-----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, NwTggY8R3Okbntcm0E6mP1zbdh9OcX+MpCxYlPV79AT/LBVmKqbVtYe11X4AOA+u ppqjhg31wUCj6izgmK88Bw== 0000950134-99-010098.txt : 19991117 0000950134-99-010098.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950134-99-010098 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNET AMERICA INC CENTRAL INDEX KEY: 0001001279 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 860778979 STATE OF INCORPORATION: TX FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25147 FILM NUMBER: 99753130 BUSINESS ADDRESS: STREET 1: 350 N ST PAUL STE 200 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2148612500 MAIL ADDRESS: STREET 1: ONE DALLAS CENTRE 350 N. ST. PAUL STREET 2: SUITE 3000 CITY: DALLAS STATE: TX ZIP: 75201 10QSB 1 FORM 10QSB FOR QUARTER ENDING SEPTEMBER 30, 1999 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _____ COMMISSION FILE NUMBER 000-25147 INTERNET AMERICA, INC. (Exact name of registrant as specified in its charter) TEXAS 86-0778979 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 350 N. ST. PAUL, SUITE 3000, DALLAS, TX 75201 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 861-2500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. OUTSTANDING AT NOVEMBER 1, 1999 ------------------ Common Stock at $.01 par value 7,063,756 Shares ================== 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS INTERNET AMERICA, INC. BALANCE SHEETS
September 30 , June 30, 1999 1999 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,303,947 $ 5,845,562 Trade receivables, net 1,212,126 1,122,894 Prepaid expenses and other current assets 128,906 126,433 ------------ ------------ Total current assets 4,644,979 7,094,889 PROPERTY AND EQUIPMENT, net 2,311,849 2,622,637 OTHER ASSETS, net 9,762,072 9,195,878 ------------ ------------ $ 16,718,900 $ 18,913,404 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 2,041,174 $ 2,131,201 Accrued liabilities 884,161 1,068,774 Deferred revenue 2,907,039 3,358,347 Current maturities of long-term debt 213,087 434,934 Current maturities of capital lease obligations 48,750 41,195 ------------ ------------ Total current liabilities 6,094,211 7,034,451 LONG-TERM DEBT, net of current portion 206,190 151,997 CAPITAL LEASE OBLIGATIONS, net of current portion 87,000 102,246 ------------ ------------ Total liabilities 6,387,401 7,288,694 ------------ ------------ SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 40,000,000 shares authorized, 7,062,439 and 6,912,930 issued and outstanding at September 30, 1999, and June 30, 1999, respectively 70,625 69,130 Additional paid-in capital 24,512,851 24,231,065 Accumulated deficit (14,251,977) (12,675,485) ------------ ------------ Total shareholders' equity 10,331,499 11,624,710 ------------ ------------ $ 16,718,900 $ 18,913,404 ============ ============
See accompanying notes to condensed financial statements. 3 Financial Statements - Continued INTERNET AMERICA, INC. STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended September 30, ------------------------------ 1999 1998 ------------ ------------ REVENUES: Access $ 4,715,164 $ 3,594,785 Business services 916,831 522,947 Other 206,608 29,684 ------------ ------------ Total 5,838,603 4,147,416 ------------ ------------ OPERATING COSTS AND EXPENSES: Connectivity and operations 3,150,195 2,048,439 Sales and marketing 1,498,470 850,858 General and administrative 1,387,200 837,995 Depreciation and amortization 1,416,012 481,768 ------------ ------------ Total 7,451,877 4,219,060 ------------ ------------ OPERATING LOSS (1,613,274) (71,644) INTEREST INCOME (EXPENSE), NET 36,782 (108,933) ------------ ------------ LOSS BEFORE INCOME TAX (1,576,492) (180,577) INCOME TAX EXPENSE -- (10,000) ------------ ------------ NET LOSS $ (1,576,492) $ (190,577) ============ ============ NET LOSS PER COMMON SHARE: BASIC $ (0.22) $ (0.05) ============ ============ DILUTED $ (0.22) $ (0.05) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 7,009,211 3,914,856 DILUTED 7,009,211 3,914,856
