UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _________ TO _____
COMMISSION FILE NUMBER 000-25147
INTERNET AMERICA, INC.
(Exact name of small business issuer as specified in its charter)
TEXAS 86-0778979
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
350 N. ST. PAUL, SUITE 3000, DALLAS, TX 75201
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 861-2500
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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT MAY 10, 2002
--------------------------------
Common Stock at $.01 par value: 10,105,249 shares
=================
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2002 2001
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,578,340 $ 1,513,123
Restricted cash 200,000 -
Accounts receivable, net of allowance for uncollectible
accounts of $2,636,117 and $1,857,790 as of March 31, 2002
and June 30, 2001, respectively 1,345,968 1,726,551
Prepaid expenses and other current assets 363,784 375,818
------------- ------------
Total current assets 4,488,092 3,615,492
Property and equipment, net 1,215,256 1,642,763
Other assets, net 7,991,019 18,654,246
------------- ------------
Total assets $ 13,694,367 $ 23,912,501
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,439,621 $ 2,046,823
Accrued liabilities 2,035,274 1,484,940
Deferred revenue 3,274,209 4,367,516
Current maturities of capital lease obligations 87,122 178,745
Current maturities of long-term debt 22,774 603,557
------------- ------------
Total current liabilities 6,859,000 8,681,581
Capital lease obligations, net of current portion 49,875 19,899
Long-term debt, net of current portion - 418
Accrued lawsuit expense 3,300,000 3,300,000
------------- ------------
Total liabilities 10,208,875 12,001,898
------------- ------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 40,000,000 shares authorized,
10,065,279 and 9,977,278 issued and outstanding at
March 31, 2002 and June 30, 2001, respectively 100,645 99,773
Additional paid-in capital 55,547,229 56,064,762
Note receivable from a shareholder and officer of the Company (82,000) (685,500)
Accumulated deficit (52,080,382) (43,568,432)
------------- ------------
Total shareholders' equity 3,485,492 11,910,603
------------- ------------
Total liabilities and equity $ 13,694,367 $ 23,912,501
============= ============
See accompanying notes to condensed financial statements.
2
Financial Statements - Continued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
REVENUES:
Internet services $ 6,183,422 $ 8,693,957 $19,973,230 $ 26,292,840
Other 12,425 63,636 60,010 173,982
----------- ----------- ----------- ------------
Total 6,195,847 8,757,593 20,033,240 26,466,822
----------- ----------- ----------- ------------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 2,954,660 5,565,696 9,973,625 17,705,638
Sales and marketing 230,626 217,002 573,331 3,028,407
General and administrative 1,399,920 1,922,319 4,371,341 6,478,309
Provision for bad debt expense 537,443 615,000 1,581,445 2,015,000
Depreciation and amortization 3,902,587 3,905,377 11,654,767 11,882,213
----------- ----------- ----------- ------------
Total 9,025,236 12,225,394 28,154,509 41,109,567
----------- ----------- ----------- ------------
OPERATING LOSS (2,829,389) (3,467,801) (8,121,269) (14,642,745)
INTEREST INCOME (EXPENSE), NET (142,654) 6,414 (390,681) 3,839
----------- ----------- ----------- ------------
NET LOSS $(2,972,043) $(3,461,387) $(8,511,950) $(14,638,906)
=========== =========== =========== ============
NET LOSS PER COMMON SHARE:
BASIC $ (0.30) $ (0.35) $ (0.85) $ (1.48)
=========== =========== =========== ============
DILUTED $ (0.30) $ (0.35) $ (0.85) $ (1.48)
=========== =========== =========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 10,064,571 9,950,608 10,030,918 9,883,189
DILUTED 10,064,571 9,950,608 10,030,918 9,883,189
See accompanying notes to condensed financial statements.
