UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _____
COMMISSION FILE NUMBER 000-25147
INTERNET AMERICA, INC.
(Exact name of registrant as specified in its charter)
| TEXAS | 86-0778979 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
| | |
| 10930 West Sam Houston Pkwy., N., Suite 200, Houston | 77064 |
| (Address of principal executive offices) | (Zip Code) |
(214) 861-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of November 8, 2006, registrant had 12,508,914 shares of Common Stock at $.01 par value, outstanding.
Transitional Small Business Disclosure Format (check one).
Yes o No x
--------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | September 30, | | June 30, | |
| | | 2006 | | 2006 | |
| | | (unaudited) | | (audited) | |
| ASSETS | | | | | |
| | | | | | |
| CURRENT ASSETS: | | | | | |
| Cash and cash equivalents | | $ | 618,110 | | $ | 937,401 | |
Accounts receivable, net of allowance for uncollectible accounts of $7,998 and $6,996 as of September 30, 2006 and June 30, 2006, respectively | | | 102,175 | | | 120,208 | |
| Inventory | | | 256,068 | | | 280,888 | |
| Prepaid expenses and other current assets | | | 433,731 | | | 299,379 | |
| Total current assets | | | 1,410,084 | | | 1,637,876 | |
| PROPERTY AND EQUIPMENT — Net | | | 1,031,267 | | | 1,082,590 | |
| OTHER ASSETS — Net | | | 4,744,682 | | | 4,812,122 | |
| TOTAL | | $ | 7,186,033 | | $ | 7,532,588 | |
| | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | |
| | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | |
| Trade accounts payable | | $ | 207,601 | | $ | 419,766 | |
| Accrued liabilities | | | 414,033 | | | 465,836 | |
| Deferred revenue | | | 1,275,045 | | | 1,292,430 | |
| Current portion of long-term debt | | | 100,220 | | | 98,208 | |
| Current portion of capital lease obligations | | | 53,577 | | | 57,390 | |
| Total current liabilities | | | 2,050,476 | | | 2,333,630 | |
| | | | | | | | |
| Long-term debt | | | 119,906 | | | 169,044 | |
| Capital lease obligations | | | 115,395 | | | 127,344 | |
| Other long-term liabilities | | | 28,345 | | | 47,320 | |
| Total liabilities | | | 2,314,122 | | | 2,677,338 | |
| | | | | | | | |
| COMMITMENTS AND CONTINGENCIES | | | - | | | - | |
| SHAREHOLDERS' EQUITY: | | | | | | | |
Common stock, $.01 par value; 40,000,000 shares authorized, 12,508,914 issued and outstanding as of September 30, 2006 and June 30, 2006 | | | 125,089 | | | 125,089 | |
| Additional paid-in capital | | | 57,072,098 | | | 57,061,952 | |
| Accumulated deficit | | | (52,325,276 | ) | | (52,331,791 | ) |
| Total shareholders' equity | | | 4,871,911 | | | 4,855,250 | |
| TOTAL | | $ | 7,186,033 | | $ | 7,532,588 | |
See accompanying notes to condensed consolidated financial statements.
Financial Statements - Continued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | Three Months Ended | |
| | | September 30, | |
| | | 2006 | | 2005 | |
| REVENUES: | | | | | |
| Internet services | | $ | 2,083,976 | | $ | 2,241,910 | |
| Other | | | - | | | 405,893 | |
| Total | | | 2,083,976 | | | 2,647,803 | |
| OPERATING COSTS AND EXPENSES: | | | | | | | |
| Connectivity and operations | | | 992,284 | | | 1,535,177 | |
| Sales and marketing | | | 41,357 | | | 74,707 | |
| General and administrative | | | 829,236 | | | 696,518 | |
| Provision for bad debt expense | | | 1,002 | | | 11,683 | |
| Depreciation and amortization | | | 206,975 | | | 217,377 | |
| Total | | | 2,070,854 | | | 2,535,462 | |
| INCOME FROM OPERATIONS | | | 13,122 | | | 112,341 | |
| INTEREST EXPENSE, NET | | | (6,607 | ) | | (3,625 | ) |
| NET INCOME | | $ | 6,515 | | $ | 108,716 | |
| NET INCOME PER COMMON SHARE: | | | | | | | |
| BASIC | | $ | 0.00 | | $ | 0.01 | |
| DILUTED | | $ | 0.00 | | $ | 0.01 | |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | | | | | | | |
| BASIC | | | 12,508,914 | | | 12,514,812 | |
| DILUTED | | | 12,508,914 | | | 12,523,761 | |
See accompanying notes to condensed consolidated financial statements.
