1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _____
COMMISSION FILE NUMBER 000-25147
INTERNET AMERICA, INC.
(Exact name of registrant as specified in its charter)
TEXAS 86-0778979
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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),
Yes [X] No [ ]
and (2) has been subject to such filing requirements for the past 90
days.
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
OUTSTANDING AT FEBRUARY 11, 1999
-----------------
Common Stock at $.01 par value 6,310,328 Shares
=================
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNET AMERICA, INC.
BALANCE SHEETS
December 31, June 30,
1998 1998
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,761,993 $ 565,182
Trade receivables, net 267,716 327,533
Prepaid expenses and other current assets 134,976 30,824
------------ ------------
Total current assets 18,164,685 923,539
PROPERTY AND EQUIPMENT, net 1,463,835 1,625,022
OTHER ASSETS, net 427,375 601,298
------------ ------------
$ 20,055,895 $ 3,149,859
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 1,051,995 $ 882,246
Accrued liabilities 655,346 1,069,191
Advances under line of credit -- 225,000
Deferred revenue 1,927,789 1,926,979
Current maturities of long-term debt -- 431,898
Current maturities of capital lease obligations 106,395 332,895
Notes payable to shareholders -- 2,017,713
------------ ------------
Total current liabilities 3,741,525 6,885,922
CAPITAL LEASE OBLIGATIONS, net of current portion -- 31,192
------------ ------------
Total liabilities 3,741,525 6,917,114
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIT):
Series A convertible preferred stock, $.01 par value; 400,000 shares
authorized, 379,672 issued and outstanding at June 30, 1998 -- 3,796
Series B convertible preferred stock, $.01 par value; 300,000 shares
authorized, 73,667 issued and outstanding at June 30, 1998 -- 737
Common stock, $.01 par value; 40,000,000 shares authorized,
6,285,957 and 3,532,205 issued and outstanding at
December 31, 1998, and June 30, 1998, respectively 62,860 35,322
Additional paid-in capital 22,697,916 2,816,114
Accumulated deficit (6,446,406) (6,623,224)
------------ ------------
Total shareholders' equity (deficit) 16,314,370 (3,767,255)
------------ ------------
$ 20,055,895 $ 3,149,859
============ ============
See accompanying notes to condensed financial statements.
3
Financial Statements - Continued
INTERNET AMERICA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
REVENUES:
Access $ 2,908,061 $ 2,235,694 $ 5,791,434 $ 4,369,026
Business services 303,151 289,342 531,546 548,119
Other 15,157 9,282 44,841 28,948
----------- ----------- ----------- -----------
Total 3,226,369 2,534,318 6,367,821 4,946,093
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 1,336,680 1,150,854 2,522,972 2,258,929
Sales and marketing 953,909 198,535 1,546,432 284,359
General and administrative 654,496 445,950 1,217,860 845,999
Depreciation and amortization 401,035 363,127 787,970 726,573
----------- ----------- ----------- -----------
Total 3,346,120 2,158,466 6,075,234 4,115,860
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (119,751) 375,852 292,587 830,233
INTEREST EXPENSE, NET 29,408 155,699 105,768 290,419
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX (149,159) 220,153 186,819 539,814
INCOME TAX EXPENSE -- 6,000 10,000 12,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (149,159) $ 214,153 $ 176,819 $ 527,814
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON
SHARE:
BASIC $ (0.04) $ 0.06 $ 0.05 $ 0.15
=========== =========== =========== ===========
DILUTED $ (0.04) $ 0.05 $ 0.03 $ 0.11
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 4,220,643 3,532,221 3,878,305 3,532,221
DILUTED 4,220,643 4,626,781 5,848,830 4,626,781
See accompanying notes to condensed financial statements.
4
Financial Statements - Continued
INTERNET AMERICA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
------------------------------
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net income $ 176,819 $ 527,814
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 787,970 726,573
Changes in operating assets and liabilities:
Accounts receivable 59,817 (158,259)
Prepaid expenses and other current assets (104,152) 1,391
Other assets 102,431 (349,397)
Accounts payable and accrued liabilities (244,095) 19,478
Deferred revenue 810 285,091
------------ ------------
Net cash provided by operating activities 779,600 1,052,691
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (484,938) (59,104)
Purchase of subscriber base -- (50,000)
------------ ------------
Net cash used in investing activities (484,938) (109,104)
------------ ------------
FINANCING ACTIVITIES:
Payments of notes and long-term obligations (2,932,492) (794,019)
Proceeds from initial public offering, net 19,834,641 --
------------ ------------
Net cash provided by (used in) financing activities 16,902,149 (794,019)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,196,811 149,568
CASH AND CASH EQUIVALENTS, beginning of period 565,182 --
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 17,761,993 $ 149,568
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 142,985 $ 290,419
Cash paid for income taxes $ 31,500 $ --
Purchase of subscriber base by assumption of service obligation $ -- $ 412,422
See accompanying notes to condensed financial statements.
