-----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, DWZ/vRSGEAEXAHAtKE8cHfnuQFljkkHCn/fDUULMet+O/grUlfDRcmmT2LE2D2F1 VRpUgqb6lAj1VcZHFALL8A== 0000950134-00-004732.txt : 20000517 0000950134-00-004732.hdr.sgml : 20000517 ACCESSION NUMBER: 0000950134-00-004732 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000516 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/A SEC ACT: SEC FILE NUMBER: 000-25147 FILM NUMBER: 637013 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/A 1 AMENDMENT NO. 1 TO FORM 10-Q QUARTER END 12/31/99 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A (Amendment No. 1) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 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) 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 Explanatory Note This Form 10-QSB/A is filed to amend the Form 10-QSB for the period ended December 31, 1999 (the "Original Form 10-QSB") to restate the Financial Statements (Item 1) and make the corresponding changes to Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 2) and the Financial Data Schedule. Subsequent to the issuance of the Company's financial statements in the Original Form 10-QSB, we discovered a data processing error in the calculation of deferred revenue. This error had the effect of understating deferred revenue and overstating revenue as of and for the three and six months ended December 31, 1999. The effects of the restatement on the financial statements are more fully described in Note 4 of the Notes to Condensed Consolidated Financial Statements. This report continues to speak as of the date of the Original Form 10-QSB, and we have not updated the disclosures in this report to speak to any later date. While this report primarily relates to the historical period covered, events may have taken place since the date of the Original Form 10-QSB that might have been reflected in this report if they had taken place prior to the filing of the Original Form 10-QSB. All information contained in this amendment is subject to updating and supplementing as provided in our periodic reports filed with the SEC. PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INTERNET AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30, 1999 1999 ------------ ------------ ASSETS (Unaudited) (As Restated, See Note 4) CURRENT ASSETS: Cash and cash equivalents $ 1,724,143 $ 5,845,562 Accounts receivable, net 1,523,494 1,122,894 Prepaid expenses and other current assets 141,146 126,433 ------------ ------------ Total current assets 3,388,783 7,094,889 PROPERTY AND EQUIPMENT, net 2,952,694 2,622,637 INTANGIBLES, net 40,272,250 8,978,384 OTHER 298,428 217,494 ------------ ------------ $ 46,912,155 $ 18,913,404 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 2,839,573 $ 2,131,201 Accrued liabilities 1,667,108 1,068,774 Deferred revenue 4,514,428 3,358,347 Current maturities of capital lease obligations 152,131 41,195 Current maturities of long-term debt 185,821 434,934 ------------ ------------ Total current liabilities 9,359,061 7,034,451 CAPITAL LEASE OBLIGATIONS, net of current portion 183,654 102,246 LONG-TERM DEBT, net of current portion 208,835 151,997 ------------ ------------ Total liabilities 9,751,550 7,288,694 ------------ ------------ SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 40,000,000 shares authorized, 9,613,818 and 6,912,930 issued and outstanding at December 31, 1999, and June 30, 1999, respectively 96,138 69,130 Additional paid-in capital 54,587,067 24,231,065 Accumulated deficit (17,522,600) (12,675,485) ------------ ------------ Total shareholders' equity 37,160,605 11,624,710 ------------ ------------ $ 46,912,155 $ 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 Six Months Ended December 31, December 31, ------------------------------ ------------------------------ 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (As Restated, (As Restated, See Note 4) See Note 4) REVENUES: Access $ 5,430,921 $ 3,619,473 $ 9,899,681 $ 7,214,257 Business services 1,190,118 597,703 2,106,949 1,120,650 Other 90,940 15,157 297,548 44,841 ------------ ------------ ------------ ------------ Total 6,711,979 4,232,333 12,304,178 8,379,748 ------------ ------------ ------------ ------------ OPERATING COSTS AND