Financial Statements - Continued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Three Months Ended | |
| | | September 30, | |
| | | 2006 | | 2005 | |
| OPERATING ACTIVITIES: | | | | | |
| Net income | | $ | 6,515 | | $ | 108,716 | |
| Adjustments to reconcile net income to net cash | | | | | | | |
| used in operating activities: | | | | | | | |
| Depreciation and amortization | | | 206,975 | | | 217,377 | |
| Provision for bad debt expense | | | 1,002 | | | 11,683 | |
| Stock based compensation | | | 10,146 | | | - | |
| Changes in operating assets and liabilities, net of effect of acquisitions: | | | | | | | |
| Accounts receivable | | | 17,031 | | | (46,952 | ) |
| Prepaid expenses and other current assets | | | (134,352 | ) | | (12,163 | ) |
| Inventory | | | 93,564 | | | (140,117 | ) |
| Other assets | | | - | | | 904 | |
| Accounts payable and accrued liabilities | | | (332,712 | ) | | (160,708 | ) |
| Other long-term liabilities | | | (18,975 | ) | | - | |
| Deferred revenue | | | (17,385 | ) | | (63,509 | ) |
| Net cash used in operating activities | | | (168,191 | ) | | (84,769 | ) |
| INVESTING ACTIVITIES: | | | | | | | |
| Purchases of property and equipment | | | (88,212 | ) | | (103,165 | ) |
| Cash paid at closing for acquisitions | | | - | | | (50,000 | ) |
| Net cash used in investing activities | | | (88,212 | ) | | (153,165 | ) |
| FINANCING ACTIVITIES: | | | | | | | |
| Proceeds from issuance of common stock | | | - | | | 6,127 | |
| Principal payments under note payable | | | (47,126 | ) | | (97,139 | ) |
| Principal payments under capital lease obligations | | | (15,762 | ) | | (16,539 | ) |
| Net cash used in financing activities | | | (62,888 | ) | | (107,551 | ) |
| NET DECREASE IN CASH AND CASH EQUIVALENTS | | | (319,291 | ) | | (345,485 | ) |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 937,401 | | | 2,364,287 | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 618,110 | | $ | 2,018,802 | |
| SUPPLEMENTAL INFORMATION: | | | | | | | |
| Cash paid for interest | | $ | 16,184 | | $ | 10,674 | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | |
| Transfers between fixed assets and inventory | | $ | — | | $ | 36,746 | |
| Assets acquired through accounts payable | | $ | 68,744 | | $ | 29,720 | |
| Stock issued in connection with acquisitions | | $ | — | | $ | 32,500 | |
| Debt issued in connection with acquisitions | | $ | — | | $ | 94,612 | |
See accompanying notes to condensed consolidated financial statements.
INTERNET AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to Article 310(b) of Regulation S-B of the Securities and Exchange Commission. The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair statement of Internet America, Inc.’s (“the Company’s”) consolidated financial position and results of operations for the interim periods presented. All such adjustments are of a normal and recurring nature. These condensed financial statements should be read in conjunction with the consolidated financial statements for the year ended June 30, 2006, included in the Company’s Annual Report on Form 10-KSB (File No 001-32273).
