1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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)
(214) 861-2500
(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 8, 2001
----------
Common Stock at $.01 par value 9,977,278 Shares
==========
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2001 2000
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 828,816 $ 1,373,786
Accounts receivable, net 2,099,369 2,162,252
Prepaid expenses and other current assets 618,750 148,772
------------ ------------
Total current assets 3,546,935 3,684,810
PROPERTY AND EQUIPMENT, net 1,973,227 2,717,715
INTANGIBLE AND OTHER ASSETS, net 22,197,404 32,884,893
------------ ------------
$ 27,717,566 $ 39,287,418
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 5,533,749 $ 2,573,700
Accrued liabilities 1,555,447 1,850,088
Deferred revenue 4,946,571 4,839,824
Current maturities of long-term debt 37,355 176,267
Current maturities of capital lease obligations 141,775 247,146
------------ ------------
Total current liabilities 12,214,897 9,687,025
LONG-TERM DEBT, net of current portion 34,721 53,932
CAPITAL LEASE OBLIGATIONS, net of current portion 120,489 206,894
------------ ------------
Total liabilities 12,370,107 9,947,851
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 40,000,000 shares authorized,
9,950,879 and 9,705,798 issued and outstanding at
March 31, 2001, and June 30, 2000, respectively 99,510 97,059
Additional paid-in capital 55,388,173 54,743,828
Accumulated deficit (40,140,224) (25,501,320)
------------ ------------
Total shareholders' equity 15,347,459 29,339,567
------------ ------------
$ 27,717,566 $ 39,287,418
============ ============
See accompanying notes to condensed financial statements.
3
Financial Statements - Continued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES:
Internet services $ 8,693,957 $ 8,755,952 $ 26,292,840 $ 20,762,582
Other 63,636 88,771 173,982 386,319
------------ ------------ ------------ ------------
Total 8,757,593 8,844,723 26,466,822 21,148,901
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 5,565,696 4,984,488 17,705,638 12,066,933
Sales and marketing 217,002 1,485,757 3,028,407 4,531,148
General and administrative 2,537,319 2,331,306 8,493,309 5,515,499
Depreciation and amortization 3,905,377 4,037,397 11,882,213 7,926,558
------------ ------------ ------------ ------------
Total 12,225,394 12,838,948 41,109,567 30,040,138
------------ ------------ ------------ ------------
OPERATING LOSS (3,467,801) (3,994,225) (14,642,745) (8,891,237)
INTEREST INCOME (EXPENSE), NET 6,414 (4,990) 3,839 44,907
------------ ------------ ------------ ------------
NET LOSS $ (3,461,387) $ (3,999,215) $(14,638,906) $ (8,846,330)
============ ============ ============ ============
NET LOSS PER COMMON
SHARE:
BASIC $ (0.35) $ (0.41) $ (1.48) $ (1.07)
============ ============ ============ ============
DILUTED $ (0.35) $ (0.41) $ (1.48) $ (1.07)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 9,950,608 9,641,590 9,883,189 8,260,053
DILUTED 9,950,608 9,641,590 9,883,189 8,260,053
See accompanying notes to condensed financial statements.
4
Financial Statements - Continued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net loss $(14,638,906) $ (8,846,330)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 11,882,213 7,926,558
Provision for bad debt expense 2,015,000 522,000
Non-cash compensation expense 587,500 --
Changes in operating assets and liabilities:
Accounts receivable (1,952,115) (1,034,113)
Prepaid expenses and other current assets (469,978) 52,758
Other assets 6,318 (160,555)
Accounts payable and accrued liabilities 2,665,407 (1,379,425)
Deferred revenue 106,747 (171,946)
------------ ------------
Net cash provided by (used in) operating activities 202,186 (3,091,053)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (456,553) (634,707)
Purchases of subscribers -- (808,432)
------------ ------------
Net cash used in investing activities (456,553) (1,443,139)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 59,296 569,954
Principal payments of capital lease obligations (191,776) (77,674)
Principal payments of long-term debt (158,123) (376,401)
------------ ------------
Net cash provided by (used in) financing activities (290,603) 115,879
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (544,970) (4,418,313)
CASH AND CASH EQUIVALENTS, beginning of period 1,373,786 5,845,562
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 828,816 $ 1,427,249
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 67,561 $ 45,339
Contribution of capital in exchange for note payable $ -- $ 10,267
Common stock and options issued in acquisition of PDQ.Net $ -- $ 29,872,852
Accrued liability recorded for acquisition costs $ -- $ 400,000
Issuance of 200,000 shares of common stock in exchange for note
receivable from an officer of the company $ 685,500 $ --
See accompanying notes to condensed financial statements.