3
Financial Statements - Continued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (8,511,950) $(14,638,906)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 11,654,767 11,882,213
Provision for bad debt expense 1,581,445 2,015,000
Non-cash compensation expense 60,000 587,500
Changes in operating assets and liabilities:
Restricted cash (200,000) -
Accounts receivable (1,200,862) (1,952,115)
Prepaid expenses and other current assets 12,034 (469,978)
Other assets 47,158 6,318
Accounts payable and accrued liabilities (56,868) 2,665,407
Deferred revenue (1,093,307) 106,747
------------ ------------
Net cash provided by operating activities 2,292,417 202,186
------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (503,509) (456,553)
------------ ------------
Net cash used in investing activities (503,509) (456,553)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common equity 26,839 59,296
Principal payments of capital lease obligations (169,329) (191,776)
Principal payments of long-term debt (581,201) (158,123)
------------ ------------
Net cash used in financing activities (723,691) (290,603)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,065,217 (544,970)
CASH AND CASH EQUIVALENTS, beginning of period 1,513,123 1,373,786
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,578,340 $ 828,816
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 170,682 $ 67,561
Capital lease obligations incurred for equipment $ 107,187 $ -
Issuance of 200,000 shares of common stock in exchange
for note receivable from an officer of the company $ 82,000 $ 685,500
See accompanying notes to condensed financial statements.
4
INTERNET AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of
Regulation S-X of the Securities and Exchange Commission. The accompanying
unaudited condensed financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair statement of the
Company's 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 financial statements for the year ended June 30, 2001, included in
the Company's Annual Report on Form 10-K (File No 000-25147).
2. Earnings Per Share
There are no adjustments required to be made to net loss for the purpose of
computing basic and diluted earnings per share ("EPS"). During the three
and nine months ended March 31, 2002, options to purchase 1,194,870 shares
of common stock were not included in the computation of diluted EPS because
the Company incurred a net loss for the period and the effect of such
instruments is antidilutive. During the three and nine months ended March
31, 2002, no options to purchase shares of common stock were exercised.
3. Issuance of Shares of Common Stock
Pursuant to a Stock Purchase Agreement entered into during September 2000,
the Company issued 200,000 shares of its common stock to an officer in
exchange for cash of $2,000 and a note receivable, bearing interest at
6.33%, for $685,500. The purchase price per share of the common stock under
the Stock Purchase Agreement was the closing price of the common stock on
the date the Company's board of directors approved the transaction. Under
the terms of the Stock Purchase Agreement, the officer had the option to
put the shares of common stock to the Company during the term of the Stock
Purchase Agreement for $3.4375 per share. The officer exercised the put
agreement on August 6, 2001. On that day another stock purchase agreement
was entered into between the officer and the Company. The Company issued
200,000 shares of common stock to the officer in exchange for cash of
$2,000 and a note receivable, bearing interest at 6.33%, for $82,000. Under
the terms of the new Stock Purchase Agreement, the officer has the option
to put the shares of common stock to the Company during the term of the
Stock Purchase Agreement for $0.42 per share. In connection with the put
option, the Company has recognized a non-cash compensation expense of
$60,000 during the nine months ended March 31, 2002, which was a result of
the decrease in the price of the Company's common stock between July 1,
2001 and March 31, 2002.
4. Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standard Board issued Statement No.
141 (SFAS No. 141), "Business Combinations," and Statement No. 142 (SFAS
No. 142), "Goodwill and Other Intangible Assets." SFAS 142 includes
requirements to test goodwill and indefinite lived intangible assets for
impairment rather than amortize them. In addition, the standard includes
provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS 142
also requires the Company to complete a transitional goodwill impairment
test six months from the date of adoption.
SFAS No. 142 requires that intangible assets be periodically evaluated for
impairment based on fair market value. The Company has historically
evaluated its intangible assets for impairment based on projected future
cash flows.
5
The Company is currently evaluating the impact that SFAS No. 142 will have
on its financial statements. The Company has elected to adopt SFAS No. 142
on July 1, 2002, and a significant impairment charge may be recorded at
that time.
5. Letter of Credit Security Commitment Agreement
On September 18, 2001, the company entered into a Letter of Credit Security
Commitment Agreement with the Company's Chairman, William O. Hunt, to
finance an appeal bond in the approximate amount of $3.3 million in
connection with a judgment entered against the Company. Under this
agreement, Mr. Hunt collateralized a letter of credit in the amount of $3.3
million and the Company agreed to pay Mr. Hunt a commitment fee of 8% per
annum, paid quarterly. If the Company reduces the collateral amount by
substituting an alternative collateral for the letter of credit, then Mr.
