SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 2004
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 0-29359
GOAMERICA, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-3693371
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
433 Hackensack Avenue, Hackensack, New Jersey 07601
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (201) 996-1717
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(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|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes: |X| No: |_|
The aggregate market value of the voting common equity of the registrant
held by non-affiliates (for this purpose, persons and entities other than
executive officers, directors, and 5% or more shareholders) of the registrant,
as of the last business day of the registrant's most recently completed second
fiscal quarter (June 30, 2004), was $11,778,583.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 24, 2005:
Class Number of Shares
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Common Stock, $0.01 par value 2,093,451
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for
its 2005 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
Item Page
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PART I 1. Business of the Company................................................ 2
2. Properties............................................................. 12
3. Legal Proceedings...................................................... 12
4. Submission of Matters to a Vote of Security Holders.................... 14
4A. Executive Officers of the Registrant................................... 14
PART II 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities................. 16
6. Selected Consolidated Financial Data................................... 18
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 20
7A. Quantitative and Qualitative Disclosures About Market Risk............. 33
8. Financial Statements and Supplementary Data............................ 33
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 33
9A. Controls and Procedures................................................ 34
9B. Other.................................................................. 34
PART III 10. Directors of the Registrant............................................ 35
11. Executive Compensation................................................. 35
12. Security Ownership of Certain Beneficial Owners and Management......... 35
13. Certain Relationships and Related Transactions......................... 35
14. Principal Accountant Fees and Services................................. 35
PART IV 15. Exhibits and Financial Statements...................................... 36
SIGNATURES................................................................................. 38
EXHIBIT INDEX.............................................................................. 39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE................ F-1
Each reference in this Annual Report to "GoAmerica", the "Company" or
"We", or any variation thereof, is a reference to GoAmerica, Inc. and its
subsidiaries, unless the context requires otherwise.
Many of GoAmerica's product/service names referred to herein are
trademarks, service marks or tradenames of GoAmerica. This Annual Report also
includes references to trademarks and tradenames of other companies. The
GoAmerica and Wynd Communications names and logos and the names of proprietary
products and services offered by GoAmerica and Wynd Communications are
trademarks, registered trademarks, service marks or registered service marks of
GoAmerica.
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended) that involve risks and
uncertainties. Such forward-looking statements may be identified by the use of
forward-looking terminology such as "may", "will", "expect", "estimate",
"anticipate", "continue", or similar terms, variations of such terms or the
negative of those terms. Such forward-looking statements involve risks and
uncertainties, including, but not limited to: (i) our limited operating history;
(ii) our ability to successfully manage our relationship with EarthLink; (iii)
our dependence on EarthLink to provide billing, customer and technical support
to certain of our subscribers; (iv) our ability to respond to the rapid
technological change of the wireless data industry and offer new services; (v)
our dependence on wireless carrier networks; (vi) our ability to respond to
increased competition in the wireless data industry; (vii) our ability to
integrate acquired businesses and technologies; (viii) our ability to generate
revenue growth; (ix) our ability to increase or maintain gross margins,
profitability, liquidity and capital resources; (x) our ability to manage our
remaining operations; and (xi) difficulties inherent in predicting the outcome
of regulatory processes. Such risks and others are more fully described in the
Risk Factors set forth in Exhibit 99.1 to this Annual Report. Our actual results
could differ materially from the results expressed in, or implied by, such
forward-looking statements.
PART I
ITEM 1. BUSINESS OF THE COMPANY.
GENERAL
GoAmerica(R) is a wireless data communications service provider, offering
solutions primarily for consumers who are deaf, hard of hearing and/or
speech-impaired, including wireless subscription and value added services,
Internet relay services and wireless devices and accessories. Wynd
Communications Corporation, a wholly owned subsidiary of GoAmerica, offers
enhanced services known as WyndTell(R) and WyndPower(TM), which assist our deaf
or hard of hearing customers in communicating from most major metropolitan areas
in the continental United States and parts of Canada. WyndTell and WyndPower
allow customers to send and receive TTY/TDD (text telephone or teletypewriter)
messages, faxes, and text-to-speech messages, send and receive email messages to
and from any email service, provide for delivery and acknowledgements of sent
messages that are read, and access the Internet using such wireless computing
devices as Research in Motion, or RIM, wireless handheld devices, certain
2
Motorola paging devices and the T-Mobile Sidekick, Fido hiptop, and SunCom
hiptop devices running on Danger Inc.'s hiptop platform. GoAmerica continues to
offer wireless data products and services to the consumer and enterprise markets
as well as support customers who use our proprietary software technology called
Go.Web(TM). Go.Web is designed for use mainly by enterprise customers to enable
secure wireless access to corporate data and the Internet on numerous wireless
computing devices (including RIM's BlackBerry and interactive handheld devices;
Microsoft Pocket PC-based personal digital assistants; Palm operating
system-based handheld computing devices; and laptop computers). The Wynd
Communications and Go.Web services transmit over most major wireless data
networks in North America. Our revenues are derived principally from
subscription to our value-added wireless data services, for which customers
typically pay monthly recurring fees. We derive additional revenue from the sale
of wireless communications devices and commissions from the acquisition of
subscribers on behalf of various wireless network providers. We continue to
engineer our technology to operate with new versions of wireless devices as they
emerge. In September 2004, we launched our GA Prepaid(TM) division and expanded
our product portfolio by commencing to offer prepaid products and services, such
as domestic and international calling cards, prepaid cellular/wireless
telephones and related services. On December 1, 2004, we acquired certain assets
from Global Interactive(TM), an established provider of wireless products,
services and accessories. Subject to our capital constraints, we intend to
evaluate additional alliances and acquisitions that we believe will allow us to
quickly increase the scale and scope of our business.
Our principal office is located at 433 Hackensack Avenue, Hackensack, New
Jersey 07601, our voice telephone number is (201) 996-1717, and our TTY number
is (201) 527-1520. Our web site is located at www.goamerica.com. We have not
incorporated by reference into this Form 10-K any of the information on our web
site, and you should not consider it to be a part of this document. Our web site
address is included in this document as an inactive textual reference only.
CORPORATE HISTORY
GoAmerica Communications Corp. was incorporated in Delaware in 1996. In
December 1999, GoAmerica, Inc. was incorporated in Delaware and each of the
security holders of GoAmerica Communications Corp. exchanged all of their
outstanding securities for newly issued securities of GoAmerica, Inc., with
GoAmerica Communications Corp. becoming a wholly owned subsidiary of GoAmerica,
Inc. GoAmerica, Inc. consummated the initial public offering of its common stock
in April 2000 and acquired Wynd Communications on June 28, 2000.
On November 7, 2000, we acquired substantially all the assets of Flash
Creative Management, Inc., a provider of consulting services to business
customers in the areas of business improvement, strategy and redesign and in
software development and integration, lines of business that we are currently
not pursuing.
On September 25, 2002, we revised our Go.Web business model by entering
into a series of agreements with EarthLink, Inc. ("Earthlink"), pursuant to
which, among other things, EarthLink purchased all of our Cellular Digital
Packet Data (also known as "CDPD") subscribers and certain other Go.Web
subscribers, EarthLink provides billing, collections and customer service to our
Go.Web customers, and EarthLink and GoAmerica collaborated on marketing each
other's services and developing new applications for and extensions of existing
technologies and services. The initial term of this relationship with EarthLink
was two years and it has continued to operate on substantially similar terms;
however, we cannot predict at this time whether this arrangement will be
extended, terminated or restructured.
