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, 2003
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 (State or other jurisdiction of incorporation or organization) |
86-0778979 (I.R.S. Employer Identification Number) | |
350 N. ST. PAUL, SUITE 3000, DALLAS, TX (Address of principal executive offices) |
75201 (Zip Code) |
Registrants 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
State the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
OUTSTANDING AT NOVEMBER 11, 2003
Common Stock at $.01 par value: 10,398,063 shares
PART IFINANCIAL INFORMATION
ITEM 1FINANCIAL STATEMENTS
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 |
June 30, 2003 |
|||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 2,256,697 | $ | 1,968,091 | ||||
Accounts receivable, net of allowance for uncollectible accounts of $1,056,544 and $1,133,944 as of September 30, 2003 and June 30, 2003, respectively |
318,123 | 347,674 | ||||||
Prepaid expenses and other current assets |
149,279 | 166,557 | ||||||
Total current assets |
2,724,099 | 2,482,322 | ||||||
Property and equipment, net |
312,456 | 411,926 | ||||||
Other assets, net |
4,380,393 | 4,380,393 | ||||||
$ | 7,416,948 | $ | 7,274,641 | |||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Trade accounts payable |
$ | 954,973 | $ | 795,714 | ||||
Accrued liabilities |
1,375,185 | 1,472,827 | ||||||
Deferred revenue |
1,958,430 | 2,068,404 | ||||||
Current portion of capital lease obligations |
| 14,096 | ||||||
Total current liabilities |
4,288,588 | 4,351,041 | ||||||
Total liabilities |
4,288,588 | 4,351,041 | ||||||
SHAREHOLDERS EQUITY: | ||||||||
Common stock, $.01 par value; 40,000,000 shares authorized, 10,384,938 and 10,337,476 issued and outstanding at September 30, 2003 and June 30, 2003, respectively |
103,849 | 103,375 | ||||||
Additional paid-in capital |
55,600,797 | 55,733,257 | ||||||
Note receivable from a shareholder |
(82,000 | ) | (82,000 | ) | ||||
Accumulated deficit |
(52,494,286 | ) | (52,831,032 | ) | ||||
Total shareholders equity |
3,128,360 | 2,923,600 | ||||||
$ | 7,416,948 | $ | 7,274,641 | |||||
See accompanying notes to condensed financial statements.
Financial StatementsContinued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three Months Ended September 30, | |||||||
2003 |
2002 | ||||||
REVENUES: |
|||||||
Internet services |
$ | 3,433,088 | $ | 4,983,899 | |||
Other |
2,436 | 2,130 | |||||
Total |
3,435,524 | 4,986,029 | |||||
OPERATING COSTS AND EXPENSES: |
|||||||
Connectivity and operations |
1,846,019 | 2,602,287 | |||||
Sales and marketing |
39,494 | 149,967 | |||||
General and administrative |
1,009,877 | 1,138,920 | |||||
Provision for bad debt expense |
102,624 | 145,963 | |||||
Depreciation |
109,554 | 233,343 | |||||
Total |
3,107,568 | 4,270,480 | |||||
OPERATING INCOME |
327,956 | 715,549 | |||||
INTEREST (INCOME) EXPENSE, NET |
(8,790 | ) | 143,159 | ||||
NET INCOME |
$ | 336,746 | $ | 572,390 | |||
NET INCOME PER COMMON SHARE: |
|||||||
BASIC |
$ | 0.03 | $ | 0.06 | |||
DILUTED |
$ | 0.03 | $ | 0.06 | |||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
|||||||
BASIC |
10,380,373 | 10,167,746 | |||||
DILUTED |
10,411,566 | 10,172,833 |
See accompanying notes to condensed financial statements.
