-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BL9dXvgPU8YA4MYrFaCtuXkzd4bUGNlTIss+oiINRearzVkxI4pBEkaUwa+/Ch9S cA7lBnt6ZoCYxrE7510Vnw== 0000950134-99-004394.txt : 19990518 0000950134-99-004394.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950134-99-004394 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNET AMERICA INC CENTRAL INDEX KEY: 0001001279 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 860778979 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25147 FILM NUMBER: 99627139 BUSINESS ADDRESS: STREET 1: 350 N ST PAUL STE 200 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2148612500 MAIL ADDRESS: STREET 1: ONE DALLAS CENTRE 350 N. ST. PAUL STREET 2: SUITE 3000 CITY: DALLAS STATE: TX ZIP: 75201 10QSB 1 FORM 10QSB FOR QUARTER ENDING MARCH 31, 1999 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 MARCH 31, 1999 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), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. OUTSTANDING AT MAY 14, 1999 -------------------------------- Common Stock at $.01 par value 6,893,530 Shares -------------------------------- 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INTERNET AMERICA, INC. BALANCE SHEETS
March 31, June 30, 1999 1998 ------------ ------------ ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 16,661,431 $ 618,290 Trade receivables, net 781,643 494,961 Prepaid expenses and other current assets 120,153 30,824 ------------ ------------ Total current assets 17,563,227 1,144,075 PROPERTY AND EQUIPMENT, net 2,084,572 2,132,131 OTHER ASSETS, net 479,498 785,634 ------------ ------------ $ 20,127,297 $ 4,061,840 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Trade accounts payable $ 1,450,322 $ 1,153,728 Accrued liabilities 1,298,481 1,322,356 Advances under line of credit -- 225,000 Deferred revenue 4,055,448 3,660,006 Current maturities of long-term debt 272,328 686,302 Current maturities of capital lease obligations 212,482 358,645 Notes payable to shareholders -- 2,017,713 ------------ ------------ Total current liabilities 7,289,061 9,423,750 LONG-TERM DEBT, net of current portion 297,162 1,182,273 CAPITAL LEASE OBLIGATIONS, net of current portion 32,328 143,915 ------------ ------------ Total liabilities 7,618,551 10,749,938 ------------ ------------ 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, 6,892,818 and 3,914,856 issued and outstanding at March 31, 1999, and June 30, 1998, respectively 68,928 39,148 Additional paid-in capital 24,217,070 3,480,288 Accumulated deficit (11,777,252) (10,212,067) ------------ ------------ Total shareholders' equity (deficit) 12,508,746 (6,688,098) ------------ ------------ $ 20,127,297 $ 4,061,840 ============ ============
See accompanying notes to condensed financial statements. 3 Financial Statements - Continued INTERNET AMERICA, INC. STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, ------------------------------ ------------------------------ 1999 1998 1999 1998 ------------ ------------ ------------ ------------ REVENUES: Access $ 4,221,499 $ 3,274,873 $ 11,435,757 $ 8,905,034 Business services 499,848 545,081 1,620,498 1,454,085 Other 34,931 25,334 79,773 54,282 ------------ ------------ ------------ ------------ Total 4,756,278 3,845,288 13,136,028 10,413,401 ------------ ------------ ------------ ------------ OPERATING COSTS AND EXPENSES: Connectivity and operations 2,036,262 2,057,698 6,283,527 5,411,223 Sales and marketing 2,140,563 627,515 4,203,665 1,119,799 General and administrative 1,057,182 820,114 2,824,363 2,103,610 Depreciation and amortization 427,705 468,750 1,405,340 1,305,173 ------------ ------------ ------------ ------------ Total 5,661,712 3,974,077 14,716,895 9,939,805 ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS) (905,434) (128,789) (1,580,867) 473,596 INTEREST INCOME (EXPENSE), NET 196,596 (191,149) 25,682 (524,461) ------------ ------------ ------------ ------------ LOSS BEFORE INCOME TAX (708,838) (319,938) (1,555,185) (50,865) INCOME TAX EXPENSE -- (6,000) (10,000) (18,000) ------------ ------------ ------------ ------------ NET LOSS $ (708,838) $ (325,938) $ (1,565,185) $ (68,865) ============ ============ ============ ============ NET LOSS PER COMMON SHARE: BASIC $ (0.10) $ (0.08) $ (0.31) $ (0.02) ============ ============ ============ ============ DILUTED $ (0.10) $ (0.08) $ (0.31) $ (0.02) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 6,762,294 3,914,856 5,081,299 3,914,856 DILUTED 6,762,294 3,914,856 5,081,299 3,914,856
See accompanying notes to condensed financial statements. 4 Financial Statements - Continued INTERNET AMERICA, INC. STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended March 31, ------------------------------ 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net loss $ (1,565,185) $ (68,865) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,405,340 1,305,173 Changes in operating assets and liabilities: Accounts receivable (286,682) (218,277) Prepaid expenses and other current assets (89,330) 24,849 Other assets (139,085) (291,165) Accounts payable and accrued liabilities 272,719 (864,442) Deferred revenue 395,442 1,601,110 ------------ ------------ Net cash provided by (used in) operating activities (6,781) 1,488,383 ------------ ------------ INVESTING ACTIVITIES Purchases of property and equipment (912,560) (472,700) Purchases of subscribers -- (50,000) ------------ ------------ Net cash used in investing activities (912,560) (522,700) ------------ ------------ FINANCING ACTIVITIES: Proceeds from issuance of common equity 20,450,844 -- Purchases of stock options -- (92,000) Principal payments of capital lease obligations (1,257,750) (612,573) Principal payments of notes payable to shareholders (1,456,539) -- Principal payments of long-term debt (549,073) -- Payments on line of credit (225,000) -- ------------ ------------ Net cash provided by (used in) financing activities 16,962,482 (704,573) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,043,141 261,110 CASH AND CASH EQUIVALENTS, beginning of period 618,290 21,574 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 16,661,431 $ 282,684 ============ ============ SUPPLEMENTAL INFORMATION: Cash paid for interest $ 234,733 $ 738,698 Cash paid for income taxes $ 31,500 $ -- Purchase of subscriber base by assumption of service obligation $ -- $ 412,422 Contribution of capital in exchange for note payable $ 311,186 $ --
See accompanying notes to condensed financial statements. 5 INTERNET AMERICA, INC. NOTES TO CONDENSED 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, 1998, included in the Company's Current Report on Form 8-K/A (File No. 000-25147) filed on May 5, 1999 and the Registration Statement on Form SB-2 (File No. 333-59527) filed on December 9, 1998. 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, 1999, options to purchase 1,117,468 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. As of March 31, 1999, options to purchase 224,300 shares of common stock had been exercised. 3. Business Combinations On January 29, 1999, the Company exchanged 16,910 shares of its common stock, par $0.01 per share, for substantially all of the net assets of CompuNet. On February 18, 1999, the Company exchanged 365,725 shares of its common stock of Internet America, Inc. for all the members' interest in CyberRamp. These combinations were accounted for as poolings of interests. Accordingly, the financial statements included herein have been restated to include CompuNet and CyberRamp as of the beginning of the earliest period presented. There were no intercompany transactions prior to their combination. No significant adjustments were required to adopt the same accounting practices. The following summarizes the results of operations for each of the combining companies prior to the combinations:
SIX MONTHS YEARS ENDED JUNE 30, ENDED DECEMBER 31, ------------------------------ ------------------ 1997 1998 1998 ------------ ------------ ------------------ (UNAUDITED) Revenue: Internet America $ 9,470,922 $ 10,643,272 $ 6,367,821 CompuNet 643,440 1,271,534 558,539 CyberRamp 1,188,560 2,163,419 1,453,539 ------------ ------------ ------------ Total $ 11,302,922 $ 14,078,225 $ 8,379,899 ============ ============ ============ Net loss: Internet America $ (3,823,529) $ 1,006,002 $ 176,819 CompuNet (507,668) (684,251) (322,536) CyberRamp (268,264) (967,689) (710,572) ------------ ------------ ------------ Total $ (4,599,461) $ (645,938) $ (856,289) ============ ============ ============
6 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. As of March 31, 1999, the Company had approximately 79,000 subscribers. The Company's strategy of achieving a high concentration of users in targeted markets enables substantial marketing, network and operating efficiencies. The Company's most popular service package includes unlimited dial-up Internet access for $19.95 a month. The Company also offers value-added services for additional fees, including multiple e-mail boxes and personal Web sites, as well as business services, including dedicated high-speed access and server co-location. The Company completed two business combinations during the quarter ended March 31, 1999, resulting in the addition of approximately 17,700 consumer dial-up and broadband customers. On January 29, 1999, the Company exchanged 16,910 shares of its common stock for substantially all the net assets of CompuNet. On February 18, 1999, the Company exchanged 365,725 shares of its common stock in exchange for all outstanding members' interests of CyberRamp. Each transaction was accounted for as a pooling of interests. Subscriber growth during the third quarter of fiscal 1999, excluding business combinations, was approximately 7,800 customers. The Company expanded service into four new markets, including San Antonio and Austin, Texas' third and fourth largest markets. STATEMENT OF OPERATIONS The Company's access revenues are derived primarily from individual dial-up Internet access 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 broadband connectivity, bulk dial-up access, web services and bulk access to newsgroups. Other revenues are derived primarily from fees associated with advertising banners on the Company's homepage. 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. General and administrative expenses consist primarily of accounting and administrative wages, professional services, rent and other general business expenses. Depreciation is computed using the straight line method over the estimated useful lives 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 MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 The following table sets forth certain unaudited financial data for the three months ended March 31, 1999 and 1998. All amounts have been restated to reflect the poolings of interests with CompuNet and CyberRamp. 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 subscriber count).
