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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934. For the fiscal year ended December 31,
2000.
OR
Transition report pursuant to Section 13 or 15(d) of the
- ----- Securities Exchange Act of 1934. For the transition period from
________________ to ________________.
Commission File Number: 0-18299
i3 MOBILE, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 51-0335259
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
181 Harbor Drive
Stamford, Connecticut 06902
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(203) 428-3000
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting common equity held by
non-affiliates of the registrant computed by reference to the closing price at
which the stock was sold on March 23, 2001, is $1.437.
As of March 23, 2001, there were 22,851,580 shares of the registrant's
common stock ($0.01 par value) outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant intends to file a definitive Proxy Statement for its
Annual Meeting of Stockholders pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934 within 120 days of the end of the fiscal year
ended December 31, 2000. Portions of such proxy statement are incorporated by
reference into Part III of this report.
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PART I
The information set forth in this Report on Form 10-K, including,
without limitation, that contained in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results may materially differ from those projected in the
forward-looking statements as a result of certain risks and uncertainties set
forth in this report. Although management believes that the assumptions made and
expectations reflected in the forward-looking statements are reasonable, there
is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual future results will not be different from the
expectations expressed in this report.
ITEM 1. BUSINESS
OUR BUSINESS
We develop and distribute information services for mobile telephones and
other wireless communications devices. We distribute our services to consumers
on a subscription basis through our distribution network of over 25 wireless
network operators and businesses. This distribution network, reaching
substantially all major North American markets, includes major wireless network
operators, such as AT&T Wireless and Bell Mobility, regional network operators,
such as U.S. Cellular, and businesses, including New York Times Digital. This
distribution network reaches more than 40 million mobile telephone subscribers.
We currently provide information services in a variety of broad-based
categories, including news, finance, sports, weather, messaging, travel,
entertainment and local information.
In fiscal 2000, we increased our subscriber penetration into existing
distributor accounts and expanded our distribution base by entering into
agreements with several new wireless network operators and business enterprises.
As a result of the further subscriber growth achieved by our existing
distributor base and the addition of these new distribution arrangements, at
December 31, 2000, we had over 400,000 paying subscribers using our information
services. This reflects an increase of 300% over our paying subscribers at
December 31, 1999.
We believe that increasing demand for our services in this new wireless
medium will continue as a result of the on-going worldwide growth in wireless
telephone services and the increasing deployment of mobile data technology.
According to a recent study by Cahners In-Stat Group, the wireless data market
is expected to grow from approximately 170 million subscribers worldwide in 2000
to greater than 1.3 billion in 2004. According to this study, messaging is
expected to be the primary driver of wireless data growth. The number of
messages sent per month is anticipated to grow from 3 billion in 2000 to over
244 billion by December 2004. We believe that the emerging leaders of the
wireless information services market will be those companies that provide
compelling content to mobile devices via an easy-to-use, consumer-friendly
delivery method.
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We provide our current services primarily to North American wireless
subscribers using mobile phones, pagers, personal digital assistants and
in-vehicle devices. Our services allow subscribers to personalize their user
experience from a broad array of information choices based on their individual
preferences. Today, our subscribers can configure their services on a branded
web site by calling into a live operator or through an interactive voice
response system and then accessing the information from their mobile telephones
or other devices. Personalization of services enhances the user experience by
allowing subscribers to access only the information they want. Subscribers
either receive alerts, e.g. "Traffic Alert: Accident on Interstate 95 Southbound
at Exit 3," or access information on-demand, e.g. "What is the current stock
price of Nokia?"
To date, our wireless network operators have provided our services under
their brand name. For example, our products are offered by AT&T Wireless to its
customers under the AT&T "Personal News" label. We provide content aggregation
and filtering, profiling systems, messaging systems, operational and customer
support and various billing and reporting services in conjunction with these
agreements. In addition, we provide our services to businesses sold under their
brands. For example, InfoBeat offers our finance and weather products to its
costumers under the InfoBeat brand. Its customers can then access these products
over various wireless networks.
We believe that obtaining access to content and services on a wireless
device is not merely an extension of the Internet. Further, we believe that
wireless data represents the emergence of a new medium that is significantly
different than the media that has come before it. The fundamental principles
that create economic value in media remain the aggregation of information and
entertainment content and the distribution of that content to individuals who
have a need for it. Just as advertising-supported mass electronic media, such as
broadcast television and radio, have been augmented by more targeted
subscription-supported media, such as cable and satellite television, we believe
that the "free wireless web" will transition to subscription-supported,
personalized services for mobile devices. To that end, we intend to expend
significant resources in 2001 on consumer research and rapid prototyping in
order to determine the time-sensitive and location-sensitive services that are
most compelling to mobile device users and to create a very simple user
experience unlike the experience afforded by today's "wireless Internet." In
particular, we believe that products that allow our subscribers to access
information and services through the development of our Personal Voice Assistant
(PVA(TM)) platform will be most compelling.
We believe that our technical knowledge, operational infrastructure,
business relationships, experience in the wireless data market and unique focus
on consumer products and applications will enable us to capitalize on the
emergence and growth of the mobile data medium.
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STRATEGY
Our objective is to be the leading provider of subscription-based
premium data services to mobile telephones and other wireless communications
devices. The key elements of our strategy are to:
- build compelling products
- grow our subscriber base
- advance our technology and product delivery systems
BUILD COMPELLING PRODUCTS
We believe that compelling products and services are created by
aggregating relevant information and then delivering the requested information
in a manner that is relevant to our subscribers and both cost effective and
beneficial to our distributors. We believe that our subscribers will pay premium
priced subscription fees to receive these services. This element of our strategy
entails:
Provide Premium Content. In order to satisfy the needs of our mobile
subscribers, we develop products and services covering a variety of personal and
commercial information categories that are relevant and, wherever practical,
unique to the needs of mobile subscribers. Our strategy is to identify content
that is time-sensitive, location-specific and mobile device-appropriate. We
believe that all "web content" is not necessarily appropriate for mobile
telephones and other wireless devices. Our strategy is premised on the belief
that mobile telephone users will pay a premium to have access to content that is
personalized to their needs.
Enhance the User Experience. We constantly seek to improve the way our
subscribers interact with our products and services. We believe that quick,
intuitive access to relevant information is essential for successful mobile data
offerings. The "drill down" menu approach of the World Wide Web is inefficient
in the mobile data medium. We believe that products designed specifically for
use on mobile devices offering the subscriber quick access to the desired
information with a minimum of navigation will create greater value for our
subscribers. Data products that are easily ordered and available anywhere and
anytime, without the need to visit a web site, will enhance the user experience.
Furthermore, we believe that voice communication will emerge as a key interface
in mobile data communications and that voice recognition-based interaction will
greatly enhance the subscriber-friendliness of our services. We intend to
enhance our systems to enable a subscriber to make a phone call to our system
and make a spoken request, such as "Next train to Chicago from Lake Forest," and
we will then deliver the information to the subscriber's mobile phone by
recorded or synthesized voice or via a text message. We believe that this type
of real-time interaction, which minimizes the number of steps the subscriber
needs to take to acquire the desired information and does not require the time
consuming step of entering text characters on the telephone's keypad, greatly
enhances the user experience.
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GROW OUR SUBSCRIBER BASE
We will continue to rely on our network of wireless carriers and
businesses to distribute our products and services and grow our subscriber base
rather than taking a direct to consumer market approach. As subscribers become
accustomed to and recognize the benefit of accessing information on their
wireless devices, we believe they will subscribe for additional premium
services.
Leverage Distribution Network. We will leverage our distribution
relationships not only to increase our subscriber base within this existing
network but also to attract additional wireless network operators and businesses
to distribute our products and services to their customers. We will actively
seek to migrate our existing base of complimentary users to premium subscription
services through direct and co-operative marketing efforts with our wireless
network operator distributors. Likewise, we will transition from providing
wireless enablement services to our enterprise distributors and move towards
providing these distributors with premium product packages that they can brand
and in turn offer to their customers.
Implement Rapid Product Development. During fiscal 2000, we commenced
development of our next generation wireless based messaging delivery framework.
This system is designed from a wireless-centric perspective which we believe
will enable us to speed development and delivery of new products and services to
our distributors. Likewise, we anticipate that the new framework, together with
improvements made to our infrastructure, will provide both increased reliability
and capacity resulting in speedier and thus more relevant message delivery to
our subscribers.
ADVANCE OUR TECHNOLOGY AND PRODUCT DELIVERY SYSTEMS
Maintain "Carrier-Grade" Infrastructure and Operation. Anticipating the
growing demand for wireless data services, we deployed a new data center in
fiscal 2000. With this new data center we can effectively deliver millions of
messages each day, supporting our Wireless Application Protocol (WAP), Short
Messaging Service (SMS) and Internet services. In addition to messaging, we will
spend a substantial amount of resources building new infrastructure components
that support rich media content, such as ringtones, graphics, audio and video
services. These new services will be supported by new business system components
which provide "pay for view" accounting, multiple service level billing and
enhanced market data reports.
Enhance Leadership in Product Delivery Systems. We will maintain our
platform's compliance with all major data standards for delivery of our products
and services on wireless networks and devices. We believe that our technology
enables us to adapt our platforms to new technology, devices and protocols with
an evolving focus on mobile telephones.
Enhance Research and Development Function. We will increase investment
in our research and development initiatives. Our primary focus will be on voice
driven development.
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We will also focus on new premium products and services, such as ringtones,
inter-carrier messaging and the availability of graphic images on wireless
devices. In addition, we are further developing relationships with our strategic
partners to leverage technologies and mutual business opportunities.
PRODUCTS AND SERVICES
Our diverse range of information and communication products and services
are available to subscribers of a wide range of wireless devices, including
mobile telephones, pagers and personal digital assistants, distributed through
our partnerships with wireless carriers and businesses. Our services currently
support all widely deployed wireless data protocols and devices and are
available with branded and unbranded content sources. In addition, we augment
the delivery of our products with support services sold to our distribution
partners. These distribution support services include content filtering,
messaging, customer care, provisioning, billing and reporting and operations
support.
CURRENT PRODUCTS AND SERVICES
Consumer Products
We offer products in many different categories for mobile device
consumers. Our products are sold primarily on a subscription basis. By
configuring individual profiles for our services, our subscribers are able to
receive personalized messages throughout the day. For example, a subscriber who
has chosen to receive New York Yankees scores might receive updated scores from
a current game at the end of the fifth inning and as the game ends. Subscribers
can also access information on-demand, such as a request for a real-time stock
quote.
Our products are offered both individually and as a suite of products
configurable for sale on a subscription basis by our distribution partners.
Available product categories include:
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NEWS - U.S., international, business, SPORTS - Scores and news for
technology, industry, entertainment professional and college sports teams
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WEATHER - Daily, 3-day and 5-day ENTERTAINMENT - Horoscopes, lottery
forecasts results, jokes, quotes, soap opera
updates, trivia, movie reviews
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FINANCE - Stock and index quotes, TRAVEL - Traffic information, flight
company news, research links information, directory services
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LOCAL/DIRECTORY - Local news and COMMUNICATIONS - Email, PIM,
directory services messaging services
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Distribution Support Services
We also provide various infrastructure and support services to both our
wireless network operator and business partners. These include content
aggregation and filtering, profiling systems, messaging systems, operational and
customer support and various billing and reporting services. Such services are
sold individually or in conjunction with a suite of products. For example, we
provide all of our products and services, including credit card billing and
second tier customer support, to AT&T Wireless, whereas we provide only content
aggregation, filtering and delivery services for New York Times Digital. All of
our consumer services can be offered with branded content, like our ESPN
products offered by AT&T Wireless, or with unbranded content, like our unbranded
sports products offered by Clearnet. Additionally, our QuickStart(TM) program, a
defined product based on our next generation wireless-based messaging framework,
provides for rapid development of a service offering for a new distribution
partner.
We have agreements with over 50 media and information companies,
including the Associated Press, SportsTicker, NASDAQ, NYSE, PCQuote, Dow Jones,
National Weather Service, TrafficCast, Flytecomm, CNBC.com and MSNBC Interactive
News, to provide us with high-quality content for our products. We offer content
providers the opportunity to leverage their existing information in a new medium
at little or no incremental cost to them and with significant co-branding
opportunities. While each of our content agreements contains varying terms, our
standard content agreement has an initial term of three years and automatically
renews for continuous one year terms unless one of the parties provides notice
that it does not intend to renew the agreement. The amount we pay to the content
provider is either a flat monthly fee, a fee based on the number of subscribers
or the number of content messages requested or a combination of the three.
