-----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, AAOfvceus+f5DjAskoSrdAqD35PxNRPxV1QNHqP2oHayYR/Lup+JEfS+gAIPJkIw e/XCMr8z4WHPwJXdY8F5dA== 0000950134-01-508548.txt : 20020410 0000950134-01-508548.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950134-01-508548 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25147 FILM NUMBER: 1787778 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 10-Q 1 d92359e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _____ COMMISSION FILE NUMBER 000-25147 INTERNET AMERICA, INC. (Exact name of registrant as specified in its charter) TEXAS 86-0778979 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 350 N. ST. PAUL, SUITE 3000, DALLAS, TX 75201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 861-2500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. OUTSTANDING AT NOVEMBER 12, 2001 -------------------------------- Common Stock at $.01 par value: 10,033,425 shares PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INTERNET AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30, 2001 2001 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,720,863 $ 1,513,123 Restricted cash 200,000 -- Accounts receivable, net of allowance for uncollectible accounts of $2,379,080 and $1,857,790 as of September 30, 2001 and June 30, 2001, respectively 1,502,365 1,726,551 Prepaid expenses and other current assets 321,428 375,818 ------------- ------------- Total current assets 3,744,656 3,615,492 Property and equipment, net 1,582,137 1,642,763 Other assets, net 15,074,347 18,654,246 ------------- ------------- $ 20,401,140 $ 23,912,501 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 1,679,790 $ 2,046,823 Accrued liabilities 1,668,455 1,484,940 Deferred revenue 3,957,798 4,367,516 Current maturities of capital lease obligations 122,937 178,745 Current maturities of long-term debt 297,749 603,557 ------------- ------------- Total current liabilities 7,726,729 8,681,581 Capital lease obligations, net of current portion 17,834 19,899 Long-term debt, net of current portion -- 418 Accrued lawsuit expense 3,300,000 3,300,000 ------------- ------------- Total liabilities 11,044,563 12,001,898 ------------- ------------- SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 40,000,000 shares authorized, 10,005,263 and 9,977,278 issued and outstanding at September 30, 2001, and June 30, 2001, respectively 100,053 99,773 Additional paid-in capital 55,471,617 56,064,762 Note receivable from a shareholder and officer of the Company (82,000) (685,500) Accumulated deficit (46,133,093) (43,568,432) ------------- ------------- Total shareholders' equity 9,356,577 11,910,603 ------------- ------------- $ 20,401,140 $ 23,912,501 ============= =============
See accompanying notes to condensed financial statements. Financial Statements - Continued INTERNET AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, --------------------------------- 2001 2000 ------------- ------------- REVENUES: Internet services $ 7,263,550 $ 8,939,384 Other 34,830 27,502 ------------- ------------- Total 7,298,380 8,966,886 ------------- ------------- OPERATING COSTS AND EXPENSES: Connectivity and operations 3,462,360 5,785,786 Sales and marketing 297,656 1,736,927 General and administrative 1,563,010 2,178,443 Provision for bad debt expense 562,528 311,208 Depreciation and amortization 3,880,581 3,988,177 ------------- ------------- Total 9,766,135 14,000,541 ------------- ------------- OPERATING LOSS (2,467,755) (5,033,655) INTEREST EXPENSE, NET (96,906) (4,770) ------------- ------------- NET LOSS $ (2,564,661) $ (5,038,425) ============= ============= NET LOSS PER COMMON SHARE: BASIC $ (0.26) $ (0.52) ============= ============= DILUTED $ (0.26) $ (0.52) ============= ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 10,001,917 9,773,350 DILUTED 10,001,917 9,773,350
See accompanying notes to condensed financial statements. Financial Statements - Continued INTERNET AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended September 30, --------------------------------- 2001 2000 ------------- ------------- OPERATING ACTIVITIES: Net loss $ (2,564,661) $ (5,038,425) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,880,581 3,988,177 Provision for bad debt expense 562,528 311,208 Non-cash compensation expense -- 287,500 Changes in operating assets and liabilities: Restricted cash (200,000) -- Accounts receivable (338,342) (737,785) Prepaid expenses and other current assets 54,389 (296,472) Other assets 41,014 9,960 Accounts payable and accrued liabilities (183,518) 1,432,739 Deferred revenue (409,718) 280,623 ------------- ------------- Net cash provided by operating activities 842,273 237,525 ------------- ------------- INVESTING ACTIVITIES Purchases of property and equipment (281,068) (228,081) ------------- ------------- Net cash used in investing activities (281,068) (228,081) ------------- ------------- FINANCING ACTIVITIES: Proceeds from issuance of common equity 10,635 33,768 Principal payments of capital lease obligations (57,873) (64,831) Principal payments of long-term debt (306,227) (71,713) ------------- ------------- Net cash used in financing activities (353,465) (102,776) ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 207,740 (93,332) CASH AND CASH EQUIVALENTS, beginning of period 1,513,123 1,373,786 ------------- ------------- CASH AND CASH EQUIVALENTS, end of period $ 1,720,863 $ 1,280,454 ============= ============= SUPPLEMENTAL INFORMATION: Cash paid for interest $ 16,906 $ 20,736 Issuance of 200,000 shares of common stock in exchange for note receivable from an officer of the company $ 82,000 $ 685,500