EXPENSES: Connectivity and operations 3,932,250 2,198,826 7,082,445 4,247,264 Sales and marketing 1,546,921 1,212,244 3,045,391 2,063,102 General and administrative 1,796,993 929,184 3,184,193 1,767,180 Depreciation and amortization 2,473,149 495,868 3,889,161 977,635 ------------ ------------ ------------ ------------ Total 9,749,313 4,836,122 17,201,190 9,055,181 ------------ ------------ ------------ ------------ OPERATING LOSS (3,037,334) (603,789) (4,897,012) (675,433) INTEREST INCOME (EXPENSE), NET 13,115 (61,981) 49,897 (170,914) INCOME TAX EXPENSE -- -- -- (10,000) ------------ ------------ ------------ ------------ NET LOSS $ (3,024,219) $ (665,770) $ (4,847,115) $ (856,347) ============ ============ ============ ============ NET LOSS PER COMMON SHARE: BASIC $ (0.37) $ (0.14) $ (0.64) $ (0.20) ============ ============ ============ ============ DILUTED $ (0.37) $ (0.14) $ (0.64) $ (0.20) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 8,129,357 4,603,278 7,569,284 4,260,940 DILUTED 8,129,357 4,603,278 7,569,284 4,260,940
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)
Six Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ (As Restated, See Note 4) OPERATING ACTIVITIES: Net loss $ (4,847,115) $ (856,347) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 3,889,161 977,635 Changes in operating assets and liabilities (excluding amounts obtained in acquisitions): Accounts receivable (149,068) 149,643 Prepaid expenses and other current assets 149,406 (105,648) Other assets (163,443) 4,492 Accounts payable and accrued liabilities (673,134) 80,294 Deferred revenue (534,970) 176,224 ------------ ------------ Net cash provided by (used in) operating activities (2,329,163) 426,293 ------------ ------------ INVESTING ACTIVITIES: Purchases of property and equipment (425,275) (514,811) Business and subscriber acquisitions, net of cash acquired (1,558,432) -- ------------ ------------ Net cash used in investing activities (1,983,707) (514,811) ------------ ------------ FINANCING ACTIVITIES: Proceeds from issuance of common equity 499,891 20,169,591 Proceeds from issuance of note payable to related party -- 311,186 Principal payments of notes payable to shareholders -- (2,017,713) Principal payments of capital lease obligations (15,995) (258,086) Principal payments of long-term debt (292,445) (669,325) Payments on line of credit -- (225,000) ------------ ------------ Net cash provided by financing activities 191,451 17,310,653 ------------ ------------ NET INCREASE (DECREASE) IN CASH (4,121,419) 17,222,135 CASH, BEGINNING OF PERIOD 5,845,562 618,290 ------------ ------------ CASH, END OF PERIOD $ 1,724,143 $ 17,840,425 ============ ============ SUPPLEMENTAL INFORMATION: Cash paid for interest $ 26,705 $ 208,131 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 $ --
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 December 31, 1999, options to purchase approximately 1,202,000 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 December 31, 1999, options to purchase 127,784 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 $8.7 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, 5 6 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 $32.6 million and is being amortized using the straight-line method over a period of three years commencing November 22, 1999. Pro forma amounts of total revenues, net loss, and net loss per share for the six months ended December 31, 1999 and 1998, assuming the acquisition had occurred at the beginning of each period, are as follows:
Six Months Ended December 31, ------------------------------ 1999 1998 ------------ ------------ (As Restated, See Note 4) Total revenues $ 16,064,459 $ 11,203,010 Net loss $(10,850,511) $ (6,491,459) Net loss per common share $ (1.15) $ (0.97)
4. Restatement Subsequent to the issuance of the Company's financial statements in its Form 10-Q for the three and six months ended December 31, 1999, we discovered a data processing error in the calculation of deferred revenue. This error had the effect of understating deferred revenue and overstating revenue as of and for the three and six months ended December 31, 1999. As a result, the accompanying financial statements as of and for the three and six months ended December 31, 1999 have been restated from amounts previously reported to properly record these transactions. A summary of the effects of the restatement is as follows:
Previously Reported Restated ------------ ------------ As of December 31, 1999: Deferred revenue $ 3,948,850 $ 4,514,428 Accumulated deficit $(16,957,022) $(17,522,600) Three months ended December 31, 1999: Access revenues $ 5,750,095 $ 5,430,921 Total revenues $ 7,031,153 $ 6,711,979 Operating loss $ (2,718,160) $ (3,037,334) Net loss $ (2,705,045) $ (3,024,219) Net loss per common share: Basic $ (0.33) $ (0.37) Diluted $ (0.33) $ (0.37) Six months ended December 31, 1999: Access revenues $ 10,465,259 $ 9,899,681 Total revenues $ 12,869,756 $ 12,304,178 Operating loss $ (4,331,434) $ (4,897,012) Net loss $ (4,281,537) $ (4,847,115) Net loss per common share: Basic $ (0.57) $ (0.64) Diluted $ (0.57) $ (0.64)
6 7 ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements, identified by words such as "anticipate," "believe," "estimate," "should," "expect" and similar expressions, include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. Our 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 December 31, 1999, we served approximately 147,000 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 user density in specific regions with a view towards positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) in the near future. 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. 7 8 The execution of our acquisition strategy will cause an increase in our amortization expense as the costs of purchasing the subscriber bases are written off. In the coming fiscal years 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 $17.5 million at December 31, 1999 and have had annual operating losses since inception as a result of building network infrastructure and rapidly increasing market share. RECENT ACQUISITIONS On November 22, 1999, we acquired all of the issued and outstanding securities of PDQ.Net for 2,425,000 shares of our common stock. We 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. As a result of the purchase, PDQ.Net became a wholly owned subsidiary of Internet America, Inc. The assets of PDQ.Net include approximately 43,000 individual and corporate Internet access accounts and the computer equipment used to service those accounts. We intend to continue to use these assets to provide Internet access to customers. The total value of the stock and options exchanged by the Company, excluding closing costs, was approximately $29.9 million based on the November 22, 1999 closing price of the Company's stock, adjusted to reflect restrictions on the transfer of certain shares. The transaction is accounted for as a purchase. 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, call center wages and management salaries. 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 and other recent acquisitions. Our business is not subject to any significant seasonal influences. 8 9 RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1998 The following table sets forth certain unaudited financial data for the three months ended December 31, 1999 and 1998. All amounts for the three months ended December 31, 1998 have been restated to reflect the poolings of interests with CompuNet and CyberRamp. 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 December 31, 1999 December 31, 1998 -------------------------- -------------------------- % of % of (000's) Revenues (000's) Revenues ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: REVENUES: Access $ 5,431 80.9% $ 3,619 85.5% Business services 1,190 17.7% 598 14.1% Other 91 1.4% 15 0.4% ---------- ---------- ---------- ---------- Total 6,712 100.0% 4,232 100.0% ---------- ---------- ---------- ---------- OPERATING COSTS AND EXPENSES: Connectivity and operations 3,932 58.6% 2,199 52.0% Sales and marketing 1,547 23.1% 1,212 28.6% General and administrative 1,797 26.8% 929 21.9% Depreciation and amortization 2,473 36.8% 496 11.7% ---------- ---------- ---------- ---------- Total 9,749 145.3% 4,836 114.2% ---------- ---------- ---------- ---------- LOSS FROM OPERATIONS (3,037) (45.3%) (604) (14.2%) INTEREST INCOME (EXPENSE), NET 13 0.2% (62) (1.5%) INCOME TAX EXPENSE -- 0.0% -- 0.0% ---------- ---------- ---------- ---------- NET LOSS $ (3,024) (45.1%) $ (666) (15.7%) ========== ========== ========== ========== NET LOSS PER COMMON SHARE: BASIC $ (0.37) $ (0.14) ========== ========== DILUTED $ (0.37) $ (0.14) ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 8,129 4,603 DILUTED 8,129 4,603 OTHER DATA: Subscribers at end of period 147,000 67,500