Hunt would have a ninety day option to purchase shares of common stock of
the Company equal in value to all or a portion of the amount of the
reduction, based on when it occurs. The purchase price would be $0.35 per
share. If a reduction had occurred within the six months following the
agreement, Mr. Hunt could have purchased shares of common stock of the
Company equal in value to one-half of the amount of the reduction, and if a
reduction occurs after this six month period, Mr. Hunt could purchase
shares of common stock of the Company equal in value to the full amount of
the reduction.
Should the letter of credit be funded in the full amount or in a reduced
amount to pay a settlement or judgment, the Company will enter into a
secured convertible promissory note for the funded amount. Interest on the
note would accrue at 12% per annum and be payable quarterly during the
first two years after issuance. The note could be converted into common
stock within two years of issuance at the purchase price discussed above.
If the note was not converted within two years of issuance, the conversion
option would terminate and all principal and unpaid accrued interest would
be payable in four quarterly payments over the third year. If the amount of
the note is less than the full amount of the letter of credit, the balance
would be treated as a reduction and Mr. Hunt would also have the purchase
rights discussed above. If the Company pays the note prior to its maturity,
Mr. Hunt would have a thirty day option to purchase shares of common stock
of the Company equal in value to the amount of the prepayment at $0.35 per
share. If Mr. Hunt does not exercise this thirty day option, he would be
issued a warrant to purchase, at the same price, one-half of the number of
shares that were subject to the option. The warrant would terminate, if
unexercised, on the second anniversary of the note issuance date.
The obligations to Mr. Hunt are secured by the Company's assets other than
accounts receivable. Under a registration agreement, Mr. Hunt has demand
and piggyback registration rights with respect to any shares issued under
the Letter of Credit Security Commitment Agreement. The demand registration
right is subject to a 120 day deferral if the Board of Directors determines
that such registration would be seriously detrimental to the Company or its
shareholders.
6
ITEM 2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains "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-K for the fiscal year
ended June 30, 2001 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 is an Internet service provider ("ISP") that offers a
wide array of Internet services tailored to meet the needs of individual and
business subscribers. We provide our subscribers with a high quality Internet
experience with fast, reliable service and responsive customer care. As of March
31, 2002, we served approximately 137,000 subscribers in the southwestern United
States.
The growth of the Internet has resulted in increased competition for
existing services and increased demand for new products and services. Increases
in demand and a surge in Internet users have fostered an increase in the number
of ISPs providing access to the Internet. Our competitors advertise in our
existing markets with aggressive new promotions or offers of free Internet
access. We believe we are well positioned to deal with these competitive forces
by continuing to build high user density and maintaining a rational business
plan.
High user density is the cornerstone of our business strategy. We will
continue to pursue an ambitious growth strategy, but in a controlled manner. Our
goal is to rapidly create high user density in specific markets to achieve and
maintain positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and
Amortization).
Recent technological developments have facilitated the increased adoption
of broadband access via mechanisms such as cable, fixed/mobile wireless, and
copper pair allowing voice, video, and data to occur simultaneously over one
connection. 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 cost effective broadband solutions to individuals and businesses.
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 we are well positioned to efficiently
market and deploy our broadband products due to the high density of our
subscriber base.
Given the high level of competition in the industry for new subscribers, we
will be more selective with investing in direct response advertising. We plan to
concentrate our direct response advertising more heavily in markets where we
have established branding other than in new markets.
The execution of our acquisition strategy has increased our amortization
expense as the costs of purchasing the subscriber bases are written off. In the
next quarter we expect to report a net loss, primarily due to amortization
expense, while generating positive EBITDA. For the next fiscal year, we expect
to report net income due to the elimination of amortization expense since the
majority of intangible assets will be written off by the end of the current
fiscal year ended June 30, 2002 and, in addition, the adoption of SFAS No. 142
related to intangible assets will result in no amortization expense. However,
there can be no assurance we will be able to sustain positive EBITDA or net
income in the future.
We have an accumulated deficit of $52.1 million at March 31, 2002 and have
had annual operating losses since inception as a result of building network
infrastructure and rapidly increasing market share.
7
Statement of Operations
Internet services revenue is derived from individual dial-up Internet
access, including analog and ISDN access, DSL access, dedicated connectivity,
bulk dial-up access, Web hosting services, and value-added services, such as
multiple e-mail boxes and personalized e-mail addresses.