| 2. | Basic and Diluted Net Income Per Share |
There are no adjustments required to be made to net income for the purpose of computing basic and diluted earnings per share (“EPS”) for the three months ended September 30, 2006 and 2005. For the three months ended September 30, 2006 and 2005, options to purchase 0 and 94,500 shares of common stock were included in the computation of diluted EPS because the options were “in the money” as of September 30, 2006 and 2005, respectively, and it resulted in 0 and 8,949 common stock equivalents to be added to the weighted average shares for the three months ended September 30, 2006 and 2005, respectively. During the three months ended September 30, 2006 and 2005, respectively, options to purchase 263,302 and 408,289 shares of common stock were not included in the computation of diluted EPS because the options were not “in the money” as of September 30, 2006 and 2005, respectively. There were no options exercised to purchase shares of common stock during the three months ended September 30, 2006 and 2005.
| 3. | Employee Stock Option Plans |
On July 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. SFAS 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of July 1, 2006, the first day of the Company’s fiscal year 2007. The Company’s Consolidated Financial Statements as of and for the three months ended September 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). The effect on net income and earnings per share of the Company before and after application of the fair value recognition provision of SFAS 123(R) to stock-based employee compensation for the three months ended September 30, 2006 is as follows:
| 3. | Employee Stock Option Plans (continued) |
| | | Three Months Ended September 30, 2006 | |
| | | Net Income Before Application of FAS 123 R | | Effect of Stock- Based Compensation Expense | | Net Income As Reported | |
| Income before income tax | | $ | 16,661 | | $ | (10,146 | ) | $ | 6,515 | |
| Provision for income tax | | | - | | | - | | | - | |
| Net Income | | $ | 16,661 | | $ | (10,146 | ) | $ | 6,515 | |
| | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | |
| Basic | | $ | 0.00 | | $ | (0.00 | ) | $ | 0.00 | |
| Diluted | | $ | 0.00 | | $ | (0.00 | ) | $ | 0.00 | |
The proforma effect on net income and earnings per share as if the Company had applied the fair value recognition provision of SFAS 123(R):
| | | Three Months Ended September 30, 2005 | |
| Reported net income | | $ | 108,716 | |
Less: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (22,663 | ) |
| Pro forma net income | | $ | 86,053 | |
| Reported basic income per share | | $ | 0.01 | |
| Reported diluted income per share | | $ | 0.01 | |
| | | | | |
| Pro forma basic income per share | | $ | 0.01 | |
| Pro forma diluted income per share | | $ | 0.01 | |
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates.
Other assets consist of the following:
| | | September 30, 2006 | | June 30, 2006 | |
Goodwill | | $ | 26,047,266 | | $ | 26,047,266 | |
| Accum. amortization-goodwill | | | (21,734,139 | ) | | (21,734,139 | ) |
| Total goodwill, net | | | 4,313,127 | | | 4,313,127 | |
| | | | | | | | |
| Subscriber acquisition costs | | | 1,244,102 | | | 1,244,102 | |
Accum. amortization-subscriber acquisition costs | | | (842,121 | ) | | (774,681 | ) |
| Total subscriber acquisition costs, net | | | 401,981 | | | 469,421 | |
| | | | | | | | |
| Deposits | | | 29,574 | | | 29,574 | |
| Total other assets, net | | $ | 4,744,682 | | $ | 4,812,122 | |
The amortization period for subscriber acquisition costs is 36 months. Prior to April 1, 2006, these costs were amortized over 24 months. Amortization expense for the three months ended September 30, 2006 and 2005, respectively, were $67,440 and $125,000. As of September 30, 2006, amortization expense for the fiscal years ended June 30, 2007, 2008 and 2009 is expected to be $269,770, $157,011 and $42,640, respectively.
During the three months ended September 30, 2006 and 2005, the Company generated net income. No provision for income taxes has been recorded as the Company has net operating losses generated in prior periods well in excess of the net income for the three months ended September 30, 2006 and 2005. As of September 30, 2006, the Company continues to maintain a full valuation allowance for its net deferred tax assets of approximately $12.3 million. Given its limited history of generating net income, the Company has concluded that it is not more likely than not that the net deferred tax assets will be realized.