We make our products available on various types of devices, including
mobile phones with and without "wireless web" micro-browsers, pagers, personal
digital assistants, in-vehicle devices and advanced two-way messaging devices
like Research In Motion's BlackBerry wireless handheld. Our messaging and
product delivery systems support several different protocols, including
mobile-originated and mobile-terminated short message service (SMS), various
microbrowsing protocols and mark-up languages, such as Openwave's UPLink/HDML
and the open standard WAP/WML, and various paging services. We provide services
over all North American air interfaces (TDMA, CDMA, GSM, iDEN, CDPD) and major
short messaging protocols.
Our products are configured via our i3(m)Power(SM) technology platform.
This platform serves as both the user's HTML-based control panel for services
delivered to the subscriber's wireless device and as an HTML-based access point
to the subscriber's content selections. This platform allows users to set up
preferences for alert messages (such as notifying the user when a stock has
moved by a certain user-defined amount) and to define the menu structure for
information the user accesses from a wireless Internet device.
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FUTURE PRODUCTS AND SERVICES
Consumer Product Offerings
We plan to spend significant resources in 2001 on rapid prototyping of
new product offerings and on market and focus group testing of these products
and their associated user interfaces. Our goal is to determine the content most
appealing to mobile users and to refine their user experience in accessing that
content. We believe that no company has created a truly compelling user
experience for the mobile user, as reflected in weaker than expected industry
wide mobile data sales, and we intend to provide some of the first truly
compelling mobile services in North America.
In 2001, we intend to focus our product development efforts in messaging
services, such as inter-carrier messaging, location-based services, travel
services and other premium content areas. We also plan to invest significant
resources in enhancing the user experience - the way a mobile subscriber
interacts with our services through the device - paying special attention to
voice interaction. It is our belief that a sophisticated voice interface to our
products that provides simple command-driven access to information will make the
basic services we offer today worthy of premium subscription price points in the
future. We believe that suites of personalized services proven valuable in
mobile environments will garner retail subscription price points in excess of
$10.00 per month, and it is our strategy in 2001 to prove this model with
premium product offerings in travel, finance, entertainment and concierge
services.
Access Platforms
We believe that it is essential to provide services for emerging
wireless technologies, and we will continue to invest in our ability to provide
products built specifically for new devices and protocols. Each individual
device requires a unique presentation of information and configuration options,
and we will focus in 2001 on improving our products for voice, personal digital
assistants and newer network devices. We will also work to develop our first
interactive products featuring multimedia elements (audio, graphics and limited
video).
Demand for the "wireless web" has been minimal in North America to date.
We feel that the growth in use of wireless telephones is based on their familiar
user experience. For the same reason, we feel that voice interaction will be an
important component to our future products because it is easy to use and
familiar to a mobile telephone user. We will expend substantial resources in
2001 developing and refining a voice user experience for our products that makes
them the easiest to use mobile products in the marketplace.
Content Providers
Our focus in 2001 will be to build our catalog of premium content to use
in our product offerings. We will put emphasis on newer multimedia content,
including ringtones, graphics, audio and other multimedia, branded content for
our financial, sports, mobile concierge, travel and entertainment services. We
believe that content which is tailored for the mobile subscriber is
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more valuable than content configured for the Internet. We expect that our
products will be recognized for this selectivity. We also intend to supplement
our offerings with expanded Spanish and French Canadian content for North
America and Central/South America.
DISTRIBUTION RELATIONSHIPS
We rely on our network of wireless carriers and businesses to distribute
our products and services to our subscriber base rather than marketing directly
to consumers. Our approach is similar to that taken in the cable industry where
HBO successfully relied on the cable operators to distribute its product rather
than going direct to consumer.
WIRELESS NETWORK OPERATORS
Our core business is to provide consumer-oriented mobile data products
that wireless network operators can offer to their customers. Our relationships
with wireless network operators typically involve more than simply
permission-based usage of their networks to distribute our products and
services. Our arrangements generally require that the two parties work closely
together in the planning, development and marketing of the service offering. Our
products are typically marketed under a co-branded arrangement with the wireless
network operator.
We have entered into relationships with a number of leading North
American telecommunications carriers and wireless network operators to
distribute our products and services and to grow our subscriber base. As of
December 31, 2000, our largest distribution relationships include the following
North American wireless network operators:
- AT&T Wireless
- Bell Mobility
- Cingular
- PrimeCo
- Qwest
- Rogers AT&T
- Telecorp PCS
- Telus/ClearNet
- US Cellular
- Verizon (AirTouch)
- Voicestream
Wireless network operators are turning to enhanced products, including
premium data services, to develop incremental revenue streams that can help them
counter declining average revenue per user. In today's marketplace, while
consumer minutes of voice use are increasing, revenue per minute of voice usage
is steadily decreasing as price has become the major
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competitive engine in the market. Increased competition has also made customer
acquisition and retention key goals for operators. We believe that our products
enable wireless network operators to generate additional subscription revenue,
increase the number of new acquisitions they make and help decrease the number
of users who terminate use of their service.
We believe that our offerings provide wireless network operators with a
complete solution for delivering premium mobile data services to their
customers. Our offerings include content aggregation, applications development
and integration, content filtering and parsing, individual customer profiling
and personalization, billing services, customer care services and delivery of
messages in volume. By serving as an outsourced provider of these services, we
simplify the process for the operators and decrease the costs necessary to offer
mobile data products to their subscribers.
We have, in the past, offered our end-users the opportunity to receive a
limited product selection free of charge. While we currently offer complimentary
services in partnership with a few wireless network operators, we are engaging
in programs to bring these offerings to an end and convert these complimentary
users to subscription-based services. We believe that, with the slow pace of
development of advertising-based services in this medium, complimentary services
do not currently provide an attractive value proposition to either the wireless
network operator or us. As a result, our strategy is to focus on growing our
subscriber base with a longer-term outlook towards developing advertising and
e-commerce revenues.
ENTERPRISE
With the growth of wireless communications outpacing the growth of the
Internet, businesses are increasingly looking to mobile data services as a means
of expanding their relationships with their customers. We believe that we can
provide these businesses with an enabling technical solution to extend the reach
of their services to their customers' wireless devices. Our services offer
businesses a number of benefits, including the extension of their brand and
services into a new medium, creating additional customer access points,
generating new revenue streams through the sale of subscription services and
increasing customer retention.
Our services for businesses have generally involved the custom
development of hosted applications that allow businesses to deliver their
content and services or a selection of our existing services to wireless
devices. Some of our current business customers include Comworxx, New York Times
Digital, InfoBeat and Mobile Media Group.
With our increased focus on providing premium services through our
network of distributors, we are seeking to migrate from reliance on custom
development work to leveraging our existing services for distribution by
appropriate business enterprises. For example, a package of youth-oriented
premium mobile services would be offered to a teen affinity web site, which the
site could sell to its user base under its brand. We anticipate that, by the end
of 2001, the majority of our non-wireless network operator activities will be
centered on providing these types of premium products to businesses.
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Currently, we generate most of our revenue from subscriptions for our
products and services. In fiscal 2000, 60% of our revenues were derived from
subscription fees and 40% were derived from development fees. Development fees
were derived primarily from our efforts in connection with our enterprise
distribution model. During fiscal 2000, 68% of our total consolidated revenue
came from Cingular/SBC, VoiceStream and Mobile Media Group, Inc.
TECHNOLOGY AND SYSTEMS
Our wireless information gateway provides the means to send customized
content to most types of mobile handheld devices. Our gateway provides message
transport utilizing several paging protocols and various protocols for Short
Message Services. The gateway also supports the protocols and languages
compatible with micro-browsers and the Wireless Application Protocol servers.
Our gateway provides delivery through all major wireless networks.
We have written applications in a number of languages to work with new
micro-browser gateways and protocols and emerging voice browser platforms. These
new applications provide the basis for the next generation of our wireless
information products and are focused on enhancing the Internet functionality of
wireless devices. For example, our technology enables a Wireless Application
Protocol-enabled handset to become a platform for two-way interactive services,
such as directory searches and remote personal information manager connectivity.
Handling a high volume of message input and output is crucial to our
subscribers and wireless network operator distributors. Our new data center
currently serves approximately 1.5 million messages per day with reserve
capacity for 5 million messages per day.
During the past year, we have significantly increased our capital
investment in system development to maintain a leadership role in content
delivery and business system support. We anticipate an even greater investment
for these and other initiatives for fiscal 2001. We believe that these further
initiatives will provide a solid foundation on which we can expand our service
offerings as well as increase our business efficiencies. These investments will
include a substantial number of custom software development efforts as well as
new investments in hardware and "off the shelf" software. Another significant
portion of our capital investment is dedicated to developing voice
recognition-enabled services and infrastructure.
Advancements made to our business and production systems, operational
infrastructure and research and development provide the basis to support the
anticipated rapid and high volume growth of the delivery of our premium products
and services. In addition to these advancements, we added key technical
personnel who have implemented operational and development processes
contributing to a higher level of quality of service.
In fiscal 2000, we opened our new data center and operations center. We
use these facilities to provide the infrastructure that enables our subscribers
to personalize the products and services they elect to receive and then to
deliver those selected services to our subscribers. The new data center utilizes
state-of-the art technologies and incorporates all standard back-up and safety
measures. The data center is monitored by a new operations command center which
allows our operators to have visibility to all production systems to insure
accurate and timely
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delivery of our product and services. This operations command center operates 24
hours a day, 7 days a week.
The reorganization of our quality assurance and operations groups during
fiscal 2000 has resulted in significant improvements to the quality level of our
products and services and the delivery of these products and services to our
subscribers. These groups are responsible for the testing and quality of every
new product, service and infrastructure module that is used to operate our
business.
During fiscal 2000, we deployed the first elements of a new enterprise
data system which will provide the basis for a new billing and reporting system.
We believe this business system provides a highly scalable, state-of-the art and
stable business solution that reduces internal resources required to support the
business and allows for rapid deployment of new business logic as our business
changes.
We also adopted third party development software for our application
platform for building, managing and delivery of our service-based applications.
We believe that this technology, when integrated with additional infrastructure
initiatives, will allow us to meet the anticipated volume demands that will be
placed on our provisioning and content management systems. Our "Quick Start"
product offering is built on this new methodology. Similar deployment
methodologies are planned for fiscal 2001 to reduce the work required to add new
content, create new services, and support new payment methods.
RESEARCH AND DEVELOPMENT
Our research and development initiatives are focused on new premium
products and services, such as ringtones, inter-carrier messaging and the
availability of graphic images on wireless phones. A significant development
effort also began in late 2000 to provide voice recognition as a means to obtain
information from our content feeds. This effort will be expanded to develop a
voice-driven product for anticipated launch in the latter part of 2001. In
addition, we will create a new research and development group in 2001 to address
emerging technologies, such as multimedia, Java-based phones, wireless games and
distributed speech recognition, as well as new carrier technologies, such as
GPRS and EDGE.
COMPETITION
The market for our services has become increasingly competitive. We
expect that we will compete primarily on the basis of functionality, content and
user experience. Our current competitors include Internet portals such as Yahoo
and Internet-based content aggregators such as Infospace. Our potential
competitors include wireless network operators, any of which may decide to
develop in-house resources to provide similar services themselves.
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INTELLECTUAL PROPERTY RIGHTS
We have filed applications in the United States to register the marks
"i3 Mobile," "Powered by i3 Mobile," "Mobile Communities," "i3(m) Power,"
"KewlPhone" and "The New Mobile Experience". In addition, we have registered the
marks "Eyes on the Web," "Village Square," "News Alert Service," and "Sports
Alert Service" on the Principal Register of the United States Patent and
Trademark Office.
We rely on a combination of copyright, trademark, service mark, trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our products and services. We have applied for a patent
covering our Advanced Data Mining Advertising Tagging and Transaction system,
which is a system that matches personal profile and demographic data against
advertising targeting information to attach advertising taglines to the end of
content messages being delivered to users.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local
government regulation, other than regulations that apply to businesses
generally. The wireless network operators with which we have contracts are
subject to regulation by the Federal Communications Commission. Therefore,
changes in Federal Communications Commission regulations could affect the
availability of wireless coverage these carriers are willing or able to provide
to us.