See accompanying notes to condensed financial statements. 4 Financial Statements - Continued INTERNET AMERICA, INC. STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended September 30, ------------------------------ 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net loss $ (1,576,492) $ (190,577) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,416,012 481,768 Changes in operating assets and liabilities: Accounts receivable (89,235) (166,017) Prepaid expenses and other current assets (7,064) (15,386) Other assets 6,068 (295,592) Accounts payable and accrued liabilities (212,213) 158,769 Deferred revenue (454,155) (130,511) ------------ ------------ Net cash used in operating activities (917,079) (157,546) ------------ ------------ INVESTING ACTIVITIES Purchases of property and equipment (147,722) (141,649) Purchases of subscribers (1,576,103) -- ------------ ------------ Net cash used in investing activities (1,723,825) (141,649) ------------ ------------ FINANCING ACTIVITIES: Proceeds from exercise of stock options 273,014 -- Proceeds from issuance of note payable to related party -- 311,186 Principal payments of capital lease obligations (7,691) (110,571) Principal payments of notes payable to shareholders -- (230,912) Principal payments of long-term debt (166,034) (38,162) Payments on line of credit -- (77,238) ------------ ------------ Net cash provided by (used in) financing activities 99,289 (145,697) ------------ ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (2,541,615) (444,892) CASH AND CASH EQUIVALENTS, beginning of period 5,845,562 618,290 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 3,303,947 $ 173,398 ============ ============ SUPPLEMENTAL INFORMATION: Cash paid for interest $ 12,350 $ 71,493 Cash paid for income taxes $ -- $ 15,750
See accompanying notes to condensed financial statements. 5 INTERNET AMERICA, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Article 10 of Regulation S-X of the Securities and Exchange Commission. The accompanying unaudited condensed financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair statement of the Company's financial position and results of operations for the interim periods presented. All such adjustments are of a normal and recurring nature. These condensed financial statements should be read in conjunction with the financial statements for the year ended June 30, 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 September 30, 1999, options to purchase 872,079 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, 1999, options to purchase 146,195 shares of common stock had been exercised. 3. Recent Acquisitions On June 30, 1999, we acquired all the outstanding common stock of NeoSoft, Inc. ("NeoSoft"), an ISP in Houston, Texas, for $8.3 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. On July 26, 1999, we 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. According to the agreement, we agreed to pay up to $464,800, half of which was paid upon closing. The remaining payment is contingent on the actual number of KDi subscribers that successfully transition to Internet America's service. On July 28, 1999, we 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 is contingent on the actual number of INTX subscribers that successfully transition to Internet America's service. On August 9, 1999, we acquired the Texas dial-up subscribers of Pointe Communications Corporation, Inc., a Nevada corporation ("PointeCom"), under the terms of an Asset Purchase Agreement. According to the agreement, we agreed to pay up to $2,000,000 in cash, half of which was paid upon closing. The remaining payment is contingent on the actual number of PointeCom subscribers that successfully transition to Internet America's service. On September 12, 1999, we signed a definitive agreement to acquire all of the outstanding shares of PDQ.Net, Incorporated, a Houston-based ISP ("PDQ"), in a stock-for-stock transaction. According to the agreement, we will issue 2,425,000 shares of our common stock in exchange for all the outstanding stock of PDQ. The value of the transaction is approximately $29.4 million based on the September 30, 1999 closing Price for Internet America's common stock. The transaction is contingent upon approval of Internet America and PDQ shareholders and is expected to be accounted for as a purchase. 6 ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements, identified by words such as "anticipate," "believe," "estimate," "should," "expect" and similar expressions, include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. Our Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999, filed with the Securities and Exchange Commission on September 15, 1999, discusses some additional important 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. As of September 30, 1999, we served approximately 105,000 subscribers in the southwestern United States. Our business model is to create high user density in each geographic area we serve which allows us to realize substantial marketing and operating efficiencies. Our highest priority is to rapidly build market share in specific regions, instead of deploying extensive network infrastructure with a substantial number of underutilized points of presence (POPs). Our growth strategy focuses on continuing to add customers in existing markets and quickly building a critical