A brief description of each element of our operating expenses follows:
Connectivity and operations expenses consist primarily of setup costs
for new subscribers, telecommunication costs, and wages of network
operations and customer support personnel. Connectivity costs include (i)
fees paid to telephone companies for subscribers' dial-up connections to
our network and (ii) fees paid to backbone providers for connections from
our network to the Internet.
Sales and marketing expenses consist primarily of creative 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
business expenses.
Depreciation is computed using the straight line method over the
estimated useful lives of the assets. Data communications equipment,
computers, data servers and office equipment are depreciated over three
years. We depreciate furniture, fixtures and leasehold improvements over
five years. Purchased subscriber bases and related goodwill are amortized
over 30 to 36 months. The assets and liabilities acquired in business
combinations are recorded at estimated fair values. The excess of the cost
of the net assets acquired over their fair value is recorded as goodwill
and amortized over an estimated life of 36 to 42 months.
Our business is not subject to any significant seasonal influences.
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
The following table sets forth certain unaudited financial data for the three
months ended March 31, 2002 and 2001. Operating results for any period are not
indicative of results for any future period. Dollar amounts are shown in
thousands (except per share data and subscriber counts).
8
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
--------------------- -------------------
% of % of
(000's) Revenues (000's) Revenues
-------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services $ 6,184 99.8% $ 8,694 99.3%
Other 12 0.2% 64 0.7%
-------- -------- -------- --------
Total 6,196 100.0% 8,758 100.0%
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 2,954 47.7% 5,566 63.6%
Sales and marketing 231 3.7% 217 2.5%
General and administrative 1,400 22.6% 1,922 21.9%
Provision for bad debt expense 537 8.7% 615 7.0%
Depreciation and amortization 3,903 63.0% 3,905 44.6%
-------- -------- -------- --------
Total 9,025 145.7% 12,225 139.6%
-------- -------- -------- --------
OPERATING LOSS (2,829) (45.7%) (3,467) (39.6%)
INTEREST EXPENSE, NET (143) (2.3%) 6 0.1%
-------- -------- -------- --------
NET LOSS $ (2,972) (48.0%) $ (3,461) (39.5%)
======== ======== ======== ========
NET LOSS PER COMMON SHARE:
BASIC $ (0.30) $ (0.35)
======== ========
DILUTED $ (0.30) $ (0.35)
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 10,065 9,951
DILUTED 10,065 9,951
OTHER DATA:
Subscribers at end of period 137,000 147,000
EBITDA(1) 1,073 438
EBITDA margin (2) 17.3% 5.0%
(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of revenue less connectivity and operating expense, sales and
marketing expense, and general administrative expense. EBITDA is provided
because it is a measure commonly used by investors to analyze and compare
companies on the basis of operating performance. EBITDA is presented to
enhance an understanding of our operating results and is not intended to
represent cash flows or results of operations in accordance with GAAP for
the periods indicated. EBITDA is not a measurement under GAAP and is not
necessarily comparable with similarly titled measures for other companies.
(2) EBITDA margin represents EBITDA as a percentage of total revenue.
9
Total revenue. Total revenue decreased by $2.6 million, or 29.5%, to $6.2
million for the three months ended March 31, 2002, from $8.8 million for the
three months ended March 31, 2001. The majority of the decrease in total revenue
is attributable to the sale of DSL customers to Covad Communications ("Covad")
as part of a settlement agreement with Covad.
Connectivity and operations. Connectivity and operations expense decreased
by $2.6 million, or 46.9%, to $3.0 million for the three months ended March 31,
2002, from $5.6 million for the three months ended March 31, 2001. As a
percentage of revenue, connectivity and operations expense decreased to 47.7%
for the three months ended March 31, 2002, from 63.6% for the three months ended
March 31, 2001. These decreases are primarily due to the costs eliminated as a
result of the sale of DSL customers to Covad and our consolidation of
operations.
Sales and marketing. Sales and marketing expense increased slightly by
$14,000, or 6.5%, to $231,000 for the three months ended March 31, 2002,
compared to $217,000 for the three months ended March 31, 2001.