3
OUR BUSINESS
GoAmerica's strategy is to focus its resources on providing a variety of
accessible communications services to people who are deaf, hard of hearing
and/or speech impaired. According to the American Speech and Hearing
Association, more than 28 million Americans currently experience some level of
significant hearing loss.
At December 31, 2004, GoAmerica had approximately 7,400 Wynd
Communications subscribers and approximately 48,700 Go.Web subscribers, from
which we receive, directly or indirectly, monthly subscription fees and, to a
lesser degree, usage fees. Throughout 2004, the number of Wynd Communications
subscribers decreased, in part due to migration to newer networks and devices
offered by wireless carriers and in part due to our strengthening of our credit
profile requirements. Accordingly, we have been shifting our business emphasis
from the resale of network airtime to a more concentrated effort on value added
services, which we believe will result in a lower overall cost structure and
higher gross margin contribution from our wireless revenue streams. This shift
has also permitted us to restructure our previous agreement with Communications
Services for the Deaf ("CSD") to serve as our outsourced provider for customer
support during nights and weekends. Our relationship with CSD enables our
customers to contact us via voice, TTY, or email on a 7 x 24 basis.
The subscription and value added services currently offered by Wynd
Communications are WyndTell and WyndPower, which enable deaf, hard of hearing
and/or speech-impaired users to communicate with co-workers, friends, family
members, and AAA Emergency Roadside service, by means of wireless devices, using
communications options such as email, fax, paging, text-to-speech, Text
Telephone ("TTY", sometimes referred to as "TDD") messaging, and operator
assisted services as well as access to the Internet.
In addition to wireless subscription and value added services, we
currently offer two forms of Internet Relay service: a wireless service marketed
in conjunction with Sprint Corporation, which launched in August 2004, and, as
of March 24, 2005, our i711.com(TM) branded Internet service, which uses Nordia,
Inc.'s technology platform and relay operators (also referred to as
Communication Assistants or "CA's") to facilitate calls. Our wireless relay
service called Sprint Relay Wireless(TM), which launched in May 2004, permits
deaf consumers to contact a Telecommunications Relay Service, or "TRS", operator
to place a "live" call using certain wireless handheld devices. TRS generally,
enables standard voice telephone users to talk to people who have difficulty
hearing or speaking on the telephone by having a Communications Assistant
interpret for both parties.
Substantially all TRS, including our Internet Relay services, are free to
the consumers who use them. Like the other relay service providers, we receive
payment indirectly from the federal government based on relay minutes used that
are initiated on our particular service. The Federal Communications Commission
requires all telephone common carriers to pay certain amounts to a central
reimbursement fund, establishes a per-minute reimbursement rate and authorizes
the National Exchange Carriers Association to administer the payments to service
providers like us from the reimbursement fund. To date, our Internet Relay
services have not been a significant source of revenue, we do not know if our
services will initiate a critical mass of communication minutes, and we do not
know if the current and future per-minute reimbursement rates will increase,
decrease or remain substantially the same as current levels. (see "Business -
Government Regulation")
4
For a person that is deaf or severely hard of hearing, the TTY or TDD, a
text-based communications instrument that operates in North America using an
outdated Baudot 45.5 protocol, had historically been the centerpiece of
telecommunications accessibility, usually requiring a wireline connection. The
size and weight of most TTY devices and the slow transmission speed of the
Baudot protocol makes communicating "on-the-go" a difficult task for a deaf
individual. Over the years, advances in regulatory policy and technology have
vastly improved the level of communications accessibility available to deaf
consumers nationwide. (see "Business - Government Regulation").
Although some people who are deaf or hard of hearing are still able to use
voice-based communications services, TRS are a basic necessity for those within
this segment of the population who are profoundly deaf or speech impaired. The
Internet Relay and Video Relay sectors of TRS are growing steadily due to
broadband technology developments and the prevalence of the Internet. Internet
Relay is available to anyone who has access to the Internet via a computer,
wireless handheld device, Web-capable telephone or any other Internet
Protocol-based device. Unlike traditional TRS, where a TTY user contacts a TRS
center via telephone lines and the CA at the TRS center calls the receiving
party via voice telephone, the first leg of an Internet Relay call goes from the
caller's computer or other Web-capable device, to the TRS relay center via the
Internet. With the development of multiple Internet Relay services, deaf
consumers now can choose their own relay provider rather than being required to
use the provider for the State in which they live. We developed our i711.com web
portal and service with distinctive calling features and a community orientation
in order to be perceived as user friendly, familiar and a preferred Internet
Relay service.
Video Relay services enable individuals who use American Sign Language to
use video equipment to make calls by communicating with a CA, who interprets the
initial message into either speech or text and signs back the hearing party's
response. We do not presently offer a Video Relay service; however, we intend to
explore opportunities to be able to offer Video Relay services in the future.
We believe that the potential market for wireless and relay communications
services among deaf and hard of hearing consumers is largely underserved,
providing us with opportunities for additional growth.
We seek to deepen penetration within our installed subscriber base and
expand the breadth of our overall customer base by distinguishing our current
and future offerings with value added solutions and, subject to capital
constraints, through increased marketing activities. In September 2004, we
launched our GA Prepaid division and expanded our product portfolio by
commencing to offer prepaid products and services, such as domestic and
international calling cards, prepaid cellular/wireless telephones and related
services. We are in the process of obtaining certification of our prepaid
telephones for use with hearing aids. On December 1, 2004, we acquired certain
assets from Global Interactive, an established provider of wireless products,
services and accessories, including the proprietary BerryPac(TM), which includes
a custom designed carrying case for RIM's Blackberry wireless devices.
5
Our GA Prepaid telephone calling cards are marketed to U.S. consumers, for
whom prepaid calling cards are a primary means of domestic and international
telecommunications, under a variety of brand names, including Cafe' Con Leche,
Caribbean Express(TM) and Caribbean Queen(TM), Canela(TM), Charitto(TM), El
Gordo(TM), GA Worldwide(TM), Mi Sueno(TM), and Ta Mejor(TM). Cards are sold in
various denominations through non-exclusive distributors, the majority of which
are currently located in the northeastern U.S. Revenues derived from sales of
our prepaid calling cards are deferred upon sale of the cards and recognized
upon the earlier of the card being fully utilized or its expiration, which is 90
days from the date of first usage.
We have established our own telecommunications switching platform, using a
combination of dedicated lines and Voice-over-Internet Protocol (VOIP)
technology as the underlying network architecture. Our switching platform
connects to multiple tier-1 and tier-2 carriers that terminate traffic for us in
over 250 countries and territories.
In addition to prepaid calling cards, in March 2005, we began selling
prepaid wireless services, consisting of a new Clear Mobile(TM) wireless handset
with approximately 100 prepaid minutes of use on Cingular's network. Consumers
can purchase Clear Mobile refill cards by various means, including from
authorized retail outlets or distributors, from us directly and via certain
websites. Additionally, some competitor refill cards can be utilized with our
phones for which we would not receive revenue. Our prepaid wireless services can
be used nationally, however our current distribution is primarily in the
northeast U.S. due to our recent service rollout and our corporate location in
that geographic market.
Our Global Interactive product lines provides, among other things, the
opportunity to sell wireless communications devices and earns commissions
through the acquisition of subscribers on behalf of various network providers
with which we do not otherwise have reseller agreements.
