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 DECEMBER 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) (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 FEBRUARY 12, 2002
----------
Common Stock at $.01 par value: 10,065,279 shares
==========
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
December 31, June 30,
2001 2001
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,812,753 $ 1,513,123
Restricted cash 200,000 --
Accounts receivable, net of allowance for uncollectible accounts of
$2,392,927 and $1,857,790 as of December 31, 2001 and June 30,
2001, respectively 1,512,216 1,726,551
Prepaid expenses and other current assets 355,395 375,818
------------ ------------
Total current assets 3,880,364 3,615,492
Property and equipment, net 1,395,995 1,642,763
Other assets, net 11,530,001 18,654,246
------------ ------------
Total assets $ 16,806,360 $ 23,912,501
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,641,938 $ 2,046,823
Accrued liabilities 1,659,477 1,484,940
Deferred revenue 3,545,398 4,367,516
Current maturities of capital lease obligations 124,120 178,745
Current maturities of long-term debt 28,993 603,557
------------ ------------
Total current liabilities 6,999,926 8,681,581
Capital lease obligations, net of current portion 63,500 19,899
Long-term debt, net of current portion -- 418
Accrued lawsuit expense 3,300,000 3,300,000
------------ ------------
Total liabilities 10,363,426 12,001,898
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 40,000,000 shares authorized,
10,033,425 and 9,977,278 issued and outstanding at
December 31, 2001, and June 30, 2001, respectively 100,327 99,773
Additional paid-in capital 55,478,946 56,064,762
Note receivable from a shareholder and officer of the Company (28,000) (685,500)
Accumulated deficit (49,108,339) (43,568,432)
------------ ------------
Total shareholders' equity 6,442,934 11,910,603
------------ ------------
Total liabilities and equity $ 16,806,360 $ 23,912,501
============ ============
</Table>
See accompanying notes to condensed financial statements.
Financial Statements - Continued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES:
Internet services $ 6,526,257 $ 8,659,499 $ 13,789,807 $ 17,598,883
Other 12,756 82,844 47,586 110,346
------------ ------------ ------------ ------------
Total 6,539,013 8,742,343 13,837,393 17,709,229
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 3,556,605 6,354,156 7,018,965 12,139,942
Sales and marketing 45,049 1,074,478 342,705 2,811,405
General and administrative 1,408,410 2,377,547 2,971,420 4,555,990
Provision for bad debt expense 481,474 1,088,792 1,044,002 1,400,000
Depreciation and amortization 3,871,599 3,988,659 7,752,180 7,976,836
------------ ------------ ------------ ------------
Total 9,363,137 14,883,632 19,129,272 28,884,173
------------ ------------ ------------ ------------
OPERATING LOSS (2,824,124) (6,141,289) (5,291,879) (11,174,944)
INTEREST INCOME (EXPENSE), NET (151,122) 2,195 (248,028) (2,575)
------------ ------------ ------------ ------------
NET LOSS $ (2,975,246) $ (6,139,094) $ (5,539,907) $(11,177,519)
============ ============ ============ ============
NET LOSS PER COMMON
SHARE:
BASIC $ (0.30) $ (0.62) $ (0.55) $ (1.13)
============ ============ ============ ============
DILUTED $ (0.30) $ (0.62) $ (0.55) $ (1.13)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 10,026,997 9,926,914 10,014,457 9,850,213
DILUTED 10,026,997 9,926,914 10,014,457 9,850,213
</Table>
See accompanying notes to condensed financial statements.
Financial Statements - Continued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
Six Months Ended
December 31,
------------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (5,539,907) $(11,177,519)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 7,752,180 7,976,836
Provision for bad debt expense 1,044,002 1,400,000
Non-cash compensation expense 54,000 562,500
Changes in operating assets and liabilities:
Restricted cash (200,000) --
Accounts receivable (829,667) (1,303,319)
Prepaid expenses and other current assets 20,423 (243,027)
Other assets 46,378 11,683
Accounts payable and accrued liabilities (230,349) 2,956,910
Deferred revenue (822,118) 205,891
------------ ------------
Net cash provided by operating activities 1,294,942 389,955
------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (320,357) (402,584)
------------ ------------
Net cash used in investing activities (320,357) (402,584)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common equity 18,238 46,148
Principal payments of capital lease obligations (118,211) (130,865)
Principal payments of long-term debt (574,982) (121,852)
------------ ------------
Net cash used in financing activities (674,955) (206,569)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 299,630 (219,198)
CASH AND CASH EQUIVALENTS, beginning of period 1,513,123 1,373,786
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,812,753 $ 1,154,588
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 108,028 $ 37,664
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
</Table>
See accompanying notes to condensed financial statements.
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
quarter ended December 31, 2001, 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 quarter ended December 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 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 $54,000 during the six months ended
December 31, 2001, which was a result of the decrease in the price of the
Company's common stock between July 1, 2001 and December 31, 2001.
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.