General and administrative. General and administrative expense decreased by
$522,000, or 27.2%, to $1.4 million for the three months ended March 31, 2002,
from $1.9 million for the three months ended March 31, 2001. The majority of the
decrease is related to our consolidation of operations. General and
administrative expense as a percentage of total revenue increased to 22.6% for
the three months ended March 31, 2002, from 21.9% for the three months ended
March 31, 2001.
Provision for bad debt. Provision for bad debt expense decreased by $78,000
or 12.7%, to $537,000 for the three months ended March 31, 2002, compared to
$615,000 for the three months ended March 31, 2001. For the three months ended
March 31, 2002, the significant charge to bad debt expense is related to the
aging of customer accounts that are at least 90 days old.
Depreciation and amortization. Depreciation and amortization remained
fairly flat at $3.9 million for the three months ended March 31, 2002 and 2001.
Beginning with the three months ended September 30, 2002, we expect to have no
amortization expense due to the fact that the majority of the intangible assets
will be fully amortized by June 30, 2002 and, in addition, the adoption of SFAS
No. 142 related to intangible assets will result in no amortization expense.
Amortization expense was $3.5 million for the three months ended March 31, 2002.
Interest expense, net. Interest expense was $143,000 for the three months
ended March 31, 2002 compared to interest income of $6,000 for the three months
ended March 31, 2001. The interest expense for the three months ended March 31,
2002 is mainly due to post-judgment interest of approximately $80,000 related to
an adverse judgment in a lawsuit and $66,000 in interest expense related to a
$3.3 million letter of credit agreement with the Company's Chairman, William O.
Hunt, which are offset by interest income.
10
Results of Operations
Nine Months Ended March 31, 2002 Compared to Nine Months Ended March 31, 2001
The following table sets forth certain unaudited financial data for the nine
months ended March 31, 2002 and 2001. Operating results for any period are not
indicative of results for any future period. Dollar amounts are shown in
thousands (except per share data and subscriber counts).
11
Nine Months Ended Nine Months Ended
March 31, 2002 March 31, 2001
--------------------- -------------------
% of % of
(000's) Revenues (000's) Revenues
-------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services $ 19,973 99.7% $ 26,293 99.3%
Other 60 0.3% 174 0.7%
-------- -------- -------- --------
Total 20,033 100.0% 26,467 100.0%
-------- -------- -------- --------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 9,974 49.8% 17,706 66.9%
Sales and marketing 573 2.9% 3,028 11.4%
General and administrative 4,371 21.8% 6,478 24.5%
Provision for bad debt expense 1,581 7.9% 2,015 7.6%
Depreciation and amortization 11,655 58.2% 11,882 44.9%
-------- -------- -------- --------
Total 28,154 140.5% 41,109 155.3%
-------- -------- -------- --------
OPERATING LOSS (8,121) (40.5%) (14,642) (55.3%)
INTEREST EXPENSE, NET (391) (2.0%) 4 0.0%
-------- -------- -------- --------
NET LOSS $ (8,512) (42.5%) $(14,638) (55.3%)
======== ======== ======== ========
NET LOSS PER COMMON SHARE:
BASIC $ (0.85) $ (1.48)
======== ========
DILUTED $ (0.85) $ (1.48)
======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 10,031 9,883
DILUTED 10,031 9,883
OTHER DATA:
Subscribers at end of period 137,000 147,000
EBITDA(1) 3,533 (2,760)
EBITDA margin (2) 17.6% -10.4%
CASH FLOW DATA:
Cash flow from operations 2,292 202
Cash flow used in investing activities 504 457
Cash flow used in financing activities 724 291
(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of revenue less connectivity and operating expense, sales and
marketing expense, and general administrative expense. EBITDA is provided
because it is a measure commonly used by investors to analyze and compare
companies on the basis of operating performance. EBITDA is presented to
enhance an understanding of our operating results and is not intended to
represent cash flows or results of operations in accordance with GAAP for
the periods indicated. EBITDA is not a measurement under GAAP and is not
necessarily comparable with similarly titled measures for other companies.
(2) EBITDA margin represents EBITDA as a percentage of total revenue.
12
Total revenue. Total revenue decreased by $6.5 million, or 24.3%, to $20.0
million for the nine months ended March 31, 2002, from $26.5 million for the
nine months ended March 31, 2001. The decrease in total revenue is primarily
attributable to the sale of DSL customers to Covad as part of a settlement
agreement with Covad.
