<PAGE> 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)
<TABLE>
<S> <C>
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)
</TABLE>
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
==================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTERNET AMERICA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 , June 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 3
Financial Statements - Continued
INTERNET AMERICA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
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
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
Financial Statements - Continued
INTERNET AMERICA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
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
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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).
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
-------------------------- --------------------------
% of % of
(000's) Revenues (000's) Revenues
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 15
INDEX TO EXHIBITS
-----------------
Sequentially
------------
<TABLE>
<CAPTION>
Exhibit Number Description ------- -----------
<S> <C>
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)
</TABLE>
- -----------------------------
* Filed herewith
(1) See note 2 to condensed financial statements
(2) Filed herewith
<PAGE> 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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,304
<SECURITIES> 0
<RECEIVABLES> 1,312
<ALLOWANCES> 100
<INVENTORY> 0
<CURRENT-ASSETS> 4,644
<PP&E> 5,786
<DEPRECIATION> 3,474
<TOTAL-ASSETS> 16,719
<CURRENT-LIABILITIES> 6,094
<BONDS> 0
0
0
<COMMON> 71
<OTHER-SE> 10,261
<TOTAL-LIABILITY-AND-EQUITY> 16,719
<SALES> 0
<TOTAL-REVENUES> 5,839
<CGS> 3,150
<TOTAL-COSTS> 7,452
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> (1,576)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,576)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,576)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