Legislative proposals have been made in the United States that, if
enacted, would afford broader protection to owners of databases of information
such as stock quotes and sports scores. If enacted, this legislation could
result in an increase in the price of services that provide data to wireless
communications devices and could create potential liability for unauthorized use
of this data.
EMPLOYEES
As of December 31, 2000, we had 1 part-time and 113 full-time employees.
We consider our relations with our employees to be good. None of our employees
are represented by a union.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. Our SEC filings are available to the public over
the Internet from our own web site at http://www.i3mobile.com or at the SEC's
web site at http://www.sec.gov. You may also read and copy any document we file
at the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms.
ITEM 2. PROPERTIES
Our principal executive offices are located on the third floor at 181
Harbor Drive, Stamford, Connecticut. We currently operate four facilities under
leases as follows:
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APPROXIMATE APPROXIMATE ANNUAL LEASE
LOCATION SQUARE FOOTAGE RENT IN 2000 EXPIRATION DATE
- -------- -------------- ------------ ---------------
181 Harbor Drive 20,453 $511,325 March 2008
Stamford, CT
One Dock Street 5,047 $81,000 March 2002
Stamford, CT
1237 Southridge Court 1,000 $25,000 February 2002
Hurst, TX
305 N.E. Loop 10,035 $110,385 January 2010
Hurst, TX
We believe that our present space is adequate for current purposes and
offers moderate expansion possibilities.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Our shares have traded on The Nasdaq National Stock Market under the
trading symbol "IIIM" since April 6, 2000. Prior to April 6, 2000 our shares
were not publicly traded. The following table sets forth, for the periods
indicated, the range of high and low closing bid quotations as reported by
Nasdaq for each quarter since our shares began trading. The bid quotations set
forth below reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
HIGH LOW
---- ---
Fiscal Year Ended December 31, 2000
Second Quarter (from April 6, 2000).......... 33.06 5.13
Third Quarter................................ 20.06 5.81
Fourth Quarter............................... 7.44 1.38
On March 23, 2001, the last reported closing price for our shares was
$1.437 per share, as reported by Nasdaq. At March 23, 2001, we had approximately
75 stockholders of record. We estimate that there are approximately 4,931
beneficial owners of our common stock.
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We have never paid cash dividends on our common stock and do not expect
to pay such dividends in the foreseeable future. We currently intend to retain
any future earnings for use in our business. The payment of any future dividends
on our common stock will be determined by our Board in light of the conditions
then existing, including our financial condition and requirements, future
prospects, restrictions in future financing agreements, business conditions and
other relevant factors.
RECENT SALE OF UNREGISTERED SECURITIES
During fiscal 2000, we issued warrants to purchase unregistered shares
of our Common Stock as follows:
- On March 7, 2000 we issued a warrant to CNBC.com LLC to purchase
10,000 shares of our Common Stock at a per share exercise price
of $10.00;
- On April 20, 2000 we issued a warrant to MSNBC Interactive News
LLC to purchase 20,000 shares of our Common Stock at a per share
exercise price of $10.00;
- On May 30, 2000 we issued a warrant to New Technology Holdings
Inc. (InfoBeat) to purchase 20,000 shares of our Common Stock at
a per share exercise price of $10.00; and
- On June 30, 2000 we issued a warrant to infoUSA.com, Inc. to
purchase 5,000 shares of our Common Stock at a per share
exercise price of $18.00.
USE OF PROCEEDS
The information required by this section is incorporated by reference
from Part II, Item 2 of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000. See also discussion at Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data set forth below as of
December 31, 2000 and 1999 and for the fiscal years ended December 31, 2000,
1999 and 1998 is derived from the audited consolidated financial statements
which are included elsewhere in this report. The selected consolidated financial
data as of December 31, 1998 and as of and for the years ended December 31, 1997
and 1996 is derived from the audited consolidated financial statements not
included in this report. The selected consolidated financial data should be read
along with such consolidated financial statements and the related notes and the
section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net revenue............................................ $ 4,494 $ 1,734 $ 1,405 $ 825 $ 645
Cost of revenue (including $11 and $14 of stock
compensation in 2000 and 1999, respectively)....... 2,628 1,316 1,081 700 465
--------- --------- -------- -------- --------
Gross profit........................................... 1,866 418 324 125 180
--------- --------- -------- -------- --------
Operating Expenses:
Sales and marketing (including $247 and $94 of
stock compensation in 2000 and 1999,
respectively).................................. 10,929 2,032 584 234 180
General and administrative (including $517
and $145 of stock compensation in 2000 and
1999, respectively)............................ 18,291 4,916 2,306 2,258 1,327
--------- --------- -------- -------- --------
Total operating expenses........................... 29,220 6,948 2,890 2,492 1,507
--------- --------- -------- -------- --------
Operating loss......................................... (27,354) (6,530) (2,566) (2,367) (1,327)
Interest (income) expense, net......................... (4,778) 326 329 81 (8)
--------- --------- -------- -------- --------
Loss before extraordinary item......................... (22,576) (6,856) (2,895) (2,448) (1,319)
Extraordinary loss on extinguishment of debt........... -- (3,434) -- -- --
--------- --------- -------- -------- --------
Net loss............................................... $(22,576) $(10,290) $(2,895) $(2,448) $(1,319)
Dividends on and redemptions of preferred stock........ (2,829) (26,580) (274) (76) (8)
========= ========= ======== ======== ========
Loss applicable to common stock........................ $(25,405) $(36,870) $(3,169) $(2,524) $(1,327)
========= ========= ======== ======== ========
Net loss per share - basic and diluted................. $ (1.39) $ (6.43) $ (0.42) $ (0.33) $ (0.18)
========= ========= ======== ======== ========
Shares used in computing net loss per share............ 18,314 5,736 7,554 7,554 7,552
DECEMBER 31,
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $84,900 $28,241 $ 166 $ 215 $ 1,168
Working capital.................................... 82,412 29,468 (687) (533) 756
Total assets....................................... 99,247 36,241 682 375 1,343
Long-term obligations, less current portion........ 568 - 455 573 646
Mandatorily redeemable preferred stock............. - 55,338 2,500 1,412 1,138
Total stockholders' equity (deficit)............... 91,890 (22,696) (3,578) (2,488) (916)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the financial statements and the related
notes included in another part of this report and which are deemed to be
incorporated into this section.
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RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
Net Revenue. Net revenues increased 159% to $4.5 million for the year
ended December 31, 2000 from $1.7 million for the year ended December 31, 1999.
The increase from the prior year is primarily attributable to development
revenue realized under agreements with Mobile Media Group and other enterprise
customers (approximately $1.8 million) and the growth of our subscriber base
(approximately $1.0 million) primarily with wireless network operators partially
offset by a reduction in average revenue per user. Under the terms of the Mobile
Media Group agreement, we will wirelessly enable several of its websites in
order to facilitate the delivery of its content and related services directly to
wireless devices.
Cost of Revenue. Cost of revenue increased by 100% to $2.6 million for
the year ended December 31, 2000 from $1.3 million for the year ended December
31, 1999. The increase was associated with costs directly related to services
provided to Mobile Media Group and other enterprise related projects, an
increase in costs associated with the acquisition of content and delivery of
information to wireless users and an increase in network operations costs as a
result of increased labor costs to provide operations support.
Sales and Marketing Expenses. Sales and marketing expenses increased by
438% to $10.9 million for the year ended December 31, 2000 from $2.0 million for
the year ended December 31, 1999. The increase from the 1999 period is
attributable to the launch of our national and regional advertising campaign
consisting of print, cable television and radio broadcasts, e-mail and online
advertising to increase market awareness of our company and our products and
services and increased compensation expenses, including the hiring of additional
sales and marketing personnel. Sales and marketing expenses during the 2000
period include non-cash marketing expenses of $0.9 million associated with
certain of our broadcast and online initiatives.
General and Administrative Expenses. General and administrative expenses
increased by 272% to $18.3 million for the year ended December 31, 2000 from
$4.9 million for the year ended December 31, 1999. The increase was primarily
due to increased compensation costs from the addition of personnel, increased
fees and expenses associated with being a publicly traded company, rent and
other related infrastructure expenses. General and administrative expenses
include $0.5 million and $0.1 million of non-cash compensation expenses for the
years ended December 31, 2000 and 1999, respectively. Additionally, the 2000
expenses include $1.0 million for a reduction in workforce and associated costs.
Interest (Income) Expense, Net. Net interest income was $4.8 million for
the year ended December 31, 2000 as compared to net interest expense of $0.3
million for the year ended December 31, 1999. Interest income consists of
interest on the investment of the net proceeds from our initial public offering
in short-term, investment grade, interest-bearing instruments.
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YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Net Revenue. Net revenues increased 23% to $1.7 million for the year
ended December 31, 1999 from $1.4 million for the year ended December 31, 1998.
This increase was primarily due to the recognition of revenues from the 1998
launches of PrimeCo PCS (Verizon), Bell Mobility and SBC Communications
(Cingular) and the growth of our subscriber base as a result of our agreements
with other wireless network operators. The percentage increase in revenue lagged
substantially behind the percentage increase in users due to an increase in
users receiving our complimentary services and a decrease in the price of
individual subscription services. Subscription fees decreased in 1999 from 1998
levels due to management's decision to increase market penetration by reducing
prices for our basic and premium subscription services.
Cost of Revenue. Cost of revenue increased by 20% to $1.3 for the year
ended December 31, 1999 from $1.1 million for the year ended December 31, 1998.
Approximately $0.1 million of the increase was related to an increase in the
delivery of stock quote information and an increase in minimum fees associated
with the acquisition of additional general news content. Network operations
costs also increased by approximately $0.1 million in the year ended December
31, 1999 compared to the year ended December 31, 1998 as a result of increased
labor costs to provide operations support.
Sales and Marketing Expenses. Sales and marketing expenses increased by
233% to $2.0 million for the year ended December 31, 1999 from $0.6 million for
the year ended December 31, 1998. This increase during the 1999 period was
attributable to increased compensation expenses, including the hiring of
additional sales and marketing personnel, and the expansion of our marketing
programs to increase market awareness of our company and our products and
services.
General and Administrative Expenses. General and administrative expenses
increased by 113% to $4.9 million for the year ended December 31, 1999 from $2.3
million for the year ended December 31, 1998. This increase was primarily due to
increased compensation costs from the addition of corporate and business
development personnel, increased professional fees, rent and other related
infrastructure expenses.
Extraordinary Loss. In December 1999, we converted two notes into shares
of Series F mandatorily redeemable preferred stock. This debt extinguishment
resulted in an extraordinary loss on redemption of $3.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception we have financed our operations primarily through
sales of our common and preferred securities and the issuance of long-term debt,
which has resulted in aggregate cash proceeds of $130.1 million through December
31, 2000. Our working capital increased to $82.4 million at December 31, 2000
from $29.5 million at December 31, 1999 and ($0.7) million at December 31, 1998.
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20
Net cash used in operating activities was $16.8 million for the year
ended December 31, 2000, $4.6 million for the year ended December 31, 1999 and
$2.6 million for the year ended December 31, 1998. The principal use of cash in
each of these periods was to fund our losses from operations.
Cash used in investing activities was $7.4 million for the year ended
December 31, 2000, $1.8 million for the year ended December 31, 1999 and $0.1
million for the year ended December 31, 1998. Cash used in investing activities
relates primarily to purchases of fixed assets.
Net cash provided by financing activities was $80.8 million for the year
ended December 31, 2000, $34.5 million for the year ended December 31, 1999 and
$2.7 million for the year ended December 31, 1998. Cash provided by financing
activities in 2000 was primarily attributable to proceeds from sales of our
common stock while cash provided from financing activities in 1999 and 1998 was
attributable to proceeds received from the sales of our preferred securities and
the issuance of debt.
On April 6, 2000, we completed an initial public offering of 5,100,000
shares of common stock at a price of $16 per share, generating net proceeds of
$72.9 million. In connection with the offering, we granted to the underwriters
an option to purchase up to 765,000 additional common shares at the initial
offering price, less the underwriting discounts and commissions, to cover any
over-allotments. On May 10, 2000 the underwriters exercised this option and
purchased an additional 522,500 shares. After deducting underwriting discounts
and commissions, we received $7.8 million in net proceeds from the sales of
shares issued upon exercise of this option. In conjunction with the offering,
all of our outstanding preferred stock was converted into a total of 11,316,765
shares of common stock.