5
INTERNET AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. 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 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 and notes thereto included in
the Company's Registration Statement on Form SB-2 (File No. 333-59527)
relating to the Company's initial public offering, which was declared
effective by the Securities and Exchange Commission on December 9, 1998.
2. Internet America, Inc. (the "Company") completed an initial public
offering of its common stock in December 1998 (the "Offering"). The
Company sold 1,700,000 shares and selling shareholders sold 600,000
shares of common stock at a price of $13 per share. Proceeds from the
Offering, net of underwriting discounts and offering expenses, were
$19.8 million. Part of these proceeds were used to pay certain
indebtedness of $2.1 million. On January 4, 1999, the Company's lead
underwriter exercised its overallotment option and purchased an
additional 345,000 shares of common stock from the selling shareholders
at $13 per share.
Immediately after the Offering, each outstanding share of Series A and
Series B convertible preferred stock was converted into 2.25 shares of
common stock and a warrant to purchase 33,750 shares of common stock was
exercised.
3. There are no adjustments required to be made to net income (loss) for the
purpose of computing basic and diluted earnings per share ("EPS"). A
reconciliation of the weighted-average number of common shares
outstanding used in the basic and diluted EPS computation is as follows:
Weighted-Average Common Shares Outstanding
------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Weighted average shares outstanding - basic 4,220,643 3,532,221 3,878,305 3,532,221
Effect of dilutive stock options, convertible
preferred stock, and a warrant -- 1,094,560 1,970,525 1,094,560
---------- ---------- ---------- ----------
Shares used for diluted earnings per share 4,220,643 4,626,781 5,848,830 4,626,781
========== ========== ========== ==========
During the quarter ended December 31, 1998, the following instruments
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: (i) options to purchase 1,208,099 shares of common stock,
(ii) 1,020,002 shares of convertible preferred stock and (iii) a warrant
to purchase 33,750 shares of common stock. As of December 31, 1998, no
options to purchase shares of common stock had been exercised.
4. On January 12, 1999, the Company filed a Registration Statement on Form
S-8 (File No. 333-70461 ) to register 225,000 shares of Common Stock
associated with the Company's 1996 Incentive Stock Option Plan. On
February 10, 1999, the Company filed a Registration Statement on Form S-8
(File No. 333-72109) to register 495,000 shares of common stock
associated with certain non-qualified stock option agreements.
Additionally, on February 10, 1999, the Company filed a Registration
Statement on Form S-8 (File No. 333-72111) to register 235,000 shares of
common stock associated with certain stock option settlement agreements.
6
5. On January 29, 1999, the Company entered into an Asset Purchase Agreement
with CompuNet, Inc., an Internet service provider located in Dallas,
Texas. Under the terms of this agreement, Internet America, Inc. acquired
CompuNet, Inc.'s customer base and all other assets for total
consideration of approximately $2 million, which consisted of common
stock of Internet America, Inc. and the assumption of certain
liabilities. The transaction is expected to be accounted for as a
pooling-of-interests. Accordingly, the financial statements included in
all future filings will be restated to include the results of operations
of CompuNet, Inc. for all periods presented.
ITEM 2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Internet America, Inc. is a leading Internet service provider ("ISP")
in the southwestern United States. The Company provides a wide array of Internet
services tailored to meet the needs of individual and business customers,
including customers with little or no online experience. With more than 53,000
customers, primarily in the North Texas area, the Company believes that it has
achieved one of the highest user densities per point of presence of any ISP in
the United States. This user density has enabled the Company to realize
substantial marketing, network and operating efficiencies.
STATEMENT OF OPERATIONS
The Company's access revenues are derived primarily from individual
dial-up Internet access, whether analog or ISDN, and revenues derived from
value-added services, such as multiple e-mail boxes and personalized e-mail
addresses. The Company derives business services revenues primarily from
dedicated connectivity, bulk dial-up access, web services and bulk access to
newsgroups. Other revenues are derived primarily from advertising fees.