9 10 Total revenue. Total revenue increased by $2.5 million, or 58.6%, to $6.7 million for the three months ended December 31, 1999, from $4.2 million for the three months ended December 31, 1998. The majority of the increase in total revenue is attributable to the increase in access revenue of $1.8 million, or 50.0%, to $5.4 million for the three months ended December 31, 1999, from $3.6 million for the same period in 1998. Approximately $800,000 of the increase in access revenue is attributable to the acquisition of PDQ.Net, which had approximately 41,000 subscribers on the closing date of November 22, 1999. The remaining $1.0 million increase in access revenue is attributable to an increase in the number of other subscribers from 67,500 at December 31, 1998, to 106,000 at December 31, 1999. Business services revenue increased from $598,000 for the three months ended December 31, 1998 to $1.2 million for the same period in 1999. The increase in business services revenue is primarily due to the acquisition of NeoSoft, Inc. (NeoSoft) on June 30, 1999. Over half of NeoSoft's total revenue relates to business services. PDQ.Net also contributed $312,000 of business services revenue during the quarter. Other revenue consists primarily of peripheral equipment sales and other miscellaneous revenue. Connectivity and operations. Connectivity and operations expense increased by $1.7 million, or 78.8%, to $3.9 million for the three months ended December 31, 1999 from $2.2 million for the three months ended December 31, 1998. As a percentage of revenue, connectivity and operations expense increased to 58.6% for the three months ended December 31, 1999, from 52.0% for the same period in 1998. 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 increased by $335,000, or 27.6%, to $1.5 million for the three months ended December 31, 1999, compared to $1.2 million for the same period in 1998, but decreased as a percentage of revenue to 23.1% for the three months ended December 31, 1999 from 28.6% for the same period in 1998. The dollar increase is due to the acquisition of PDQ.Net and the expansion of our marketing program to nine markets in 1999 compared to four in 1998. The decrease as a percentage of revenue is due primarily to a restriction of marketing efforts to markets with established branding. General and administrative. General and administrative expense increased by $868,000, or 93.4%, to $1.8 million for the three months ended December 31, 1999, from $929,000 for the three months ended December 31, 1998. General and administrative expense as a percentage of total revenue increased to 26.8% for the three months ended December 31, 1999, from 21.9% for the same period in 1998, primarily due to administrative support related to our growth strategy. Depreciation and amortization. Depreciation and amortization increased by $2.0 million to $2.5 million for the three months ended December 31, 1999, from $496,000 for the same period in 1998. 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 $1.9 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 realized $13,000 of interest income during the three months ended December 31, 1999, compared to interest expense of $62,000 for the same period in 1998. During the three months ended December 31, 1998, several notes payable to shareholders were outstanding, resulting in interest expense of $62,000 for the period. These notes payable were retired with part of the proceeds from our initial public offering in December 1998. 10 11 SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1998 The following table sets forth certain unaudited financial data for the six months ended December 31, 1999 and 1998. All amounts for the six months ended December 31, 1998 have been restated to reflect the poolings of interests with CompuNet and CyberRamp. 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).