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 will collateralize a letter of credit in the amount
of $3.3 million and the Company will 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 occurs within the six months following the
agreement, Mr. Hunt could purchase 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.
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
December 31, 2001, we served approximately 142,000 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 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
coming quarters we expect to report net losses, primarily due to amortization
expense, while generating positive EBITDA. There can be no assurance we will be
able to achieve or sustain positive EBITDA or net income in the future. Recently
issued accounting pronouncements may impact the amortization or impairment
charges relative to our intangible assets.
We have an accumulated deficit of $49.1 million at December 31, 2001 and
have had annual operating losses since inception as a result of building network
infrastructure and rapidly increasing market share.
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 DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2000
The following table sets forth certain unaudited financial data for the three
months ended December 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 counts).
<Table>
<Caption>
Three Months Ended Three Months Ended
December 31, 2001 December 31, 2000
--------------------- ---------------------
% of % of
(000's) Revenues (000's) Revenues
--------- -------- --------- --------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services $ 6,526 99.8% $ 8,659 99.1%
Other 13 0.2% 83 0.9%
--------- -------- --------- --------
Total 6,539 100.0% 8,742 100.0%
--------- -------- --------- --------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 3,557 54.4% 6,354 72.7%
Sales and marketing 45 0.7% 1,074 12.3%
General and administrative 1,408 21.5% 2,377 27.2%
Provision for bad debt expense 481 7.4% 1,089 12.5%
Depreciation and amortization 3,872 59.2% 3,989 45.6%
--------- -------- --------- --------
Total 9,363 143.2% 14,883 170.2%
--------- -------- --------- --------
OPERATING LOSS (2,824) (43.2)% (6,141) (70.2)%
INTEREST EXPENSE, NET (151) (2.3)% 2 0.0%
--------- -------- --------- --------
NET LOSS $ (2,975) (45.5)% $ (6,139) (70.2)%
========= ======== ========= ========
NET LOSS PER COMMON SHARE:
BASIC $ (0.30) $ (0.62)
========= =========
DILUTED $ (0.30) $ (0.62)
========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 10,027 9,927
DILUTED 10,027 9,927
OTHER DATA:
Subscribers at end of period 142,000 153,000
EBITDA(1) 1,048 (2,152)
EBITDA margin(2) 16.0% -24.6%
</Table>
(1) EBITDA (earnings before interest, taxes, depreciation and amortization)
consists of revenue less connectivity and operating expense, sales and
marketing expense, and general 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.
Total revenue. Total revenue decreased by $2.2 million, or 25.3%, to $6.5
million for the three months ended December 31, 2001, from $8.7 million for the
three months ended December 31, 2000. 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 $2.8 million, or 43.8%, to $3.6 million for the three months ended December
31, 2001, from $6.4 million for the three months ended December 31, 2000. As a
percentage of revenue, connectivity and operations expense decreased to 54.4%
for the three months ended December 31, 2001, from 72.7% for the three months
ended December 31, 2000. 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 decreased by $1.0 million,
or 90.9%, to $45,000 for the three months ended December 31, 2001, compared to
$1.1 million for the three months ended December 31, 2000. The majority of the
decrease relates to a reduction of television advertising in all markets.
General and administrative. General and administrative expense decreased by
$1.0 million, or 41.7%, to $1.4 million for the three months ended December 31,
2001, from $2.4 million for the three months ended December 31, 2000. General
and administrative expense as a percentage of total revenue decreased to 21.5%
for the three months ended December 31, 2001, from 27.2% for the three months
ended December 31, 2000. The majority of the decrease is related to our
consolidation of operations. In addition, general and administrative expense for
the three months ended December 31, 2000 includes $275,000 in non-cash
compensation expense related to an officer's stock purchase agreement compared
to $54,000 for the three months ended December 31, 2001.
Provision for bad debt. Provision for bad debt expense decreased by
$608,000, or 55.8%, to $481,000 for the three months ended December 31, 2001,
compared to $1.1 million for the three months ended December 31, 2000. For the
three months ended December 31, 2000, there was a significant charge to bad debt
expense due to an evaluation of the collectibility of accounts receivable.
Depreciation and amortization. Depreciation and amortization decreased
slightly by $100,000, or 2.5%, to $3.9 million for the three months ended
December 31, 2001, from $4.0 million for the three months ended December 31,
2000.
Interest expense, net. Interest expense was $151,000 for the three months
ended December 31, 2001 compared to interest income of $2,000 for the three
months ended December 31, 2000. The interest expense for the three months ended
December 31, 2001 is mainly due to $80,000 related to post-judgement interest on
an adverse judgement 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2000
The following table sets forth certain unaudited financial data for the six
months ended December 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 counts).