Long-term debt consists of:
| | | September 30, 2006 | | June 30, 2006 | |
Note payable due November 15, 2007, payable in monthly installments of $1,825, bearing interest at prime plus 3% | | $ | 26,279 | | $ | 31,200 | |
| Note payable due September 22, 2007, payable in annual installments of $41,667 with interest imputed at 8% (net of unamortized discount of $3,087) | | | 38,580 | | | 74,303 | |
Note payable due May 30, 2007, payable in monthly installments of approximately $987, bearing interest at prime plus 2% | | | 10,580 | | | 13,201 | |
| Note payable due July 19, 2009, payable in quarterly payments of $7,751 with interest imputed at 9% (net of unamortized discount of $29,409) | | | 94,612 | | | 94,612 | |
| Note payable due January 23, 2011, payable in bi-annual installments of $13,917 with interest imputed at 8% (net of unamortized discount of $8,131) | | | 33,619 | | | 32,980 | |
| Credit card line of credit advance, payable on demand, bearing interest at prime plus 6.5% | | | 16,456 | | | 20,956 | |
| | | | 220,126 | | | 267,252 | |
| Less current portion | | | (100,220 | ) | | (98,208 | ) |
| Total long-term debt | | $ | 119,906 | | $ | 169,044 | |
The Company’s long-term debt is unsecured except for approximately $16,500 and $21,000 as of September 30, 2006 and June 30, 2006, respectively, which is secured by certain inventory and equipment. The prime rate at September 30, 2006 and June 30, 2006, was 8.25%.
| 8. | Capital Lease Obligations |
The Company leases certain wireless equipment under leases with bargain purchase options. The following is a schedule by fiscal years of the future minimum lease payments under these capital leases together with the present value of the net minimum lease payments as of September 30, 2006:
| 2007 | | $ | 51,333 | |
| 2008 | | | 54,368 | |
| 2009 | | | 54,368 | |
| 2010 | | | 31,714 | |
| 2011 | | | ------- | |
| Total minimum lease payments | | | 191,783 | |
| Less amounts representing interest | | | (22,811 | ) |
| Present value of minimum capitalized payments | | | 168,972 | |
| Less current portion | | | (53,577 | ) |
| Long-term capitalized lease obligations | | $ | 115,395 | |
9. Related Parties
The following table shows amounts paid to three non-employee directors for serving on the Company’s board of directors during the three months ended September 30, 2006 and 2005:
| | | Three Months Ended September 30, | |
| | | 2006 | | 2005 | |
| Troy LeMaile Stovall | | $ | 4,000 | | $ | 6,750 | |
| Justin McClure | | | 3,750 | | | 6,750 | |
| John Palmer | | | 3,750 | | | 3,750 | |
| Total director fees | | $ | 11,500 | | $ | 17,250 | |
9. New Accounting Pronouncements
During the quarter ended September 30, 2006, no new accounting pronouncements have been issued or adopted, except as disclosed within the
10-KSB for the year ended June 30, 2006. None of these pronouncements are expected to have a material impact on the Company’s financial statements.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in this Form 10-QSB constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements, identified by words such as "anticipate," "believe," "estimate," "should," "expect" and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. Our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2006 and other publicly filed reports discuss some additional important factors that could cause our actual results to differ materially from those in any forward-looking statements.
Overview
Internet America, Inc. (the “Company”) is an Internet service provider (“ISP”) serving approximately 38,500 subscribers in Texas, as of September 30, 2006. A subscriber represents an active, billed service. One customer account may represent multiple subscribers depending on the number of active and billed services for that customer. During the quarter ended September 30, 2006, the Company began billing customers for certain services which were previously complimentary, which caused an increase of approximately 4,000 subscribers. This increase was offset by attrition in our dial up services. The Company derives substantially all revenues from services, primarily Internet access services, and related fees, and such revenues represented 100% of our revenue for the quarter ended September 30, 2006. For the year ended June 30, 2006, Internet access services accounted for 89.5% of total revenue, with the remaining revenues related primarily to wireless reseller revenues. During fiscal 2005 the Company became a wireless equipment reseller which changed the revenue mix. For the three months ended September 30, 2005, Internet access services accounted for 84.7% of total revenue with the remaining revenues related primarily to wireless equipment reseller revenues. The Company discontinued wireless reseller sales in fiscal 2006 due to low gross profit margins.
