-----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, AhelFoiAeXTwXYSQNbdyH4FnNAlY5xj/+cC19NJr8taBWcfLHM1pcyd0P4w7GFzs qWxcwVtN17vvQV/QT+yAEA== 0000950134-00-004692.txt : 20000516 0000950134-00-004692.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950134-00-004692 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 635544 BUSINESS ADDRESS: STREET 1: 350 N ST PAUL STE 3000 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, 2000 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, 2000 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) Issuer's telephone number, including area code: (214) 861-2500 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. OUTSTANDING AT MAY 9, 2000 -------------------------- Common Stock at $.01 par value 9,704,632 Shares -------------------------- Transitional Small Business Disclosure Format (check one) Yes [ ] No [x] 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INTERNET AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30, 2000 1999 ------------ ------------ ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,427,249 $ 5,845,562 Accounts receivable, net 1,886,539 1,122,894 Prepaid expenses and other current assets 237,794 126,433 ------------ ------------ Total current assets 3,551,582 7,094,889 PROPERTY AND EQUIPMENT, net 2,807,610 2,622,637 INTANGIBLES, net 36,241,375 8,978,384 OTHER 296,748 217,494 ------------ ------------ $ 42,897,315 $ 18,913,404 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 2,327,117 $ 2,131,201 Accrued liabilities 1,777,273 1,068,774 Deferred revenue 4,877,452 3,358,347 Current maturities of capital lease obligations 155,968 41,195 Current maturities of long-term debt 107,091 434,934 ------------ ------------ Total current liabilities 9,244,901 7,034,451 CAPITAL LEASE OBLIGATIONS, net of current portion 217,352 102,246 LONG-TERM DEBT, net of current portion 203,609 151,997 ------------ ------------ Total liabilities 9,665,862 7,288,694 ------------ ------------ SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 40,000,000 shares authorized, 9,662,659 and 6,912,930 issued and outstanding at March 31, 2000, and June 30, 1999, respectively 96,622 69,130 Additional paid-in capital 54,656,646 24,231,065 Accumulated deficit (21,521,815) (12,675,485) ------------ ------------ Total shareholders' equity 33,231,453 11,624,710 ------------ ------------ $ 42,897,315 $ 18,913,404 ============ ============
See accompanying notes to condensed consolidated financial statements. 2 3 Financial Statements - Continued INTERNET AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended March 31, March 31, ------------------------------ ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ REVENUES: Access $ 6,616,757 $ 4,221,499 $ 16,516,438 $ 11,435,757 Business services 2,139,195 499,848 4,246,144 1,620,498 Other 88,771 34,931 386,319 79,773 ------------ ------------ ------------ ------------ Total 8,844,723 4,756,278 21,148,901 13,136,028 ------------ ------------ ------------ ------------ OPERATING COSTS AND EXPENSES: Connectivity and operations 4,984,488 2,036,262 12,066,933 6,283,527 Sales and marketing 1,485,757 2,140,563 4,531,148 4,203,665 General and administrative 2,331,306 1,057,182 5,515,499 2,824,363 Depreciation and amortization 4,037,397 427,705 7,926,558 1,405,340 ------------ ------------ ------------ ------------ Total 12,838,948 5,661,712 30,040,138 14,716,895 ------------ ------------ ------------ ------------ OPERATING LOSS (3,994,225) (905,434) (8,891,237) (1,580,867) INTEREST INCOME (EXPENSE), NET (4,990) 196,596 44,907 25,682 INCOME TAX EXPENSE -- -- -- (10,000) ------------ ------------ ------------ ------------ NET LOSS $ (3,999,215) $ (708,838) $ (8,846,330) $ (1,565,185) ============ ============ ============ ============ NET LOSS PER COMMON SHARE: BASIC $ (0.41) $ (0.10) $ (1.07) $ (0.31) ============ ============ ============ ============ DILUTED $ (0.41) $ (0.10) $ (1.07) $ (0.31) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 9,641,590 6,762,294 8,260,053 5,081,299 DILUTED 9,641,590 6,762,294 8,260,053 5,081,299
See accompanying notes to condensed consolidated financial statements. 3 4 Financial Statements - Continued INTERNET AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended March 31, ------------------------------ 2000 1999 ------------ ------------ OPERATING ACTIVITIES: Net loss $ (8,846,330) $ (1,565,185) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,926,558 1,405,340 Changes in operating assets and liabilities (excluding amounts obtained in acquisitions): Accounts receivable (512,113) (286,682) Prepaid expenses and other current assets 52,758 (89,330) Other assets (160,555) (139,085) Accounts payable and accrued liabilities (1,379,425) 272,719 Deferred revenue (171,946) 395,442 ------------ ------------ Net cash used in operating activities (3,091,053) (6,781) ------------ ------------ INVESTING ACTIVITIES: Purchases of property