5
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, 2000, included in
the Company's Annual Report on Form 10-KSB (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 quarter
ended March 31, 2001, options to purchase 1,160,189 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 quarter ended March 31, 2001, 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 note provides for payment of interest on a
quarterly basis beginning October 1, 2000 with principal due August 29,
2007. The purchase price of the common stock under the Stock Purchase
Agreement was based on 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 has the option
to put the shares of common stock to the Company during the term (which
expires September 5, 2007) of the Stock Purchase Agreement for $3.4375 per
share. In connection with the put option, the Company has recognized a
non-cash compensation expense of $25,000 during the quarter ended March 31,
2001, which was a result of the decrease in the price of the Company's
common stock between December 31, 2000 and March 31, 2001.
4. Recently Issued Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133 ("FAS
133"), Accounting for Derivative Instruments and Hedging Activities, was
issued. This statement establishes standards for valuing and reporting at
fair value all derivative instruments as either assets or liabilities. FAS
133, as amended by FAS 137 and 138, is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The adoption of this
Standard did not have a material impact on the Company's financial
statements.
On March 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 provides guidance on the recognition, presentation
and disclosures of revenue in financial statements filed with the
Commission and is required to be implemented no later than the fourth
quarter of fiscal 2000. The adoption of SAB No. 101 did not have a material
effect on the Company's financial statements.
6
5. Litigation and Other Disputes
Internet America, our former Chief Executive Officer, Michael T. Maples,
and our Chairman, William O. Hunt were named as defendants in a lawsuit
filed on November 12, 1999 by Cindy Carradine in the District Court of
Dallas County, Texas. The plaintiff asserts claims for fraud in connection
with the plaintiff's sale of options to the Company in 1998. On March 30,
2001, a Dallas district court jury returned a verdict of potentially
approximately $6 million in damages against the defendants. A judgment has
not been entered. We believe the jury's findings provide a basis for the
court to enter a judgment of no liability and we intend to pursue this
course of action. However, there can be no assurance that our efforts will
be successful and that a judgment adverse to Internet America will not be
entered.
There are disputed amounts in our accounts payable totaling approximately
$2.6 million at March 31, 2001. If these accounts payable are not settled
in a satisfactory manner, we may experience a short-term liquidity problem.
There can be no assurance of a satisfactory resolution of these accounts
payable.
7
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-KSB for the fiscal
year ended June 30, 2000, filed with the Securities and Exchange Commission on
September 26, 2000, our most recent registration statement 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 provides a
wide array of Internet services tailored to meet the needs of business and
individual subscribers. We afford our subscribers a high quality Internet
experience with fast, reliable service and responsive customer care.
High user density and efficiency of operations 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 high user density in
specific markets to achieve and maintain positive EBITDA (Earnings Before
Interest, Taxes, Depreciation, and Amortization).
The majority of our revenues are derived from dial-up Internet access.
Consumer dial-up access generates positive cash flow and remains an important
and viable part of our current business model. A key part of our strategy,
however, is to focus our efforts on building a significant portion of our total
business on broadband services, such as Digital Subscriber Line (DSL) access and
integrated broadband services to business customers. We are currently realizing
operational losses from our DSL initiative due to the marketing and front-end
deployment costs of these services, but management believes that operating
margins for these services will improve as our volume grows and front-end
deployment costs decline. As of March 31, 2001, we served approximately 147,000
subscribers in the southwestern United States.
