof and will be true and
correct through the Closing Date as if made on that date:
SECTION 4.01. Organization and Good Standing. Each of Parent and Merger Sub
is a corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation, with all requisite corporate power and
authority to carry on the business in which it is engaged, to own the properties
it owns, to execute and deliver this Agreement and to consummate the
transactions contemplated hereby.
A-15
<PAGE> 94
SECTION 4.02. Authorization and Validity. The execution, delivery and
performance by Parent and Merger Sub of this Agreement and the other agreements
contemplated hereby, and the consummation of the transactions contemplated
hereby and thereby, have been duly authorized by Parent and Merger Sub. This
Agreement and each other agreement contemplated hereby have been or will be as
of the Closing Date duly executed and delivered by Parent and Merger Sub and
constitute or will constitute legal, valid and binding obligations of Parent and
Merger Sub, enforceable against Parent and Merger Sub in accordance with their
respective terms, except as may be limited by applicable bankruptcy, insolvency
or similar laws affecting creditors' rights generally or the availability of
equitable remedies.
SECTION 4.03. No Violation. Neither the execution, delivery or performance
of this Agreement or the other agreements contemplated hereby nor the
consummation of the transactions contemplated hereby or thereby will (a)
conflict with, or result in a violation or breach of the terms, conditions and
provisions of, or constitute a default under, the Articles of Incorporation or
Bylaws of Parent or Merger Sub or any agreement, indenture or other instrument
under which Parent or Merger Sub is bound or (b) violate or conflict with any
judgment, decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over Parent,
Merger Sub or the properties or assets of Parent or Merger Sub.
SECTION 4.04. Finder's Fee. Except as set forth on Schedule 4.04, neither
Parent nor Merger Sub has incurred any obligation for any finder's, broker's or
agent's fee in connection with the transactions contemplated hereby.
SECTION 4.05. Authorization for Parent Common Stock. The authorized and
issued capital stock of the Parent as of September 1, 1999 are set forth on
Schedule 4.05. Except as set forth on Schedule 4.05, as of September 1, 1999,
there exist no options, warrants, subscriptions or other rights to purchase, or
securities convertible into or changeable for, the capital stock of the Parent.
No shares of capital stock of the Parent have been issued or disposed of in
violation of the preemptive rights of any of the Parent's shareholders. Subject
to the consents set forth in Schedule 4.08, Parent has taken all action
necessary to permit it to issue the Parent Common Stock. The Parent Common Stock
issued pursuant to this Agreement will, when issued, be duly authorized, validly
issued, fully paid and nonassessable, free and clear of any liens, claims,
charges or security interests (except as created herein) and no shareholder of
Parent will have any preemptive right of subscription or purchase in respect
thereof.
SECTION 4.06. SEC Reports and Nasdaq. Since the date of its initial public
offering, Parent has filed all forms, documents and reports with the SEC
required to be filed by it pursuant to federal securities laws and the SEC rules
and regulations thereunder (the "SEC Reports"), all of which complied in all
material respects with all applicable requirements of the Securities Act and the
Exchange Act. The SEC Reports do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein to make
statements contained therein not misleading. Since the date of the last SEC
Report, Parent has not suffered a material adverse change in its condition
(financial or otherwise), operations or business. Parent has not received any
notification from The Nasdaq Stock Market that it fails to meet the minimum
listing requirements required for continued listing, nor does Parent have
knowledge of any basis for such notification.
SECTION 4.07. Accuracy of Information Furnished. With respect to all
information furnished to the Company by Parent hereby or in connection with the
transactions contemplated hereby, Parent has not made any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading.
SECTION 4.08. Consents. Except as set forth in Schedule 4.08, no consent,
authorization, approval, permit or license of, or filing with, any governmental
or public body or authority, any lender or lessor or any other person or entity
is required to authorize, or is required in connection with, the execution,
delivery and performance of this Agreement or the Related Agreements on the part
of Parent.
A-16
<PAGE> 95
ARTICLE V
THE COMPANY'S AND PRINCIPAL SHAREHOLDERS' COVENANTS
The Company and Principal Shareholders jointly and severally agree that
between the date hereof and the Closing:
SECTION 5.01. Consummation of Agreement. The Company and Principal
Shareholders shall use their best efforts to cause the consummation of the
transactions contemplated hereby in accordance with their terms and conditions.
SECTION 5.02. Business Operations. The Company and the Subsidiaries shall
operate their businesses in the ordinary course consistent with past practice.
Without the prior written consent of Parent, the Company and Subsidiaries shall
not pursue, negotiate or enter into any acquisitions of other businesses and
shall discontinue any such pursuits or negotiations pending as of the date of
this Agreement. The Company and Principal Shareholders shall use their
reasonable best efforts to preserve the business of the Company and the
Subsidiaries intact, to retain the present customers, suppliers, creditors,
officers and employees so that they will be available to Parent after the
Closing. The Company and Principal Shareholders shall not take any action that
could adversely affect the condition (financial or otherwise), operations,
assets, liabilities, business or prospects of the Company or any Subsidiary
without the prior written consent of Parent or take or fail to take any action
that would cause or permit the representations made in Article III to be
inaccurate at the time of Closing or preclude the Company and Principal
Shareholders from making such representations and warranties at the Closing.
SECTION 5.03. Access. Subject to reasonable notice from Parent, the Company
and Principal Shareholders shall permit during business hours, Parent and its
authorized representatives full access to, and make available for inspection,
all of the assets and business of the Company and the Subsidiaries, including
their respective employees, customers and suppliers, and permit Parent and its
authorized representatives to inspect and make copies of all documents, records
and information with respect to the affairs of the Company and the Subsidiaries
as Parent and its representatives may request, all for the sole purpose of
permitting Parent to become familiar with the business and assets and
liabilities of the Company and the Subsidiaries.
SECTION 5.04. Material Change. The Company and Principal Shareholders shall
promptly inform Parent in writing of any material adverse change in the
condition (financial or otherwise), operations, assets, liabilities, business or
prospects of the Company or any Subsidiary. Notwithstanding the disclosure to
Parent of any such material adverse change, the Company and Principal
Shareholders shall not be relieved of any liability for, nor shall the providing
of such information by the Company to Parent be deemed a waiver by Parent of,
the breach of any representation or warranty of the Company and Principal
Shareholders contained in this Agreement.
SECTION 5.05. Approvals of Third Parties. The Company and Principal
Shareholders shall use their reasonable best efforts to secure, as soon as
practicable after the date hereof, all necessary approvals and consents of third
parties and the Company's shareholders to the consummation of the transactions
contemplated hereby. In connection therewith, the Company shall duly call, give
notice of, convene and hold a shareholders meeting for the purpose of voting on
the approval and adoption of this Agreement and the Merger as soon as
practicable after the date hereof; provided that, a validly executed consent in
lieu of a shareholders meeting shall constitute compliance with this provision.
Unless the Company's board of directors determines that an alternative action is
necessary in accordance with its fiduciary duties to the Company's shareholders
under applicable law (which determination shall not affect the previous approval
by the Company's board of directors of the transactions contemplated herein or
the obligations of the Company's shareholders under the Voting Agreement), the
board of directors of the Company shall recommend approval and adoption of this
Agreement and the Merger by the holders of Company Common Stock and shall use
all commercially reasonable efforts to obtain such approval and adoption. The
Principal Shareholders agree to vote all of their stock in favor of the
Agreement and Merger.
A-17
<PAGE> 96
SECTION 5.06. Employee Matters. Neither the Company nor any Subsidiary
shall, without the prior written approval of Parent, except as required by law:
(a) increase the Cash Compensation of the employees set forth on
Schedule 5.06(a), except in the ordinary course of business;
(b) adopt, amend or terminate any Compensation Plan;
(c) adopt, amend or terminate any Employment Agreement;
(d) adopt, amend or terminate any Employee Policies and Procedures;
(i) institute, settle or dismiss any employment litigation;
(j) enter into, modify, amend or terminate any agreement with any
union, labor organization or collective bargaining unit; or
(k) take or fail to take any action with respect to any past or
present employee of the Company or any Subsidiary that could adversely
affect the business of the Company or any Subsidiary.
SECTION 5.07. Employee Benefit Plans. Neither the Company nor any
Subsidiary shall, without the prior written approval of Parent, except as
required by law:
(a) adopt, amend or terminate any Employee Benefit Plan;
(b) take any action that would deplete the assets of any Employee
Benefit Plan, other than payment of benefits in the ordinary course to
participants and beneficiaries;
(c) fail to pay any premium or contribution due or with respect to any
Employee Benefit Plan;
(d) fail to file any return or report with respect to any Employee
Benefit Plan; or
(e) take or fail to take any action that could adversely affect any
Employee Benefit Plan.
SECTION 5.08. Contracts. Except with Parent's prior written consent,
neither the Company nor any Subsidiary shall waive any right or cancel any
contract, debt or claim nor assume, enter into, amend or modify any contract,
lease, license, obligation, indebtedness, commitment, purchase or sale except in
the ordinary course of business consistent with past practices.
SECTION 5.09. Capital Assets; Payments of Liabilities;
Indebtedness. Neither the Company nor any Subsidiary shall, without the prior
written approval of Parent (a) acquire or dispose of any capital asset having an
initial cost of $60,000 or more; (b) incur any indebtedness for borrowed money
or guarantee any such indebtedness other than in the ordinary course of its
business consistent with past practice; (c) voluntarily purchase, cancel, prepay
or otherwise provide for a complete or partial discharge in advance of a
scheduled repayment date with respect to, or waive any right under, any
indebtedness for borrowed money; or (d) discharge or satisfy any lien or
encumbrance or pay or perform any obligation or liability other than (i)
liabilities and obligations reflected in the Financial Statements or (ii)
current liabilities and obligations incurred in the ordinary course of business
since July 31, 1999 and, in either case (i) or (ii) above, only as required by
the express terms of the agreement or other instrument pursuant to which the
liability or obligation was incurred.
SECTION 5.10. Mortgages, Leases, Liens and Guaranties. Neither the Company
nor any Subsidiary shall, without the prior written approval of Parent, enter
into or assume any mortgage, pledge, conditional sale or other title retention
agreement, permit any security interest, lien, encumbrance or claim of any kind
to attach to any of its assets, whether now owned or hereafter acquired, or
guarantee or otherwise become contingently liable for any obligation of another,
except obligations arising by reason of endorsement for collection and other
similar transactions in the ordinary course of business consistent with past
practice, or make any capital contribution or investment in any corporation,
business or other person. The Company and Subsidiaries shall not (a) enter into
(or commit to enter into) any new lease or renew any existing lease of real
A-18
<PAGE> 97
property (except pursuant to commitments for such lease or lease renewal entered
into prior to the date hereof); or (b) purchase or acquire or enter into any
agreement to purchase or acquire any real estate.
SECTION 5.11. No Negotiation with Others. Neither the Company nor any
Principal Shareholder shall solicit or participate in negotiations with (and the
Company and the Principal Shareholders shall use their best efforts to prevent
any affiliate, shareholder, director, officer, employee or other representative
or agent of the Company from negotiating with, soliciting or participating in
negotiations with) any third party with respect to the sale of the business of
the Company or any Subsidiary or any transaction inconsistent with those
contemplated hereby, except to the extent necessary to comply with the Company's
and the Principal Shareholders' fiduciary duties to the Company's Shareholders
under the TBCA.
SECTION 5.12. HSR Act. The Company and Principal Shareholders shall use
their best efforts to file as soon as possible, and to effect early termination
of all applicable waiting periods, under the HSR Act, including without
limitation complying promptly with all requests thereunder for additional
information, if necessary.
SECTION 5.13. Corporate Actions. No distribution, payment or dividend of
any kind will be declared or paid by the Company or any Subsidiary, nor will any
repurchase or redemption of any capital stock of the Company be approved or
effected. The Company and Subsidiaries shall make no offerings, issuances or
grants of securities of the Company or Subsidiaries, including but not limited
to options, warrants and other securities convertible into Company Common Stock.
The Company and Subsidiaries shall not (a) adopt or propose any change in their
respective articles of incorporation or bylaws; (b) adopt a plan or agreement of
complete or partial liquidation, dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization; or (c) split, combine,
reclassify or take similar action with respect to its capital stock.
SECTION 5.14. Tax Issues. Neither the Company nor any Subsidiary will
change any tax election, change any annual tax accounting period, change any
method of tax accounting, file any amended Tax Return, enter into any closing
agreement relating to any Tax, settle any Tax claim or assessment, surrender any
right to claim a Tax refund or consent to any extension or waiver (other than a
reasonable extension or waiver) of the limitations period applicable to any Tax
claim or assessment, if any such action would have the effect of increasing the
aggregate Tax liability or reducing the aggregate tax assets of the Company and
its Subsidiaries, taken as a whole.
SECTION 5.15. General. The Company and Subsidiaries will not agree or
commit to do any actions prohibited by this Agreement.
SECTION 5.16. Tax-Free Reorganization. Neither the Company nor the
Principal Shareholders shall take any action prior to or after the Effective
Time that could reasonably be expected to cause the Merger to fail to qualify as
a "reorganization" under Section 368(a) of the Code.
ARTICLE VI
PARENT'S COVENANTS
Parent agrees that between the date hereof and the Closing:
SECTION 6.01. Consummation of Agreement. Parent shall use its best efforts
to cause the consummation of the transactions contemplated hereby in accordance
with their terms and conditions.
SECTION 6.02. HSR Act. Parent shall use its best efforts to file as soon as
possible, and to effect early termination of all applicable waiting periods,
under the HSR Act, including without limitation complying promptly with all
requests thereunder for additional information, if necessary.
SECTION 6.03. Approvals of Third Parties. Parent shall use its reasonable
best efforts to secure, as soon as practicable after the date hereof, all
necessary approvals and consents of third parties and Parent's shareholders to
the consummation of the transactions contemplated hereby. In connection
therewith, Parent shall duly call, give notice of, convene and hold a
shareholders meeting for the purpose of voting on the approval and adoption of
this Agreement and the Merger as soon as practicable after the date hereof.
Parent
A-19
<PAGE> 98
shall use all commercially reasonable efforts to file a preliminary proxy
statement within fourteen (14) days after the date of this Agreement. The board
of directors of Parent shall recommend approval and adoption of this Agreement
and the Merger by its shareholders and shall use all commercially reasonable
efforts to obtain such approval and adoption.
SECTION 6.04. Listing Application. Parent shall prepare and submit to the
Nasdaq National Market a listing application covering the Parent Common Stock
being issued hereunder and shall use its best effort to obtain approval for the
listing of such shares upon official notice of issuance.
SECTION 6.05. Tax Free Reorganization. Neither Parent nor the Merger Sub
shall take any action prior to or after the Effective Time that could reasonably
be expected to cause the Merger to fail to qualify as a "reorganization" under
Section 368(a) of the Code.
SECTION 6.06. General. Parent will not agree or commit to do any actions
prohibited by this Agreement.
ARTICLE VII
PARENT'S CONDITIONS PRECEDENT
Except as may be waived in writing by Parent, the obligations of Parent
hereunder are subject to the fulfillment at or prior to the Closing Date of each
of the following conditions:
SECTION 7.01. Representations and Warranties. The representations and
warranties of the Company and Principal Shareholders contained herein shall have
been true and correct in all respects when initially made and shall be true and
correct in all material respects as of the Closing Date; and Parent shall have
received a certificate of the Company's President, and of Principal
Shareholders, dated as of the Closing Date, to the foregoing effect.
SECTION 7.02. Covenants and Conditions. The Company and Principal
Shareholders shall have performed and complied in all material respects with all
covenants and conditions required by this Agreement to be performed and complied
with by the Company and Principal Shareholders prior to the Closing Date; and
Parent shall have received a certificate of the Company's President, and of
Principal Shareholders, dated as of the Closing Date, to the foregoing effect.
SECTION 7.03. Proceedings. No action, proceeding or order by any court or
governmental body or agency shall have been threatened, orally or in writing,
asserted, instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
SECTION 7.04. No Material Adverse Change. No material adverse change in the
condition (financial or otherwise), operations, assets, liabilities, business or
prospects of the Company shall have occurred since the date of the most recent
balance sheet included in the Financial Statements.
SECTION 7.05. HSR Act. All applicable waiting periods under the HSR Act
shall have expired or been terminated.
SECTION 7.06. Resignations of Directors and Officers. Parent shall have
received the resignations of the directors and officers of the Company and all
Subsidiaries as requested by Parent in Schedule 7.06.
SECTION 7.07. Tax Affidavit. Parent shall have received a nonforeign
affidavit, as such affidavit is referred to in Section 1445(b)(2) of the Code,
of each of the Company's shareholders signed under penalty of perjury and dated
as of the Closing Date, to the effect that such shareholder is not a foreign
person and providing such shareholder's United States taxpayer identification
number.
SECTION 7.08. Dissenting Shareholders. Parent shall have received a
certificate signed by the President of the Company stating that none of the
Company's shareholders have filed with the Company a demand for dissenters
rights under the TBCA.
SECTION 7.09. Merger Effective. The Merger shall have become effective
under the TBCA.
A-20
<PAGE> 99
SECTION 7.10. Approval by the Shareholders. This Agreement and the
transactions contemplated hereby shall have been approved by the shareholders of
Parent and the Company.
SECTION 7.11. Closing Deliveries. Parent shall have received all documents,
duly executed in form satisfactory to Parent and its counsel, referred to in
Section 9.01.
ARTICLE VIII
THE COMPANY'S AND PRINCIPAL SHAREHOLDERS' CONDITIONS PRECEDENT
Except as may be waived in writing by the Company and Principal
Shareholders, the obligations of the Company and Principal Shareholders
hereunder are subject to fulfillment at or prior to the Closing Date of each of
the following conditions:
SECTION 8.01. Representations and Warranties. The representations and
warranties of Parent contained herein shall have been true and correct in all
respects when initially made and shall be true and correct in all material
respects as of the Closing Date; and Parent shall have delivered to the Company
and Principal Shareholders a certificate of Parent's President, dated as of the
Closing Date, to the foregoing effect.