and equipment (634,707) (912,560) Business and subscriber acquisitions, net of cash acquired (808,432) -- ------------ ------------ Net cash used in investing activities (1,443,139) (912,560) ------------ ------------ FINANCING ACTIVITIES: Proceeds from issuance of common equity 569,954 20,450,844 Principal payments of notes payable to shareholders -- (1,456,539) Principal payments of capital lease obligations (77,674) (1,257,750) Principal payments of long-term debt (376,401) (549,073) Payments on line of credit -- (225,000) ------------ ------------ Net cash provided by financing activities 115,879 16,962,482 ------------ ------------ NET INCREASE (DECREASE) IN CASH (4,418,313) 16,043,141 CASH, BEGINNING OF PERIOD 5,845,562 618,290 ------------ ------------ CASH, END OF PERIOD $ 1,427,249 $ 16,661,431 ============ ============ SUPPLEMENTAL INFORMATION: Cash paid for interest $ 45,339 $ 234,733 Cash paid for income taxes $ -- $ 31,500 Common stock and options issued in acquisition of PDQ.Net $ 29,872,852 $ -- Accrued liability recorded for acquisition costs $ 400,000 $ -- Contribution of capital in exchange for note payable $ 10,267 $ 311,186
See accompanying notes to condensed consolidated financial statements. 4 5 INTERNET AMERICA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Article 10 of Regulation S-X of the Securities and Exchange Commission. The accompanying unaudited condensed financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair statement of the Company's financial position and results of operations for the interim periods presented. All such adjustments are of a normal and recurring nature. These condensed financial statements should be read in conjunction with the financial statements for the year ended June 30, 1999, included in the Company's Annual Report on Form 10-KSB (File No 000-25147). 2. Earnings Per Share There are no adjustments required to be made to net loss for the purpose of computing basic and diluted earnings per share ("EPS"). During the quarter ended March 31, 2000, options to purchase approximately 1,315,000 shares of common stock were not included in the computation of diluted EPS because the Company incurred a net loss for the period and the effect of such instruments is antidilutive. During the quarter ended March 31, 2000, options to purchase 48,841 shares of common stock were exercised. 3. Business Combinations Each of the following acquisitions has been accounted for using the purchase method of accounting, and resulting intangibles are being amortized over a three year period. On June 30, 1999, the Company acquired all the outstanding common stock of NeoSoft, Inc. ("NeoSoft"), an ISP in Houston, Texas, for $8.1 million. Assets of NeoSoft include approximately 9,500 individual and corporate Internet access accounts, including customer support and network operations facilities in Houston and New Orleans. Intangibles acquired as a result of the acquisition aggregated approximately $8.8 million. On July 26, 1999, the Company acquired the subscribers of King Dinosaur, Inc. d/b/a KDI Internet Solutions, a Texas corporation ("KDi"). Under the terms of an Asset Purchase Agreement, we paid a total of $259,250 based on the actual number of KDi subscribers that transitioned to Internet America's service. On July 28, 1999, the Company acquired the subscribers of INTX Networking, L.L.C., a Texas limited liability company ("INTX"), under the terms of an Asset Purchase Agreement. According to the agreement, we agreed to pay up to $380,600 in cash, half of which was paid upon closing. The remaining payment was contingent on the actual number of INTX subscribers that transitioned to Internet America's service by January 24, 2000. We do not expect to make any further payments under the agreement. On August 9, 1999, the Company acquired the Texas dial-up subscribers of Pointe Communications Corporation, Inc., a Nevada corporation ("PointeCom"). Under the terms of an Asset Purchase Agreement, we made an initial payment of $1,000,000 in cash. The remaining payment of $1,000,000 was contingent on the actual number of PointeCom customers that transitioned to Internet America's service. In January 2000, the Company received a refund of $750,000 based on the actual number of Pointecom subscribers that transitioned to Internet America's service. On November 22, 1999, the Company acquired all of the outstanding shares of PDQ.Net, Inc. ("PDQ.Net"), a Houston-based ISP, in exchange for 2,425,000 shares of the Company's common stock. The Company also issued options to purchase 352,917 shares of the Company's common stock with a weighted average exercise price of $1.62 per share in replacement of all of the outstanding stock options of PDQ.Net. The total value of the stock and options exchanged by the Company was approximately $29.9 million, excluding closing costs, based on the November 22, 1999 closing price of the Company's stock, adjusted to reflect restrictions on the transfer of certain shares. Goodwill arising from the transaction aggregates approximately $32.8 million and is being amortized using the straight-line method over a period of 36 months commencing November 22, 1999. 