On December 22, 1999, we issued 8,248.33 shares of Series F mandatorily
redeemable convertible preferred stock at a price of $3,960.40 per share to
private investor groups. The proceeds included $24.9 million of cash
investments, including $3.0 million from a related party stockholder, the
conversion of a $5.0 million outstanding note payable, the conversion of a $0.3
million five-year convertible note payable and future television advertising
rights. The Series F mandatorily redeemable preferred stock was converted into
4,124,165 shares of common stock at an equivalent price per share of common
stock of $7.92.
In February 1999, we repurchased 1,885,000 shares of our common stock
and 3,770 shares of our Series A preferred stock from a stockholder for $8.0
million in cash and notes and issued a warrant to purchase 500,000 shares of our
common stock at an exercise price of $3.00 per share. In connection with this
repurchase, we paid $3.0 million in cash and delivered a $5.0 million promissory
note. This note was converted into Series F mandatorily redeemable preferred
stock in December 1999 and subsequently converted into 631,250 shares of common
stock at an equivalent price per share of common stock of $7.92.
In February 1999, we sold 7,714.56 shares of Series E mandatorily
redeemable convertible preferred stock for $12.0 million to a private investor
group. On November 23, 1999, the same private investor group, in accordance with
its contract with us, purchased an additional
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1,928.64 shares of Series E mandatorily redeemable convertible preferred stock
for $3.0 million. The Series E preferred stock was converted into 4,821,600
shares of common stock at an equivalent price per share of common stock of
$3.11.
At December 31, 2000, we financed a portion of our capital hardware and
software purchases, particularly certain of our billing and data warehouse
system costs, through capital leases with about $1.4 million of capital lease
obligations outstanding. During 2000, we made payments on capital lease
obligations of approximately $0.1 million. We believe that our capital lease
obligations can be adequately serviced by our existing cash and cash
equivalents.
We believe that our current cash and cash equivalents will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
for at least the next twelve months. We anticipate utilizing the proceeds of the
initial public offering to fund expected losses from operations as well as to
continue to significantly invest in systems development to further our content
delivery and business systems support.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." In June 2000, the FASB issued SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Agreements - an Amendment
of FASB Statement No. 133." SFAS 133 establishes new standards of accounting and
reporting for derivative instruments and hedging activities, and requires that
all derivatives, including foreign currency exchange contracts, be recognized on
the balance sheet at fair value. We will adopt SFAS 133, as amended by SFAS 137
and SFAS 138, in the first quarter of 2001 and do not expect the adoption to
have a material effect on our financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. We do not currently transact significant business in foreign
currencies and, accordingly, are not subject to exposure from adverse movements
in foreign currency exchange rates. Our exposure to market risks for changes in
interest rates relates primarily to corporate debt securities. We place our
investments with high credit quality issuers and, by policy, limit the amount of
the credit exposure to any one issuer. Our general policy is to limit the risk
of principal loss and ensure the safety of invested funds by limiting market and
credit risk. All highly liquid investments with a maturity of less than three
months at the date of purchase are considered to be cash equivalents.
As of December 31, 2000 we had no debt outstanding. We currently have no
plans to incur debt during the next twelve months. As such, changes in interest
rates will only impact interest income. The impact of potential changes in
hypothetical interest rates on budgeted interest income in 2001 has been
estimated at approximately $0.7 million or approximately 2% of budgeted net loss
for each 1% change in interest rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, including the notes thereto,
together with the report thereon of PricewaterhouseCoopers LLP, is presented
beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors and executive officers is
incorporated by reference herein to our Proxy Statement for our Annual Meeting
of Stockholders to be held on May 23, 2001.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of our executive officers is
incorporated by reference herein to our Proxy Statement for our Annual Meeting
of Stockholders to be held on May 23, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the beneficial ownership of shares of our common
stock by certain persons is incorporated by reference herein to our Proxy
Statement for our Annual Meeting of Stockholders to be held on May 23, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
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23
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule
Number Description
-------- -----------
I Report of Independent Accountants on Financial Statement
Schedule
II Valuation and Qualifying Accounts
3. Exhibits
Exhibit
Number Description
3.1 Restated Certificate of Incorporation filed with the Secretary
of State of the State of Delaware on February 16, 1999 (A)
3.2 Certificate of Amendment to Restated Certificate of
Incorporation filed with the Secretary of State of the State of
Delaware on December 22, 1999 (A)
3.3 Certificate of Designations, Powers, Preferences and Rights of
Series F Convertible Preferred Stock filed with the Secretary of
State of the State of Delaware on December 22, 1999 (A)
3.4 Certificate of Amendment to Restated Certificate of
Incorporation filed with the Secretary of State of the State of
Delaware on December 22, 1999 (A)
3.5 Amendment to Certificate of Designations, Powers, Preferences
and Rights of Series F Convertible Preferred Stock filed with
Secretary of State of the State of Delaware on December 30, 1999
(A)
3.6 Certificate of Amendment to Restated Certificate of
Incorporation filed with the Secretary of State of the State of
Delaware on January 4, 2000 (A)
3.7 Amended and Restated Bylaws of i3 Mobile as amended as of
November 19, 2000*
23
24
4.1 Form of Common Stock Certificate (A)
4.1a Amended Form of Common Stock Certificate *
4.2 Fourth Amended and Restated Stockholders Agreement dated
December 22, 1999 (A)
4.3 1995 Stock Incentive Plan, as amended, as of July 13, 1999 (A)
4.4 2000 Stock Incentive Plan, as amended by the Board of Directors*
4.5 Third Amended and Restated Registration Rights Agreement dated
December 22, 1999 (A)
4.6 General Form of Warrant issued to other warrant holders (A)
10.1 Employment Agreement by and between i3 Mobile and Stephen G.
Maloney dated as of January 1, 1999 as amended September 9, 1999
(A)
10.1a Amendment to Employment Agreement by and between i3 Mobile and
Stephen G. Maloney dated as of January 1, 1999 as amended
November 20, 2000*
10.1b Employment Agreement by and between i3 Mobile and Stephen G.
Maloney dated as of January 1, 2001*
10.2 Employment Agreement by and between i3 Mobile and Robert M.
Unnold dated January 1, 1999, as amended September 9, 1999 (A)
10.2a Amendment to Employment Agreement by and between i3 Mobile and
Robert M. Unnold dated as of January 1, 1999 as amended November
20, 2000*
10.3 Employment and Royalty Agreement by and between i3 Mobile and
Jeffrey N. Klein dated October 27, 1998 (A)
10.3a Letter Agreement by and between i3 Mobile and Jeffrey N. Klein
dated December 20, 2000*
10.4 Employment Agreement by and between i3 Mobile and Michael P.
Neuscheler dated as of January 10, 2000 (A)
10.5 Employment Agreement by and between i3 Mobile and Alan Katzman
dated as of September 1, 2000*
10.6 Employment Agreement by and between i3 Mobile and Mwangi Wamae
dated as of September 1, 2000*
10.6a Separation Agreement and General Release between i3 Mobile and
Mwangi Wamae dated December 29, 2000*
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25
10.7 Employment Agreement by and between i3 Mobile and John Lack
dated as of November 20, 2000*
10.8 Employment Agreement by and between i3 Mobile and Wes Trager
dated as of December 21, 2000*
10.9 Employment Agreement by and between i3 Mobile and John McMenamin
dated as of February 21, 2001*
10.10 Agreement of Lease by and between i3 Mobile and Seaboard
Property Management, Inc. dated April 27, 1995, as amended (A)
10.10a Lease Modification Agreement between i3 Mobile and Seaboard
Property Management, Inc. dated February 1997 (A)
10.10b Agreement of Sublease by and between i3 Mobile and O'Donnell &
Associates dated as of August 1, 2000*
10.11 Ridgewood Square Office Park Commercial Lease by and between i3
Mobile and Ridgewood Square Ltd. dated February 7, 1997 (A)
10.12 Agreement of Sublease by and between i3 Mobile and National
Westminster Bank, PLC, dated as of September 9, 1999 (A)
10.13 Lease Agreement by and between i3 Mobile and Double Creek
Capital Corporation dated November 30, 1999 (A)
10.14 Stock Purchase Agreement by and between i3 Mobile and Michael J.
Pryslak and Dennis M. Roland dated February 27, 1992, as amended
as of September 30, 1994 and further amended in November 1998
(A)
10.15 Services Agreement by and between i3 Mobile and Southwestern
Bell Mobile Systems, Inc. and Southwestern Bell Wireless Inc.
dated June 9, 1998 (A)
10.15a Amendment to Services Agreement by and between i3 Mobile and
Southwestern Bell Mobile Systems, Inc. and Southwestern Bell
Wireless Inc. dated January 11, 1999 (A)
10.15b Amendment to Services Agreement by and between i3 Mobile and
Southwestern Bell Mobile Systems, Inc. and Southwestern Bell
Wireless Inc. dated as of October 15, 1999*
10.15c Amendment to Services Agreement by and between i3 Mobile and
Southwestern Bell Mobile Systems, Inc. and Southwestern Bell
Wireless Inc. dated January 1, 2000*
10.16 Letter Agreement by and between i3 Mobile and National
Broadcasting Company, Inc. dated December 24, 1999 (A)
10.17 Letter Agreement by and between i3 Mobile and NBC Interactive
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Media, Inc. dated December 29, 1999 (A)
10.18 Letter Agreement by and between i3 Mobile and Sony Corporation
of America dated January 25, 2000 (A)
10.19 Master Content Provider Agreement by and between i3 Mobile and
Broadcast Entertainment.com, Inc. dated February 9, 2000 (A)
10.19a Letter Agreement by and between i3 Mobile and Mobile Media
Group, Inc. (formerly Broadcast Entertainment.com, Inc.) dated
as of September 20, 2000*
10.20 Distribution Agreement by and between i3 Mobile and CNBC.com LLC
dated March 13, 2000 (A)
10.21 Distribution Agreement by and between i3 Mobile and MSNBC
Interactive News, LLC dated as of April 20, 2000*
10.21a Warrant Purchase Agreement by and between i3 Mobile and MSNBC
Interactive News, LLC dated as of April 20, 2000*
10.22 Wireless Content Services Enterprise Agreement by and between i3
Mobile and Infobeat, Inc. dated May 23, 2000*
10.22a Amendment No. 1 to Wireless Content Services Enterprise
Agreement by and between i3 Mobile and Infobeat, Inc. dated June
22, 2000*
10.23 Wireless Services Master Agreement by and between i3 Mobile and
Voicestream Corporation dated November 20, 2000*
10.24 Database License Agreement -- Wireless Internet by and between
i3 Mobile, Inc. and InfoUSA Inc. dated December 28, 1999 (A)
21.1 Subsidiaries of i3 Mobile*
23.1 Consent of PricewaterhouseCoopers LLP*
27.1 Financial Data Schedule*
A. Incorporated by reference from Registration Statement of the Registrant
on Form S-1, No. 333-94191, declared effective by the Securities and
Exchange Commission on April 6, 2000.
* Filed herewith.
(b) No reports were filed on Form 8-K during the last quarter of fiscal
2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
i3 MOBILE, INC.