Financial StatementsContinued
INTERNET AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
September 30, |
||||||||
2003 |
2002 |
|||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 336,746 | $ | 572,390 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
109,554 | 233,343 | ||||||
Provision for bad debt expense |
102,624 | 145,963 | ||||||
Non-cash compensation expense |
4,000 | 40,000 | ||||||
Changes in operating assets and liabilities: |
||||||||
Restricted cash |
| (332,053 | ) | |||||
Accounts receivable |
(73,073 | ) | 16,826 | |||||
Prepaid expenses and other current assets |
17,278 | (18,304 | ) | |||||
Other assets |
| 31,953 | ||||||
Accounts payable and accrued liabilities |
61,617 | (86,202 | ) | |||||
Deferred revenue |
(109,974 | ) | (229,292 | ) | ||||
Net cash provided by operating activities |
448,772 | 374,624 | ||||||
INVESTING ACTIVITIES |
||||||||
Purchases of property and equipment |
(10,084 | ) | (62,249 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Proceeds from issuance of common stock |
14,014 | 16,249 | ||||||
Principal payments of capital lease obligations |
(14,096 | ) | (22,525 | ) | ||||
Principal payments of long-term debt |
| (6,746 | ) | |||||
Purchase of outstanding Company stock option |
(150,000 | ) | | |||||
Net cash used in financing activities |
(150,082 | ) | (13,022 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
288,606 | 299,353 | ||||||
CASH AND CASH EQUIVALENTS, beginning of period |
1,968,091 | 2,901,545 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 2,256,697 | $ | 3,200,898 | ||||
SUPPLEMENTAL INFORMATION: |
||||||||
Cash paid for interest |
$ | 19 | $ | 67,348 |
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 Companys 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, 2003, included in the Companys Annual Report on Form 10-K (File No 000-25147).
2. | Basic and Diluted Net Income Per Share |
There are no adjustments required to be made to net income for the purpose of computing basic and diluted earnings per share (EPS). During the quarter ended September 30, 2003, options to purchase 53,000 shares of common stock were included in the computation of diluted EPS because the options were in the money as of September 30, 2003 and it resulted in 31,193 common stock equivalents to be added to the weighted average shares. During the quarter ended September 30, 2002, options to purchase 18,000 shares of common stock were included in the computation of diluted EPS because the options were in the money as of September 30, 2002 and it resulted in 5,087 common stock equivalents to be added to the weighted average shares. During the three months ended September 30, 2003 and 2002, options to purchase 713,894 and 1,101,323 shares of common stock were not included in the computation of diluted EPS because the options were not in the money as of September 30, 2003 and 2002, respectively. During the quarter ended September 30, 2003, 5,000 options to purchase shares of common stock were exercised while no options were exercised during the quarter ended September 30, 2002.
3. | Recently Issued Accounting Pronouncements |
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company adopted the interim disclosure provisions beginning with the quarter ended March 31, 2003. The Company did not elect to change to the fair value based method of accounting for stock-based employee compensation.
4. | Other Assets |
The carrying value of other assets at September 30, 2003 is as follows:
Goodwill |
Deposits and other |
Total |
|||||||||
Original Cost |
$ | 26,023,407 | $ | 84,916 | $ | 26,108,323 | |||||
Less accumulated amortization |
(21,727,930 | ) | $ | | (21,727,930 | ) | |||||
Other assets, net |
$ | 4,295,477 | $ | 84,916 | $ | 4,380,393 |
5. | Employee Stock Option Plans |
The Company applies APB No. 25 and related Interpretations in accounting for its employee stock option plans. The estimated fair value of each option grant was determined by reference to quoted market price or recent private, arms length sales of common and preferred stock prior to the companys initial public offering. In cases where there were no arms length transactions on or around the date of an option grant, the Board of Directors determined the value. No compensation expense has been charged against operations for the three months ended September 30, 2003 and 2002 related to stock option plans.
Had compensation cost for the Companys stock options been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Companys net income and income per share for the three months ended September 30, 2003 and 2002 would have been as indicated below:
Three September 30, |
Three Months Ended September 30, |
|||||||
Reported net income |
$ | 336,746 | $ | 572,390 | ||||
Less: SFAS No. 123 compensation expense |
(119,030 | ) | (199,645 | ) | ||||
Pro forma net income |
$ | 217,716 | $ | 372,745 | ||||
Reported basic and diluted income per share |
$ | 0.03 | $ | 0.06 | ||||
Less: SFAS No. 123 compensation expense |
(0.01 | ) | (0.02 | ) | ||||
Pro forma basic and diluted income per share |
$ | 0.02 | $ | 0.04 |
6. | Income Taxes |
During the three months period ended September 30, 2003 and 2002, the Company generated taxable income. No provision for income taxes has been recorded as the taxable income will be offset with net operating losses generated in prior periods. As of September 30, 2003, the Company continues to maintain a full valuation allowance for its net deferred tax assets. Given its limited history of generating taxable income, the Company does not consider the future recoverability of the net deferred tax assets to be more likely than not at this time.
7. | Commitments and Contingencies |
On September 3, 2003, the Company purchased an outstanding stock option to buy 9,428,571 shares of the Companys common stock from its former Chairman, William O. Hunt for $150,000.
There have been no other material changes in the legal proceedings previously reported in the Companys Annual Report on Form 10-K for the year ended June 30, 2003.