mass of subscribers in new markets. We offer Internet services tailored to meet the needs of both individual and business subscribers. Our primary service offering is dial-up and broadband Internet access. For our business subscribers, we offer dedicated high speed Internet access, Web hosting and other services. Our most popular service package includes unlimited dial-up Internet access for $19.95 a month. We also offer value-added services for additional fees, including multiple e-mail boxes, personalized e-mail addresses and personal Web sites. Our Expresslane DSL product provides high-speed Internet access over existing telephone lines, and allows subscribers to simultaneously use a single telephone line for voice service and for access to the Internet. In addition, the product is an "always on" connection thereby removing wait times associated with dialing into a network. We offer an array of Expresslane DSL bandwidth options to consumers at prices ranging from $9.95 per month to $99.95 per month. The Expresslane DSL product offers our subscribers a cost-effective way of substantially increasing bandwidth in residences and businesses. RECENT ACQUISITIONS On June 30, 1999, we acquired all the outstanding common stock of NeoSoft, Inc. ("NeoSoft"), an ISP in Houston, Texas, for $8.3 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. On July 26, 1999, we 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. According to the agreement, we agreed to pay up to $464,800, half of which was paid upon closing. The remaining payment is contingent on the actual number of KDi subscribers that successfully transition to Internet America's service. 7 On July 28, 1999, we 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 is contingent on the actual number of INTX subscribers that successfully transition to Internet America's service. On August 9, 1999, we acquired the Texas dial-up subscribers of Pointe Communications Corporation, Inc., a Nevada corporation ("PointeCom"), under the terms of an Asset Purchase Agreement. According to the agreement, we agreed to pay up to $2,000,000 in cash, half of which was paid upon closing. The remaining payment is contingent on the actual number of PointeCom subscribers that successfully transition to Internet America's service. On September 12, 1999, we signed a definitive agreement to acquire all of the outstanding shares of PDQ.Net, Incorporated, a Houston-based ISP ("PDQ"), in a stock-for-stock transaction. According to the agreement, we will issue 2,425,000 shares of our common stock in exchange for all the outstanding stock of PDQ. The value of the transaction is approximately $29.4 million based on the September 30, 1999 closing price for Internet America's common stock. The transaction is contingent upon approval of Internet America and PDQ shareholders and is expected to be accounted for as a purchase. STATEMENT OF OPERATIONS Access revenues are derived primarily from individual dial-up Internet access, whether analog or ISDN, 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, 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, media and production costs, and call center employee wages. These expenses include the cost of our television and billboard campaigns and other advertising. Advertising costs are expensed as incurred. General and administrative expenses consist primarily of accounting and administrative wages, professional services, rent and other general business expenses. Depreciation is computed using the straight line method over the estimated useful life of the assets. Our data communications equipment, computers, data server and office equipment are depreciated over three years. We depreciate our furniture, fixtures and leasehold improvements over five years. Acquisition costs are allocated among acquired subscriber bases and goodwill, both of which are amortized over three years. Amortization of acquired subscriber bases and goodwill will increase substantially during fiscal 2000 due to the acquisition of NeoSoft and other recent acquisitions. Our business is not subject to any significant seasonal influences. 8 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 The following table sets forth certain unaudited financial data for the three months ended September 30, 1999 and 1998. All amounts for the three months ended September 30, 1998 have been restated to reflect the poolings of interests with CompuNet, Inc. and CyberRamp, LLC., companies acquired by Internet America in the third quarter of fiscal 1999. Operating results for any period are not indicative of results for any future period. Dollar amounts are shown in thousands (except per share data and subscriber count).