A brief description of each element of the Company's operating expenses follows:
Connectivity and operations expenses consist primarily of setup costs for
new customers, telecommunication costs, and wages of network operations and
customer support personnel. Setup costs include cost of diskettes and other
media, manuals, packaging and delivery costs. The Company does not defer
customer setup costs, but expenses such items as incurred. Connectivity costs
include (i) fees paid to telephone companies for customers' dial-up connections
to the Company's network and (ii) fees paid to backbone providers for
connections from the Company's network to the Internet.
Sales and marketing expenses consist primarily of creative, media and
production costs, and call center employee wages. These expenses include the
cost of the Company's television and billboard campaigns and other advertising.
The Company does not defer any advertising costs, but expenses such items as
incurred. The Company expects to significantly increase its level of marketing
activities as it expands into new markets.
General and administrative expenses consist primarily of accounting and
administrative wages, professional services, rent and other general business
expenses.
As the Company expands into new markets, both costs of operations and
general and administrative expenses will increase. The early phases of entering
new markets will involve substantial expenditures on advertising, customer care
and other operating needs.
Depreciation is computed using the straight line method over the
estimated useful life of the assets. The Company's data communications
equipment, computers, data server and office equipment are depreciated over
three years. The Company depreciates its furniture, fixtures and leasehold
improvements over five years. The costs of acquired subscriber bases are
amortized over three to five years.
7
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998, COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1997
The following table sets forth certain unaudited financial data for the
three months ended December 31, 1998 and 1997. Operating results for any period
are not necessarily indicative of results for any future period. Dollar amounts
are shown in thousands (except per share data and customer count).
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
------------------------ ---------------------
% of % of
(000's) Revenues (000's) Revenues
-------- ---------- ---------- --------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Access $ 2,908 90.1% $ 2,236 88.2%
Business services 303 9.4% 289 11.4%
Other 15 0.5% 9 0.4%
-------- ---------- ---------- --------
Total 3,226 100.0% 2,534 100.0%
-------- ---------- ---------- --------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 1,337 41.4% 1,151 45.4%
Sales and marketing 954 29.6% 198 7.8%
General and administrative 654 20.3% 446 17.6%
Depreciation and amortization 401 12.4% 363 14.3%
-------- ---------- ---------- --------
Total 3,346 103.7% 2,158 85.2%
-------- ---------- ---------- --------
OPERATING INCOME (LOSS) (120) (3.7%) 376 14.8%
INTEREST EXPENSE, NET 29 0.9% 156 6.2%
-------- ---------- ---------- --------
INCOME (LOSS) BEFORE INCOME TAX (149) (4.6%) 220 8.7%
INCOME TAX EXPENSE -- 0.0% 6 0.2%
-------- ---------- ---------- --------
NET INCOME (LOSS) $ (149) (4.6%) $ 214 8.4%
======== ========== ========== ========
NET INCOME (LOSS) PER COMMON
SHARE:
BASIC $ (0.04) $ 0.06
======== ==========
DILUTED $ (0.04) $ 0.05
======== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 4,221 3,532
DILUTED 4,221 4,627
OTHER DATA:
Customers at end of period 53,500 44,600
8
Total revenues. Total revenues increased by $692,000, or 27.3%, to $3.2
million for the three months ended December 31, 1998, from $2.5 million for the
three months ended December 31, 1997. Access revenues increased by $672,000, or
30.1%, to $2.9 million for the three months ended December 31, 1998, from $2.2
million for the same period in the prior year. The increase in access revenues
is attributable to an increase in the number of dial-up customers from 44,600 at
December 31, 1997, to 53,500 at December 31, 1998. Business services revenues
increased by $14,000, or 4.8%, to $303,000 for the three months ended December
31, 1998, but declined as a percentage of total revenues as the Company
continues to focus its growth strategy on the consumer dial-up market.
Connectivity and operations. Connectivity and operations expenses
increased by $186,000, or 16.1%, to $1.3 million for the three months ended
December 31, 1998, but decreased as a percentage of total revenues to 41.4%
compared to 45.4% for the same period in the prior year. The decrease in
expenses as a percentage of revenues is due to cost efficiencies achieved for
wages and connectivity resulting from greater user density in existing markets.