Six Months Ended Six Months Ended December 31, 1999 December 31, 1998 -------------------------- -------------------------- % of % of (000's) Revenues (000's) Revenues ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: REVENUES: Access $ 9,899 80.5% $ 7,214 86.1% Business services 2,107 17.1% 1,121 13.4% Other 298 2.4% 45 0.5% ---------- ---------- ---------- ---------- Total 12,304 100.0% 8,380 100.0% ---------- ---------- ---------- ---------- OPERATING COSTS AND EXPENSES: Connectivity and operations 7,083 57.6% 4,247 50.7% Sales and marketing 3,045 24.7% 2,063 24.6% General and administrative 3,184 25.9% 1,767 21.1% Depreciation and amortization 3,889 31.6% 978 11.7% ---------- ---------- ---------- ---------- Total 17,201 139.8% 9,055 108.1% ---------- ---------- ---------- ---------- LOSS FROM OPERATIONS (4,897) (39.8%) (675) (8.1%) INTEREST INCOME (EXPENSE), NET 50 0.4% (171) (2.0%) INCOME TAX EXPENSE -- 0.0% (10) (0.1%) ---------- ---------- ---------- ---------- NET LOSS $ (4,847) (39.4%) $ (856) (10.2%) ========== ========== ========== ========== NET LOSS PER COMMON SHARE: BASIC $ (0.64) $ (0.20) ========== ========== DILUTED $ (0.64) $ (0.20) ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 7,569 4,261 DILUTED 7,569 4,261 OTHER DATA: Subscribers at end of period 147,000 67,500
Total revenue. Total revenue increased by $3.9 million, or 46.8%, to $12.3 million for the six months ended December 31, 1999, from $8.4 million for the six months ended December 31, 1998. The majority of the increase in total revenue is attributable to the increase in access revenue of $2.7 million, or 37.2%, to $9.9 million for the six months ended December 31, 1999, from $7.2 million for the same period in 1998. Approximately $1.4 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 $1.0 million, or 88.0%, to $2.1 million for the six months ended December 31, 1999, from $1.1 million for the same period in 1998, primarily as a result of the NeoSoft and PDQ.Net acquisitions. 11 12 Connectivity and operations. Connectivity and operations expense increased by $2.8 million, or 66.8%, to $7.1 million for the six months ended December 31, 1999 from $4.2 million for the six months ended December 31, 1998. As a percentage of revenue, connectivity and operations expense increased to 57.6% for the six months ended December 31, 1999, from 50.7% for the same period in 1998. 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 $1.0 million, or 47.6%, to $3.0 million for the six months ended December 31, 1999, compared to $2.1 million for the same period in 1998, and increased as a percentage of revenue to 24.7% for the six months ended December 31, 1999 from 24.6% for the same period in 1998. The dollar increase is due primarily to the expansion of our marketing program which, until December 1998, was limited to North Texas. We currently advertise in nine markets throughout Texas. General and administrative. General and administrative expense increased by $1.4 million, or 80.2%, to $3.2 million for the six months ended December 31, 1999, from $1.8 million for the six months ended December 31, 1998. General and administrative expense as a percentage of total revenue increased to 25.9% for the six months ended December 31, 1999, from 21.1% for the same period in 1998, primarily due to administrative support related to our growth strategy. Depreciation and amortization. Depreciation and amortization increased by $2.9 million to $3.9 million for the six months ended December 31, 1999, from $1.0 million for the same period in 1998. Approximately $2.6 million of the increase relates to amortization of goodwill arising from the acquisitions of PDQ.Net and NeoSoft. Interest income and expense. We realized $50,000 of interest income during the six months ended December 31, 1999, compared to interest expense of $171,000 for the same period in 1998. This change resulted primarily from the repayment of several interest bearing notes payable to shareholders with part of the proceeds of our initial public offering in December 1998 and the subsequent reinvestment of those proceeds, which generated interest income for the six months ended December 31, 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 December 31, 1999, cash and cash equivalents on hand totaled $1.7 million. Cash used in operating activities totaled $2.3 million for the six months ended December 31, 1999, compared to cash provided by operating activities of $426,000 for the same period in 1998. Increases in sales and marketing expenses of $1 million and increases in general and administrative expenses of $1.4 million related to our growth strategy contributed to additional cash used in operations for the six months ended December 31, 1999, as compared to the same period a year ago. Cash used in investing activities totaled $2.0 million for the six months ended December 31, 1999, and consisted of $1.6 million in business and subscriber acquisitions and $425,000 of routine purchases of property and equipment to expand and upgrade our network. Cash provided by financing activities totaled $191,000 for the six months ended December 31, 1999 and consisted of proceeds of $500,000 from the exercise of stock options by option holders less payments of $309,000 to service long-term obligations. We estimate that cash on hand of $1.7 million at December 31, 1999 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 $1.4 million. 