March 28, 2001 By: /s/ Michael P. Neuscheler
-----------------------------------------
Michael P. Neuscheler,
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ John A. Lack President, Chief Executive Officer
- ----------------------------- and Director (Principal Executive
John A. Lack Officer) March 28, 2001
/s/ Michael P. Neuscheler
- ----------------------------- Executive Vice President and Chief
Michael P. Neuscheler Financial Officer March 28, 2001
/s/ Donald F. Christino
- -----------------------------
Donald F. Christino Director March 28, 2001
/s/ W. Peter Daniels
- -----------------------------
W. Peter Daniels Director March 28, 2001
/s/ J. William Grimes
- -----------------------------
J. William Grimes Director March 28, 2001
/s/ James A. Johnson
- -----------------------------
James A. Johnson Director March 28, 2001
/s/ Stephen G. Maloney
- -----------------------------
Stephen G. Maloney Director March 28, 2001
/s/ Matthew J. Stover
- -----------------------------
Matthew J. Stover Director March 28, 2001
/s/ Robert M. Unnold
- -----------------------------
Robert M. Unnold Director March 28, 2001
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i3 MOBILE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants............. F-2
Consolidated Balance Sheets as of December 31,
2000 and 1999................................. F-3
Consolidated Statements of Operations for the
years ended December 31, 2000, 1999 and 1998.. F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the years ended December 31, 2000,
1999 and 1998................................. F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998.. F-6
Notes to Consolidated Financial Statements.... F-7
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
i3 Mobile, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
i3 Mobile, Inc. at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 29, 2001
F-2
30
i3 MOBILE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-----------------
2000 1999
------- -------
ASSETS
Current assets:
Cash and cash equivalents..................... $84,900 $28,241
Accounts receivable, net of allowances (Note 2) 536 397
Deferred advertising (Note 11)................ 3,349 4,261
Prepaid expenses and other current assets..... 416 168
------- -------
Total current assets................... 89,201 33,067
Fixed assets, net (Note 3).................... 9,217 1,942
Deposits and other non-current assets......... 829 1,232
------- -------
Total assets........................... $99,247 $36,241
======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................. $2,019 $ 724
Accrued liabilities (Note 4).................. 3,969 2,875
Capital lease obligation, current portion
(Note 5).................................... 801 --
------- -------
Total current liabilities.............. 6,789 3,599
Capital lease obligation, less current portion
(Note 5)...................................... 568 --
------- -------
Commitments and contingencies (Notes 6 and 7)
Total liabilities...................... 7,357 3,599
------- -------
Mandatorily redeemable convertible preferred
stock (Note 9)................................ -- 55,338
------- -------
Stockholders' equity (deficit):
Convertible preferred stock (Note 9).......... -- --
Common stock; $.01 par value, 50,000,000 shares
authorized, 24,706,440 and 7,655,500 shares
issued...................................... 247 77
Additional paid-in capital.................... 168,007 27,253
Notes receivable from stockholders............ (4) (31)
Deferred compensation......................... (1,724) (764)
Accumulated deficit........................... (70,406) (45,001)
Treasury stock at cost, 1,885,000 shares...... (4,230) (4,230)
------- -------
Stockholders' equity (deficit)................ 91,890 (22,696)
------- -------
Total liabilities, mandatorily redeemable
convertible preferred stock and
stockholders' equity (deficit)....... $99,247 $36,241
======= =======
See accompanying notes to consolidated financial statements.
F-3
31
i3 MOBILE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
---- ---- ----
Net revenue -- trade.................... $ 4,494 $ 1,711 $1,245
Net revenue -- related parties.......... -- 23 160
-------- -------- -------
Net revenue............................. 4,494 1,734 1,405
Cost of revenue (including $11, $14 and
$0 of stock compensation)............. 2,628 1,316 1,081
-------- -------- -------
Gross profit............................ 1,866 418 324
-------- -------- -------
Operating expenses:
Sales and marketing (including $247,
$94 and $0 of stock compensation)... 10,929 2,032 584
General and administrative (including
$517, $145 and $0 of stock
compensation)....................... 18,291 4,916 2,306
-------- -------- -------
Operating expenses...................... 29,220 6,948 2,890
-------- -------- -------
Operating loss.......................... (27,354) (6,530) (2,566)
Interest (income) expense, net.......... (4,778) 326 329
-------- -------- -------
Loss before extraordinary item.......... (22,576) (6,856) (2,895)
Extraordinary item -- loss on
extinguishment of debt............... -- (3,434) --
-------- -------- -------
Net loss................................ (22,576) (10,290) (2,895)
-------- -------- -------
Redemption of preferred stock........... -- (3,665) --
Beneficial conversion feature of
preferred stock...................... -- (20,504) --
Dividends on mandatorily redeemable
preferred stock...................... (2,829) (2,411) (274)
-------- -------- -------
Loss applicable to common stock......... $(25,405) $(36,870) $(3,169)
======== ======== =======
Net loss per share -- basic and diluted:
Loss before extraordinary item........ $ (1.39) $ (5.83) $ (0.42)
Extraordinary item.................... -- (0.60) --
-------- -------- -------
Net loss.............................. $ (1.39) $ (6.43) $ (0.42)
======== ======== =======
Shares used in computing net loss per
share............................... 18,314 5,736 7,554
======== ======== =======
See accompanying notes to consolidated financial statements.
F-4
32
i3 MOBILE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A PREFERRED STOCK SERIES C PREFERRED STOCK COMMON STOCK ADDITIONAL PAID-
------------------------ ------------------------ ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT IN CAPITAL
------------------------ ------------------------ ---------------- ---------------
Balance at
January 1, 1998...... 3,770 -- 864 -- 7,554,000 $ 76 $ 2,398
Issuance of Series C
preferred stock...... -- -- 1,330 -- -- -- 1,579
Issuance of warrants to
debt holders......... -- -- -- -- -- -- 158
Extension of warrants.. -- -- -- -- -- -- 213
Accretion of preferred
Dividends............ -- -- -- -- -- -- --
Issuance of warrants for
financing fees....... -- -- -- -- -- -- 182
Notes receivable from
Shareholders......... -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- --
-------- ------ ------ ----- ---------- ----- --------
Balance at
December 31, 1998.... 3,770 -- 2,194 -- 7,554,000 76 4,530
Repurchase of shares... (3,770) -- -- -- -- -- (105)
Issuance of common stock -- -- -- -- 101,500 1 174
Repayment of notes
Receivable from
shareholders......... -- -- -- -- -- -- --
Issuance of warrants... -- -- -- -- -- -- 1,133
Accretion of preferred
Stock dividends...... -- -- -- -- -- -- --
Deferred compensation --
Stock options....... -- -- -- -- -- -- 1,017
Beneficial conversion
Feature -- Series E.. -- -- -- -- -- -- 3,000
Beneficial conversion
Feature-Series F..... -- -- -- -- -- -- 17,504
Amortization of deferred
Compensation......... -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- --
-------- ------ ------ ----- ---------- ----- --------
Balance at
December 31, 1999.... -- -- 2,194 -- 7,655,500 77 27,253
Sale of common shares 5,622,500 56 80,619
Conversion of
Mandatorily redeemable
preferred............ -- -- (2,194) -- 11,316,765 113 58,056
Issuance of common
shares pursuant to the
exercise of stock
options.............. -- -- -- -- 111,675 1 168
Repayment of notes
Receivable from
shareholders......... -- -- -- -- -- -- --
Amortization of deferred
Compensation......... -- -- -- -- -- -- 1,641
Accretion of preferred
Dividends............ -- -- -- -- -- -- --
Issuance of common stock
Purchase warrants.... -- -- -- -- -- -- 270
Net loss............... -- -- -- -- -- -- --
-------- ------ ------ ----- ---------- ----- --------
Balance at
December 31, 2000.... -- $ -- -- $ -- 24,706,440 $ 247 $168,007
======== ====== ====== ===== ========== ===== ========
NOTES RECEIVABLE DEFERRED ACCUMULATED TREASURY
FROM STOCKHOLDERS COMPENSATION DEFICIT STOCK TOTAL
----------------- ------------ ----------- -------- -----
Balance at
January 1, 1998...... -- -- $ (4,962) -- $ (2,488)
Issuance of Series C
preferred stock...... -- -- -- -- 1,579
Issuance of warrants to
debt holders......... -- -- -- -- 158
Extension of warrants.. -- -- -- -- 213
Accretion of preferred
Dividends............ -- -- (274) -- (274)
Issuance of warrants for
financing fees....... -- -- -- -- 182
Notes receivable from
Shareholders......... $ (53) -- -- -- (53)
Net loss............... -- -- (2,895) -- (2,895)
------- -------- --------- -------- --------
Balance at
December 31, 1998.... (53) -- (8,131) -- (3,578)
Repurchase of shares... -- -- (3,665) $ (4,230) (8,000)
Issuance of common stock -- -- -- -- 175
Repayment of notes
Receivable from
shareholders......... 22 -- -- -- 22
Issuance of warrants... -- -- -- -- 1,133
Accretion of preferred
Stock dividends...... -- -- (2,411) -- (2,411)
Deferred compensation --
Stock options....... -- $(1,017) -- -- --
Beneficial conversion
Feature -- Series E.. -- -- (3,000) -- --
Beneficial conversion
Feature-Series F..... -- -- (17,504) -- --
Amortization of deferred
Compensation......... -- 253 -- -- 253
Net loss............... -- -- (10,290) -- (10,290)
------- -------- --------- -------- --------
Balance at
December 31, 1999.... (31) (764) (45,001) (4,230) (22,696)
Sale of common shares 80,675
Conversion of
Mandatorily redeemable
preferred............ -- -- -- 58,169
Issuance of common
shares pursuant to the
exercise of stock
options.............. -- -- -- -- 169
Repayment of notes
Receivable from
shareholders......... 27 -- -- -- 27
Amortization of deferred
Compensation......... -- (960) -- -- 681
Accretion of preferred
Dividends............ -- -- (2,829) -- (2,829)
Issuance of common stock
Purchase warrants.... -- -- -- 270
Net loss............... -- -- (22,576) -- (22,576)
------- -------- --------- -------- --------
Balance at
December 31, 2000.... $ (4) $(1,724) $(70,406) $(4,230) $91,890
======= ======== ========= ======== ========
See accompanying notes to consolidated financial statements
33
i3 MOBILE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss................................. $(22,576) $(10,290) $(2,895)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 1,703 139 19
Amortization of debt discount.......... -- 19 35
Non-cash charges from the issuance of
common stock warrants................ 95 100 392
Non-cash charges from the issuance of
common stock options................. 681 253 --
Loss on extinguishment of debt......... -- 3,434 --
Interest on extinguished debt.......... -- 311 --
Other.................................. 96 133 67
Changes in operating assets and
liabilities:
Increase in accounts receivable...... (232) (88) (390)
Decrease in deferred advertising..... 912 -- --
Decrease (increase) in other current
assets and other assets............ 170 (1,217) 2
Increase in accounts payable......... 1,295 166 31
Increase in accrued liabilities...... 1,094 2,451 95
------- ------- -------
Net cash used in operating activities...... (16,762) (4,589) (2,644)
------- ------- ------
Cash flows from investing activities:
Purchase of fixed assets................. (7,382) (1,800) (57)
------- ------- ------
Net cash used in investing activities...... (7,382) (1,800) (57)
------- ------- ------
Cash flows from financing activities:
Payments on capital lease obligations.... (68) -- --
Proceeds from sales of preferred stock,
net.................................... -- 38,136 2,154
Proceeds from issuance of notes payable
-- trade............................... -- -- 650
Proceeds of issuance of notes payable --
related parties........................ -- -- 227
Proceeds from the sale of common stock,
net.................................... 80,675 175 --
Proceeds from the exercise of stock
options................................ 169 -- --
Repurchase of common and preferred stock. -- (3,000) --
Repayments of notes payable.............. -- (869) (326)
Issuance of notes receivable -- related
parties................................ -- (200) (53)
Repayments of notes receivable -- related
parties................................ 27 222 --
------- ------- ------
Net cash provided by financing activities.. 80,803 34,464 2,652
------- ------- ------
Increase (decrease) in cash and cash
equivalents.............................. 56,659 28,075 (49)
Cash and cash equivalents at beginning of
period................................... 28,241 166 215
------- ------- ------
Cash and cash equivalents at end of period. $84,900 $28,241 $ 166
======= ======= ======
Supplemental disclosures of cash flow and
non cash activities:
Interest paid in cash.................... $ 36 $ 136 $ 88
Conversion of debt to mandatorily
redeemable preferred stock............. $ -- $ 5,317 $ 400
Accretion of mandatorily redeemable
preferred stock dividends.............. $2,829 $ 2,411 $ 274
Common stock warrants issued in Series F
preferred stock offering............... $ -- $ 1,033 $ --
See accompanying notes to consolidated financial statements.
34
i3 MOBILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
NOTE 1 -- FORMATION AND OPERATIONS OF THE COMPANY:
i3 Mobile, Inc., "i3" or the "Company", formerly known as Intelligent
Information Incorporated, was incorporated in Delaware on June 28, 1991. The
Company provides premium subscription data services to wireless devices. The
Company sells its services to consumers on a subscription basis through its
distribution network of over 25 wireless network operators and businesses. The
Company offers a range of individualized information products, including news,
finance, sports, weather, messaging, travel, entertainment and local
information.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Significant accounting policies followed in the preparation of these
financial statements are as follows:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The markets
for the Company's services are characterized by intense competition, rapid
technological development, regulatory changes, and frequent new service
introductions, all of which could impact the future value of the Company's
assets.
CASH AND CASH EQUIVALENTS:
Cash equivalents consist of highly liquid investments purchased with an
initial maturity of three months or less.