Three Months Ended Three Months Ended September 30, 1999 September 30, 1998 -------------------------- -------------------------- % of % of (000's) Revenues (000's) Revenues ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: REVENUES: Access $ 4,715 80.8% $ 3,595 86.7% Business services 917 15.7% 523 12.6% Other 207 3.5% 29 0.7% ---------- ---------- ---------- ---------- Total 5,839 100.0% 4,147 100.0% ---------- ---------- ---------- ---------- OPERATING COSTS AND EXPENSES: Connectivity and operations 3,151 54.0% 2,048 49.4% Sales and marketing 1,498 25.7% 851 20.5% General and administrative 1,387 23.8% 838 20.2% Depreciation and amortization 1,416 24.3% 482 11.6% ---------- ---------- ---------- ---------- Total 7,452 127.6% 4,219 101.7% ---------- ---------- ---------- ---------- OPERATING LOSS (1,613) (27.6%) (72) (1.7%) INTEREST INCOME (EXPENSE), NET 37 0.6% (109) (2.6%) ---------- ---------- ---------- ---------- LOSS BEFORE INCOME TAX (1,576) (27.0%) (181) (4.4%) INCOME TAX EXPENSE -- 0.0% (10) (0.2%) ---------- ---------- ---------- ---------- NET LOSS $ (1,576) (27.0%) $ (191) (4.6%) ========== ========== ========== ========== NET LOSS PER COMMON SHARE: BASIC $ (0.22) $ (0.05) ========== ========== DILUTED $ (0.22) $ (0.05) ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC 7,009 3,915 DILUTED 7,009 3,915 OTHER DATA: Subscribers at end of period 105,000 64,200
9 Total revenue. Total revenue increased by $1.7 million, or 40.8%, to $5.8 million for the three months ended September 30, 1999, from $4.1 million for the three months ended September 30, 1998. The majority of the increase in total revenue is attributable to the increase in access revenue of $1.1 million, or 31.2%, to $4.7 million for the three months ended September 30, 1999, from $3.6 million for the same period in the prior year. The increase in access revenue is attributable to an increase in the number of dial-up subscribers from 64,200 at September 30, 1998, to 105,000 at September 30, 1999. Business services revenue increased by $394,000, or 75.3%, to $917,000 for the three months ended September 30, 1999, from $523,000 for the same period in the prior year. The increase in business services revenue is primarily due to the NeoSoft acquisition on June 30, 1999. Over half of NeoSoft's total revenue relates to business services. Other revenue increased by $177,000, to $207,000 for the three months ended September 30, 1999, from $30,000 for the same period in the prior year. The increase in other revenue is due to sales tax refunds related to NeoSoft operations and other miscellaneous revenue realized by NeoSoft. Connectivity and operations. Connectivity and operations expense increased by $1.1 million, or 53.8%, to $3.2 million for the three months ended September 30, 1999 from $2.0 million for the three months ended September 30, 1998. As a percentage of revenue, connectivity and operations expense increased to 54.0% for the three months ended September 30, 1999, from 49.4% for the same period in the prior year. The increase as a percentage of revenue is primarily due to the effects of recent acquisitions. After an acquisition, there is some duplication of inbound telephone connectivity and Internet backbone connectivity during the transition period. Sales and marketing. Sales and marketing expense increased by $648,000, or 76.1%, to $1.5 million for the three months ended September 30, 1999, compared to $851,000 for the same period in the prior year. During the three months ended September 30, 1998, our marketing expenses were limited to an advertising campaign in the North Texas area only, our primary market during that time. For the three months ended September 30, 1999, our marketing campaign included television and billboard advertisements in a total of nine markets. Total sales and marketing expense of $1.5 million for the period ended September 30, 1999 included $1.2 million in television, print and billboard advertising. Approximately half of the $1.2 million in television, print and billboard advertising incurred for the quarter ended September 30, 1999 related to new markets outside of the North Texas area. General and administrative. General and administrative expense increased by $549,000, or 65.5%, to $1.4 million for the three months ended September 30, 1999, from $838,000 for the three months ended September 30, 1998. General and administrative expense as a percentage of total revenue increased to 23.8% for the three months ended September 30, 1999, from 20.2% for the same period in the prior year, primarily due to administrative support related to our growth strategy. Depreciation and amortization. Depreciation and amortization increased by $934,000, or 194%, to $1.4 million for the three months ended September 30, 1999, from $482,000 for the same period in the prior year. The increase is due to amortization of recently acquired subscriber bases and related goodwill along with additional depreciation expense related to routine upgrades of our network facilities. Approximately $724,000 of the total increase in depreciation and amortization relates to amortization of the subscriber base and goodwill related to the NeoSoft purchase which closed on June 30, 1999, and approximately $160,000 relates to amortization due to other recent acquisitions. Interest income and expense. We realized $37,000 of interest income during the three months ended September 30, 1999, compared to interest expense of $109,000 for the same period in the prior year. During the three months ended September 30, 1998, several notes payable to shareholders were outstanding, resulting in interest expense of $109,000 for the period. These notes payable were retired with part of the proceeds from our initial public offering in December 1998. 