We continue to support wireless data technology, applications and software
that address the productivity and communications needs of enterprise customers
and consumers. In the enterprise market, our solutions are primarily based on
our proprietary software technology called Go.Web. By utilizing Go.Web,
corporations can improve the productivity of employees by enabling secure
wireless access to corporate data on many wireless computing devices and over
many wireless data networks. Our Go.Web technology can be hosted and supported
in a secure network operations center maintained by GoAmerica or its third party
outsourcing provider.
6
SALES AND MARKETING
Sales
We currently sell our services and solutions through two primary channels
of distribution: direct and indirect. As of March 1, 2005, we had 4 employees
working in our sales department.
Direct Distribution. Direct distribution methods consist of those channels
in which our personnel actively assist the customers with placing orders,
currently comprised of our sales professionals and our DeafWireless
Superstore(TM), an online shopping portal designed for people who are deaf or
hard of hearing. Our telesales representatives respond to queries generated as a
result of Web site visits and our marketing efforts, which usually contain our
toll-free sales telephone and TTY numbers.
Indirect Distribution. Indirect distribution methods consist of those
channels where our distribution alliance partners take the order directly from
the customers or refer customers to one of our direct sales representatives.
With indirect distribution, we capture new business through dealers and value
added resellers.
Dealers offer our products and services to their customers and are paid a
commission for each sale. A dealer's commission may consist of a one-time bounty
only or may include a small percentage of revenues generated by their customers.
Dealers are not responsible for billing or supporting the customer.
Value added resellers buy our services at a discounted wholesale price and
then sell these services to their customers at a retail price. Resellers are not
paid a commission. Resellers are responsible for selling the GoAmerica service
and mobile devices, and billing and supporting the customer. We are responsible
for billing the reseller.
Marketing
We typically deploy a marketing mix consisting of direct mail, Internet
direct response, print ads in periodicals aimed at deaf and hard of hearing
audiences, and tradeshow sponsorship and support. As of March 1, 2005, we had 3
employees working in our marketing department.
TECHNOLOGY AND OPERATIONS
Service Infrastructure
Data Center. We consolidated our Go.Web and WyndTell production systems
into a single data center operated by a third party during April 2004. This new
outsourced facility provides mission critical services to a variety of large
corporate clients. Our outsourcing strategy provides our customers with the
highest levels of reliability while enabling our Company to operate with a lower
overall cost structure. We believe this data center is capable of meeting the
capacity demands and security standards for services we have developed or are
developing for our customers. Technical personnel will monitor network traffic,
service quality, and security continually.
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Wireless Networks. Through our relationships with leading wireless
services providers, we are able to offer our customers the ability to use our
wireless solutions in most major metropolitan areas in the continental U.S. and
parts of Canada. We are a dealer for a variety of wireless network providers,
and, in other cases, we provide wireless services directly to our customers
through reseller agreements with wireless network operators such as Velocita
(formerly Cingular Interactive), Motient and Metrocall (formerly WebLink
Wireless). This type of wireless resale offering is primarily limited to our
WyndTell services.
Software Technology
For our Wynd Communications business, we deploy a combination of licensed
technology and custom built software. This technology gives our customers access
to wireless messaging and information services specifically geared toward the
needs of the deaf and hard of hearing users. We have developed and run gateway
technology to connect wireless devices to a variety of traditional TTY devices
as well as our proprietary TTY-based applications. Currently, our Wynd software
supports the RIM-based family of 95X and 85X devices, certain Motorola paging
devices, and the T-Mobile Sidekick, Fido hiptop and SunCom hiptop devices
running on Danger Inc.'s hiptop platform.
For our continuing Go.Web business, we have developed a proprietary
wireless services platform that enables our customers to securely access most
types of Web-based data from many leading wireless devices. The Go.Web platform
also allows qualified developers to introduce standard Web-based applications
for many wireless devices and networks. As a result of our Go.Web development
efforts, our engineering staff has acquired substantial wireless and Web
formatting expertise, which enables us to develop solutions as new wireless
devices are introduced. In addition, the Go.Web compression technology and
enhanced wireless transport protocol included in our software provide bandwidth
efficiency and maximize data transmission speeds. We also have employed industry
standard SSL, or secure sockets layer, and use Certicom's cryptography within
the Go.Web infrastructure.
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Licensed Software Technology
The Velocita (formerly Cingular) Interactive Paging Service, or IPS, is
based on server software that we have licensed. We are one of a limited number
of companies that have deployed an IPS gateway. This service provides two-way
messaging on devices such as the RIM interactive devices.
Customer Service, Billing and Fulfillment
We provide corporate or individual customer billing for all Wynd
Communications customers' subscription fees, devices and modems, and other
related fees. Resellers such as EarthLink provide the majority of customer
support and billing for our Go.Web services. The outsourcing structure enables
us to provide our customers with best-in-class support while minimizing our own
costs of operations.
For product fulfillment, we maintain an inventory of mobile devices for
our Wynd Communications, Global Interactive and Prepaid customers, which we buy
from third-party manufacturers and resellers. EarthLink handles that function
for our Go.Web customers.
COMPETITION
The market for our wireless services is becoming increasingly competitive.
The widespread adoption of industry standards in the wireless data
communications market may make it easier for new market entrants and existing
competitors to introduce services that compete against ours. Our competitors may
use the same products and services in competition with us. With time and
capital, it would be possible for competitors to replicate our services. We
expect that we will compete primarily on the basis of the functionality,
breadth, quality and price of our services.
Many of our existing and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we do, although
none (to our knowledge) are exclusively devoted to consumers who are deaf or
hard of hearing as is our Wynd Communications subsidiary. Despite the lack of
focus, many of these companies may have greater name recognition and may be able
to adopt more aggressive pricing policies and offer customers more attractive
terms than we can. Competitive pressures may have a material adverse effect on
our business and reduce our market share or force us to lower prices to
unprofitable levels.
RESEARCH AND DEVELOPMENT
Most of our product and service offerings are developed internally. We
also purchase and license technology. We continue to enhance the features and
performance of our existing products and services. In addition, we are
continuing to develop new products to meet our customers' expectations of
ongoing innovation and enhancement within our suite of products.
Our ability to meet our customers' expectations depends on a number of
factors, including our ability to identify and respond to emerging technological
trends in our target markets, develop and maintain competitive products, enhance
our existing products by adding features and functionality that differentiate
them from those of our competitors and bring products to market on a timely
basis and at competitive prices. Consequently, we have made, and we intend to
continue to make, investments in research and development, subject to our
capital constraints.
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INTELLECTUAL PROPERTY RIGHTS
We have not yet obtained patents on our technology that would preclude or
inhibit competitors from using our technology. In February 2001, we filed a
patent application on certain aspects of our Go.Web technology. The application
is presently pending in the United States Patent and Trademark Office and has
been filed internationally. Certain aspects of our various technologies rely on
perpetual, royalty-free, worldwide licenses under third party patents relating
to wireless products and services. We rely on a combination of patent,
copyright, trademark, service mark, trade secret laws, unfair competition law
and contractual restrictions to establish and protect certain proprietary rights
in our technology and intellectual property. We have received or applied for
registration of certain of our GoAmerica and Wynd names and marks in the United
States Patent and Trademark Office. The steps taken by us to protect our
intellectual property may not prove sufficient to prevent misappropriation of
our technology or to deter independent third party development of similar
technologies. In addition, the laws of certain foreign countries may not protect
our technologies or intellectual property rights to the same extent as do the
laws of the United States. We also rely on certain technologies that we license
from third parties. These third party technology licenses may not continue to be
available to us on commercially attractive terms. The loss of the ability to use
such technology could require us to obtain the rights to use substitute
technology, which could be more expensive or offer lower quality or performance,
and therefore have a material adverse effect on our business, financial
condition or results of operations. Third parties could claim infringement by us
with respect to current or future technology. We expect that we and other
participants in our markets will be increasingly subject to infringement claims
as the number of services and competitors in our industry segment grows. Any
such claim, whether meritorious or not, could be time consuming, result in
costly litigation, cause service or installation interruptions or require us to
enter into royalty or licensing agreements. Such royalty or licensing agreements
might not be available on terms acceptable to us or at all. As a result, any
such claim could have a material adverse effect upon our business, financial
condition or results of operations.
