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As Filed with the Securities and Exchange Commission on January 21, 1999
Registration No. 333-__________
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
INTERNET AMERICA, INC.
(Exact name of small business issuer as specified in its charter)
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TEXAS 7372 86-0778979
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(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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ONE DALLAS CENTRE MICHAEL T. MAPLES
350 NORTH ST. PAUL, SUITE 3000 ONE DALLAS CENTRE
DALLAS, TEXAS 75201 350 NORTH ST. PAUL, SUITE 3000
(214) 861-2500 DALLAS, TEXAS 75201
(Address and telephone of principal executive offices (214) 861-2500
and principal place of business) (Name, address and telephone of agent for service)
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Copies of communications to:
RICHARD F. DAHLSON
JACKSON WALKER L.L.P.
901 MAIN STREET, SUITE 6000
DALLAS, TEXAS 75202-3797
TELEPHONE: (214) 953-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this Form is filed to register additional Common Stock for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box: [ ]
CALCULATION OF REGISTRATION FEE
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Title of each class Proposed maximum Proposed maximum
of securities Amount to be offering price aggregate offering Amount of
to be registered registered per unit (1) price registration fee
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Common Stock, par value 350,000 shares $10.8125 $3,784,375 $999.08
$.01 per share
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(1) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rules 457(c) and 457(h), the offering price and
registration fee are computed on the basis of the average of the high
and low prices of the Common Stock as reported on the Nasdaq National
Market on January 18, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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SUBJECT TO COMPLETION DATED JANUARY 21, 2000
PROSPECTUS
350,000 SHARES
INTERNET AMERICA, INC.
COMMON STOCK
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The shareholders of Internet America, Inc. listed under "Principal and
Selling Shareholders" on page 44, below, are offering and selling 350,000 shares
of Internet America Common Stock under this Prospectus. The selling shareholders
acquired the shares in connection with our purchase of all of the issued and
outstanding securities of PDQ.Net, Incorporated, a Texas corporation.
Some or all of the selling shareholders expect to sell their shares.
The selling shareholders may offer their shares of Common Stock through public
or private transactions, on or off the Nasdaq National Market, at prevailing
market prices or at privately negotiated prices. We will not receive any of the
proceeds from the sale of shares by the selling shareholders. The selling
shareholders will pay any selling commissions from the sales, and we will pay
all other registration expenses relating to the offer and sale of the stock.
The Common Stock is listed on the Nasdaq National Market under the
symbol "GEEK." On January 20, 2000, the last reported sale price of the Common
Stock was $10.75.
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INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is January ___, 2000.
INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY................................................................................................3
RISK FACTORS......................................................................................................6
USE OF PROCEEDS..................................................................................................16
DIVIDEND POLICY..................................................................................................16
PRICE RANGE OF COMMON STOCK .....................................................................................16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................17
BUSINESS ........................................................................................................26
MANAGEMENT.......................................................................................................35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................42
PRINCIPAL AND SELLING SHAREHOLDERS...............................................................................44
DESCRIPTION OF SECURITIES........................................................................................47
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS .............................................................49
PLAN OF DISTRIBUTION.............................................................................................50
LEGAL MATTERS....................................................................................................50
EXPERTS ........................................................................................................51
WHERE YOU CAN FIND MORE INFORMATION..............................................................................51
GLOSSARY OF TECHNICAL TERMS......................................................................................52
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
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PROSPECTUS SUMMARY
The following is merely a summary and may not contain all of the
information important to your decision whether to invest in the Common Stock.
This summary is qualified in its entirety by the more detailed information and
Financial Statements, including Notes thereto, appearing elsewhere in this
Prospectus. You should read the entire Prospectus before deciding to invest in
the Common Stock. This Prospectus contains certain forward-looking statements
that involve risks and uncertainties. In addition to the other information in
this Prospectus, you should carefully consider the information set forth under
the heading "Risk Factors" on page 6, below. The "Glossary of Technical Terms"
on page 52, below, contains definitions of certain technical terms.
THE COMPANY
Internet America is an Internet service provider ("ISP") that provides
a wide array of Internet services tailored to meet the needs of individual and
business subscribers. As of November 30, 1999, we served approximately 145,000
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. Our growth strategy focuses on
continuing to add customers in existing markets and quickly building a critical
mass of subscribers in new markets.
We offer Internet services tailored to meet the needs of both
individual and business subscribers. Our primary service offering is dial-up and
broadband Internet access. For our business subscribers, we offer dedicated high
speed Internet access, Web hosting and other services.
Our most popular service package includes unlimited dial-up Internet
access. We also offer value-added services, including multiple e-mail boxes,
personalized e-mail addresses and personal Web sites. Our Expresslane DSL and
Bullet DSL products provide high-speed Internet access over existing telephone
lines, and may allow subscribers to simultaneously use a single telephone line
for voice service and for access to the Internet. In addition, the products
provide an "always on" connection thereby removing wait times associated with
dialing into a network. Our DSL products offer our subscribers a cost-effective
way of substantially increasing bandwidth in residences and businesses.
Outstanding service and customer care are crucial to subscriber
acquisition and retention in our industry. Our goal is to attain 100% customer
satisfaction by providing superior systems and network performance along with
high quality service and technical support. Our customer care department, which
is open 24 hours-a-day, 7 days-a-week in our Dallas facility, is structured to
provide prompt, effective and friendly support.
Our systems and network infrastructure can be expanded to accommodate
rapid subscriber growth and is designed to provide fast, reliable performance.
We utilize a "Virtual Point of Presence (POP)" architecture to quickly expand
our geographic coverage and to facilitate technological upgrades. With this
Virtual POP architecture, we can provide local access services without investing
in additional physical infrastructure. This strategy also lowers operating costs
and reduces exposure to technological obsolescence.
In December 1998, we completed our initial public offering of 2.3
million shares of Common Stock at $13 per share. We sold 1.7 million shares in
that offering and certain of our shareholders sold 600,000 shares. We raised
approximately $20 million from that offering, after deducting underwriting
discounts and offering expenses.
We were formed in 1994 and reincorporated in Texas in 1995. Our
principal executive office is located at One Dallas Centre, 350 N. St. Paul St.,
Dallas, Texas 75201, and our telephone number is (214) 861-2500. Our World Wide
Web home page is at http://www.airmail.net and our wholly owned subsidiary,
PDQ.Net, Incorporated, has a World Wide Web home page at http://www.PDQ.net.
Information contained in these Web sites is not part of this Prospectus.
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GROWTH STRATEGY
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. 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:
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.
Aggressive Use of Advertising to Build the Internet America
Brand. We use television, radio, print and outdoor billboards to
acquire subscribers quickly and build brand awareness.
Attract New Subscribers and Migrate Existing Subscribers to
Our Expresslane DSL and Bullet DSL Products. We will emphasize our DSL
products in marketing efforts to increase our total subscriber base and
our average revenue per subscriber.
Cost-Effective Development of Network Infrastructure. We
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
additional physical infrastructure.
Development of Value-Added Revenue Streams. We continue to
develop value-added revenue streams such as dedicated broadband
connectivity, news access and Web hosting. In addition, we continue to
evaluate 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 November 22, 1999, we acquired all of the outstanding shares of
PDQ.Net, Incorporated, a Houston-based ISP ("PDQ"), in a stock-for-stock
transaction. Under the agreement, we issued 2,425,000 shares of Common Stock in
exchange for all the outstanding stock of PDQ. We also issued options to
purchase 352,917 shares of Common Stock with a weighted average exercise price
of $1.62 per share in replacement of all of the outstanding stock options of
PDQ. The transaction will be accounted for as a purchase. PDQ is a wholly owned
subsidiary of Internet America and constitutes the majority of our Houston
operations.
In July and August 1999, we acquired certain subscribers of INTX
Networking, L.L.C., King Dinosaur, Inc. d/b/a/ KDi Internet Solutions and Pointe
Communications Corporation, Inc. The consideration for each of these
transactions was a cash payment contingent on the actual number of subscribers
that successfully transition to our service.
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 9,000 individual and corporate Internet access accounts,
including customer support and network operations facilities in Houston and New
Orleans. The transaction was accounted for as a purchase.
On January 29, 1999, we acquired the net assets of CompuNet, Inc., a
Dallas-based Internet service provider with a concentration of business clients,
in exchange for 16,910 shares of Common Stock. On February 18, 1999, we acquired
all of the outstanding securities of CyberRamp, L.L.C., a Dallas-based Internet
service provider with approximately 16,000 customers, in exchange for 365,725
shares of Common Stock. These combinations were
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accounted for as poolings-of-interests. As a result, our financial statements
have been restated to include the accounts and results of operations of CompuNet
and CyberRamp.
THE OFFERING
Common Stock offered by the selling shareholders............ 350,000 shares
Common Stock outstanding (as of January 5, 2000)(1)......... 9,613,818 shares
Nasdaq National Market symbol............................... GEEK
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(1) Excludes as of January 5, 2000 (i) 225,000 shares of Common Stock
reserved for issuance under the 1996 Incentive Stock Option Plan (the
"1996 Option Plan"), of which options to purchase 30,589 shares were
outstanding at a weighted average exercise price of $1.67 per share,
(ii) 800,000 shares of Common Stock reserved for issuance under the
1998 Nonqualified Stock Option Plan (the "1998 Option Plan"), of which
618,738 options were outstanding at a weighted average exercise price
of $11.36 per share, (iii) 260,063 shares of Common Stock reserved for
issuance under the Employee and Consultant Stock Option Plan (the
"Employee and Consultant Option Plan"), of which 235,317 options were
outstanding at a weighted average exercise price of $2.05 per share,
(iv) 546,563 shares of Common Stock issuable upon exercise of other
outstanding options at a weighted average exercise price of $1.69 per
share, and (v) 194,230 shares of Common Stock reserved for issuance but
not yet issued under the Employee Stock Purchase Plan. See "Management
-- 1996 Incentive Stock Option Plan," "-- Nonqualified Stock Options,"
"-- 1998 Nonqualified Stock Option Plan," "-- Employee and Consultant
Stock Option Plan" and "-- Employee Stock Purchase Plan."
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RISK FACTORS
An investment in the Common Stock involves a high degree of risk. In
addition to the other information contained in this Prospectus, you should
carefully consider the following factors before purchasing any of the shares of
Common Stock. Further, this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, goals, objectives, expectations and intentions. You are cautioned that,
while the forward-looking statements reflect our good faith beliefs, they are
not guarantees of future performance, and involve known and unknown risks and
uncertainties. You should not place undue reliance on any forward-looking
statement. Our actual results could differ materially from those discussed in
this Prospectus. If any of the following risks actually occur, our business and
financial results would suffer and the trading price of our Common Stock may
decline.
WE ARE A RELATIVELY NEW COMPANY AND HAVE A HISTORY OF OPERATING LOSSES
Internet America was incorporated in December 1994 and began offering
Internet access in January 1995. We have only a limited operating history upon
which an evaluation of our prospects can be made. Moreover, our current
management is relatively new. We are subject to the substantial risks, expenses
and difficulties encountered by new entrants into the Internet services
industry. Those risks include our ability to:
- successfully implement our business model;
- expand our subscriber base and increase subscriber revenues;
- successfully compete in a highly competitive market;
- introduce new products and services;
- upgrade our network and systems infrastructure; and
- attract and retain qualified personnel.
As of September 30, 1999, we had an accumulated deficit of
approximately $14.2 million. Our recent expansion plan has resulted in operating
losses for the last four fiscal quarters, and we expect to incur operating
losses in future periods. Our ability to attain profitability and positive cash
flow is dependent upon a number of factors, including our ability to increase
revenues while reducing costs per subscriber. We may not be successful in
increasing or maintaining revenues or achieving positive cash flow. As a result,
we may not be as profitable as hoped.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
Our success depends on a number of factors, many of which are beyond
our control. These factors include (1) the rate of new subscriber acquisition
and related costs, subscriber retention, capital expenditures and other costs
relating to the expansion of operations, (2) changes in our pricing policies and
those of our competitors, including those providing free access, (3) the timing
of new product and service announcements, (4) market acceptance of new or
enhanced versions of our services, (5) changes in operating expenses, (6)
changes in strategy, (7) personnel changes, (8) the introduction of alternative
technologies, (9) the timing and effect of potential acquisitions, (10)
increased competition in current and prospective markets and (11) other general
economic factors.
Our operating results, cash flows and liquidity may fluctuate
significantly. Our revenues depend on our ability to attract and retain
subscribers. Our monthly subscribers, who account for a majority of our
revenues, have the option of discontinuing service at the end of any month for
any reason. Our expense levels are based, in part, on our expectations regarding
future revenues, which could be inaccurate. Moreover, our operations often
require up-front expenses, but result in trailing revenues. To the extent that
revenues are below expectations, we may be unable to reduce expenses
proportionately, and operating results, cash flow and liquidity could be
negatively affected. Subscribers are spending more time online, which increases
our expenses. Our entry into new markets will involve substantial expenditures
on advertising, customer care and other operating needs. To remain competitive,
we may not be able to
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increase subscription fees to match these increasing expenses and could
experience deteriorating profit margins or losses. Due to these and other
factors, our operating results and/or growth rate may be below the expectations
of analysts, management and investors. This, in turn, could cause the price of
our Common Stock to drop.
OUR GROWTH STRATEGY IS UNTESTED; IF WE FAIL TO INTEGRATE OUR ACQUISITIONS
SUCCESSFULLY, OUR RESULTS OF OPERATIONS WILL SUFFER
Our growth strategy is new and untested. We may not be successful in
implementing our growth strategy, and any failure could cause our financial
condition and results of operations to suffer. One component of our growth
strategy, the strategic acquisition of businesses and subscriber accounts,
involves numerous risks, including, among others, the following:
- the difficulty of integrating acquired operations and
personnel;
- the potential disruption of our ongoing business;
- the potential inability of management to successfully
incorporate acquired technology and rights into our service
offerings and to maintain uniform standards, controls,
procedures and policies;
- the risks of entering markets in which we have little or no
direct prior experience; and
- the potential loss of, or impairment of relationships with,
employees and customers as a result of changes in management.
The above risks apply to our recent acquisition of PDQ in November
1999, as well as other acquisitions. We may not be successful in overcoming
these risks or any other problems encountered in connection with acquisitions,
including the PDQ acquisition. In addition, acquisitions could negatively affect
our operating results due to dilutive issuances of equity securities, incurrence
of additional debt or amortization of goodwill and other intangible assets.
COMPETITION FOR ACQUISITIONS MAY IMPEDE OUR BUSINESS STRATEGY
The increased consolidation within our industry and the increased
numbers of ISPs going public has intensified competition for acquisition
targets. This results in fewer acquisition targets and increased expectations by
potential targets. Accordingly, it will be more difficult to make acquisitions
at reasonable prices or at all. This increased competition could negatively
affect our subscriber and revenue growth and profitability.
INTENSE COMPETITION MAY RESULT IN REDUCED REVENUES AND PROFITABILITY
The market for the provision of Internet access to individuals and
small businesses is extremely competitive and highly fragmented. There are no
substantial barriers to entry, and we expect competition to intensify. We
believe that the primary competitive factors for success in this market are a
reputation for reliability and service, competitive pricing, effective customer
support, creative marketing, easy-to-use software and geographic coverage. Other
important factors include the timing of introductions of new products and
services, as well as industry and general economic trends.
We face increased competition from certain ISPs, including NetZero,
Juno Online Services, and Freei.Net, that provide free Internet access to
consumers. Under this "free access" business model, revenues are derived
primarily from companies that place advertisements in small banners or windows
on users' computer screens while they are online. Subscribers are generally
required to provide demographic information which is used by advertisers to
deliver targeted messages to the users' screens that cannot be closed or
removed. ISPs employing this business model could continue to attract a sizable
number of users and exert pressure on prices.
As a result of the increase in competitors and vertical and horizontal
integration in the industry, we face significant competition, including pressure
to reduce prices. Our current competitors include Internet service providers
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and on-line service providers with a significant national presence that focus on
individual and small business subscribers, such as America Online, MindSpring,
EarthLink and Prodigy. Most of these competitors have significantly broader
market presence and brand recognition and greater financial, technical and
marketing resources. They also have extensive coast-to-coast access to Internet
backbones, which provides greater scalability and the ability to provide better
service quality. We also compete with independent regional and local Internet
service providers, computer hardware and software and other technology companies
(such as IBM, Microsoft, Dell and Gateway), as well as wireless communications
companies, satellite companies and nonprofit or educational Internet access
providers.
All the major long-distance companies, including AT&T, Qwest, MCI
WorldCom and Sprint, compete with us by offering Internet access services. Local
exchange carriers, including regional Bell operating companies and competitive
local exchange carriers, have also entered the ISP market. Long-distance and
local carriers are moving toward horizontal integration through acquisitions of,
and joint ventures with, ISPs. Accordingly, we expect increased competition from
traditional telecommunications carriers for customers and potential
acquisitions. These telecommunications carriers have nationwide networks and
substantially greater financial, technical and marketing resources.
Telecommunications providers also have the ability to bundle Internet access
with basic local and long-distance telecommunications services. In addition,
some long-distance companies are promoting their services by offering consumers
free Internet access. Such bundling of services may make it difficult for us to
compete with telecommunications providers and may force us to lower prices,
resulting in reduced revenues.
New competitors, including large computer hardware and software, media
and telecommunications companies, may continue to enter the Internet services
market, resulting in greater competition. In particular, we may face increased
competition from companies that provide connections to consumers' homes,
including cable companies, electric utility companies and wireless
communications companies. For example, cable companies offer Internet access
through their cable facilities at significantly faster rates than existing modem
speeds. These companies can bundle Internet access with basic services or offer
access for a nominal charge. In addition, they could deny us access to their
networks.
Competition could also result in increased selling and marketing
expenses, related customer acquisition costs and customer attrition, all of
which could adversely affect our operations and financial condition. We may not
be able to offset the effects of such increased costs. For further information
on competitive risks, see "Business -Competition" on page 31 below.
OUR GROWTH STRATEGY WILL BE HARMED IF THE MARKET FOR BROADBAND ACCESS FAILS TO
DEVELOP OR IF OTHER BROADBAND OFFERINGS ARE MORE SUCCESSFUL THAN DSL.
The market for broadband services is in an early stage of development.
There is no assurance if or when broadband services will gain wide acceptance by
consumers. In addition, other methods of broadband delivery, such as cable or
wireless transmission, could prove to be more successful than DSL.
IN ORDER TO DELIVER OUR DSL PRODUCT, WE ARE DEPENDENT ON LOCAL EXCHANGE CARRIERS
AND/OR COVAD COMMUNICATIONS GROUP, INC. (COVAD), A NATIONAL PROVIDER OF DSL
SERVICES.
Based on technologies now in use, a rather complex installation process
is required in order to provide DSL service to a subscriber. Currently, the
subscribers' local telephone company must dispatch a technician to install a
signal splitter in the subscriber's home or business, or a Covad technician must
install and configure an additional copper telephone line. Usually the
technician must also install and test DSL hardware (the so-called "DSL modem")
and complete any necessary wiring. Our ability to deliver DSL will be hindered
if the local exchange carrier and/or Covad are unable to coordinate a successful
installation on a timely basis. These installation problems would be detrimental
to our growth strategy and have a negative impact on our financial results.
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ELECTRONIC COMMERCE MAY EXPOSE US TO LIABILITY
Many of our subscribers use the Internet for commercial purposes, such
as financial services and retail. Additionally, in the future, we may offer our
subscribers certain commercial services such as credit card clearing and
commercial website hosting. Our subscribers or other Interest users doing
business with our subscribers may sue us for damages incurred in connection with
such commercial uses of the Internet and our services. The law in this area is
untested and it is possible that we could have significant liability to our
subscribers or others in such transactions.
FUTURE GROWTH WILL STRAIN OUR RESOURCES
We must plan and manage effectively during periods of rapid growth. Our
growth will place a significant strain on our managerial, operational and
financial resources. To manage growth effectively, we must improve our
operational, financial and management information systems and attract, integrate
and retain qualified personnel. These demands may require additional management
personnel and development of additional expertise by existing management. The
successful integration of acquired businesses and the expansion of our
subscriber base will require (1) close monitoring of quality of service, (2)
identification and acquisition of physical sites, (3) acquisition and
installation of equipment and facilities, (4) increased marketing in new and
existing markets, (5) employment of qualified personnel for such sites and (6)
expansion of our managerial, operational and financial resources. In particular,
our customer service and technical support resources, as well as our systems
capacity, may not be sufficient to manage rapid growth. If we cannot effectively
manage our growth, our financial and operating results will suffer.
IF WE FAIL TO ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS, WE
WILL NOT BE COMPETITIVE
Our industry is subject to rapidly changing technology, evolving
industry standards, changes in subscriber needs and frequent new service
introductions. Our success depends, in part, on our ability to meet changing
subscriber needs on a timely and cost-effective basis. We must improve our
existing services, develop new services and continue to develop and expand our
technical expertise. We may not be successful in those endeavors. Our ability to
compete successfully is also dependent upon the continued compatibility and
interoperability of our services with products and architectures offered by
various vendors. Although we intend to support emerging standards in the market
for Internet services, we do not know that industry standards will be
established or, if they are established, that we will be able to conform to them
in a timely fashion and maintain a competitive position. In addition, there is a
risk that services or technologies developed by others will render our services
or technologies uncompetitive or obsolete.
We are also at risk to fundamental changes in the way Internet access
is delivered. Currently, Internet services are accessed primarily by computers
connected by telephone lines. Many alternative methods to access the Internet
are available or under development, including cable modems, screen based
telephones, satellite technologies, wireless telecommunications technologies and
other consumer electronic devices. These methods may transmit data at
substantially faster speeds than the modems we currently use for dial-up
subscribers. As these alternative methods gain greater use, or as subscriber
requirements change the way Internet access is provided, we will have to develop
or use new technology to remain competitive. Adjusting to such technological
advances may require substantial time and expense, and we may not succeed in
addressing these competitive pressures or adapting our business to alternative
access methods.