SECTION 8.02. Covenants and Conditions. Parent shall have performed and
complied in all material respects with all covenants and conditions required by
this Agreement to be performed and complied with by it prior to the Closing
Date; and Parent shall have delivered to the Company and Principal Shareholders
a certificate of Parent's President, dated as of the Closing Date, to the
foregoing effect.
SECTION 8.03. Proceedings. No action, proceeding or order by any court or
governmental body or agency shall have been threatened in writing, asserted,
instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
SECTION 8.04. HSR Act. All applicable waiting periods under the HSR Act
shall have expired or been terminated.
SECTION 8.05. No Material Adverse Change. No material adverse change in the
condition (financial or otherwise), operations, assets, liabilities, business or
prospects of Parent shall have occurred since the date of the most recent
balance sheet of Parent provided to the Company.
SECTION 8.06. Approval by the Shareholders. This Agreement and the
transactions contemplated hereby shall have been approved by the shareholders of
Parent and the Company.
SECTION 8.07. Nasdaq Listing. The shares of Parent Common Stock being
issued hereunder shall have been approved for listing on the Nasdaq National
Market, subject to official notice of issuance.
SECTION 8.08. Closing Deliveries. The Company or Principal Shareholders, as
the case may be, shall have received all documents referred to in Section 9.02.
SECTION 8.09. Tax Opinion. The Company shall have received a written
opinion from its tax counsel, Andrews & Kurth LLP, in form and substance
reasonably satisfactory to the Company, to the effect that, based on the facts,
representations and assumptions set forth in such opinion, the Merger shall
constitute a reorganization within the meaning of Section 368(a) of the Code and
such opinion shall have not been withdrawn. The parties to this Agreement agree
to make such reasonable representations as requested by such counsel for the
purpose of rendering such opinion.
A-21
<PAGE> 100
ARTICLE IX
CLOSING DELIVERIES
SECTION 9.01. Deliveries of the Company and Principal Shareholders. At the
Closing, the Company and Principal Shareholders shall deliver to Parent the
following, all of which shall be in form and content satisfactory to Parent and
its counsel:
(a) certificates representing all of the Company Common Stock, duly
endorsed and in proper form for transfer to Parent by delivery under
applicable law, or accompanied by duly executed instruments of transfer in
blank;
(b) a copy of resolutions of the Board of Directors and shareholders
of the Company authorizing the execution, delivery and performance of this
Agreement and all related documents and agreements, each certified by the
Secretary of the Company as being true and correct copies of the originals
thereof subject to no modifications or amendments;
(c) a certificate of the President of the Company, and of Principal
Shareholders, dated the Closing Date, as to the truth and correctness of
the representations and warranties of the Company and Principal
Shareholders contained herein on and as of the Closing Date;
(d) a certificate of the President of the Company, and of Principal
Shareholders, dated the Closing Date, (i) as to the performance of and
compliance by the Company and Principal Shareholders with all covenants
contained herein on and as of the Closing Date and (ii) certifying that all
conditions precedent of the Company and Principal Shareholders to the
Closing have been satisfied;
(e) a certificate of the Secretary of the Company certifying as to the
incumbency of the directors and officers of the Company and as to the
signatures of such directors and officers who have executed documents
delivered at the Closing on behalf of the Company;
(f) a certificate, dated within five business days of the Closing
Date, of the Secretary of State of the states of incorporation of the
Company and each Subsidiary establishing that the Company and each
Subsidiary is in existence, has paid all franchise taxes and otherwise is
in good standing to transact business in its state of incorporation;
(g) certificates, dated within five business days of the Closing Date,
of the Secretaries of State of the states in which the Company and each
Subsidiary is qualified to do business, to the effect that the Company and
each Subsidiary is qualified to do business and is in good standing as a
foreign corporation in each of such states;
(h) an opinion of Andrews & Kurth, L.L.P., counsel to the Company and
Principal Shareholders, dated as of the Closing Date, in substantially the
form attached as Exhibit C;
(i) all authorizations, consents, approvals, permits and licenses
referenced in Schedule 3.08;
(j) an executed General Release in substantially the form attached as
Exhibit D;
(k) executed Articles of Merger to effectuate the Merger;
(l) executed Escrow Agreement in substantially the form attached as
Exhibit E;
(m) executed tax certificate in substantially the form attached as
Exhibit F; and
(n) such other instrument or instruments of transfer as shall be
necessary or appropriate, as Parent or its counsel shall reasonably
request, to vest in Parent good and marketable title to the Company Common
Stock.
A-22
<PAGE> 101
SECTION 9.02. Deliveries of Parent. At the Closing, Parent shall deliver
the following to the Company or the appropriate party:
(a) the Parent Common Stock and Parent Options as set forth in Section
1.04;
(b) a copy of the resolutions of the Board of Directors of Parent
authorizing the execution, delivery and performance of this Agreement and
all related documents and agreements and approving the issuance of the
Parent Common Stock to be issued hereunder, each certified by Parent's
Secretary as being true and correct copies of the originals thereof subject
to no modifications or amendments;
(c) a certificate of the President of Parent, dated the Closing Date,
as to the truth and correctness of the representations and warranties of
Parent contained herein on and as of the Closing Date;
(d) a certificate of the President of Parent, dated the Closing Date,
(i) as to the performance of and compliance by Parent with all covenants
contained herein on and as of the Closing Date and (ii) certifying that all
conditions precedent of Parent to the Closing have been satisfied;
(e) a certificate of the Secretary of Parent certifying as to the
incumbency of the directors and officers of Parent and as to the signatures
of such directors and officers who have executed documents delivered at the
Closing on behalf of Parent;
(f) a certificate, dated within five business days of the Closing
Date, of the Secretary of State of Parent's state of incorporation,
establishing that Parent is in existence, has paid all state taxes and
otherwise is in good standing to transact business in such state;
(g) certificates, dated within five business days of the Closing Date,
of the Secretaries of State of the states in which Parent and Merger Sub
are qualified to do business, to the effect that Parent and Merger Sub are
qualified to do business and are in good standing as a foreign corporation
in each of such states;
(h) an opinion of Jackson Walker L.L.P. counsel to Parent and Merger
Sub, dated as of the Closing Date, in substantially the form attached as
Exhibit G;
(i) executed Escrow Agreement in substantially the form attached as
Exhibit E; and
(j) executed tax certificate in substantially the form attached as
Exhibit F.
ARTICLE X
POST CLOSING MATTERS
SECTION 10.01. Further Instruments of Transfer. Following the Closing, at
the request of Parent, Principal Shareholders shall deliver any further
instruments of transfer and take all reasonable action as may be necessary or
appropriate to (a) vest in Parent good and marketable title to the Company
Common Stock and (b) carry out more effectively the provisions of this Agreement
and to establish and protect the rights created in favor of the parties
hereunder or thereunder.
SECTION 10.02. Registration Rights. The Company and Parent covenant and
agree as follows:
(a) Definitions. For purposes of this Section 10.02:
(i) The term "Holder" means any person owning or having the right
to acquire Registrable Securities or any assignee thereof in accordance
with Section 10.02(l) hereof.
(ii) The term "1934 Act" shall mean the Securities Exchange Act of
1934, as amended.
(iii) The term "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act of
1933, as amended (the "Act"), and the declaration or ordering of
effectiveness of such registration statement or document.
A-23
<PAGE> 102
(iv) The term "Registrable Securities" means (A) the shares of
Parent Common Stock issued pursuant to Section 1.04 of this Agreement
(including the shares of Parent Common Stock underlying the Parent
Options that are not registered on Form S-8 under Section 10.06 below),
and (B) any Parent Common Stock issued as (or issuable upon the
conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of the shares referenced in (A) above,
excluding in all cases, however, any Registrable Securities (I) sold by
a Holder in a transaction in which such Holder's rights under this
Section 10.02 are not assigned, or (II) registered under the Act, the
registration statement in connection therewith has been declared
effective; provided, however, that in either case of (A) or (B) above,
any such securities shall cease to be Registrable Securities if the
registration rights granted hereunder are not transferred in accordance
with the provisions of Section 10.02(l) below. For purposes of Sections
10.02 (c) and (d) below, the term "Registrable Securities" does not
include Shelf Shares.
(v) The term "SEC" shall mean the Securities and Exchange
Commission.
(vi) The term "Shelf Shares" shall mean 350,000 shares of Parent
Common Stock issued pursuant to Section 1.04 of this Agreement, which
Shelf Shares are identified on Schedule 10.02(a).
(b) Shelf Registration.
(i) On or before 60 days after the Closing Date, Parent agrees to
cause the filing of a registration statement on an appropriate form with
the SEC to register the resale from time to time in the open market of
the Shelf Shares (as adjusted to or resulting from additional securities
being issued in connection with the reclassification, split,
combination, or dividends of securities paid thereon). Parent shall use
commercially reasonable efforts to cause such registration statement to
be declared effective by the SEC and to remain effective from the date
it is declared effective by the SEC until the earlier of: (A) six months
after the first anniversary of the Closing Date; or (B) the date upon
which all the Shelf Shares which are included in such registration
statement have been sold.
(ii) The registration statement filed pursuant to this Section
10.02(b) may include other securities of Parent.
(c) Demand Registration.
(i) From and after six months after the Closing Date, the Holders
of at least 55% of the Registrable Securities then outstanding
(excluding any Shelf Shares) may notify Parent in writing that such
Holders desire for Parent to cause up to all of such notifying Holders'
Registrable Securities to be registered for sale to the public under the
Act. Upon receipt of such written request, Parent will promptly notify
in writing all other Holders of Registrable Securities of such request,
which Holders shall within twenty days following such notice from Parent
notify Parent in writing whether such persons desire to have up to all
of the Registrable Securities held by each of them included in such
offering. Parent will, promptly following the expiration of such twenty
day period, prepare and file subject to the provisions of this Section
10.02, and use its best efforts to prosecute to effectiveness, an
appropriate filing with the SEC of a registration statement covering
such Registrable Securities and the proposed sale or distribution
thereof under the Act.
(ii) Notwithstanding anything in this Section 10.02(c) to the
contrary, Parent shall not be obligated to prepare or file any
registration statement pursuant to this Section 10.02(c) or to prepare
or file any amendment or supplement thereto, at any time when Parent
delivers a certificate signed by Parent's Chief Executive Officer or
Chairman of the Board stating that in the good faith judgment of the
Board of Directors of Parent that the filing thereof at the time
requested, or the offering of securities pursuant thereto (A) would
materially adversely affect a pending or proposed public offering of
Parent's securities, or an acquisition, merger, recapitalization,
consolidation, reorganization or similar transaction, negotiations,
discussions or pending proposals with respect
A-24
<PAGE> 103
thereto or (B) would materially adversely affect the business or
prospects of Parent in view of the disclosures that may be required
thereby of information about the business, assets, liabilities or
operations of Parent theretofore disclosed; provided, however, that the
filing of a registration statement, or any supplement or amendment
thereto, by Parent may be deferred pursuant to this Section 10.02(c) for
no longer than 180 days (but only once in every twelve month period)
after the delivery of such demand notice.
(iii) Notwithstanding anything in this Section 10.02(c) to the
contrary: (A) Parent shall not be required to effect the registration of
the Registrable Securities pursuant to this Section 10.02(c) more than
one time; and (B) Parent shall not be required to effect any such
registration unless at least $1 million of Registrable Securities are to
be sold in such registration (with such amount being determined based on
the market price of the Parent Common Stock on the date of the
initiating Holder(s) request). If any registration pursuant to this
Section 10.02(c) is in the form of an underwritten offering, Parent will
select and obtain the investment banker or investment bankers and
manager or managers that will administer the offering, which investment
bankers must offer terms which are reasonably competitive in the
marketplace for similar size companies and similar offerings. Parent
shall (together with all Holders proposing to distribute Registrable
Securities through such underwriting) enter into an underwriting
agreement, containing usual and customary terms, with the managing
underwriter selected for such underwriting. If any holder of Registrable
Securities disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to Parent and the managing
underwriter. The Registrable Securities so withdrawn shall also be
withdrawn from registration.
(iv) If any registration statement under this Section 10.02(c) is
not declared effective (except as a result of Holders withdrawing
Registrable Securities), then the holders of Registrable Securities may
request an additional registration under this Section 10.02(c).
(v) No registrations effected under this Section 10.02(c) shall
relieve Parent of its obligations to effect any registrations under, and
pursuant to the terms of, Section 10.02(d).
(d) Piggyback Registration. If (but without any obligation to do so)
Parent proposes to register (including for this purpose a registration
effected by Parent for shareholders other than the Holders) any Parent
Common Stock or other securities under the Act in connection with the
public offering of such securities solely for cash (other than registration
relating solely to the sale of securities to participants in a Parent stock
option, stock purchase or similar employee benefit plan, a registration on
any form which does not include substantially the same information as would
be required to be included in a registration statement covering the sale of
the Registrable Securities (including Form S-4 or any form substitution
thereof) or a registration in which the only Parent Common Stock being
registered is Parent Common Stock issuable upon conversion of debt
securities which are also being registered or a SEC Rule 145 transaction),
Parent shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given within
twenty days after mailing of such notice by Parent, Parent shall, subject
to the provisions of Section 10.02(h), use all reasonable efforts to cause
to be registered under the Act and any applicable state securities laws up
to all of such requesting Holder's Registrable Securities.
(e) Obligations of Parent. Whenever under this Section 10.02 Parent is
to effect the registration of any Registrable Securities, Parent shall, as
expeditiously as reasonably possible:
(i) Prepare and file with the SEC on any appropriate form a
registration statement with respect to the Registrable Securities
proposed to be registered and use its best efforts to cause such
registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for a period of
up to twelve months (except as provided in Section 10.02(b)(i)) or, if
earlier, until the distribution contemplated in the Registration
Statement has been completed;
A-25
<PAGE> 104
(ii) Unless such registration is a firm commitment underwriting,
prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective and to comply with the provisions of
the Act with respect to the disposition of all Registrable Securities
and other securities covered by such registration statement for a period
of twelve months (except as provided in Section 10.02(b)(i)).
(iii) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably
request in order to facilitate the disposition of Registrable Securities
owned by them.
(iv) Use its best efforts to register or qualify all Registrable
Securities and other securities covered by such registration statement
under such other securities or "blue sky" laws of such jurisdictions as
the underwriter or such sellers shall reasonably request and do any and
all other acts and things as may be reasonably necessary to consummate
the disposition in such jurisdictions of the Registrable Securities
covered by such registration statement, except that Parent shall not for
any such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction wherein it is not so qualified,
or to subject itself to taxation in respect of doing business in any
such jurisdiction, or to consent to general service of process in any
such jurisdiction.
(v) Immediately notify each seller of Registrable Securities
covered by such registration statement, at any time when a prospectus
relating thereto is required to be delivered under the Act, 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 any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing
or if it is necessary, in the opinion of counsel to Parent, to amend or
supplement such prospectus to comply with law, and at the request of any
such seller prepare and to send such seller a reasonable number of
copies of a supplement to or any amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such
Registrable Securities, such prospectus shall not include any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing and shall
otherwise comply in all material respects with law and so that such
prospectus, as amended or supplemented, will comply with law.
(vi) Otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC.
(vii) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each
Holder participating in such underwriting shall also enter into and
perform its obligations under such an agreement.
(viii) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date
of such registration.
(f) Furnish Information. It shall be a condition precedent to the
obligations of Parent to take any action pursuant to this Section 10.02
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to Parent such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition
of such securities as shall be required to effect the registration of such
Holder's Registrable Securities.
(g) Expenses of Registration. All expenses incurred in connection with
registrations, filings or qualifications pursuant to this Section 10.02 in
connection with one demand registration, any shelf registration and all
piggyback registrations including, without limitation, all registration,
filing and
A-26
<PAGE> 105
qualification fees, printers' and accounting fees, fees and disbursements
of counsel for Parent and the reasonable fees and expenses of one counsel
for the selling Holders (as a group) (but excluding underwriter's
commissions and fees and any fees of others employed by a selling Holder)
shall be borne by Parent.
(h) Underwriting Requirements; Cut-backs.
(i) In connection with any offering involving an underwriting of
shares of Parent's capital stock, Parent shall not be required to
include any Holders' Registrable Securities in such underwriting unless
they accept the terms of the underwriting as agreed upon between Parent
and the underwriters selected by it (or by other persons entitled to
select the underwriters), and then only in such quantity as the
underwriters determine in their sole discretion will not materially
jeopardize or in any way reduce the success of the offering by Parent
(with the securities being eliminated as provided in (ii) below).
(ii) Parent has previously granted registration rights to certain
of its securityholders (the "Other Holders"). Notwithstanding anything
in this Section 10.02 to the contrary, in the event of any request for
registration hereunder, Parent shall provide each Other Holder the
notice required with respect to their registration rights and will allow
such Other Holders to participate in any such registration to the extent
of such registration rights; it being acknowledged and agreed that if
the total amount of securities, including Registrable Securities,
requested by Holders and Other Holders to be included in such offering
exceeds the amount of securities that the underwriters determine in
their sole discretion is compatible with the success of the offering
(excluding any securities to be offered by Parent), then Parent shall be
required to include in the offering only that number of such securities,
including Registrable Securities, which the underwriters determine in
their sole discretion will not jeopardize the success of the offering
(the securities so included to be apportioned pro rata among the selling
Holders and Other Holders according to the total amount of securities
entitled to be included therein owned by each selling Holder and Other
Holder or in such other proportions as shall mutually be agreed to by
such selling Holders and Other Holders).
(i) Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any registration by
Parent of any securities as a result of any controversy that might arise
with respect to the interpretation or implementation of this Section 10.02.