See accompanying notes to condensed financial statements. INTERNET AMERICA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Article 10 of Regulation S-X of the Securities and Exchange Commission. The accompanying unaudited condensed financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair statement of the Company's financial position and results of operations for the interim periods presented. All such adjustments are of a normal and recurring nature. These condensed financial statements should be read in conjunction with the financial statements for the year ended June 30, 2001, included in the Company's Annual Report on Form 10-KSB (File No 000-25147). 2. Basic and Diluted Net Loss 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 September 30, 2001, options to purchase 1,061,870 shares of common stock were not included in the computation of diluted EPS because the Company incurred a net loss for the period and the effect of such instruments is antidilutive. During the quarter ended September 30, 2001, no options to purchase shares of common stock were exercised. 3. Issuance of Shares of Common Stock Pursuant to a Stock Purchase Agreement entered into during September 2000, the Company issued 200,000 shares of its common stock to an officer in exchange for cash of $2,000 and a note receivable, bearing interest at 6.33%, for $685,500. The purchase price per share of the common stock under the Stock Purchase Agreement was the closing price of the common stock on the date the Company's board of directors approved the transaction. Under the terms of the Stock Purchase Agreement, the officer had the option to put the shares of common stock to the Company during the term of the Stock Purchase Agreement for $3.4375 per share. The officer exercised the put agreement on August 6, 2001. On that day another stock purchase agreement was entered into between the officer and the Company. The Company issued 200,000 shares of common stock to the officer in exchange for cash of $2,000 and a note receivable, bearing interest at 6.33%, for $82,000. Under the terms of the new Stock Purchase Agreement, the officer has the option to put the shares of common stock to the Company during the term of the Stock Purchase Agreement for $0.42 per share. 4. Recently Issued Accounting Pronouncements In July 2001, the Financial Accounting Standard Board issued Statement No. 141 (SFAS No. 141), "Business Combinations," and Statement No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." SFAS 142 includes requirements to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. SFAS No. 142 requires that intangible assets be periodically evaluated for impairment based on fair market value. The Company has historically evaluated its intangible assets for impairment based on projected future cash flows. The Company is currently evaluating the impact that SFAS No. 142 will have on its financial statements. The Company has elected to adopt SFAS No. 142 on July 1, 2002, and a significant impairment charge may be recorded at that time. 5. Letter of Credit Security Commitment Agreement On September 18, 2001, the company entered into a Letter of Credit Security Commitment Agreement with the Company's Chairman, William O. Hunt, to finance an appeal bond in the approximate amount of $3.3 million in connection with a judgment entered against the Company. Under this agreement, Mr. Hunt will collateralize a letter of credit in the amount of $3.3 million and the Company will pay Mr. Hunt a commitment fee of 8% per annum, paid quarterly. If the Company reduces the collateral amount by substituting an alternative collateral for the letter of credit, then Mr. Hunt would have a ninety day option to purchase shares of common stock of the Company equal in value to all or a portion of the amount of the reduction, based on when it occurs. The purchase price would be $0.35 per share. If a reduction occurs within the six months following the agreement, Mr. Hunt could purchase shares of common stock of the Company equal in value to one-half of the amount of the reduction, and if a reduction occurs after this six month period, Mr. Hunt could purchase shares of common stock of the Company equal in value to the full amount of the reduction. Should the letter of credit be funded in the full