5 6 ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements, identified by words such as "anticipate," "believe," "estimate," "should," "expect" and similar expressions, include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. Our Registration Statement on Form SB-2, initially filed with the Securities and Exchange Commission on January 21, 2000, discusses some additional important risk factors that could cause our actual results to differ materially from those in such forward-looking statements. OVERVIEW Internet America is an Internet service provider ("ISP") that provides a wide array of Internet services tailored to meet the needs of individual and business subscribers. We afford our subscribers a high quality Internet experience with fast, reliable service and responsive customer care. As of March 31, 2000, we served approximately 153,000 subscribers in the southwestern United States. The rapid 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 have begun to 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. Rapid growth and high user density are the cornerstones of our business strategy. We will continue to pursue an ambitious growth strategy, but in a controlled manner. Our goal is to rapidly create high user density in specific markets to achieve and maintain positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Recent technological developments have allowed for the propagation of broadband, a transmission medium that can carry numerous voice, video, and data channels simultaneously. 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 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 DSL products due to the high density of our subscriber base. Given the increased level of competition in the industry for new subscribers, we will be more selective with regard to 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. We have found that the most effective way to initially penetrate new markets is through an aggressive acquisition strategy. Management believes the level of consolidation in the industry will escalate, and a viable acquisition strategy is the most efficient way to rapidly build market share. We expect our total sales and marketing expenses to remain relatively stable as a percentage of total revenue. However, we anticipate a lower cost of adding new subscribers by using a market development fund provided by a telecommunications company with which we have partnered to deliver DSL. 6 7 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. We expect general and administrative expenses to increase to support our growth. Connectivity costs will increase after acquisitions, since there is some duplication of inbound telephone connectivity and Internet connectivity during the transition period. However, we believe we can quickly transition even sizable acquisitions and realize connectivity and networking economies of scale within two quarters of an acquisition. We have an accumulated deficit of $21.5 million at March 31, 2000 and have had annual operating losses since inception as a result of building network infrastructure and rapidly increasing market share. STATEMENT OF OPERATIONS Access revenues are derived primarily from individual Internet access, whether dial-up, ISDN, or DSL and value-added services, such as multiple e-mail boxes and personalized e-mail addresses. Business services revenues are derived primarily from dedicated connectivity, bulk dial-up access and Web services. A brief description of each element of our operating expenses follows: Connectivity and operations expenses consist primarily of setup costs for new subscribers, telecommunications costs, and wages of network operations and customer support personnel. Connectivity costs include (i) fees paid to telecommunications companies for subscribers' 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 are amortized over three years. The assets and liabilities acquired in business combinations are recorded at estimated fair values. The excess of the cost of the net assets acquired over their fair value is recorded as goodwill and amortized over an estimated life of three years. Depreciation and amortization will increase substantially during fiscal 2000 due to the acquisition of PDQ.Net, Inc. and other recent acquisitions. Our business is not subject to any significant seasonal influences. 7 8 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 The following table sets forth certain unaudited financial data for the three months ended March 31, 2000 and 1999. Operating results for any period are not indicative of results for any future period. Dollar amounts are shown in thousands (except per share data and subscriber count).