GOVERNMENT REGULATION
The enactment of the Americans with Disabilities Act of 1990 mandated that
every State implement a system for Telecommunications Relay Services whereby a
deaf consumer, using a TTY connected to the telephone network, could communicate
with a hearing person through the use of a relay operator. The Federal
Communications Commission ("FCC") has oversight responsibility for
Telecommunications Relay Services in the U.S. and maintains guidelines that all
States must follow. These services, beginning statewide in California in 1987
and nationally available since 1992, empowered deaf consumers to expand their
use of the TTY in telephone conversations with hearing parties as well. At the
national level, interstate relay services are funded by FCC-mandated common
carrier contributions to a reimbursement fund that is administered by the
National Exchange Carrier's Association. At the State level, funds for
intrastate relay reimbursement can come from rate payer surcharges, tariff
charges to the local exchange carrier or taxes as administered by the State.
10
We are not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. The
wireless network carriers we contract with to provide airtime are subject to
regulation by the FCC. Changes in FCC regulations could affect the availability
of wireless coverage these carriers are willing or able to sell to us. We could
also be adversely affected by developments in regulations that govern or may in
the future govern the Internet, the allocation of radio frequencies or the
placement of cellular towers. Also, changes in these regulations could create
uncertainty in the marketplace that could reduce demand for our services or
increase the cost of doing business as a result of costs of litigation or
increased service delivery cost or could in some other manner have a material
adverse effect on our business, financial condition or results of operations.
We currently do not collect sales or other taxes with respect to the sale
of services or products in states and countries where we believe we are not
required to do so. We do collect sales and other taxes in the State in which we
have an office and are required by law to do so. One or more jurisdictions have
sought to impose sales or other tax obligations on companies that engage in
online commerce within their jurisdictions. A successful assertion by one or
more jurisdictions that we should collect sales or other taxes on our products
and services, or remit payment of sales or other taxes for prior periods, could
have a material adverse effect on our business, financial condition or results
of operations.
Any new legislation or regulation that may be adopted by the United States
Congress to regulate the Internet, or the application of laws or regulations
from jurisdictions whose laws do not currently apply to our business, could have
a material adverse effect on our business.
EMPLOYEES
As of March 1, 2005, we had a total of 40 full-time employees. None of our
employees are covered by a collective bargaining agreement. We believe that our
relations with our employees are good.
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ITEM 2. PROPERTIES. REFERENCE NEW LEASE
We own no real property. Our principal offices are located at 433
Hackensack Avenue in Hackensack, New Jersey, consisting of approximately 10,000
square feet that we lease until July 2007. On November 14, 2003, GoAmerica and
our GoAmerica Communications Corporation subsidiary entered into two agreements
with Stellar Continental LLC ("Stellar"), the then lessor of our corporate
headquarters at 433 Hackensack Avenue and our former office at 401 Hackensack
Avenue, both located in Hackensack, New Jersey. The agreements consisted of a
Surrender Agreement and a new Lease Agreement as well as a Common Stock purchase
warrant. These agreements enabled us and our subsidiary to cure all prior
defaults under the previous lease, which we refer to below as the "Original
Lease", and terminated all parties' rights and obligations under the Original
Lease, in exchange for (i) Stellar's, or its successors' right to retain
$555,755 previously drawn on a letter of credit of ours that secured the
Original Lease, (ii) our issuing a warrant to Stellar that allows it to acquire
up to 12,500 shares of our Common Stock at an exercise price of $36.80 per share
at any time prior to the close of business on November 13, 2008, and (iii) the
execution of a new lease, between our GoAmerica Communications Corporation
subsidiary and Stellar for office space at 433 Hackensack Avenue, Hackensack,
New Jersey. This new lease was entered into as of August 1, 2004. These
agreements relieved us of approximately $8.1 million of future minimum payments
on operating lease obligations. These agreements also require us to rent from
Stellar's successor any new office space in New Jersey that we require during
the term of the new lease, on terms no less favorable than the new lease.
The offices of Wynd Communications formerly located in San Luis Obispo,
California, consisting of approximately 7,400 square feet, were consolidated
with our Hackensack, New Jersey office during the first half of 2004.
In April 2004, we consolidated all of our network operations to a
co-location third party facility in Leonia, New Jersey. The agreement under
which we operated our approximately 7,000 square foot New York City network
operating center expired on February 29, 2004. We believe that our current
facilities are adequate to support our existing operations subject to any credit
or liquidity matters discussed in "Risk Factors".
ITEM 3. LEGAL PROCEEDINGS.
On February 15, 2002, Eagle Truck Lines Inc. (also known as Air Eagle,
Inc.) filed suit against GoAmerica, Inc. in the Superior Court of the State of
California for the County of Los Angeles seeking payment of $590,000, plus other
damages, expenses, interest and costs of suit. This action was removed to the
United States District Court for the Central District of California and
subsequently, pursuant to a motion brought by GoAmerica, transferred to the
District of New Jersey where GoAmerica moved to have it consolidated with the
action described in the next paragraph. Air Eagle alleged that GoAmerica, as
successor in interest to Flash Creative Management, Inc. ("Flash"), failed to
perform its obligations under a consulting contract dated July 2, 1999 (the
"Contract"), by and between Flash and Air Eagle. Air Eagle alleged that
GoAmerica assumed the rights and liabilities under this Contract as a result of
the Company's purchase of substantially all of the assets of Flash in November
2000. On September 19, 2003, Air Eagle filed for Chapter 11 bankruptcy
protection in the United States Bankruptcy Court for the Central District of
California. In December 2004, the parties agreed and received court approval to
settle this litigation in consideration of GoAmerica's paying Air Eagle $140,000
and Air Eagle principals agreeing to assist GoAmerica in the Company's
litigation against the Flash Defendants below.
12
In a separate but related matter, on July 31, 2002, GoAmerica filed suit
against Flash and certain former officers and shareholders of Flash (the "Flash
Defendants") in the United States District Court for the District of New Jersey
for violations of federal and state securities law and common law fraud in
connection with the sale of the assets of Flash to GoAmerica. In October 2002,
each of the Flash Defendants filed answers to GoAmerica's complaint denying all
of the Company's charges, with one of the Flash Defendants adding counterclaims
against the Company and certain named officers alleging, among other things,
fraudulent misrepresentation, violations of state securities law and unjust
enrichment in excess of $1 million. The other Flash Defendants have been granted
leave to amend their answer to include substantially similar counterclaims
against the Company and Company officer defendants. The Company filed a motion
to dismiss the Flash Defendants' counterclaims, and the Flash Defendants filed
cross-motions for judgment on the pleadings and for summary judgment seeking
dismissal of the Company's claims against them. On March 2, 2005, all of the
Flash Defendants' counterclaims against the Company and the Company officer
defendants were dismissed, and the Flash Defendants' cross-motions to dismiss
the Company's claims against them were denied in all respects other than the
common law fraud claim. The Company is exploring its options as a result of
these favorable dismissals.