ITEM 2- |
MANAGEMENTS 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, 2003 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, 2003, we served approximately 76,000 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 through the introduction of new products and services.
High user density is the cornerstone of our business strategy. We will pursue a growth strategy based on the introduction of new products and services and focusing on markets where we have established branding rather than new markets. Our goal is to rapidly create high user density in specific markets to maintain positive operating results.
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 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 selective with investing in advertising. We plan to concentrate our advertising more heavily in markets where we have established branding than in new markets.
Our amortization expense increased through fiscal year 2002 as the costs of purchased subscriber bases were written off. No amortization expense was recorded for the three months ended September 30, 2003 and 2002 and no amortization expense will be recorded for future quarters because all of the Companys intangible assets, excluding goodwill, were fully amortized by June 30, 2002 and, in addition, the adoption of Statement of Financial Accounting Standards Board No. 142, Goodwill and Other Intangible Assets, SFAS No. 142 related to intangible assets as of July 1, 2002 and our test for impairment in June 2003 resulted in no impairment related to goodwill.
We have an accumulated deficit of $52.5 million at September 30, 2003 and have had annual operating losses since inception until the prior fiscal year ended June 30, 2003 as a result of building network infrastructure and rapidly increasing market share.
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. For fiscal years prior and ended June 30, 2002, purchased subscriber bases and related goodwill were amortized over 30 to 36 months. Effective July 1, 2002, it was determined that the Companys goodwill would not be amortized due to the adoption of SFAS No. 142.
Our business is not subject to any significant seasonal influences.
Results of Operations
Three Months Ended September 30, 2003 Compared to Three Months Ended September 30, 2002
The following table sets forth certain unaudited financial data for the three months ended September 30, 2003 and 2002. 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 September 30, 2003 |
Three Months Ended September 30, 2002 |
|||||||||||||
(000's) |
% of Revenues |
(000's) |
% of Revenues |
|||||||||||
INCOME STATEMENT DATA: |
||||||||||||||
REVENUES: |
||||||||||||||
Internet services |
$ | 3,434 | 99.9 | % | $ | 4,984 | 100.0 | % | ||||||
Other |
2 | 0.1 | % | 2 | 0.0 | % | ||||||||
Total |
3,436 | 100.0 | % | 4,986 | 100.0 | % | ||||||||
OPERATING COSTS AND EXPENSES: |
||||||||||||||
Connectivity and operations |
1,846 | 53.7 | % | 2,602 | 52.2 | % | ||||||||
Sales and marketing |
39 | 1.1 | % | 150 | 3.0 | % | ||||||||
General and administrative |
1,010 | 29.4 | % | 1,140 | 22.9 | % | ||||||||
Provision for bad debt expense |
103 | 3.0 | % | 146 | 2.9 | % | ||||||||
Depreciation |
110 | 3.2 | % | 233 | 4.7 | % | ||||||||
Total |
3,108 | 90.5 | % | 4,271 | 85.7 | % | ||||||||
OPERATING INCOME |
328 | 9.5 | % | 715 | 14.3 | % | ||||||||
INTEREST (INCOME) EXPENSE, NET |
(9 | ) | (0.3 | %) | 143 | 2.9 | % | |||||||
NET INCOME |
$ | 337 | 9.8 | % | $ | 572 | 11.5 | % | ||||||
NET INCOME PER COMMON SHARE: |
||||||||||||||
BASIC |
$ | 0.03 | $ | 0.06 | ||||||||||
DILUTED |
$ | 0.03 | $ | 0.06 | ||||||||||
WEIGHTED AVERAGE COMMON |
||||||||||||||
SHARES OUTSTANDING: |
||||||||||||||
BASIC |
10,380 | 10,167 | ||||||||||||
DILUTED |
10,412 | 10,173 | ||||||||||||
OTHER DATA: |
||||||||||||||
Subscribers at end of period |
76,000 | 118,000 | ||||||||||||
EBITDA(1) |
438 | 948 | ||||||||||||
EBITDA margin (2) |
12.7 | % | 19.0 | % | ||||||||||
CASH FLOW DATA: |
||||||||||||||
Cash flow from operations |
449 | 375 | ||||||||||||
Cash flow used in investing activities |
10 | 62 | ||||||||||||
Cash flow used in financing activities |
150 | 13 | ||||||||||||
Reconciliation of net income to EBITDA: |
||||||||||||||
Net income |
$ | 337 | $ | 572 | ||||||||||
Add: |
||||||||||||||
Depreciation |
110 | 233 | ||||||||||||
Interest (income) expense, net |
(9 | ) | 143 | |||||||||||
EBITDA (1) |
$ | 438 | $ | 948 | ||||||||||
(1) | EBITDA (earnings before interest, taxes and depreciation) EBITDA is not a measurement of financial performance under generally accepted accounting principles (GAAP) and should not be considered an alternative to net income as a measure of performance. Management has consistently used EBITDA on a historical basis as a measurement of the Companys current operating cash income because it is commonly used in the industry and we believe it is useful information for investors. |
(2) | EBITDA margin represents EBITDA as a percentage of total revenue. |
Total revenue. Total revenue decreased by $1.6 million, or 32.0%, to $3.4 million for the three months ended September 30, 2003, from $5.0 million for the three months ended September 30, 2002. The Companys subscriber count decreased by 42,000, or 35.6%, to 76,000 as of September 30, 2003 compared to 118,000 as of September 30, 2002. The decrease in the subscriber count is attributable to tightened credit policies and procedures and normal customer attrition exceeding our rate of new sales, and the loss of DSL customers due to the bankruptcy of one of our DSL providers. Our subscriber count also decreased due to the consolidation of several billing systems, which eliminated counting multiple products sold to one customer, which did not impact revenues.