amount or in a reduced amount to pay a settlement or judgment, the Company will enter into a secured convertible promissory note for the funded amount. Interest on the note would accrue at 12% per annum and be payable quarterly during the first two years after issuance. The note could be converted into common stock within two years of issuance at the purchase price discussed above. If the note was not converted within two years of issuance, the conversion option would terminate and all principal and unpaid accrued interest would be payable in four quarterly payments over the third year. If the amount of the note is less than the full amount of the letter of credit, the balance would be treated as a reduction and Mr. Hunt would also have the purchase rights discussed above. If the Company pays the note prior to its maturity, Mr. Hunt would have a thirty day option to purchase shares of common stock of the Company equal in value to the amount of the prepayment at $0.35 per share. If Mr. Hunt does not exercise this thirty day option, he would be issued a warrant to purchase, at the same price, one-half of the number of shares that were subject to the option. The warrant would terminate, if unexercised, on the second anniversary of the note issuance date. The obligations to Mr. Hunt are secured by the Company's assets other than accounts receivable. Under a registration agreement, Mr. Hunt has demand and piggyback registration rights with respect to any shares issued under the Letter of Credit Security Commitment Agreement. The demand registration right is subject to a 120 day deferral if the Board of Directors determines that such registration would be seriously detrimental to the Company or its shareholders. ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Form 10-Q constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements, identified by words such as "anticipate," "believe," "estimate," "should," "expect" and similar expressions, include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. Our Annual Report on Form 10-K for the fiscal year ended June 30, 2001 and other publicly filed reports discuss some additional important factors that could cause our actual results to differ materially from those in any forward-looking statements. OVERVIEW Internet America is an Internet service provider ("ISP") that 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 September 30, 2001, we served approximately 148,000 subscribers in the southwestern United States. The growth of the Internet has resulted in increased competition for existing services and increased demand for new products and services. Increases in demand and a surge in Internet users have fostered an increase in the number of ISPs providing access to the Internet. Our competitors advertise in our existing markets with aggressive new promotions or offers of free Internet access. We believe we are well positioned to deal with these competitive forces by continuing to build high user density and maintaining a rational business plan. High user density is the cornerstone of our business strategy. We will continue to pursue an ambitious growth strategy, but in a controlled manner. Our goal is to rapidly create high user density in specific markets to achieve and maintain positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Recent technological developments have facilitated the increased adoption of broadband access via mechanisms such as cable, fixed/mobile wireless, and copper pair allowing voice, video, and data to occur simultaneously over one connection. The emergence of low-cost broadband solutions will significantly impact the ability of many ISPs to compete. We are committed to being a leader in offering cost effective broadband solutions to individuals and businesses. High-speed connectivity is essential to the commercially viable deployment of new, value-added services such as Internet telephony, particularly Voice Over Internet Protocol (VoIP), video and audio programming distribution and other high bandwidth applications. We believe we are well positioned to efficiently market and deploy our broadband products due to the high density of our subscriber base. Given the high level of competition in the industry for new subscribers, we will be more selective with investing in direct response advertising. We plan to concentrate our direct response advertising more heavily in markets where we have established branding than in new markets. The execution of our acquisition strategy has increased our amortization expense as the costs of purchasing the subscriber bases are written off. In the coming quarters we expect to report net losses, primarily due to amortization expense, while generating positive EBITDA. There can be no assurance we will be able to achieve or sustain positive EBITDA or net income in the future. Recently issued Accounting Pronouncements may impact the amortization or impairment charges relative to the intangible assets. We have an accumulated deficit of $46.1 million at September 30, 2001 and have had annual operating losses since inception as a result of building network infrastructure and rapidly increasing market share. SIGNIFICANT ACQUISITIONS We have completed several acquisitions, the most significant of which were PDQ.Net, Incorporated ("PDQ") and NeoSoft, Inc. ("NeoSoft"). On November 22, 1999, we acquired all of the outstanding shares of PDQ, a Houston-based ISP, in exchange for 2,425,000 shares of Common Stock. 