Sales and marketing. Sales and marketing expenses increased by $755,000,
or 381%, to $954,000 for the three months ended December 31, 1998, compared to
$199,000 for the same period in the prior year, when the Company had suspended
virtually all advertising efforts. During the quarter ended December 31, 1998,
the Company launched its marketing campaign in four new markets and continued
its advertising efforts in North Texas. Total sales and marketing expenses for
the period ended December 31, 1998, of $954,000 included $803,000 in
television, print and billboard advertising.
General and administrative. General and administrative expenses increased
by $209,000, or 46.8%, to $654,000 for the three months ended December 31, 1998,
from $446,000 for the three months ended December 31, 1997. As a percentage of
total revenues, general and administrative expenses increased to 20.3% for the
three months ended December 31, 1998, from 17.6% for the same period in the
prior year. The percentage increase is primarily due to increases in wages and
professional services related to the Company's growth and write-offs of bad debt
during the period.
Depreciation and amortization. Depreciation and amortization increased by
$38,000, or 10.4%, to $401,000 for the three months ended December 31, 1998,
from $363,000 for the same period in the prior year. The increase is due to
routine purchases of property and equipment and an acquisition of a subscriber
base in December 1997, resulting in additional amortization expense.
Interest expense. Interest expense decreased by $126,000, or 81.1%, to
$29,000 for the three months ended December 31, 1998, from $156,000 for the same
period in the prior year. During the three months ended December 31, 1997, the
Company had several notes payable to shareholders bearing interest at 18%. In
July 1998, the shareholder notes were restructured and the interest rate
decreased from 18% to prime rate.
9
SIX MONTHS ENDED DECEMBER 31, 1998, COMPARED TO SIX MONTHS ENDED DECEMBER
31, 1997
The following table sets forth certain unaudited financial data for the
six months ended December 31, 1998 and 1997. Operating results for any period
are not necessarily indicative of results for any future period. Dollar amounts
are shown in thousands (except per share data and customer count).
Six Months Ended Six Months Ended
December 31, 1998 December 31, 1997
------------------------ ---------------------
% of % of
(000's) Revenues (000's) Revenues
-------- ---------- ---------- --------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Access $ 5,791 90.9% $ 4,369 88.3%
Business services 532 8.4% 548 11.1%
Other 45 0.7% 29 0.6%
-------- ---------- ---------- --------
Total 6,368 100.0% 4,946 100.0%
-------- ---------- ---------- --------
OPERATING COSTS AND EXPENSES:
Connectivity and operations 2,523 39.6% 2,259 45.7%
Sales and marketing 1,546 24.3% 284 5.7%
General and administrative 1,218 19.1% 846 17.1%
Depreciation and amortization 788 12.4% 727 14.7%
-------- ---------- ---------- --------
Total 6,075 95.4% 4,116 83.2%
-------- ---------- ---------- --------
OPERATING INCOME 293 4.6% 830 16.8%
INTEREST EXPENSE, NET 106 1.7% 290 5.9%
-------- ---------- ---------- --------
INCOME BEFORE INCOME TAX 187 2.9% 540 10.9%
INCOME TAX EXPENSE 10 0.2% 12 0.2%
-------- ---------- ---------- --------
NET INCOME $ 177 2.8% $ 528 10.7%
======== ========== ========== ========
NET INCOME PER COMMON
SHARE:
BASIC $ 0.05 $ 0.15
======== ==========
DILUTED $ 0.03 $ 0.11
======== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC 3,878 3,532
DILUTED 5,849 4,627
OTHER DATA:
Customers at end of period 53,500 44,600
10
Total revenues. Total revenues increased by $1.4 million, or 28.7%, to
$6.4 million for the six months ended December 31, 1998, from $4.9 million for
the same period in the prior year. Virtually all of the increase in total
revenues is attributable to an increase in access revenues resulting from growth
in customer count. Access revenues increased $1.4 million, or 32.6%, and the
number of access customers increased by 20% to 53,500 at December 31, 1998.
Business services revenues decreased by $17,000, or 3.0%, to $532,000 for the
six months ended December 31, 1998, from the same period in the prior year.
The decrease in business services revenues is attributable to a planned change
in the mix of services offered to include more web hosting and other
lower-priced products for the six months ended December 31, 1998.