(j) Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 10.02:
(i) To the extent permitted by law, Parent will indemnify and hold
harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Act or the 1934 Act against any losses,
claims, damages, or liabilities (joint or several) to which they may
become subject under the Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions
in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"): (A)
any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (B) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (C) any violation or
alleged violation by Parent of the Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under, the 1934 Act
or any state securities law; and, subject to Section 10.02(j)(iii)
below, Parent will pay to each such Holder, underwriter or controlling
person, as incurred, any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the indemnity
agreement contained in this Section 10.02(j)(i) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of Parent
(which consent shall
A-27
<PAGE> 106
not be reasonably delayed or withheld), nor shall Parent be liable in
any such case for any such loss, claim, damage, liability, or action to
the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by any
such Holder, underwriter or controlling person.
(ii) To the extent permitted by law, each selling Holder will
indemnify and hold harmless Parent, each of its directors, each of its
officers who has signed the registration statement, each person, if any,
who controls Parent within the meaning of the Act, any underwriter, any
other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, and any
agent of Parent, against any losses, claims, damages, or liabilities
joint or several) to which any of the foregoing persons may become
subject, under the Act, the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each
case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished by
such Holder expressly for use in connection with such registration; and
each such Holder will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to
this Section 10.02(j)(ii), in connection with investigating or defending
any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this Section 10.02(j)(ii)
shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the
consent of the Holder, which consent shall not be reasonably withheld;
provided, that, in no event shall any indemnity under this Section
10.02(j)(ii) exceed the net proceeds from the offering received by such
Holder.
(iii) Promptly after receipt by an indemnified party under this
Section 10.02(j) of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this
Section 10.02(j), deliver to the indemnifying party a written notice of
the commencement thereof and the indemnifying party shall have the right
to participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party receiving similar notice, to
assume the defense thereof with counsel reasonably satisfactory to the
parties; provided, however, that an indemnified party (together with all
other indemnified parties which may be represented without conflict by
one counsel) shall have the right to retain one separate counsel, with
the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding; otherwise, the
indemnified party shall be responsible for the fees and expenses of its
counsel. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 10.02(j) with respect to such action, but not with respect to
any other action.
(iv) Except as provided in the last sentence of Section
10.02(j)(iii) above, if the indemnification provided for in this Section
10.02(j) is held by a court of competent jurisdiction to be unavailable
to an indemnified party with respect to any loss, liability, claim,
damage, or expense referred to herein, then the indemnifying party, in
lieu of indemnifying such indemnified party hereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of
such loss, liability, claim, damage, or expense in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on
the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability,
claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the
parties
A-28
<PAGE> 107
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(v) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in any
underwriting agreement entered into in connection with an underwritten
public offering are in conflict with the foregoing provisions, the
provisions in the underwriting agreement shall control.
(vi) The obligations of Parent and Holders under this Section
10.02(j) shall survive the completion of any offering of Registrable
Securities pursuant to a registration statement under this Section
10.02.
(k) Reports Under the 1934 Act. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the Act ("Rule 144") and
any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of Parent to the public without registration or
pursuant to a registration on Form S-3, Parent agrees to:
(i) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times after the Closing Date;
(ii) file with the SEC in a timely manner all reports and other
documents required of Parent under the Act and the 1934 Act; and
(iii) furnish to any Holder, so long as the Holder owns any
Registrable Securities, promptly upon request (A) a written statement by
Parent that it has complied with the reporting requirements of Rule 144
(at any time after ninety (90) days after the effective date of the
first registration statement filed by Parent), the Act and the 1934 Act
(at any time after it has become subject to such reporting
requirements), or that it qualifies as a registrant whose securities may
be resold pursuant to Form S-3 (at any time after it so qualifies), (B)
a copy of the most recent annual or quarterly report of Parent and such
other reports and documents so filed by Parent, and (C) such other
information as may be reasonably requested in availing any Holder of any
rule or regulation of the SEC that permits the selling of any such
securities without registration or pursuant to such form.
(l) Assignment of Registration Rights. The registration rights of the
Holders under this Section 10.02 may be assigned (but only with all related
obligations) by a Holder to a transferee or assignee of such securities who
purchases from such Holder at least 10,000 shares of Registrable Securities
(subject to appropriate adjustment for stock splits, stock dividends,
combinations and other recapitalizations), provided: (A) Parent is within a
reasonable time after such transfer, furnished with written notice of the
name and address of such transferee or assignee and the securities with
respect to which such registration rights are being assigned; (B) such
transferee or assignee agrees in writing to be bound by and subject to the
terms and conditions of this Agreement, including without limitation the
provisions of Section 10.02(m) below; and (C) such assignment shall be
effective only if immediately following such transfer the further
disposition of such securities by the transferee or assignee is restricted
under the Act.
(m) Lock-up Agreement. Each Holder hereby agrees that if requested by
Parent or the underwriters in any underwritten offering, such Holder shall
not, for the period of not more than 180 days (as specified by the managing
underwriter) after the effective date of an underwritten public offering of
shares of Parent Common Stock, if requested by the managing underwriter,
without the prior written approval of Parent or such underwriters (as the
case may be), directly or indirectly, sell, offer to sell, contract to sell
(including without limitation, any short sale), grant any option to
purchase or otherwise transfer or dispose of any shares of Parent Common
Stock legally or beneficially owned by such Holder. In order to enforce the
foregoing covenant, Parent may impose stop-transfer instructions with
respect to the Registrable Securities of each Holder (and the shares or
securities of every other person subject to the foregoing restriction)
until the end of such period. Notwithstanding the foregoing, the provisions
of this Section 10.02(m) shall only be applicable to the Holders if all
officers and directors of Parent enter into similar agreements.
A-29
<PAGE> 108
(n) Termination of Registration Rights. Notwithstanding anything in
this Section 10.02 to the contrary, no Holder shall be entitled to exercise
any right provided for in this Section 10.02: (i) at any time more than two
(2) years following the Closing Date or (ii) at such time as such Holder is
able to sell all of such Holder's Registrable Securities in a single
three-month period in compliance with Rule 144.
(o) Limitations on Subsequent Registration Rights. From and after the
date of this Agreement and until Holder's registration rights terminate
pursuant to Section 10.02(n) above, Parent shall not, without the prior
written consent of the Holders of a majority of the Registrable Securities,
enter into any agreement with any holder or prospective holder of any
securities of Parent that would grant to such holder or prospective holder
registration rights which are superior to those granted to the Holders
hereunder (although pari passu rights will be permissible).
SECTION 10.03. Appointment of Directors. Parent shall cause Ladin to become
a member of the board of directors of Parent immediately following the Effective
Time and shall increase the size of the board to five members, consisting of the
aforesaid person and the four current board members. In addition, following the
Closing, the parties acknowledge and agree that the board of directors and
management of Parent will use reasonable efforts to cause John N. Palmer to
become a member of the board of directors of Parent and in that event, will
increase the size of the board to six members. Should John N. Palmer decline to
become a member of the board of directors of Parent, then Ladin may nominate
someone else to become a director subject to the approval of the board of
directors other than Ladin. In addition, following the Closing, the parties
acknowledge and agree that William O. Hunt and John N. Palmer (should he become
a director) will jointly attempt to identify up to two (2) outside persons to
add as members of the board of directors of Parent and that in such event, the
board of directors of Parent shall be increased to eight persons. If John N.
Palmer does not become a member of the board of directors of Parent, then
William O. Hunt and Ladin will jointly attempt to identify up to two (2) outside
persons to add as members of the board of directors of Parent. So long as John
N. Palmer and Ladin, collectively, own 5% or more of the Parent's outstanding
common stock, Parent will use its reasonable best efforts to elect Ladin to the
Board of Directors.
SECTION 10.04. Tax Matters. Each party hereto shall provide to each of the
other parties hereto such cooperation and information as any of them reasonably
may request in filing any Return, amended Return or claim for refund,
determining a liability for Taxes or a right to refund of such Taxes or in
conducting any audit or other proceeding in respect of such Taxes. Such
cooperation and information shall include providing copies of all relevant
portions of Returns, together with relevant accompanying schedules, work papers,
documents relating to rulings or other determinations by taxing authorities and
records concerning the ownership and tax basis of property, which such party may
possess.
SECTION 10.05. Indemnification of Directors and Officers.
(a) From and after the Effective Time and for a period of six (6)
years thereafter, the Surviving Corporation shall fulfill and honor in all
material respects the indemnification obligations of the Company contained
in the Articles of Incorporation or by-laws or any equivalent
organizational document of the Company as in effect immediately prior to
the Effective Time.
(b) The provisions of this Section 10.05 are intended to be for the
benefit of, and shall be enforceable by, each Person entitled to
indemnification as set forth in Section 10.05(a) and the heirs and
representatives of such Person. Parent shall not permit the Surviving
Corporation to dividend or distribute all or substantially all of its
assets, or merge or consolidate with, or sell all or substantially all of
its assets to, any other Person unless: (i) the Surviving Corporation
ensures that the surviving or resulting entity will assume the obligations
imposed by this Section 10.05; or (ii) Parent agrees to assume the
obligations of the Surviving Corporation imposed by this Section 10.05.
SECTION 10.06. Registration of Shares Underlying Parent Options. As soon as
practicable after the Closing Date, but in no event later than fifteen business
days following the Closing Date, Parent shall register
A-30
<PAGE> 109
all of the shares of Parent Common Stock underlying Parent Options that Parent
is permitted to register on a Form S-8 under the rules and regulations of the
SEC.
ARTICLE XI
REMEDIES
SECTION 11.01. Indemnification by Shareholders. Subject to the terms and
conditions of this Article, the shareholders of the Company entitled to shares
of Parent Common Stock under Section 1.04 (the "Indemnifying Shareholders") each
agree to indemnify, defend and hold Parent and its directors, officers, agents,
attorneys and affiliates (the "Parent Indemnitees") harmless from and against
any and all losses, claims, obligations, demands, assessments, penalties,
liabilities, costs, damages and expenses (including reasonable attorneys' and
other fees and expenses for investigation and defense with respect to the
foregoing) (collectively, "Damages") asserted against or incurred by such
indemnitees by reason of or resulting from: (a) a breach of any representation,
warranty or covenant of the Company or Principal Shareholders contained herein,
in any exhibit, schedule, certificate or financial statement delivered
hereunder, any certificate delivered at Closing, or in any agreement executed in
connection with the transactions contemplated hereby; and (b) any claims,
liabilities, costs, expenses or losses resulting from and arising out of the
matters described in Schedule 11.01 attached hereto; provided that the
Indemnifying Shareholders shall not be required to indemnify the Parent
Indemnitees in respect to any Damages until the aggregate amount of all such
Damages exceeds $100,000 (the "Basket"), whereupon the Indemnifying Shareholders
shall be required to indemnify the Parent Indemnitees in respect of such Damages
to the extent (but only to the extent) that such Damages exceed the Basket. Any
provision in this Agreement to the contrary notwithstanding, (x) the
Indemnifying Shareholders' liability to the Parent Indemnitees for Damages under
this Article shall be limited to the Escrowed Shares and shall be payable only
by return of the Escrowed Shares in accordance with the Escrow Agreement, except
as provided in the next sentence of this Section 11.01; (y) Damages arising out
of a breach of the representations in Section 3.01, 3.03 or 3.05 with respect to
an Indemnifying Shareholder shall be the obligation of only the Indemnifying
Shareholder breaching such representations; and (z) the obligations of the
Principal Shareholders to indemnify the Parent Indemnitees for Damages arising
out of any breach of any representation or warranty contained in Article II of
this Agreement shall be several, and not joint, and shall be the obligation only
of the Principal Shareholder breaching such representation or warranty.
Notwithstanding anything hereinabove to the contrary, in the event of any
Damages arising from a breach of the representations set forth in Section 3.01,
3.03, or 3.05 in excess of the Escrowed Shares remaining in escrow, the
Indemnifying Shareholders shall be severally liable on a pro rata basis based
upon the amount of shares of Parent Common Stock issued to each Indemnifying
Shareholder hereunder, but not in excess of such amount of Parent Common Stock
issued to such Indemnifying Shareholder. Any claim for Damages against an
Indemnifying Shareholder to be satisfied by Escrowed Shares shall be pursuant to
and in accordance with the Escrow Agreement.
SECTION 11.02. Indemnification by Parent. Subject to the terms and
conditions of this Article, Parent hereby agrees to indemnify, defend and hold
the Company and Indemnifying Shareholders and its or their respective directors,
officers, agents, attorneys and affiliates (the "Company Indemnities") harmless
from and against all Damages asserted against or incurred by any of such
indemnitees by reason of or resulting from a breach of any representation,
warranty or covenant of Parent contained herein or in any exhibit, schedule or
certificate delivered hereunder, any certificate delivered at Closing, or in any
agreement executed in connection with the transactions contemplated hereby;
provided however, that Parent shall not be required to indemnify the Company
Indemnitees in respect to any Damages until the aggregate amount of all such
Damages exceeds the Basket.
SECTION 11.03. Conditions of Indemnification. The respective obligations
and liabilities of the Company and Principal Shareholders and Parent (the
"indemnifying party") to the other (the "party to be
A-31
<PAGE> 110
indemnified") under Sections 11.01 and 11.02 with respect to claims resulting
from the assertion of liability by third parties shall be subject to the
following terms and conditions:
(a) Within 20 days (or such earlier time as might be required to avoid
prejudicing the indemnifying party's position) after receipt of notice of
commencement of any action evidenced by service of process or other legal
pleading, the party to be indemnified shall give the indemnifying party
written notice thereof together with a copy of such claim, process or other
legal pleading, and the indemnifying party shall have the right to
undertake the defense thereof by representatives of its own choosing and at
its own expense; provided that the party to be indemnified may participate
in the defense with counsel of its own choice, the fees and expenses of
which counsel shall be paid by the party to be indemnified unless (i) the
indemnifying party has agreed to pay such fees and expenses, (ii) the
indemnifying party has failed to assume the defense of such action or (iii)
the named parties to any such action (including any impleaded parties)
include both the indemnifying party and the party to be indemnified and the
party to be indemnified has been advised by counsel that there may be one
or more legal defenses available to it that are different from or
additional to those available to the indemnifying party (in which case, if
the party to be indemnified informs the indemnifying party in writing that
it elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the
defense of such action on behalf of the party to be indemnified, it being
understood, however, that the indemnifying party shall not, in connection
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys at any time for the
party to be indemnified, which firm shall be designated in writing by the
party to be indemnified).
(b) In the event that the indemnifying party, by the 30th day after
receipt of notice of any such claim (or, if earlier, by the 10th day
preceding the day on which an answer or other pleading must be served in
order to prevent judgment by default in favor of the person asserting such
claim), does not elect to defend against such claim, the party to be
indemnified will (upon further notice to the indemnifying party) have the
right to undertake the defense, compromise or settlement of such claim on
behalf of and for the account and risk of the indemnifying party and at the
indemnifying party's expense, subject to the right of the indemnifying
party to assume the defense of such claims at any time prior to settlement,
compromise or final determination thereof.
(c) Notwithstanding the foregoing, the indemnifying party shall not
settle any claim without the consent of the party to be indemnified unless
such settlement involves only the payment of money and the claimant
provides to the party to be indemnified a release from all liability in
respect of such claim. If the settlement of the claim involves more than
the payment of money, the indemnifying party shall not settle the claim
without the prior consent of the party to be indemnified.
(d) The party to be indemnified and the indemnifying party will each
cooperate with all reasonable requests of the other.
SECTION 11.04. Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants contained herein shall survive the
Closing and all statements contained in any certificate, exhibit or other
instrument delivered by or on behalf of the Company, Principal Shareholders or
Parent pursuant to this Agreement shall be deemed to have been representations
and warranties by the Company and Principal Shareholders or Parent, as the case
may be, and, notwithstanding any provision in this Agreement to the contrary,
shall survive for a period of twelve months after the Closing Date. Any claims
for Damages must be made prior to the expiration of the applicable period set
forth in this section, and as to any such claim that is presented to the
indemnifying party within the applicable period set forth in this section, such
obligation to indemnify shall continue to survive until such claim is finally
resolved or disposed of.
SECTION 11.05. Waiver. No waiver by any party of any default or breach by
another party of any representation, warranty, covenant or condition contained
in this Agreement, any exhibit or any document, instrument or certificate
contemplated hereby shall be deemed to be a waiver of any subsequent default or
breach by such party of the same or any other representation, warranty, covenant
or condition. No act, delay,
A-32
<PAGE> 111
omission or course of dealing on the part of any party in exercising any right,
power or remedy under this Agreement or at law or in equity shall operate as a
waiver thereof or otherwise prejudice any of such party's rights, powers and
remedies. All remedies, whether at law or in equity, shall be cumulative and the
election of any one or more shall not constitute a waiver of the right to pursue
other available remedies.
SECTION 11.06. Remedies Exclusive. The remedies provided in this Article
shall be exclusive of any other rights or remedies available to one party
against the other, either at law or in equity, except in the case of fraud.
SECTION 11.07. Offset. Any and all amounts owing or to be paid by Parent to
Principal Shareholders, hereunder or otherwise, shall be subject to offset and
reduction pro tanto by any amounts that may be owing at any time by Principal
Shareholders to Parent in respect of any failure or breach of any
representation, warranty or covenant of the Company or Principal Shareholders
under or in connection with this Agreement or any other agreement with Parent or
any transaction contemplated hereby or thereby, as reasonably determined by
Parent. If Parent determines that such offset is appropriate, notice shall be
given to Principal Shareholders of such determination at least 10 days prior to
the due date of the payment to be reduced. If the conditions upon which the
reduction is based are cured by Principal Shareholders prior to such due date,
as determined by Parent, the amount of such payment shall not be so reduced.
SECTION 11.08. Costs, Expenses and Legal Fees. Whether or not the
transactions contemplated hereby are consummated, each party hereto shall bear
its own costs and expenses (including attorneys' fees and expenses), except that
each party hereto that is shown to have breached this Agreement or any other
agreement contemplated hereby agrees to pay the costs and expenses (including
reasonable attorneys' fees and expenses) incurred by any other party in
successfully (a) enforcing any of the terms of this Agreement against such
breaching party or (b) proving that another party breached any of the terms of
this Agreement.