NETWORK CAPACITY CONSTRAINTS OR SYSTEMS FAILURES COULD CAUSE US TO LOSE
SUBSCRIBERS
Our business depends on the capacity, reliability and security of our
network infrastructure. Delays or failures in connectively could cause us to
lose subscribers. We must expand and adapt our network infrastructure as the
number of subscribers increases and the amount of information transferred
expands. The expansion and adaptation of network infrastructure will require
substantial financial, operational and management resources. We may not be able
to timely
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expand or adapt our network infrastructure to meet additional demand or changing
subscriber requirements at a reasonable cost or at all.
Capacity constraints may occur in system-wide services, such as e-mail
or newsgroups, or in particular POPs. We could experience delayed delivery from
suppliers of new telephone lines, modems, terminal servers and other equipment.
If these delays are severe, incoming modem lines may become full during peak
times. Further, if we do not maintain sufficient bandwidth capacity in our
network connections, subscribers will experience a slowdown of Internet
services. Similar problems can occur if we are unable to expand the capacity of
our servers for e-mail, newsgroups and the World Wide Web fast enough to keep up
with increasing demand. New broadband technologies will cause increasing
congestion on the Internet backbone. If the capacity of our servers is exceeded,
subscribers will experience delays.
Damage to our equipment from fire, earthquakes, power loss,
telecommunications failures and similar events could cause service
interruptions. Despite precautions, natural disasters or other unanticipated
problems at our headquarters, network hub or a POP could cause service
interruptions. We do not currently maintain fully redundant Internet services,
backbone facilities or telecommunications networks. System failures could result
in a loss of subscribers.
Our billing and management information systems are subject to potential
damage, malfunction or other loss. We bill the majority of our subscribers by
automatic charges to subscribers' credit cards or bank accounts. Any failure of
our billing and management information systems could result in delayed
collections and reduced revenues.
WE ARE DEPENDENT ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS
We rely on local telephone companies and other companies to provide
data communications capacity. These providers may experience disruptions of
service or have limited capacity, which could disrupt our services. We may not
be able to replace or supplement these services on a timely basis or at all. In
addition, local phone service is sometimes available only from a local monopoly
telephone company. Telecommunications carriers could prevent us from delivering
Internet access through their data transmission networks. Because we rely on
third-party telecommunications companies for our backbone connections to the
Internet, we face limitations on our ability to serve our subscribers, including
the following:
- we do not control decisions regarding availability of service
at any particular time;
- we may not be able to deploy new technologies because our
telecommunications providers may not be able to support that
technology on their backbones;
- we may not be able to establish new POPs rapidly enough to
respond to increased subscriber demand; and
- we may not be able to negotiate favorable interconnectivity
agreements with other Internet service providers.
In addition, we provide Internet access exclusively through Virtual
POPs in many markets. Our service in these markets is dependent upon the ability
and willingness of third-parties to provide POP access to our subscribers. If we
are unable to secure Virtual POP arrangements, our services and ability to
expand in new markets would be significantly limited. There can be no assurance
that, if access to one or more Virtual POPs is lost, any alternative
arrangements will be available on acceptable terms. We do not currently have any
plans or commitments with respect to alternative POP arrangements. Moreover,
while our third-party providers are contractually obligated to provide
commercially reliable service to our subscribers, there can be no assurance that
such services will meet our requirements.
Our operations and services could be interrupted if our third-party
network providers or telecommunications providers experience systems failures or
equipment damage due to fire, earthquakes, power loss and similar events.
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Thus, any such event could cause us to lose subscribers, which would have an
adverse effect on our business and financial condition.
We are dependent on third-party suppliers of hardware components.
Increasing demand for these components places a significant strain on suppliers.
There could be delays and increased costs in expanding our network
infrastructure if alternative sources of supply are unavailable.
Our telecommunications providers sell or lease their products and
services to our competitors. They may enter into exclusive arrangements with our
competitors or stop selling or leasing their products or services to us at
commercially reasonable prices or at all. In addition, our telecommunication
providers may become our direct competitors.
IF WE CANNOT ATTRACT AND RETAIN KEY PERSONNEL, OUR BUSINESS WILL SUFFER
Our success depends upon the continued efforts of our senior management
team and our technical, marketing and sales personnel. These employees may
terminate their employment at any time, as we have no employment agreements. Our
success also depends on our ability to attract and retain additional highly
qualified management, technical, marketing and sales personnel. The market for
employees with the combination of skills and attributes required to carry out
our strategy is extremely competitive. We may not be able to retain or integrate
existing personnel or identify and hire additional qualified personnel. The loss
of the services of our key personnel, or the inability to attract additional
qualified personnel, could cause the quality of our services to deteriorate.
This could adversely affect our subscriber retention, revenue and profitability.
GOVERNMENT REGULATION MAY INCREASE OUR COSTS OF DOING BUSINESS
Although we are not currently directly regulated by the Federal
Communications Commission or any other federal or state agency, changes in the
regulatory environment relating to the Internet access market could affect the
prices at which we sell our services. These changes may include regulatory
changes which directly or indirectly affect telecommunications costs or increase
the likelihood or scope of competition from regional Bell operating companies or
other telecommunications companies. For example, the imposition of interstate
access charges to local telephone companies or the elimination of reciprocal
compensation for local telephone companies may increase our costs of serving
dial-up subscribers.
Furthermore, the FCC may, in the future, reconsider its past ruling
that Internet access providers should be classified as unregulated "information
service providers" rather than regulated "telecommunications providers." In that
event, Internet service providers would be required to pay a percentage of their
gross revenues to the universal service fund, which subsidizes phone service for
rural and low income consumers and supports Internet access among schools and
libraries. If the FCC were to require universal service contributions from
providers of Internet access or Internet backbone services, our costs of doing
business could increase substantially, and we may not be able to recover these
costs from our subscribers.
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. These laws and regulations may address
issues such as content, privacy, pricing, encryption standards, consumer
protection, fraud, electronic commerce, taxation, copyright infringement and
other intellectual property issues. Legislation in these areas could slow the
growth in use of the Internet generally and decrease the acceptance of the
Internet as a communications medium. Additional regulations relating to the
Internet access industry, including those that affect telecommunication costs or
increase competition from regional telephone companies or others, could have a
material adverse effect on our financial condition. For more information on
regulation of our business, see "Business-Government Regulation," on page 32
below.
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WE MAY NOT HAVE SUFFICIENT CAPITAL TO SUCCESSFULLY EFFECT OUR BUSINESS
STRATEGIES
As of September 30, 1999, we had approximately $3.3 million in
unrestricted cash. We cannot be certain that this is sufficient capital for our
acquisition and marketing strategy. In our most recent acquisition, we were able
to use Common Stock as consideration; however due to the competitive nature of
acquisitions, we may be forced or choose to use cash for future acquisitions. In
addition, during the transition period following an acquisition, such as the
recent PDQ acquisition, we could lose money as we integrate the operations of
the acquired company. Moreover, we may have insufficient capital to respond to
technological developments or competitive pressures or to take advantage of
unanticipated opportunities, such as special marketing opportunities, the
development of new services or acquisitions of complementary businesses or
assets. As a result, we may need to raise additional funds through equity or
debt financings. There can be no assurance that such additional financings will
be available on terms acceptable to us or at all. Further, any such financings
may be on terms that are dilutive or potentially dilutive to our shareholders.
If alternative financing is required but is insufficient or unavailable, we will
have to curtail our growth and operating plans. As a result, our business may
not produce the level of growth or profitability we hope to achieve.
WE MAY BE LIABLE FOR INFORMATION DISSEMINATED OVER OUR NETWORK
We have limited control over our subscribers' online practices and the
information passed through and stored on our systems. We may be liable for
information disseminated through our network. A number of lawsuits have sought
to impose liability on Internet service providers for defamatory speech and
infringement of copyrighted materials. The possible imposition of liability on
Internet service providers for materials disseminated through their systems
could require us to implement measures to reduce our exposure. These measures,
as well as existing and proposed federal and state legislation, may require the
expenditure of substantial resources or the discontinuation of some product or
service offerings.
In addition, the Communications Decency Act of 1996 imposes fines on
any entity that: (1) by means of a telecommunications device, knowingly sends
indecent or obscene material to a minor; (2) by means of an interactive computer
service sends or displays indecent material to a minor; or (3) permits any
telecommunications facility under such entity's control to be used for the
purposes detailed above. The standard for determining whether an entity acted
knowingly has not been established. Certain defenses to liability under the
statute are available but may not apply. Although we do not actively monitor the
content of our subscribers' Internet transmissions, a court may determine that
we have knowledge of such content. Although no such claims or lawsuits have been
asserted against us to date, there can be no assurance that if we were
prosecuted that any defenses to liability would be applicable.
OUR NETWORK IS VULNERABLE TO SECURITY RISKS, SUCH AS HACKING AND VIRUSES
Despite security measures, our network infrastructure may be vulnerable
to computer viruses, hacking or similar problems caused by subscribers or other
persons. Computer viruses or problems could lead to interruptions, delays or
cessation in service, causing subscribers to seek Internet access from other
providers. Inappropriate use of the Internet by third parties could jeopardize
the security of confidential information stored in our computer systems or our
subscribers' computer systems. In addition, we expect that our subscribers will
increasingly use the Internet for commercial transactions. Any network
malfunction, overload or security breach could cause these transactions to be
delayed, not completed at all or completed with compromised security, which may
result in claims against us. Further, the security and privacy concerns of
existing and potential Internet users may inhibit the growth of the Internet,
our subscriber base and revenues.
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WE DEPEND ON THE PROTECTION OF OUR PROPRIETARY RIGHTS
We rely on a combination of copyright, trademark and trade secret laws,
and contractual restrictions to establish and protect our proprietary
technology. We cannot be certain that the steps we have taken are adequate to
prevent misappropriation of our technology or that our competitors will not
independently develop technologies that are equivalent or superior to ours.
We have obtained permission and, in certain cases, licenses from each
manufacturer of software that we bundle in our front-end software product for
customers. Although we do not believe that the software or trademarks we use
infringe on the proprietary rights of any third parties, third parties could
assert infringement claims against us. The defense of such claims could result
in substantial costs and diversion of management resources, which could
adversely affect our operations and financial condition. Parties asserting such
claims could secure judgments awarding substantial damages, as well as
injunctive or equitable relief that could block our ability to sell services. In
the event a claim relating to proprietary technology or information is asserted,
we may seek licenses to use such intellectual property. However, we cannot be
certain that we could obtain licenses on acceptable terms, if at all.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR ABILITY TO
PROVIDE SERVICES
The Year 2000 issue could result in system failures or miscalculations,
causing disruptions of operations, including a temporary inability to process
transactions, send invoices or engage in similar business activities. Although
we have not experienced any material Year 2000 problems that have harmed or
threaten to harm our business, they could still occur. For further information
on our efforts to handle the Year 2000 issue, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Compliance"
on page 23, below.
OUR COMMON STOCK MAY BE DIFFICULT TO RESELL AND YOU MAY NOT BE ABLE TO RESELL
SHARES FOR MORE THAN YOU PAID; OUR STOCK PRICE HAS EXPERIENCED, AND IS LIKELY TO
CONTINUE TO EXPERIENCE, EXTREME PRICE AND VOLUME FLUCTUATIONS
Prior to our initial public offering in December 1998, you could not
buy or sell our Common Stock publicly. The active public market for our Common
Stock may not be sustained. You may not be able to resell your shares at or
above the price you pay for them due to a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance
or changes in financial estimates of securities analysts;
- announcements of technological innovations by our existing or
future competitors;
- conditions and trends in the Internet services and technology
industries;
- departures of key personnel;
- the operating and stock price performance of other comparable
companies; and
- general market conditions.
The stock market in general, and our Common Stock and the stocks of
other Internet companies in particular, have recently experienced extreme price
and volume fluctuations that are often unrelated or disproportionate to
operating performance. These broad market and industry fluctuations may
adversely affect the price of our Common Stock. Companies that have experienced
volatility in the price of their stock have had securities class action
litigation filed against them. Such litigation may be filed against us. Such
litigation could result in substantial costs and divert management's attention
and resources. Any adverse rulings in such litigation could subject us to
significant liabilities.
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A DROP IN DEMAND FOR INTERNET ACCESS MAY CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE
The market for Internet access and related products is in an early
stage of growth. Our success depends upon the development and expansion of the
Internet and the market for Internet access. Critical issues concerning
commercial and personal use of the Internet (including practice standards and
protocol, security, reliability, cost, ease of use, access and quality of
service) remain uncertain and may affect the growth of the Internet.
Our business will not grow as we intend and the price of our Common
Stock may decline if:
- the market for Internet access services fails to continue to
develop;
- the Internet market develops more slowly than anticipated;
- the Internet market becomes saturated with competitors; or
- the Internet access and related products and services we offer
are not widely accepted.
MANAGEMENT HAS SUBSTANTIAL OWNERSHIP OF OUR COMMON STOCK
Currently, our officers and directors beneficially own approximately
24.3% of our outstanding voting stock (assuming the exercise of all derivative
securities currently outstanding, such persons would beneficially own
approximately 25.8% of the outstanding voting stock). As a result, these
shareholders will be able to influence the election of directors, the
appointment of management and the approval of certain actions requiring the
approval of a majority of our shareholders. Such concentration of ownership may
have the effect of delaying or preventing a change in control, even if such
change in control is beneficial to shareholders.
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY LOWER OUR STOCK PRICE AND
IMPAIR OUR ABILITY TO RAISE FUNDS IN FUTURE OFFERINGS
We have a large number of shares of Common Stock currently outstanding
and available for resale now and at various times in the future. If our
shareholders sell substantial amounts of our Common Stock in the public market,
the market price of our Common Stock could fall. The price of our Common Stock
could also drop as a result of the exercise of options for Common Stock or the
perception that such sales or exercise of options could occur. These factors
also could make it more difficult for us to raise funds through future offerings
of our Common Stock.
As of January 5, 2000 there were 9,613,818 shares of Common Stock
outstanding. In addition, as of January 5, 2000, options to purchase 1,431,207
shares of Common Stock were outstanding. Of the outstanding shares, the
2,645,000 shares sold in our initial public offering and the 382,635 shares
issued in the CyberRamp and CompuNet acquisitions are freely transferable
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except for any shares purchased by our
"affiliates," as defined in Rule 144 under the Securities Act. In addition, a
total of 1,941,418 shares have been sold pursuant to Rule 144 of the Securities
Act and are now freely transferable. The 350,000 shares offered by the selling
shareholders under this Prospectus will be freely transferable. The remaining
4,294,765 shares are "restricted securities" within the meaning of Rule 144. Of
these "restricted securities," 2,219,765 shares have been held for the required
one-year period and are freely tradable, subject in certain cases to the
restrictions of Rule 144.
The holders of the remaining 2,075,000 shares of Common Stock issued in
the PDQ acquisition have certain rights to have these shares registered under
the Securities Act after May 21, 2000 pursuant to the terms of the PDQ merger
agreement. In addition, we have filed Registration Statements on Form S-8 to
register a total of 2,662,813 shares of Common Stock, which is all shares
reserved for issuance under our 1996 Option Plan, 1998 Option Plan, Employee and
Consultant Option Plan and Employee Stock Purchase Plan, as well as shares
underlying certain nonqualified options granted to certain current and former
officers, directors and employees. Accordingly, shares issued upon
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exercise of such options or under such plans will be freely tradeable by holders
who are not our affiliates and, subject to volume and other limitations of Rule
144, by holders who are our affiliates.
OUR ARTICLES AND BYLAWS MAY DELAY OR PREVENT A POTENTIAL TAKEOVER OF US
Our Articles of Incorporation, as amended, and Bylaws, as amended,
contain provisions that may have the effect of delaying, deterring or preventing
a potential takeover of us, even if the takeover is in the best interest of our
shareholders. The Articles and Bylaws prevent shareholders from calling a
special meeting of shareholders, prevent shareholders from amending the Bylaws
and prohibit shareholder action by written consent. The Bylaws provide for a
classified Board of Directors, which makes replacing the entire Board a more
difficult task. The Articles also authorize only the Board of Directors to fill
vacancies, including newly-created directorships, and state that directors may
be removed only for cause and only by the affirmative vote of holders of at
least two-thirds of the outstanding shares of the voting stock. Article XIII of
the Texas Business Corporation Act contains provisions that restrict certain
business combinations with interested shareholders. This may have the effect of
preventing a non-negotiated merger or other business combination involving us,
even if such transaction is in the best interest of our shareholders.
WE DO NOT PLAN TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT,
SHAREHOLDERS WILL NEED TO SELL SHARES TO REALIZE A RETURN ON THEIR INVESTMENT
We have not declared or paid any cash dividends on the Common Stock. We
intend to retain any future earnings to finance the operation and expansion of
our business and do not anticipate paying any cash dividend in the foreseeable
future. Consequently, shareholders will need to sell shares of Common Stock in
order to realize a return on their investment, if any.
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USE OF PROCEEDS
All net proceeds from the sale of 350,000 shares of Common Stock
offered by this Prospectus will go to the selling shareholders. Accordingly, we
will not receive any of the proceeds from the sale of shares of Common Stock
offered by this Prospectus.
DIVIDEND POLICY
To date, we have neither declared nor paid any dividends on our Common
Stock nor do we anticipate that dividends will be declared or paid in the
foreseeable future. Rather, we intend to retain any earnings to finance the
growth and development of our business. Any payment of cash dividends on our
Common Stock in the future will be dependent, among other things, upon our
earnings, financial condition, capital requirements and other factors which the
Board of Directors deems relevant.
PRICE RANGE OF COMMON STOCK
Our Common Stock began trading on the Nasdaq National Market on
December 10, 1998 under the symbol "GEEK." Before that date, there was no
established public trading market for the Common Stock. As of January 5, 2000,
we had approximately 195 holders of record of our Common Stock. The closing
sales price of the Common Stock on January 5, 2000 was $12.9375 per share. The
following table sets forth, for the period indicated, the high and low sales
price of the Common Stock.
<TABLE>
<CAPTION>
PERIOD High Low
- ------ ---- ---
<S> <C> <C>
Quarter ended December 31, 1998
(from December 10, 1998).................... $61.00 $11.50
Quarter ended March 31, 1999......................... 44.00 22.25
Quarter ending June 30, 1999......................... 35.00 15.00
Quarter ending September 30, 1999.................... 23.50 11.50
Quarter ending December 31, 1999..................... 27.00 8.00
Quarter ending March 31, 2000
(up to January 5, 2000)......................... 14.50 12.50
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Internet America is an Internet service provider 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 an 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 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 future.
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 broadband solutions to individuals and businesses. We
began offering DSL 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 Voice Over
Internet Protocol (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.
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. 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 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 approximately 61,600 at
June 30, 1998 to approximately 145,000 at November 30, 1999. We have achieved
this growth by direct marketing to consumers and by seven acquisitions. During
the fiscal year, we expanded marketing activities into several new markets,
continuing to implement our user density strategy of achieving a critical mass
of subscribers in targeted regions.
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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.
RECENT ACQUISITIONS
On November 22, 1999, we acquired all of the outstanding shares of
PDQ.Net, Incorporated, a Houston-based ISP ("PDQ"), in a stock-for-stock
transaction. Under the agreement, we issued 2,425,000 shares of Common Stock in
exchange for all the outstanding stock of PDQ. We also issued options to
purchase 352,917 shares of Common Stock with a weighted average exercise price
of $1.62 per share in replacement of all of the outstanding stock options of
PDQ. The transaction will be accounted for as a purchase. PDQ is a wholly owned
subsidiary of Internet America and constitutes the majority of our Houston
operations.
On August 9, 1999, we acquired certain Texas dial-up subscribers of
Pointe Communications Corporation, Inc., a Nevada corporation. The consideration
for that transaction consisted of up to $2,000,000 in cash, half of which was
paid upon closing. The remaining payment is contingent on the actual number of
subscribers that successfully transition to our service.
On July 28, 1999, we acquired the subscribers of INTX Networking,
L.L.C., a Texas limited liability company. The consideration for that
transaction consisted of up to $380,600 in cash, half of which was paid upon
closing. The remaining payment is contingent on the actual number of subscribers
that successfully transition to our service.
On July 26, 1999, we acquired the subscribers of King Dinosaur, Inc.
d/b/a KDi Internet Solutions, a Texas corporation. The consideration for that
transaction consisted of up to $464,800, half of which was paid upon closing.
The remaining payment is contingent on the actual number of subscribers that
successfully transition to our service.
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 9,000 individual and corporate Internet access accounts,
including customer support and network operations facilities in Houston and New
Orleans. This transaction was accounted for as a purchase.
On January 29, 1999, we acquired the net assets of CompuNet, Inc., a
Dallas-based Internet service provider with a concentration of business clients,
in exchange for 16,910 shares of Common Stock. On February 18, 1999, we acquired
all of the outstanding securities of CyberRamp, L.L.C., a Dallas-based Internet
service provider with approximately 16,000 customers, in exchange for 365,725
shares of Common Stock. These combinations were accounted for as
poolings-of-interests. As a result, our financial statements have been restated
to include the accounts and results of operations of CompuNet and CyberRamp.
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.
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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.
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. Amortization of acquired subscriber bases and
goodwill will increase substantially during fiscal 2000 due to the
acquisition of NeoSoft and other recent acquisitions.
Our business is not subject to any significant seasonal influences.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Total revenue. Total revenue increased by $1.7 million, or 40.8%, to
$5.8 million for the three months ended September 30, 1999, from $4.1 million
for the three months ended September 30, 1998. The majority of the increase in
total revenue is attributable to the increase in access revenue of $1.1 million,
or 31.2%, to $4.7 million for the three months ended September 30, 1999, from
$3.6 million for the same period in the prior year. The increase in access
revenue is attributable to an increase in the number of dial-up subscribers from
64,200 at September 30, 1998, to 105,000 at September 30, 1999. Business
services revenue increased by $394,000, or 75.3%, to $917,000 for the three
months ended September 30, 1999, from $523,000 for the same period in the prior
year. The increase in business services revenue is primarily due to the NeoSoft
acquisition on June 30, 1999. Over half of NeoSoft's total revenue relates to
business services. Other revenue increased by $177,000, to $207,000 for the
three months ended September 30, 1999, from $30,000 for the same period in the
prior year. The increase in other revenue is due to sales tax refunds related to
NeoSoft operations and other miscellaneous revenue realized by NeoSoft.