The Company continues to experience an attrition of dial-up service customers. The loss of these customers is primarily attributable to their moving to broadband connectivity with other service providers. The largest competitors in broadband access are the cable companies and regional Bell operating companies. We operate in a highly competitive market for each of our service offerings. The competitive environment impacts the churn rates we experience as well as the number of new customers we are able to add.
The Company’s strategy is to focus on providing wireless Internet connectivity to customers in under-served markets. During the fiscal year ended June 30, 2006, we expanded in the suburban and rural markets near San Antonio and Houston, Texas, through acquisitions, and in all three of our major wireless markets we deployed new infrastructure to enable additional growth within markets we presently serve. The Company is pursuing additional growth within markets we presently serve and acquisition opportunities in non-metropolitan markets where competition is less intense and the demand for Internet connectivity may be under-served. In pursuing this strategy, the Company is narrowing its focus to products and developments that contribute directly to its implementation.
The Company’s customer count for wireless Internet services has increased to approximately 3,400 subscribers as of September 30, 2006 and has continued to grow to approximately 3,600 subscribers as of October 31, 2006. Management believes that we are poised for additional growth as we have targeted areas where competition is less intense and demand for Internet connectivity may be under-served. This growth will help to replace declining revenues due to attrition and management believes this will allow the Company to stabilize and then begin to regain revenue and profits.
Management continues to evaluate overall profitability. During 2006, we reduced telecommunications cost per subscriber by optimizing network capacity and entering into more favorable agreements with telecommunications service providers. The Company also reduced head count in fiscal 2006 through a reduction-in-force (“RIF”) carried out by management in January 2006. Although a certain number of staff has been added since then and we incurred severance costs related to the RIF, the Company still experienced an approximate 13% decrease in total salaries and wages, excluding severance costs of approximately $83,000 in 2006 and $132,000 in 2005. Overall, connectivity and operations costs for the quarter ended September 30, 2006 decreased by 55% from $1,535,000 for the quarter ended September 30, 2005 to $992,000.
Company management believes the initiatives identified above are instrumental to the achievement of our goals, but they may be subject to competitive, regulatory and other events and circumstances that are beyond our control. We can provide no assurance that we will be successful in achieving any or all of the initiatives, that the achievement or existence of such initiatives will result in profit improvements, or that other factors will not arise that would adversely affect future profits.
Statement of Operations
Internet services revenue is derived from dial-up Internet access, including analog and ISDN access, DSL access, dedicated connectivity, wireless access, bulk dial-up access, web hosting services, and value-added services, such as multiple e-mail boxes, personalized e-mail addresses and Fax-2-Email services. In addition to miscellaneous revenue, other revenue includes wireless equipment reseller revenues, which was discontinued in March 2006.
Prior to fiscal 2005 the Company operated primarily out of its corporate headquarters in Dallas, Texas. In fiscal 2005, in addition to the corporate office, the Company began operating out of local offices including computer centers in Corsicana, Hillsboro, and Stafford, Texas. In March 2006, the corporate headquarters were moved to Houston, Texas. Operating expenses for the Company includes operating expenses for both the corporate office and the local computer centers.
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, merchant processing fees 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; (ii) fees paid to backbone providers for connections from our network to the Internet; and (iii) equipment and tower lease costs for our new wireless networks.
Sales and marketing expenses consist primarily of creative and production costs, costs of media placement, management salaries and call center wages. Advertising costs are expensed as incurred.
General and administrative expenses consist primarily of administrative salaries, professional services, rent and other general office and business expenses.
Bad debt expense (recoveries) consists primarily of customer accounts that have been deemed uncollectible and will potentially be written off in future periods, net of recoveries. Historically, the expense has been based on the aging of customer accounts, whereby all accounts that are 90 days or older have been provided for as a bad debt expense.
Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets or the capital lease term, as appropriate. Data communications equipment, computers, data servers and office equipment are depreciated over three years. We depreciate furniture, fixtures and leasehold improvements over five years. Amortization expense consists of the amortization of subscriber acquisition costs.