10 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) cash flows from operations. We completed an initial public offering 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 September 30, 1999, cash and cash equivalents on hand totaled $3.3 million. Cash used in operating activities totaled $1.2 million for the three months ended September 30, 1999, compared to cash used in operating activities of $158,000 for the same period in the prior year. During the three months ended September 30, 1999, sales and marketing expenses totaled $1.5 million, as compared to only $851,000 for the same period in the prior year. Increased connectivity costs and general and administrative expenditures related to our growth strategy also contributed to additional cash used in operations for the three months ended September 30, 1999, as compared to the same period a year ago. Cash used in investing activities totaled $1.5 million for the three months ended September 30, 1999, and consisted of $1.4 million in subscriber acquisition costs and routine purchases of property and equipment to expand and upgrade our network. Cash provided by financing activities totaled $99,000 for the three months ended September 30, 1999 and consisted of proceeds of $273,000 from the exercise of stock options by option holders less payments of $174,000 to service long-term obligations. We estimate that cash on hand of $3.3 million at September 30, 1999 along with cash provided by operations 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 expansion through acquisitions and marketing. The availability of additional capital from public debt and equity markets is currently limited due to a decline in stock prices for the entire Internet sector. 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 are currently investigating capital financing arrangements to help fund a portion of equipment purchases during the coming year which are estimated to total approximately $1.1 million. There can be no assurance that we will enter into any such capital equipment financing, and if so, on what terms. 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. 11 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) evaluate 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 outstanding issues, if any, relating to Year 2000 readiness, 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 Our software products, network applications and system hardware components have been tested and continue to be reviewed. To date, we have experienced few problems relating to Year 2000 testing and any such problems have been addressed through upgrades or replacements. Additionally, we have investigated our Third Party Systems to assess their Year 2000 readiness, and have upgraded or replaced noncompliant Third Party Systems. 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 (collectively, the "Installation Package"). 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 Installation 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. During the quarter ended September 30, 1999, we upgraded the software components of our telephone system, which manages all inbound and outbound phone and fax capabilities, 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 that 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 $75,000 in connection with the implementation of the Plan. We estimate that an additional $10,000 to $15,000 will be incurred through the remainder of the execution of the Plan. 12 Risks 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 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. There is inherent uncertainty in the Year 2000 issue, but we expect that as our Plan progresses, the level of uncertainty about the impact of the Year 2000 issue will be reduced and we should be better positioned to identify the nature and extent of material risk as a result of any Year 2000 disruptions. Contingency Plans We believe that 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 during the change-over 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. "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. 13 PART II - OTHER INFORMATION 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). 3.3 Second Amendment to the Bylaws of Internet America, Inc. dated as of September 13, 1999.* 4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit No. 4.1 on Form SB-2, as amended, initially filed with the Securities and Exchange Commission on July 21, 1998 (File No. 333-59527). 11. Computation of earnings per share (1) 27. Financial Data Schedule (2) (b) Reports on Form 8-K On September 27, 1999, we filed a Current Report on Form 8-K to report that, on September 13, 1999, we announced a definitive agreement to acquire all of the outstanding chares of PDQ.Net, Incorporated, a Houston-based ISP ("PDQ"), in a stock-for-stock transaction. The transaction is contingent upon approval of Internet America and PDQ shareholders and is expected to be accounted for as a purchase. - ----------------------------- * Filed herewith (1) See note 2 to condensed financial statements (2) Filed herewith 14 SIGNATURES In accordance with 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: November 15, 1999 By: /s/ Michael T. Maples ----------------- ------------------------- Michael T. Maples President and Chief Executive Officer Date: November 15, 1999 By: /s/ James T. Chaney ----------------- ------------------------------ James T. Chaney Vice President and Chief Financial Officer 15 INDEX TO EXHIBITS ----------------- Sequentially ------------