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. The transaction was accounted for as a purchase. On June 30, 1999, we acquired all the outstanding common stock of NeoSoft, an ISP in Houston, Texas for $8.3 million. The transaction was accounted for as a purchase. PDQ and NeoSoft are wholly owned subsidiaries and constitute the majority of our Houston operations. STATEMENT OF OPERATIONS Internet services revenue is derived from individual dial-up Internet access, including analog and ISDN access, DSL access, dedicated connectivity, bulk dial-up access, Web hosting services, and value-added services, such as multiple e-mail boxes and personalized e-mail addresses. A brief description of each element of our operating expenses follows: Connectivity and operations expenses consist primarily of setup costs for new subscribers, telecommunication costs, and wages of network operations and customer support personnel. Connectivity costs include (i) fees paid to telephone companies for subscribers' dial-up connections to our network and (ii) fees paid to backbone providers for connections from our network to the Internet. Sales and marketing expenses consist primarily of creative and production costs, costs of media placement, management salaries and call center wages. Advertising costs are expensed as incurred. General and administrative expenses consist primarily of administrative salaries, professional services, rent and other general business expenses. Depreciation is computed using the straight line method over the estimated useful lives of the assets. Data communications equipment, computers, data servers and office equipment are depreciated over three years. We depreciate furniture, fixtures and leasehold improvements over five years. Purchased subscriber bases and related goodwill are amortized over 30 to 36 months. The assets and liabilities acquired in business combinations are recorded at estimated fair values. The excess of the cost of the net assets acquired over their fair value is recorded as goodwill and amortized over an estimated life of 36 to 42 months. Our business is not subject to any significant seasonal influences. RESULTS OF OPERATIONS Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 The following table sets forth certain unaudited financial data for the three months ended September 30, 2001 and 2000. Operating results for any period are not indicative of results for any future period. Dollar amounts are shown in thousands (except per share data and subscriber counts).
Three Months Ended Three Months Ended September 30, 2001 September 30, 2000 -------------------------------- -------------------------------- % of % of (000's) Revenues (000's) Revenues ------------ --------- ------------ --------- STATEMENT OF OPERATIONS DATA: REVENUES: Internet services $ 7,263 99.5% $ 8,939 99.7% Other 35 0.5% 28 0.3% ------------ --------- ------------ --------- Total 7,298 100.0% 8,967 100.0% ------------ --------- ------------ --------- OPERATING COSTS AND EXPENSES: Connectivity and operations 3,462 47.4% 5,786 64.5% Sales and marketing 298 4.1% 1,737 19.4% General and administrative 1,562 21.4% 2,179 24.3% Provision for bad debt expense 563 7.7% 311 3.5% Depreciation and amortization 3,881 53.2% 3,988 44.5% ------------ --------- ------------ --------- Total 9,766 133.8% 14,001 156.1% ------------ --------- ------------ --------- OPERATING LOSS (2,468) (33.8%) (5,034) (56.1%) INTEREST EXPENSE, NET (97) (1.3%) (4) (0.0%) ------------ --------- ------------ --------- NET LOSS $ (2,565) (35.1%) $ (5,038) (56.2%) ============ ========= ============ ========= NET LOSS PER COMMON SHARE: BASIC $ (0.26) $ (0.52) ============ ============ DILUTED $ (0.26) $ (0.52) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 10,002 9,773 DILUTED 10,002 9,773 OTHER DATA: Subscribers at end of period 148,000 152,000 EBITDA(1) 1,413 (1,046) EBITDA margin (2) 19.4% -11.7% CASH FLOW DATA: Cash flow from operations 842 238 Cash flow used in investing activities 281 228 Cash flow used in financing activities 353 103