On November 22, 1999, we acquired all of the outstanding shares of PDQ.Net,
Inc., a Houston-based ISP, in exchange for 2,425,000 shares of common stock. 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 was accounted for as a
purchase. We acquired approximately 41,400 new subscribers as a result of this
transaction. PDQ is a wholly owned subsidiary of Internet America and
constitutes the majority of our Houston operations.
STATEMENT OF OPERATIONS
Internet services revenue is derived from 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' connections to our network and (ii) fees
paid to backbone providers for connections from our network to the Internet.
8
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 three years. 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 three years.
Our business is not subject to any significant seasonal influences.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
The following table sets forth certain unaudited financial data for the
three months ended March 31, 2001 and 2000. 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 count).
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
-------------------------- --------------------------
% of % of
(000's) Revenues (000's) Revenues
--------- ----------- --------- -----------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services $ 8,694 99.3% $ 8,756 99.0%
Other 64 0.7% 89 1.0%
--------- ----------- --------- -----------
Total 8,758 100.0% 8,845 100.0%
--------- ----------- --------- -----------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 5,566 63.6% 4,985 56.4%
Sales and marketing 217 2.5% 1,486 16.8%
General and administrative 2,537 29.0% 2,331 26.4%
Depreciation and amortization 3,905 44.6% 4,037 45.6%
--------- ----------- --------- -----------
Total 12,225 139.6% 12,839 145.2%
--------- ----------- --------- -----------
OPERATING LOSS (3,467) (39.6%) (3,994) (45.2%)
INTEREST INCOME (EXPENSE), NET 6 (0.1%) (5) (0.1%)
--------- ----------- --------- -----------
NET LOSS $ (3,461) (39.7%) $ (3,999) (45.2%)
========= =========== ========= ===========
NET LOSS PER COMMON
SHARE:
BASIC $ (0.35) $ (0.41)
========= =========
DILUTED $ (0.35) $ (0.41)
========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 9,951 9,642
DILUTED 9,951 9,642
OTHER DATA:
Subscribers at end of period 147,000 153,000
10
Total revenue. Total revenue decreased by $87,000, or 1.0%, to $8.7 million
for the three months ended March 31, 2001, from $8.8 million for the three
months ended March 31, 2000. The decrease in total revenue is attributable to
DSL sales being flat for the three months ended March 31, 2001 compared to the
same period in the prior year, and a decrease in our customer base due to our
efforts to terminate customers not currently paying for services. We continue to
defer revenue associated with DSL services until such services have been
successfully installed.
Connectivity and operations. Connectivity and operations expense increased
by $581,000, or 11.7%, to $5.6 million for the three months ended March 31,
2001, from $5.0 million for the three months ended March 31, 2000. As a
percentage of revenue, connectivity and operations expense increased to 63.6%
for the three months ended March 31, 2001, from 56.4% for the same period in the
prior year. The increase as a percentage of revenue is primarily due to
additional connectivity costs related to our entry into new markets and the
deployment of our DSL products.
Sales and marketing. Sales and marketing expense decreased by $1.3 million,
or 85.4%, to $217,000 for the three months ended March 31, 2001, compared to
$1.5 million for the same period in the prior year. The majority of the decrease
relates to a reduction of television advertising in all markets. In addition, we
received co-marketing credits of $194,000 from one of our DSL providers related
to subscribers with successfully installed DSL services.
General and administrative. General and administrative expense increased by
$206,000, or 8.8%, to $2.5 million for the three months ended March 31, 2001,
from $2.3 million for the three months ended March 31, 2000. General and
administrative expense as a percentage of total revenue increased to 29.0% for
the three months ended March 31, 2001, from 26.4% for the same period in the
prior year, primarily due to an increase in personnel. In addition, we have seen
an increase in professional services related to a lawsuit we are currently
defending. General and administrative expense for the three months ended March
31, 2001 also includes $25,000 in non-cash compensation expense related to an
officer's stock purchase agreement.