ARTICLE XII
TERMINATION
SECTION 12.01. Termination. This Agreement may be terminated:
(a) At any time prior to the Closing Date by mutual written agreement
of all parties.
(b) At any time prior to the Closing Date by Parent if any
representation or warranty of the Company or Principal Shareholders
contained in this Agreement or in any certificate or other document
executed and delivered by the Company pursuant to this Agreement is or
becomes untrue or breached in any material respect or if the Company or
Principal Shareholders fail to comply in any material respect with any
covenant contained herein, and any such misrepresentation, noncompliance or
breach is not cured, waived or eliminated within seven days.
(c) At any time prior to the Closing Date by the Company if any
representation or warranty of Parent contained in this Agreement or in any
certificate or other document executed and delivered by Parent pursuant to
this Agreement is or becomes untrue or breached in any material respect or
if Parent fails to comply in any material respect with any covenant
contained herein, and any such misrepresentation, noncompliance or breach
is not cured, waived or eliminated within seven days.
(d) By Parent if the conditions stated in Article VII have not been
satisfied by the Closing Date.
(e) By the Company if the conditions stated in Article VIII have not
been satisfied by the Closing Date.
In the event this Agreement is terminated pursuant to subparagraph (b), (c), (d)
or (e) above, Parent, the Company and Principal Shareholders shall each be
entitled to pursue, exercise and enforce any and all remedies, rights, powers
and privileges available at law or in equity. In the event of a termination of
this Agreement under the provisions of this Article, a party not then in
material breach of this Agreement shall stand fully released and discharged of
any and all obligations under this Agreement.
A-33
<PAGE> 112
SECTION 12.02. Stock Price Protection.
(a) This Agreement may be terminated by the Company on the Closing
Date, if both of the following conditions are satisfied:
(i) the market value of the Parent Common Stock as of the close of
business on the Determination Date (the "Parent Market Value") shall be
less than $9.875; and
(ii) the quotient obtained by dividing the Parent Market Value by
the Starting Date Price (such number being referred to herein as the
"Parent Ratio") shall be less than the quotient obtained by dividing the
Index Price on the Determination Date by the Index Price on the Starting
Date and subtracting 0.15 from such quotient subject, however, to the
following: If the Company shall elect to terminate this Agreement
pursuant to this Section 12.02, it shall give written notice thereof to
Parent on the Closing Date; but provided further, that Parent shall have
the option to elect to increase the Exchange Ratio by multiplying the
Exchange Ratio by the quotient obtained by dividing the Starting Date
Price by the Parent Market Value, whereupon no termination shall have
occurred pursuant to this Section 12.02 and this Agreement shall remain
in effect in accordance with its terms (except as the Exchange Ratio
shall have been so modified), and any references in this Agreement to
"Exchange Ratio" shall thereafter be deemed to refer to the Exchange
Ratio as adjusted pursuant to this Section 12.02.
(b) For purposes of this Section 12.02, the following terms shall have
the meanings indicated:
"Starting Date Price" shall mean the closing price per share of the
Parent Common Stock on the Nasdaq National Market on the last trading
day prior to the date of this Agreement.
"Determination Date" shall mean the date immediately preceding the
Closing Date.
"Index Group" shall mean the six internet service provider
companies listed below, the common stocks of all of which shall be
publicly traded and as to which there shall not have been, since the
Starting Date and before the Determination Date, any public announcement
of a proposal of such company to be acquired or for such company to
acquire another company or companies in transactions with a value
exceeding 25% of the acquiror's market capitalization. In the event that
any such company or companies are removed from the Index Group, the
weights which have been determined based upon the number of shares of
outstanding common stock shall be redistributed proportionately for
purposes of determining the Index Price. The six internet service
provider companies and the weights attributed to them are as follows:
<TABLE>
<CAPTION>
INTERNET SERVICE PROVIDER % WEIGHTING
- ------------------------- -----------
<S> <C>
MindSpring............................................... 16 2/3%
Earthlink................................................ 16 2/3%
Prodigy Communications................................... 16 2/3%
OneMain.com.............................................. 16 2/3%
Voyager Net.............................................. 16 2/3%
Flash net................................................ 16 2/3%
------
Total.......................................... 100.00%
</TABLE>
"Index Price" on a given date shall mean the weighted average
(weighted in accordance with the factors listed above) of the closing
sales prices on such date of the companies composing the Index Group.
"Starting Date" shall mean the date of this Agreement or the last
business day prior to the date of this Agreement if this Agreement is
not dated as of a business day.
If Parent or any company belonging to the Index Group declares or
effects a stock dividend, reclassification, recapitalization, split-up,
combination, exchange of shares, or similar transaction
A-34
<PAGE> 113
between the Starting Date and the Determination Date, the prices for the
common stock of such company or Parent shall be appropriately adjusted
for the purposes of applying this Section 12.02.
SECTION 12.03. This Agreement shall terminate if the Closing has not
occurred by December 15, 1999.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.01. Amendment. This Agreement may be amended, modified or
supplemented only by an instrument in writing executed by all the parties
hereto.
SECTION 13.02. Assignment. Neither this Agreement nor any right created
hereby or in any agreement entered into in connection with the transactions
contemplated hereby shall be assignable by any party hereto, except by Parent to
an affiliate of Parent.
SECTION 13.03. Parties In Interest; No Third Party Beneficiaries. Except as
otherwise provided herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective heirs, legal
representatives, successors and assigns of the parties hereto. Neither this
Agreement nor any other agreement contemplated hereby shall be deemed to confer
upon any person not a party hereto or thereto any rights or remedies hereunder
or thereunder.
SECTION 13.04. Entire Agreement. This Agreement and the agreements
contemplated hereby constitute the entire agreement of the parties regarding the
subject matter hereof, and supersede all prior agreements and understandings,
both written and oral, among the parties, or any of them, with respect to the
subject matter hereof.
SECTION 13.05. Severability. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision 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 part of this Agreement a
provision as similar in its terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
SECTION 13.06. Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF
LAWS) OF THE STATE OF TEXAS.
SECTION 13.07. Captions. The captions in this Agreement are for convenience
of reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
SECTION 13.08. Gender and Number. When the context requires, the gender of
all words used herein shall include the masculine, feminine and neuter and the
number of all words shall include the singular and plural.
SECTION 13.09. Reference to Agreement. Use of the words "herein", "hereof",
"hereto" and the like in this Agreement shall be construed as references to this
Agreement as a whole and not to any particular Article, Section or provision of
this Agreement, unless otherwise noted.
SECTION 13.10. Confidentiality; Publicity and Disclosures. Each party shall
keep this Agreement and its terms confidential, and shall make no press release
or public disclosure, either written or oral, regarding the transactions
contemplated by this Agreement without the prior knowledge and consent of the
other parties hereto; provided that the foregoing shall not prohibit any
disclosure (a) by press release, filing or otherwise that is required by federal
securities laws or the rules of the Nasdaq National Market, (b) to attorneys,
accountants, investment bankers or other agents of the parties assisting the
parties in connection with the
A-35
<PAGE> 114
transactions contemplated by this Agreement and (c) by Parent in connection with
conducting an examination of the operations and assets of the Company and the
Subsidiaries.
SECTION 13.11. Notice. Any notice or communication hereunder or in any
agreement entered into in connection with the transactions contemplated hereby
must be in writing and given by depositing the same in the United States mail,
addressed to the party to be notified, postage prepaid and registered or
certified with return receipt requested, or by delivering the same in person or
by facsimile transmission. Such notice shall be deemed received on the date on
which it is hand-delivered or received by facsimile transmission or on the third
business day following the date on which it is so mailed. For purposes of
notice, the addresses of the parties shall be:
<TABLE>
<S> <C>
If to Parent: Internet America, Inc.
350 N. St. Paul Street, Suite 3000
Dallas, Texas 75201
Attn: President
with a copy to: Richard Dahlson
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
If to the Company: PDQ. Net, Incorporated
20 E. Greenway, Suite 600
Houston, Texas 77046
Attn: President
If to Principal Shareholders: William E. Ladin, Jr.
20 E. Greenway, Suite 600
Houston, Texas 77046
J. N. Palmer Family Partnership
2335 Eastover
Jackson, Mississippi 39211
with a copy to: Jeffrey R. Harder
Andrews & Kurth, L.L.P.
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
</TABLE>
Any party may change its address for notice by written notice given to the other
parties in accordance with this Section.
SECTION 13.14. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
A-36
<PAGE> 115
EXECUTED as of the date first above written.
PARENT:
INTERNET AMERICA, INC.
By: /s/ MICHAEL T. MAPLES
----------------------------------
Michael T. Maples
President and Chief Executive
Officer
MERGER SUB:
GEEK HOUSTON II, INC.
By: /s/ MICHAEL T. MAPLES
----------------------------------
Michael T. Maples
President
THE COMPANY:
PDQ.NET, INCORPORATED
By: /s/ WILLIAM E. LADIN, JR.
----------------------------------
William E. Ladin, Jr.
PRINCIPAL SHAREHOLDERS:
/s/ WILLIAM E. LADIN, JR.
------------------------------------
William E. Ladin, Jr.
/s/ JOHN N. PALMER
------------------------------------
J. N. Palmer Family Partnership
By: John N. Palmer, General Partner
A-37
<PAGE> 116
EXHIBIT A
DEFINITIONS
In addition to terms otherwise defined in this Agreement, as used in this
Agreement, the following terms shall have the meanings set forth below:
"Articles of Merger" shall have the meaning set forth in Section 1.02.
"knowledge", "have no knowledge of ", or "do not know of " and similar
phrases shall mean (i) in the case of a natural person, the particular fact was
known, or not known, as the context requires, to such person after diligent
investigation and inquiry by such person, and (ii) in the case of an entity, the
particular fact was known, or not known, as the context requires, to any
executive officer of such entity after diligent investigation and inquiry by the
principal executive officer of such entity.
"Cash Compensation" shall have the meaning set forth in Section 3.11(a).
"Closing" shall mean the closing of the transactions contemplated by this
Agreement, which shall occur at 10:00 a.m., local time, on the Closing Date in
the offices of Jackson Walker L.L.P., Suite 6000, 901 Main Street, Dallas, Texas
75202, or at such other time and place as shall be mutually agreed in writing by
the parties hereto.
"Closing Date" shall mean the date of Closing, which date shall be as soon
as practicable after the date of this Agreement; provided that the date may not
be later than December 15, 1999.
"Code" shall mean the Internal Revenue Code of 1986.
"Commitments" shall have the meaning set forth in Section 3.15(a).
"Company Common Stock" shall have the meaning set forth in Section 1.04.
"Company Shareholders" shall have the meaning set forth in Section 10.02.
"Compensation Plans" shall have the meaning set forth in Section 3.11(b).
"Competitor" means an Internet service provider that operates in a
geographic market in which Parent operates.
"Controlled Group" shall have the meaning set forth in Section 3.1(d).
"Damages" shall have the meaning set forth in Section 10.02.
"Dissenting Share" shall have the meaning set forth in Section 1.06.
"Effective Time" shall have the meaning set forth in Section 1.02.
"Employee Benefit Plan" shall have the meaning set forth in Section
3.12(a).
"Employee Policies and Procedures" shall have the meaning set forth in
Section 3.11(d).
"Employment Agreements" shall have the meaning set forth in Section
3.11(c).
"Environmental Laws" shall have the meaning set forth in Section 3.33(a).
"Exchange Ratio" means the ratio obtained by dividing 2,425,000 by the
number of issued and outstanding shares of Company Common Stock as set forth on
Schedule 3.01.
"Financial Statements" shall have the meaning set forth in Section 3.09.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"ordinary course of business" means the usual and customary way in which
the Company or any Subsidiary, as the case may be, has conducted its business in
the past.
A-38
<PAGE> 117
"Merger" shall have the meaning set forth in the preamble of this
Agreement.
"Related Agreements" shall have the meaning set forth in Section 2.03.
"Parent Common Stock" shall have the meaning set forth in Section 1.04.
"Parent Notice" shall have the meaning set forth in Section 10.02.
"Personal Property" shall have the meaning set forth in Section 3.14(b).
"Proprietary Rights" shall have the meaning set forth in Section 3.18(a).
"Return" or "Returns" means any returns, reports or statements (including
any information returns) required to be filed for purposes of a particular Tax.
"Tax" or "Taxes" means all federal, state, local or foreign net or gross income,
gross receipts, net proceeds, sales, use, ad valorem, value added, franchise,
bank shares, withholding, payroll, employment, excise, property, deed, stamp,
alternative or add on minimum, environmental or other taxes, assessments,
duties, fees, levies or other governmental charges of any nature whatever,
whether disputed or not, together with any interest, penalties, additions to tax
or additional amounts with respect thereto.
"Shares" shall have the meaning set forth in Section 10.02.
"Subsidiary" shall mean any corporation, partnership, joint venture or
other legal entity of which the Company owns, directly or indirectly, stock or
other equity interests which entitle the holder to vote for the election of the
board of directors or other governing body of such corporation or other legal
entity; and shall include within the meaning of the term each Subsidiary, as
defined above, of any Subsidiary of the Company.
"Surviving Corporation" shall have the meaning set forth in Section 1.01.
A-39
<PAGE> 118
EXHIBIT B
VOTING AGREEMENT
THIS VOTING AGREEMENT (the "Agreement"), dated as of September , 1999
(the "Agreement"), is by and between Internet America, Inc., a Texas corporation
("Internet America"), PDQ.Net, Incorporated, a Texas corporation ("PDQ"), the
undersigned shareholders of Internet America (the "Internet America
Shareholders") and the undersigned shareholders of PDQ (the "PDQ Shareholders").
The Internet America Shareholders and the PDQ Shareholders are referred to
collectively as the "Shareholders."
WITNESSETH:
WHEREAS, the Internet America Shareholders are the record and beneficial
owners of shares of common stock, par value $0.01 per share, of Internet America
and the PDQ Shareholders are the record and beneficial owners of shares of
common stock, par value $0.01 per share, of PDQ, (such shares together with any
other common stock and any other securities of the Company or PDQ having any
voting rights now or hereafter owned by the Shareholders are referred to as the
"Shares"); and
WHEREAS, Internet America, GEEK Houston II, Inc., a Texas corporation and
wholly-owned subsidiary of Internet America ("Merger Sub"), PDQ and certain
shareholders of PDQ have entered into that certain Agreement and Plan of Merger
dated as of the same date hereof (the "Merger Agreement"), pursuant to which,
among other things, Merger Sub will merge with and into PDQ, with PDQ surviving
as a wholly owned subsidiary of Internet America (the "Merger") (all capitalized
terms used herein without definition have the meanings ascribed to them in the
Merger Agreement); and
WHEREAS, a condition to closing the Merger Agreement is that Internet
America's shareholders and PDQ's shareholders approve and adopt the Merger
Agreement and the Merger.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged and confessed, the parties hereto
agree as follows:
1. Voting of Shares.
(a) Internet America Shareholders. During the term of this
Agreement, each Internet America Shareholder agrees that: (i) such
Internet America Shareholder will not sell or transfer any of the Shares
or any interest therein to any person other than another Internet
America Shareholder, provided, however that each Internet America
Shareholder may sell or transfer up to 5% of such Internet America
Shareholder's Shares to any person, and (ii) at any meeting (whether
annual or special and whether or not an adjourned or postponed meeting)
of Internet America's shareholders, however called, or in connection
with any written consent of Internet America's shareholders, such
Internet America Shareholder will appear at the meeting or otherwise
cause the Shares to be counted as present for purposes of establishing a
quorum and vote or consent (or cause to be voted or consented) the
Shares (A) in favor of the adoption of the Merger Agreement and the
approval of all other actions contemplated by the Merger Agreement and
this Agreement and any actions required in furtherance thereof and
hereof, and (B) against any action or agreement that would result in a
breach in any respect of any covenant, representation or warranty or any
other obligation or agreement of Internet America under the Merger
Agreement. Each Internet America Shareholder further agrees not to enter
into any agreement or understanding with any person or entity the effect
of which would be inconsistent with or violative of any provision
contained in this Section 1(a).
(b) PDQ Shareholders. During the term of this Agreement, each PDQ
Shareholder agrees that: (i) such PDQ Shareholder will not sell or
transfer any of the Shares or any interest therein to any person other
than another PDQ Shareholder and (ii) at any meeting (whether annual or
special and whether or not an adjourned or postponed meeting) of PDQ's
shareholders, however called, or in connection with any written consent
of PDQ's shareholders, such PDQ Shareholder will appear at
A-40
<PAGE> 119
the meeting or otherwise cause the Shares to be counted as present for
purposes of establishing a quorum and vote or consent (or cause to be
voted or consented) the Shares (A) in favor of the adoption of the
Merger Agreement and the approval of all other actions contemplated by
the Merger Agreement and this Agreement and any actions required in
furtherance thereof and hereof, and (B) against any action or agreement
that would result in a breach in any respect of any covenant,
representation or warranty or any other obligation or agreement of
Internet America under the Merger Agreement. Each PDQ Shareholder
further agrees not to enter into any agreement or understanding with any
person or entity the effect of which would be inconsistent with or
violative of any provision contained in this Section 1(b).
2. Representations and Warranties.
(a) Each Shareholder represents and warrants that he or it is the
sole and beneficial owner of that number of Shares set forth next to
such Shareholder's name on Schedule 1, attached hereto, except as
otherwise set forth on Schedule 1. On the date hereof, such Shares
constitute all of the shares of common stock of the Company or PDQ, as
appropriate, owned of record or beneficially owned by such Shareholder.
Such Shareholder has sole voting power, sole power to issue instructions
with respect to the Shares set forth next to such Shareholder's name on
Schedule 1 and sole power of disposition of such Shares, in each case
with no limitations, qualifications or restrictions on such rights,
subject to applicable securities laws and the terms of this Agreement.