FIXED ASSETS:
Fixed assets are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, which vary
between 2 and 9 years. Maintenance and repairs are charged to expense as
incurred.
F-7
35
RESEARCH AND DEVELOPMENT:
Research and development costs are charged to expense as incurred. All
costs incurred to establish the technological feasibility of the Company's
products and services have been expensed as general and administrative expenses.
Costs incurred subsequent to the establishment of technological feasibility and
prior to the general release of the product have not been capitalized as such
amounts are not significant.
LONG-LIVED ASSETS:
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
requires that long-lived assets and certain intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. In such an event, the carrying value of
intangible assets is reviewed by management to determine if the value(s) may be
impaired. If this review indicates that the carrying amount(s) will not be
recoverable, as determined based on the estimated expected future cash flows
attributable to such asset(s) over the remaining amortization period, management
will reduce the carrying amount to recognize the impairment and recognize an
impairment loss. The measurement of the impairment losses to be recognized is to
be based on the difference between the fair values and the carrying amounts of
the assets. Fair value is defined as the amount for which the asset could be
bought or sold in a current transaction between willing parties. Where quoted
market prices in active markets are not available, management would estimate
fair value based on the best information available in the circumstances -- the
price of similar assets, discounted cash flow analysis or other valuation
techniques.
At each balance sheet date, the Company evaluates the realizability of
its long-lived assets, including goodwill, based on estimates of future
non-discounted cash flows. In the event that the estimated expected future cash
flows from a long-lived asset, including goodwill, are less than the carrying
value, an impairment loss is calculated. This impairment loss is calculated as
the difference between the fair value of the asset, as defined above, and the
carrying value of the asset. In instances where goodwill is identified with
assets that are subject to an impairment loss, the carrying value of the
identified goodwill shall be eliminated before making any reduction of the
carrying amounts of impaired long-lived assets.
REVENUE RECOGNITION:
The majority of the Company's revenues relate to their
subscription-based services provided to individual users, wireless network
operators and enterprise customers. The Company derives subscriber revenue from
the delivery of personalized information to wireless telephones and other
wireless devices. Subscriber revenue consists of fixed monthly usage charges,
transactional fees based on the information delivered, or a combination of the
two arrangements. The Company recognizes subscriber revenue when products and
services are provided to subscribers or resellers. The products sold by the
Company are information service products provided to the Company's customers.
These information products are not considered tangible products for financial
reporting purposes. The Company does not offer refund privileges to its
customers.
F-8
36
As a part of its subscription based revenue, the Company also provides
software design and customization services to its resellers and enterprise
customers and generally charges fees on the equivalent of a time and material
basis for these services. These revenues are generally recognized as services
are completed. Revenues are net of volume discounts to customers.
The Company offers complimentary services to build awareness of its
products and services and to generate revenue. The wireless network operators
are responsible for determining the price, if any, to be charged to their
customers for this service. The fees charged by the Company to the wireless
network operators for this service varies by wireless network operator. Under
agreements with reduced pricing terms, the Company recognizes revenue at the
time these services are provided. In the instance where the Company agreed to
provide services directly to the customers of a wireless network operator at no
cost to the customer, no revenue is recognized.
On February 9, 2000, the Company entered into a 5-year agreement with
Mobile Media Group, Inc. (formerly known as BroadcastEntertainment.com, Inc.)
under which Mobile Media Group will be the exclusive provider to the Company for
certain entertainment related content. The agreement, among other items,
includes that the Company will provide enterprise services to Mobile Media Group
to upgrade its website for the delivery of content and related services directly
to wireless devices and to offer Mobile Media Group the capability to provide
these web-to-wireless services to up to five of its related companies. The
Company applies the American Institute of Certified Public Accountants'
Statement of Position 81-1, Accounting for Performance of Construction Type and
Certain Production-Type Contracts to recognize revenue on a percentage of
completion basis related to this agreement.
COST OF REVENUES:
Cost of revenues consists primarily of costs associated with purchasing
content, direct labor costs, distribution fees, and royalty payments. Content
providers are paid either a flat monthly fee, a fee based on the number of users
requesting the content, a fee based on a percentage of the Company's revenues
generated from the content they provide, a fee based on the number of on-demand
messages requested or a combination of these arrangements. Distribution fees are
paid to wireless network operators to use their network to deliver advertising
and electronic commerce enabling messages and for delivery of content to direct
subscribers.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The Company controls this risk through credit approvals, credit limits and
monitoring procedures. The Company does not require collateral or other forms of
security. The Company can, however, limit the amount of information services
provided to its customers in the event of nonperformance.
During the years ended December 31, 2000 and 1999, the Company had three
customers, which accounted for approximately 68% and 69% of its total net
revenues, respectively. During the year ended December 31, 1998, the Company had
two customers, which accounted for approximately 52% of its total net revenues.
F-9
37
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The Company maintained an allowance for doubtful accounts of $109 and
$143 at December 31, 2000 and 1999, respectively.
INCOME TAXES:
The Company uses the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities and net
operating loss carryforwards, all calculated using presently enacted tax rates.
STOCK COMPENSATION:
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for its stock option plan and stock awards with the disclosure
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123). Under APB 25, compensation expense is
computed to the extent that the fair value of the underlying stock on the date
of grant exceeds the exercise price of the employee stock option or stock award.
Compensation so computed is deferred and then recognized over the vesting period
of the stock option or award.
The Company applies SFAS 123, Emerging Issues Task Force Abstract No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services (EITF 96-18)
and related interpretations in accounting for issuances of stock awards to
non-employees. Under SFAS 123 these equity transactions are accounted for based
on the fair value of the consideration received or the fair value of the equity
instruments issued, which ever is more reliably measurable. The value of the
equity instruments is calculated under a fair value based method using a
Black-Scholes pricing model. EITF 96-18 defines the measurement date for
determining fair value as the earlier of the date at which a commitment for
performance by the counterparty to earn the equity instruments is reached or the
date at which the counterparty's performance is complete.
EARNINGS (LOSS) PER SHARE:
The Company computes net loss per share pursuant to Statement of
Financial Accounting Standards No. 128, Earnings Per Share, and SEC Staff
Accounting Bulletin No. 98. Basic net loss per share is computed by dividing
loss applicable to common stockholders by the weighted average number of shares
of the Company's common stock outstanding during the period. Diluted net loss
per share is determined in the same manner as basic net loss per share except
that the number of weighted average shares is increased assuming exercise of
dilutive stock options and warrants using the treasury stock method.
F-10
38
For the years ended December 31, 2000, 1999, and 1998, options to
purchase 2,162,075, 914,000, and 387,250, shares of common stock, respectively,
and warrants to purchase 1,984,084, 1,929,084, and 1,206,859, shares of common
stock, respectively, were excluded from the calculation of diluted earnings per
share since their inclusion would be antidilutive for all periods presented.
RECLASSIFICATIONS:
Certain reclassifications have been made for consistent presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137 (SFAS 137), "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." In June 2000, the FASB issued SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Agreements - an Amendment
of FASB Statement No. 133." SFAS 133 establishes new standards of accounting and
reporting for derivative instruments and hedging activities, and requires that
all derivatives, including foreign currency exchange contracts, be recognized on
the balance sheet at fair value. We will adopt SFAS 133, as amended by SFAS 137
and SFAS 138, in the first quarter of 2001 and do not expect the adoption to
have a material effect on our financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition (SAB 101) which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 had no material
effect on the Company's financial position, results of operations or cash flows.
NOTE 3 -- FIXED ASSETS:
DECEMBER 31,
---------------
2000 1999
------ ------
Furniture and fixtures..... $664 $ 63
Equipment and computers.... 8,701 218
Leasehold improvements..... 1,530 --
Construction in progress... -- 1,804
----- -----
10,895 2,085
Less -- Accumulated
depreciation............. (1,678) (143)
------- ------
$9,217 $1,942
======= ======
Depreciation expense for the years ended December 31, 2000, 1999 and
1998 was $1,535, $122, and $19, respectively.
F-11
39
NOTE 4 -- ACCRUED LIABILITIES:
The following table provides the major components of accrued
liabilities:
DECEMBER 31,
---------------
2000 1999
------ ------
Accrued stock issuance and
professional fees............. $ 643 $2,045
Accrued salaries and wages...... 675 250
Accrued marketing............... 595 --
Accrued severance............... 769 --
Other accrued liabilities....... 1,287 580
------ ------
$3,969 $2,875
====== ======
NOTE 5 -- LEASES:
During December, 2000, the Company entered into a capital lease for
certain machinery and equipment that expires in December, 2002. The gross amount
of machinery and equipment under the capital lease and the related accumulated
depreciation were as follows:
DECEMBER 31,
------------
2000
--------
Machinery and equipment $1,437
Accumulated depreciation (61)
-------
1,376
=======
The following is a schedule of future minimum lease payments for the
capital lease as of December 31, 2000:
2001................... $ 883
2002................... 643
------
Total lease payments... 1,526
Less amount representing
interest............. (157)
------
Present value of net capital
lease payments....... 1,369
Less current portion... (801)
------
Long term portion...... $ 568
======
The Company leases space in several buildings which is used for offices
and development facilities as well as various equipment, all subject to
operating leases. As of December 31, 2000, the minimum annual rental payments
under the terms of such non-cancelable leases which expire at various dates
through 2010 are as follows:
2001................... 750
2002................... 708
2003................... 683
2004................... 683
2005................... $ 690
Thereafter............. 1,785
------
Total minimum lease
payments............... $5,299
======
Rent expense for the years ended December 31, 2000, 1999 and 1998
amounted to $753, $211, and $165, respectively.
F-12
40
NOTE 6 -- COMMITMENTS AND CONTINGENCIES:
LITIGATION:
The Company, in the ordinary course of business, is subject to various
legal proceedings. While it is impossible to determine the ultimate outcome of
these matters, it is management's opinion that the resolution of these matters
will not have a material adverse effect on the financial position or results of
operations of the Company.
AGREEMENTS:
The Company has agreements with wireless network operators who act as
resellers of the Company's products and services to their customers. These
contracts generally have one to three-year terms and are nonexclusive.
The Company maintains agreements with various content providers. The
content agreements generally have one-year terms, are nonexclusive and can be
canceled by either party without notice.
The Company is a member of an industry association of wireless service,
wireless equipment and software companies that develops worldwide standards for
wireless information and telephony services on digital mobile phones and other
wireless devices. As a result of their affiliation with the organization, the
Company has agreed to license its intellectual property to other members on fair
and reasonable terms to the extent that the license is required to develop
noninfringing products under the specifications promulgated by the organization.
Each other member has entered into reciprocal agreements.
NOTE 7 -- ROYALTY AGREEMENT:
The Company maintains a royalty agreement with two current stockholders
of the Company. The agreements provide for the payment of royalties of 2 1/2% of
gross revenues on a monthly basis, but in no event less than $3 per month, with
a maximum aggregate payment of $6,000 adjustable up to a maximum of $8,000 as
defined in the agreement. Total royalties expensed under the terms of the
agreement were $117, $46, and $32, for the years ended December 31, 2000, 1999
and 1998, respectively.
NOTE 8 -- INCOME TAXES:
No provision for federal or state income taxes has been made for the
years ended December 31, 2000, 1999 and 1998 given the Company's loss position
in each year. At December 31, 2000, the Company had net operating loss
carryforwards of $34,637 which expire through the year 2019. Net deferred tax
assets at December 31, 2000 and 1999 have been fully reserved due to the
uncertainty of realization.
The Company's gross deferred tax assets at December 31, 2000 and 1999
were comprised of the following:
F-13
41
DECEMBER 31,
-----------------
2000 1999
------- -------
GROSS DEFERRED TAX ASSET:
Net operating loss
carryforwards........ $13,401 $ 7,275
Interest accretion..... -- 187
Other.................. 302 320
------- -------
13,703 7,782
Valuation allowance.... (13,703) (7,782)
------- -------
Net deferred taxes..... $ -- $ --
======= =======
Under provisions of the Tax Reform Act of 1986, if certain substantial
changes in the Company's ownership should occur, there would be an annual
limitation on the amount of net operating loss carryforwards which could be
utilized. Due to this potential annual limitation, the net operating loss
carryforwards may expire prior to when otherwise utilizable.