In September 2003, Michael Marts, an individual residing in California,
sued Boundless Depot, Scott Johnson and Robert Rademacher (collectively, the
"Boundless Depot Defendants"), among others, with respect to claims for breach
of contract by some or all of the Boundless Depot Defendants. Wynd
Communications was named as a co-defendant in this action (the "Marts Action")
as the successor-in-interest to the Deafwireless assets that Wynd and the
Company acquired as of March 1, 2003 from the Boundless Depot Defendants
pursuant to an asset purchase agreement dated as of February 8, 2003 (the
"Deafwireless Agreement"). All of the claims, aggregating approximately
$433,000, arose prior to execution of the Deafwireless Agreement, with more than
half of the damages claimed arising prior to 2003. Wynd and the Company are no
longer parties to the Marts Action pursuant to their motion to dismiss being
granted on March 17, 2005.
In a separate but related matter, on September 22, 2004, two of the
Boundless Depot Defendants sued GoAmerica and Wynd Communications in the
Superior Court of the State of California for the County of Los Angeles,
claiming damages of one million dollars for GoAmerica's refusal to pay
unattained contingent consideration, comprising cash and/or GoAmerica Common
Stock, to Boundless Depot in connection with the Deafwireless Agreement. We
believe that the contractual contingencies of the Deafwireless Agreement were
not met and that the Boundless Depot Defendants remain in breach of their
indemnity obligations under the Deafwireless Agreement with respect to the Marts
Action; therefore the Company does not believe that any of the contingent
consideration is owed. Moreover, even if all contingencies under the
Deafwireless Agreement had been attained, the Company believes that the damages
claimed in this case are excessive since the aggregate value of such contingent
consideration would not be material. The Company intends to defend this action
vigorously and may elect to pursue counterclaims.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on December 17, 2004. There
were present at the Annual Meeting, in person or by proxy, stockholders holding
an aggregate of 1,451,978 shares of Common Stock out of a total number of
2,039,565 shares of Common Stock issued and outstanding and entitled to vote at
the Annual Meeting. The results of the vote taken at such Annual Meeting with
respect to the election of the nominees to be our Class A directors as elected
by the holders of the Common Stock to hold office until the 2007 Annual Meeting
were as follows:
Nominees For Withheld
--------- --- --------
Joseph Korb 1,449,497 2,481
Mark Kristoff 1,450,669 1,309
Daniel Luis and David Lyons, who was appointed to our Board on October 21,
2004, continued their terms as Class B directors, which term expires at the 2005
Annual Meeting of Stockholders. Aaron Dobrinsky, Alan Docter and King Lee
continued their terms as Class C directors, such terms expiring at the 2006
Annual Meeting of Stockholders.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table identifies the current executive officers of the
Company:
CAPACITIES IN IN CURRENT
NAME AGE WHICH SERVING POSITION SINCE
- ---- --- ------------- --------------
Daniel R. Luis 38 Chief Executive Officer and Director 2003
Donald Barnhart 47 Chief Financial Officer 2004
Jesse Odom 39 Chief Technology Officer 2000
Wayne D. Smith 46 Executive Vice President, General Counsel 2005
and Secretary
14
- ------------
Daniel Luis joined our Board of Directors in January 2003 at the time he
was elected our Chief Executive Officer. He previously served as our President
and Chief Operating Officer from May 2002 until January 2003. Mr. Luis is also
President and Chief Executive Officer of Wynd Communications Corporation, which
became a wholly owned subsidiary of GoAmerica in June 2000. Mr. Luis joined Wynd
in 1994 and has held his current positions with Wynd since 1998.
Donald Barnhart joined GoAmerica in 1999 and became its Vice President and
Controller in 2000. He was appointed Chief Financial Officer in March 2004.
Prior to joining GoAmerica, Mr. Barnhart was employed by Bogen Communications (a
telecommunications manufacturer) as its Accounting Manager and operated his own
accounting and consulting firm. Mr. Barnhart is a CPA in New Jersey.
Jesse Odom joined GoAmerica in 1996 as Vice President of Network
Operations. He was appointed Chief Technology Officer in November 2000. Prior to
joining GoAmerica.
Wayne Smith joined GoAmerica in May 2002 as Vice President, General
Counsel and was appointed corporate Secretary in November 2003. He was appointed
Executive Vice President, General Counsel and Secretary in March 2005. Prior to
joining GoAmerica, Mr. Smith held a variety of legal and staff positions with
Viacom Inc. (a diversified entertainment company) from 1985 to 2001, most
recently serving as Vice President, Corporate Counsel.
None of our executive officers is related to any other executive officer
or to any director of the Company. Our executive officers are elected annually
by the Board of Directors and serve at the pleasure of the Board of Directors.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET FOR OUR COMMON STOCK
Our common stock traded on the Nasdaq National Market from our initial
public offering in April 2000 until August 28, 2002, at which time our listing
moved to the Nasdaq Small Cap Market, where it continues to trade under the
symbol "GOAM".
The following table sets forth the high and low sales prices for our
common stock for the quarters indicated as reported on the Nasdaq National
Market and Nasdaq SmallCap Market.
QUARTER ENDED HIGH LOW
---------------------------------------------------------------------
March 31, 2003............. $36.80 $16.80
June 30, 2003.............. $59.20 $12.00
September 30, 2003......... $44.80 $19.20
December 31, 2003.......... $82.40 $23.20
March 31, 2004............. $56.80 $14.40
June 30, 2004.............. $20.00 $6.32
September 30, 2004......... $6.88 $2.56
December 31, 2004.......... $14.50 $2.48
As of March 24, 2005, the approximate number of holders of record of our
common stock was 100 and the approximate number of beneficial holders of our
common stock was 12,135.
The market price of our common stock has fluctuated since the date of our
initial public offering and is likely to fluctuate in the future. Changes in the
market price of our common stock and other securities may result from, among
other things:
o Quarter-to quarter variations in operating results
o Operating results being less than analysts' estimates
o Changes in analysts' earnings estimates
o Announcements of new technologie, products and services or pricing
policies by us or our competitors
o Announcements of acquisitions or strategic partnerships by us or our
competitors
o Developments in existing customer or strategic relationships
o Actual or perceived changes in our business strategy
o Developments in pending litigation and claims
o Regulatory developments
o Sales of large amounts of our common stock
o Changes in market conditions in wireless technology and wireless
telecommunication
o Changes in general economic conditions
o Fluctuations in securities markets in general.