Connectivity and operations. Connectivity and operations expenses
increased by $264,000, or 11.7%, to $2.5 million for the six months ended
December 31, 1998, compared to the same period in the prior year. Connectivity
and operations expenses as a percentage of total revenues decreased from 45.7%
for the six months ended December 31, 1997, to 39.6% for the six months ended
December 31, 1998. The decrease as a percentage of revenues is due to cost
efficiencies achieved for wages and connectivity resulting from greater user
density in existing markets.
Sales and marketing. Sales and marketing expenses increased by $1.3
million, or 444%, to $1.5 million for the six months ended December 31, 1998,
compared to the same period in the prior year. The Company suspended virtually
all of its advertising efforts during calendar 1997. In January 1998, the
Company launched a new marketing campaign with television and billboard
advertising that continued throughout the calendar year. In December 1998, the
Company launched its marketing campaign in four new markets, while continuing
its advertising efforts in North Texas. Total sales and marketing expenses of
$1.5 million for the six months ended December 31, 1998, included $1.2 million
in television, print and billboard advertising.
General and administrative. General and administrative expenses increased
by $372,000, or 44.0%, to $1.2 million for the six months ended December 31,
1998, from $846,000 for the same period in the prior year. As a percentage of
revenues, general and administrative expenses increased to 19.1% for the six
months ended December 31, 1998, from 17.1% for the same period in the prior
year. The increase as a percentage of revenues is primarily due to increases in
wages and professional services related to the Company's growth and write-offs
of bad debt during the period.
Depreciation and amortization. Depreciation and amortization increased by
$61,000, or 8.5%, to $788,000 for the six months ended December 31, 1998, from
$727,000 for the same period in the prior year. The increase is due to routine
purchases of property and equipment and an acquisition of a subscriber base in
December 1997, resulting in additional amortization expense.
Interest expense. Interest expense decreased by $185,000, or 63.6%, to
$106,000 for the six months ended December 31, 1998, compared to the same period
in the prior year. During the six months ended December 31, 1997, the Company
had several notes payable to shareholders bearing interest up to 18%. In June
1998, the shareholder notes were restructured and the interest rate decreased
from 18% to prime rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its 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. The Company completed an
initial public offering in December 1998, issuing 1,700,000 shares of common
stock at a price of $13 per share. The proceeds of the Offering were $19.8
million, net of underwriting discounts and expenses. Upon completion of the
Offering, the Company repaid the remaining balances of shareholder notes and
related accrued interest which totaled $1.4 million. In addition, the Company
repaid certain other notes and capital lease obligations totaling $625,000. As a
result, the Company had no long-term obligations at December 31, 1998.
Cash provided by operating activities totaled $780,000 for the six months
ended December 31, 1998, compared to $1.1 million for the same period in the
prior year. Payments for advertising costs of $1.3 million were included in the
six months ended December 31, 1998, versus $110,000 for the same period in the
prior year.
Cash used in investing activities was $485,000 for the six months ended
December 31, 1998, and consisted of routine purchases of property and equipment
to maintain network reliability.
11
For the six months ended December 31, 1998, cash provided by financing
activities totaled $16.9 million, which consisted of proceeds from the Offering
of $19.8 million less payments of $2.9 million to service and retire shareholder
notes and long-term obligations.
At December 31, 1998, the Company had cash on hand of $17.8 million. The
Company estimates that its funding needs for the next twelve months can be met
by cash on hand and cash flows from operations. After such period, depending on
its financial condition and results of operations, the Company may require
additional equity or debt financing. There can be no assurance that additional
financing will be available when required. The Company is currently in
discussions with various lenders concerning a possible credit facility, but
there can be no assurance that the Company will enter into any facility, and if
so, on what terms.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective with the first quarter of 1998, the Company was subject to the
provisions of Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income" and Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." Neither statement had any impact on the Company's financial
statements as the Company does not have any items of "comprehensive income." The
Company will continue to review these statements over time, in particular, SFAS
131, to determine if any additional disclosures are necessary based on evolving
circumstances.
YEAR 2000
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations, causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
State of Readiness
In order to address Year 2000 issues, the Company has developed and is
implementing a plan for the Company to become Year 2000 ready (the "Year 2000
Plan"). The Year 2000 Plan covers: (i) software products which are supplied by
the Company to its customers and (ii) the Company's information and other
systems technology. In addition, the Year 2000 Plan calls for the Company to
identify and assess the systems and services of the Company's major vendors,
third party network service providers and other material service providers
("Third Party Systems"), and take appropriate remedial actions and develop
contingency plans where appropriate in connection with such Third Party Systems.