NOTE 9 -- STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING:
On April 6, 2000, the Company completed an initial public offering (the
"Offering") of 5,100,000 shares of common stock at a price of $16 per share,
generating net proceeds of $72.9 million. In connection with the Offering, the
Company granted to the underwriters an option to purchase up to 765,000
additional common shares at the initial offering price less the underwriting
discounts and commissions, to cover any over-allotments. On May 10, 2000 the
underwriters exercised this option and purchased an additional 522,500 shares.
After deducting underwriting discounts and commissions, the Company received
$7.8 million in net proceeds from the exercise of this option. In conjunction
with the Offering, all of the Company's outstanding preferred stock was
converted into a total of 11,316,765 shares of common stock.
PREFERRED STOCK:
Preferred stock consisted of the following at December 31, 1999:
DECEMBER 31,
------------
1999
-------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK:
Series B................................ $ 1,460
Series D................................ 1,292
Series E................................ 17,104
Series F................................ 35,482
-------
Total mandatorily redeemable
convertible preferred stock.. $55,338
=======
CONVERTIBLE PREFERRED STOCK AT PAR VALUE:
Series A................................ $ --
Series C................................ --
-------
$ --
=======
SERIES A CONVERTIBLE PREFERRED STOCK:
In February 1999, the Company redeemed all 3,770 shares of its Series A
convertible preferred stock and 1,885,000 shares of its common stock owned by
Intelligent Investment Partners, Inc. The redemption price of the Series A
preferred stock and the common stock of $8,000 was
F-14
42
payable as follows: $3,000 in cash upon closing of the transaction and $5,000 in
a promissory note having an original maturity of February 12, 2004. The
redemption price was subsequently satisfied through the issuances of the Series
E and F mandatorily redeemable convertible preferred stock in the fourth quarter
of 1999. In addition, a warrant to purchase 500,000 shares of the Company's
common stock at a price of $3.00 per share was issued to Intelligent Investment
Partners, Inc. This warrant expires February 11, 2004. This warrant has a fair
value of $460 which has been applied to the value of the common and preferred
stock repurchased. The fair value of the warrant was determined using the
Black-Scholes pricing model utilizing a volatility rate of 40%, a 5-year
expected life, no expected dividends and a risk free rate of return of 5.0%. The
redemption of the preferred stock in 1999 resulted in $4,230 recorded as
treasury stock, a $3,665 charge to accumulated deficit that is included in "loss
applicable to common stock" and a $105 charge to additional paid-in capital.
SERIES B MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In August 1996, the Company issued 1,421 shares of Series B mandatorily
redeemable preferred stock to a private investor group for $879.66 per share. In
connection with the issuance of the Series B mandatorily redeemable preferred
stock, the investor group was granted options to purchase an additional 284
shares of Series B mandatorily redeemable preferred stock at a price of $879.66.
These options were exercisable at the option of the holder at any time prior to
August 31, 1997. Further subject to certain criteria outlined in the stock
agreement, the investor group purchased 284 shares of Series B mandatorily
redeemable preferred stock on February 27, 1997.
The relative fair value of the warrants and options granted in
conjunction with the Series B preferred stock of $90 was recorded as a discount
to the Series B preferred stock value and was being amortized as preferred stock
dividends over the period until the earliest possible redemption date, which
became April 6, 2000 in conjunction with the Offering. The fair value of the
warrant was determined using the Black-Scholes pricing model utilizing a
volatility rate of 40%, a 1-year expected life, no expected dividends and a risk
free rate of return of 6.7%.
These shares were converted into 852,500 shares of common stock on April
6, 2000, the date of our initial public offering.
SERIES C CONVERTIBLE PREFERRED STOCK:
From July 1997 through December 1997, the Company sold 476 and 388 shares of
Series C convertible preferred stock to private investors at prices of $879.66
per share and $1,187.00 per share, respectively. During 1998, the Company
changed the number of authorized shares of its Series C convertible preferred
stock to 2,194 and sold an additional 1,330 shares of its Series C convertible
preferred stock to private investors for $1,187.00 per share. In connection with
these issuances, a warrant was issued for the purchase of 74,910 shares of
common stock for $3.00 per share. The fair value of the warrants were determined
using the Black-Scholes pricing model utilizing a volatility rate of 40%, a
1-year expected life, no expected dividends and a risk free rate of return of
5.7%.
On December 22, 1999, the Company's certificate of incorporation was
amended to provide for the mandatory conversion of the Series C preferred stock
into common stock upon a qualified initial public offering. This amendment was
approved by the Board of Directors and the stockholders, including a majority of
the Series C stockholders.
F-15
43
These shares were converted into 1,097,000 shares of common stock on
April 6, 2000, the date of our initial public offering.
SERIES D MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In August 1998, the Company converted two outstanding notes payable into
Series D preferred stock and sold additional shares of Series D preferred stock
to a private investor group. The notes were issued to the private investor group
in June 1998. The carrying value of the notes of $407 was converted into Series
D preferred stock at $1,187.00 per share. A total of 843 shares of Series D
preferred stock were sold at a price of $1,187.00 per share for total
consideration of $1,001 of cash and converted notes payable.
These shares were converted into 421,500 shares of common stock on April
6, 2000, the date of our initial public offering.
SERIES E MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In February 1999, the Company sold to a private investor group, 7,714.56
shares of Series E mandatorily redeemable convertible preferred stock at a price
of $1,555.50 per share for $12,000.
On November 23, 1999, the same private investor group, in accordance
with its contract with the Company, purchased an additional 1,928.64 shares of
Series E mandatorily redeemable convertible preferred stock at a price of
$1,555.50 per share for $3,000. A $3,000 deemed dividend has been recognized as
a charge to additional paid-in capital and an increase to net loss available to
common shareholders for the beneficial conversion feature, calculated as the
difference between the per share conversion price and the estimated fair value
of the common stock into which the preferred stock is convertible, measured at
the commitment date. This beneficial conversion feature is limited to the amount
of the proceeds received, or $3,000.
These shares were converted into 4,821,600 shares of common stock on
April 6, 2000, the date of our initial public offering.
SERIES F MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On December 22, 1999, the Company issued 8,248.33 shares of Series F
mandatorily redeemable convertible preferred stock at a price of $3,960.40 per
share to private investor groups. The proceeds include $24,850 of cash
investments, including $3,000 from a related party stockholder of the Company,
the conversion of a $5,000 outstanding note payable, the conversion of a $317
five-year convertible note payable and future television advertising rights. In
connection with this issuance the Company recorded a beneficial conversion
charge of $17,504, an extraordinary loss on the redemption of the two notes
payable of $3,434 and deferred advertising value of $4,261. These charges are
calculated as the difference between the per share value of the conversion
feature and the estimated fair value of the common stock at commitment date
multiplied by the applicable equivalent common shares.
F-16
44
These shares were converted into 4,124,165 shares of common stock on
April 6, 2000, the date of our initial public offering.
COMMON STOCK WARRANTS:
The Company had outstanding stock purchase warrants as follows. In this
table, "Debt financings" refers to warrants issued to noteholders, "Services
related to 1998 capital raising" refers to warrants issued in consideration for
assistance provided to the Company in obtaining debt and preferred stock
financing, while "Strategic partners" refers to warrants issued in consideration
of certain of the Company's executed distribution agreements.
DECEMBER 31,
---------------------
2000 1999
-------- ---------
Debt financings.................. 645,984 645,984
Series B preferred stock......... 234,465 234,465
Series C preferred stock......... 74,910 74,910
Services related to 1998 capital
raising.......................... 350,000 350,000
Series A preferred stock redemption 500,000 500,000
Series F preferred stock......... 123,725 123,725
Strategic partners............... 55,000 --
--------- ---------
1,984,084 1,929,084
========= =========
Weighted Average exercise price
per share........................ $3.70 $3.50
----- -----
In December 1997, a warrant was issued to the Series B preferred
stockholders, a related party, for the purchase of 234,465 shares of common
stock of the Company for $3.00 per share. This warrant was issued in
consideration for the Series B stockholder relinquishing its 12% cumulative
dividend. The warrant is exercisable at the option of the holder and originally
expired on December 31, 1998. In April 1998 the expiration date of this warrant
was extended to December 31, 2001 in consideration for the continued financial
support of the Series B stockholder. The warrants' original fair value of $52
was charged as a preferred dividend immediately upon issuance in 1997 and the
fair value of the extension of the expiration date of $123 was immediately
charged as a preferred dividend in 1998.
In connection with the issuance of the Series C convertible preferred
stock in 1997, two warrants were issued for the purchase of an aggregate of
74,910 shares of common stock for $3.00 per share. The warrants are exercisable
at the option of the holder, had an original expiration date of December 31,
1998. In April 1998 the expiration dates of these warrants were extended to
December 31, 2001 in consideration for the continued financial support of the
holders. The fair value of the warrants issued with Series C convertible
preferred stock was determined to be $17 using the Black-Scholes pricing model
utilizing a volatility rate of 40%, a 1-year expected life, no expected
dividends and a risk free rate of return of 5.7% percent. The cash proceeds were
allocated to the warrants, recorded as additional paid-in capital, and to the
Series C convertible preferred stock. The difference between the fair value of
the warrants under their original terms and the fair value under the extended
terms of $39 was immediately charged as a preferred dividend in 1998.
In December 1997, in connection with the issuance of a $200 promissory
note, a warrant was issued to the private investor for the purchase of 100,000
shares of common stock of the Company for $3.00 per share. The warrant is
exercisable at the option of the holder and had an original expiration date of
December 31, 1998. The relative fair value of the warrant of $20 was amortized
to interest expense over the term of the note. In April 1998 the expiration date
for this warrant was
F-17
45
extended to December 31, 2001 in consideration for the continued financial
support of the lender. The fair value related to the extension of the expiration
date of $52 was immediately charged as interest expense in 1998.
In connection with the issuance of the Company's June 1998 notes to
private investors, two warrants were issued in August 1998 to purchase an
aggregate of 195,984 shares of the Company's common stock at a price of $3.00
per share. These notes to private investors were converted into Series D
preferred stock in August 1998. These warrants expire on July 31, 2003. The fair
value of the warrant of $83 was immediately recorded as interest expense in
1998.
In consideration for assistance provided in raising capital during 1998,
a warrant was issued in June 1998 to the holder of the Series B preferred stock,
a related party, for the purchase of 350,000 shares of common stock for $3.50
per share in June 1998. This warrant is exercisable at the option of the holder
and expires on December 31, 2001. As a result of the issuance, the fair value of
the warrant of $182 has been charged to general and administrative expense in
1998. The charge was recorded to general and administrative expenses as the
warrants were issued in consideration for the general assistance provided to the
Company in obtaining debt and preferred stock financings and was not applicable
to a specific financing.
In December 1998 a warrant to purchase 150,000 shares of the Company's
common stock at a price of $3.50 per share was issued to a holder of the
Company's notes payable for financing provided to the Company. This warrant
expires on December 31, 2001. As a result of this issuance, the Company has
recorded the fair value of the warrant of $75 as a charge to interest expense in
1998.
In February 1999, as part of the redemption price for its Series A
preferred and common stock, the Company issued a warrant to purchase 500,000
shares of the Company's common stock at a price of $3.00 per share, subject to
adjustment. This warrant expires on February 11, 2004. The value of this warrant
of $460 was included in the valuation of the treasury stock and the loss on
redemption of Series A preferred stock.
In September 1998 the Company authorized a Loan Incentive Warrant Plan
that provided for the issuance of warrants to purchase common stock of the
Company to the holders of notes payable. In March 1999, the Company issued
warrants under this plan to purchase 200,000 shares of the Company's common
stock at a price of $3.50 per share. The number of warrants was determined by a
formula based on the amount of the loan. This plan has now expired. These
warrants were issued to short-term notes payable holders and expire on December
31, 2001. The related loans were repaid in February 1999. As a result of the
issuance, the Company has recorded the fair value of the warrants of $100 as a
charge to interest expense in 1999.
In conjunction with the Series F mandatorily redeemable preferred stock
offering, the Company issued a warrant to purchase 123,725 shares of common
stock at an exercise price of $7.92 per share and incurred a liability of $1,633
to an investment banking firm pursuant to a binding agreement. This fee is in
consideration for acting as placement agent in connection with the Series F
mandatorily redeemable preferred stock offering. The warrant, which has an
exercise price of $7.92 per share and a five year life, has been valued at
$1,033 using a Black-Scholes pricing model. Assumptions utilized included a
volatility rate of 40%, a 5-year expected life, no expected dividends
F-18
46
and a risk free rate of return of 5.8%. The value of the payment and warrants
has been accounted for as issuance costs against the gross proceeds of the
Series F offering.