16
On August 27, 2003, the Company received a letter from the Nasdaq Stock
Market ("Nasdaq") Staff stating that the Company's Common Stock was scheduled to
be delisted from the Nasdaq Smallcap Market due to the Common Stock's
non-compliance with the $1 minimum bid price per share requirement as set forth
in Nasdaq Marketplace Rule 4310 (C) (4). The Company appealed the Nasdaq Staff
Determination and subsequently the Nasdaq Listings Qualifications Panel granted
the Company a series of temporary exceptions, until May 31, 2004, to regain
compliance with the minimum price requirement since the Company continued to
meet all of the other listing requirements. On May 14, 2004, the Company filed
an amendment to its Amended and Restated Certificate of Incorporation to effect
a reverse stock split at a ratio of one-for-ten that had been previously
authorized by the Company's stockholders at a Special Meeting of Stockholders on
March 10, 2004. The closing bid price per share of the Company's Common Stock
did not close at or above $1 during the entire compliance period and on June 3,
2004, the Nasdaq Staff sent a letter to the Company stating that the Company's
Common Stock was scheduled to be delisted from the Nasdaq Smallcap Market due to
the Common Stock's non-compliance with the $1 minimum bid price per share
requirement as set forth in Nasdaq Marketplace Rule 4310 (C) (4). The Company
appealed the Nasdaq Staff Determination and, on August 18, 2004, the Nasdaq
Listing Qualifications Panel granted the Company a temporary exception through
October 4, 2004, with interim deadlines for certain actions the Company needed
to complete as part of the process of remedying its bid price deficiency. On
October 1, 2004, the Company filed an amendment to its Amended and Restated
Certificate of Incorporation to effect a reverse stock split at a ratio of
one-for-eight that had been authorized by the Company's stockholders at a
Special Meeting of Stockholders on September 30, 2004. On October 20, 2004, the
Nasdaq Listing Qualifications Panel notified the Company that its bid price
deficiency had been remedied and that the Company's Common Stock would continue
to be listed on The Nasdaq SmallCap Market.
The following table gives information about the Company's Common Stock
that my be issued upon the exercise of options, warrants and rights under the
Company's GoAmerica, Inc. 1999 Stock Plan and GoAmerica Communications Corp.
1999 Stock Option Plan as of December 31, 2004. These plans were the Company's
only equity compensation plans in existence as of December 14, 2004.
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE
(A) (B) ISSUANCE UNDER EQUITY
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE COMPENSATION PLANS
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND REFLECTED IN
WARRANTS AND RIGHTS RIGHTS COLUMN (A))
------------------- ------------------------ -----------------------
Equity Compensation Plans
Approved by
Shareholders............. 212,746 $ 100.42 57,028
Equity Compensation Plans
Not Approved by
Shareholders ............ -- -- --
Total.................... 212,746 $ 100.42 57,028
========= ========= =======
17
RELATED STOCKHOLDER MATTERS
We have never declared or paid any cash dividends on our common stock. We
intend to retain earnings, if any, to fund future growth and the operation of
our business.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below with respect to
our statement of operations data for the years ended December 31, 2004, 2003 and
2002, and with respect to the consolidated balance sheet data at December 31,
2004 and 2003 are derived from and are qualified by reference to our audited
consolidated financial statements and related notes thereto presented elsewhere
herein. Our selected consolidated statement of operations data for the years
ended December 31, 2001 and 2000 and consolidated balance sheet data as of
December 31, 2002, 2001 and 2000 are derived from audited consolidated financial
statements not included in this Annual Report on Form 10-K. The selected
consolidated financial data set forth below should be read in conjunction with,
and is qualified in its entirety by, our audited consolidated financial
statements and related notes thereto and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations", which are included
elsewhere in this Annual Report on Form 10-K.
18
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Subscriber ....................... $ 5,588 $ 10,108 $ 29,017 $ 28,308 $ 8,535
Equipment ........................ 181 1,042 6,560 10,088 5,097
Other ............................ 453 728 335 618 242
--------- --------- --------- --------- ---------
Total revenue ...................... 6,222 11,878 35,912 39,014 13,874
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of subscriber revenue ....... 2,539 2,669 20,434 22,578 7,194
Cost of equipment revenue ........ 260 1,152 8,537 20,665 6,090
Cost of network operations ....... 733 1,828 3,074 3,264 623
Cost of other revenue ............ 201 -- -- -- --
Sales and marketing .............. 597 1,072 8,038 24,700 35,807
General and administrative ....... 5,625 9,617 29,082 40,685 26,853
Research and development ......... 507 1,209 3,456 4,174 762
Depreciation and amortization of
fixed assets .................. 804 1,912 4,342 2,987 994
Amortization of goodwill and other
intangibles ................... 682 1,081 1,483 18,398 7,247
Impairment of goodwill ........... -- 193 8,400 12,991 --
Impairment of other intangible
assets ........................ -- -- -- 12,423 --
Impairment of other long-lived
assets ........................ -- 1,202 5,582 97 --
--------- --------- --------- --------- ---------
Total costs and expenses ........... 11,948 21,935 92,428 162,962 85,570
--------- --------- --------- --------- ---------
Loss from operations ............... (5,726) (10,057) (56,516) (123,948) (71,696)
Other income:
Gain on sale of subscribers ...... -- 1,756 -- -- --
Settlement gains, net ............ 1,494 85 -- -- --
Interest (expense) income, net ... (944) (275) 191 3,099 6,944
--------- --------- --------- --------- ---------
Total other income ................. 550 1,566 191 3,099 6,944
--------- --------- --------- --------- ---------
Net loss before benefit from income
taxes ............................ (5,176) (8,491) (56,325) (120,849) (64,752)
Income tax benefit ................. 732 284 436 578 --
--------- --------- --------- --------- ---------
Net loss ........................... (4,444) (8,207) (55,889) (120,271) (64,752)
Beneficial conversion feature and
accretion of redemption value of
mandatorily redeemable convertible
preferred stock .................. -- -- -- -- (30,547)
--------- --------- --------- --------- ---------
Net loss applicable to common
stockholders ..................... $ (4,444) $ (8,207) $ (55,889) $(120,271) $ (95,299)
========= ========= ========= ========= =========
Basic net loss per share applicable
to common stockholders ........... $ (2.49) $ (12.10) $ (83.04) $ (181.45) $ (175.56)
========= ========= ========= ========= =========
Diluted net loss per share
applicable to common stockholders $ (2.49) $ (12.10) $ (83.00) $ (180.34) $ (174.55)
========= ========= ========= ========= =========
Weighted average shares used in
computation of basic net loss per
share applicable to common
stockholders ..................... 1,785 678 673 663 543
Weighted average shares used in
computation of diluted net loss
per share applicable to common
stockholders ..................... 1,785 678 673 667 546
19
AS OF DECEMBER 31,
--------------------------------------------------------
(IN THOUSANDS)
2004 2003 2002 2001 2000
--------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents ........ $ 7,098 $ 568 $ 4,982 $ 34,977 $114,411
Working capital (deficit) ........ 8,530 (2,656) (1,037) 33,292 113,530
Total assets ..................... 17,986 12,965 26,765 87,785 207,746
Total stockholders' equity ....... 16,814 7,142 13,017 66,413 181,530
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
You should read the following discussion of our financial condition and
results of operations in conjunction with the consolidated financial statements
and the notes thereto included elsewhere in this Annual Report on Form 10-K. The
results shown in this Annual Report of Form 10-K are not necessarily indicative
of the results we will achieve in any future periods.
OVERVIEW
GoAmerica(R) is a wireless data communications service provider, offering
solutions primarily for consumers who are deaf, hard of hearing and/or
speech-impaired, including wireless subscription and value added services,
Internet relay services and wireless devices and accessories. Wynd
Communications Corporation, a wholly owned subsidiary of GoAmerica, offers
enhanced services known as WyndTell(R) and WyndPower(TM), which assist our deaf
or hard of hearing customers in communicating from most major metropolitan areas
in the continental United States and parts of Canada. GoAmerica continues to
offer wireless data products and services to the consumer and enterprise markets
as well as support customers who use our proprietary software technologu called
Go.Web(TM). GoWeb is designed for use mainly by enterprise customers to enable
secure wireless access to corporate date and the Internet on numerous wireless
computing devices. In September 2004, we launched our GA Prepaid(TM) division
and expanded our product portfolio by commencing to offer prepaid products and
services, such as domestic and international calling cards, prepaid
cellular/wireless telephones and related services. On December 1, 2004, we
acquired certain assets from Global Interactive(TM), an established provider of
wireless products, services and accessories.