12 13 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. YEAR 2000 The Year 2000 issue relates to computer programs that use two digits rather than four digits to define an applicable year. Software may recognize a date as the year 1900 rather than the year 2000, which could result in system failures or miscalculations, causing disruptions of operations. This could cause a temporary inability to process transactions, send invoices, route our subscribers' Internet traffic or engage in similar normal business activities. We have developed a Year 2000 Plan (the "Plan") which is designed to address Year 2000 issues so that we will be prepared for any problems arising from the arrival of the Year 2000. The Plan covers: (i) internally developed and vendor supplied software products which are provided to our subscribers; (ii) network software and hardware, including routing and server components and telephony systems; (iii) network operations and network support systems; (iv) software and hardware components used by our customer care and sales departments; and (v) other office infrastructure components. Additionally, the Plan is designed to identify and assess our third party network service providers and major vendors ("Third Party Systems") in order to develop and implement action and contingency plans where appropriate in connection with these Third Party Systems. For the internal systems described above, the Plan requires that we 1) investigate our internal software and hardware components in order to assess the current state of Year 2000 readiness, 2) prepare an evaluation of the resources necessary to upgrade our components to become Year 2000 ready, 3) develop and execute action plans to procure the necessary resources and implement fixes to the problems that exist, 4) re-evaluate the upgraded components, and 5) repeat steps 2 through 4, if necessary. For our Third Party Systems, the plan requires that we 1) investigate the products and services provided by Third Party systems in order to assess the current state of Year 2000 readiness with respect to these external suppliers, including a survey of the publicly available statements issued by vendors of those systems, 2) inquire of our Third Party Systems as to their plans to remedy any issues outstanding relating to Year 2000 issues, 3) evaluate alternatives to existing Third Party Systems relationships in cases where Year 2000 readiness is questionable, and 4) take the appropriate steps to become Year 2000 ready. In addition to the preparation work on both internal and external systems, the Plan also details contingency plans which are designed to deal with unanticipated Year 2000 issues, should they arise. STATE OF READINESS To date, we have experienced no material Year 2000 problems that could harm or threaten to harm our business. Our software products, network applications and system hardware components were tested and continue to be monitored. The few problems relating to Year 2000 testing that we experienced were addressed through upgrades or replacements. Additionally, we investigated our Third Party Systems to assess their Year 2000 readiness and upgraded or replaced noncompliant Third Party Systems. 13 14 We supply our subscribers with a software package that, among other things, allows subscribers to access our services. The software package consists of internally developed software which is bundled with third party software. We believe that the current version of our software package is Year 2000 ready. In addition, we believe that substantially all of our customer base is presently using a version of the software package that is Year 2000 ready. Our network components consist primarily of routers and servers. Routers function as network traffic coordinators and determine the paths that individual packets of data will take to get from point A to point B. The primary component of router functionality is the software which manages the data traffic. We believe that the current version of the software within the routers is Year 2000 ready. Servers act as the processing centers for the management of information. Our servers generally utilize the UNIX operating system or internally developed systems, all of which we believe are currently Year 2000 ready. The software component of our telephone system, which manages all inbound and outbound phone and fax capabilities, was upgraded, and we believe it is currently Year 2000 ready. Our NOCC monitors the internal and external network operations using specialized software provided by Third Party Systems. Our network operations software has been upgraded, and we believe it is currently Year 2000 compliant. Our customer care and sales departments utilize standardized desktop computers to interact with our internal data systems. We do not believe that significant issues exist relating to our customer care and sales departments' systems. Other office infrastructure includes, among others, our administrative computer systems, fax machines and copiers. We do not expect significant Year 2000 issues to exist with these devices. COSTS We have incurred expenses of approximately $85,000 in connection with the implementation of the Plan. We do not expect to incur significant additional expenses related to the execution of the Plan. RISKS Although we have