(b) Each Shareholder has full power and authority to execute,
deliver and perform this Agreement, and to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered
by each Shareholder, and constitutes the legal, valid and binding
obligations of each Shareholder, enforceable against each Shareholder in
accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency or similar laws affecting creditors' rights
generally or the availability of equitable remedies.
(c) Neither the execution, delivery or performance of this
Agreement, nor the consummation of the transactions contemplated hereby,
will (a) conflict with, or result in a violation or breach of the terms,
conditions or provisions of, or constitute a default under, any
organizational document of a Shareholder or any agreement, indenture or
other instrument under which a Shareholder is bound or to which the
Shares are subject, or (b) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or public,
governmental or regulatory agency or body having jurisdiction over a
Shareholder or the Shares.
3. Term of Agreement. This Agreement shall terminate and be of no
further force or effect automatically without any action by any party
hereto upon the earlier of (a) the termination of the Merger Agreement and
(b) the Effective Time of the Merger.
4. Other Matters. The voting of shares pursuant to this Agreement may
be effected in any manner permitted by applicable law, including, but not
limited to, written consent of shareholders.
5. Amendments. This Agreement sets forth the entire understanding of
the parties with respect to the subject matter hereof and may be amended
only by an instrument in writing executed by all parties hereto.
6. Headings. The paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
7. Parties Bound. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors,
heirs, devisees, personal and legal representatives and assigns, including
without limitation any transferee of shares of common stock subject to this
Agreement.
8. Irrevocability. All parties hereto agree and acknowledge that this
Agreement is not revocable at, upon or by reason of a unilateral decision
or death or dissolution of any party hereto; rather the parties agree and
acknowledge that this Agreement shall not terminate except pursuant to
Section 3 hereof.
A-41
<PAGE> 120
9. Notices. Whenever this Agreement requires or permits any consent,
approval, notice, request or demand from one party to another, the consent,
approval, notice, request or demand must be in writing to be effective,
shall be deemed delivered if either hand delivered in person sent by
telegram, telex, facsimile or overnight courier or shall be deemed given
three (3) days following deposit or by mail, and if mailed, shall be deemed
to have been given after it is enclosed in an envelope, properly stamped,
sealed and deposited in the depository of the United States postal service,
postage prepaid, mailed certified return receipt requested, addressed to
the party to be notified at the address set forth below, or such other
address as either party may have notified the other in writing:
<TABLE>
<S> <C>
If to the Company: Internet America, Inc.
350 North St. Paul, Suite 3000
Dallas, Texas 75201
Fax: (214) 861-2663
If to PDQ: PDQ.Net, Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
Fax: (713) 830-3233
If to a Shareholder: To the address set forth by such
Shareholder's name on Schedule 1, attached hereto
</TABLE>
10. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision 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 part of this
Agreement a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and
enforceable.
11. Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS
OF LAWS) OF THE STATE OF TEXAS.
12. Specific Performance. The Shareholders acknowledge that a refusal
by any Shareholder to consummate the transactions contemplated hereby will
cause irreparable harm to Internet America and to PDQ, for which there may
be no adequate remedy at law and for which the ascertainment of damages
would be difficult. Therefore, Internet America and PDQ shall be entitled,
in addition to, and without having to prove the inadequacy of, other
remedies at law, to specific performance of this Agreement, as well as
injunctive relief (without being required to post bond or other security).
13. Counterparts. This Agreement may be executed in any number of
identical counterparts, all of which shall collectively constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have executed this Voting Agreement as of
the date first above written.
INTERNET AMERICA, INC.
------------------------------------
Michael T. Maples
President and Chief Executive
Officer
A-42
<PAGE> 121
------------------------------------
Michael T. Maples
------------------------------------
James T. Chaney
------------------------------------
Douglas L. Davis
------------------------------------
John James Stewart III
------------------------------------
D. Jackson Chaney
------------------------------------
Jack T. Smith
------------------------------------
Gary Corona
------------------------------------
William O. Hunt
B&G PARTNERSHIP, LTD.
------------------------------------
By: William O. Hunt
General Partner
PDQ.NET, INCORPORATED
------------------------------------
William E. Ladin, Jr.
President
A-43
<PAGE> 122
------------------------------------
William E. Ladin, Jr.
------------------------------------
J. N. Palmer Family Partnership
By: John N. Palmer, General Partner
------------------------------------
Richard L. Kelley, Jr.
------------------------------------
Mark C. Williams
------------------------------------
Ernest D. Rapp
A-44
<PAGE> 123
SCHEDULE 1 TO VOTING AGREEMENT
INTERNET AMERICA COMMON STOCK
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OWNED
- ---------------- ------------
<S> <C>
Michael T. Maples................. 83,688 shares and options to purchase 225,000 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
James T. Chaney................... 128 shares and options to purchase 78,750 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
Douglas L. Davis.................. 151,690 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
John James Stewart, III........... options to purchase 53,944 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
D. Jackson Chaney................. 1,000 shares and options to purchase 35,000 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
Jack T. Smith..................... 422,811 shares and options to purchase 45,000 shares
Westcott LLC
100 Crescent Court
Suite 1620
Dallas, Texas 75201
Gary Corona....................... 21,999 shares and options to purchase 120,000 shares
Westcott LLC
100 Crescent Court
Suite 1620
Dallas, Texas 75201
William O. Hunt................... Sole owner of 463,385 shares and options to purchase 45,000
17604 Woods Edge Drive shares; joint owner of 464,678 shares held by a limited
Dallas, Texas 75287 partnership of which he is one of the general partners.
</TABLE>
A-45
<PAGE> 124
PDQ COMMON STOCK
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OWNED
- ---------------- ------------
<S> <C>
William E. Ladin, Jr.............. 1,996,374 shares and options to purchase 165,000 shares
PDQ.Net Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
J. N. Palmer Family Partnership... 1,834,689 shares
2335 Eastover
Jackson, Mississippi 39211
Richard L. Kelley, Jr............. 255,114 shares and options to purchase 105,000 shares
PDQ.Net, Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
Mark C. Williams.................. 303,231 shares and options to purchase 50,000 shares
PDQ.Net, Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
Ernest D. Rapp.................... 45,453 shares and options to purchase 100,000 shares
PDQ.Net, Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
</TABLE>
A-46
<PAGE> 125
EXHIBIT C
ANDREWS & KURTH OPINION
1. PDQ.Net, Incorporated (the "Company") is a corporation duly organized
and validly existing under the laws of the State of Texas.
2. The Company has authorized the execution, delivery and performance of
the Merger Agreement and the Other Shareholder Agreements to which it is party
by all necessary corporate action. The Merger Agreement has been duly executed
and delivered by the Company and by each of the Principal Shareholders, and the
Other Shareholder Agreements have been duly executed by and delivered by the
Principal Shareholders party thereto.
3. The Merger Agreement and the Other Shareholder Agreements constitute
legal, valid and binding obligations of each of the Company and Principal
Shareholders who are party to the same, enforceable against them in accordance
with their terms.
4. The Company has the corporate power to execute, deliver and perform its
obligations under the Merger Agreement and the Other Shareholder Agreements to
which it is party.
5. The authorized capital stock of the Company consists of 16,000,000
shares of common stock $0.01 par value (the "Common Shares"), of which 6,517,923
shares are outstanding and 1,000,000 shares of Preferred Stock, $10.00 par
value, of which no shares are outstanding. The Common Shares have been duly
authorized and validly issued, and are fully paid and non-assessable.
6. The execution and delivery by the Principal Shareholders and the Company
of the Merger Agreement and Other Shareholder Agreements to which they are
party, and the performance of the transactions described therein, will not (a)
conflict with or result in a violation of the Articles of Incorporation or
Bylaws of the Company; (b) to our knowledge except as set forth in the Merger
Agreement, conflict with, constitute a default under, result in a breach or
acceleration of or require notice to or the consent of any third party under any
material contract, agreement, commitment, mortgage, note, license or other
instrument except to the extent that such conflict, default, breach or
acceleration would not have a material adverse effect on the Company; (c)
violate applicable provisions of Texas statutory laws or regulations; or (d)
violate any judgment, order, writ, injunction, determination, award or decree of
any governmental authority to which the Company is subject.
7. To our knowledge, there is no action, suit, arbitration, mediation or
proceeding pending or threatened before any court, arbitrator, mediator or
administrative body, at law or at equity, seeking to restrain, prohibit or
invalidate the transactions contemplated by the Merger Agreement or the Other
Shareholder Agreements.
A-47
<PAGE> 126
EXHIBIT D
GENERAL RELEASE
THIS GENERAL RELEASE (this "Release") is made by the undersigned
shareholders (each a "Shareholder" and collectively, the "Shareholders") of
PDQ.Net, Incorporated, a Texas corporation (the "Company" to be effective as of
, 1999.
WHEREAS, Internet America, Inc., a Texas corporation ("Purchaser"), a
wholly owned subsidiary of Purchaser, the Company and the Shareholders have
entered into an Agreement and Plan of Merger dated as of the date hereof (the
"Merger Agreement");
WHEREAS, the Shareholders are directors, officers and/or employees of the
Company;
WHEREAS, pursuant to the Merger Agreement, Purchaser will acquire all of
the issued and outstanding shares of capital stock of the Company and this
Release is a condition to Purchaser entering into the Merger Agreement and
consummating the transactions contemplated thereby;
NOW, THEREFORE, in consideration of the foregoing premises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, each of the Shareholders hereby agrees as follows:
1. Release. Each of the Shareholders hereby unconditionally releases
and forever discharges the Company and its respective agents, employees,
representatives, officers, directors, shareholders, trustees and attorneys,
past and present, and the heirs, successors and assigns of all of the
foregoing (collectively, the "Released Parties"), from any and all debts,
liabilities, claims, demands, actions or causes of action, suits, judgments
or controversies of any kind whatsoever against the Released Parties
(collectively, the "Claims"), that now exist or that may arise in the
future out of any matter, transaction or event occurring prior to the date
hereof, including without limitation: (i) Claims by the Shareholders with
respect to repayment of loans or indebtedness; (ii) any rights, titles and
interests in, to and under any agreements, arrangements or understandings
to which any of the Shareholders is a party; and (iii) Claims by the
Shareholders with respect to dividends, violation of preemptive rights, or
payment of salaries or other compensation or in any way arising out of or
in connection with his or her employment with the Company, the cessation of
such employment, his or her status as an officer, director or shareholder
of the Company or otherwise, but excluding Claims for benefits payable
under employee benefit plans covering the Shareholders and Claims for
salary payable to the Shareholders which has accrued since the end of the
last payroll period. The Shareholders further agree not to file or bring
any claim, suit, civil action, complaint, arbitration or administrative
action in any city, state or federal court or agency or arbitration
tribunal with respect to any Claim (except for those Claims specifically
excluded above). Notwithstanding the foregoing, this General Release shall
not relieve Purchaser or the Company from any obligations to the
Shareholders under the Merger Agreement or from any obligations to
indemnified parties under the Company's Articles of Incorporation or bylaws
as in effect immediately prior to the date of this Release.
2. Disclaimer of Liability. Each of the Shareholders acknowledges that
this Release shall not in any way be construed as an admission by any of
the Released Parties of any wrongful or illegal act against any of the
Shareholders or any other person, and that the Released Parties expressly
disclaim any liability of any nature whatsoever arising from or related to
the subject of this Release.
3. Competency. Each of the Shareholders acknowledges that he fully
comprehends and understands all of the terms of this Release and their
legal effects. Each of the Shareholders hereby further expressly warrants
that he is competent to execute this Release, that it is executed knowingly
and voluntarily and without reliance upon any statement or representation
of any Released Party or its representatives, and that he had the
opportunity to consult with an attorney of his choice regarding this
Release.
A-48
<PAGE> 127
4. Parties in Interest. This Release is for the benefit of the
Released Parties and shall be binding upon each of the Shareholders and
their legal representatives and heirs.
5. Governing Law. This Release and the rights and obligations of the
Shareholders hereunder shall be governed by and construed and enforced in
accordance with the substantive laws (but not the rules governing conflict
of laws) of the State of Texas.
6. Amendment. This Release may not be clarified, modified, changed or
amended except in writing and signed by each of the Shareholders or their
duly authorized representatives and Purchaser.
7. Severability. If any provision of this Release is held to be
illegal, invalid or unenforceable under present or future laws, such
provision shall be fully severable and this Release shall be construed and
enforced as if such illegal, invalid or unenforceable provision 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, and there shall be added automatically as part
of this Release a provision as similar in its terms to such illegal,
invalid or unenforceable provision as may be possible and be legal, valid
and enforceable.
IN WITNESS WHEREOF, each of the Shareholders has executed this Release to
be effective as of the date first written above.
<TABLE>
<S> <C>
WITNESS:
----------------------------------------------------- -----------------------------------------------------
William E. Ladin, Jr.
WITNESS:
By:
----------------------------------------------------- -------------------------------------------------
John N. Palmer Family Partnership
General Partner
</TABLE>
A-49
<PAGE> 128
EXHIBIT E
ESCROW AGREEMENT
This Escrow Agreement (this "Escrow Agreement") is made and entered into as
of the day of , 1999, by and among Internet America, Inc., a Texas
corporation ("Parent"), William E. Ladin, Jr. ("Ladin"), and Bank (the
"Escrow Agent"). Terms used herein but not otherwise defined shall have the
meanings ascribed thereto in the Merger Agreement (as hereinafter defined). The
term "Representative" shall mean Ladin, acting in his capacity as the
representative of the Indemnifying Shareholders (as defined in the Merger
Agreement) hereunder.
WHEREAS, Parent, PDQ.Net, Incorporated, a Texas corporation (the
"Company"), Ladin, John N. Palmer Family Partnership, Parent and GEEK Houston
II, Inc., a Texas corporation ("Subsidiary"), have entered into that certain
Agreement and Plan of Merger, dated as of September , 1999 (the "Merger
Agreement"), pursuant to which, among other things, the parties agreed that
Subsidiary would merge with and into the Company and that the common stock of
the Company would be exchanged for common stock of Parent ("Parent Common
Stock"), as more particularly described in Article I of the Merger Agreement;
WHEREAS, pursuant to the Merger Agreement, 240,000 shares of Parent Common
Stock to be issued to the Indemnifying Shareholders would be deposited hereunder
to secure the continuing obligations of such Indemnifying Shareholders under
Article XI of the Merger Agreement (the "Escrowed Securities");
WHEREAS, the Indemnifying Shareholders have approved the Merger Agreement
and the transactions contemplated thereby, including but not limited to this
Escrow Agreement and the appointment of the Representative.
NOW, THEREFORE, in consideration of the payment of $10.00 paid in hand and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Appointment of Escrow Agent. Parent and the Representative hereby
designate Bank, as Escrow Agent, and Escrow Agent accepts such
appointment for the purposes hereinafter set forth.
2. Deposit into Escrow. Concurrently with the Closing, Parent shall
deliver to Escrow Agent the Escrowed Securities. The Escrowed Securities
shall be allocated among the Indemnifying Shareholders as provided in
Schedule I hereto, and any Escrowed Securities delivered to Parent
hereunder shall be allocated among the Indemnifying Shareholders on a pro
rata basis in accordance with Schedule I.
3. Duties of Escrow Agent.
(a) The duties of Escrow Agent hereunder shall be limited to the
safekeeping of the Escrowed Securities and to the transfer and
distribution of the same in accordance with the provisions of this
Agreement, and no implied duties or obligations shall be read into this
Agreement against Escrow Agent. Escrow Agent shall be protected in
acting in accordance with the provisions of this Agreement upon any
written notice, request, waiver, consent, receipt, certificate or other
document furnished to it, as to its validity, the effectiveness of its
provisions, the identity or authority of the person executing or
depositing the same, the truth and acceptability of any information
therein contained, which Escrow Agent in good faith believes to be
genuine. Escrow Agent will not be liable for any error of judgment, or
any act or step taken or omitted by it in good faith, or for any mistake
of fact or law or for anything it might do or refrain from doing in
connection herewith, except to the extent such action shall be proved to
constitute gross negligence or willful misconduct on the part of Escrow
Agent. Escrow Agent shall have no duties except those that are expressly
stated herein, and it shall not be bound by any notice of any claim, or
demand with respect thereto, or any waiver, modification, amendment or
termination of this Agreement until written notice of the same shall
have been received by it and approved by it.
A-50
<PAGE> 129
(b) Escrow Agent is not a principal, participant or beneficiary in
any transaction underlying this Agreement and shall have no duty to
inquire beyond the terms and provisions hereof. Escrow Agent shall have
no responsibility or obligation of any kind in connection with this
Agreement or the Escrowed Securities except as set forth herein and
shall not be required to deliver the Escrowed Securities or any part
thereof or take any action with respect to any matters that might arise
in connection therewith, other than to receive, hold, invest, reinvest
and deliver the Escrowed Securities as herein provided. Escrow Agent is
not responsible for the genuineness or sufficiency of the Escrowed
Securities for any particular purpose. Without limiting the generality
of the foregoing, it is hereby expressly agreed and stipulated by the
parties hereto that Escrow Agent shall not be required to exercise any
discretion hereunder and shall have no investment or management
responsibility and, accordingly, shall have no duty to, or liability for
its failure to, provide investment recommendations or investment advice
to any of the other parties hereto. It is the intention of the parties
hereto that Escrow Agent shall never be required to use, advance or risk
its own funds or otherwise incur financial liability in the performance
of any of its duties or the exercise of any of its rights and powers
hereunder.
4. Distributions.
(a) In the event that Parent makes a claim for indemnification
under Article XI the Merger Agreement (each, a "Claim"), Parent shall
deliver a written notice to Escrow Agent and the Representative, duly
executed by Parent, which shall (1) state the basis of the Claim, (2)
state the amount of the indemnification claimed, and (3) provide Escrow
Agent with instructions regarding the delivery of Escrowed Securities.