Connectivity and operations. Connectivity and operations expense
increased by $1.1 million, or 53.8%, to $3.2 million for the three months ended
September 30, 1999 from $2.0 million for the three months ended September 30,
1998. As a percentage of revenue, connectivity and operations expense increased
to 54.0% for the three months ended September 30, 1999, from 49.4% for the same
period in the prior year. The increase as a percentage of revenue is primarily
due to the effects of recent acquisitions. After an acquisition, there is some
duplication of inbound telephone connectivity and Internet backbone connectivity
during the transition period.
Sales and marketing. Sales and marketing expense increased by $648,000,
or 76.1%, to $1.5 million for the three months ended September 30, 1999,
compared to $851,000 for the same period in the prior year. During the three
months ended September 30, 1998, our marketing expenses were limited to an
advertising campaign in the North Texas area only, our primary market during
that time. For the three months ended September 30, 1999, our marketing campaign
included television and billboard advertisements in a total of nine markets.
Total sales and marketing expense of $1.5 million for the period ended September
30, 1999 included $1.2 million in television, print and billboard advertising.
Approximately half of the $1.2 million in television, print and billboard
advertising incurred for the quarter ended September 30, 1999 related to new
markets outside of the North Texas area.
General and administrative. General and administrative expense
increased by $549,000, or 65.5%, to $1.4 million for the three months ended
September 30, 1999, from $838,000 for the three months ended September 30, 1998.
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General and administrative expense as a percentage of total revenue increased to
23.8% for the three months ended September 30, 1999, from 20.2% for the same
period in the prior year, primarily due to administrative support related to our
growth strategy.
Depreciation and amortization. Depreciation and amortization increased
by $934,000, or 194%, to $1.4 million for the three months ended September 30,
1999, from $482,000 for the same period in the prior year. The increase is due
to amortization of recently acquired subscriber bases and related goodwill along
with additional depreciation expense related to routine upgrades of our network
facilities. Approximately $724,000 of the total increase in depreciation and
amortization relates to amortization of the subscriber base and goodwill related
to the NeoSoft purchase which closed on June 30, 1999, and approximately
$160,000 relates to amortization due to other recent acquisitions.
Interest income and expense. We realized $37,000 of interest income
during the three months ended September 30, 1999, compared to interest expense
of $109,000 for the same period in the prior year. During the three months ended
September 30, 1998, several notes payable to shareholders were outstanding,
resulting in interest expense of $109,000 for the period. These notes payable
were retired with part of the proceeds from our initial public offering in
December 1998.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998
Total revenue. Total revenues 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 revenues 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 revenues, 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 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
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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. 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.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Total revenue. Total revenue increased by $2.8 million, or 24.6%, to
$14.1 million for fiscal 1998 from $11.3 million for fiscal 1997. Access revenue
increased by $2.6 million, or 27.5%, to $12.1 million for fiscal 1998 from $9.5
million for fiscal 1997. The increase in access revenue is primarily due to
increased subscription fees derived from an increase in the number of dial-up
access customers which totaled 61,600 at June 30, 1998, as compared to 47,900 at
June 30, 1997. Business services revenue increased by $366,000, or 23.6%, to
$1.9 million for fiscal 1998 from $1.6 million for fiscal 1997. The increase in
business services revenue is primarily due to an increase in the number of
business customers and price increases from the prior year. Other revenue
decreased by $208,000, or 83.4%, to $41,000 for fiscal 1998 from $249,000 for
fiscal 1997. The decrease in other revenue is primarily attributable to the
termination of a contract to provide customer care services to another ISP and
the termination of charges for browser software provided to customers.
Connectivity and operations. Connectivity and operations expense
decreased by $14,000, or 0.2%, to $7.4 million for fiscal 1998. As a percentage
of revenue, connectivity and operations expenses decreased by 13.1% to 52.7% for
fiscal 1998 from 65.8% for fiscal 1997. The majority of the reduction in these
expenses is associated with the cost control program which commenced in the
fourth quarter of fiscal 1997, consisting of (1) a decrease in wages resulting
from reduced staffing, (2) a decrease in software costs and (3) a decrease in
Internet and telephone connectivity costs due to improved cost efficiencies in
our network infrastructure.
Sales and marketing. Sales and marketing expenses decreased by
$256,000, or 11.7%, to $1.9 million for fiscal 1998 from $2.2 million for fiscal
1997. For the first and second quarters of fiscal 1998, we suspended virtually
all advertising resulting in a decrease in advertising expenses from the prior
year. We began a new television and advertising campaign in January 1998.
General and administrative. General and administrative expenses
decreased by $409,000, or 12.2%, to $2.9 million for fiscal 1998 from $3.4
million for fiscal 1997. The decrease in general and administrative expenses was
primarily due to decreased staffing, and decreases in telephone expenses,
professional services and equipment leases in connection with our cost control
program.
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Depreciation and amortization. Depreciation and amortization decreased
by $61,000, or 3.4%, to $1.7 million for fiscal 1998 from $1.8 million for
fiscal 1997.
Interest expense. Interest expense increased by $153,000, or 29.6%, to
$670,000 for fiscal 1998 from $517,000 for fiscal 1997. The increase in interest
expense relates primarily to interest on certain indebtedness accruing at a
default rate of 18%. See "Certain Transactions."
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 and received net proceeds of approximately $19.8
million. After the offering, we repaid approximately $2.1 million in shareholder
notes and certain other indebtedness. As of September 30, 1999, cash and cash
equivalents on hand totaled $3.3 million.
Cash used in operating activities totaled $1.2 million for the three
months ended September 30, 1999, compared to cash used in operating activities
of $158,000 for the same period in the prior year. During the three months ended
September 30, 1999, sales and marketing expenses totaled $1.5 million, as
compared to only $851,000 for the same period in the prior year. Increased
connectivity costs and general and administrative expenditures related to our
growth strategy also contributed to additional cash used in operations for the
three months ended September 30, 1999, as compared to the same period a year
ago.
Cash used in investing activities totaled $1.5 million for the three
months ended September 30, 1999, and consisted of $1.4 million in subscriber
acquisition costs and routine purchases of property and equipment to expand and
upgrade our network.
Cash provided by financing activities totaled $99,000 for the three
months ended September 30, 1999 and consisted of proceeds of $273,000 from the
exercise of stock options by option holders less payments of $174,000 to service
long-term obligations.
We estimate that cash on hand of $3.3 million at September 30, 1999
along with cash provided by operations 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.
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 arranging
capital financing to help fund a portion of equipment purchases during the
coming year which are estimated to total approximately $1.4 million.
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 canceled with less than two weeks notice.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective with the first quarter of 1999, we were subject to the
provisions of Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." This statement had no impact on our financial
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statements as we do not have any items of "comprehensive income." Also effective
with the first quarter of 1999, we were subject to the provisions of Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." We do not believe this
statement will have a significant impact on our consolidated financial
statements.
YEAR 2000 COMPLIANCE
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) evaluate the resources necessary to upgrade our 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 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 outstanding issues, if any, relating to Year 2000
readiness,
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.
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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
To date, we have experienced no material Year 2000 problems that could
harm or threaten to harm our business. Our software products, network
applications and system hardware components were tested and continue to be
monitored. The few problems relating to Year 2000 testing that we experienced
were addressed through upgrades or replacements. Additionally, we investigated
our Third Party Systems to assess their Year 2000 readiness, and upgraded or
replaced noncompliant Third Party Systems.
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. The software component of our telephone system, which manages all inbound
and outbound phone and fax capabilities, was upgraded, and we believe it is
currently Year 2000 ready.
Our NOCC monitors the internal and external network operations using
specialized software provided by Third Party Systems. Our network operations
software has been upgraded and we believe that it is currently Year 2000
compliant.
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.
Costs
We have incurred expenses of approximately $85,000 in connection with
the implementation of the Plan. We do not expect to incur significant additional
expenses related to the execution of the Plan.
Risks
Although we have experienced no significant Year 2000 problems to date,
they could still occur. 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 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.
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Contingency Plans
We believe that we have assessed the risks involved with the Year 2000
issue and have established procedures to minimize any effect of an unidentified
or Third Party Systems-created Year 2000 problem. These procedures include
identifying recovery strategies and providing personnel on duty or on call
during the transition period specifically trained to deal with software failures
and Third Party Systems failures, should they occur.
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.
SAFE HARBOR STATEMENT
The following "Safe Harbor" Statement is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the Statements contained in
the body of this Report are forward-looking statements (rather than historical
facts) that are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, we seek the
protections afforded by the Private Securities Litigation Reform Act of 1995.
These risks include, without limitation, (1) that we will not retain or grow our
subscriber base, (2) that we will fail to be competitive with existing and new
competitors, (3) that we will not be able to sustain our current growth, (4)
that we will not adequately respond to technological developments impacting the
Internet, and (5) that needed financing will not be available to us if and as
needed. This list is intended to identify certain of the principal factors that
could cause actual results to differ materially from those described in the
forward-looking statements included elsewhere herein. These factors are not
intended to represent a complete list of all risks and uncertainties inherent in
our business, and should be read in conjunction with the more detailed
cautionary statements included in our other publicly filed reports and
documents.
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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 November 30, 1999, we served approximately 145,000 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 approximately 47,900 at June
30, 1997, to approximately 61,600 at June 30, 1998, and to approximately 145,000
at November 30, 1999.
RECENT ACQUISITIONS
On November 22, 1999, we acquired all of the outstanding shares of
PDQ.Net, Incorporated, a Houston-based ISP ("PDQ"), in a stock-for-stock
transaction. Under the agreement, we issued 2,425,000 shares of Common Stock in
exchange for all the outstanding stock of PDQ. We also issued options to
purchase 352,917 shares of Common Stock with a weighted average exercise price
of $1.62 per share in replacement of all of the outstanding stock options of
PDQ. The transaction will be accounted for as a purchase. PDQ is a wholly owned
subsidiary of Internet America and constitutes the majority of our Houston
operations.
On August 9, 1999, we acquired certain Texas dial-up subscribers of
Pointe Communications Corporation, Inc., a Nevada corporation. The consideration
for that transaction consisted of up to $2,000,000 in cash, half of which was
paid upon closing. The remaining payment is contingent on the actual number of
subscribers that successfully transition to our service.
On July 28, 1999, we acquired the subscribers of INTX Networking,
L.L.C., a Texas limited liability company. The consideration for that
transaction consisted of up to $380,600 in cash, half of which was paid upon
closing. The remaining payment is contingent on the actual number of subscribers
that successfully transition to our service.
On July 26, 1999, we acquired the subscribers of King Dinosaur, Inc.
d/b/a KDi Internet Solutions, a Texas corporation. The consideration for that
transaction consisted of up to $464,800, half of which was paid upon closing.
The remaining payment is contingent on the actual number of subscribers that
successfully transition to our service.
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 9,000 individual and corporate Internet access accounts,
including customer support and network operations facilities in Houston and New
Orleans. This transaction was accounted for as a purchase.
On January 29, 1999, we acquired the net assets of CompuNet, Inc., a
Dallas-based Internet service provider with a concentration of business clients,
in exchange for 16, 910 shares of Common Stock. On February 18, 1999, we
acquired all of the outstanding securities of CyberRamp, L.L.C., a Dallas-based
Internet service provider with approximately 16,000 customers, in exchange for
365,725 shares of Common Stock. These combinations were accounted for as
poolings-of-interests. As a result, our financial statements have been restated
to include the accounts and results of operations of CompuNet and CyberRamp.
INDUSTRY OVERVIEW
Internet access and related value-added services ("Internet services")
represent one of the fastest growing segments of the telecommunications services
marketplace. Industry analysts predict that in 2000, the United States Internet
user population will reach 137 million and worldwide will exceed 274 million.
In addition, by the end of 2000, over 1 in 10 online households - about 2.5
times the number in 1999 - are projected to have high speed Internet access.
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Declining prices in the PC market, continuing improvements in Internet
connectivity, advancements in Internet navigation technology, and the
proliferation of services, applications, information and other content on the
Internet have attracted a rapidly growing number of users.
Numerous companies have moved to enter the Internet services market,
such as (1) telecommunications services providers, including national and
regional interexchange carriers, incumbent local exchange carriers ("LECs") and
competitive LECs, (2) online commercial information service providers, (3)
computer hardware and software providers, (4) cable television operators and (5)
national, regional and local companies that focus primarily on providing
Internet services. These companies pursue a wide variety of business strategies.
For example, cable television operators, who are not required to grant third
party ISPs access to their local networks, are deploying high-speed cable modems
among their subscribers. Incumbent and competitive LECs, which generally provide
third party ISPs access to their local networks, are deploying high-speed data
transmission technologies such as xDSL to support the provision of Internet
services.
Of the numerous ISPs in the United States, some have chosen to focus on
business subscribers, others on individual subscribers. Most national ISPs have
made a major investment in network infrastructure in anticipation of future high
subscriber growth. As a result, the average national ISP has been experiencing
an extended period of losses as it works to build a profitable base of
subscribers in each of the many markets it serves. In addition to these losses,
national ISPs are exposed to a high level of technological obsolescence risk as
Internet access technology continues to evolve. At the other end of the
spectrum, many regional and local ISPs, which have a much lower investment in
network infrastructure, lack the marketing skills and resources to build a
critical mass of subscribers.
STRATEGY
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. 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:
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.
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. See "-- Marketing," below.
Attract New Subscribers and Migrate Existing Subscribers to
Our Expresslane DSL and Bullet DSL Products. We will emphasize our DSL
products in marketing efforts to increase our total subscriber base and
our average revenue per subscriber.
Cost-Effective Development of Network Infrastructure. We
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
additional physical infrastructure. See "-- Infrastructure," below.
Development of Value-Added Revenue Streams. We continue to
develop value-added revenue streams such as dedicated broadband
connectivity, news access and Web hosting. In addition, we continue to
evaluate
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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.
SERVICES
We offer Internet services tailored to meet the needs of both
individual and business subscribers. Our primary service offerings are dial-up
and broadband Internet access, as well as related value-added services. For our
business subscribers, we offer dedicated high speed Internet access, Web hosting
and other services. Our services are offered in several different packages to
provide subscribers a broad range of choices to satisfy their Internet needs.
The majority of our subscribers have month-to-month subscriptions. Most
subscribers are billed through automatic charges to their credit cards or bank
account. We offer discounts on most of our services for subscribers who prepay
for their services.
Internet Access. Our most popular service is a dial-up Internet access
package, which includes basic 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. Available value-added services include
multiple e-mail mailboxes, filtered Internet access, global roaming services,
Internet call waiting functionality, 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. As of January 5, 2000, there were
approximately 5,400 Airnews.net subscribers.
High Speed Connectivity. In addition to offering dial-up and dedicated
analog access, we also offer DSL (Digital Subscriber Line) service for consumers
and businesses, dedicated ISDN access and full and partial T-1 connectivity,
which can service hundreds of users at once.
DSL Service. Our Expresslane DSL and Bullet DSL products provide
high-speed Internet access over existing telephone lines, and may allow
subscribers to simultaneously use a single telephone line for voice service and
for access to the Internet. In addition, the products provide an "always on"
connection thereby removing wait times associated with dialing into a network.
The Expresslane DSL and Bullet DSL products offer our residential and business
subscribers a cost-effective way to substantially increase the speed at which
they access the Internet.
Web Services. We offer Web hosting through our Airweb.net service and
through PDQ 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 or PDQ 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.
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 departments must be able to efficiently and effectively address:
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- problems affecting a variety of hardware systems,
- start-up or other basic problems of new subscribers or new
Internet users, and
- highly technical issues that sophisticated users may
encounter.
We have customer care departments in our Dallas facilities consisting
of approximately 70 employees and in our PDQ Houston facilities consisting of
approximately 55 employees. Our Dallas customer care department is available to
subscribers 24-hours-a-day, 7-days-a-week. Both departments are organized in
tiers designed to respond to varying types of support needs. In addition to
diagnosing and resolving subscribers' technical problems, our customer care
departments answer questions about account status, respond to software requests
and provide configuration information.
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 high density
urban markets in order to acquire a critical mass of subscribers to support
profitable operations. Our approach combines direct response marketing and brand
building advertising. We use a variety of mediums to communicate our marketing
message, including television, outdoor billboards, print, radio, direct mail and
on-line marketing activities. Because we believe that the demand for high-speed
connectivity is growing, our future advertising will focus almost exclusively on
our DSL products.
INFRASTRUCTURE
Our network provides subscribers with local dial-up and broadband (DSL)
access in all major metropolitan areas of Texas, as well as dial-up access in
several smaller communities. Our systems and network infrastructure is designed
to provide 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
additional physical infrastructure. 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. 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.
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 and provide both resiliency to failure
and redundancy. 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.
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We also maintain a Network Operations Control Center ("NOCC") in
Dallas, which is staffed 24 hours a day. The NOCC 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 internal departments and is also responsible for
communication with external service providers. Sophisticated historical and
statistical analysis software used in the NOCC provides data about the quality
of service most 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. 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.
Management Information Systems. Our MIS department uses a near
real-time customer database, billing and flow-through fulfillment system to
handle all customer contact and billing information for the services we provide.
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. Our PDQ subsidiary
uses a similar system, while our NeoSoft subsidiary uses a database to hold
customer information but provisions services manually. We are currently
transitioning to an integrated financial and information reporting system that
will include all subsidiaries, automate many additional functions and provide
financial, marketing and management reports.
TECHNOLOGY AND DEVELOPMENT
Although we do not focus a significant amount of resources on creating
new technologies, we continuously evaluate new technologies and applications for
possible introduction or incorporation into our services. In the fourth quarter
of fiscal 1999, we deployed Expresslane DSL and Bullet DSL, high-speed
connectivity technologies, in our established markets. These DSL products use
existing twisted copper pair wire running from a local exchange carrier's
central office to a subscriber's home or office to provide high-speed
connectivity. 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. We believe that we are well positioned to efficiently
market and deploy our DSL products and other new, value-added services due to
the high density of our subscriber base.
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," "1-800-Be-A-Geek," "PDQ.Net," "Airmail.net"
and "Airweb.net" are registered service marks of Internet America or its
subsidiaries. Service mark applications are pending for the registration of
"Airnews.net," "Expresslane DSL," their respective logos and the Internet
America logo.
There can be no assurance that the steps we take will be adequate to
prevent the misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to ours.
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 our
start-up package have, when necessary, been licensed. We intend to maintain or
negotiate renewals of all existing
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software licenses and authorizations as necessary. We may also want or need to
license other applications in the future. Other applications included in our
start-up packages are shareware 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:
- a reputation for reliability and service,
- pricing,
- access speed,
- effective customer support,
- access to capital,
- creative marketing,
- easy-to-use software, and
- 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:
- commercial online service providers, such as America Online;
- national ISPs, such as MindSpring, EarthLink and Prodigy;
- numerous regional and local ISPs;
- computer hardware and software companies, and other technology
companies, such as IBM, Microsoft, Dell and Gateway;
- national telecommunications providers, such as AT&T, Qwest,
MCI WorldCom and Sprint;
- regional telecommunications providers, such as SBC
Communications;
- cable operators, such as Time Warner, Inc. and AT&T;
- wireless communications companies;
- satellite companies; and
- 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.
We face increased competition from certain ISPs, including NetZero,
Juno Online Services, and Freei.Net, that provide free Internet access to
consumers. Under this "free access" business model, revenues are derived
primarily from companies that place advertisements in small banners or windows
on users' computer screens while they are online. Subscribers are generally
required to provide demographic information which is used by advertisers to
deliver targeted messages to the users' screens that cannot be closed or
removed. ISPs employing this business model could continue to attract a sizable
number of users and exert pressure on prices.
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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
Internet service provider market. We believe long-distance and local carriers
are moving toward horizontal integration through acquisitions of, and joint
ventures with, Internet service providers. 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 Federal Communications Commission 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
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
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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 adopted 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.
We have limited control over our subscribers' online practices and the
information passed through and stored on our systems. We may be liable for
information disseminated through our network. A number of lawsuits have sought
to impose liability on Internet service providers for defamatory speech and
infringement of copyrighted materials. The possible imposition of liability on
Internet service providers for materials disseminated through their systems
could require us to implement measures to reduce our exposure. These measures,
as well as existing and proposed federal and state legislation, may require the
expenditure of substantial resources or the discontinuation of some product or
service offerings.
In addition, the Communications Decency Act of 1996 imposes fines on
any entity that: (1) by means of a telecommunications device, knowingly sends
indecent or obscene material to a minor; (2) by means of an interactive computer
service sends or displays indecent material to a minor; or (3) permits any
telecommunications facility under such entity's control to be used for the
purposes detailed above. The standard for determining whether an entity acted
knowingly has not been established. Certain defenses to liability under the
statute are available but may not apply. Although we do not actively monitor the
content of our subscribers' Internet transmissions, a court may determine that
we have knowledge of such content. Although no such claims or lawsuits have been
asserted against us to date, there can be no assurance that if we were
prosecuted that any defenses to liability would be applicable.
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 any 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.
PROPERTIES
Our corporate headquarters are located in downtown Dallas at One Dallas
Center, 350 N. St. Paul, Suite 3000, where all executive functions exist. We
lease approximately 31,000 square feet in Dallas, Texas and approximately 36,000
square feet in Houston, Texas under multiple leases. All systems, sales and
technical support functions take place in our Dallas and Houston facilities. We
also lease small equipment room facilities for each of our other physical
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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.
EMPLOYEES
As of January 5, 2000, we employed approximately 280 people, almost all
of which are full time employees. We anticipate that the development of our
business will require that we hire additional employees. None of our current
employees are represented by a labor organization, and we consider employee
relations to be good.