Our business is not subject to any significant seasonal influences.
Results of Operations
Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
The following table sets forth certain unaudited financial data for the three months ended September 30, 2006 and 2005. Operating results for any period are not indicative of results for any future period. Amounts are shown in thousands (except per share data and subscriber counts).
| | Three Months Ended September 30, 2006 | | Three Months Ended September 30, 2005 | |
| | (000's) | | % of Revenues | | (000's) | | % of Revenues | |
STATEMENT OF INCOME DATA: REVENUES: | | | | | | | | | |
| Internet services | | $ | 2,084 | | | 100.0 | % | $ | 2,242 | | | 84.7 | % |
| Other | | | - | | | 0.0 | % | | 406 | | | 15.3 | % |
| Total | | | 2,084 | | | 100.0 | % | | 2,648 | | | 100.0 | % |
| OPERATING COSTS AND EXPENSES: | | | | | | | | | | | | | |
| Connectivity and operations | | | 992 | | | 47.6 | % | | 1,535 | | | 58.0 | % |
| Sales and marketing | | | 41 | | | 2.0 | % | | 75 | | | 2.8 | % |
| General and administrative | | | 830 | | | 39.8 | % | | 696 | | | 26.3 | % |
| Provision for bad debt expense | | | 1 | | | 0.0 | % | | 12 | | | 0.4 | % |
| Depreciation and amortization | | | 207 | | | 9.9 | % | | 217 | | | 8.2 | % |
| Total | | | 2,071 | | | 99.4 | % | | 2,535 | | | 95.8 | % |
| OPERATING INCOME | | | 13 | | | 0.6 | % | | 113 | | | 4.2 | % |
| INTEREST (EXPENSE) INCOME, NET | | | (6 | ) | | (0.3)% | | | (4 | ) | | (0.1)% | |
| NET INCOME | | $ | 7 | | | 0.3 | % | $ | 109 | | | 4.1 | % |
| NET INCOME PER COMMON SHARE: | | | | | | | | | | | | | |
| BASIC | | $ | 0.00 | | | | | $ | 0.01 | | | | |
| DILUTED | | $ | 0.00 | | | | | $ | 0.01 | | | | |
| WEIGHTED AVERAGE COMMON | | | | | | | | | | | | | |
| SHARES OUTSTANDING: | | | | | | | | | | | | | |
| BASIC | | | 12,509 | | | | | | 12,515 | | | | |
| DILUTED | | | 12,509 | | | | | | 12,524 | | | | |
| | | | | | | | | | | | | | |
| CASH FLOW DATA: | | | | | | | | | | | | | |
| Cash flow used in operations | | $ | (168 | ) | | | | $ | (85 | ) | | | |
| Cash flow used in investing activities | | $ | (88 | ) | | | | $ | (153 | ) | | | |
| Cash flow used in financing activities | | $ | (63 | ) | | | | $ | (108 | ) | | | |
| | | | | | | | | | | | | | |
| OTHER DATA: | | | | | | | | | | | | | |
| Subscribers at end of period (1) | | | 38,500 | | | | | | 51,000 | | | | |
| EBITDA(2) | | $ | 220 | | | | | $ | 330 | | | | |
| EBITDA margin(3) | | | 10.6 | % | | | | | 12.5 | % | | | |
| | | | | | | | | | | | | | |
| Reconciliation of net income to EBITDA: | | | | | | | | | | | | | |
| Net income | | $ | 7 | | | | | $ | 109 | | | | |
| Add: | | | | | | | | | | | | | |
| Depreciation and amortization | | | 207 | | | | | | 217 | | | | |
| Interest expense (income), net | | | 6 | | | | | | 4 | | | | |
| EBITDA(2) | | $ | 220 | | | | | $ | 330 | | | | |
| | | | | | | | | | | | | | |
__________
(1) A subscriber represents an active, billed service. One customer account may represent multiple subscribers depending on the number of active and billed services for that customer.