Depreciation and amortization. Depreciation and amortization decreased by
$132,000, or 3.3%, to $3.9 million for the three months ended March 31, 2001,
from $4.0 million for the same period in the prior year. The decrease relates to
an acquisition in 1997, which is now fully amortized. In addition, the amount of
older data communications and computer equipment fully depreciated has
increased.
Interest income and expense. We earned approximately $6,000 of interest
income during the three months ended March 31, 2001, compared to $5,000 in net
expense for the same period in the prior year. Interest expense during the
current quarter decreased as capital leases used to acquire data communications
equipment expired.
11
NINE MONTHS ENDED MARCH 31, 2001 COMPARED TO NINE MONTHS ENDED MARCH 31, 2000
The following table sets forth certain unaudited financial data for the
nine months ended March 31, 2001 and 2000. 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 count).
Nine Months Ended Nine Months Ended
March 31, 2001 March 31, 2000
-------------------------- --------------------------
% of % of
(000's) Revenues (000's) Revenues
--------- ----------- --------- -----------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services $ 17,599 99.4% $ 12,007 97.6%
Other 110 0.6% 297 2.4%
--------- ----------- --------- -----------
Total 17,709 100.0% 12,304 100.0%
--------- ----------- --------- -----------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 12,140 68.6% 7,083 57.6%
Sales and marketing 2,811 15.9% 3,045 24.7%
General and administrative 5,956 33.6% 3,184 25.9%
Depreciation and amortization 7,977 45.0% 3,889 31.6%
--------- ----------- --------- -----------
Total 28,884 163.1% 17,201 139.8%
--------- ----------- --------- -----------
OPERATING LOSS (11,175) (63.1%) (4,897) (39.8%)
INTEREST INCOME (EXPENSE), NET (2) (0.1%) 50 0.4%
--------- ----------- --------- -----------
NET LOSS $ (11,177) (63.2%) $ (4,847) (39.4%)
========= =========== ========= ===========
NET LOSS PER COMMON
SHARE:
BASIC $ (1.13) $ (0.64)
========= =========
DILUTED $ (1.13) $ (0.64)
========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 9,850 7,569
DILUTED 9,850 7,569
OTHER DATA:
Subscribers at end of period 147,000 153,000
12
Total revenue. Total revenue increased by $5.3 million, or 25.1%, to $26.4
million for the nine months ended March 31, 2001, from $21.1 million for the
nine months ended March 31, 2000. The increase in total revenue is attributable
to the increase in internet services revenue of $5.5 million to $26.2 million
for the nine months ended March 31, 2001, from $20.7 million for the same period
in the prior year. The majority of the increase in internet services revenue is
attributable to the acquisition of PDQ and increased sales of our DSL products,
which we began offering during last fiscal year. Other revenue decreased by
$212,000 to $173,000 for the nine months ended March 31, 2001, from $386,000 for
the same period in the prior year. The decrease in other revenue is due to a
decrease in peripheral equipment sales.
Connectivity and operations. Connectivity and operations expense increased
by $5.6 million, or 46.7%, to $17.7 million for the nine months ended March 31,
2001, from $12.1 million for the nine months ended March 31, 2000. As a
percentage of revenue, connectivity and operations expense increased to 66.9%
for the nine months ended March 31, 2001, from 57.1% for the same period in the
prior year. The increase as a percentage of revenue is primarily due to
additional connectivity costs related to our entry into new markets and the
deployment of our DSL products.
Sales and marketing. Sales and marketing expense decreased by $1.5 million,
or 33.2%, to $3.0 million for the nine months ended March 31, 2001, compared to
$4.5 million for the same period in the prior year. The majority of the decrease
relates to a reduction of television advertising in all markets.
General and administrative. General and administrative expense increased by
$3.0 million, or 54.0%, to $8.5 million for the nine months ended March 31,
2001, from $5.5 million for the nine months ended March 31, 2000. General and
administrative expense as a percentage of total revenue increased to 32.1% for
the nine months ended March 31, 2001, from 26.1% for the same period in the
prior year. General and administrative expense for the nine months ended March
31, 2001 includes $587,500 in non-cash compensation expense related to an
officer's stock purchase agreement. In addition, a charge for bad debt expense
of $2.0 million has taken place this fiscal year. This charge was due to an
evaluation of the collectibility of accounts receivable, including consumer
accounts. Delinquent accounts deemed uncollectible were disconnected and written
off, although we continue collection efforts on such accounts.