Escrow Agent shall deliver to Parent the number of shares of Escrowed
Securities as determined in accordance with subsection (f) below,
together with stock powers, executed in blank, or the amount of cash, or
a combination thereof, as applicable, upon a Claim becoming a "Final
Claim" as defined under subsection (b), (c) or (d) below. Failure by
Parent to deliver written notice to the Representative on a timely basis
shall release the Indemnifying Shareholders from liability hereunder if
such failure adversely affects the Indemnifying Shareholders' rights
with respect to any such claim.
(b) If the Representative does not dispute a Claim, Representative
shall deliver to the Escrow Agent a written notice to that effect. Upon
receipt by Escrow Agent of such notice, the Claim shall be considered to
be a "Final Claim" for purposes of subsection (a) above.
(c) If the Representative disputes all or a portion of a Claim,
Parent and Representative shall attempt to reach an agreement with
respect to the Claim for a period of thirty (30) days after the date of
Parent's original notice. In the event that Parent and Representative
reach an agreement on a Claim, Parent and Representative shall deliver
to Escrow Agent a joint written notice to that effect, which contains
the information required under subsection (a) above. Upon receipt by
Escrow Agent of such notice, the Claim (as described in the joint
written notice) shall be considered to be a "Final Claim" for purposes
of subsection (a) above.
(d) In the event Representative disputes all or a portion of a
Claim and Parent and the Representative are unable to reach an agreement
regarding the Claim within 30 days after the date of the original notice
from Parent, the Claim will be submitted to the American Arbitration
Association (the "AAA") for final and conclusive resolution through the
process of binding arbitration in accordance with the Commercial
Arbitration Rules of the AAA. Any judgment upon the award rendered by an
arbitration panel may be entered and enforced by any court having
jurisdiction over the parties or the subject of their dispute. Unless
the parties otherwise agree, any arbitration shall be held in Houston,
Texas before no more than three members of the arbitration panel. Each
party shall pay its own costs and legal fees related to an arbitration,
and they shall share equally all fees and costs of the arbitrators. In
the event that Parent and Representative resolve a Claim after
arbitration is commenced but prior to the issuance of the final
arbitration decision, Parent and Representative shall deliver to Escrow
Agent a joint written notice to that effect, which contains the
information required under subsection (a) above. Upon receipt by Escrow
Agent of
A-51
<PAGE> 130
such notice from Parent and the Representative or receipt by Escrow
Agent of a written arbitration decision which instructs Escrow Agent to
pay a Claim to Parent and contains the information required under
subsection (a) above, the Claim (as described in the joint written
notice or arbitrator's decision) shall be considered to be a "Final
Claim" for purposes of subsection (a) above.
(e) Upon the expiration of the Escrow Period (as defined below),
Escrow Agent shall deliver to the Indemnifying Shareholders in
accordance with the allocation set forth on Schedule I all Escrowed
Securities, cash, or a combination thereof, remaining in escrow
hereunder; provided, however that an amount of Escrowed Securities,
cash, or a combination thereof, as applicable, sufficient to secure a
Claim made by Parent prior to the expiration of the applicable
indemnification period under the Merger Agreement that has not become a
Final Claim shall continue to be held by the Escrow Agent under the
terms of this Agreement until receipt of a written notice or
arbitrator's decision in accordance with subsections (b), (c) or (d)
above, at which time such Escrowed Securities, cash, or a combination
thereof, as applicable, shall either be distributed to Parent in
accordance with such written notice or decision or shall be delivered to
Representative. The term "Escrow Period" shall mean the period
commencing on the date hereof and ending on the first anniversary of the
date hereof.
(f) For purposes of determining the number of Escrowed Securities
to be delivered to Parent by Escrow Agent pursuant to subsections
(b)-(d) above, the Escrow Agent shall divide the amount of the Final
Claim by the average closing price of the Parent Common Stock on the
Nasdaq National Market for the ten (10) trading days immediately prior
to the Closing Date (the "Share Price") (as adjusted from time to time
under Section 5(f) below). The result shall be the number of Escrowed
Securities to be delivered to Parent. In the event property held in
escrow as Escrowed Securities takes the form of cash or other property,
such cash or other property shall be deemed to constitute Escrowed
Securities, with the value thereof being such property's fair market
value as determined in good faith at the time of the Claim by Parent's
Board of Directors.
5. Additional Rights and Obligations.
(a) Subject to the provisions of subsection (b) below, all cash
dividends, property dividends, stock dividends, or other distributions
on or otherwise paid with respect to the Escrowed Securities shall be
paid directly to the Escrow Agent and shall be deemed to be Escrowed
Securities.
(b) If the outstanding shares of Parent Common Stock shall be
changed into or exchanged for a different number or kind of shares of
stock or other securities of Parent or of another corporation, whether
through reorganization, recapitalization, stock split-up, combination of
shares, sale of assets, merger or consolidation, whether or not Parent
is the surviving corporation, then Parent shall be obligated to
substitute for the Escrowed Securities and deposit in escrow hereunder
the number and kind of shares of stock or other securities into which
each outstanding share of Parent Common Stock shall be so changed, or
for which each such share shall be exchanged. In any such event, such
additional or substituted securities shall be deemed "Escrowed
Securities" as such term is used in this Agreement.
(c) Each Indemnifying Shareholder shall be entitled to exercise the
voting power with respect to the portion of the Escrowed Securities
allocated to such Indemnifying Shareholder.
(d) Any cash proceeds of the Escrowed Securities shall be invested
by Escrow Agent in U.S. Treasuries or other U.S. governmental
obligations. All gains, interest and other income received by Escrow
Agent with respect to the Escrowed Securities shall be added to the
Escrowed Securities and held by Escrow Agent as a part thereof. Escrow
Agent shall not be responsible for any interest earned on or from the
Escrowed Securities except for such as is actually received, nor shall
Escrow Agent be responsible for any loss resulting from the investment
of the Escrowed Securities (including, but not limited to, the loss of
any interest arising from the sale of any investment prior to maturity).
A-52
<PAGE> 131
(e) In the event a contingency described in subsections (a) or (b)
occurs, the Share Price shall be appropriately adjusted in a manner as
agreed by the Parent and the Representative within 30 days of such
event. In the event the Parent and the Representative are unable to
reach an agreement within 30 days, the Share Price adjustment will be
submitted to binding arbitration in a manner described in Section 4(d)
above.
6. Indemnification. Parent and each Indemnifying Shareholder, jointly
and severally, hereby agrees to indemnify and defend Escrow Agent against
and hold Escrow Agent harmless from, any costs, damages, judgments,
attorneys' fees, expenses, obligations and liabilities of any kind or
nature that may be suffered or incurred by Escrow Agent as a result of, in
connection with or hereby arising out of the acts or omissions of Escrow
Agent in the performance of, or pursuant to, this Agreement, except as
provided in the last sentence of this Section 6 (with such indemnification,
as between Parent and the Indemnifying Shareholders, being 50% by Parent
and 50% by the Indemnifying Shareholders). If any controversy arises
between the parties or with any other person with respect to the subject
matter of this Agreement, Escrow Agent shall not be required to determine
the same or to take any action thereupon, but may await the settlement or
disposition of any such controversy. In such event, Escrow Agent shall not
be liable for interest or damages, except to the extent such action shall
be proved to constitute gross negligence or willful misconduct on the part
of Escrow Agent.
7. Reimbursement of Escrow Agent. Except as provided in Section 6
above or Section 9 below, Parent agrees to pay all necessary and reasonable
fees and expenses incurred by Escrow Agent in connection with the
operation, administration and enforcement of this Agreement and its
obligations hereunder.
8. Tax Matters. Each of the Indemnifying Shareholders shall provide
Escrow Agent with their respective taxpayer identification number
documented by an appropriate Form W-9 upon execution of this Agreement.
Failure so to provide such forms may prevent or delay disbursements from
the Escrowed Securities and may also result in the assessment of a penalty
and Escrow Agent's being required to withhold tax on any interest or other
income earned on the Escrowed Securities. Any payments of income shall be
subject to applicable withholding regulations then in force in the United
States or any other jurisdiction, as applicable.
9. Right of Interpleader. Should any controversy arise involving the
parties hereto or any of them or any other person, firm or entity with
respect to this Agreement or the Escrowed Securities, or should a
substitute escrow agent fail to be designated as provided in Section 14
below, or if Escrow Agent should be in doubt as to what action to take,
Escrow Agent shall have the right, but not the obligation, either to (a)
withhold delivery of the Escrowed Securities until the controversy is
resolved, the conflicting demands are withdrawn or its doubt is resolved or
(b) institute a petition for interpleader in any court of competent
jurisdiction to determine the rights of the parties hereto. In the event
Escrow Agent is a party to any dispute, Escrow Agent shall have the
additional right to refer such controversy to binding arbitration. Should a
petition for interpleader be instituted, or should Escrow Agent be
threatened with litigation or become involved in litigation or binding
arbitration in any manner whatsoever in connection with this Agreement or
the Escrowed Securities, then, as between (a) the other parties to this
Agreement on the one hand and (b) Escrow Agent on the other, the other
parties hereby jointly and severally agree to reimburse Escrow Agent for
its attorneys' fees and any and all other expenses, losses, costs and
damages incurred by Escrow Agent in connection with or resulting from such
threatened or actual litigation or arbitration prior to any disbursement
hereunder.
10. Consultation with Legal Counsel. Escrow Agent may consult with its
counsel or other counsel satisfactory to it concerning any question
relating to its duties or responsibilities hereunder or otherwise in
connection herewith and shall not be liable for any action taken, suffered
or omitted by it in good faith upon the advice of such counsel.
11. Notices. All notices given by any party to any other party under
this Agreement shall be in writing and shall either be delivered by
facsimile or overnight courier, mailed postage prepaid by
A-53
<PAGE> 132
registered or certified mail with return receipt requested, or delivered in
person to the intended addressee. For purposes of such notice, the
addresses of the party shall be as set forth below, and shall be deemed
given when actually received by addressee if delivered in person or by
facsimile, or seventy-two (72) hours after deposited in the United States
mail:
<TABLE>
<S> <C>
Escrow Agent:
Attn:
Fax No.: ( )
Parent: Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
Attn: President
Fax No.: (214) 861-2663
Any Indemnifying Shareholder c/o William E. Ladin, Jr.
or the Representative: 5722 Indian Circle
Houston, Texas 77057
Fax No.: (713)
</TABLE>
Any party may change its address for notice by written notice similarly given to
the other parties.
12. Governing Law. This Agreement and the obligations of the parties
hereunder shall be governed and construed in accordance with the laws of
the State of Texas.
13. Entire Agreement; Amendments. This Agreement contains the entire
agreement between the parties relating to the subject matter hereof. This
Agreement may be amended, extended or changed only by appropriate written
instrument or by instruments duly executed by each party to this Agreement.
14. Successors and Assigns. This Agreement and all of the terms,
provisions and conditions hereof shall be binding upon and inure to the
benefit of the parties hereto, their respective heirs, legal
representatives, successors and assigns. Any person who acquires in any
manner whatsoever Escrowed Securities from any Indemnifying Shareholder
irrespective of whether such person has accepted or adopted in writing the
terms and provisions of this Agreement shall be deemed by the acquisition
thereof to have agreed to be subject to and be bound by all of the
restrictions and provisions of this Agreement. Escrow Agent may resign at
any time by giving Parent and the Representative thirty (30) days prior
written notice. In the event of such resignation, Parent and the
Representative shall agree within fifteen (15) days of such notice upon a
successor escrow agent, and failing such agreement, the successor escrow
agent shall be any national banking association selected by Parent with
deposits in excess of $100,000,000.00. In the event a successor escrow
agent is not appointed by the end of such 30-day period, Escrow Agent may
petition a Court of competent jurisdiction for the appointment of a
successor escrow agent, and Escrow Agent shall retain the Escrowed
Securities until such appointment.
15. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision 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 part of this
Agreement a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and
enforceable.
16. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
A-54
<PAGE> 133
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above written.
INTERNET AMERICA, INC.
------------------------------------
Michael T. Maples
President and Chief Executive
Officer
------------------------------------
William E. Ladin
Representative of the Indemnifying
Shareholders
[ESCROW AGENT]
------------------------------------
By:
Title:
A-55
<PAGE> 134
EXHIBIT F
TAX CERTIFICATES
INTERNET AMERICA, INC.
350 N. St. Paul Street, Suite 3000
Dallas, Texas 75201
, 1999
Andrews & Kurth L.L.P.
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to Section 8.09 of
the Agreement and Plan of Merger (the "Merger Agreement"), dated as of September
12, 1999, among PDQ.Net, Incorporated, a Texas corporation (the "Company"), Geek
Houston II, Inc., a Texas corporation ("Merger Sub") and Internet America, Inc.,
a Texas corporation ("Parent"), with respect to the merger (the "Merger") of
Merger Sub with and into the Company, pursuant to which shareholders of the
Company will receive voting stock of Parent, in exchange for their stock in the
Company, the undersigned does hereby make the following certification and
representations on behalf of Parent and Merger Sub as of the date hereof. Terms
not otherwise defined herein have the meanings ascribed to them in the Merger
Agreement.
1. I certify to you that I am the President and Chief Executive
Officer of Parent and the President of Merger Sub. I am familiar with the
transactions contemplated by, and the terms and provisions of, the Merger
Agreement, have personal knowledge of the matters covered by the
representations made herein, and I am authorized to make these
representations on behalf of Parent and Merger Sub.
2. The fair market value of the Parent Common Stock and cash received
in lieu of fractional shares received by each Company stockholder will be
approximately equal to the fair market value of the Company Common Stock
surrendered in the exchange.
3. Parent has no present plan or intention to redeem or reacquire, or
have a party related to Parent acquire, shares of Parent Common Stock
issued in the Merger. However, Parent may authorize or engage in the
repurchase from time to time of shares of Parent Common Stock in the open
market as part of an ongoing stock repurchase program that will not be
created or modified in connection with the Merger. For purposes of this
representation and the following representations, a party is related to
Parent if such party and Parent would be treated as related parties within
the meaning of Treasury Regulation Section 1.368-1(e)(3).
4. Following the Merger, Parent will cause the Company to hold at
least 90 percent of the fair market value of its net assets and at least 70
percent of the fair market value of its gross assets and at least 90
percent of the fair market value of Merger Sub's net assets and at least 70
percent of the fair market value of Merger Sub's gross assets held
immediately prior to the Merger. For purposes of this representation,
amounts paid by the Company or Merger Sub to dissenters, amounts paid by
the Company or Merger Sub to stockholders who receive cash or other
property, amounts used by the Company or Merger Sub to pay reorganization
expenses will be included as assets of the Company or Merger Sub,
respectively, immediately prior to the Merger.
5. Prior to the Merger, Parent will be in control of Merger Sub. For
purposes of this representation and the following representations, control
is defined as the ownership of stock possessing at least 80 percent of the
total combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of
stock of the corporation.
A-56
<PAGE> 135
6. Parent has no present plan or intention to liquidate the Company
subsequent to the Merger; to merge the Company with or into another
corporation subsequent to the Merger; to sell or otherwise dispose of the
stock of the Company, except for transfers of stock to corporations
controlled by Parent, subsequent to the Merger, or to cause the Company to
sell or otherwise dispose of any of its assets or any assets acquired from
Merger Sub subsequent to the Merger, except for (i) dispositions made in
the ordinary course of business and (ii) transfers of assets to
corporations controlled by Parent.
7. Merger Sub will have no liabilities assumed by the Company, and
will not transfer to the Company any assets subject to liabilities in the
Merger.
8. Following the Merger, Parent will cause the Company to continue its
historic business or use a significant portion of its historic business
assets in a business within the meaning of Treasury Regulation Section
1.368-1(d). For purposes of this representation, Parent will be deemed to
satisfy this requirement if (a) the members of Parent's qualified group (as
defined in Treasury Regulation Section 1.368-1(d)(4)(ii)), in the
aggregate, continue the historic business of the Company or use a
significant portion of the Company's historic business assets in a
business, or (b) the foregoing activities are undertaken by a partnership
in which (i) the members of Parent's qualified group, in the aggregate, own
at least a 33 1/3 percent capital and/or profits interest in the
partnership, or (ii) one or more members of the qualified group has active
and substantial management functions as a partner with respect to the
partnership business and the members of the qualified group, in the
aggregate, own at least a 20 percent capital and/or profits interest in the
partnership.
9. There is no intercorporate indebtedness existing between Parent and
the Company or between Merger Sub and the Company that was issued, acquired
or will be settled at a discount.
10. Neither Parent nor Merger Sub are investment companies. For
purposes of this representation, an investment company means a regulated
investment company (as defined in the Code), a real estate investment trust
(as defined in the Code) or a corporation, 50 percent or more of the value
of whose total assets are stock and securities and 80 percent or more of
the value of whose total assets are assets held for investment within the
meaning of Section 368(a)(2)(F)(iii) of the Code.
11. Parent and Merger Sub will pay their respective expenses, if any,
incurred in connection with the Merger.
12. None of the compensation received by any stockholder-employees of
the Company will be separate consideration for, or allocable to, any of
their shares of common stock of the Company. None of the shares of Parent
Common Stock to be received by any stockholder-employee will be separate
consideration for, or allocable to, any employment agreements, and the
compensation paid to any stockholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services.
13. The payment of cash in lieu of issuing fractional shares of Parent
Common Stock is solely for the purpose of avoiding the expense and
inconvenience to Parent of issuing fractional shares and does not represent
separately bargained-for consideration. The total cash consideration that
will be paid in the Merger to the Company stockholders instead of issuing
fractional shares of Parent Common Stock will not exceed one percent of the
total consideration that will be issued in the Merger to the Company
stockholders in exchange for their Company Common Stock. The fractional
share interests of each Company stockholder will be aggregated and no
Company stockholder will receive cash in an amount equal to or greater than
the value of one full share of Parent Common Stock.