Three Months Ended Three Months Ended March 31, 1999 March 31, 1998 ----------------------- ----------------------- % of % of (000's) Revenues (000's) Revenues -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: REVENUES: Access $ 4,221 88.8% $ 3,275 85.2% Business services 500 10.5% 545 14.2% Other 35 0.7% 25 0.7% -------- -------- -------- -------- Total 4,756 100.0% 3,845 100.0% -------- -------- -------- -------- OPERATING COSTS AND EXPENSES: Connectivity and operations 2,036 42.8% 2,058 53.5% Sales and marketing 2,141 45.0% 627 16.3% General and administrative 1,057 22.2% 820 21.3% Depreciation and amortization 428 9.0% 469 12.2% -------- -------- -------- -------- Total 5,662 119.0% 3,974 103.4% -------- -------- -------- -------- OPERATING LOSS (906) (19.0)% (129) (3.4)% INTEREST INCOME (EXPENSE), NET 197 4.1% (191) (5.0)% -------- -------- -------- -------- LOSS BEFORE INCOME TAX (709) (14.9)% (320) (8.3)% INCOME TAX EXPENSE -- 0.0% (6) (0.2)% -------- -------- -------- -------- NET LOSS $ (709) (14.9)% $ (326) (8.2)% ======== ======== ======== ======== NET LOSS PER COMMON SHARE: BASIC $ (0.10) $ (0.08) ======== ======== DILUTED $ (0.10) $ (0.08) ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 6,762 3,915 DILUTED 6,762 3,915 OTHER DATA: Subscribers at end of period 79,000 59,100
8 Total revenues. Total revenues increased by $911,000, or 23.7%, to $4.8 million for the three months ended March 31, 1999, from $3.8 million for the three months ended March 31, 1998. Access revenues increased by $947,000, or 28.9%, to $4.2 million for the three months ended March 31, 1999, from $3.3 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 subscribers from 59,100 at March 31, 1998, to 79,000 at March 31, 1999. Connectivity and operations. Connectivity and operations expenses decreased by $21,000, or 1.0%, to $2.0 million for the three months ended March 31, 1999. As a percentage of revenues, connectivity and operations expenses decreased to 42.8% for the three months ended March 31, 1999, from 53.5% for the same period in the prior year. 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 $1.5 million, or 241%, to $2.1 million for the three months ended March 31, 1999, compared to $627,000 for the same period in the prior year. During the three months ended March 31, 1998, the Company concentrated marketing efforts in its primary market, the Dallas/Ft. Worth area. For the three months ended March 31, 1999, the Company's marketing campaign included television and billboard advertisements in a total of nine markets. Total sales and marketing expenses for the period ended March 31, 1999, of $2.1 million included $1.9 million in television, print and billboard advertising. General and administrative. General and administrative expenses increased by $237,000, or 28.9%, to $1.1 million for the three months ended March 31, 1999, from $820,000 for the three months ended March 31, 1998. As a percentage of total revenues, general and administrative expenses increased by 0.9% to 22.2% for the three months ended March 31, 1999, from 21.3% for the same period in the prior year. The percentage increase is primarily due to professional service fees associated with the combinations with CompuNet and CyberRamp. Depreciation and amortization. Depreciation and amortization decreased by $41,000, or 8.8%, to $428,000 for the three months ended March 31, 1999, from $469,000 for the same period in the prior year. The decrease is due to fully depreciated assets that are no longer included in depreciation expense for the quarter ending March 31, 1999. Interest income and expense. The Company realized $197,000 of interest income during the three months ended March 31, 1999, compared to interest expense of $191,000 for the same period in the prior year. The net proceeds from the initial public offering completed in December 1998 were invested in investment grade securities resulting in interest income of $197,000 for the three months ended March 31, 1999. During the three months ended March 31, 1998, the Company had several notes payable outstanding with interest rates up to 18%, resulting in interest expense of $191,000 for the period. 9 NINE MONTHS ENDED MARCH 31, 1999, COMPARED TO NINE MONTHS ENDED MARCH 31, 1998 The following table sets forth certain unaudited financial data for the nine months ended March 31, 1999 and 1998. All amounts have been restated to reflect the poolings of interests with CompuNet and CyberRamp. 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 subscribers count).