Three Months Ended Three Months Ended March 31, 2000 March 31, 1999 -------------------------- -------------------------- % of % of (000's) Revenues (000's) Revenues ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: REVENUES: Access $ 6,617 74.8% $ 4,221 88.8% Business services 2,139 24.2% 500 10.5% Other 89 1.0% 35 0.7% ---------- ---------- ---------- ---------- Total 8,845 100.0% 4,756 100.0% ---------- ---------- ---------- ---------- OPERATING COSTS AND EXPENSES: Connectivity and operations 4,985 56.4% 2,036 42.8% Sales and marketing 1,486 16.8% 2,141 45.0% General and administrative 2,331 26.3% 1,057 22.2% Depreciation and amortization 4,037 45.6% 428 9.0% ---------- ---------- ---------- ---------- Total 12,839 145.1% 5,662 119.0% ---------- ---------- ---------- ---------- LOSS FROM OPERATIONS (3,994) (45.1)% (906) (19.0)% INTEREST INCOME (EXPENSE), NET (5) (0.1)% 197 4.1% INCOME TAX EXPENSE -- 0.0% -- 0.0% ---------- ---------- ---------- ---------- NET LOSS $ (3,999) (45.2)% $ (709) (14.9)% ========== ========== ========== ========== NET LOSS PER COMMON SHARE: BASIC $ (0.41) $ (0.10) ========== ========= DILUTED $ (0.41) $ (0.10) ========== ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 9,642 6,762 DILUTED 9,642 6,762 OTHER DATA: Subscribers at end of period 153,000 79,000
8 9 Total revenue. Total revenue increased by $4.0 million, or 86.0%, to $8.8 million for the three months ended March 31, 2000, from $4.8 million for the three months ended March 31, 1999. The majority of the increase in total revenue is attributable to the increase in access revenue of $2.4 million, or 56.7%, to $6.6 million for the three months ended March 31, 2000, from $4.2 million for the same period in 1999. Approximately $2.2 million of the increase in access revenue is attributable to the acquisition of PDQ.Net. The remaining $200,000 increase in access revenue is attributable to a 25,000 increase in the number of subscribers from other acquisitions and organic growth. Business services revenue increased from $500,000 for the three months ended March 31, 1999 to $2.1 million for the same period in 2000. The increase in business services revenue is primarily due to the acquisitions of NeoSoft, Inc. (NeoSoft) and PDQ.Net. Other revenue consists primarily of peripheral equipment sales, advertising income generated from our web page, and other miscellaneous revenue. Connectivity and operations. Connectivity and operations expense increased by $3.0 million, or 144.8%, to $5.0 million for the three months ended March 31, 2000 from $2.0 million for the three months ended March 31, 1999. As a percentage of revenue, connectivity and operations expense increased to 56.4% for the three months ended March 31, 2000, from 42.8% for the same period in 1999. The increase as a percentage of revenue is due primarily to additional connectivity related to our entry into new markets and the development of our DSL products. Sales and marketing. Sales and marketing expense decreased by $655,000, or 30.6%, to $1.5 million for the three months ended March 31, 2000, compared to $2.1 million for the same period in 1999. Sales and marketing expense decreased as a percentage of revenue to 16.8% for the three months ended March 31, 2000 from 45.0% for the same period in 1999. This decrease is due to restricting advertising efforts to markets with established branding and utilizing a market development fund provided by our primary DSL service provider. General and administrative. General and administrative expense increased by $1.2 million, or 120.5%, to $2.3 million for the three months ended March 31, 2000, from $1.1 million for the three months ended March 31, 1999. General and administrative expense for the three months ended March 31, 2000 included $422,000 of nonrecurring bad debt expense related primarily to the CyberRamp and PointeCom acquisitions. The Company terminated its efforts to integrate these customers after exhaustive efforts were taken over several quarters to transition them to Internet America services. General and administrative expense as a percentage of total revenue increased to 26.3% for the three months ended March 31, 2000, from 22.2% for the same period in 1999, primarily due to administrative