Exhibit Number 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). 3.3 Second Amendment to the Bylaws of Internet America, Inc. dated as of September 13, 1999.* 4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit No. 4.1 on Form SB-2, as amended, initially filed with the Securities and Exchange Commission on July 21, 1998 (File No. 333-59527). 12. Computation of earnings per share (1) 27. Financial Data Schedule (2)
- ----------------------------- * Filed herewith (1) See note 2 to condensed financial statements (2) Filed herewith EX-3.3 2 SECOND AMENDMENT TO THE BYLAWS OF INTERNET AMERICA 1 EXHIBIT 3.3 SECOND AMENDMENT TO THE BYLAWS OF INTERNET AMERICA, INC. The Board of Directors of Internet America, Inc., a Texas corporation (the "Corporation"), adopted the following amendments to the Corporation's Bylaws as of September 13, 1999: 1. The current Article Three, Section 3.02 of the Corporation's Bylaws shall be amended and restated so that it reads in its entirety as follows: "3.02 Number; Election; Term; Qualification. The number of directors which shall constitute the board of directors shall be not less than one. The first board of directors shall consist of the number of directors named in the articles of incorporation. Thereafter, the number of directors which shall constitute the entire board of directors shall be determined by resolution of the board of directors at any meeting thereof, but shall never be less than one. The board of directors of the Corporation shall be divided into three classes which shall be as nearly equal in number as is possible. At the first election of directors to such classified board of directors, each Class I director shall be elected to serve until the next ensuing annual meeting of shareholders, each Class II director shall be elected to serve until the second ensuing annual meeting of shareholders and each Class III director shall be elected to serve until the third ensuing annual meeting of shareholders. At each annual meeting of shareholders following the meeting at which the board of directors is initially classified, the number of directors equal to the number of the class whose term expires at the time of such meeting shall be elected to serve until the third ensuing annual meeting of shareholders. At each annual meeting of shareholders, directors shall be elected to hold office until their successors are elected and qualified or until their earlier resignation, removal from office or death. No director need be a shareholder, a resident of the State of Texas, or a citizen of the United States." 2. The current Article Three, Section 3.03 of the Corporation's Bylaws shall be amended and restated so that it reads in its entirety as follows: "3.03 Changes in Number. In the event of any change in the authorized number of directors, the number of directors in each class shall be adjusted so that thereafter each of the three classes shall be composed, as nearly as may be possible, of one-third of the authorized number of directors; provided that any change in the authorized number of directors shall not increase or shorten the term of any director, and any decrease shall become effective only as and when the term or terms of office of the class or classes of directors affected thereby shall expire, or a vacancy or vacancies in such class or classes shall occur. Any directorship to be filled by reason of an increase in the number of directors may be filled by (i) the shareholders at any annual or special meeting of shareholders called for that purpose or (ii) the board of directors for a term of office continuing only until the next election of one or more directors by the shareholders; provided that the board of directors may not fill more than two such directorships during the period between any two successive annual meetings of shareholders. Notwithstanding the foregoing, whenever the holders of any class or series of shares are entitled to elect one or more directors by the provisions of the articles of incorporation, any newly created directorship(s) of such class or series to be filled by reason of an increase in the number of such directors may be filled by the affirmative vote of a majority of the 2 directors elected by such class or series then in office or by a sole remaining director so elected or by the vote of the holders of the outstanding shares of such class or series, and such directorship(s) shall not in any case be filled by the vote of the remaining directors or by the holders of the outstanding shares of the Corporation as a whole unless otherwise provided in the articles of incorporation." Dated as of the 13th day of September, 1999. INTERNET AMERICA, INC. /s/ Elizabeth Palmer Daane ----------------------------------------- Elizabeth Palmer Daane, Secretary EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF INTERNET AMERICA, INC. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 3,304 0 1,312 100 0 4,644 5,786 3,474 16,719 6,094 0 0 0 71 10,261 16,719 0 5,839 3,150 7,452 0 0 37 (1,576) 0 (1,576) 0 0 0 (1,576) (0.22) (0.22)
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