experienced no significant Year 2000 problems to date, they could still occur. Our failure to correct a material Year 2000 problem could result in a complete failure or degradation of the performance of our 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, we believe that our most reasonably likely worst case scenario related to the Year 2000 is associated with potential concerns with third party services. Specifically, we are heavily dependent on a significant number of third party vendors to provide network services. A significant Year 2000-related disruption of the network services provided by Third Party Systems could cause subscribers to seek alternative providers or cause an unmanageable burden on operations, liquidity and financial condition. We are not presently aware of any Third Party Systems issue that is likely to result in such a disruption. CONTINGENCY PLANS We believe we have assessed the risks involved with the Year 2000 issue and have established procedures to minimize any effect of an unidentified or Third Party Systems created Year 2000 problem. These procedures include identifying recovery strategies and providing personnel on duty or on call during the transition period specifically trained to deal with software failures and Third Party Systems failures, should they occur. The estimates and conclusions herein contain forward-looking statements and are based on our best estimates of future events. Our expectations about risks, future costs and the timely completion of our 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 our success in identifying and correcting potential Year 2000 issues and the ability of Third Party Systems to appropriately address their Year 2000 issues. 14 15 "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. 15 16 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On November 22, 1999, we issued 2,425,000 shares of common stock in exchange for all of the issued and outstanding securities of PDQ.Net. We subsequently filed a Form SB-2 to register the resale of 350,000 of these shares. We also issued options to purchase 352,917 shares of common stock with a weighted average exercise price of $1.62 per share in replacement of all of the outstanding stock options of PDQ.Net. All of these options were subsequently registered on Form S-8. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS On November 4, 1999, the Company held its 1999 annual meeting of shareholders, at which the shareholders voted as follows:
AUTHORITY MATTER VOTED ON SHARES VOTED FOR WITHHELD --------------- ---------------- -------- The election of Michael T. Maples to the board of directors 6,326,846 89,610 The election of William O. Hunt to the board of directors 6,327,665 88,791 The election of Jack T. Smith to the board of directors 6,320,673 95,783 The election of Gary L. Corona to the board of directors 6,321,970 94,486
NUMBER OF SHARES ---------------- MATTER VOTED ON FOR AGAINST ABSTAIN --------------- --- ------- ------- Approval of Internet America, Inc. Employee Stock Purchase Plan 3,207,812 107,233 11,125 Approval of an amendment to the Internet America, Inc. 1998 Nonqualified Stock Option Plan to increase by 400,000 the number of shares of common stock available for issuance pursuant to such plan and to revise the mechanism for granting options to independent directors under such plan to take into account the newly-created staggered board of directors 2,878,655 333,951 23,780
On November 22, 1999, the Company held a special meeting of shareholders, at which the shareholders voted as follows:
NUMBER OF SHARES ---------------- MATTER VOTED ON FOR AGAINST ABSTAIN --------------- --- ------- ------- Approval of the Agreement and Plan of Merger between Internet America and PDQ.Net 3,233,896 67,660 19,615 Approval of the Internet America, Inc. Employee and Consultant Stock Option Plan 5,928,473 378,489 38,447
16 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.1 Agreement and Plan of Merger dated as of September 12, 1999 by and between Internet America, Inc., GEEK Houston II, Inc., PDQ.Net, Incorporated, William E. Ladin, Jr. and J.N. Palmer Family Partnership, incorporated by reference to Exhibit A to the preliminary proxy statement and definitive proxy statement filed with the Securities and Exchange Commission on October 7, 1999 and October 19, 1999, respectively (File No. 000-25147). 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. 17 18 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 18 19 INDEX TO EXHIBITS
Exhibit No. Description - ----------- ----------- 2.1 Agreement and Plan of Merger dated as of September 12, 1999 by and between Internet America, Inc., GEEK Houston II, Inc., PDQ.Net, Incorporated, William E. Ladin, Jr. and J.N. Palmer Family Partnership, incorporated by reference to Exhibit A to the preliminary proxy statement and definitive proxy statement filed with the Securities and Exchange Commission on October 7, 1999 and October 19, 1999, respectively (File No. 000-25147). 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 6-MOS JUN-30-2000 JUL-01-1999 DEC-31-1999 1,724,143 0 1,797,018 273,524 0 3,388,783 7,162,453 4,209,759 46,912,155 9,359,061 392,489 0 0 96,138 37,064,467 46,912,155 0 12,304,178 0 17,201,190 0 0 (49,897) (4,847,115) 0 (4,847,115) 0 0 0 (4,847,115) (0.64) (0.64)
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