LEGAL PROCEEDINGS
We are not involved in any material pending legal proceeding.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions of the executive officers and directors
of the Company, are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- --- --------
<S> <C> <C>
Michael T. Maples........................ 43 President, Chief Executive Officer and Director (Class III)
Ernest D. Rapp........................... 38 Vice President and Chief Operating Officer
James T. Chaney.......................... 43 Vice President, Chief Financial Officer and Treasurer
John James Stewart III................... 40 Vice President-Customer Care
Elizabeth Palmer Daane................... 33 Vice President, General Counsel and Secretary
Marc Ladin............................... 29 Vice President - Marketing
Bobby R. B. Manson....................... 43 Vice President - Network Operations
William O. Hunt(1)(2).................... 65 Chairman of the Board (Class III)
William E. Ladin, Jr..................... 58 Vice Chairman of the Board (Class II)
Jack T. Smith(1)(2)...................... 45 Director (Class II)
Gary L. Corona(1)(2)..................... 47 Director (Class I)
</TABLE>
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
The Board of Directors is divided into three classes, as nearly equal
in size as possible, with staggered terms. Each class serves a term of three
years, with the term of office of one class expiring each year at the Annual
Meeting of Shareholders. The term of office of directors in Class I will expire
at the 2000 Annual Meeting, the term of office of directors in Class II will
expire at the 2001 Annual Meeting, and the term of office of directors in Class
III will expire at the 2002 Annual Meeting. Directors are elected to a class to
hold office for a term of three years or until their successors are duly elected
and qualified. Officers serve at the discretion of the Board of Directors.
MICHAEL T. MAPLES has served as President and Chief Executive Officer
since March 1997 and has served as a director since April 1997. Mr. Maples
joined us in September 1996. Prior to joining us, Mr. Maples was Vice President
of Westcott Communications, Inc., a provider of educational, motivational and
instructional programming for various industries via satellite delivered
television or videotape. From 1988 to 1996, Mr. Maples was the General Manager
of the Automotive and Government Services business units of Westcott
Communications, Inc.
ERNEST D. RAPP has served as our Vice President and Chief Operating
Officer since November 1999. Prior to joining us, Mr. Rapp was the Chief
Financial Officer of PDQ since January 1999. From 1996 until joining PDQ, Mr.
Rapp was Chief Financial Officer and Chief Operating Officer of The Forefront
Group, Inc, a Houston Internet company which was sold to CBT Group, PLC. From
1988 until 1996, Mr. Rapp was Executive Vice President and Chief Financial
Officer of Information Publishing Corporation, a 1990 Inc. 500 firm specializing
in high technology niche market publishing and trade-show management.
JAMES T. CHANEY joined us in December 1997 as Chief Financial Officer,
and has served as Vice President, Chief Financial Officer and Treasurer since
February 1998. Prior to joining us, Mr. Chaney was Tax Manager at Judd, Thomas,
Smith & Co., CPAs, Dallas, Texas, where he managed the tax department and
performed tax and financial planning for clients in the real estate and oil and
gas industries. From 1990 to 1994, he was self-employed as a Certified Public
Accountant.
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JOHN JAMES STEWART III has served as Vice President - Customer Care
since May 1997. Mr. Stewart joined us in September 1995 as the Director of
Technical Support, and has also served as Director of Training and Customer
Retention Officer. From February 1993 until joining us, Mr. Stewart was employed
by Toys R Us. While at Toys R Us, he served as Assistant Store Director and
Department Manager.
ELIZABETH PALMER DAANE joined us in August 1999 as Vice President,
General Counsel and Secretary. From September 1992 until joining us, Ms. Daane
was an attorney at the law firm of Jackson Walker LLP, where she specialized in
corporate and securities law.
MARC LADIN joined us in November 1999 as Vice President - Marketing.
Prior to joining us, Mr. Ladin was the Director of Marketing of PDQ since June
1997. From January 1995 until joining PDQ, Mr. Ladin was a Business Development
Manager for Compaq Computer Corporation, where he helped establish Compaq's
first Internet division and Internet partnerships with leading technology
companies, including Microsoft, PointCast and Marimba. Mr. Ladin is the son of
William E. Ladin, Jr., the Vice Chairman of our Board.
BOBBY R. B. MANSON has served as our Vice President - Network
Operations since January 2000. He has been with us since February 1999 as
Director of Network Engineering and from April 1995 to February 1997 as Vice
President of Network Operations. From April 1998 to February 1999, Mr. Manson
was Director of Operations of Allegiance Telecom, Inc. Prior to that, Mr. Manson
was acting Vice President of Dallas Operations of Winstar Wireless from October
1997 to April 1998 and Regional Director of Operations of Advanced Radio Telecom
from February 1997 to October 1997. Prior to joining Internet America in April
1995, Mr. Manson was a manager in the technical operations department of
Metropolitan Fiber Systems (now a part of MCI WorldCom).
WILLIAM O. HUNT has served as our Chairman of the Board and as one of
our directors since May 1995. Mr. Hunt is currently Chairman of the Board and
director of Intellicall, Inc., a diversified telecommunications company
providing products and services to pay telephone networks on a worldwide basis.
From December 1992 to May 1998, Mr. Hunt served as Chief Executive Officer of
Intellicall, Inc. From August 1990 to March 1996, Mr. Hunt served as Chairman or
Vice Chairman of the Board and director of Hogan Systems, Inc., a designer of
integrated online application software products for financial institutions. He
is also a director of American Homestar Corporation, Dr. Pepper Bottling
Holdings, Inc., The Allen Group, Inc., DSC Communications Corporation and Andrew
Corporation.
WILLIAM E. LADIN, JR. has served as Vice Chairman of our Board of
Directors since January 2000. Prior to joining us, Mr. Ladin founded PDQ in 1997
and was its Chief Executive Officer from its inception to its acquisition by us.
From 1991 until present, Mr. Ladin served as Chief Executive Officer of Desktop
Solutions, Inc. Mr. Ladin is the father of Marc Ladin, our Vice
President-Marketing.
JACK T. SMITH has served as one of our directors since November 1995.
Mr. Smith is currently employed by Carl Westcott LLC, a private capital firm.
From March 1997 to February 1999, Mr. Smith was President and Chief Operating
Officer of Jayhawk Acceptance Corporation, a specialized financial services
company. From June 1996 to September 1997, Mr. Smith was employed as an
independent business consultant. From 1989 until its acquisition by Primedia,
Inc., in June 1996, Mr. Smith was President and Chief Operating Officer of
Westcott Communications, Inc. He is also a director of Jayhawk Acceptance
Corporation, First Extended Service Corporation and FFG Insurance Company.
GARY L. CORONA has served as one of our directors May 1998. Mr. Corona
is currently employed by Carl Westcott LLC, a private capital firm. From March
1997 to February 1999, Mr. Corona was General Manager of the Automotive Division
of Jayhawk Acceptance Corporation. From July 1996 to August 1997, Mr. Corona
served as a business consultant for Carl Westcott LLC. From July 1990 until its
acquisition by Primedia, Inc., in June 1996, Mr. Corona
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<PAGE> 38
was Vice President, New Business Development of Westcott Communications, Inc.
Mr. Corona is also a director of First Extended Service Corporation and FFG
Insurance Company.
BOARD COMMITTEES
The Board of Directors has two standing committees: the Audit Committee
and the Compensation Committee. The functions of these committees and their
current members are described below.
Audit Committee. The Audit Committee reviews the professional services
and independence of our independent auditors, as well as the adequacy of our
accounting procedures and internal controls. The Audit Committee recommends to
the Board of Directors the appointment of the firm selected to be our
independent public accountants and monitors the performance of such firm;
reviews and approves the results and scope of the annual audit; reviews with
management the status of internal accounting controls; evaluates any problem
areas having a potential financial impact on us that may be brought to its
attention by management, the independent public accountants or the Board of
Directors; and evaluates all of our public financial reporting documents. The
Audit Committee is comprised of Messrs. Hunt, Smith and Corona.
Compensation Committee. The Compensation Committee recommends
compensation for all executive officers and administers incentive compensation
and benefit plans. The Compensation Committee is comprised of Messrs. Hunt,
Smith and Corona.
COMPENSATION OF DIRECTORS
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. Upon initial election to the Board of Directors,
each Independent Director will receive a nonqualified option to purchase 22,500
shares of Common Stock (which are immediately exercisable) under the 1998 Option
Plan. Independent Directors holding office at the time of our initial public
offering received such options as of such date. Following the first anniversary
of election to the Board of Directors, 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 of Directors, and further subject
to the terms and provisions of the 1998 Option Plan).
On April 20, 1999, we entered into a Consulting Agreement with Mr.
Corona 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 in April 1999, we granted Mr. Corona
an option under the 1998 Option Plan to purchase 75,000 shares of our Common
Stock at an exercise price of $25.00 per share. We also 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. In addition, in
November 1999 we granted Mr. Corona an option under the 1998 Option Plan to
purchase 75,000 shares of Common Stock at an exercise price of $10.00 per share.
Mr. Ladin, the Vice Chairman of our Board of Directors, provides
consulting services to us in the areas of developing strategic relationships,
assistance with acquisitions and consultation on consumer marketing. For these
services, we pay Mr. Ladin $16,666 per month and reimburse him for his
reasonable expenses incurred in fulfilling his duties to us. We also offer him
the same benefits offered to our officers and employees.
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EXECUTIVE COMPENSATION
The following table sets forth the information regarding compensation
(on an annualized basis) for our Chief Executive Officer and other most highly
compensated executive officer (the "Named Executive Officers") for the periods
indicated. No other executive officers were compensated over $100,000 in fiscal
1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ---------------
SECURITIES
Fiscal Other Annual UNDERLYING
Name and Principal Position Year Salary Compensation OPTIONS
- ------------------------------------ ------ ------------ ------------ ----------
<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 (2)....... 1998 110,000 - -
</TABLE>
- -----------------
(1) On March 24, 1998, Mr. Maples was granted an option to purchase 157,500
shares of Common Stock at an exercise price of $1.67 per share.
(2) Resigned as of December 31, 1999.
The following table sets forth information regarding the value of stock
options outstanding at June 30, 1999 held by each of the Named Executive
Officers. No stock options were exercised by the Named Executive Officers in
fiscal 1999. There have been no option grants to the Named Executive Officers
during the last fiscal year.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY END(#) AT FY END ($)(1)
---------------------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- ------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Michael T. Maples............ 106,875 118,125 $1,838,784 $2,032,341
Douglas L. Davis(2).......... 112,500 - 1,935,563 -
</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 $18.875 (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.
(2) Resigned as of December 31, 1999
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1998 NONQUALIFIED STOCK OPTION PLAN
Our 1998 Nonqualified Stock Option Plan, as amended (the "1998 Option
Plan"), was adopted by the Board of Directors and our shareholders on July 13,
1998. The purpose of the 1998 Option Plan is to promote our growth and general
prosperity by permitting us to grant to our employees, directors and advisors
options to purchase Common Stock. Pursuant to the 1998 Option Plan, we may grant
nonstatutory (nonqualified) stock options to our employees, directors and
advisors. A total of 800,000 shares of Common Stock have been reserved for
issuance under the 1998 Option Plan.
The Compensation Committee has the authority to select the employees,
directors and advisors to whom stock options are granted. Subject to the
limitations set forth in the 1998 Option Plan, the Compensation Committee has
the sole discretion and authority to determine the persons to whom options shall
be granted and the number of shares covered by each option, to interpret the
1998 Option Plan, to establish vesting schedules, to specify the type of
consideration to be paid upon exercise and, subject to certain restrictions, to
specify other terms of the options.
The maximum term of options granted under the 1998 Option Plan is ten
years. Options granted under the 1998 Option Plan are in most cases
nontransferable and generally expire within 30 days after the termination of the
optionee's services, except in cases when the optionee is terminated "for cause"
(as such term is defined therein). In such cases, the option typically expires
automatically on the date of termination. In general, if an optionee is disabled
or dies, such option may be exercised up to 12 months following such disability
or death, unless the Compensation Committee determines to allow a longer period
for exercise. In general, if an optionee retires from his or her service to us,
such option may be exercised up to three months following such retirement,
unless the Compensation Committee determines to allow a longer period for
exercise.
In July 1998, Mr. Corona was issued an option to purchase 22,500 shares
of Common Stock at an exercise price of $8.00 per share under the 1998 Option
Plan. In December 1998, Messrs. Corona, Hunt and Smith were each issued an
option to purchase 22,500 shares of Common Stock at an exercise price of $13.00
per share under the 1998 Option Plan. In April 1999, Mr. Corona was issued an
option to purchase 75,000 shares of Common Stock at an exercise price of $25.00
per share under the 1998 Option Plan. In November 1999, Mr. Corona was issued an
option to purchase 75,000 shares of Common Stock at an exercise price of $10.00
per share under the 1998 Option Plan. In January 2000, Mr. W. Ladin was issued
an option to purchase 22,500 shares of Common Stock at an exercise price of
$13.1875 per share under the 1998 Option Plan. We currently have issued and
outstanding to our officers options to purchase a total of 92,000 shares of
Common Stock at an exercise price of $13.75 per share under the 1998 Option
Plan.
As of January 5, 2000, we have a total of 618,738 options outstanding
under the 1998 Option Plan. These options are exercisable at prices ranging from
$1.12 per share of Common Stock to $25.00 per share of Common Stock. We have
filed a registration statement on Form S-8 for the 800,000 shares of Common
Stock reserved for issuance under the 1998 Option Plan.
EMPLOYEE AND CONSULTANT STOCK OPTION PLAN
Our Employee and Consultant Stock Option Plan (the "Employee and
Consultant Option Plan") was approved by the Board of Directors in September
1999 in connection with the acquisition of PDQ. The plan was subsequently
approved by our shareholders at a special meeting of shareholders in November
1999. This plan was created in connection with the acquisition of PDQ so that
each outstanding PDQ incentive stock option could be exchanged for an incentive
stock option to purchase Common Stock. Pursuant to the Employee and Consultant
Stock Option Plan, we may grant incentive and nonqualified stock options to our
employees, consultants, directors and advisors. A total of 260,063 shares of
Common Stock have been reserved for issuance under the Employee and Consultant
Option Plan.
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<PAGE> 41
The Compensation Committee has the authority to select the employees,
directors and advisors to whom stock options are granted. Subject to the
limitations set forth in the Employee and Consultant Option Plan, the
Compensation Committee 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 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 Employee and Consultant
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 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.
In June 1998, Mr. W. Ladin was issued an incentive option to purchase
shares of PDQ, which was amended in November 1999 to become an incentive option
to purchase 61,388 shares of Common Stock at an exercise price of $1.23 per
share, 49,388 of which are currently outstanding. We currently have issued and
outstanding to our officers incentive options to purchase a total of 50,227
shares of Common Stock at exercise prices ranging from $1.48 to $2.69 under the
Employee and Consultant Stock Option Plan.
As of January 5, 2000, we have a total of 235,317 options outstanding
under the Employee and Consultant Option Plan. These options are exercisable at
prices ranging from $1.12 per share of Common Stock to $2.69 per share of Common
Stock. We have filed a registration statement on Form S-8 for the 260,063 shares
of Common Stock reserved for issuance under the Employee and Consultant Option
Plan.
1996 INCENTIVE STOCK OPTION PLAN
Our 1996 Incentive Stock Option Plan (the "1996 Option Plan") was
adopted by the Board of Directors and our shareholders in December 1996.
Pursuant to the 1996 Option Plan, we may grant incentive and nonstatutory
(nonqualified) stock options to our key employees and directors. A total of
225,000 shares of Common Stock have been reserved for issuance under the 1996
Option Plan.
The Compensation Committee has the authority to select the employees
and directors to whom stock options are granted. Subject to the limitations set
forth in the 1996 Option Plan, the Compensation Committee has the sole
discretion and authority to determine from time to time the persons to whom
options shall be granted and the number of shares covered by each option, to
interpret the 1996 Option Plan, to establish vesting schedules, to specify the
type of consideration to be paid upon exercise and, subject to certain
restrictions, to specify other terms of the options.
The maximum term of options granted under the 1996 Option Plan is ten
years. The aggregate fair market value of the stock with respect to which
incentive stock options are first exercisable in any calendar year may not
exceed $100,000 per incidence. Options granted under the 1996 Option Plan are in
most cases nontransferable and generally expire within three months after the
termination of the optionee's services to us. In general, if an optionee is
disabled, dies or retires from his or her service to us, such option may be
exercised up to 12 months following such disability or death, unless the
Compensation Committee determines to allow a longer period for exercise.
The exercise price of incentive stock options must be not less than the
fair market value of the Common Stock on the date of grant. The exercise price
of incentive stock options granted to any person who at the time of grant owns
stock possessing more than 10% of the total combined voting power of all classes
of stock must be at least 110% of the fair market value of such stock on the
date of grant. The term of those options cannot exceed five years.
As of January 5, 2000, we have a total of 30,589 options outstanding
under the 1996 Option Plan. These options are exercisable at $1.67 per share of
Common Stock. The exercise price of such options was adjusted from
40
<PAGE> 42
$3.33 per share to $1.67 per share on March 24, 1998 by the Board of Directors.
We have filed a registration statement on Form S-8 for the 225,000 shares of
Common Stock reserved for issuance under the 1996 Option Plan.
NONQUALIFIED STOCK OPTIONS
Mr. Maples was granted an option to purchase 67,500 shares of Common
Stock at an exercise price of $3.33 per share on October 27, 1996. The exercise
price of this option was adjusted to $1.67 per share by the Board of Directors
on March 24, 1998. Additionally, on March 24, 1998, Mr. Maples was granted an
option to purchase 157,500 shares of Common Stock at an exercise price of $1.67
per share. On April 5, 1996, Messrs. Hunt and Smith were each granted an option
to purchase 22,500 shares of Common Stock at an exercise price of $1.67 per
share. On December 15, 1995, Mr. Davis, a former officer, was granted an option
to purchase 112,500 shares of Common Stock at an exercise price of $1.67 per
share, all of which have been exercised. Other officers currently hold options
to purchase a total of 130,851 shares of Common Stock at an exercise price of
$1.67 per share. All of the options described in this paragraph are nonqualified
stock options.
Additionally, on October 27, 1996, 215,026 nonqualified options were
granted to certain of our founders at an exercise price of $3.33 per share in
connection with such founders' pledge of their Internet America stock to
guarantee the bridge loan from First Computer Services Corporation. The exercise
price of these options was adjusted to $1.67 per share by the Board of Directors
on March 24, 1998.
As of January 5, 2000, we have a total of 546,563 nonqualified options
outstanding. These options are exercisable at prices ranging from $0.09 per
share of Common Stock to $3.33 per share of Common Stock. We have filed
registration statements on Form S-8 for 1,110,250 shares of Common Stock in
connection with non-qualified stock options granted to certain current and
former officers, directors and employees.
EMPLOYEE STOCK PURCHASE PLAN
On April 20, 1999, our Board of Directors approved the Employee Stock
Purchase Plan subject to shareholder approval, which was received at our 1999
annual meeting of shareholders. The purpose of the Employee Plan is to provide
eligible employees with an opportunity to purchase Common Stock through
accumulated payroll withholding amounts and to thereby acquire or increase their
proprietary interest in us. The Employee Plan provides that 200,000 shares of
Common Stock will be reserved for offerings under the Employee Plan, subject to
adjustment upon the occurrence of certain events. To the extent Common Stock is
available for purchase by eligible employees under the Employee Plan, we may
make consecutive quarterly offerings of Common Stock, but we reserve the right
to terminate the Employee Plan at any time. The provisions of the Employee Plan
are intended to satisfy the requirements of Section 423 of the Internal Revenue
Code of 1986, as amended, and to comply with Section 16(b) of the Securities
Exchange Act of 1934, as amended. The Employee Plan is not subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended,
and is not a qualified plan under Internal Revenue Code Section 401(a). The
Employee Plan is administered by the Board of Directors or by a committee of
individuals, who may be our officers, appointed from time to time by the Board
of Directors.
Under the Employee Plan, eligible employees are granted an option to
purchase the greatest number of whole shares of our Common Stock that may be
purchased with the amount elected by the eligible employee to be withheld from
the eligible employee's after-tax base pay, up to 10% of the before-tax base
pay, during a calendar quarter. An eligible employee may not purchase more than
$25,000 in value of Common Stock under the Employee Plan during any calendar
year. The price paid for each share of Common Stock under the Employee Plan is
the lesser of (1) 85% of the fair market value of a share of Common Stock on the
first day of each calendar quarter, or (2) 85% of the fair market value of a
share Common Stock on the exercise date. We will pay all transaction costs in
connection with the purchase of Common Stock under the Employee Plan.
To date, 5,770 shares of Common Stock have been issued under the
Employee Plan. We have filed a registration statement on Form S-8 for the
200,000 shares of Common Stock reserved for issuance under the Employee Plan.
41
<PAGE> 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 31, 1997, we entered into a letter agreement (the "First
Extended Agreement") with First Extended, Inc. (successor in interest to First
Computer Services Corporation, which was owned by Carl Westcott, a principal
shareholder at the time) and William O. Hunt, one of our directors. First
Extended acted as a nominee for Jack T. Smith, one of our directors, Michael T.
Maples, our Chief Executive Officer and one of our directors, and Mr. Westcott.
Under the terms of the First Extended Agreement, we made a promissory note in
the original principal amount of $650,000 in favor of First Extended (the "First
Extended Note"). The First Extended Note and First Extended Agreement provided
that we could borrow up to $650,000 from First Extended. All advances under the
First Extended Note and First Extended Agreement were made at First Extended's
discretion. We had borrowed a total of $250,000 under the First Extended Note
and First Extended Agreement. The First Extended Note bore interest at 18% per
annum, and all principal and interest were originally payable on April 1, 1997.
The First Extended Note, which was in default, was refinanced at prime rate in
June 1998 as set forth below and was paid off on July 14, 1998.
On March 24, 1998, Mr. Hunt, Douglas Sheldon, a former director and
officer, and Carl Westcott LLC, as nominee for Messrs. Westcott, Maples, Smith,
Corona and others, entered into a Stock Purchase Agreement pursuant to which
Carl Westcott LLC, as nominee, and Messrs. Hunt and Sheldon purchased all of the
1,987,124 shares of Common Stock held by Robert Maynard, John Nanni and Tim
Martin, founding shareholders of the Company, in exchange for $883,166.
Mr. Hunt personally guaranteed payment under a promissory note made by
us in the original principal amount of $350,000 payable to NationsBank, N.A.