14. Except for the payment of cash in lieu of issuing fractional
shares of Parent Common Stock, Parent will acquire Company Common Stock
solely in exchange for Parent Common Stock. For purposes of this
representation, Company Common Stock redeemed for cash or other property
furnished by Parent will be considered as acquired by Parent. Further, no
liabilities of the Company stockholders will be assumed by Parent, nor will
any of the Company Common Stock be subject to any liabilities.
A-57
<PAGE> 136
I understand, and Parent and Merger Sub understand, that Andrews & Kurth
L.L.P. will rely on these representations and assume them to be accurate as of
the date hereof and as of the date of the Merger, without further inquiry on its
part, in rendering its opinions with respect to the Merger and that the
inaccuracy of any of these representations may negatively affect those opinions.
Very truly yours,
Internet America, Inc.
By:
----------------------------------
Name:
------------------------------------
Title:
------------------------------------
GEEK Houston II, Inc.
By:
----------------------------------
Name:
------------------------------------
Title:
------------------------------------
A-58
<PAGE> 137
PDQ.NET, INCORPORATED
20 Greenway, Suite 600
Houston, Texas 77046
, 1999
Andrews & Kurth L.L.P.
2170 Buckthorne Place, Suite 150
The Woodlands, Texas 77380
Ladies and Gentlemen:
In connection with the opinions to be delivered pursuant to Section 8.09 of
the Agreement and Plan of Merger (the "Merger Agreement"), dated as of September
12, 1999, among PDQ.Net, Incorporated, a Texas corporation (the "Company"), GEEK
Houston II, Inc., a Texas corporation ("Merger Sub") and Internet America, Inc.,
a Texas corporation ("Parent"), with respect to the merger (the "Merger") of
Merger Sub with and into the Company, pursuant to which shareholders of the
Company will receive voting stock of Parent, in exchange for their stock in the
Company, the undersigned does hereby make the following certification and
representations on behalf of the Company as of the date hereof. Terms not
otherwise defined herein have the meanings ascribed to them in the Merger
Agreement.
1. I certify to you that I am the of the Company. I am
familiar with the transactions contemplated by, and the terms and
provisions of, the Merger Agreement, have personal knowledge of the matters
covered by the following representations, and am authorized to make the
following representations on behalf of the Company.
2. The fair market value of the Parent Common Stock and cash received
in lieu of fractional shares received by each Company stockholder will be
approximately equal to the fair market value of the Company Common Stock
surrendered in the exchange.
3. There is no plan or intention of the stockholders of the Company to
have Parent redeem, or have a party related to Parent acquire, shares of
Parent Common Stock received in the Merger which would reduce the Company
stockholders' ownership of a number of shares of Parent Common Stock
received in the Merger to a number of shares having a value, at the
Effective Time, of less than 50% of the value at the Effective Time of all
the Company Common Stock held immediately prior to the Merger by the
Company stockholders. For purposes of this representation, Company Common
Stock outstanding immediately prior to the Merger includes stock exchanged
for cash in lieu of fractional shares of Parent Common Stock as well as
stock redeemed prior to the Merger by reason of or as part of the Merger,
and the value of all stock outstanding immediately prior to the Merger
shall be determined without regard to any extraordinary distributions
(i.e., distributions with respect to stock other than periodic dividends
that are consistent with the Company's historic dividend practices and
repurchases in the ordinary course of business of unvested shares by the
Company, if any, acquired from Company terminating employees) by the
Company by reason of or as part of the Merger. For purposes of this
representation, a party is related to Parent if such party and Parent would
be treated as related parties within the meaning of Treasury Regulation
Section 1.368-1(e)(3).
4. Following the Merger, the Company will hold at least 90 percent of
the fair market value of its net assets and at least 70 percent of the fair
market value of its gross assets and at least 90 percent of the fair market
value of Merger Sub's net assets and at least 70 percent of the fair market
value of Merger Sub's gross assets held immediately prior to the Merger.
For purposes of this representation, amounts paid by Company or Merger Sub
to dissenters, amounts paid by the Company or Merger Sub to stockholders
who receive cash or other property, amounts used by the Company or Merger
Sub to pay reorganization expenses, and all redemptions and distributions
(except for regular, normal dividends, if any) made by the Company have
been included as assets of the Company or Merger Sub, respectively,
immediately prior to the Merger.
A-59
<PAGE> 138
5. The Company has no plan or intention to issue additional shares of
its stock that would result in Parent failing to acquire or losing control
of the Company. For purposes of this representation and the following
representations, control means the ownership of stock possessing at least
80 percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares of
all other classes of stock of the corporation.
6. Following the Merger, the Company intends to continue its historic
business or use a significant portion of its historic business assets in a
business.
7. There is no intercorporate indebtedness existing between Parent and
the Company or between Merger Sub and the Company that was issued, acquired
or will be settled at a discount.
8. Except for the payment of cash in lieu of issuing fractional shares
of Parent Common Stock, in the Merger, Parent will acquire all of the
Company Common Stock solely in exchange for Parent Common Stock. For
purposes of this representation, Company Common Stock exchanged for cash or
other property originating with Parent will be treated as outstanding
Company Common Stock on the date of the Merger that is acquired by Parent.
Further, no liabilities of the Company stockholders will be assumed by
Parent, nor will any of the Company Common Stock be subject to any
liabilities.
9. At the time of the Merger, the Company will not have outstanding
any warrants, options, convertible securities, or any other type of right
pursuant to which any person could acquire stock in the Company that, if
exercised or converted, would affect Parent's acquisition or retention of
control of the Company.
10. The Company is not an investment company. For purposes of this
representation, an investment company means a regulated investment company
(as defined in the Code), a real estate investment trust (as defined in the
Code), or a corporation, 50 percent or more of the value of whose total
assets are stock and securities and 80 percent or more of the value of
whose total assets are assets held for investment within the meaning of
Section 368(a)(2)(F)(iii) of the Code.
11. On the date of the Merger, the fair market value of the assets of
the Company will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which its assets are subject.
12. The Company is not under the jurisdiction of a court in a case
under Title 11 of the United States Code, or a receivership, foreclosure,
or similar proceeding in a Federal or State court.
13. The Company and the Company stockholders will pay their respective
expenses, if any, incurred in connection with the Merger.
14. None of the compensation received by any stockholder-employees of
the Company will be separate consideration for, or allocable to, any of
their shares of Company Common Stock. None of the shares of Parent Common
Stock to be received by any stockholder-employee will be separate
consideration for, or allocable to, any employment agreements, and the
compensation paid to any stockholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services.
15. The payment of cash in lieu of issuing fractional shares of Parent
Common Stock is solely for the purpose of avoiding the expense and
inconvenience to Parent of issuing fractional shares and does not represent
separately bargained-for consideration. The total cash consideration that
will be paid in the Merger to the Company stockholders instead of issuing
fractional shares of Parent Common Stock will not exceed one percent of the
total consideration that will be issued in the Merger to the Company
stockholders in exchange for their Company Common Stock. The fractional
share interest of each Company stockholder will be aggregated and no
Company stockholder will receive cash in an amount equal to or greater than
the value of one full share of Parent Common Stock.
16. There will be no dissenters afforded appraisal rights in the
transaction.
A-60
<PAGE> 139
I understand, and the Company understands, that Andrews & Kurth L.L.P. will
rely on these representations and assume them to be accurate as of the date
hereof and as of the date of the Merger, without further inquiry on its part, in
rendering its opinion with respect to the Merger and that the inaccuracy of any
of these representations may negatively affect that opinion.
Very truly yours,
PDQ.Net, Incorporated
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
A-61
<PAGE> 140
EXHIBIT G
JACKSON WALKER OPINION
1. Internet America, Inc. (the "Company") is a corporation duly organized
and validly existing under the laws of the State of Texas.
2. The Company has authorized the execution, delivery and performance of
the Merger Agreement and the Other Shareholder Agreements by all necessary
corporate action. The Merger Agreement and Other Shareholder Agreements have
been duly executed and delivered by the Company.
3. The Merger Agreement and the Other Shareholder Agreements constitute
legal, valid and binding obligations of the Company, enforceable against it in
accordance with their terms.
4. The Company has the corporate power to execute, deliver and perform its
obligations under the Merger Agreement and the Other Shareholder Agreements.
5. The authorized capital stock of the Company consists of 40,000,000
shares of common stock $0.01 par value (the "Common Shares"), of which
shares are outstanding and 5,000,000 shares of Preferred Stock, $0.01
par value, of which no shares are outstanding. The Common Shares have been duly
authorized and validly issued, and are fully paid and non-assessable.
6. The execution and delivery by the Company of the Merger Agreement and
Other Shareholder Agreements, and the performance of the transactions described
therein, will not (a) conflict with or result in a violation of the Articles of
Incorporation or Bylaws of the Company; (b) to our knowledge except as set forth
in the Merger Agreement, conflict with, constitute a default under, result in a
breach or acceleration of or require notice to or the consent of any third party
under any material contract, agreement, commitment, mortgage, note, license or
other instrument except to the extent that such conflict, default, breach or
acceleration would not have a material adverse effect on the Company; (c)
violate applicable provisions of Texas statutory laws or regulations; or (d)
violate any judgment, order, writ, injunction, determination, award or decree of
any governmental authority to which the Company is subject.
7. To our knowledge, there is no action, suit, arbitration, mediation or
proceeding pending or threatened before any court, arbitrator, mediator or
administrative body, at law or at equity, seeking to restrain, prohibit or
invalidate the transactions contemplated by the Merger Agreement or the Other
Shareholder Agreements.
A-62
<PAGE> 141
APPENDIX B
VOTING AGREEMENT
THIS VOTING AGREEMENT (the "Agreement"), dated as of September 12, 1999
(the "Agreement"), is by and between Internet America, Inc., a Texas corporation
("Internet America"), PDQ.Net, Incorporated, a Texas corporation ("PDQ"), the
undersigned shareholders of Internet America (the "Internet America
Shareholders") and the undersigned shareholders of PDQ (the "PDQ Shareholders").
The Internet America Shareholders and the PDQ Shareholders are referred to
collectively as the "Shareholders."
WITNESSETH:
WHEREAS, the Internet America Shareholders are the record and beneficial
owners of shares of common stock, par value $0.01 per share, of Internet America
and the PDQ Shareholders are the record and beneficial owners of shares of
common stock, par value $0.01 per share, of PDQ, (such shares together with any
other common stock and any other securities of the Company or PDQ having any
voting rights now or hereafter owned by the Shareholders are referred to as the
"Shares"); and
WHEREAS, Internet America, GEEK Houston II, Inc., a Texas corporation and
wholly-owned subsidiary of Internet America ("Merger Sub"), PDQ and certain
shareholders of PDQ have entered into that certain Agreement and Plan of Merger
dated as of the same date hereof (the "Merger Agreement"), pursuant to which,
among other things, Merger Sub will merge with and into PDQ, with PDQ surviving
as a wholly owned subsidiary of Internet America (the "Merger") (all capitalized
terms used herein without definition have the meanings ascribed to them in the
Merger Agreement); and
WHEREAS, a condition to closing the Merger Agreement is that Internet
America's shareholders and PDQ's shareholders approve and adopt the Merger
Agreement and the Merger.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged and confessed, the parties hereto
agree as follows:
1. Voting of Shares.
(a) Internet America Shareholders. During the term of this
Agreement, each Internet America Shareholder agrees that: (i) such
Internet America Shareholder will not sell or transfer any of the Shares
or any interest therein to any person other than another Internet
America Shareholder, provided, however that each Internet America
Shareholder may sell or transfer up to 5% of such Internet America
Shareholder's Shares to any person, and (ii) at any meeting (whether
annual or special and whether or not an adjourned or postponed meeting)
of Internet America's shareholders, however called, or in connection
with any written consent of Internet America's shareholders, such
Internet America Shareholder will appear at the meeting or otherwise
cause the Shares to be counted as present for purposes of establishing a
quorum and vote or consent (or cause to be voted or consented) the
Shares (A) in favor of the adoption of the Merger Agreement and the
approval of all other actions contemplated by the Merger Agreement and
this Agreement and any actions required in furtherance thereof and
hereof, and (B) against any action or agreement that would result in a
breach in any respect of any covenant, representation or warranty or any
other obligation or agreement of Internet America under the Merger
Agreement. Each Internet America Shareholder further agrees not to enter
into any agreement or understanding with any person or entity the effect
of which would be inconsistent with or violative of any provision
contained in this Section 1(a).
(b) PDQ Shareholders. During the term of this Agreement, each PDQ
Shareholder agrees that: (i) such PDQ Shareholder will not sell or
transfer any of the Shares or any interest therein to any person other
than another PDQ Shareholder and (ii) at any meeting (whether annual or
special and whether or not an adjourned or postponed meeting) of PDQ's
shareholders, however called, or in connection with any written consent
of PDQ's shareholders, such PDQ Shareholder will appear at
B-1
<PAGE> 142
the meeting or otherwise cause the Shares to be counted as present for
purposes of establishing a quorum and vote or consent (or cause to be
voted or consented) the Shares (A) in favor of the adoption of the
Merger Agreement and the approval of all other actions contemplated by
the Merger Agreement and this Agreement and any actions required in
furtherance thereof and hereof, and (B) against any action or agreement
that would result in a breach in any respect of any covenant,
representation or warranty or any other obligation or agreement of
Internet America under the Merger Agreement. Each PDQ Shareholder
further agrees not to enter into any agreement or understanding with any
person or entity the effect of which would be inconsistent with or
violative of any provision contained in this Section 1(b).
2. Representations and Warranties.
(a) Each Shareholder represents and warrants that he or it is the
sole and beneficial owner of that number of Shares set forth next to
such Shareholder's name on Schedule 1, attached hereto, except as
otherwise set forth on Schedule 1. On the date hereof, such Shares
constitute all of the shares of common stock of the Company or PDQ, as
appropriate, owned of record or beneficially owned by such Shareholder.
Such Shareholder has sole voting power, sole power to issue instructions
with respect to the Shares set forth next to such Shareholder's name on
Schedule 1 and sole power of disposition of such Shares, in each case
with no limitations, qualifications or restrictions on such rights,
subject to applicable securities laws and the terms of this Agreement.
(b) Each Shareholder has full power and authority to execute,
deliver and perform this Agreement, and to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered
by each Shareholder, and constitutes the legal, valid and binding
obligations of each Shareholder, enforceable against each Shareholder in
accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency or similar laws affecting creditors' rights
generally or the availability of equitable remedies.
(c) Neither the execution, delivery or performance of this
Agreement, nor the consummation of the transactions contemplated hereby,
will (a) conflict with, or result in a violation or breach of the terms,
conditions or provisions of, or constitute a default under, any
organizational document of a Shareholder or any agreement, indenture or
other instrument under which a Shareholder is bound or to which the
Shares are subject, or (b) violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or public,
governmental or regulatory agency or body having jurisdiction over a
Shareholder or the Shares.
3. Term of Agreement. This Agreement shall terminate and be of no
further force or effect automatically without any action by any party
hereto upon the earlier of (a) the termination of the Merger Agreement and
(b) the Effective Time of the Merger.
4. Other Matters. The voting of shares pursuant to this Agreement may
be effected in any manner permitted by applicable law, including, but not
limited to, written consent of shareholders.
5. Amendments. This Agreement sets forth the entire understanding of
the parties with respect to the subject matter hereof and may be amended
only by an instrument in writing executed by all parties hereto.
6. Headings. The paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
7. Parties Bound. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors,
heirs, devisees, personal and legal representatives and assigns, including
without limitation any transferee of shares of common stock subject to this
Agreement.
8. Irrevocability. All parties hereto agree and acknowledge that this
Agreement is not revocable at, upon or by reason of a unilateral decision
or death or dissolution of any party hereto; rather the parties agree and
acknowledge that this Agreement shall not terminate except pursuant to
Section 3 hereof.
B-2
<PAGE> 143
9. Notices. Whenever this Agreement requires or permits any consent,
approval, notice, request or demand from one party to another, the consent,
approval, notice, request or demand must be in writing to be effective,
shall be deemed delivered if either hand delivered in person sent by
telegram, telex, facsimile or overnight courier or shall be deemed given
three (3) days following deposit or by mail, and if mailed, shall be deemed
to have been given after it is enclosed in an envelope, properly stamped,
sealed and deposited in the depository of the United States postal service,
postage prepaid, mailed certified return receipt requested, addressed to
the party to be notified at the address set forth below, or such other
address as either party may have notified the other in writing:
If to the Company: Internet America, Inc.
350 North St. Paul, Suite 3000
Dallas, Texas 75201
Fax: (214) 861-2663
If to PDQ: PDQ.Net, Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
Fax: (713) 830-3233
If to a Shareholder: To the address set forth by such
Shareholder's name on Schedule 1, attached
hereto
10. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective
during the term hereof, such provision shall be fully severable and this
Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision 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 part of this
Agreement a provision as similar in its terms to such illegal, invalid or
unenforceable provision as may be possible and be legal, valid and
enforceable.
11. Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS
OF LAWS) OF THE STATE OF TEXAS.
12. Specific Performance. The Shareholders acknowledge that a refusal
by any Shareholder to consummate the transactions contemplated hereby will
cause irreparable harm to Internet America and to PDQ, for which there may
be no adequate remedy at law and for which the ascertainment of damages
would be difficult. Therefore, Internet America and PDQ shall be entitled,
in addition to, and without having to prove the inadequacy of, other
remedies at law, to specific performance of this Agreement, as well as
injunctive relief (without being required to post bond or other security).
13. Counterparts. This Agreement may be executed in any number of
identical counterparts, all of which shall collectively constitute on and
the same instrument.
B-3
<PAGE> 144
IN WITNESS WHEREOF, the parties have executed this Voting Agreement as of
the date first above written.
INTERNET AMERICA, INC.