Depreciation and amortization. Depreciation and amortization increased by
$4.0 million, or 49.9%, to $11.9 million for the nine months ended March 31,
2001, from $7.9 million for the same period in the prior year. All of the
increase relates to the amortization of goodwill and cost of acquired
subscribers arising from the acquisition of PDQ.
Interest income and expense. We incurred approximately $3,800 of interest
income during the nine months ended March 31, 2001, compared to $45,000 for the
same period in the prior year. The proceeds from our initial public offering
were primarily expended in acquisitions and marketing, resulting in a decrease
in interest income.
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, and made several large cash subscriber
acquisitions. As of March 31, 2001, cash and cash equivalents on hand totaled
$828,000.
Cash provided by operating activities totaled $202,000 for the nine months
ended March 31, 2001, compared to cash used in operating activities of $3.1
million for the same period in the prior year. Cash provided by operating
activities for the nine months ended March 31, 2001 was impacted by increased
cash flow resulting from an increase in trade payables of $2.7 million, due
primarily to increasing amounts due to telecommunications vendors for DSL
connectivity and related equipment.
Cash used in investing activities totaled $456,000 for the nine months
ended March 31, 2001, and consisted of routine purchases of property and
equipment to expand and upgrade our network.
Cash used in financing activities totaled $290,000 for the nine months
ended March 31, 2001 and consisted of proceeds of $59,000 from the exercise of
stock options by option holders less payments of $349,000 to service long-term
obligations.
13
We estimate that cash on hand of $828,000 at March 31, 2001 along with cash
expected to be provided by operations will be sufficient for meeting our working
capital needs for fiscal 2001 with regard to continuing operations in existing
markets. There are, however, disputed amounts in our accounts payable. If these
accounts payable are not settled in a satisfactory manner, we may experience a
short-term liquidity problem. There can be no assurance of a satisfactory
resolution of these accounts payable.
Additional financing will be required to fund expansion through
acquisitions and marketing. We intend to continue reduced expenditures for
advertising during the last quarter of fiscal 2001 to assist our short-term
liquidity.
The availability of additional capital from public debt and equity markets
is currently limited due to a decline in stock prices for the entire Internet
sector. 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.
"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 able to improve EBITDA or product margins,
(3) we will not successfully integrate acquisitions or achieve operating
efficiencies, (4) needed financing will not be available to us if and as needed,
(5) we will not be competitive with existing or new competitors, (6) we will not
keep up with industry pricing or technological developments impacting the
Internet, 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.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Internet America, our former Chief Executive Officer, Michael T. Maples,
and our Chairman, William O. Hunt were named as defendants in a lawsuit filed on
November 12, 1999 by Cindy Carradine in the District Court of Dallas County,
Texas. The plaintiff asserts claims for fraud in connection with the plaintiff's
sale of options to the Company in 1998. On March 30, 2001, a Dallas district
court jury returned a verdict of potentially approximately $6 million in damages
against the defendants. A judgment has not been entered. We believe the jury's
findings provide a basis for the court to enter a judgment of no liability and
we intend to pursue this course of action. However, there can be no assurance
that our efforts will be successful and that a judgment adverse to Internet
America will not be entered.
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: 05/09/01 By: /s/ Jack T. Smith
-------------------------------------
Jack T. Smith
President and Chief Executive Officer
Date: 05/09/01 By: /s/ Cherie R. Marcum
-------------------------------------
Cherie R. Marcum
Chief Accounting Officer
Date: 05/09/01 By: /s/ Peter C. Gibbons
-------------------------------------
Peter C. Gibbons
Chief Operating Officer
16
INDEX TO EXHIBITS
EXHIBIT
NUMBER 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.