Nine Months Ended Nine Months Ended March 31, 1999 March 31, 1998 ------------------------ ------------------------ % of % of (000's) Revenues (000's) Revenues -------- ---------- -------- ---------- STATEMENT OF OPERATIONS DATA: REVENUES: Access $ 11,436 87.1% $ 8,905 85.5% Business services 1,620 12.3% 1,454 14.0% Other 80 0.6% 54 0.5% -------- ---------- -------- ---------- Total 13,136 100.0% 10,413 100.0% -------- ---------- -------- ---------- OPERATING COSTS AND EXPENSES: Connectivity and operations 6,284 47.8% 5,411 52.0% Sales and marketing 4,204 32.0% 1,120 10.8% General and administrative 2,824 21.5% 2,104 20.2% Depreciation and amortization 1,405 10.7% 1,305 12.5% -------- ---------- -------- ---------- Total 14,717 112.0% 9,940 95.5% -------- ---------- -------- ---------- OPERATING LOSS (1,581) (12.0)% 473 4.5% INTEREST INCOME (EXPENSE), NET 26 0.2% (524) (5.0)% -------- ---------- -------- ---------- LOSS BEFORE INCOME TAX (1,555) (11.8)% (51) (0.5)% INCOME TAX EXPENSE (10) (0.1)% (18) (0.2)% -------- ---------- -------- ---------- NET LOSS $ (1,565) (11.8)% $ (69) (0.3)% ======== ========== ======== ========== NET LOSS PER COMMON SHARE: BASIC $ (0.31) $ (0.02) ======== ======== DILUTED $ (0.31) $ (0.02) ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 5,081 3,915 DILUTED 5,081 3,915 OTHER DATA: Subscribers at end of period 79,000 59,100
10 Total revenues. Total revenues increased by $2.7 million, or 26.1%, to $13.1 million for the nine months ended March 31, 1999, from $10.4 million for the same period in the prior year. Access revenues increased by $2.5 million, or 28.4%, to $11.4 million for the nine months ended March 31, 1999, primarily due to the increase in the number of subscribers from the same period in the prior year. As of March 31, 1999, the Company had 79,000 subscribers compared to 59,100 as of March 31, 1998, representing an increase of 33.7%. Business services revenues increased by $166,000, or 11.4%, to $1.6 million for the nine months ended March 31, 1999, from $1.5 million for the same period in the prior year. This increase is primarily attributable to revenue associated with the Company's web hosting service, a product that was introduced during fiscal 1999. Connectivity and operations. Connectivity and operations expenses increased by $872,000, or 16.1%, to $6.3 million for the nine months ended March 31, 1999, from $5.4 million for the same period in the prior year. Connectivity and operations expenses as a percentage of total revenues decreased to 47.8% for the nine months ended March 31, 1999 from 52.0% for the nine months ended March 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 $3.1 million, or 275%, to $4.2 million for the nine months ended March 31, 1999, compared to the same period in the prior year. The increase is primarily due to the Company's continued marketing efforts in its existing markets in North Texas and the entry into nine new markets during the second and third quarters of fiscal 1999. Total sales and marketing expenses of $4.2 million for the nine months ended March 31, 1999, included $3.2 million in television, print and billboard advertising. General and administrative. General and administrative expenses increased by $720,000, or 34.3%, to $2.8 million for the nine months ended March 31, 1999, from $2.1 million for the same period in the prior year. As a percentage of revenues, general and administrative expenses increased to 21.5% for the nine months ended March 31, 1999, from 20.2% for the same period in the prior year, primarily due to professional service fees associated with the combinations with CompuNet and CyberRamp. Depreciation and amortization. Depreciation and amortization increased by $100,000, or 7.7%, to $1.4 million for the nine months ended March 31, 1999, from $1.3 million for the same period in the prior year. The increase is due to additional depreciation expense resulting from routine purchases of property and equipment. Interest income/expense. The Company realized $26,000 of interest income for the nine months ended March 31, 1999, compared to interest expense of $524,000 for the same period in the prior year. During the nine months ended March 31, 1998, the Company had several notes payable to shareholders bearing interest up to 18% resulting in interest expense of $524,000. The Company has invested the net proceeds from the Company's initial public offering in December 1998 in investment grade securities which generated net interest income for the period of $26,000. 