(the "NationsBank Note"). A total of $225,000 was borrowed under the NationsBank
Note, which bore interest at the bank's prime rate. The NationsBank Note
originally matured on July 15, 1997 and was renewed through December 15, 1998. A
guarantee fee would accrue to Mr. Hunt at 18% minus the bank's prime rate if the
NationsBank Note became in default. The guarantee fee and all principal were
payable upon demand of the guarantor. All advances under the NationsBank Note
required the consent of the guarantor.
In June 1998, we refinanced the First Computer Note and the First
Extended Note pursuant to a Letter Agreement between us and Messrs. Hunt, Smith
and Westcott (the "Letter Agreement"). Pursuant to the Letter Agreement, we made
the following promissory notes: (i) Amended and Restated Promissory Note payable
to Mr. Smith in the principal amount of $229,450, (ii) Amended and Restated
Promissory Note payable to Mr. Smith in the principal amount of $77,694, (iii)
Amended and Restated Promissory Note payable to Mr. Westcott in the principal
amount of $1,538,263 and (iv) Amended and Restated Promissory Note payable to
Mr. Westcott in the principal amount of $172,306 (collectively, the "Amended
Notes"). All of the Amended Notes bore interest per annum at the NationsBank of
Texas, N.A. prime rate. Pursuant to the Letter Agreement, we were to make a
monthly payment of $140,000, which would be applied pro rata to the repayment of
the Amended Notes and the NationsBank Note. In the event of default under any of
the Amended Notes, the outstanding indebtedness of such note was convertible
into shares of Common Stock at the price of $0.44 per share at the option of the
noteholders. Mr. Maples sold his interest in the Amended Notes to Mr. Westcott.
Under the Amended Notes and the Letter Agreement, in the event of any offering
of our securities pursuant to a registration statement declared effective by the
Securities and Exchange Commission or the sale or issuance of our securities
through which we raise a minimum of $1.0 million, we had to use all of the
proceeds of such offering, sale or issuance to pay off the Amended Notes and the
NationsBank Note until all such debt was extinguished. We used approximately
$2.0 million of the net proceeds of our initial public offering in December 1998
to prepay the Amended Notes and the NationsBank Note.
In 1997, Chase Bank made available a stand-by letter of credit in the
original principal amount of $150,000, payment of which was personally
guaranteed by Mr. Hunt. Approximately $66,000 of this letter of credit was
pledged as collateral under a three year capital lease. All amounts outstanding
under the letter of credit were paid with a portion of the proceeds of our
initial public offering in December 1998, and the letter of credit was
terminated.
42
<PAGE> 44
On April 20, 1999, we entered into a Consulting Agreement with Mr.
Corona 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 in April 1999, we granted Mr. Corona
an option to purchase 75,000 shares of our Common Stock at an exercise price of
$25.00 per share. We also 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. In addition, in November 1999 we granted Mr.
Corona an option to purchase 75,000 shares of our Common Stock at an exercise
price of $10.00 per share.
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. Two of our directors, Messrs. Smith and Corona, are employed
by Carl Westcott LLC. Under the letter agreement, Carl Westcott LLC will assist
us in identifying and contacting potential acquisition or business combination
candidates, evaluate and value such candidate businesses, assist in structuring
transaction proposals, develop strategies for successful consummation of
transactions, analyze the economic effects to us of a transaction, assist in the
negotiation of transaction proposals and preparation of documents, assist in the
due diligence process and complete other matters related to closing such
transactions. As compensation for rendering such services, we will 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 shall such fee for any acquisition be 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.
Carl Westcott owns a significant interest in Jayhawk Acceptance
Corporation, First Extended Service Corporation and FFG Insurance Company. Carl
Westcott LLC and Westcott Communications, Inc. are current and former affiliates
of Carl Westcott.
Mr. Ladin, the Vice Chairman of our Board of Directors, provides
consulting services to us in the areas of developing strategic relationships,
assistance with acquisitions and consultation on consumer marketing. For these
services, we pay Mr. Ladin $16,666 per month and reimburse him for his
reasonable expenses incurred in fulfilling his duties to us. We also offer him
the same benefits offered to our officers and employees.
We have adopted a policy providing that all transactions between us and
related parties are subject to approval by a majority of all disinterested
directors and must be on terms no less favorable than those that could otherwise
be obtained from unrelated third parties.
43
<PAGE> 45
PRINCIPAL AND SELLING SHAREHOLDERS
The shares offered hereby are owned by and offered for the account of
the former shareholders of PDQ listed below. We will not receive any of the
proceeds from the sale of the shares. The selling shareholders received their
shares of Common Stock in connection with our acquisition of PDQ pursuant to an
Agreement and Plan of Merger dated as of September 12, 1999, and closed on
November 22, 1999, by and between us, our wholly-owned subsidiary, PDQ and
certain shareholders of PDQ (the "PDQ Merger Agreement"). Under the PDQ Merger
Agreement, we purchased all of the issued and outstanding securities of PDQ in
exchange for Common Stock.
The PDQ Merger Agreement contained a registration rights provision
pursuant to which we agreed to register 350,000 shares of Common Stock received
by the PDQ shareholders in the merger. Accordingly, we have caused to be
prepared and have filed with the Securities and Exchange Commission the
Registration Statement of which this Prospectus forms a part, with respect to
the sale by the selling shareholders from time to time of the shares in
accordance with the intended methods of distribution described under "Plan of
Distribution." We have agreed to use commercially reasonable efforts to cause
the Registration Statement to be declared effective and to remain effective
until the earlier of May 22, 2001 or the date that all shares included in the
Registration Statement are sold. In addition, we have agreed to pay all expenses
incurred by us in connection with the Securities Act registration of the shares,
including, without limitation, registration and filing fees, printing expenses,
and fees and disbursements of our counsel and accountants. All selling expenses,
such as taxes, selling commissions, and fees and disbursements for seller's
counsel shall be paid by the selling shareholders.
The following table sets forth certain information as of January 5,
2000, 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 of our directors and Named Executive Officers, (3) all
executive officers and directors as a group and (4) each selling shareholder.
Unless otherwise noted, the persons named below have sole voting and investment
power with respect to the shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(2)
--------------------- ---------------------
NAME, ADDRESS AND OFFICE SHARES
OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
---------------------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS, DIRECTORS AND EXECUTIVE
OFFICERS WHO ARE ALSO SELLING SHAREHOLDERS:
Michael T. Maples
President, Chief Executive Officer
and Director ................................. 190,563(3) 2.0% -- 190,563(3) 2.0%
Ernest D. Rapp
Vice President and Chief Operating Officer ... 54,116(3) * 2,441 51,675(3) *
Marc Ladin
Vice President - Marketing ................... 39,433(3) * 4,684 34,749(3) *
William O. Hunt
Chairman of the Board ........................ 777,063(3)(4) 8.0% -- 777,063(3)(4) 8.0%
William E. Ladin, Jr.
Vice Chairman of the Board ................... 809,526 8.4% 107,201 702,325 7.3%
Jack T. Smith
Director ..................................... 441,811(3) 4.6% -- 441,811(3) 4.6%
Gary L. Corona
Director ..................................... 73,624(3) * -- 73,624(3) *
All directors and executive
officers as a group (eleven
persons) ...................................... 2,432,007(3) 24.3 114,326 2,317,681(3) 23.2%
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(2)
---------------------- ----------------------
NAME, ADDRESS AND OFFICE SHARES
OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
---------------------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
SELLING SHAREHOLDERS:
William E. Ladin, Jr.
5722 Indian Circle
Houston, Texas 77057 ............... 809,526(3) 8.4% 107,201 702,325(3) 7.3%
J.N. Palmer Family Partnership
P.O. Box 3747
Jackson, Mississippi 39207 ......... 682,599 7.1% 98,519 584,080 6.1%
Ernest D. Rapp
4825 Willow
Bellaire, Texas 77401 .............. 54,116(3) * 2,441 51,675(3) *
Marc Ladin
3620 Yupon
Houston, Texas 77006 ............... 39,433(3) * 4,684 34,749(3) *
Richard L. Kelley, Jr.
5229 Memorial
Houston, Texas 77007 ............... 130,724(5) 1.4% 13,699 117,025(5) 1.2%
Jerry H. Deutser
4600 Post Oak Place, Suite 152
Houston, Texas 77027 ............... 70,025 * 10,107 59,918 *
S. Conrad Weil, Jr.
4600 Post Oak Place, Suite 152
Houston, Texas 77027 ............... 70,025 * 10,107 59,918 *
Ronald M. Ladin
7900 Washington
Houston, Texas 77007 ............... 45,575 * 6,578 38,997 *
Gerard N. Catalano
9327 Fairdale
Houston, Texas 77063 ............... 4,321(6) * 425 3,896(6) *
Phillip V. Ladin
7900 Washington
Houston, Texas 77007 ............... 96,308 1.0% 13,900 82,408 *
Barry M. Lewis
2000 West Loop S, Suite 1080
Houston, Texas 77027 ............... 35,035 * 5,057 29,978 *
Charles Dixon
1107 Anne
Houston, Texas 77055 ............... 7,431 * 1,073 6,358 *
Chris Geston
4602 Waring
Houston, Texas 77027 ............... 12,462 * 1,799 10,663 *
Allen Becker
2000 West Loop S., Suite 1080
Houston, Texas 77027 ............... 48,565 * 7,009 41,556 *
James R. Warren
5843 Inwood Park Court
Houston, Texas 77057 ............... 122,894(7) 1.3% 16,283 106,611 1.1%
Joe R. Martin
1301 Kipling
Houston, Texas 77006 ............... 134,974 1.4% 19,481 115,593 1.2%
Amanda J. Ladin
1623 Linwood
San Diego, California 92103 ........ 25,354(8) * 3,122 22,232(7) *
Kelly Ladin
507 Parkside Circle
Chapel Hill, North Carolina 27516... 13,945 * 2,013 11,932 *
Kimberly Ladin
104 Wool Street
San Francisco, California 94110..... 5,581 * 805 4,776 *
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(2)
---------------------- -----------------------
NAME, ADDRESS AND OFFICE SHARES
OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
---------------------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Mark Knodel
8906 Cardwell Lane
Houston, Texas 77055 .... 7,431 * 1,073 6,358 *
Daniel Castro
1335 Silverado, #207
Houston, Texas 77077 .... 5,344(9) * 425 4,919(8) *
David Byrd
5731 Gulfton, #2734
Houston, Texas 77081 .... 1,635(10) * 232 1,403(9) *
Gregory H. Wilson
9543 Meadowdale
Houston, Texas 77063 .... 27,887 * 4,025 23,862 *
Mark C. Williams
6059 Riverway Way
Houston, Texas 77057 .... 122,894(7) 1.3% 16,283 106,611 1.1%
Maximilian J. Defreitas
7742 Stonesdale
Houston, Texas 77095 .... 25,352 * 3,659 21,693 *
</TABLE>
- ----------
* Less than one percent.
(1) The address of each of our officers and directors is in care of us at
One Dallas Centre, 350 North St. Paul, Suite 3000, Dallas, Texas 75201.
(2) Assumes the sale of all 350,000 shares covered by this Prospectus and
no other sales of Common Stock.
(3) Includes options to purchase 106,875, 19,688, 37,205, 15,170, 6,976,
45,000, 66,772, 45,000 and 45,000 shares of Common Stock granted to
Messrs. Maples, Chaney, Rapp, Stewart, M. Ladin, Hunt, W. Ladin, Smith
and Corona, respectively, that are exercisable within 60 days of
January 5, 2000.
(4) Includes 286,678 shares of Common Stock owned by B&G Partnership, Ltd.,
a limited partnership in which Mr. Hunt and his wife serve as general
partners.
(5) Includes options to purchase 35,809 shares of Common Stock that are
exercisable within 60 days of January 5, 2000.
(6) Includes options to purchase 1,364 shares of Common Stock that are
exercisable within 60 days of January 5, 2000.
(7) Includes options to purchase 10,077 shares of Common Stock that are
exercisable within 60 days of January 5, 2000.
(8) Includes options to purchase 3,721 shares of Common Stock that are
exercisable within 60 days of January 5, 2000.
(9) Includes options to purchase 2,387 shares of Common Stock that are
exercisable within 60 days of January 5, 2000.
(10) Includes options to purchase 28 shares of Common Stock that are
exercisable within 60 days of January 5, 2000.
46
<PAGE> 48
DESCRIPTION OF SECURITIES
GENERAL
We are a Texas corporation and are governed by our Articles of
Incorporation, Bylaws and the Texas Business Corporation Act (the "TBCA"). The
following description of our capital stock is qualified in all respects by the
Articles and the Bylaws, which have been filed as exhibits to our Registration
Statement on Form SB-2, filed in connection with our initial public offering in
December 1998.
Our authorized capital stock consists of 40,000,000 shares of Common
Stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par
value $0.01 per share (the "Preferred Stock").
COMMON STOCK
As of January 5, 2000, we had approximately 195 holders of record of
our Common Stock. The holders of outstanding shares of Common Stock are entitled
to receive dividends out of assets legally available therefor at such times and
in such amounts as the Board of Directors may, from time to time, determine,
subject to any preferences which may be granted to the holders of Preferred
Stock. Holders of Common Stock do not have cumulative voting rights and are
entitled to one vote per share on all matters on which the holders of Common
Stock are entitled to vote. The Common Stock is not entitled to preemptive
rights and is not subject to redemption or conversion. Upon our liquidation,
dissolution or winding-up, the assets (if any) legally available for
distribution to shareholders are distributable ratably among the holders of
Common Stock after payment of all our debts and liabilities and the liquidation
preference of any outstanding class or series of Preferred Stock. All
outstanding shares of Common Stock are validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
will be subject to the preferential rights of any outstanding class or series of
Preferred Stock that we may issue in the future.
PREFERRED STOCK
The Board of Directors may, without further action of our shareholders,
issue shares of Preferred Stock in one or more series and fix or alter the
rights and preferences thereof, including the voting rights, redemption
provisions (including sinking fund provisions), dividend rights, dividend rates,
liquidation preferences, conversion rights and any other rights, preferences,
privileges and restrictions of any wholly unissued series of Preferred Stock.
The rights of holders of Common Stock will be subject to, and may be adversely
affected by, the rights of holders of any Preferred Stock. As of the date of
this Prospectus, there are two series of Preferred Stock authorized, but no
shares of either series are issued or outstanding.
On November 10, 1995, the Board of Directors authorized and issued a
series of Preferred Stock, which currently consists of 400,000 authorized shares
of Preferred Stock (such amount may from time to time be increased or decreased
by the Board of Directors), designated as Series A Preferred Stock. The Series A
Preferred Stock, with respect to rights on liquidation, winding up and
dissolution, ranks senior to all classes and series of Common Stock and may rank
senior to other classes of Preferred Stock. The Series A Preferred Stock has no
specified dividend rate and the holders of Series A Preferred Stock are entitled
to receive the same dividends as the holders of the Common Stock. The holders of
Series A Preferred Stock are entitled to vote in all matters as to which the
holders of the Common Stock are entitled to vote (on an "as converted" basis) in
the same manner and with the same effect as such holders of Common Stock, voting
together with the holders of Common Stock and Series A Preferred Stock as one
class. Each share of Series A Preferred Stock is convertible at any time into
2.25 shares of Common Stock. Each share of Series A Preferred Stock issued and
outstanding prior to our initial public offering was automatically converted
into 2.25 fully paid and nonassessable shares of Common Stock upon completion of
the initial public offering. There are currently no shares of Series A Preferred
Stock issued or outstanding.
47
<PAGE> 49
On May 15, 1996, the Board of Directors authorized and issued a series
of Preferred Stock, which currently consists of 300,000 authorized shares of
Preferred Stock (such amount may from time to time be increased or decreased by
the Board of Directors), designated as Series B Preferred Stock. The Series B
Preferred Stock, with respect to rights on liquidation, winding up and
dissolution, ranks equally to the Series A Preferred Stock, ranks senior to all
classes and series of Common Stock and may rank senior to other classes of
Preferred Stock. The Series B Preferred Stock has no specified dividend rate and
the holders of Series B Preferred Stock are entitled to receive the same
dividends as the holders of the Common Stock. The holders of Series B Preferred
Stock are entitled to vote in all matters as to which the holders of the Common
Stock are entitled to vote, in the same manner and with the same effect as such
holders of Common Stock (on an "as converted" basis), voting together with the
holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock
as one class. Each share of Series B Preferred Stock is convertible at any time
into 2.25 shares of Common Stock. Each share of Series B Preferred Stock issued
and outstanding prior to our initial public offering was automatically converted
into 2.25 fully paid and nonassessable shares of Common Stock upon completion of
the initial public offering. There are currently no shares of Series B Preferred
Stock issued or outstanding.
REGISTRATION RIGHTS
The PDQ Merger Agreement contained a registration rights provision
pursuant to which we agreed to register 350,000 shares of Common Stock received
by the shareholders of PDQ as consideration for our acquisition of PDQ.
Accordingly, we have caused to be prepared and have filed with the Securities
and Exchange Commission the Registration Statement of which this Prospectus
forms a part, with respect to the sale by the selling shareholders from time to
time of the shares in accordance with the intended methods of distribution
described under "Plan of Distribution." We have agreed to use commercially
reasonable efforts to cause the Registration Statement to be declared effective
and to remain effective until the earlier of May 22, 2001 or the date that all
shares included in the Registration Statement are sold. In addition, we have
agreed to pay all expenses incurred by us in connection with the Securities Act
registration of the shares, including, without limitation, registration and
filing fees, printing expenses, and fees and disbursements of our counsel and
accountants. All selling expenses, such as taxes, selling commissions, and fees
and disbursements for sellers' counsel shall be paid by the selling
shareholders.
The holders of the remaining 2,075,000 shares of Common Stock issued in
the PDQ acquisition have certain rights to have those shares registered under
the Securities Act pursuant to the terms of PDQ Merger Agreement. Under that
agreement, after May 21, 2000, the holders of at least 55% of those shares then
outstanding may demand registration of those shares under the Securities Act.
The holders of those shares also have piggyback registration rights in the event
we register other securities under the Securities Act.
TRADING MARKET, TRANSFER AGENT AND REGISTRAR
The Common Stock is quoted on the Nasdaq National Market under the
symbol "GEEK." The Transfer Agent and Registrar for the Common Stock is
ChaseMellon Shareholder Services, L.L.C.
TEXAS ANTI-TAKEOVER LAW AND CERTAIN PROVISIONS
As a Texas corporation, we are subject to the provisions of the Texas
Business Combination Law ("TBCL") that became effective on September 1, 1997. In
general, the TBCL prohibits a Texas "issuing public corporation" (such as us)
from engaging in a "business combination" with any shareholder who is a
beneficial owner of 20% or more of the corporation's outstanding stock for a
period of three years after such shareholder's acquisition of a 20% ownership
interest, unless: (1) the board of directors of the corporation approves the
transaction or the shareholder's acquisition of the shares prior to the
acquisition or (2) two-thirds of the unaffiliated shareholders of the
corporation approve the transaction at a shareholders' meeting. The TBCL may
have the effect of inhibiting a non-negotiated merger or other business
combination involving us. We are subject to the terms of the TBCL, unless its
shareholders or directors take action electing not to be governed by its terms
(which action is not currently contemplated).
48
<PAGE> 50
Our Articles and Bylaws prevent shareholders from calling a special
meeting of shareholders, prevent shareholders from amending the Bylaws and
prohibit shareholder action by written consent. Our Bylaws provide for a
classified Board of Directors, which makes replacing the entire Board a more
difficult task. Our Bylaws also authorize only the Board of Directors to fill
vacancies, including newly-created directorships and state that our directors
may be removed only for cause and only by the affirmative vote of holders of at
least a majority of the outstanding shares of the voting stock, voting together
as a single class.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our Articles of Incorporation provide that to the fullest extent
permitted by applicable law, a director will not be liable to us or our
shareholders for monetary damages for an act or omission in the director's
capacity as a director. Our Articles and Bylaws provide that we shall indemnify
any person to the fullest extent permitted by law. We have entered into
indemnification agreements with each of our officers and directors in which we
agree to indemnify such persons to the fullest extent permitted by law.
The TBCA permits the indemnification of directors, employees, officers
and agents of Texas corporations. Under the TBCA, an officer or director may be
indemnified if he acted in good faith and reasonably believed that his conduct
(1) was in our best interests and if he acted in his official capacity or (2)
was not opposed to our best interests in all other cases. In addition, the
indemnitee may not have reasonable cause to believe that his conduct was
unlawful in the case of a criminal proceeding. In any case, the indemnitee may
not have been found liable to us for improperly receiving a personal benefit or
for willful or intentional misconduct in the performance of his duty to us. We
(1) must indemnify an officer or director for reasonable expenses if he is
successful, (2) may indemnify an officer or director for such reasonable
expenses unless he was found liable for willful or intentional misconduct in the
performance of his duty to us and (3) may advance reasonable defense expenses if
the officer or director undertakes to reimburse us if he is later found not to
satisfy the standard for indemnification expenses. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to our
directors, officers and controlling persons pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. This
provision in the Articles does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of nonmonetary relief would remain available under Texas law. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
49
<PAGE> 51
PLAN OF DISTRIBUTION
We are registering the shares of Common Stock on behalf of the selling
shareholders (the "Selling Shareholders"). For purposes of this discussion
regarding the plan of distribution, "Selling Shareholders" includes donees and
pledgees selling shares received from a named Selling Shareholder after the date
of this prospectus. We will bear all costs, expenses and fees in connection with
the registration of the shares of Common Stock offered hereby. The Selling
Shareholders will bear brokerage commissions and similar selling expenses, if
any, attributable to the sale of shares of Common Stock. The Selling
Shareholders may sell shares of Common Stock from time to time in one or more
types of transactions (which may include block transactions):
- on the Nasdaq National Market;
- in the over-the-counter market;
- in negotiated transactions;
- through put or call options transactions relating to the
shares of Common Stock; and
- through short sales or a combination of such methods of sale.
Such transactions may be made at market prices prevailing at the time
of sale or at negotiated prices, and may or may not involve brokers or dealers.