- ---------- (1) EBITDA (earnings before interest, taxes, depreciation and amortization) consists of revenue less connectivity and operating expense, sales and marketing expense, and general administrative expense. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is presented to enhance an understanding of our operating results and is not intended to represent cash flows or results of operations in accordance with GAAP for the periods indicated. EBITDA is not a measurement under GAAP and is not necessarily comparable with similarly titled measures for other companies. (2) EBITDA margin represents EBITDA as a percentage of total revenue. Total revenue. Total revenue decreased by $1.7 million, or 18.9%, to $7.3 million for the three months ended September 30, 2001, from $9.0 million for the three months ended September 30, 2000. The majority of the $1.7 million decrease is attributable to the sale of DSL customers to Covad Communications ("Covad") as part of a settlement agreement with Covad. Internet services revenue for the three months ended September 30, 2000 included approximately $450,000 in revenues related to sales of DSL equipment to new DSL subscribers. Connectivity and operations. Connectivity and operations expense decreased by $2.3 million, or 39.7%, to $3.5 million for the three months ended September 30, 2001 from $5.8 million for the three months ended September 30, 2000. The decrease is primarily due to the costs eliminated as a result of the sale of DSL customers to Covad and our consolidation of operations. As a percentage of revenue, connectivity and operations expense decreased to 47.4% for the three months ended September 30, 2001, from 64.5% for the three months ended September 30, 2000. Sales and marketing. Sales and marketing expense decreased by $1.4 million, or 82.4%, to $298,000 for the three months ended September 30, 2001, compared to $1.7 million for the three months ended September 30, 2000. The majority of the decrease relates to a reduction of television advertising specifically in the Austin and San Antonio markets to promote our DSL products and a decreased emphasis on direct response marketing programs. General and administrative. General and administrative expense decreased by $600,000, or 27.3%, to $1.6 million for the three months ended September 30, 2001, from $2.2 million for the three months ended September 30, 2000. For the three months ended September 30, 2000, there was $287,500 in non-cash compensation expense related to an officer's stock purchase agreement and $112,000 in costs related to the consolidation of Texas operations. General and administrative expense as a percentage of total revenue decreased to 21.4% for the three months ended September 30, 2001, from 24.3% for the three months ended September 30, 2000. Provision for bad debt expense. Provision for bad debt expense increased by $252,000, or 81.0%, to $563,000 for the three months ended September 30, 2001, from $311,000 for the three months ended September 30, 2000. Depreciation and amortization. Depreciation and amortization decreased slightly by $107,000, or 2.7%, to $3.9 million for the three months ended September 30, 2001, from $4.0 million for the three months ended September 30, 2000. Interest expense, net. We incurred approximately $97,000 of interest expense, net of interest income during the three months ended September 30, 2001, compared to interest expense, net of interest income of $4,000 for the three months ended September 30, 2000. The increase is due to recognition of interest expense of $80,000 related to the post-judgment interest on an adverse judgment in a lawsuit and $11,000 in interest expense related to a $3.3 million letter of credit agreement with the Company's Chairman, William O. Hunt. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations to date primarily through (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 in December 1998 and received net proceeds of approximately $19.8 million. We used a portion of the proceeds of the offering to repay approximately $2.1 million in shareholder notes and certain other indebtedness Cash provided by operating activities totaled $842,000 and $238,000 for the three months ended September 30, 2001 and 2000, respectively. Cash provided by operating activities for the three months ended September 30, 2001 was positively impacted by the $1.4 million in EBITDA. Cash used in investing activities totaled $281,000 and $228,000 for the three months ended September 30, 2001 and 2000, respectively, which consisted of routine purchases of property and equipment to expand and upgrade our network. Cash used in financing activities totaled $353,000 and $103,000 for the three months ended September 30, 2001 and 2000, respectively. Cash used in financing activities for the three months ended September 30, 2001 consisted mainly of payments of $364,000 to service capital leases and long-term obligations. On September 18, 2001, we entered into an agreement with our Chairman, William O. Hunt, in which Mr. Hunt collateralized an appeal bond with a letter of credit in the approximate amount of $3.3 million to appeal a judgment entered against the Company, Mr. Hunt and a former executive officer of the Company. Internet America collateralized a portion of the appeal bond by placing $200,000 in a short term certificate of deposit