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 and received net proceeds from the offering of approximately $20.0 million. Subsequent to the offering, the Company repaid certain indebtedness of $2.1 million. As of March 31, 1999, cash and cash equivalents on hand totaled $16.7 million, which represents the Company's principal source of liquidity. Cash used in operating activities totaled $7,000 for the nine months ended March 31, 1999, compared to cash provided by operating activities of $1.5 million for the same period in the prior year. Payments for advertising costs of $3.2 million were included in the nine months ended March 31, 1999, versus $570,000 for the same period in the prior year. Cash used in investing activities was $913,000 for the nine months ended March 31, 1999, and consisted of routine purchases of property and equipment to maintain network reliability. 11 For the nine months ended March 31, 1999, cash provided by financing activities totaled $17.0 million, which consisted of proceeds from the Offering of $19.8 million and proceeds from the exercise of stock options by option holders less payments of $3.5 million to service and retire shareholder notes and long-term obligations. The Company estimates that cash on hand of $16.7 million will meet its operating needs for the next twelve months. Depending on its financial condition, results of operations and the level of acquisition activity, 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. 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. These costs are not expected to exceed $100,000. 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 On February 16, 1999, the Company filed a Current Report on Form 8-K to report that, on January 29, 1999, the Company acquired substantially all of the net assets of CompuNet, Inc., a Texas corporation ("CompuNet") pursuant to the terms of an Asset Purchase Agreement by and among CompuNet, certain securityholders of CompuNet, the Company and GEEK Assets, Inc., a Texas corporation and wholly owned subsidiary of the Company. On March 1, 1999, the Company filed a Current Report on Form 8-K to report that, on February 18, 1999, the Company acquired all the issued and outstanding membership interests in CyberRamp, L.L.C., a Texas limited liability company ("CyberRamp"), pursuant to a Securities Purchase Agreement by and among the members of CyberRamp and the Company. (1) See note 2 to condensed financial statements (2) Filed herewith 14 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: May 17, 1999 By: /s/ Michael T. Maples --------------- ---------------------------------------- Michael T. Maples President and Chief Executive Officer Date: May 17, 1999 By: /s/ James T. Chaney --------------- ---------------------------------------- James T. Chaney Vice President and Chief Financial Officer 15 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF INTERNET AMERICA, INC. FOR THE NINE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS YEAR YEAR JUN-01-1999 JUN-30-1997 JUN-30-1998 JUL-01-1998 JUL-01-1996 JUL-01-1997 MAR-31-1999 JUN-30-1997 JUN-30-1998 16,661 22 618 0 0 0 882 469 693 100 127 198 0 0 0 17,563 427 1,144 6,450 4 5,538 4,366 4,691 3,405 20,127 1,800 4,062 7,289 3,954 9,424 0 0 0 0 0 0 0 0 0 69 39 39 12,440 5,911 6,649 20,127 3,954 4,062 0 0 0 13,136 11,303 14,078 6,284 7,432 7,418 14,717 15,385 14,030 0 0 0 0 0 0 26 517 670 (1,555) (4,609) (670) 10 10 24 (1,565) (4,599) (646) 0 0 0 0 0 0 0 0 0 (1,565) (4,599) (646) (0.31) (1.21) (0.16) (0.31) (1.21) (0.16)
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