The Selling Shareholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of shares of Common Stock by the Selling Shareholders.
The Selling Shareholders may sell shares of Common Stock directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders and/or the
purchasers of shares of Common Stock from whom such broker-dealers may act as
agents or to whom they sell as principal, or both. Any compensation as to a
particular broker-dealer might be in excess of customary commissions.
The Selling Shareholders and any broker-dealers that act in connection
with the sale of shares of Common Stock might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act. Any commissions
received by such broker-dealers and any profit on the resale of the shares of
Common Stock sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. Because the
Selling Shareholders may be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, the Selling Shareholders will be subject to
the prospectus delivery requirements of the Securities Act. We have informed the
Selling Shareholders that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to their sales in the market.
Selling Shareholders also may resell all or a portion of the shares of
Common Stock in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of Rule 144.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for us by Jackson Walker L.L.P., Dallas, Texas.
50
<PAGE> 52
EXPERTS
The consolidated financial statements of Internet America, Inc. and
subsidiaries as of June 30, 1998 and 1999 and for the years then ended included
in this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of PDQ.Net, Incorporated as of December 31,
1997 and 1998 and for the years then ended included in this Prospectus have been
audited by Grant Thornton, LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other documents with the Securities and Exchange Commission. You may read and
copy any documents we file at the SEC's public reference room at Judiciary Plaza
Building, 450 Fifth Street, N.W., Room 1024, Washington, D.C., 20549. You should
call 1-800-SEC-0330 for more information on the public reference room. The SEC
maintains an Internet site at http://www.sec.gov where certain information
regarding issuers (including Internet America) may be found.
This Prospectus is part of the Registration Statement that we filed
with the SEC. The Registration Statement contains more information than this
Prospectus regarding Internet America and the Common Stock, including certain
exhibits and schedules. You can get a copy of the Registration Statement from
the SEC at the address listed above or from its Internet site.
We maintain an Internet site at http://www.airmail.net. Information
contained on our Web site is not a part of this Prospectus. Industry information
presented is based on sources that we believe are reliable, although we have not
independently verified this information.
51
<PAGE> 53
GLOSSARY OF TECHNICAL TERMS
BACKBONE A high-speed network that connects smaller, independent networks.
BANDWIDTH The number of bits of information that can move over a
communications medium in a given amount of time.
BROADBAND A transmission facility that has a bandwidth greater than a voice
grade line of 3 kHz and which may carry numerous voice, video and
data channels simultaneously.
ELECTRONIC MAIL
OR E-MAIL An application that allows a user to send or receive
messages to or from any other user with an Internet address,
commonly termed an e-mail address.
FTP File Transfer Protocol. A protocol that allows file transfer
between a host and a remote computer.
INTERNET An open global network of interconnected commercial, educational
and governmental computer networks that utilize a common
communications protocol, TCP/IP.
INTERNET
BACKBONE The Internet backbone consists of high-speed networks that link
the smaller, independent networks of the Internet.
ISDN Integrated Services Digital Network. A digital network that
combines voice and digital network services through a single
medium, making it possible to offer subscribers digital data
services as well as voice connections.
ISP Internet Service Provider. A company that provides access to the
Internet. For a monthly fee, the service provider gives you a
software package, username, password and access phone number.
Equipped with a computer and modem, you can then connect to the
Internet and browse the World Wide Web and USENET, and send and
receive e-mail.
LEC Local Exchange Carrier. A telecommunications utility that has
been granted either a certificate of convenience and necessity or
a certificate of operating authority to provide local exchange
telephone service, basic local telecommunications service, or
switched access service within the state. A local exchange
carrier is also referred to as a local exchange company.
MODEM A piece of equipment that connects a computer to a data
transmission line (typically a telephone line).
NEWSGROUP Same as forum, an on-line discussion group. On the Internet,
there are literally tens of thousands of newsgroups covering
every conceivable interest. To view and post messages to a
newsgroup, you need a news reader, a program that runs on your
computer and connects you to a news server on the Internet.
POP Point of Presence. The Company defines a POP as a local
geographic point of presence where subscribers can access the
Company's services via a local telephone call. To the Company's
knowledge, there is no industry-wide definition of an Internet
access POP, and other companies may define a POP differently.
52
<PAGE> 54
ROUTER A device that receives and transmits data packets between
segments in a network or different networks.
SERVER Software that allows a computer to offer a service to another
computer. Other computers contact the server program by means
of matching client software. In addition, such term means the
computer on which server software runs.
T-1 A data communications line capable of transmission speeds of
1.54 Mbps.
TERMINAL
SERVER A specialized computer that supports multiple communications
connections.
USENET A worldwide bulletin board system that can be accessed through
the Internet or through many online services. The USENET
contains tens of thousands of forums, called newsgroups, that
cover every imaginable interest group. It is used daily by
millions of people around the world.
VIRTUAL POP Modems without a geographically specific location typically
housed or co-located at central offices inside of a LEC
Network. Private networks connect these facilities with the
Company.
WORLD WIDE WEB A network of computer servers that uses a special
communications protocol to link different servers throughout
the Internet and permits communication of graphics, video and
sound.
xDSL An abbreviation that refers collectively to all types of
digital subscriber lines, the two main categories being ADSL
and SDSL. Two other types of xDSL technologies are
High-data-rate DSL ("HDSL") and symmetric digital subscriber
lines ("SDSL"). DSL technologies use sophisticated modulation
schemes to pack data onto copper wires. They are sometimes
referred to as last-mile technologies because they are used
only for connections from a telephone switching station to a
home or office, not between switching stations. xDSL is
similar to ISDN inasmuch as both operate over existing copper
telephone lines (POTS) and both require the short runs to a
central telephone office (usually less than 20,000 feet).
However, xDSL offers much higher speeds -- up to 32 Mbps for
downstream traffic.
53
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial statements of Internet America, Inc. and Subsidiaries:
(i) Independent Auditors' Report F-2
(ii) Consolidated Balance Sheets at September 30, 1999
(unaudited) and at June 30, 1999 and 1998 F-3
(iii) Consolidated Statements of Operations for the three months ended
September 30, 1999 and 1998 (unaudited) and for the years ended June
30, 1999 and 1998 F-4
(iv) Consolidated Statements of Shareholders' Equity (Deficit) for the three
months ended September 30, 1999 (unaudited) and for the years ended
June 30, 1999 and 1998 F-5
(v) Consolidated Statements of Cash Flows for the three
months ended September 30, 1999 and 1998 (unaudited)
and for the years ended June 30, 1999 and 1998 F-6
(vi) Notes to Consolidated Financial Statements F-7
Financial statements of PDQ.Net:
(vii) Independent Auditors' Report F-16
(viii) Balance Sheets at September 30, 1999 (unaudited) and at
December 31, 1998 and 1997 F-17
(ix) Statements of Operations for the nine months ended
September 30, 1999 and 1998 (unaudited) and for the
years ended December 31, 1998 and 1997 F-18
(x) Statements of Stockholders' Deficit for the nine months
ended September 30, 1999 (unaudited) and for the years
ended December 31, 1998 and 1997 F-19
(xi) Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (unaudited) and for the
years ended December 31, 1998 and 1997 F-20
(xii) Notes to Financial Statements F-21
Proforma financial information (unaudited).
(i) Pro Forma Condensed Balance Sheet at September 30,
1999 F-28
(ii) Pro Forma Condensed Statement of Operations for the
year ended June 30, 1999 F-29
(iii) Pro Forma Condensed Statement of Operations for the
three months ended September 30, 1999 F-30
(iv) Notes to Pro Forma Financial Statements F-31
</TABLE>
F-1
<PAGE> 56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Internet America, Inc. and subsidiaries
We have audited the consolidated balance sheets of Internet America, Inc. and
subsidiaries 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 subsidiaries 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
November 22, 1999)
Dallas, Texas
F-2
<PAGE> 57
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, ----------------------------
1999 1999 1998
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,303,947 $ 5,845,562 $ 618,290
Accounts receivable, net of allowance for uncollectible
accounts of $366,940 and $198,155 at June 30, 1999
and June 30, 1998, respectively 1,212,126 1,122,894 494,961
Prepaid expenses and other current assets 128,906 126,433 30,824
------------ ------------ ------------
Total current assets 4,644,979 7,094,889 1,144,075
PROPERTY AND EQUIPMENT, Net 2,311,849 2,622,637 2,132,131
OTHER ASSETS - Net 9,762,072 9,195,878 785,634
------------ ------------ ------------
$ 16,718,900 $ 18,913,404 $ 4,061,840
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 2,041,174 $ 2,131,201 $ 1,153,728
Accrued liabilities 884,161 1,068,774 1,322,356
Deferred revenue 2,907,039 3,358,347 3,660,006
Current maturities of long-term debt 213,087 434,934 686,302
Current maturities of capital lease obligations 48,750 41,195 358,645
Advances under line of credit -- -- 225,000
Notes payable to shareholders -- -- 2,017,713
------------ ------------ ------------
Total current liabilities 6,094,211 7,034,451 9,423,750
CAPITAL LEASE OBLIGATIONS, net of current portion 87,000 102,246 143,915
LONG-TERM DEBT, net of current portion 206,190 151,997 1,182,273
------------ ------------ ------------
Total liabilities 6,387,401 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 at
June 30, 1999 and June 30, 1998, respectively 70,625 69,130 39,148
Additional paid-in capital 24,512,851 24,231,065 3,480,288
Accumulated deficit (14,251,977) (12,675,485) (10,212,067)
------------ ------------ ------------
Total shareholders' equity (deficit) 10,331,499 11,624,710 (6,688,098)
------------ ------------ ------------
$ 16,718,900 $ 18,913,404 $ 4,061,840
------------ ------------ ------------
</TABLE>
F-3
<PAGE> 58
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
THREE MONTHS ENDED JUNE 30,
SEPTEMBER 30, ----------------------------
1999 1999 1998
------------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Access $ 4,715,164 $ 15,911,844 $ 12,117,587
Business services 916,831 2,097,774 1,919,326
Other 206,608 109,412 41,312
------------ ------------ ------------
Total 5,838,603 18,119,030 14,078,225
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 3,150,195 8,800,924 7,417,819
Sales and marketing 1,498,470 6,044,762 1,925,180
General and administrative 1,387,200 4,244,557 2,947,828
Depreciation and amortization 1,416,012 1,685,097 1,739,301
------------ ------------ ------------
Total 7,451,877 20,775,340 14,030,128
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,613,274) (2,656,310) 48,097
INTEREST INCOME (EXPENSE), NET 36,782 185,105 (670,035)
------------ ------------ ------------
LOSS BEFORE INCOME TAX (1,576,492) (2,471,205) (621,938)
INCOME TAX BENEFIT (EXPENSE) -- 7,787 (24,000)
------------ ------------ ------------
NET LOSS $ (1,576,492) $ (2,463,418) $ (645,938)
------------ ------------ ------------
NET LOSS PER COMMON SHARE:
BASIC $ (0.22) $ (0.45) $ (0.16)
============ ============ ============
DILUTED $ (0.22) $ (0.45) $ (0.16)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 7,009,211 5,533,670 3,914,856
============ ============ ============
DILUTED 7,009,211 5,533,670 3,914,856
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 59
INTERNET AMERICA, INC. AND SUBSIDIARIES
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
Issuance of common stock (Unaudited) -- -- 149,509 1,495 281,786
Net loss (Unaudited) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, September 30, 1999 (Unaudited) -- $ -- 7,062,439 $ 70,625 $ 24,512,851
============ ============ ============ ============ ============
<CAPTION>
TREASURY STOCK
---------------------------- ACCUMULATED
SHARES AMOUNT DEFICIT
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, JULY 1, 1997 28,125 $ (12,500) $ (9,566,129)
Purchase of stock options -- -- --
Cancellation of treasury stock (28,125) 12,500 --
Net loss -- -- (645,938)
------------ ------------ ------------
BALANCE, JUNE 30, 1998 -- -- (10,212,067)
Conversion of preferred stock -- -- --
Issuance of common stock:
For initial public offering, net proceeds -- -- --
Other -- -- --
Contribution of capital in exchange for note payable -- -- --
Net loss -- -- (2,463,418)
------------ ------------ ------------
Balance, June 30, 1999 -- -- (12,675,485)
Issuance of common stock (Unaudited) -- -- --
Net loss (Unaudited) -- -- (1,576,492)
------------ ------------ ------------
BALANCE, September 30, 1999 (Unaudited) -- $ -- $(14,251,977)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 60
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
THREE MONTHS ENDED JUNE 30,
SEPTEMBER 30, ----------------------------
1999 1999 1998
------------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,576,492) $ (2,463,418) $ (645,938)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,416,012 1,685,097 1,739,301
Changes in operating assets and liabilities:
Accounts receivable (89,235) (858,500) (152,529)
Prepaid expenses and other current assets (7,064) (114,905) 32,432
Other assets 6,068 (126,580) 21,511
Accounts payable and accrued liabilities (212,213) 1,360,104 (198,356)
Deferred revenue (454,155) (140,836) 1,228,363
------------ ------------ ------------
Net cash provided by (used in) operating activities (917,079) (659,038) 2,024,784
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (147,722) (3,395,765) (846,725)
Purchases of subscribers (1,576,103) (7,970,442) (50,000)
------------ ------------ ------------
Net cash used in investing activities (1,723,825) (11,366,207) (896,725)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common equity 273,014 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 (7,691) (359,119) (436,850)
Principal payments of long-term debt (166,034) (1,171,377) (295,679)
Payments on line of credit -- (225,000) (18,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 99,289 17,252,517 (531,343)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (2,541,615) 5,227,272 596,716
CASH AND CASH EQUIVALENTS, beginning of period 5,845,562 618,290 21,574
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,303,947 $ 5,845,562 $ 618,290
============ ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 12,350 $ 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> 61
INTERNET AMERICA, INC. AND SUBSIDIARIES
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
F-7
<PAGE> 62
INTERNET AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are recorded at the lesser of the present value of aggregate future minimum
lease payments, including recorded at the lesser of the present value of
aggregate future minimum lease payments, including 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.
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> 63
INTERNET AMERICA, INC. AND SUBSIDIARIES
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.
2. 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> 64
INTERNET AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG -TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Notepayable 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> 65
INTERNET AMERICA, INC. AND SUBSIDIARIES
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.
F-11
<PAGE> 66
INTERNET AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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> 67
INTERNET AMERICA, INC. AND SUBSIDIARIES
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.
F-13
<PAGE> 68
INTERNET AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-14
<PAGE> 69
INTERNET AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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 November 22, 1999, the Company acquired all of the outstanding shares
of PDQ.net, Inc., a Houston-based ISP ("PDQ"), in exchange for 2,425,000 shares
of its common stock. The Company also issued options to purchase 352,917 shares
of the Company's common stock with a weighted average exercise price of $1.62
per share in replacement of all of the outstanding stock options of PDQ.Net,
Inc. The value of the transaction was approximately $30 million based on the
November 22, 1999 closing price for the Company's common stock, adjusted to
reflect restrictions on the transfer of certain shares. The acquisition is
expected to be accounted for as a purchase transaction.
F-15
<PAGE> 70
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-16
<PAGE> 71
PDQ.NET, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------------
1999 1998 1997
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 366,445 $ 1,108,364 $ 59,996
Accounts receivable 266,836 9,234 1,457
------------- ------------- -------------
Total current assets 633,281 1,117,598 61,453
PROPERTY AND EQUIPMENT - net 795,288 386,540 154,429
OTHER ASSETS:
Prepaid expenses and deposits 177,282 92,771 19,526
Identifiable intangibles 258,999 - -
Goodwill, net 22,130 17,333 18,667
------------- ------------- -------------
Total other assets 458,411 110,104 38,193
------------- ------------- -------------
$ 1,886,980 $ 1,614,242 $ 254,075
============= ============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 745,714 $ 336,462 $ 158,354
Current maturities of long-term debt 59,474 20,888 13,079
Current maturities of capital lease obligations 95,946 65,709 -
Deferred revenue 1,688,736 1,178,639 573,032
------------- ------------- -------------
Total current liabilities 2,589,870 1,601,698 744,465
LONG-TERM DEBT, net of current portion 50,074 30,417 23,932
CAPITAL LEASE OBLIGATIONS, net of current portion 94,222 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 (3,205,214) (2,019,892) (1,350,546)
------------- ------------- -------------
Total stockholders' deficit (847,186) (74,072) (514,322)
------------- ------------- -------------
$ 1,886,980 $ 1,614,242 $ 254,075
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE> 72
PDQ.NET, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1998 1997
------------------ ---------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues
Consumer connectivity $ 5,061,451 $ 2,867,892 $ 4,337,921 $1,081,902
Business connectivity 1,493,284 106,657 185,906 197,386
Other 42,698 - - -
------------------ ---------------- ----------------- -----------------
6,597,433 2,974,549 4,523,827 1,279,288
------------------ ---------------- ----------------- -----------------
Operating costs and expenses
Connectivity and operations 3,800,287 1,690,242 2,490,665 1,012,798
Sales and marketing 1,507,308 796,066 1,180,252 820,661
General and administrative 2,124,907 996,836 1,390,051 775,525
Depreciation and amortization 322,086 65,658 113,896 27,337
------------------ ---------------- ----------------- -----------------
7,754,588 3,548,802 5,174,864 2,636,321
------------------ ---------------- ----------------- -----------------
Operating loss (1,157,155) (574,253) (651,037) (1,357,033)
Interest expense (28,167) (11,732) (18,309) -
------------------ ---------------- ----------------- -----------------
Net loss $(1,185,322) $ (585,985) $ (669,346) $(1,357,033)
================== ================ ================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE> 73
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) - - - (1,185,322) (1,185,322)
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1999 (Unaudited) $ - $ 65,180 $ 2,292,848 $(3,205,214) $ (847,186)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE> 74
PDQ.NET, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30, Year Ended December 31,
-------------------------- --------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,185,322) $ (585,985) $ (669,346) $(1,357,033)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 322,086 65,658 113,896 27,337
Bad debt expense 37,744 - - -
Changes in operating assets and liabilities, net of the
effects resulting from the acquisitions in 1997 and 1999
Increase in accounts receivable (42,540) (5,458) (7,777) (1,457)
Increase in prepaid expenses and deposits (80,986) (64,137) (73,245) (19,526)
Increase in accounts payable and accrued liabilities 324,919 75,097 178,108 158,354
Decrease in bank overdraft - - - (7,466)
Increase in deferred revenue 412,610 539,893 605,607 573,032
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (211,489) 25,068 147,243 (626,759)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Net increase (decrease) in cash resulting from acquisition 16,305 - - (20,000)
Purchases of property and equipment (406,487) (104,081) (182,855) (128,453)
----------- ----------- ----------- -----------
Net cash used in investing activities (390,182) (104,081) (182,855) (148,453)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Long-term borrowings - - 28,760 -
Repayment of long-term debt (74,983) (10,256) (14,466) -
Payments of capital lease obligations (65,265) (16,080) (39,910) -
Proceeds from sale of common stock - 223,206 1,109,596 835,208
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities (140,248) 196,870 1,083,980 835,208
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (741,919) 117,857 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 $ 366,445 $ 177,853 $ 1,108,364 $ 59,996
=========== =========== =========== ===========
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under capital leases $ 133,525 $ 89,855 $ 161,818 $ -
Acquisitions of property plant and equipment with debt $ - $ 16,982 $ - $ 37,011
Issuance of common stock in connection with
Entech acquisition $ 412,208 $ - $ - $ -
Cash paid for interest $ 28,167 $ 11,732 $ 18,309 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE> 75
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.
F-21
<PAGE> 76
PDQ.NET, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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 nine months ended September 30, 1999
and September 30, 1998 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-22
<PAGE> 77
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>
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-23
<PAGE> 78
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-24
<PAGE> 79
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>
F-25
<PAGE> 80
PDQ.NET, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
On April 2, 1999, the Company acquired Entrepreneurial Technologies, Inc.
(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 4 years. The
results of operations of Entech will be included with the results of the Company
from April 2, 1999.
(UNAUDITED)
On November 22, 1999, Internet America, Inc. (IA) issued 2,425,000 shares
of its common stock in exchange for all of the outstanding stock of the Company.
IA also issued options to purchase 352,917 shares of IA common stock with a
weighted average exercise price of $1.62 per share in replacement of all of the
Company's outstanding stock options. The definitive agreement to acquire all of
the outstanding shares of the Company in a stock-for-stock transaction was
previously announced on September 13, 1999 and was approved by the Company's and
IA's shareholders. The value of the transaction was approximately $30 million
based upon the closing price for IA's common stock on November 22, 1999,
adjusted to reflect restrictions on the transfer of certain shares. The
transaction is expected to be accounted for as a purchase.
F-26
<PAGE> 81
INTERNET AMERICA, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited condensed pro forma balance sheet as of September 30,
1999 and the unaudited condensed pro forma statements of operations for the year
ended June 30, 1999 and the three months ended September 30, 1999 reflect the
acquisition of PDQ.Net, Inc. by Internet America, Inc. (the "Company"). On
November 22, 1999, the Company acquired all of the outstanding common stock of
PDQ.Net, Inc. in exchange for 2,425,000 shares of the Company's common stock.
The Company also issued options to purchase 352,917 shares of the Company's
common stock with a weighted average exercise price of $1.62 per share in
replacement of all of the outstanding stock options of PDQ.Net, Inc. The
transaction is valued at approximately $30 million based upon the November 22,
1999 closing price for the Company's common stock adjusted to reflect
restrictions on the transfer of certain shares. The combination will be
accounted for as a purchase under the provisions of Accounting Principles Board
Opinion No. 16, "Business Combinations." The assets and liabilities acquired
will be recorded at estimated fair values which, in the opinion of the Company's
management, approximate book value. The excess of the cost of the net assets
acquired over their fair value will be recorded as goodwill and amortized using
the straight-line method over an estimated life of three years. The results of
operations for the periods presented include the results of operations of the
acquired business assuming the transaction was consummated at the beginning of
the earliest periods presented.
The unaudited condensed pro forma financial statements are not necessarily
indicative of the Company's results of operations that might have occurred had
the acquisition been completed at the beginning of the periods presented, or
indicative of the Company's consolidated financial position or results of
operations for any future date or period.