(2) EBITDA (earnings before interest, taxes, depreciation and amortization) is not a measurement of financial performance under generally accepted accounting principles (GAAP) and should not be considered an alternative to net income as a measure of performance. Management has consistently used EBITDA on a historical basis as a measurement of the Company’s current operating cash income.
| | (3) | EBITDA margin represents EBITDA as a percentage of total revenue. |
Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 (Continued)
Total revenue. Total revenue decreased by $550,000, or 20.8%, to $2.1 million for the three months ended September 30, 2006, from $2.6 million for the three months ended September 30, 2005. The Company’s subscriber count decreased by 12,500, or 25%, to 38,500 as of September 30, 2006 compared to 51,000 as of September 30, 2005. The decrease in subscriber counts and related revenue is attributed to the loss of dial-up customers moving to other providers’ broadband service. Approximately $406,000 of the decrease is related to discontinuance of the wireless equipment reseller business prior to fiscal 2007.
Connectivity and operations. Connectivity and operations expense decreased by $543,000, or 35.4%, to $992,000 for the three months ended September 30, 2006, from $1.5 million for the three months ended September 30, 2005. Approximately $347,000 of the decrease is related to discontinuance of the wireless equipment reseller business prior to fiscal 2007, which resulted in $0 cost of goods sold for the quarter ended September 30, 2006 compared to $347,000 for the quarter ended September 30, 2005. Due to reductions-in-force carried out in fiscal 2005 and fiscal 2006, labor costs decreased by $103,000 for the period. A decrease of approximately $119,000 in connectivity costs was due to the consolidation of internet and telephone connections and circuits to more closely align with demand, as well as the renegotiation of contracts with several of our major telecom vendors. These decreases are offset to a lesser extent by an increase in operating costs related to the operation of new field offices.
Sales and marketing. Sales and marketing expense decreased by $34,000, or 45.3%, to $41,000 for the three months ended September 30, 2006, compared to $75,000 for the three months ended September 30, 2005. The decrease relates primarily to reductions in head count.
General and administrative. General and administrative expense (G&A) increased by $134,000, or 19.3%, to $830,000 for the three months ended September 30, 2006, from $696,000 for the three months ended September 30, 2005. The increase relates primarily to increases in personnel costs, offset by decreases in G&A related to lower professional fees. G&A salaries and wages and related taxes increased by $172,000, to $365,000 for the quarter ended September 30, 2006, primarily as a result of the addition of managers for newly established or acquired field offices as well as the addition of Chief Operating Officer, Glen Blackmon and Chief Financial Officer, Jennifer LeBlanc, offset by the Company’s staff reductions. Professional fees increased by approximately $15,000, from $103,000 for the quarter ended September 30, 2006, compared to $88,000 for the quarter ended September 30, 2005.
Provision for bad debt expense. Provision for bad debt expense decreased to $1,000 for the three months ended September 30, 2006, from $12,000 for the three months ended September 30, 2005. The decrease is due primarily to reserve for bad debts for the wireless equipment reseller business incurred in the quarter ended September 30, 2005. As of September 30, 2006, we are fully reserved for all customer accounts that are at least 90 days old.
Depreciation and amortization. Depreciation and amortization decreased slightly by $10,000, or 4.6%, to $207,000 for the three months ended September 30, 2006, from $217,000 for the three months ended September 30, 2005. The decrease relates to increases in fully depreciated assets still in use. This is offset by an increase in depreciation for fixed asset purchases related to new wireless infrastructure as well as amortization of subscriber acquisition costs.
Interest (expense) income, net. For the three months ended September 30, 2006 and 2005, the Company recorded net interest expense of $6,000 and $4,000, respectively. For the three months ended September 30, 2006, the interest income earned was more than offset by the interest paid on long-term debt and capital leases.
Liquidity and Capital Resources
We have financed our operations to date primarily through (i) cash flows from operations, (ii) public and private sales of equity securities and (iii) loans from shareholders and third parties.