Historically, we have derived our revenue primarily from the sale of basic
and value-added wireless data services and the sale of related mobile devices to
our subscribers. During March 1997, we commenced offering our services to
individuals and businesses. Since our inception, we have invested significant
capital to build our wireless network operations and e-commerce system as well
as our billing system. We have invested additional capital in the development of
our software applications Go.Web and Mobile Office(R) as well as other software
applications. We have provided mobile devices made by third parties to our
customers at prices below our costs for such devices. We have incurred operating
losses since our inception and expect to continue to incur operating losses for
a portion of the fiscal year ending December 31, 2005. We will need to
significantly improve our overall gross margins, and further reduce our selling,
general and administrative expenses to become profitable and sustain
profitability on a quarterly or annual basis. We will seek to grow Wynd's
business through additional strategic alliances or new service offerings. As a
result of our strategic alliance with EarthLink, Inc., or EarthLink, we
experienced an overall decline in revenue while gross margins increased and
selling, marketing and administrative declined. We have generated and may
continue to generate revenues from EarthLink from three primary sources: (i)
recurring service revenue; (ii) software revenue; and (iii) activation bounties.
We have substantially reduced our costs of subscriber airtime and operating
costs as a result of our relationship with EarthLink.
20
Our subscriber revenue primarily consists of monthly service fees, which
we recognize as revenue when the services are provided to the subscriber.
Subscriber revenue accounted for approximately 89.8%, 85.1% and 80.8% of our
total revenue during 2004, 2003 and 2002, respectively. Historically, we offered
a variety of mobile data service plans. Our consumer plans, which are marketed
through Wynd, provide data usage on multiple mobile devices through variable and
fixed monthly fees ranging from $9.95 to $39.95. In the enterprise market, we
provide unlimited data usage on any mobile device for a fixed monthly fee, which
currently ranges from $1.25 to $17.95. We will continue to derive recurring
subscriber revenue from our consumer channels and through the sale of our Go.Web
software. We also typically sell third-party mobile devices in conjunction with
a service agreement to a new subscriber. Equipment revenue accounted for
approximately 2.9%, 8.8% and 18.3% of our total revenue during 2004, 2003 and
2002, respectively. We recognize equipment revenue at the time of the shipment
of the mobile device to a subscriber.
In addition to our subscriber and equipment revenue, we historically have
generated other revenue which consists of consulting services relating to the
development and implementation of wireless data systems for certain corporate
customers. We anticipate that our professional service revenues will decrease as
a percentage of our total revenues during 2005 from prior year levels.
Additionally, we anticipate during 2005 that the amount of our non-recurring
bounty revenues we receive from EarthLink and other wireless providers for
selling their wireless services and other product offerings to increase as
compared with 2004 levels.
Our sales and marketing expenses consist primarily of compensation and
related costs for marketing personnel, advertising and promotions, travel and
entertainment and other related costs. We expect sales and marketing expenses to
increase as a percentage of sales during 2005 as compared to 2004 as we
introduce new products and services to the consumer marketplace. Our general and
administrative expenses consist primarily of compensation and related costs for
general corporate and business development, along with rent and other related
costs. We expect general and administrative expenses to decrease as a percentage
of our annual revenues. Our research and development expenses consist primarily
of compensation and related costs and professional service fees. Depreciation
and amortization expenses consist primarily of depreciation expenses arising
from equipment purchased for our network operations center and other property
and equipment purchases.
21
During 1999 and the first quarter of 2000, we granted options to certain
of our employees at exercise prices below the deemed fair market value per share
of our common stock. Such grants resulted in non-cash employee compensation
expenses based on the difference, on the date of grant, between the fair market
value and the exercise price of stock options granted to employees. The
resulting deferred employee compensation is being amortized over the vesting
periods of the grants. During 2003, we incurred an aggregate of $314,000 in
non-cash employee compensation, representing the remaining balance of deferred
compensation, as a result of stock option and warrant grants during 1999 and the
first quarter of 2000 which were granted at prices below the fair market value
of our common stock.
Net interest expense consists primarily of amortization of deferred debt
expense and is partially offset by interest earned on cash and cash equivalents.
We expect interest expense to decrease during 2005 as compared with 2004 as a
result of the deferred debt described above being fully amortized as of December
31, 2004.
During 2001, we acquired OutBack Resource Group, Inc., a software
development company. The total purchase price of approximately $148,000 included
the issuance of 1,687 shares of common stock valued at $76.80 per share and
warrants issued at the date of acquisition with an estimated fair market value
of approximately $19,000 to purchase an aggregate of 843 shares of our common
stock at an exercise price of $240.00 per share. As a result of this
acquisition, we recorded intangibles of approximately $193,000.
During 2003, we identified indicators of possible impairment of our
long-lived assets, principally goodwill recorded with regard to the acquisition
of Outback. Such indicators included the continued deterioration in the business
climate for wireless Internet service providers, significant declines in the
market values of our competitors in the wireless Internet services industry,
recent changes in our 2004 operating and cash flow forecasts, and changes in our
strategic plans for certain of our acquired businesses. We determined that the
carrying value of these long-lived assets exceeded their respective fair values,
thus requiring a write-down totaling $193,000 of goodwill associated with
Outback.
On December 19, 2003, we announced plans for a strategic re-focusing
premised on a financing that we completed in 2004. Our strategy is centered on
the pursuit of three priorities, centered on the market currently serviced by
our Wynd Communications subsidiary:
o growth of Wynd Communications' core wireless services business;
o development and marketing of new communications services, including
branded Internet protocol and video relay services; and
o streamlined operations to enable superior customer support.
22
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our condensed consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, allowance for
doubtful accounts, inventory valuation and recoverability of our intangible
assets. Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. Historically, we have
derived our revenue primarily from the sale of basic and value-added wireless
data services and the sale of related mobile devices. Subscriber revenue
consists primarily of monthly charges for access and usage and is recognized as
the services are provided. We also generally charge a non-refundable activation
fee upon initial subscription. Equipment revenue is recognized upon shipment to
the end user. We estimate the collectibility of our trade receivables. A
considerable amount of judgment is required in assessing the ultimate
realization of these receivables, including analysis of historical collection
rates and the current credit-worthiness of significant customers. Significant
changes in required reserves have been recorded in recent periods and may occur
in the future due to the current market conditions. We write down inventory for
estimated excess or obsolete inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required. In assessing the recoverability of our goodwill, other intangibles and
other long-lived assets, we must make assumptions regarding estimated future
cash flows. If such assumptions change in the future, we may be required to
record impairment charges for these assets not previously recorded.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of revenue:
PERCENTAGE OF REVENUE
---------------------------------------
YEARS ENDED
DECEMBER 31,
---------------------------------------
2004 2003 2002
-------- -------- --------
Revenue:
Subscriber...................................... 89.8% 85.1% 80.8%
Equipment....................................... 2.9 8.8 18.3
Other........................................... 7.3 6.1 0.9
-------- -------- --------
Total revenue............................... 100.0 100.0 100.0
Costs and expenses:
Cost of subscriber revenue...................... 40.8 22.5 56.9
Cost of equipment revenue....................... 4.2 9.7 23.8
Cost of network operations...................... 11.8 15.4 8.6
Cost of other revenue........................... 3.2 -- --
Sales and marketing............................. 9.6 9.0 22.4
General and administrative...................... 90.4 81.0 81.0
Research and development........................ 8.1 10.2 9.6
Depreciation and amortization of fixed assets... 12.9 16.1 12.1
Amortization of other intangibles............... 11.0 9.1 4.1
Impairment of goodwill.......................... -- 1.6 23.4
Impairment of other long-lived assets........... -- 10.1 15.5
--------- -------- --------
Total costs and expenses.................... 192.0 184.7 257.4
-------- -------- --------
Loss from operations........................ 92.0 84.7 157.4
Other income (expense)............................... 8.8 13.2 0.5
Income tax benefit................................... 11.8 2.4 1.2
-------- -------- --------
Net loss.................................... 71.4% 69.1% 155.7%
======== ======== ========
23
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Subscriber revenue. Subscriber revenue decreased to $5.6 million for the
year ended December 31, 2004 from $10.1 million for the year ended December 31,
2003. This decrease was primarily due to declines in our full service offering
subscriber base. Our subscriber base decreased to 56,026 subscribers at December
31, 2004 from 75,130 subscribers at December 31, 2003. We expect the number of
our subscribers to remain relatively constant to levels at December 31, 2004.