Connectivity and operations. Connectivity and operations expense decreased by $0.8 million, or 30.8%, to $1.8 million for the three months ended September 30, 2003 from $2.6 million for the three months ended September 30, 2002. The decrease is primarily due to the consolidation of internet and telephone connections and circuits which was a result of decreased revenues. As a percentage of total revenue, connectivity and operations expense increased to 53.7% for the three months ended September 30, 2003, from 52.2% for the three months ended September 30, 2002.
Sales and marketing. Sales and marketing expense decreased by $111,000, or 74.0%, to $39,000 for the three months ended September 30, 2003, compared to $150,000 for the three months ended September 30, 2002. The majority of the decrease relates to a reduction of personnel costs and general advertising programs.
General and administrative. General and administrative expense decreased by $0.1 million, or 9.1%, to $1.0 million for the three months ended September 30, 2003, from $1.1 million for the three months ended September 30, 2002. The decrease is related to a $230,000 decrease in personnel costs which was offset by an increase in legal and professional fees of $127,000 related primarily to the purchase of the Hunt option. General and administrative expense as a percentage of total revenue increased to 29.4% for the three months ended September 30, 2003, from 22.9% for the three months ended September 30, 2002.
Provision for bad debt expense. Provision for bad debt expense decreased by $43,000, or 29.5%, to $103,000 for the three months ended September 30, 2003, from $146,000 for the three months ended September 30, 2002. The decrease is mainly related to an overall improvement in the Companys aging of customer accounts that are at least 90 days old. Provision for bad debt expense as a percentage of revenue increased slightly to 3.0% for the three months ended September 30, 2003, from 2.9% for the three months ended September 30, 2002. As of September 30, 2003, the Company continues to be fully reserved for all customer accounts that are at least 90 days old.
Depreciation. Depreciation decreased by $123,000, or 52.8%, to $110,000 for the three months ended September 30, 2003, from $233,000 for the three months ended September 30, 2002. The decrease is primarily due to certain property and equipment becoming fully depreciated.
Interest (income) expense, net. For the three months ended September 30, 2003, the Company recorded virtually no interest expense, but did record approximately $9,000 in interest income which is primarily due to interest earned on the Companys cash balances. For the three months ended September 30, 2002, the Company recorded interest expense of $66,000 related to a $3.3 million letter of credit agreement with the Companys former Chairman, William O. Hunt, and $80,000 in interest expense related to post-judgment interest on a lawsuit judgment for the three months ended September 30, 2002.
Liquidity and Capital Resources
We have financed our operations to date primarily through public and private sales of equity securities, loans from shareholders and third parties and cash flows from operations.
Cash provided by operating activities totaled $449,000 and $375,000 for the three months ended September 30, 2003 and 2002, respectively. Cash provided by operating activities for the three months ended September 30, 2003 was primarily impacted by $438,000 in EBITDA.
Cash used in investing activities totaled $10,000 and $62,000 for the three months ended September 30, 2003 and 2002, respectively, which consisted of routine purchases of property and equipment to expand and upgrade our network.
Cash used in financing activities totaled $150,000 and $13,000 for the three months ended September 30, 2003 and 2002, respectively. Cash used in financing activities for the three months ended September 30, 2003 consisted primarily of $150,000 paid to purchase an outstanding stock option of the Company from Mr. Hunt.