support related to our growth strategy. Depreciation and amortization. Depreciation and amortization increased by $3.6 million, to $4.0 million for the three months ended March 31, 2000, from $428,000 for the same period in 1999. The increase is due to the amortization of recently acquired subscriber bases and goodwill, along with additional depreciation expense related to routine upgrades of our network facilities. Approximately $3.5 million of the total increase in depreciation and amortization relates to amortization of goodwill arising from the PDQ.Net and NeoSoft acquisitions. Interest income and expense. We incurred $5,000 of interest expense during the three months ended March 31, 2000, compared to interest income of $197,000 for the same period in 1999. The interest income in 1999 resulted from the temporary investment of the proceeds of our initial public offering. 9 10 NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999 The following table sets forth certain unaudited financial data for the nine months ended March 31, 2000 and 1999. Operating results for any period are not indicative of results for any future period. Dollar amounts are shown in thousands (except per share data and subscriber count).
Nine Months Ended Nine Months Ended March 31, 2000 March 31, 1999 -------------------------- -------------------------- % of % of (000's) Revenues (000's) Revenues ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: REVENUES: Access $ 16,517 78.1% $ 11,436 87.1% Business services 4,246 20.1% 1,620 12.3% Other 386 1.8% 80 0.6% ---------- ---------- ---------- ---------- Total 21,149 100.0% 13,136 100.0% ---------- ---------- ---------- ---------- OPERATING COSTS AND EXPENSES: Connectivity and operations 12,067 57.0% 6,284 47.8% Sales and marketing 4,531 21.4% 4,204 32.0% General and administrative 5,515 26.1% 2,824 21.5% Depreciation and amortization 7,927 37.5% 1,405 10.7% ---------- ---------- ---------- ---------- Total 30,040 142.0% 14,717 112.0% ---------- ---------- ---------- ---------- LOSS FROM OPERATIONS (8,891) (42.0)% (1,581) (12.0)% INTEREST INCOME (EXPENSE), NET 45 0.2% 26 0.2% INCOME TAX EXPENSE -- 0.0% (10) (0.1)% ---------- ---------- ---------- ---------- NET LOSS $ (8,846) (41.8)% $ (1,565) (11.9)% ========== ========== ========== ========== NET LOSS PER COMMON SHARE: BASIC $ (1.07) $ (0.31) ========== ========== DILUTED $ (1.07) $ (0.31) ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 8,260 5,081 DILUTED 8,260 5,081 OTHER DATA: Subscribers at end of period 153,000 79,000
Total revenue. Total revenue increased by $8.0 million, or 61.0%, to $21.1 million for the nine months ended March 31, 2000, from $13.1 million for the nine months ended March 31, 1999. The majority of the increase in total revenue is attributable to the increase in access revenue of $5.1 million, or 44.4%, to $16.5 million for the nine months ended March 31, 2000, from $11.4 million for the same period in 1999. Approximately $3.8 million of the increase in access revenue is attributable to the acquisitions of PDQ.Net and NeoSoft, while the remainder is attributable to other growth of our customer base. Business services revenue increased by $2.6 million, or 162.0%, to $4.2 million for the nine months ended March 31, 2000, from $1.6 million for the same period in 1999, primarily as a result of the PDQ.Net and NeoSoft acquisitions. 10 11 Connectivity and operations. Connectivity and operations expense increased by $5.8 million, or 92.0%, to $12.1 million for the nine months ended March 31, 2000 from $6.3 million for the nine months ended March 31, 1999. As a percentage of revenue, connectivity and operations expense increased to 57.0% for the nine months ended March 31, 2000, from 47.8% for the same period in 1999. The increase as a percentage of revenue is due primarily to additional connectivity purchases related to our entry into new markets and the development of our DSL products. Sales and marketing. Sales and marketing expense increased by $327,000, or 7.8%, to $4.5 million for the nine months ended March 31, 2000, compared to $4.2 million for the same period in 1999. Sales and marketing expense decreased as a percentage of revenue to 21.4% for the nine months ended March 31, 