These unaudited condensed pro forma financial statements should be read in
conjunction with the historical financial statements and notes thereto of
PDQ.Net, Inc. included elsewhere in this document and the consolidated financial
statements of Internet America, Inc. subsidiaries as filed previously under Form
10-KSB.
F-27
<PAGE> 82
INTERNET AMERICA, INC.
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS
-------------------------------------- ---------------- PRO FORMA
INTERNET INTERNET
AMERICA PDQ AMERICA
----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,303,947 $ 366,445 $ 3,670,392
Trade receivables, net 1,212,126 266,836 1,478,962
Prepaid expenses and other current assets 128,906 - 128,906
---------------- ---------------- ----------------
Total current assets 4,644,979 633,281 5,278,260
Property and equipment, net 2,311,849 795,288 3,107,137
Other assets, net 9,762,072 458,411 30,652,850 (1) 40,873,333
---------------- ---------------- ----------------
$ 16,718,900 $ 1,886,980 $ 49,258,730
================ ================ ================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Trade accounts payable $ 2,041,174 $ 468,479 $ 2,509,653
Accrued liabilities 884,161 277,235 780,000 (2) 1,941,396
Deferred revenue 2,907,039 1,688,736 4,595,775
Current maturities of long-term debt 213,087 59,474 272,561
Current maturities of capital lease obligations 48,750 95,946 144,696
---------------- ---------------- ----------------
Total current liabilities 6,094,211 2,589,870 9,464,081
Capital lease obligations, net of current
portion 87,000 94,222 300,412
Long-term debt, net of current portion 206,190 50,074 137,074
---------------- ---------------- ----------------
Total liabilities 6,387,401 2,734,166 9,901,567
---------------- ---------------- ----------------
Shareholders' equity (deficit):
Common stock 70,625 65,180 24,250 (3) 160,055
Additional paid-in capital 24,512,851 2,292,848 29,848,600 (3) 56,654,299
Accumulated deficit (14,251,977) (3,205,214) (17,457,191)
---------------- ---------------- ----------------
Total shareholders' equity (deficit) 10,331,499 (847,186) 39,357,163
---------------- ---------------- ----------------
$ 16,718,900 $ 1,886,980 $ 49,258,730
================ ================ ================
</TABLE>
F-28
<PAGE> 83
INTERNET AMERICA, INC.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS
---------------------------------- ----------------- PRO FORMA
INTERNET INTERNET
AMERICA PDQ AMERICA
----------------- --------------- -----------------
<S> <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 10,217,617 (4) 12,176,827
----------------- --------------- -----------------
Total 20,775,340 7,650,620 38,643,577
----------------- --------------- -----------------
Operating loss (2,656,310) (749,925) (13,623,852)
Interest income (expense), net 185,105 (29,523) 155,582
----------------- --------------- -----------------
Loss before income tax (2,471,205) (779,448) (13,468,270)
Income tax benefit 7,787 - 7,787
----------------- --------------- -----------------
Net loss $ (2,463,418) $ (779,448) $ (13,460,483)
================= =============== =================
Net loss per common share:
Basic $ (0.45) $ (1.69)
================= =================
Diluted $ (0.45) $ (1.69)
================= =================
Weighted average common
shares outstanding
Basic 5,533,670 2,425,000 (3) 7,958,670
Diluted 5,533,670 2,425,000 (3) 7,958,670
</TABLE>
F-29
<PAGE> 84
INTERNET AMERICA, INC.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS
---------------------------------- ----------------- PRO FORMA
INTERNET INTERNET
AMERICA PDQ AMERICA
----------------- --------------- -----------------
<S> <C> <C> <C>
Revenues
Access $ 4,715,164 $ 1,752,118 $ 6,467,282
Business services 916,831 735,682 1,652,513
Other 206,608 32,200 238,808
----------------- --------------- -----------------
Total 5,838,603 2,520,000 8,358,603
----------------- --------------- -----------------
Operating Costs and Expenses
Connectivity and operations 3,150,195 1,502,601 4,652,796
Sales and marketing 1,498,470 489,399 1,987,869
General and administrative 1,387,200 973,443 2,360,643
Depreciation and amortization 1,416,012 140,194 2,554,404 (4) 4,110,610
----------------- --------------- -----------------
Total 7,451,877 3,105,637 13,111,918
----------------- --------------- -----------------
Operating loss (1,613,274) (585,637) (4,753,315)
Interest income (expense), net 36,782 (15,149) 21,633
----------------- --------------- -----------------
Loss before income tax (1,576,492) (600,786) (4,731,682)
Income tax benefit - - -
----------------- --------------- -----------------
Net loss $ (1,576,492) $ (600,786) $ (4,731,682)
================= =============== =================
Net loss per common share:
Basic $ (0.22) $ (0.50)
================= =================
Diluted $ (0.22) $ (0.50)
================= =================
Weighted average common
shares outstanding
Basic 7,009,211 2,425,000 (3) 9,434,211
Diluted 7,009,211 2,425,000 (3) 9,434,211
</TABLE>
F-30
<PAGE> 85
INTERNET AMERICA, INC.
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS
(1) Represents goodwill associated with the purchase of PDQ.Net, Inc.
(2) Represents finder's fee, professional fees, and other costs associated
with the acquisition incurred subsequent to September 30, 1999.
(3) Represents the effect of Internet America common stock issued for the
purchase of PDQ.Net, Inc.
(4) Represents the amortization of goodwill for the indicated period
calculated using the straight-line method over an estimated life of three
years.
F-31
<PAGE> 86
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT MADE IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY INTERNET AMERICA OR THE SELLING SHAREHOLDERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY OF THE COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF INTERNET
AMERICA SINCE SUCH DATE.
- ---------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary................................................................................................3
Risk Factors......................................................................................................6
Use of Proceeds..................................................................................................16
Dividend Policy..................................................................................................16
Price Range of Common Stock .....................................................................................16
Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................................................17
Business ........................................................................................................26
Management.......................................................................................................35
Certain Relationships and Related Transactions ..................................................................42
Principal and Selling Shareholders...............................................................................44
Description of Securities........................................................................................47
Limitation on Liability and Indemnification Matters..............................................................49
Plan of Distribution.............................................................................................50
Legal Matters....................................................................................................50
Experts ........................................................................................................51
Where You Can Find More Information..............................................................................51
Glossary of Technical Terms......................................................................................52
Index to Financial Statements...................................................................................F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
350,000 SHARES
INTERNET AMERICA LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
______________, 2000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation, as amended (the "Articles"), of the
Registrant provide that to the fullest extent permitted by applicable law, a
director of the Registrant will not be liable to the Registrant or its
shareholders for monetary damages for an act or omission in the director's
capacity as a director. The Registrant has also entered into an agreement with
each of its directors and officers wherein it has agreed to indemnify each of
them to the fullest extent permitted by law.
The Texas Business Corporation Act ("TBCA") permits the indemnification
of directors, employees, officers and agents to Texas corporations. The
Registrant's Articles and Bylaws, as amended (the "Bylaws"), provide that the
Registrant shall indemnify any person to the fullest extent permitted by law.
Under the TBCA, an officer or director may be indemnified if he acted in good
faith and reasonably believed that his conduct (i) was in the best interests of
the Registrant if he acted in his official capacity or (ii) was not opposed to
the best interests of the Registrant in all other cases. In addition, the
indemnitee may not have reasonable cause to believe that his conduct was
unlawful in the case of a criminal proceeding. In any case, the indemnitee may
not have been found liable to the Registrant for improperly receiving a personal
benefit or for willful or intentional misconduct in the performance of his duty
to the Registrant. The Registrant (i) must indemnify an officer or director for
reasonable expenses if he is successful, (ii) may indemnify an officer or
director for such reasonable expenses unless he was found liable for willful or
intentional misconduct in the performance of his duty to the Registrant and
(iii) may advance reasonable defense expenses if the officer or director
undertakes to reimburse the Registrant if he is later found not to satisfy the
standard for indemnification expenses. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. This
provision in the Articles does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of nonmonetary relief would remain available under Texas law. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this registration statement will be as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee $ 999.08
Nasdaq listing fee 7,000.00
Printing and engraving expenses 10,000.00
Accounting fees and expenses 10,000.00
Legal fees and expenses 10,000.00
Fees and expenses (including legal fees) for qualification under state securities laws 0
Registrar and Transfer Agent's fees and expenses 0
Miscellaneous 5,000.00
---------------
TOTAL 42,999.08
===============
</TABLE>
* All amounts except the Securities and Exchange Commission registration
fee and the Nasdaq listing fee are estimated.
The Selling Shareholders will pay any selling commissions from the sales
of the Common Stock, and the Company is paying all of the registration expenses
related to the offer and sale of Common Stock offered by the Selling
Shareholders.
II-1
<PAGE> 88
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
From July to October 1996, the Company issued 575,822 shares of its
Common Stock to ten sophisticated investors at prices ranging from $0.57 to
$1.67 per share in separate transactions for aggregate proceeds of $671,135
cash. The shares were issued in reliance on the exemption from registration
under section 4(2) of the Securities Act.
During June 1996, the Registrant issued 1,125 shares of Common Stock in
exchange for services valued at $3,750 provided by an officer of the Registrant.
The shares were issued to the officer, a sophisticated investor, in reliance on
the exemption from registration under section 4(2) of the Securities Act.
In a private offering completed in June 1996 and exempt under Regulation
D, the Registrant sold 73,667 shares of Series B Preferred Stock at $7.50 per
share, for aggregate proceeds of $552,503 cash. The shares were sold to a total
of three institutional and individual investors that qualify as "accredited
investors" under the federal securities laws. The Registrant did not engage any
brokers to act as placement agents, and the private offering was made on a best
efforts basis. The shares sold by the Registrant in the private offering were
sold in reliance on the exemption from registration under the Securities Act
provided by Rule 506 of Regulation D promulgated thereunder.
On September 25, 1996, the Registrant entered into a Securities Purchase
Agreement with First Computer Services Corporation, pursuant to which the
Registrant issued 544,149 shares of Common Stock to First Computer Services
Corporation at a price equal to approximately $0.43 per share, for aggregate
proceeds of $233,984 cash. The shares were issued to First Computer Services
Corporation, a sophisticated investor, in reliance on the exemption from
registration under section 4(2) of the Securities Act.
During fiscal 1997, the Registrant also issued 15,001 shares of Common
Stock in exchange for services valued at $6,667 provided by one of the employees
of the Registrant. The shares were issued to the employee, a sophisticated
investor, in reliance on the exemption from registration under section 4(2) of
the Securities Act.
During fiscal 1996, options to purchase 45,000 shares of Common Stock
were granted to two directors of the Registrant at an exercise price of $1.67
per share. Also in 1996, an option to purchase 22,500 shares of Common Stock was
granted to a director of the Registrant at an exercise price of $3.33 per share.
The Board of Directors adjusted the exercise price of this option to $1.67 per
share in March 1998. In addition to the above, in October 1996, an option to
purchase 67,500 shares of Common Stock at an exercise price of $3.33 per share
was granted to an officer of the Registrant. The Board of Directors adjusted the
exercise price of this option to $1.67 per share in March 1998. Additionally, in
March 1998, 393,750 options to purchase shares of Common Stock were granted to
certain officers and employees of the Company at an exercise price of $1.67 per
share. Certain of these options were subsequently registered by the Registrant
on Form S-8.
During October 1996, 215,026 nonqualified stock options were granted to
certain founders of the Registrant in connection with such founders' pledge of
their stock of the Registrant to guarantee a bridge loan. The Registrant had
1,381,651 nonqualified options outstanding as of March 31,1998 to certain of its
officers, employees and advisors. These options are exercisable at prices
ranging from $0.09 per share of Common Stock to $3.33 per share of Common Stock.
Certain of these options were subsequently registered by the Registrant on Form
S-8.
In July 1998, a nonqualified option to purchase 22,500 shares of Common
Stock was granted to a director at an exercise price of $8.00 per share of
Common Stock pursuant to the Registrant's 1998 Nonqualified Stock Option Plan.
These options were subsequently registered by the Registrant on Form S-8.
On July 13, 1998, the Registrant's Board authorized a 2.25-for-1.00 stock
split of Common Stock effected in the form of a dividend. The stock split was
effected on July 13, 1998.
II-2
<PAGE> 89
In December 1998 and pursuant to the Registrant's 1998 Nonqualified Stock
Option Plan, the Registrant granted certain options to purchase a total of
86,500 shares of Common Stock to certain directors and employees at an exercise
price of $13.00 per share of Common Stock. These options were subsequently
registered by the Registrant on Form S-8.
On January 29, 1999, the Registrant issued 16,910 shares of Common Stock
to CompuNet, Inc. in connection with the Registrant's acquisition of the net
assets of CompuNet, Inc. The shares were issued in reliance on the exemption
from registration under the Securities Act provided by Rule 506 of Regulation D
promulgated thereunder. These shares were subsequently registered on Form SB-2.
On February 18, 1999, the Registrant issued 365,725 shares of Common
Stock to the security holders of CyberRamp, L.L.C. in connection with the
Registrant's acquisition of all of the outstanding securities of CyberRamp,
L.L.C. The shares were issued in reliance on the exemption from registration
under the Securities Act provided by Rule 506 of Regulation D promulgated
thereunder. Theses shares were subsequently registered on Form SB-2.
On April 20, 1999 and pursuant to the Registrant's 1998 Nonqualified
Stock Option Plan, the Registrant granted a nonqualified option to purchase
75,000 shares of Common Stock to a director at an exercise price of $25.00 per
share. These options were subsequently registered by the Registrant on Form S-8.
On November 22, 1999, the Registrant issued 2,425,000 shares of Common
Stock to the security holders of PDQ.Net, Incorporated ("PDQ") in connection
with the Registrant's acquisition of all of the outstanding securities of PDQ.
The shares were issued in reliance on the exemption from registration under the
Securities Act provided by Rule 506 of Regulation D promulgated thereunder.
350,000 of these shares are being registered on this Form SB-2. Also on November
22, 1999, in connection with the acquisition of PDQ.Net and pursuant to the
Registrant's Employee and Consultant Stock Option Plan, the Registrant granted
certain options to purchase a total of 260,063 shares of Common Stock to certain
current and former employees of PDQ as follows: options to purchase 61,388
shares of Common Stock were issued at an exercise price of $1.23 per share,
options to purchase 39,065 shares of Common Stock were issued at an exercise
price of $1.12 per share, options to purchase 110,871 shares of Common Stock
were issued at an exercise price of $1.48 per share and options to purchase
48,739 shares of Common Stock were issued at an exercise price of $2.69 per
share. These options were subsequently registered by the Registrant on Form S-8.
Unless otherwise indicated, the issuance of the securities described
above was effected without the involvement of an underwriter.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.1 Securities Purchase Agreement dated September 25,
1996 by and among First Computer Services
Corporation and Internet America, Inc.(1)
2.2 Asset Purchase Agreement dated July 31, 1996 by and
between Internet America, Inc. and Webstar, Inc.(1)
2.3 Asset Purchase Agreement dated November 26, 1997 by
and between Internet America, Inc. and Why?
Telecommunications, Inc.(1)
2.4 Asset Purchase Agreement dated as of January 29,
1999 by and among CompuNet, Inc., William Thompson,
Internet America, Inc. and GEEK Assets, Inc.(2)
</TABLE>
II-3
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.5 Securities Purchase Agreement dated as of February
18, 1999 by and among CyberRamp, L.L.C., its
Members and Internet America, Inc.(3)
2.6 Agreement and Plan of Merger dated as of June 30,
1999 by and among Internet America, Inc.,
GEEK Houston, Inc. NeoSoft, Inc. and certain of the
shareholders of NeoSoft, Inc.(4)
2.7 Agreement and Plan of Merger dated as of September
12, 1999 by and among Internet America, Inc.,
GEEK Houston II, Inc., PDQ.Net, Incorporated and
certain of the shareholder of PDQ.Net,
Incorporated(5)
3.1 Internet America, Inc.'s Articles of Incorporation,
as amended(1)
3.2 Internet America, Inc.'s Bylaws, as amended(6)
4.1 Specimen Common Stock certificate(1)
4.2 Pages from the Articles and Bylaws that define the
rights of holders of Common Stock*
5.1 Opinion of Jackson Walker L.L.P.*
10.1 Network Services Agreement dated August 25, 1997 by
and between Internet America, Inc. and Golden
Harbor of Texas, Inc.(1)
10.2 Consulting Agreement dated April 20, 1999 by and
between Internet America, Inc. and Gary L.
Corona(7)
10.3 Financial Advisory Agreement dated April 20, 1999
by and among Carl Westcott LLC and Internet
America, Inc.(7)
11.1 Statement regarding computation of per shares
earnings(8)
16.1 Letter on change in certifying accountant(1)
21.1 Subsidiary List*
23.1 Consent of Jackson Walker L.L.P. (included in its
opinion filed as Exhibit 5.1)*
23.2 Consent of Deloitte & Touche LLP*
23.3 Consent of Grant Thornton, LLP*
24.1 Reference is made to the Signatures section of this
Registration Statement for the Power of Attorney
contained therein
</TABLE>
----------------------
* Filed herewith.
(1) Previously filed as an exhibit to Internet America's Registration
Statement on Form SB-2, as amended (file no. 333-59527) initially
filed on July 21, 1998, and incorporated herein by reference.
(2) Previously filed as an exhibit to Internet America's Current
Report on Form 8-K, as amended, filed on February 16, 1999, and
incorporated herein by reference.
II-4
<PAGE> 91
(3) Previously filed as an exhibit to Internet America's Current
Report on Form 8-K, as amended, filed on March 1, 1999, and
incorporated herein by reference.
(4) Previously filed as an exhibit to Internet America's Current
Report on Form 8-K, as amended, filed on July 15, 1999, and
incorporated hereby by reference.
(5) Previously filed as Exhibit A to the preliminary proxy statement
and definitive proxy statement filed on October 7, 1999 and
October 19, 1999, respectively, and incorporated herein by
reference.
(6) Previously filed as an exhibit to Internet America's Registration
Statement on Form SB-2, as amended (file no. 333-59527) initially
filed on July 21, 1998, and Quarterly Report on Form 10-QSB filed
on November 15, 1999, and incorporated herein by reference.
(7) Previously filed as an exhibit to Internet America's Registration
Statement on Form SB-2, as amended (file no. 333-78615) filed on
May 17, 1999, and incorporated herein by reference.
(8) Statement omitted because not applicable or because the required
information is contained in the Financial Statements or Notes
thereto.
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer
or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
II-5
<PAGE> 92
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Dallas,
State of Texas, on January 21, 2000.
INTERNET AMERICA, INC.
By: /s/ MICHAEL T. MAPLES
------------------------------
Michael T. Maples
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Michael T. Maples and James T. Chaney his
true and lawful attorneys-in-fact, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments, including any
post-effective amendments, to this registration statement, and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes, each acting alone, may lawfully do
or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, the
registration statement was signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ MICHAEL T. MAPLES Chief Executive Officer, President and January 21, 2000
- ------------------------ Director (Principal Executive Officer)
Michael T. Maples
Chief Financial Officer, Vice President,
/s/ JAMES T. CHANEY Secretary and Treasurer (Principal Financial January 21, 2000
- ------------------------ and Accounting Officer)
James T. Chaney
/s/ WILLIAM O. HUNT
- ------------------------ Chairman of the Board January 21, 2000
William O. Hunt
/s/ JACK T. SMITH
- ------------------------ Director January 21, 2000
Jack T. Smith
/s/ GARY L. CORONA
- ------------------------ Director January 21, 2000
Gary L. Corona
/s/ WILLIAM E. LADIN, JR.
- ------------------------- Vice Chairman of the Board January 21, 2000
William E. Ladin, Jr.
</TABLE>
II-6
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.1 Securities Purchase Agreement dated September 25,
1996 by and among First Computer Services
Corporation and Internet America, Inc.(1)
2.2 Asset Purchase Agreement dated July 31, 1996 by and
between Internet America, Inc. and Webstar, Inc.(1)
2.3 Asset Purchase Agreement dated November 26, 1997 by
and between Internet America, Inc. and Why?
Telecommunications, Inc.(1)
2.4 Asset Purchase Agreement dated as of January 29,
1999 by and among CompuNet, Inc., William Thompson,
Internet America, Inc. and GEEK Assets, Inc.(2)
2.5 Securities Purchase Agreement dated as of February
18, 1999 by and among CyberRamp, L.L.C., its
Members and Internet America, Inc.(3)
2.6 Agreement and Plan of Merger dated as of June 30,
1999 by and among Internet America, Inc.,
GEEK Houston, Inc. NeoSoft, Inc. and certain of the
shareholders of NeoSoft, Inc.(4)
2.7 Agreement and Plan of Merger dated as of September
12, 1999 by and among
Internet America, Inc., GEEK Houston II, Inc.,
PDQ.Net, Incorporated and certain of the
shareholder of PDQ.Net, Incorporated(5)
3.1 Internet America, Inc.'s Articles of Incorporation,
as amended(1)
3.2 Internet America, Inc.'s Bylaws, as amended(6)
4.1 Specimen Common Stock certificate(1)
4.2 Pages from the Articles and Bylaws that define the
rights of holders of Common Stock*
5.1 Opinion of Jackson Walker L.L.P.*
10.1 Network Services Agreement dated August 25, 1997 by
and between Internet America, Inc. and Golden
Harbor of Texas, Inc.(1)
10.2 Consulting Agreement dated April 20, 1999 by and
between Internet America, Inc. and Gary L.
Corona(7)
10.3 Financial Advisory Agreement dated April 20, 1999
by and among Carl Westcott LLC and Internet
America, Inc.(7)
11.1 Statement regarding computation of per shares
earnings(8)
16.1 Letter on change in certifying accountant(1)
21.1 Subsidiary List*
23.1 Consent of Jackson Walker L.L.P. (included in its
opinion filed as Exhibit 5.1)*
23.2 Consent of Deloitte & Touche LLP*
23.3 Consent of Grant Thornton, LLP*
24.1 Reference is made to the Signatures section of this
Registration Statement for the Power of Attorney
contained therein
</TABLE>
II-7
<PAGE> 94
----------------------
* Filed herewith.