required to be in place for the duration of the appeal. There were one time transaction costs to post this appeal bond. Annual recurring financing costs for this bond will be up to $264,000. In addition, if the letter of credit is funded in the full amount or in a reduced amount to pay a judgment or settlement, Internet America would enter into a convertible secured promissory note for the funded amount. Interest would accrue at 12% per annum and be payable quarterly for the first two years after issuance. If the note was not converted within two years of issuance, the conversion option would terminate and all principal and unpaid accrued interest would be payable in four quarterly payments over the third year. In connection with the agreement, we granted Mr. Hunt a security interest in our assets other than accounts receivable. We estimate that cash on hand of $1.7 million at September 30, 2001 along with anticipated revenue collections and the appeal bond financing discussed above will be sufficient for meeting our working capital needs for fiscal 2002 with regard to continuing operations in existing markets. Additional financing will be required to fund acquisitions or expansion into new markets. If additional capital financing arrangements, including public or private sales of debt or equity securities, or additional borrowings from commercial banks, are insufficient or unavailable, or if we experience shortfalls in anticipated revenues or increases in anticipated expenses, we will modify our operations and growth strategies to match available funding. In such case, it is likely that our advertising expenditures would be downscaled to a level where positive cash flows are generated from operations. We have no long term advertising commitments. "SAFE HARBOR" STATEMENT The following "Safe Harbor" Statement is made pursuant to the Private Securities Litigation Reform Act of 1995. Certain of the Statements contained in the body of this Report are forward-looking statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation, that (1) we will not improve EBITDA, profitability or product margins, (2) we will not continue to achieve operating efficiencies, (3) we will not retain or grow our subscriber base, including DSL and commercial services customers, (4) we will not be competitive with existing or new competitors, (5) we will not keep up with industry pricing or technological developments impacting the Internet, (6) needed financing will not be available to us if and as needed, and (7) we will be adversely affected by dependence on network infrastructure, telecommunications providers and other vendors, by regulatory changes and by general economic and business conditions. This list is intended to identify certain of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included elsewhere herein. These factors are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements included in our other publicly filed reports and documents. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We do not issue or engage in trading of market-risk sensitive instruments. We also do not purchase for investment, hedging or for purposes "other than trading", instruments that are likely to expose the Company to market risk. We have not entered into any forward nor purchased any futures contracts, nor purchased any options or entered into any swaps. We invest in short-term high grade interest bearing instruments. In this regard, our interest income is most sensitive to changes in the general level of U.S. interest rates. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In August, 2001, we appealed an adverse judgment entered against the Company, our former Chief Executive Officer, Michael T. Maples, and our Chairman, William O. Hunt. This litigation and judgment have been previously disclosed in 10-Q and 10-K filings for our fiscal years ended 2001 and 2000. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) The Company entered into a Stock Purchase Agreement dated August 6, 2001, in which the Company's President and Chief Executive Officer, Jack T. Smith, purchased 200,000 shares of common stock from the Company at the price of $0.42 per share, which was the closing market price of the stock on the date of the agreement. This issuance was effected under Section 4(2) of the Securities Act in connection with Mr. Smith's employment by the Company and without the involvement of an underwriter. Of the total purchase price of $84,000, Mr. Smith paid $2,000 in cash and entered into a Promissory Note to the Company for the remaining amount. The Promissory Note is for the principal amount of $82,000, with interest accruing at the rate of 6.33% annually. Interest is payable each calendar quarter beginning on October 1, 2001 and continuing until July 1, 2008. All unpaid principal and interest is due and payable on August 29, 2008. The Promissory Note is secured by the 200,000 shares of Common Stock under a Pledge and Security