On December 29, 1999, the Company entered into a two-year agreement with
NBC Interactive Media, Inc. ("NBC"). This agreement provides the Company with
the right to distribute content from NBC or its affiliates upon execution of
distribution agreements. The Company will issue warrants to NBC to purchase
20,000 common shares at an exercise price of $10.00 per share for each content
distribution agreement it or any of its affiliates enters into with the Company,
or 30,000 shares for the first agreement reached prior to March 31, 2000. The
aggregate number of shares of common stock issuable under this contingent
warrant agreement is 110,000 shares. These warrants expire three years after
their issuance. The original terms of the NBC agreement called for the initial
warrant issuance to be for 30,000 shares of common stock. These terms were
adjusted to allow for the initial warrant to be for 10,000 shares of common
stock. On March 7, 2000 and April 20, 2000, in conjunction with its agreement
with NBC, the Company entered into two-year distribution agreements with
CNBC.com and MSNBC Interactive News LLC ("MSNBC"), respectively under which the
Company was granted non-exclusive licenses to distribute specific types of
CNBC.com's and MSNBC's content to designated users and resellers of the Company.
In consideration the Company has granted CNBC.com a warrant to purchase 10,000
shares of the Company's common stock and MSNBC a warrant to purchase 20,000
shares of the Company's common stock each at an exercise price of $10.00 per
share. The warrants have three-year terms and are exercisable immediately. As
part of the agreement with CNBC.com, the Company has also agreed to purchase
banner advertising from CNBC.com utilizing its deferred advertising rights
described in Note 11. The fair value of the warrants have been estimated at $210
using a Black-Scholes option pricing model assuming a volatility of 40%, an
expected term of 3 years, no expected dividends and a risk free rate of return
of 5.8%. The value of the warrants will be amortized over the term of the
agreements.
On January 25, 2000, the Company entered into a two-year agreement with
Sony Corporation of America, "Sony". This agreement provides the Company with
the right to distribute content from Sony or its affiliates upon execution of
distribution agreements. The Company will issue warrants to Sony to purchase
20,000 common shares at an exercise price of $10.00 per share for each content
distribution agreement Sony or any of its affiliates enters into with the
Company. The aggregate number of shares of common stock issuable under this
contingent warrant agreement is 110,000 shares. These warrants expire three
years after their issuance. The accounting treatment for these contingent
warrants to be issued to Sony is prescribed by EITF 96-18. Under EITF 96-18 the
measurement date for determining the fair value of these warrants would not
occur until such time as an agreement is entered into between i3 Mobile and Sony
or its affiliates. With the signing of a wireless content services agreement
between New Technology Holdings, Inc. (InfoBeat) and the Company in May 2000,
the Company issued warrants to purchase 20,000 shares to New Technology
Holdings, Inc. (InfoBeat) at $10.00 per share and recorded a deferred charge of
$30 which will be amortized over the term of the agreement. The fair value of
the warrant was determined through a Black-Scholes pricing model utilizing the
fair value of the Company's common stock as of the measurement date.
In March 2000, the Company entered into an agreement with AT&T Wireless
Services, Inc. The agreement calls for the Company to issue stock purchase
warrants based upon certain performance criteria being met. Under the agreement,
the Company can issue warrants to purchase
F-19
47
up to 200,000 shares of common stock at an exercise price of $15.00 per share.
These warrants vest upon the development and implementation of a program to tag
messages with advertisements and upon the achievement of designated new
registered user levels. These warrants expire three years after their issuance
date. The accounting treatment for these contingent warrants is prescribed by
EITF 96-18. Under EITF 96-18 the measurement date for determining the fair value
of the warrants would not occur until such time as the performance criteria are
met. The fair value of the warrants will be determined through a Black-Scholes
option pricing model utilizing the fair value of the Company's common stock at
the measurement date. As the performance criteria related to this agreement have
not been met as of December 31, 2000, these contingent warrants have no impact
on the 2000 financial statements.
In April 2000 the Company entered into an agreement with Intel
Corporation. The agreement calls for the Company to issue stock purchase
warrants to Intel Corporation based upon certain performance criteria being met.
Under the agreement the Company can issue warrants to purchase up to 100,000
shares of common stock at an exercise price of $15.00 per share. These warrants
vest as the performance criteria are met and expire two years after their
issuance date. The accounting treatment for these contingent warrants is
prescribed by EITF 96-18. Under EITF 96-18 the measurement date for determining
the fair value of the warrants would not occur until such time as the
performance criteria are met. The fair value of the warrants will be determined
through a Black-Scholes option pricing model utilizing the fair value of the
Company's common stock at the measurement date. As the performance criteria
related to this agreement have not been met as of December 31, 2000, these
contingent warrants have no impact on the 2000 financial statements.
COMMON STOCK RESERVED:
The Company has reserved shares of common stock as follows:
DECEMBER 31,
----------------------
2000 1999
--------- ----------
Conversion of preferred stock..... -- 11,316,765
Stock options..................... 2,162,075 914,000
Stock warrants.................... 1,984,084 1,929,084
--------- ----------
4,146,159 14,159,849
========= ==========
NOTE 10 -- STOCK INCENTIVE PLANS:
The Company's 1995 Stock Incentive Plan provides for the issuance of up
to 1,014,000 shares of common stock outstanding through the granting of stock
options to employees, officers, consultants and directors. The board of
directors has complete authority to determine awards and establish the exercise
price based on the Board's estimate of fair value provided that the exercise
price of the stock option was no less than the fair value of a share of common
stock on the date of grant, and the exercise price of a stock option granted to
an employee who owns more than 10% of the common stock will be no less than 110%
of the fair value of a share of common stock on the date of grant. Such option
grants prior to September 15, 1999 vest over a period of five years. As of
September 15, 1999, new options granted vest over a period of four years.
On February 9, 2000, the Board of Directors adopted the 2000 Stock
Incentive Plan, certain terms of which were subsequently amended on November 19,
2000. This plan provides for
F-20
48
the issuance of up to 2,407,770 shares of common stock through the granting of
stock options to employees, officers, consultants and directors. The option
exercise price will be determined by the Board and may be equal to or greater
than the fair market value of a share of the Company's common stock on the date
of grant. The plan limits the number of options issued to any one employee in
one fiscal year to 750,000.
The following table describes the Company's stock option activity:
WEIGHTED AVERAGE
WEIGHTED AVERAGE FAIR VALUE
NUMBER OF EXERCISE PRICE OF OPTIONS GRANTED
OPTIONS PER SHARE PER SHARE
------------ ------------------ -----------------
- -
Outstanding at January 1, 1998 227,000 $1.05
Granted....................... 162,600 $2.37 $2.37
Canceled...................... (4,450) $2.37
----------
Outstanding at December 31, 1998 385,150 $1.59
Granted....................... 540,500 $2.74 $5.38
Canceled...................... (11,650) $2.37
----------
Outstanding at December 31, 1999 914,000 $2.71
Granted....................... 1,620,250 $8.17 $2.53
Canceled...................... (260,500) $8.24
Exercised..................... (111,675) $1.51
----------
Outstanding at December 31, 2000 2,162,075 $6.27
==========
The following summarizes the outstanding and exercisable options under
the Plan as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OUTSTANDING PRICE
-------------- ----------- --------- -------- ----------- ---------
(IN YEARS)
$0.30 -- $3.11 422,450 6.9 $ 2.01 266,270 $1.79
$4.00 -- $5.03 550,050 9.4 $ 4.49 159,550 $4.00
$5.34 -- $7.92 784,975 9.7 $ 7.45 83,800 $7.50
$8.06 -- $18.69 404,600 9.7 $10.86 70,650 $14.41
---------- --------
2,162,075 580,270
========== ========
For all options granted in 2000 and 1998, the exercise price equaled the
fair value of the common stock on the date of grant. In 1999, options granted
with an exercise price equal to fair value of the common stock had
weighted-average exercise price of $2.42. Options granted with an exercise price
below the fair value had a weighted average exercise price and weighted-average
fair value of $3.96 and $6.66 per share, respectively.
If compensation expenses had been recognized based on the fair value of
the options at their grant date, in accordance with Statement of Financial
Accounting Standard No. 123 ("FAS 123"), pro forma results of operations would
be as follows:
F-21
49
DECEMBER 31,
------------------------------
2000 1999 1998
--------- --------- --------
Loss applicable to common stock:
As reported............. $(25,405) $(36,870) $(3,169)
Pro forma under FAS 123. (27,463) (37,062) (3,231)
Basic and diluted net loss per share:
As reported............. ($1.39) ($6.43) ($0.42)
Pro forma under FAS 123. ($1.50) ($6.46) ($0.43)
The estimated fair value at date of grant for options granted for the
year ended December 31, 2000 ranged from $0.71 to $8.63. The fair value of each
option is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
2000 1999 1998
---- ---- ----
Risk free interest rate................ 4.9% 5.80% 5.400%
Expected dividend yield................ 0 0 0
Expected life of option (years)........ 4.0 4.33 5.000
Expected volatility.................... 63.0% 28.83% 0.0001%
As additional options are expected to be granted in future years and the
options vest over several years, the above pro forma results are not necessarily
indicative of future pro forma results.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Deferred compensation of $1,641 and $764 was recorded
for the years ended December 31, 2000 and 1999, respectively. This represents
compensation expense that will be recognized over the remaining vesting period.
Compensation expense of $431 and $253 was recorded for the years ended December
31, 2000 and 1999, respectively. No compensation expense has been recognized for
stock-based compensation plans for the year ended December 31, 1998.
NOTE 11 -- DEFERRED ADVERTISING:
As part of the Series F mandatorily redeemable convertible preferred
stock offering, the Company entered into an agreement with National Broadcasting
Company, Inc., "NBC". In the agreement NBC provides television advertising
rights to the Company in exchange for 631.25 shares of Series F mandatorily
redeemable preferred stock issued to NBC Interactive Media, Inc. in December
1999. This advertising can be broadcast on NBC, NBC's owned and operated
television stations or CNBC. The term of the agreement is two years, effective
January 1, 2000. The Company has accounted for these services as deferred
advertising at the fair value of the Series F mandatorily redeemable preferred
shares exchanged for the advertising rights of $4,261. These advertising rights
are amortized to expense as the advertising is used by the Company and amounted
to $912 for the year ended December 31, 2000.
NOTE 12 -- SEVERANCE CHARGE:
During the fourth quarter of 2000, the Company reduced its workforce by
approximately 20% and recorded a $955 restructuring charge. As of December 31,
2000, termination benefits aggregating $186 were paid to these employees as a
result of the workforce reduction. Payments for the remainder of this liability
will be made in 2001.
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50
NOTE 13 -- SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 2000 and 1999 is as follows (in thousands, except per share data):
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
2000
Revenue............................... $ 910 $ 1,106 $ 1,448 $ 1,030
Gross profit.......................... 338 457 649 422
Net loss.............................. (3,626) (3,390) (5,823) (9,737)
Loss applicable to common stock....... (6,311) (3,534) (5,823) (9,737)
Loss per share - basic and diluted.... $ (1.09) $ (0.16) $ (0.26) $ (0.43)
1999
Revenues.............................. $ 510 $ 433 $ 382 $ 409
Gross profit.......................... 245 105 14 54
Net loss.............................. (798) (1,614) (1,760) (6,118)
Loss applicable to common stock....... (1,159) (2,279) (2,425) (31,007)
Loss per share - basic and diluted.... $ (0.18) $ (0.40) $ (0.43) $ (5.46)
F-23
51
SCHEDULE I
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
i3 Mobile, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated January 29, 2001 appearing in this Annual Report on the Form 10-K of i3
Mobile, Inc. also included an audit of the financial statement schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Stamford, Connecticut
January 29, 2001
52
SCHEDULE II
i3 MOBILE, INC.
VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts:
Balance, January 1, 1998.................................. $ 42,000
Provision................................................. 68,000
Charge-offs............................................... 0
-----------
Balance, December 31, 1998................................ 110,000
Provision................................................. 131,000
Charge-offs............................................... (98,000)
-----------
Balance, December 31, 1999................................ 143,000
Provision................................................. 30,000
Charge-offs............................................... (64,000)
-----------
Balance, December 31, 2000................................ $ 109,000
===========