(1) Previously filed as an exhibit to Internet America's Registration
Statement on Form SB-2, as amended (file no. 333-59527) initially
filed on July 21, 1998, and incorporated herein by reference.
(2) Previously filed as an exhibit to Internet America's Current
Report on Form 8-K, as amended, filed on February 16, 1999, and
incorporated herein by reference.
(3) Previously filed as an exhibit to Internet America's Current
Report on Form 8-K, as amended, filed on March 1, 1999, and
incorporated herein by reference.
(4) Previously filed as an exhibit to Internet America's Current
Report on Form 8-K, as amended, filed on July 15, 1999, and
incorporated hereby by reference.
(5) Previously filed as Exhibit A to the preliminary proxy statement
and definitive proxy statement filed on October 7, 1999 and
October 19, 1999, respectively, and incorporated herein by
reference.
(6) Previously filed as an exhibit to Internet America's Registration
Statement on Form SB-2, as amended (file no. 333-59527) initially
filed on July 21, 1998, and Quarterly Report on Form 10-QSB filed
on November 15, 1999, and incorporated herein by reference.
(7) Previously filed as an exhibit to Internet America's Registration
Statement on Form SB-2, as amended (file no. 333-78615) filed on
May 17, 1999, and incorporated herein by reference.
(8) Statement omitted because not applicable or because the required
information is contained in the Financial Statements or Notes
thereto.
II-8
<PAGE> 1
EXHIBIT 4.2
Pages from the Articles of Incorporation, as amended, defining the rights of
holders of Common Stock:
ARTICLE FOUR
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is forty-five million (45,000,000), of
which (a) forty million (40,000,000) shares shall be designated as Common Stock,
par value $.01 per share, and (b) five million (5,000,000) shares shall be
designated as Preferred Stock, par value $.01 per share.
The following is a statement of the designations, preferences,
limitations, and relative rights, including voting rights, in respect of the
classes of stock of the Corporation and of the authority with respect thereto
expressly vested in the Board of Directors of the Corporation:
COMMON STOCK
(1) Each share of Common Stock of the Corporation shall have identical
rights and privileges in every respect. The holders of shares of Common Stock
shall be entitled to vote upon all matters submitted to a vote of the
shareholders of the Corporation and shall be entitled to one vote for each share
of Common Stock held.
(2) Subject to the prior rights and preferences, if any, applicable to
shares of the Preferred Stock or any series thereof, the holders of shares of
the Common Stock shall be entitled to receive such dividends (payable in cash,
stock, or otherwise) as may be declared thereon by the Board of Directors at any
time and from time to time out of any funds of the Corporation legally available
therefor.
(3) In the event of any voluntary or involuntary liquidation,
dissolution, or winding-up of the Corporation, after distribution in full of the
preferential amounts, if any, to be distributed to the holders of shares of the
Preferred Stock or any series thereof, the holders of shares of the Common Stock
shall be entitled to receive all of the remaining assets of the Corporation
available for distribution to its shareholders, ratably in proportion to the
number of shares of the Common Stock held by them. A liquidation, dissolution,
or winding-up of the Corporation, as such terms are used in this Paragraph (3),
shall not be deemed to be occasioned by or to include any merger of the
Corporation with or into one or more corporations or other entities, any
acquisition or exchange of the outstanding shares of one or more classes or
series of the Corporation, or any sale, lease, exchange, or other disposition of
all or a part of the assets of the Corporation.
PREFERRED STOCK
(1) Shares of the Preferred Stock may be issued from time to time in
one or more series, the shares of each series to have such designations,
preferences, limitations, and relative rights,
<PAGE> 2
including voting rights, as shall be stated and expressed herein or in a
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation. Each such series of Preferred Stock shall
be designated so as to distinguish the shares thereof from the shares of all
other series and classes. The Board of Directors of the Corporation is hereby
expressly authorized, subject to the limitations provided by law, to establish
and designate series of the Preferred Stock, to fix the number of shares
constituting each series, and to fix the designations and the preferences,
limitations, and relative rights, including voting rights, of the shares of each
series and the variations of the relative rights and preferences as between
series, and to increase and to decrease the number of shares constituting each
series, provided that the Board of Directors may not decrease the number of
shares within a series to less than the number of shares within such series that
are then issued. The relative powers, rights, preferences, and limitations may
vary between and among series of Preferred Stock in any and all respects so long
as all shares of the same series are identical in all respects, except that
shares of any such series issued at different times may have different dates
from which dividends thereon cumulate. The authority of the Board of Directors
of the Corporation with respect to each series shall include, but shall not be
limited to, the authority to determine the following:
(a) The designation of such series;
(b) The number of shares initially constituting such
series;
(c) The rate or rates and the times at which dividends on
the shares of such series shall be paid, the periods
in respect of which dividends are payable, the
conditions upon such dividends, the relationship and
preferences, if any, of such dividends to dividends
payable on any other class or series of shares,
whether or not such dividends shall be cumulative,
partially cumulative, or noncumulative, if such
dividends shall be cumulative or partially
cumulative, the date or dates from and after which,
and the amounts in which, they shall accumulate,
whether such dividends shall be share dividends, cash
or other dividends, or any combination thereof, and
if such dividends shall include share dividends,
whether such share dividends shall be payable in
shares of the same or any other class or series of
shares of the Corporation (whether now or hereafter
authorized), or any combination thereof and the other
terms and conditions, if any, applicable to dividends
on shares of such series. The Board of Directors of
the Corporation is hereby expressly empowered,
subject to the limitations provided by law, to
authorize the Corporation to pay share dividends on
any class or series of capital stock of the
Corporation (whether now or hereafter authorized)
payable in shares of the same or any other class or
series of capital stock of the Corporation (whether
now or hereafter authorized) or any combination
thereof;
(d) Whether or not the shares of such series shall be
redeemable or subject to repurchase at the option of
the Corporation or the holder thereof or upon the
happening of a specified event, if such shares shall
be redeemable, the terms and conditions of such
redemption, including but not limited to the date or
<PAGE> 3
dates upon or after which such shares shall be
redeemable, the amount per share which shall be
payable upon such redemption, which amount may vary
under different conditions and at different
redemption dates, and whether such amount shall be
payable in cash, property, or rights, including
securities of the Corporation or another corporation;
(e) The rights of the holders of shares of such series
(which may vary depending upon the circumstances or
nature of such liquidation, dissolution, or winding
up) in the event of the voluntary or involuntary
liquidation, dissolution, or winding up of the
Corporation and the relationship or preference, if
any, of such rights to rights of holders of stock of
any other class or series. A liquidation,
dissolution, or winding up of the Corporation, as
such terms are used in this subparagraph (e), shall
not be deemed to be occasioned by or to include any
merger of the Corporation with or into one or more
corporations or other entities, any acquisition or
exchange of the outstanding shares of one or more
classes or series of the Corporation, or any sale,
lease, exchange, or other disposition of all or a
part of the assets of the Corporation;
(f) Whether or not the shares of such series shall have
voting powers and, if such shares shall have such
voting powers, the terms and conditions thereof,
including, but not limited to, the right of the
holders of such shares to vote as a separate class
either alone or with the holders of shares of one or
more other classes or series of stock and the right
to have more (or less) than one vote per share;
provided, however, that the right to cumulate votes
for the election of directors is expressly denied and
prohibited;
(g) Whether or not a sinking fund shall be provided for
the redemption of the shares of such series and, if
such a sinking fund shall be provided, the terms and
conditions thereof;
(h) Whether or not a purchase fund shall be provided for
the shares of such series and, if such a purchase
fund shall be provided, the terms and conditions
thereof;
(i) Whether or not the shares of such series, at the
option of either the Corporation or the holder or
upon the happening of a specified event, shall be
convertible into stock of any other class or series
and, if such shares shall be so convertible, the
terms and conditions of conversion, including, but
not limited to, any provision for the adjustment of
the conversion rate or the conversion price;
(j) Whether or not the shares of such series, at the
option of either the Corporation or the holder or
upon the happening of a specified event, shall be
exchangeable for securities, indebtedness, or
property of the Corporation and, if such shares shall
be so exchangeable, the terms and conditions of
<PAGE> 4
exchange, including, but not limited to, any
provision for the adjustment of the exchange rate or
the exchange price; and
(k) Any other preferences, limitations, and relative
rights as shall not be inconsistent with the
provisions of this Article Four or the limitations
provided by law.
(2) Except as otherwise required by law or in any resolution of the
Board of Directors creating any series of Preferred Stock, the holders of shares
of Preferred Stock and all series thereof who are entitled to vote shall vote
together with the holders of shares of Common Stock, and not separately by
class.
ARTICLE FIVE
No holder of any shares of capital stock of the Corporation, whether
now or hereafter authorized, shall, as such holder, have any preemptive or
preferential right to receive, purchase, or subscribe to (a) any unissued or
treasury shares of any class of stock (whether now or hereafter authorized) of
the Corporation, (b) any obligations, evidences of indebtedness, or other
securities of the Corporation convertible into or exchangeable for, or carrying
or accompanied by any rights to receive, purchase, or subscribe to, any such
unissued or treasury shares, (c) any right of subscription to, any right to
receive, or any warrant or option for the purchase of, any of the foregoing
securities, or (d) any other securities that may he issued or sold by the
Corporation.
ARTICLE SEVEN
Cumulative voting for the election of directors is expressly denied and
prohibited.
ARTICLE NINE
Any action of the Corporation which, under the provisions of the Texas
Business Corporation Act or any other applicable law, is required to be
authorized or approved by the holders of any specified fraction which is in
excess of one-half or any specified percentage which is in excess of fifty
percent of the outstanding shares (or of any class or series thereof) of the
Corporation shall, notwithstanding any law, be deemed effectively and properly
authorized or approved if authorized or approved by the vote of the holders of
more than fifty percent of the outstanding shares entitled to vote thereon (or,
if the holders of any class or series of the Corporation's shares shall be
entitled by the Texas Business Corporation Act or any other applicable law to
vote thereon separately as a class, by the vote of the holders of more than
fifty percent of the outstanding shares of each such class or series). Without
limiting the generality of the foregoing, the foregoing provisions of this
Article Nine shall be applicable to any required shareholder authorization or
approval of: (a) any amendment to these articles of incorporation; (b) any plan
of merger, share exchange, or reorganization involving the Corporation; (c) any
sale, lease, exchange, or other disposition of all, or substantially all, the
property and assets of the Corporation; and (d) any voluntary dissolution of the
Corporation.
<PAGE> 5
Directors of the Corporation shall be elected by a plurality of the
votes cast by the holders of shares entitled to vote in the election of
directors of the Corporation at a meeting of shareholders at which a quorum is
present.
Except as otherwise provided in this Article Nine or as otherwise
required by the Texas Business Corporation Act or other applicable law, with
respect to any matter, the affirmative vote of the holders of a majority of the
Corporation's shares entitled to vote on, and voted for or against, that matter
at a meeting of shareholders at a meeting of shareholders at which a quorum is
present shall be the act of the shareholders.
Nothing contained in this Article Nine is intended to require
shareholder authorization or approval of any action of the Corporation
whatsoever unless such approval is specifically required by the other provisions
of these articles of incorporation, the bylaws of the Corporation, or by the
Texas Business Corporation Act or other applicable law.
Pages from the Bylaws, as amended, defining the rights of holders of Common
Stock:
ARTICLE TWO: SHAREHOLDERS
2.01 Annual Meetings. An annual meeting of shareholders of the
Corporation shall be held during each calendar year on such date and at such
time as shall be designated from time to time by the board of directors and
stated in the notice of the meeting, if not a legal holiday in the place where
the meeting is to be held, and, if a legal holiday in such place, then on the
next business day following, at the time specified in the notice of the meeting.
At such meeting, the shareholders shall elect directors and transact such other
business as may properly be brought before the meeting.
2.02 Special Meetings. A special meeting of the shareholders may be
called at any time by the president, board of directors, or the holders of not
less than fifty percent of all shares entitled to vote at such meeting. Only
business within the purpose or purposes described in the notice of special
meeting may be conducted at such special meeting.
2.03 Place of Meetings. The annual meeting of shareholders may be held
at any place within or without the State of Texas designated by the board of
directors. Special meetings of shareholders may be held at any place within or
without the State of Texas designated by the person or persons calling such
special meeting as provided in Section 2.02 above. Meetings of shareholders
shall be held at the principal office of the Corporation unless another place is
designated for meetings in the manner provided herein.
2.04 Notice. Except as otherwise provided by law, written or printed
notice stating the place, day, and hour of each meeting of the shareholders and,
in case of a special meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than ten nor more than sixty days before the
date of the meeting by or at the direction of the president, the secretary, or
the person calling the meeting, to each shareholder of record entitled to vote
at such meeting.
<PAGE> 6
Notice need not be given to a shareholder if (i) notice of two consecutive
annual meetings and all notices of meetings held during the period between those
annual meetings, if any, or (ii) all (but in no event less than two) payments
(if sent by first class mail) of distributions or interest on securities during
a 12-month period, have been mailed to that shareholder, addressed at his
address as shown on the share transfer records of the Corporation, and have been
returned undeliverable. Any action or meeting taken or held without notice to
such shareholder shall have the same force and effect as if the notice had been
duly given and, if the action taken by the Corporation is reflected in any
articles or document filed with the Texas Secretary of State, those articles or
that document may state that notice was duly given to all persons to whom notice
was required to be given. If such a shareholder delivers to the Corporation a
written notice setting forth his then current address, the requirement that
notice be given to that shareholder shall be reinstated.
2.05 Voting List. At least ten days before each meeting of
shareholders, the secretary shall prepare a complete list of shareholders
entitled to vote at such meeting, arranged in alphabetical order, including the
address of each shareholder and the number of voting shares held by each
shareholder. For a period of ten days prior to such meeting, such list shall be
kept on file at the registered office or principal place of business of the
Corporation and shall be subject to inspection by any shareholder during usual
business hours. Such list shall be produced at such meeting, and at all times
during such meeting shall be subject to inspection by any shareholder. The
original share transfer records shall be prima facie evidence as to who are the
shareholders entitled to examine such list or transfer records or to vote at any
meeting of shareholders.
2.06 Voting of Shares. Treasury shares, shares of the Corporation's own
stock owned by another corporation the majority of the voting stock of which is
owned or controlled by the Corporation, and shares of the Corporation's own
stock held by the Corporation in a fiduciary capacity shall not be shares
entitled to vote or to be counted in determining the total number of outstanding
shares. Shares standing in the name of another domestic or foreign corporation
of any type or kind may be voted by such officer, agent, or proxy as the bylaws
of such corporation may authorize or, in the absence of such authorization, as
the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him, either in
person or by proxy, without transfer of such shares into his name so long as
such shares form a part of the estate served by him and are in the possession of
such estate. Shares held by a trustee may be voted by him, either in person or
by proxy, only after the shares have been transferred into his name as trustee.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without transfer of such shares into his name if authority to do so is contained
in the court order by which such receiver was appointed. A shareholder whose
shares are pledged shall be entitled to vote such shares until they have been
transferred into the name of the pledgee, and thereafter, the pledgee shall be
entitled to vote such shares.
2.07 Quorum; Withdrawal of Quorum. A quorum shall be present at a
meeting of shareholders if the holders of a majority of the shares entitled to
vote are represented at the meeting in person or by proxy, except as otherwise
provided by law or the articles of incorporation. If a quorum shall not be
present at any meeting of shareholders, the shareholders represented in person
or by proxy at such meeting may adjourn the meeting until such time and to such
place as may be
<PAGE> 7
determined by a vote of the holders of a majority of the shares represented in
person or by proxy at that meeting. Once a quorum is present at a meeting of
shareholders, the shareholders represented in person or by proxy at the meeting
may conduct such business as may be properly brought before the meeting until it
is adjourned, and the subsequent withdrawal from the meeting of any shareholder
or the refusal of any shareholder represented in person or by proxy to vote
shall not affect the presence of a quorum at the meeting.
2.08 Majority Vote. Directors of the Corporation shall be elected by a
plurality of the votes cast by the holders of shares entitled to vote in the
election of directors of the Corporation at a meeting of shareholders at which a
quorum is present. Except as otherwise provided by law, the articles of
incorporation, or these bylaws, with respect to any matter, the affirmative vote
of the holders of a majority of the Corporation's shares entitled to vote on,
and voted for or against, that matter at a meeting of shareholders at which a
quorum is present shall be the act of the shareholders.
2.09 Method of Voting; Proxies. Every shareholder of record shall be
entitled at every meeting of shareholders to one vote on each matter submitted
to a vote, for every share standing in his name on the original share transfer
records of the Corporation except to the extent that the voting rights of the
shares of any class or classes are increased, limited, or denied by the articles
of incorporation. Such share transfer records shall be prima facie evidence as
to the identity of shareholders entitled to vote. At any meeting of
shareholders, every shareholder having the right to vote may vote either in
person or by a proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. A telegram, telex, cablegram or similar
transmission by the shareholder, or a photographic, photostatic, facsimile, or
similar reproduction of a writing executed by the shareholder, shall be treated
as an execution in writing for purposes of this Section 2.09. Each such proxy
shall be filed with the secretary of the Corporation before, or at the time of,
the meeting. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy. If no date is stated on a
proxy, such proxy shall be presumed to have been executed on the date of the
meeting at which it is to be voted. Each proxy shall be revocable unless the
proxy form conspicuously states that the proxy is irrevocable and the proxy is
coupled with an interest.
2.10 Closing of Transfer Records; Record Date. For the purpose of
determining shareholders entitled to notice of, or to vote at, any meeting of
shareholders or any adjournment thereof, or entitled to receive a distribution
(other than a distribution involving a purchase or redemption by the Corporation
of any of its own shares) or a share dividend, or in order to make a
determination of shareholders for any other proper purpose (other than
determining shareholders entitled to consent to action by shareholders proposed
to be taken without a meeting of shareholders), the board of directors may
provide that the share transfer records of the Corporation shall be closed for a
stated period but not to exceed in any event sixty days. If the share transfer
records are closed for the purpose of determining shareholders entitled to
notice of, or to vote at, a meeting of shareholders, such records shall be
closed for at least ten days immediately preceding such meeting. In lieu of
closing the share transfer records, the board of directors may FIX in advance a
date as the record date for any such determination of shareholders, such date in
any case to be not more than sixty days and, in case of a meeting of
shareholders, not less than ten days prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If the share
transfer records are not closed and if no record date is fixed for the
determination of
<PAGE> 8
shareholders entitled to notice of, or to vote at, a meeting of shareholders or
entitled to receive a distribution (other than a distribution involving a
purchase or redemption by the Corporation of any of its own shares) or a share
dividend, the date on which the notice of the meeting is mailed or the date on
which the resolution of the board of directors declaring such distribution or
share dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this Section 2.
10, such determination shall apply to any adjournment thereof except where the
determination has been made through the closing of the share transfer records
and the stated period of closing has expired.
2.11 Officers' Duties at Meetings. The president shall preside at, and
the secretary shall prepare minutes of, each meeting of shareholders, and in the
absence of either such officer, his duties shall be performed by some person or
persons elected by the vote of the holders of a majority of the outstanding
shares entitled to vote, present in person or represented by proxy.
<PAGE> 1
[JACKSON WALKER L.L.P. LETTERHEAD]
January 21, 2000
Internet America, Inc.
One Dallas Centre
350 N. St. Paul, Suite 3000
Dallas, Texas 75201
RE: REGISTRATION STATEMENT ON FORM SB-2 OF INTERNET AMERICA, INC.
Ladies and Gentlemen:
We are acting as counsel for Internet America, Inc., a Texas corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), of the offering and sale of up to 350,000 shares
of the Company's Common Stock, par value $0.01 per share (the "Shares") by
certain Selling Shareholders. The Selling Shareholders acquired the Shares
pursuant to that certain Agreement and Plan of Merger dated as of September 12,
1999 by and among the Company, GEEK Houston II, Inc., PDQ.Net, Incorporated and
certain shareholders of PDQ.Net, Incorporated (the "Agreement"). A Registration
Statement on Form SB-2 covering the offering and sale of the Shares (the
"Registration Statement") is expected to be filed with the Securities and
Exchange Commission (the "Commission") on or about the date hereof.
In reaching the conclusions expressed in this opinion, we have examined and
relied upon the originals or certified copies of all documents, certificates and
instruments as we have deemed necessary to the opinions expressed herein,
including the Articles of Incorporation, as amended, and the Bylaws, as amended,
of the Company and a copy of the Agreement. In making the foregoing
examinations, we have assumed the genuineness of all signatures on original
documents, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all copies submitted to us.
Based solely upon the foregoing, subject to the comments hereinafter
stated, and limited in all respects to the laws of the State of Texas and the
federal laws of the United States of America, it is our opinion that the Shares
issued pursuant to the terms of the Agreement have been validly issued, fully
paid and nonassessable.
<PAGE> 2
Internet America, Inc.
January 21,2000
Page 2
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to us under "Legal Matters" in the
prospectus forming part of the Registration Statement. In giving this consent,
we do not admit that we come within the category of persons whose consent is
required under Section 7 of the Act or the rules and regulations of the
Commission promulgated thereunder.
Very truly yours,
/s/ JACKSON WALKER L.L.P
----------------------------------
JACKSON WALKER L.L.P.
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF ORGANIZATION
<S> <C>
CyberRamp, LLC Texas
NeoSoft, Inc. Texas
PDQ.Net, Incorporated Texas
Entrepreneurial Technologies, Inc. Texas
GEEK Assets, Inc. Texas
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Registration Statement of Internet
America, Inc. on Form SB-2 of our report dated August 13, 1999, appearing in the
Prospectus, which is part of this Registration Statement, and to the reference
to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
January 21, 1999
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
EXHIBIT 23.3
CONSENT OF GRANT THORNTON, LLP
We have issued our report dated August 25, 1999, accompanying the
financial statements of PDQ.Net, Incorporated contained in the Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and the Prospectus, and to the use of our name as it
appears under the caption "Experts."
/s/ GRANT THORNTON, LLP
Houston, Texas
January 21, 2000