Agreement also dated August 6, 2001. Under the Stock Purchase Agreement, the Company agreed to pay to Mr. Smith as additional compensation on or before the due date of any interest payment under the Promissory Note, an amount which after all withholding required by applicable law equals the next interest installment due on the Promissory Note. This amount may be paid by a credit to the accrued unpaid interest on the Promissory Note. No later than January 15 of each calendar year during the term of Mr. Smith's employment, the Company will pay to Mr. Smith a cash bonus in an amount which after all withholding required by applicable law equals the federal income tax liability of Mr. Smith not previously withheld or paid by the Company for any such additional compensation. For a period of seven years after the date of the Stock Purchase Agreement, Mr. Smith has the right and option to sell all or any portion of the 200,000 shares to the Company for the price of $0.42 per share. In the event that Mr. Smith's employment with the Company is terminated for cause prior to the third anniversary of the Stock Purchase Agreement, for a period of 60 days after the date of such termination, the Company has the right and option to purchase from Mr. Smith, at a purchase price equal to $0.42 per share, the following number of shares: (i) on or prior to the first anniversary: 200,000 shares; (ii) after the first anniversary but on or prior to the second anniversary: 133,333 shares; and (iii) prior to the third anniversary: 66,666 shares; provided, however, that this repurchase right will terminate immediately prior to any change in control of the Company. The purchase price upon exercise of this option shall be applied to the outstanding balance of unpaid accrued interest and principal upon the Promissory Note and the balance, if any, shall be paid in cash to Mr. Smith. Under the Stock Purchase Agreement, Mr. Smith has demand registration rights for all or any portion of the 200,000 shares of Common Stock. 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). 4.3 Stock Purchase Agreement dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 4.4 Promissory Note dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 4.5 Pledge and Security Agreement dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 4.6 Letter of Credit Security Commitment Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 4.7 Security Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 4.8 Registration Rights Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 10.1 Stock Purchase Agreement dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 10.2 Promissory Note dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 10.3 Pledge and Security Agreement dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 10.4 Letter of Credit Security Commitment Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 10.5 Security Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 10.6 Registration Rights Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 11 Computation of earnings per share(2) - ---------- (1) Previously filed as an exhibit to the Company's Annual Report on Form 10-K filed on September 28, 2001 and incorporated herein by reference. (2) See note 2 to the financial statements. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERNET AMERICA, INC. (Registrant) Date: 11/14/01 By: /s/ Jack T. Smith --------------------------------------- Jack T. Smith President and Chief Executive Officer Date: 11/14/01 By: /s/ Mark Novy --------------------------------------- Mark Novy Chief Accounting Officer 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). 4.3 Stock Purchase Agreement dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 4.4 Promissory Note dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 4.5 Pledge and Security Agreement dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 4.6 Letter of Credit Security Commitment Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 4.7 Security Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 4.8 Registration Rights Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 10.1 Stock Purchase Agreement dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 10.2 Promissory Note dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 10.3 Pledge and Security Agreement dated August 6, 2001 by and between Internet America, Inc. and Jack T. Smith.(1) 10.4 Letter of Credit Security Commitment Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 10.5 Security Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 10.6 Registration Rights Agreement dated September 18, 2001 by and between Internet America, Inc. and William O. Hunt(1) 11 Computation of earnings per share(2)
- ---------- (1) Previously filed as an exhibit to the Company's Annual Report on Form 10-K filed on September 28, 2001 and incorporated herein by reference. (2) See note 2 to the financial statements. -----END PRIVACY-ENHANCED MESSAGE-----