Connectivity and operations. Connectivity and operations expense decreased
by $7.7 million, or 43.7%, to $10.0 million for the nine months ended March 31,
2002, from $17.7 million for the nine months ended March 31, 2001. As a
percentage of revenue, connectivity and operations expense decreased to 49.8%
for the nine months ended March 31, 2002, from 66.9% for the nine months ended
March 31, 2001. The decrease is primarily due to the costs eliminated as a
result of the sale of DSL customers to Covad and our consolidation of
operations.
Sales and marketing. Sales and marketing expense decreased by approximately
$2.4 million, or 81.1%, to $600,000 for the nine months ended March 31, 2002,
compared to $3.0 million for the nine months ended March 31, 2001. The majority
of the decrease relates to a reduction of television advertising in all markets.
General and administrative. General and administrative expense decreased by
$2.1 million, or 32.5%, to $4.4 million for the nine months ended March 31,
2002, from $6.5 million for the nine months ended March 31, 2001. General and
administrative expense as a percentage of total revenue decreased to 21.8% for
the nine months ended March 31, 2002, from 24.5% for the nine months ended March
31, 2001. General and administrative expense for the nine months ended March 31,
2001 includes $588,000 in non-cash compensation expense related to an officer's
stock purchase agreement compared to $60,000 for the nine months ended March 31,
2002. The remainder of the decrease is related to consolidation of operations.
Provision for bad debt. Provision for bad debt expense decreased by
$400,000 or 21.5%, to $1.6 million for the nine months ended March 31, 2002,
compared to $2.0 million for the nine months ended March 31, 2001. For the nine
months ended March 31, 2002, the significant charge to bad debt expense is
related to the aging of customer accounts that are at least 90 days old.
Depreciation and amortization. Depreciation and amortization decreased by
$200,000, or 1.9%, to $11.7 million for the nine months ended March 31, 2002,
from $11.9 million for the nine months ended March 31, 2001. Beginning with the
three months ended September 30, 2002, we expect to have no amortization expense
due to the fact that the majority of the intangible assets will be fully
amortized by June 30, 2002 and, in addition, the adoption of SFAS No. 142
related to intangible assets will result in no amortization expense.
Amortization expense was $10.6 million for the nine months ended March 31, 2002.
Interest expense, net. Interest expense was $391,000 for the nine months
ended March 31, 2002 compared to interest income of only $4,000 for the nine
months ended March 31, 2001. The interest expense for the nine months ended
March 31, 2002 is mainly due to post-judgment interest of approximately $240,000
related to an adverse judgment in a lawsuit and $143,000 in interest expense
related to a $3.3 million letter of credit agreement with the Company's
Chairman, William O. Hunt.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through public and
private sales of equity securities, loans from shareholders and third parties
and revenue collections. We completed an initial public offering in December
1998 and received net proceeds of approximately $19.8 million. We used a portion
of the proceeds of the offering to repay approximately $2.1 million in
shareholder notes and certain other indebtedness
Cash provided by operating activities totaled $2.3 million and $202,000 for
the nine months ended March 31, 2002 and 2001, respectively. Cash provided by
operating activities for the nine months ended March 31, 2002 was positively
impacted by $3.5 million in EBITDA and offset by a $1.1 million decrease in
deferred revenue.
Cash used in investing activities totaled $503,000 and $457,000 for the
nine months ended March 31, 2002 and 2001, respectively, which consisted of
routine purchases of property and equipment to expand and upgrade our network.
Cash used in financing activities totaled $723,000 and $291,000 for the
nine months ended March 31, 2002 and 2001, respectively. Cash used in financing
activities for the nine months ended March 31, 2002 consisted mainly of payments
of $750,000 to service debt and capital lease obligations.
13
On September 18, 2001, we entered into an agreement with our Chairman,
William O. Hunt, in which Mr. Hunt collateralized an appeal bond with a letter
of credit in the approximate amount of $3.3 million to appeal a judgment entered
against the Company, Mr. Hunt and a former executive officer of the Company.
Internet America collateralized a portion of the appeal bond by placing $200,000
in a short term certificate of deposit required to be in place for the duration
of the appeal. There were one time transaction costs to post this appeal bond.