2000 from 32.0% for the same period in 1999. The dollar increase is due primarily to the expansion of our marketing program which, until December 1998, was limited to North Texas. The reduction as a percentage of revenue for the nine months ended March 31, 2000 is due to restricting advertising to markets with established branding and utilizing a market development fund provided by our primary DSL service provider. General and administrative. General and administrative expense increased by $2.7 million, or 95.3%, to $5.5 million for the nine months ended March 31, 2000, from $2.8 million for the nine months ended March 31, 1999. General and administrative expense as a percentage of total revenue increased to 26.1% for the nine months ended March 31, 2000, from 21.5% for the same period in 1999, primarily due to administrative support related to our growth strategy. Depreciation and amortization. Depreciation and amortization increased by $6.5 million to $7.9 million for the nine months ended March 31, 2000, from $1.4 million for the same period in 1999. Approximately $6.1 million of the increase relates to amortization of goodwill arising from the acquisitions of PDQ.Net and NeoSoft. Interest income and expense. We realized $45,000 of interest income during the nine months ended March 31, 2000, compared to $26,000 for the same period in 1999. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations to date primarily through (i) public and private sales of equity securities, (ii) loans from shareholders and third parties and (iii) revenue collections. We completed an initial public offering of our common stock in December 1998 and received net proceeds of approximately $19.8 million. After the offering, we repaid approximately $2.1 million in shareholder notes and certain other indebtedness. As of March 31, 2000, cash on hand totaled $1.4 million. Cash used in operating activities totaled $2.7 million for the nine months ended March 31, 2000, compared to $7,000 for the same period in 1999. During the nine months ended March 31, 2000, we reduced accounts payable and accrued liabilities by $1.4 million. In addition, increases in general and administrative expenses of $2.7 million related to our growth strategy contributed to cash used in operations for the nine months ended March 31, 2000, as compared to the same period a year ago. Cash used in investing activities totaled $1.8 million for the nine months ended March 31, 2000, and consisted of $1.2 million in business and subscriber acquisitions and $635,000 of routine purchases of property and equipment to expand and upgrade our network. Cash provided by financing activities totaled $116,000 for the nine months ended March 31, 2000 and consisted of proceeds of $570,000 from the exercise of stock options by option holders less payments of $454,000 to service long-term obligations. We estimate that cash on hand of $1.4 million at March 31, 2000 along with anticipated revenue collections will be sufficient for meeting our working capital needs for fiscal 2000 with regard to continuing operations in existing markets. Additional financing will be required to fund acquisitions or expansion into new markets. We are currently in discussions with various lenders concerning a possible credit facility, but there can be no assurance that we will enter into any facility, and if so, on what terms. In addition, we have arranged capital financing to fund a portion of equipment purchases during this fiscal year which are estimated to total approximately $1.0 million. 11 12 If additional capital financing arrangements, including public or private sales of debt or equity securities, or additional borrowings from commercial banks, are insufficient or unavailable, or if we experience shortfalls in anticipated revenues or increases in anticipated expenses, we will have to modify our operations and growth strategies to match available funding. In such case, it is likely that our advertising expenditures would be downscaled to a level where positive cash flows are generated from operations. We have no long term advertising commitments, and our scheduled television commercials may be cancelled with less than two weeks notice. "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, (1) that we will not retain or grow our subscriber base, (2) that we will fail to be competitive with existing and new competitors, (3) that we will not be able to sustain our current growth, (4) that we will not adequately respond to technological developments impacting the Internet, and (5) that needed financing will not be available to us 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 our business, and should be read in conjunction with the more detailed cautionary statements included in our other publicly filed reports and documents. 