The Company supplies its customers with a software package that, among
other things, allows its customers to access the Company's services. The
software package consists of internally developed software which is bundled with
third party software (collectively, the "Installation Package"). The Company
believes that the current shipping version of its software package is Year 2000
ready. In addition, the Company believes that substantially all of its customer
base is presently using a version of the Installation Package that is Year 2000
ready.
The Company continues to evaluate its information and other systems
technology to identify and eliminate Year 2000 issues in order to achieve Year
2000 readiness. The Company has performed a review of its more critical Third
Party Systems and has surveyed the publicly available statements issued by
vendors of such systems. Most of the Company's critical third-party providers
have made representations to the effect that they are, or will be, Year 2000
compliant. The Company, however, has not undertaken an in-depth evaluation of
its critical or other third-party providers in relation to the Year 2000 issue,
and furthermore the Company has no control over whether its third-party
providers are, or will be, Year 2000 compliant.
Costs
There are no significant historical costs associated with the Company's
Year 2000 readiness efforts and the magnitude of any future costs will depend
upon the nature and extent of any problems that are identified.
12
Risks
The failure by the Company to correct a material Year 2000 problem could
result in a complete failure or degradation of the performance of the Company's
network or other systems, including the disruption of operations, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. Presently, however, the Company believes that its most
reasonably likely worst case scenario related to the Year 2000 is associated
with potential concerns with third-party services or products. Specifically, the
Company is heavily dependent on a significant number of third-party vendors to
provide both network services or equipment. A significant Year 2000-related
disruption of the network services or equipment provided to the Company by
third-party vendors could cause customers to consider seeking alternate
providers or cause an unmanageable burden on customer service and technical
support, which in turn could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The Company is not
presently aware of any vendor-related Year 2000 issue that is likely to result
in such a disruption. Although there is inherent uncertainty in the Year 2000
issue, the Company expects that as it progresses with its Year 2000 Plan, the
level of uncertainty about the impact of the Year 2000 issue on the Company will
be reduced and the Company should be better positioned to identify the nature
and extent of material risk to the Company as a result of any Year 2000
disruptions.
Contingency Plans
Due to the current stage of the Company's Year 2000 Plan, the Company is
currently unable to fully assess its risks and determine what contingency plans,
if any, need to be implemented. As the Company progresses with its Year 2000
Plan and identifies specific risk areas, the Company intends to timely implement
appropriate remedial actions and contingency plans.
The estimates and conclusions herein contain forward-looking statements
and are based on management's best estimates of future events. The Company's
expectations about risks, future costs, and the timely completion of its Year
2000 efforts are subject to uncertainties that could cause actual results to
differ materially from what has been discussed above. Factors that could
influence risks, amount of future costs and the effective timing of remediation
efforts include the Company's success in identifying and correcting potential
Year 2000 issues and the ability of third parties to appropriately address their
Year 2000 issues.
"SAFE HARBOR" STATEMENT
The following "Safe Harbor" Statement is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the Statements contained in
the body of this Report are forward-looking statements (rather than historical
facts) that are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, the Company seeks
the protections afforded by the Private Securities Litigation Reform Act of
1995. These risks include, without limitation, (1) that the Company will not
retain or grow its subscriber base, (2) that the Company will fail to be
competitive with existing and new competitors, (3) that the Company will not be
able to sustain its current growth, (4) that the Company will not adequately
respond to technological developments impacting the Internet, and (5) that
needed financing will not be available to the Company if and as needed. This
list is intended to identify certain of the principal factors that could cause
actual results to differ materially from those described in the forward-looking
statements included elsewhere herein. These factors are not intended to
represent a complete list of all risks and uncertainties inherent in the
Company's business, and should be read in conjunction with the more detailed
cautionary statements included in the Company's other publicly filed reports and
documents.
13
PART II - OTHER INFORMATION
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).
11. Computation of earnings per share (1)
27. Financial Data Schedule (2)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter for which this report is filed.
(1) See note 3 to condensed financial statements
(2) Filed herewith
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: 2-16-99 By: /s/ Michael T. Maples
------------- --------------------------------------------
Michael T. Maples
President and Chief Executive Officer
Date: 2-16-99 By: /s/ James T. Chaney
------------- ---------------------------------------------
James T. Chaney
Vice President and Chief Financial Officer
14
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27. Financial Data Schedule