/s/ MICHAEL T. MAPLES
------------------------------------
Michael T. Maples,
President and Chief Executive
Officer
/s/ MICHAEL T. MAPLES
------------------------------------
Michael T. Maples
/s/ JAMES T. CHANEY
------------------------------------
James T. Chaney
/s/ DOUGLAS L. DAVIS
------------------------------------
Douglas L. Davis
/s/ JOHN JAMES STEWART III
------------------------------------
John James Stewart III
/s/ D. JACKSON CHANEY
------------------------------------
D. Jackson Chaney
/s/ JACK T. SMITH
------------------------------------
Jack T. Smith
/s/ GARY CORONA
------------------------------------
Gary Corona
/s/ WILLIAM O. HUNT
------------------------------------
William O. Hunt
B-4
<PAGE> 145
B&G PARTNERSHIP, LTD.
/s/ WILLIAM O. HUNT
------------------------------------
By: William O. Hunt, General Partner
PDQ.NET, INCORPORATED
/s/ WILLIAM E. LADIN
------------------------------------
William E. Ladin, Jr., President
/s/ WILLIAM E. LADIN
------------------------------------
William E. Ladin, Jr.
/s/ JOHN N. PALMER
------------------------------------
J. N. Palmer Family Partnership
By: John N. Palmer, General Partner
/s/ RICHARD L. KELLEY, JR.
------------------------------------
Richard L. Kelley, Jr.
/s/ MARK C. WILLIAMS
------------------------------------
Mark C. Williams
/s/ ERNEST D. RAPP
------------------------------------
Ernest D. Rapp
B-5
<PAGE> 146
SCHEDULE 1 TO VOTING AGREEMENT
INTERNET AMERICA COMMON STOCK
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OWNED
- ---------------- ------------
<S> <C>
Michael T. Maples............................ 83,688 shares and options to purchase 225,000 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
James T. Chaney.............................. 128 shares and options to purchase 78,750 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
Douglas L. Davis............................. 151,690 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
John James Stewart, III...................... options to purchase 53,944 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
D. Jackson Chaney............................ 1,000 shares and options to purchase 35,000 shares
Internet America, Inc.
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
Jack T. Smith................................ 422,811 shares and options to purchase 45,000 shares
Westcott LLC
100 Crescent Court
Suite 1620
Dallas, Texas 75201
Gary Corona.................................. 21,999 shares and options to purchase 120,000 shares
Westcott LLC
100 Crescent Court
Suite 1620
Dallas, Texas 75201
William O. Hunt.............................. Sole owner of 463,385 shares and options to purchase
17604 Woods Edge Drive Dallas, Texas 75287 45,000 shares joint owner of 464,678 shares held by a
limited partnership of which he is one of the general
partners.
</TABLE>
B-6
<PAGE> 147
PDQ COMMON STOCK
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES OWNED
- ---------------- ------------
<S> <C>
1,996,374 shares and options to purchase 165,000
William E. Ladin, Jr. ....................... shares
PDQ.Net Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
J. N. Palmer Family Partnership.............. 1,834,689 shares
2335 Eastover
Jackson, Mississippi 39211
Richard L. Kelley, Jr. ...................... 255,114 shares and options to purchase 105,000 shares
PDQ.Net, Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
Mark C. Williams............................. 303,231 shares and options to purchase 50,000 shares
PDQ.Net, Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
Ernest D. Rapp............................... 45,453 shares and options to purchase 100,000 shares
PDQ.Net, Incorporated
20 Greenway, Suite 600
Houston, Texas 77046
</TABLE>
B-7
<PAGE> 148
APPENDIX C
INTERNET AMERICA, INC.
EMPLOYEE AND CONSULTANT STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under this Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonqualified stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. No Incentive Stock Options may be granted
under this Plan unless this Plan has been approved by the stockholders of the
Company within twelve months following its adoption by the Board of Directors.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees, as
applicable, that is administering the Plan pursuant to Section 4 of the
Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Change of Control" shall have the meaning provided in Section 12
hereof.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(f) "Company" means Internet America, Inc., a Texas corporation.
(g) "Consultant" means any consultant or advisor to the Company or any
Parent or Subsidiary.
(h) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship by the Company
or any Subsidiary. Continuous Status as an Employee shall not be considered
interrupted in the case of: (i) any leave of absence approved by the Board,
including sick leave, military leave, or any other personal leave;
provided, however, that for purposes of Incentive Stock Options, such leave
is for a period of not more than ninety (90) days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or
unless provided otherwise pursuant to Company policy adopted from time to
time; or (ii) in the case of transfers between locations of the Company or
between the Company, its Subsidiaries or its successor.
(i) "Employee" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The
payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(k) "Fair Market Value" means, as of any date, the value of Stock
determined as follows:
(i) If the Stock is listed on any established stock exchange or a
national market system, including without limitation The Nasdaq National
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported, as quoted on such
system or exchange or the exchange with the greatest volume of trading
in Stock for the last market trading day prior to the time of
determination) as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Stock is quoted on The Nasdaq Stock Market (but not on
The Nasdaq National Market) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high and low asked prices for the
Stock; or
C-1
<PAGE> 149
(iii) In the absence of an established market for the Stock, the
Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonqualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(n) "Option" means a stock option granted pursuant to the Plan.
(o) "Optioned Stock" means the Stock subject to an Option.
(p) "Optionee" means an Employee or Consultant who receives an Option.
(q) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(r) "Plan" means this 1998 Employee and Consultant Stock Option Plan.
(s) "Share" means a share of the Stock, as adjusted in accordance with
Section 12 of the Plan.
(t) "Stock" means the Common Stock, par value $.01 per share, of the
Company.
(u) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum number of shares of Stock which may be optioned and sold
under the Plan is shares. The shares may be authorized, but unissued,
or reacquired Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Administration With Respect to Directors and Officers. With
respect to grants of Options to Employees who are also officers or
directors of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board to administer the Plan,
which Committee shall be constituted in such a manner as to permit the
Plan to comply with Rule 16b-3 promulgated under the Exchange Act or any
successor thereto ("Rule 16b-3") with respect to a plan intended to
qualify thereunder as a discretionary plan. Once appointed, such
Committee shall continue to serve in its designated capacity until
otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies, however caused, and remove all
members of the Committee and thereafter directly administer the Plan,
all to the extent permitted by Rule 16b-3 with respect to a plan
intended to qualify thereunder as a discretionary plan. Notwithstanding
the foregoing, the Plan shall not be administered by the Board if (a)
the Company and its officers and directors are then subject to the
requirements of Section 16 of the Exchange Act and (b) the Board's
administration of the Plan would prevent the Plan from complying with
Rule 16b-3.
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-3,
the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees who are neither directors
nor officers.
(iii) Administration With Respect to Consultants and Other
Employees. With respect to grants of Options to Employees or Consultants
who are neither directors nor officers of the
C-2
<PAGE> 150
Company, the Plan shall be administered by (A) the Board or (B) a
Committee designated by the Board, which Committee shall be constituted
in such a manner as to satisfy the legal requirements relating to the
administration of incentive stock option plans, if any, of corporate and
securities laws applicable to the Company and of the Code (the
"Applicable Laws"). Once appointed, such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board.
From time to time the Board may increase the size of the Committee and
appoint additional members thereof, remove members (with or without
cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by the
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan
and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Stock, in accordance
with Section 2(j) of the Plan;
(ii) to select the officers, Consultants and Employees to whom
Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Stock to be covered by
each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but
not limited to, the per share exercise price for the Shares to be issued
pursuant to the exercise of an Option and any restriction or limitation,
or any vesting acceleration or waiver of forfeiture restrictions
regarding any Option or other award and/or the shares of Stock relating
thereto, based in each case on such factors as the Administrator shall
determine, in its sole discretion);
(vii) to determine whether and under what circumstances an Option
may be bought-out for cash under subsection 9(f);
(viii) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining the
amount, if any, of any deemed earnings on any deferred amount during any
deferral period); and
(ix) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Stock covered by such
Option shall have declined since the date the Option was granted.
(c) Effect of Committee's Decision. All decisions, determinations and
interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options. Neither the Board, the
Committee nor any member thereof shall be liable for any act, omission,
interpretation, construction or determination made in connection with the
Plan in good faith, and the members of the Board and of the Committee shall
be entitled to indemnification and reimbursement by the Company in respect
of any claim, loss, damage or expense (including counsel fees) arising
therefrom to the full extent permitted by law.
5. Eligibility.
(a) Nonqualified Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
C-3
<PAGE> 151
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonqualified Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonqualified Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair
Market Value of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with respect
to continuation of employment or consulting relationship with the Company,
nor shall it interfere in any way with his right or the Company's right to
terminate his employment or consulting relationship at any time, with or
without cause, unless otherwise agreed in writing by the Company and such
Optionee.
6. Term of Plan. The Plan shall become effective upon its adoption by the
Board of Directors. It shall continue in effect until June 24, 2008 unless
extended by the Board or sooner terminated under Section 14 of the Plan. No
grants of Options will be made pursuant to the Plan after June 24, 2008.
7. Term of Option. The term of each Option shall be the term stated in the
Option Agreement; provided, however, that in the case of an Incentive Stock
Option, the term shall be no more than ten (10) years from the date of grant
thereof or such shorter term as may be provided in the Option Agreement.
However, in the case of an Incentive Stock Option granted to an Optionee who, at
the time the Option is granted, owns Stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Administrator, provided that, in the case of an Incentive Stock Option:
(i) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(ii) granted to any Employee, the per Share exercise price shall be
no less than 100% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall
be determined at the time of grant) and may consist entirely of (1) cash,
(2) check, (3) promissory note, (4) other shares of the Company's capital
stock which (x) in the case of shares of the Company's capital stock
acquired upon exercise of an Option either have been owned by the Optionee
for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (y) have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (5) authorization for
the Company to retain from the total number of Shares as to which the
Option is exercised that number of Shares having a Fair Market Value on the
date of exercise equal to the exercise price for the total number of Shares
as to which the Option is exercised, (6) delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price, (7) any combination of the foregoing
methods of payment, or
C-4
<PAGE> 152
(8) such other consideration and method of payment for the issuance of
Shares to the extent permitted under applicable laws.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance
criteria with respect to the Company and/or the Optionee, and as shall be
permissible under the terms of the Plan. An Option may not be exercised for
a fraction of a Share.
An Option shall be deemed to be exercised, and the Optionee deemed to
be a stockholder of the Shares being purchased upon exercise, when written
notice of such exercise has been given to the Company in accordance with
the terms of the Option by the person entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised
has been received by the Company. Full payment may, as authorized by the
Board, consist of any consideration and method of payment allowable under
Section 8(b) of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which
the Option is exercised.
(b) Termination of Employment. In the event of termination of an
Optionee's relationship as a Consultant (unless such termination is for
purposes of becoming an Employee of the Company) or Continuous Status as an
Employee with the Company (as the case may be), such Optionee may, but only
within ninety (90) days (or such other period of time as is determined by
the Board, with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option after the date of such
termination (but in no event later than the expiration date of the term of
such Option as set forth in the Option Agreement)), exercise his Option to
the extent that an Optionee was entitled to exercise it at the date of such
termination. To the extent that an Optionee was not entitled to exercise
the Option at the date of such termination, or if Optionee does not
exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of Section
9(b) above, in the event of termination of an Optionee's relationship as a
Consultant or Continuous Status as an Employee as a result of his total and
permanent disability (as defined in Section 22(e)(3) of the Code), Optionee
may, but only within twelve (12) months from the date of such termination
(but in no event later than the expiration date of the term of such Option
as set forth in the Option Agreement), exercise the Option to the extent
otherwise entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee, the
Option may be exercised, at any time within twelve (12) months following
the date of death (but in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement), by the
Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent the Optionee was
entitled to exercise the Option at the date of death. To the extent that
Optionee was not entitled to exercise the Option at the date of
termination, or if the Optionee's estate (or such other person who acquired
the right to exercise the Option) does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall
terminate.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b) of
the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
C-5
<PAGE> 153
(f) Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. Non-Transferability of Options. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose shall
be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator; and
(d) if the Optionee is subject to Rule 16b-3, the election must comply
with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option is exercised but such Optionee
shall be unconditionally obligated to tender back to the Company the proper
number of Shares on the Tax Date.
12. Changes in the Company's Capital Structure. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting the Stock or the rights thereof, or the dissolution or liquidation of
the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of the Stock outstanding, without receiving
compensation therefor in money, services or property, then (a) the number,
class, and per share price of shares of Stock subject to outstanding Options
hereunder shall be appropriately adjusted in such a manner as to entitle an
Optionee to receive upon exercise of an Option, for the same aggregate cash
consideration, the same total number and class of shares as he would have
received had he exercised his Option in full immediately prior to the event
requiring the adjustment; and (b) the number and class of shares of Stock then
reserved for issuance under the Plan shall be adjusted by substituting for the
total number and class of shares of Stock then reserved that number and class of
shares of stock that would have been received by the owner of an equal number of
outstanding shares of each class of Stock as the result of the event requiring
the adjustment.
C-6
<PAGE> 154
If the Company shall be a party to a merger or a similar reorganization
after which the Company is not the surviving corporation, or if there is a sale
of all or substantially all the Common Stock or a sale of all or substantially
all of the assets of the Company, or if the Company is to be liquidated or
dissolved (any of which events shall constitute a "Significant Transaction"),
then, subject to the provisions hereof, the Administrator, in its discretion,
may accelerate the vesting of all outstanding Options or take such other action
with respect to outstanding Options as it deems appropriate, including, without
limitation, canceling such outstanding Options and paying the Optionees an
amount equal to the value of such Options, as determined by the Board.
Notwithstanding the foregoing, if a Significant Transaction shall occur in
connection with or following a Change in Control (as defined below), in
connection with which Significant Transaction the holder of any Option that is
not fully vested shall not receive, in respect of such Option, a substitute
award of stock options containing substantially similar terms to and having an
equal or greater fair market value than such Option, then the Administrator
shall either (i) accelerate the vesting of such Option within a reasonable time
prior to the completion of such Significant Transaction (such that the holder of
such Option would have the opportunity to participate in the Significant
Transaction on the same basis as holders of Stock, subject to such holder's
exercise of such Option) or (ii) cancel such Option in consideration of the
payment to the holder thereof of an amount (in cash) equal to the fair market
value of such Option. For purposes of the foregoing, the fair market value
attributable to Options shall be determined by the Administrator either, at its
election, (x) in accordance with the Black-Scholes method (for purposes of which
volatility shall be measured over the preceding one year period and the
risk-free interest rate shall be the rate of U.S. treasury bills with a maturity
corresponding to the remaining term of such Option) or (y) to be an amount equal
to the fair market value of the Stock subject to such Option less the exercise
price thereof and (ii) the fair market value of (A) any Options shall be
determined as of the date, either of the Change in Control or of the Significant
Transaction, that results in the greater fair market value of such Options, and
(B) any substitute award shall be determined as of the date of the Significant
Transaction. A "Change in Control" shall be deemed to occur if:
(i) any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended)
shall become (directly or indirectly) the beneficial owner (within the
meaning of Rule 13d-3 promulgated under such Act) of more than 50% of the
combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors ("Voting
Power"); or
(ii) the Company's stockholders shall approve a merger or
consolidation, sale or disposition of all or substantially all of the
Company's assets or a plan of liquidation or dissolution of the Company,
other than (A) a merger or consolidation in which the voting securities of
the Company outstanding immediately prior thereto will become (by operation
of law), or are to be converted into voting securities of the surviving
corporation or its parent corporation that, immediately after such merger
or consolidation, (x) are owned by the same person or entity or persons or
entities that owned the voting securities of the Company immediately prior
thereto and (y) possess at least 75% of the Voting Power held by the voting
securities of the surviving corporation or its parent corporation, or (B) a
merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person acquires more than 50%
of the Voting Power.
Except as expressly provided herein, the issue by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
for cash or property, or for labor or services either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number, class, or price of shares of Stock then subject to
outstanding Options.
13. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
C-7
<PAGE> 155
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act or with Section 422 of the Code (or any other
applicable law or regulation, including the applicable requirements of The
Nasdaq Stock Market or an established stock exchange), the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to
such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by
the Optionee and the Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
16. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
17. Agreements. Options shall be evidenced by written agreements ("Option
Agreement") in such form as the applicable Administrator shall approve from time
to time.
18. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are generally provided
to all stockholders of the Company. The Company shall not be required to provide
such information to persons whose duties in connection with the Company assure
their access to equivalent information.
19. Governing Law; Construction. All rights and obligations under the Plan
shall be governed by, and the Plan shall be construed in accordance with, the
laws of the State of Texas without regard to the principles of conflicts of
laws. Titles and headings to Sections herein are for purposes of reference only,
and shall in no way limit, define or otherwise affect the meaning or
interpretation of any provisions of the Plan.
C-8
<PAGE> 156
INTERNET AMERICA, INC.
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING OF SHAREHOLDERS - __________, 1999
The undersigned hereby appoints Michael T. Maples and Elizabeth Palmer
Daane, each with power to act without the other and full power of substitution,
as proxies of the undersigned and authorizes them to represent and vote, as
designated on the reverse side hereof, all of the shares of common stock of
Internet America, Inc. that the undersigned is entitled to vote at the Special
Meeting of Shareholders to be held at ______________, on _________, 1999,
at ________ central time, and any adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED AND DATED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSAL NOS. 1 AND 2 AND WILL GRANT DISCRETIONARY AUTHORITY
PURSUANT TO ITEM 3.
(to be dated and signed on reverse side)
-------------------------------------------------------------------------
<PAGE> 157
1. Approve Merger Agreement and merger with PDQ.Net, Incorporated; Internet
America will issue 2,425,000 shares of common stock to the shareholders of
PDQ.Net in connection with the merger; PDQ.Net will become a wholly owned
subsidiary of Internet America.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Approve Internet America, Inc. Employee and Consultant Stock Option Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Dated ____________________________, 1999
________________________________________
Signature
________________________________________
Signature, if held jointly
Please sign this proxy as your name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by the president or other
authorized officer. If a partnership, please sign in partnership name by an
authorized person.
Please mark, sign, date and return this proxy promptly using the enclosed
envelope.