Cash used in operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. For the three months ended September 30, 2006, cash used in operations was $168,000 compared to cash used in operations of $85,000 for the three months ended September 30, 2005. For the three months ended September 30, 2006, net income plus non-cash items contributed $225,000 in cash which was then used primarily for purchases of inventory, payments of accounts payable and accrued expenses and a decrease in deferred revenue. Inventory, which primarily includes modems and wireless access radios, decreased in the three months ended September 30, 2006 by approximately $94,000 due to the Company discontinuing its wireless equipment reseller business. For the three months ended September 30, 2005, net income plus non-cash items contributed $338,000 in cash which was then used primarily for the payment of accounts payable and accrued expenses and a decrease in deferred revenue. Payables were significantly reduced due to more timely payment of all open payables. Days payables was reduced to 12 days at September 30, 2006 from 29 days at June 30, 2006. The decrease in deferred revenue from year to year is a result of the decrease in our subscriber count and the related decrease in revenue.
Cash used in investing activities totaled $88,000 and $153,000 for the three months ended September 30, 2006 and 2005, respectively, which relates primarily to the deployment of new wireless infrastructure.
Cash used in financing activities, which totaled $63,000 and $108,000 for the three months ended September 30, 2006 and 2005, respectively, consisted primarily of principal payments on debt and capital leases.
We estimate that cash on hand of $618,000 at September 30, 2006 along with anticipated cash flow from operations will be sufficient for meeting our working capital needs for the next twelve months with regard to continuing operations in existing markets. Additional financing may be required to fund acquisitions or expansion into new markets. Continued decreases in revenues and subscriber count may ultimately adversely affect the liquidity of the Company.
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 modify our operations and growth strategies to match available funding.
Off Balance Sheet Arrangements
None.
“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, that (1) we will not be able to increase our rural customer base at a rate that exceeds the loss of metropolitan area customers, (2) we will not improve EBITDA, profitability or product margins, (3) we will not continue to achieve operating efficiencies, (4) we will not be competitive with existing or new competitors, (5) we will not keep up with industry pricing or technological developments impacting the Internet, (6) needed financing will not be available to us if and as needed, (7) we will be adversely affected by dependence on network infrastructure, telecommunications providers and other vendors, by regulatory changes and by general economic and business conditions; (8) service interruptions or impediments could harm our business; (9) we may not be able to protect our proprietary technologies or successfully defend infringement claims and may be required to enter licensing arrangements on unfavorable terms; (10) we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future; (11) government regulations could force us to change our business practices; (12) we may be unable to continually develop effective business systems, processes and personnel to support our business; (13) we may be unable to hire and retain qualified personnel, including our key executive officers; (14) provisions in our certificate of incorporation, bylaws and shareholder rights plan could limit our share price and delay a change of management; (15) our stock price has been volatile historically and may continue to be volatile; and (16) some other unforeseen difficulties may occur. 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.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) in effect as of September 30, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that, as of September 30, 2006, the design and operation of these disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company required to be included in its periodic filings with the Securities and Exchange Commission. There were no changes in our internal control over financial reporting during the three months ended September 30, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit | | Description |
| 31.1 | | Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr. |
| 31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Jennifer S. LeBlanc |
| 32.1 | | Section 1350 Certification of William E. Ladin, Jr. |
| 32.2 | | Section 1350 Certification of Jennifer S. LeBlanc |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | INTERNET AMERICA, INC. |
| | (Registrant) |
| | | |
| Date: 11/09/06 | By: | /s/ William E. Ladin, Jr. |
| | | William E. Ladin, Jr. |
| | | Chairman and Chief Executive Officer |
| | | |
| Date: 11/09/06 | By: | /s/ Jennifer S. LeBlanc |
| | | Jennifer S. LeBlanc |
| | | Chief Financial and Accounting Officer |
INDEX TO EXHIBITS
Exhibit | | Description |
| | | |
| 31.1 | | Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr. |
| | | |
| 31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Jennifer S. LeBlanc |
| | | |
| 32.1 | | Section 1350 Certification of William E. Ladin, Jr. |
| | | |
| 32.2 | | Section 1350 Certification of Jennifer S. LeBlanc |