Annual recurring financing costs for this bond will be up to $264,000.
In addition, if the letter of credit is funded in the full amount or in a
reduced amount to pay a judgment or settlement, Internet America would enter
into a convertible secured promissory note for the funded amount. Interest would
accrue at 12% per annum and be payable quarterly for the first two years after
issuance. If the note was not converted within two years of issuance, the
conversion option would terminate and all principal and unpaid accrued interest
would be payable in four quarterly payments over the third year. In connection
with the agreement, we granted Mr. Hunt a security interest in our assets other
than accounts receivable.
We estimate that cash on hand of $2.6 million at March 31, 2002 along with
anticipated revenues and the appeal bond financing discussed above will be
sufficient for meeting our working capital needs for fiscal 2002 with regard to
continuing operations in existing markets. Additional financing will be required
to fund acquisitions or expand into new markets.
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. 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.
"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 retain or grow our
subscriber base, (2) we will not be competitive with existing or new
competitors, (3) we will not be able to sustain positive EBITDA, (4) we will not
keep up with industry pricing or technological developments impacting the
Internet, (5) we will not successfully integrate acquisitions, achieve further
operating efficiencies or sustain current operating efficiencies (6) needed
financing will not be available to us if and as needed, and (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. 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. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We do not issue or engage in trading of market-risk sensitive instruments.
We also do not purchase for investment, hedging or for purposes "other than
trading", instruments that are likely to expose the Company to market risk. We
have not entered into any forward nor purchased any futures contracts, nor
purchased any options or entered into any swaps. We invest in short-term high
grade interest bearing instruments. In this regard, our interest income is most
sensitive to changes in the general level of U.S. interest rates.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See disclosures set forth in our Quarterly Report on Form 10-Q for our
first fiscal quarter ended September 30, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation, as amended, incorporated by reference to
Exhibit Nos. 3.1 and 3.2 on Form SB-2, as amended, initially filed
with the Securities and Exchange Commission on July 21, 1998 (File No.
333-59527).
3.2 By-Laws, as amended, incorporated by reference to Exhibit Nos. 3.3 and
3.4 of the Company's Registration Statement on Form SB-2, as amended,
initially filed with the Securities and Exchange Commission on July
21, 1998 (File No. 333-59527), and Exhibit No. 3.3 to the Company's
Form 10-QSB filed on November 15, 1999 (File No. 000-25147).
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit No. 4.1 of the Company's Registration Statement on Form SB-2,
as amended, initially filed with the Securities and Exchange
Commission on July 21, 1998 (File No. 333-59527).
4.2 Pages from the Articles and By-Laws that define the rights of holders
of Common Stock, incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form SB-2, initially filed with
the Securities and Exchange Commission on January 21, 2000 (File No.
333-95179).
11 Computation of earnings per share (1)
---------------------------------
(1) See note 2 to the financial statements.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
15
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: 05/15/02 By: /s/ Jack T. Smith
------------------------------------------
Jack T. Smith
President and Chief Executive Officer
Date: 05/15/02 By: /s/ Mark Novy
------------------------------------------
Mark Novy
Chief Accounting Officer
16
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation, as amended, incorporated by reference to
Exhibit Nos. 3.1 and 3.2 on Form SB-2, as amended, initially filed
with the Securities and Exchange Commission on July 21, 1998 (File No.
333-59527).
3.2 By-Laws, as amended, incorporated by reference to Exhibit Nos. 3.3 and
3.4 of the Company's Registration Statement on Form SB-2, as amended,
initially filed with the Securities and Exchange Commission on July
21, 1998 (File No. 333-59527), and Exhibit No. 3.3 to the Company's
Form 10-QSB filed on November 15, 1999 (File No. 000-25147).
4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit No. 4.1 of the Company's Registration Statement on Form SB-2,
as amended, initially filed with the Securities and Exchange
Commission on July 21, 1998 (File No. 333-59527).
4.2 Pages from the Articles and By-Laws that define the rights of holders
of Common Stock, incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form SB-2, initially filed with
the Securities and Exchange Commission on January 21, 2000 (File No.
333-95179).
11 Computation of earnings per share (1)
--------------------------------
(1) See note 2 to the financial statements.
17