<Table>
<Caption>
Six Months Ended Six Months Ended
December 31, 2001 December 31, 2000
------------------------ -----------------------
% of % of
(000's) Revenues (000's) Revenues
--------- -------- --------- --------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Internet services $ 13,790 99.7% $ 17,599 99.4%
Other 47 0.3% 110 0.6%
--------- ------- --------- -------
Total 13,837 100.0% 17,709 100.0%
--------- ------- --------- -------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 7,019 50.7% 12,140 68.6%
Sales and marketing 343 2.5% 2,811 15.9%
General and administrative 2,971 21.5% 4,556 25.7%
Provision for bad debt expense 1,044 7.5% 1,400 7.9%
Depreciation and amortization 7,752 56.0% 7,977 45.0%
--------- ------- --------- -------
Total 19,129 138.2% 28,884 163.1%
--------- ------- --------- -------
OPERATING LOSS (5,292) (38.2)% (11,175) (63.1)%
INTEREST EXPENSE, NET (248) (1.8)% (3) (0.0)%
--------- ------- --------- -------
NET LOSS $ (5,540) (40.0)% $ (11,178) (63.1)%
========= ======= ========= =======
NET LOSS PER COMMON SHARE:
BASIC $ (0.55) $ (1.13)
========= =========
DILUTED $ (0.55) $ (1.13)
========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 10,014 9,850
DILUTED 10,014 9,850
OTHER DATA:
Subscribers at end of period 142,000 153,000
EBITDA(1) 2,460 (3,198)
EBITDA margin (2) 17.8% -18.1%
CASH FLOW DATA:
Cash flow from operations 1,295 390
Cash flow used in investing activities 320 403
Cash flow used in financing activities 675 207
</Table>
(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.
Total revenue. Total revenue decreased by $3.9 million, or 22.0%, to $13.8
million for the six months ended December 31, 2001, from $17.7 million for the
six months ended December 31, 2000. The decrease in total revenue is
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 $5.1 million, or 42.1%, to $7.0 million for the six months ended December 31,
2001, from $12.1 million for the six months ended December 31, 2000. As a
percentage of revenue, connectivity and operations expense decreased to 50.7%
for the six months ended December 31, 2001, from 68.6% for the six months ended
December 31, 2000. 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 $2.5 million,
or 89.3%, to $343,000 for the six months ended December 31, 2001, compared to
$2.8 million for the six months ended December 31, 2000. The majority of the
decrease relates to a reduction of television advertising in all markets.
General and administrative. General and administrative expense decreased by
$1.6 million, or 34.8%, to $3.0 million for the six months ended December 31,
2001, from $4.6 million for the six months ended December 31, 2000. General and
administrative expense as a percentage of total revenue decreased to 21.5% for
the six months ended December 31, 2001, from 25.7% for the six months ended
December 31, 2000. General and administrative expense for the six months ended
December 31, 2000 includes $562,500 in non-cash compensation expense related to
an officer's stock purchase agreement compared to $54,000 for the six months
ended December 31, 2001. The remainder of the decrease is related to
consolidation of operations.
Depreciation and amortization. Depreciation and amortization decreased by
$200,000, or 2.5%, to $7.8 million for the six months ended December 31, 2001,
from $8.0 million for the six months ended December 31, 2000.
Interest expense, net. Interest expense was $248,000 for the six months
ended December 31, 2001 compared to interest expense of only $3,000 for the six
months ended December 31, 2000. The interest expense for the six months ended
December 31, 2001 is mainly due to $160,000 related to post-judgement interest
on an adverse judgement in a lawsuit and $77,000 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 $1.3 million and $390,000 for
the six months ended December 31, 2001 and 2000, respectively. Cash provided by
operating activities for the six months ended December 31, 2001 was positively
impacted by $2.5 million in EBITDA and offset by an $822,000 decrease in
deferred revenue.
Cash used in investing activities totaled $320,000 and $403,000 for the six
months ended December 31, 2001 and 2000, respectively, which consisted of
routine purchases of property and equipment to expand and upgrade our network.
Cash used in financing activities totaled $675,000 and $207,000 for the six
months ended December 31, 2001 and 2000, respectively. Cash used in financing
activities for the six months ended December 31, 2001 consisted mainly of
payments of $575,000 to service debt and capital lease obligations.
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 $1.8 million at December 31, 2001 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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
On November 20, 2001, the Company held its 2001 annual meeting of
shareholders, at which the shareholders voted as follows:
<Table>
<Caption>
AUTHORITY
MATTER VOTED ON SHARES VOTED FOR WITHHELD
--------------- ---------------- ---------
The election of Jack T. Smith to the
board of directors 7,040,068 83,686
The election of Peter C. Gibbons to the
board of directors 7,040,528 83,226
</Table>
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.
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: 02/14/02 By: /s/ Jack T. Smith
-------------------------------------
Jack T. Smith
President and Chief Executive Officer
Date: 02/14/02 By: /s/ Mark Novy
-------------------------------------
Mark Novy
Chief Accounting Officer
INDEX TO EXHIBITS
<Table>
<Caption>
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)
</Table>
----------
(1) See note 2 to the financial statements.