12 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Our wholly owned subsidiary, PDQ.Net, and our Vice Chairman, William E. Ladin, Jr., were named as defendants in a lawsuit filed on April 10, 2000 by Santa Fe Capital Group, Inc. in the district court of Sante Fe County, New Mexico. The plaintiff alleges a finders fee was owed to plaintiff in connection with the Company's acquisition of PDQ.Net. Plaintiff asserts claims for breach of contract, restitution, fraud and unfair trade practices, and alleges damages in the amount of $960,000. We believe this lawsuit is without merit and intend to defend it vigorously. Internet America, our Chief Executive Officer, Michael T. Maples, and our Chairman, William O. Hunt were named as defendants in a lawsuit filed on November 12, 1999 by Cindy Carradine in the District Court of Dallas County, Texas. The plaintiff asserts claims for fraud in connection with the plaintiff's sale of options to the Company in 1998. The plaintiff alleges actual and punitive damages in an unspecified amount. We believe this lawsuit is without merit and intend to defend it vigorously. 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) 27 Financial Data Schedule* ------------ * Filed herewith (1) See note 2 to the financial statements. (b) Reports on Form 8-K On December 7, 1999, the Company filed a Current Report on Form 8-K to report the closing of the Agreement and Plan of Merger between the Company and PDQ.Net, pursuant to which PDQ.Net became a wholly owned subsidiary of the Company. The Form 8-K was subsequently amended on January 19, 2000 and January 21, 2000 to include the financial statements required by Item 7 of Form 8-K. 13 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: 5/15/00 By: /s/ Michael T. Maples ---------------------------------------- Michael T. Maples President and Chief Executive Officer Date: 5/15/00 By: /s/ James T. Chaney ---------------------------------------- James T. Chaney Vice President and Chief Financial Officer 14 15 INDEX TO EXHIBITS
Exhibit No. Description ----------- ----------- 3.1 Articles of Incorporation, as amended, incorporated by reference to Exhibit Nos. 3.1 and 3.2 on Form SB-2, as amended, initially filed with the Securities and Exchange Commission on July 21, 1998 (File No. 333-59527). 3.2 By-Laws, as amended, incorporated by reference to Exhibit Nos. 3.3 and 3.4 of the Company's Registration Statement on Form SB-2, as amended, initially filed with the Securities and Exchange Commission on July 21, 1998 (File No. 333-59527), and Exhibit No. 3.3 to the Company's Form 10-QSB filed on November 15, 1999 (File No. 000-25147). 4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit No. 4.1 of the Company's Registration Statement on Form SB-2, as amended, initially filed with the Securities and Exchange Commission on July 21, 1998 (File No. 333-59527). 4.2 Pages from the Articles and By-Laws that define the rights of holders of Common Stock, incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form SB-2, initially filed with the Securities and Exchange Commission on January 21, 2000 (File No. 333-95179). 11 Computation of earnings per share (1) 27 Financial Data Schedule*
- ---------------- *Filed herewith (1) See note 2 to the financial statements. 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, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS JUN-30-2000 JUL-01-1999 MAR-31-1999 1,427,249 0 2,045,388 158,849 0 3,551,582 7,453,446 4,645,836 42,897,315 9,244,901 0 0 0 96,622 33,134,831 42,897,315 0 21,148,901 0 30,040,138 0 0 (44,907) (8,846,330) 0 (8,846,330) 0 0 0 (8,846,330) (1.07) (1.07)
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