On September 18, 2001, we entered into an agreement with our former 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 initially collateralized a portion of the appeal bond by placing approximately $200,000 in short term certificates of deposit required to be in place for the duration of the appeal. In August 2002, Internet America increased the amount of these short-term certificates of deposit by approximately $332,000 in order to significantly reduce the annual premium of the appeal bond. There were one time transaction costs to post this appeal bond. Annual recurring financing costs for this bond were up to $316,000. In connection with this agreement, we granted Mr. Hunt a security interest in our assets other than accounts receivable.
On May 6, 2003, the Company settled the judgment described in the preceding paragraph. As part of the settlement agreement, the Company made a cash payment of $3.25 million to the plaintiff. The judgment of approximately $3.3 million had been on appeal by both parties since 2001, with the Company seeking to reduce the amount in full and the plaintiff to increase the amount to approximately $5.5 million, plus post-judgment interest. Just before the settlement, post-judgment interest accruing at a rate of 10% per annum had increased the liability to over $3.7 million. As a result of the settlement, the appeal bond was released and, under the financing agreement with Mr. Hunt, Mr. Hunt received an option to purchase approximately 9,428,571 shares of common stock. The Company purchased the option from Mr. Hunt for $150,000 on September 3, 2003.
We estimate that cash on hand of approximately $2.3 million at September 30, 2003 along with anticipated cash flow from operations will be sufficient for meeting our working capital needs for fiscal 2004 with regard to continuing operations in existing markets. Continued decrease in revenues and subscriber count may ultimately affect the liquidity of the Company. 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. 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 retain or grow our subscriber base, including DSL and commercial services customers, (2) we will not improve EBITDA, profitability or product margins, (3) we will not continue to achieve operating efficiencies, (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 |
No material changes have occurred to the Companys previously reported risk profile for market-risk sensitive instruments.
ITEM 4. | CONTROLS AND PROCEDURES |
An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) in effect as of September 30, 2003. Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that, as of September 30, 2003, the design and operation of these disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company required to be included in its periodic filings with the Securities and Exchange Commission. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the conclusion of their evaluation.
PART IIOTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
There have been no other material changes in the legal proceedings previously reported in the Companys Annual Report on Form 10-K for the year ended June 30, 2003.
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 | Amended and Restated By-Laws* | |
10.1 | Redemption Agreement dated September 3, 2003 by and between Internet America, Inc. and William O. Hunt, incorporated by reference to Exhibit No. 10.2 on Form 10-K filed with the Securities and Exchange Commission on September 29, 2003 | |
10.2 | Consultation Agreement dated September 19, 2003 by and between Internet America, Inc. and Jack T. Smith, incorporated by reference to Exhibit No. 10.3 on Form 10-K filed with the Securities and Exchange Commission on September 29, 2003 | |
11 | Computation of earnings per share (1) | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.* | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Mark Novy* | |
32.1 | Section 1350 Certification of William E. Ladin, Jr.* | |
32.2 | Section 1350 Certification of Mark Novy* |
* | Filed herewith |
(1) | See note 2 to the financial statements |
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the quarter ended September 30, 2003: (1) Form 8-K filed on August 19, 2003 reporting earnings for the quarter and year ended June 30, 2003; (2) Form 8-K filed on September 19, 2003 announcing management changes; and (3) Form 8-K filed on September 30, 2003 announcing revised earnings for the quarter and year ended June 30, 2003.
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: | 11/14/03 | By: | /s/ William E. Ladin, Jr. | |||||
William E. Ladin President and Chief Executive Officer |
Date: | 11/14/03 | By: | /s/ Mark Novy | |||||
Mark Novy Controller and 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 | Amended and Restated By-Laws* | |
10.1 | Redemption Agreement dated September 3, 2003 by and between Internet America, Inc. and William O. Hunt, incorporated by reference to Exhibit No. 10.2 on Form 10-K filed with the Securities and Exchange Commission on September 29, 2003 (File No. 000-25147) | |
10.2 | Consultation Agreement dated September 19, 2003 by and between Internet America, Inc. and Jack T. Smith, incorporated by reference to Exhibit No. 10.3 on Form 10-K filed with the Securities and Exchange Commission on September 29, 2003 (File No. 000-25147) | |
11 | Computation of earnings per share (1) | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.* | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Mark Novy* | |
32.1 | Section 1350 Certification of William E. Ladin, Jr.* | |
32.2 | Section 1350 Certification of Mark Novy* |
* | Filed herewith |
(1) | See note 2 to the financial statements. |