Our average monthly revenue per user, or ARPU, decreased to $7.10 for the year
ended December 31, 2004 from $10.10 for the year ended December 31, 2003.
Equipment revenue. Equipment revenue decreased to $181,000 for the year
ended December 31, 2004 from $1.0 million for the year ended December 31, 2003.
This decrease was primarily due to lower sales of mobile devices. We anticipate
that equipment revenue may increase slightly as we continue to provide devices
to new subscribers of our Wynd services and due to our recent acquisition of
Global Interactive.
Other revenue. Other revenue decreased to $453,000 for the year ended
December 31, 2004 from $728,000 for the year ended December 31, 2003. This
decrease was primarily due to reduced consulting services. We anticipate that
consulting services will decrease as a result of our decision not to pursue
certain consulting projects and consulting services to third parties during
2005.
Cost of subscriber revenue. Cost of subscriber revenue decreased to $2.5
million for the year ended December 31, 2004 from $2.7 million for the year
ended December 31, 2003. The decrease was primarily due to having a smaller
average subscriber base in the year ended December 31, 2004 than in the year
ended December 31, 2003. Additionally, during the third and fourth quarters of
2003, we recorded one-time reductions of accruals for certain subscriber-related
costs recorded in prior periods of $763,000 and $750,000, respectively. We
expect the number of our subscribers to remain relatively constant to levels at
December 31, 2004.
24
Cost of equipment revenue. Cost of equipment revenue decreased to $260,000
for the year ended December 31, 2004 from $1.2 million for the year ended
December 31, 2003. This decrease was primarily due to lower sales of mobile
devices and was partially offset by an inventory related charge for a lower of
cost to market adjustment primarily related to wireless handheld devices which
remained unsold. We anticipate that equipment revenue may increase slightly as
we continue to provide devices to new subscribers of our Wynd services and due
to our recent acquisition of Global Interactive.
Cost of network operations. Cost of network operations decreased to
$733,000 for the year ended December 31, 2004 from $1.8 million for the year
ended December 31, 2003 as a result of the consolidation of our GoWeb and
WyndTell production systems into a single data center operated by a third party
provider. We expect our cost of network operations to decline as a percentage of
sales during 2005.
Sales and marketing. Sales and marketing expenses decreased to $597,000
for the year ended December 31, 2004 from $1.1 million for the year ended
December 31, 2003. This decrease primarily was due to our consolidation of
operations completed during April of 2004, as well as decreased advertising and
marketing activities. Additionally, during the year ended December 31, 2003, we
recorded a $372,000 one-time reduction of accruals for certain sales and
marketing expenses recorded in prior periods. We expect sales and marketing
expenses to increase as a percentage of sales during 2005 as compared to 2004 as
we introduce new products and services to the consumer marketplace.
General and administrative. General and administrative expenses decreased
to $5.6 million for the year ended December 31, 2004 from $9.6 million for the
year ended December 31, 2003. This decrease primarily was due to our
consolidation of operations completed during April of 2004, as well as decreased
general corporate activities of approximately $500,000, decreased salaries and
benefits for personnel performing general corporate activities of approximately
$1.0 million, amounts paid to third parties for professional services of
approximately $100,000, a decrease in our bad debt expense of approximately
$295,000, and decreased facility costs of approximately $2.0 million. We expect
general and administrative expenses to decline as a percentage of sales during
2005. Additionally, during the fourth quarter of 2003, we recorded one-time
reductions of deferred rent for certain long term lease related costs recorded
in prior periods of $347,000.
Research and development. Research and development expense decreased to
$507,000 for the year ended December 31, 2004 from $1.2 million for the year
ended December 31, 2003. This decrease primarily was due to decreased salaries
and benefits for personnel performing research and development activities. We
expect research and development expenses to remain constant as we utilize
internal resources to develop and maintain our WyndTell, Go.Web and Relay
technologies rather than using outside consultants.
Amortization of other intangibles. Amortization of other intangibles
decreased for the year ended December 31, 2004 to $682,000 from $1.1 million for
the year ended December 31, 2003. This decrease primarily was due to certain of
our other intangibles being fully amortized as of December 31, 2003. We expect
amortization of other intangible assets to decline further as a result of
additional classes of intangible assets becoming fully amortized during 2005.
25
Settlement Gains, net. The Company entered into agreements with certain of
its creditors to relieve the Company of certain debts. As a result, the Company
has recorded settlement gains totaling $1.5 million in 2004.
Interest (expense) income, net. The Company incurred interest expense of
$944,000 for the year ended December 31, 2004 compared to interest expense of
$275,000 for the year ended December 31, 2003. This change was primarily due to
the amortization of deferred debt expense and discount recorded on bridge notes
payable. The majority of this amortization occurred in 2004.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Subscriber revenue. Subscriber revenue decreased to $10.1 million for the
year ended December 31, 2003 from $29.0 million for the year ended December 31,
2002. The decrease was primarily due to having a smaller average subscriber base
in the year ended December 31, 2003 than in the year ended December 31, 2002 as
a result of the sale of our CDPD subscribers, as well as a portion of our
Cingular and Motient network subscribers, to EarthLink during the fourth quarter
2002. Our subscriber base decreased to 75,130 subscribers at December 31, 2003
from 91,384 subscribers at December 31, 2002. Our average monthly revenue per
user, or ARPU, decreased to $10.10 for the year ended December 31, 2003 from
$23.53 for the year ended December 31, 2002. The decline in ARPU was due to an
increase in the number of new subscribers from the sale of our Go.Web value
added services, which generally have a lower monthly ARPU than our full-service
offerings.
Equipment revenue. Equipment revenue decreased to $1.0 million for the
year ended December 31, 2003 from $6.6 million for the year ended December 31,
2002. This decrease was primarily due to our outsourcing of device provisioning
to EarthLink.
Other revenue. Other revenue increased to $728,000 for the year ended
December 31, 2003 from $335,000 for the year ended December 31, 2002. This
increase was primarily due to consulting services provided to Earthlink.
Cost of subscriber revenue. Cost of subscriber revenue decreased to $2.7
million for the year ended December 31, 2003 from $20.4 million for the year
ended December 31, 2002. The decrease was primarily due to having a smaller
average subscriber base in the year ended December 31, 2003 than in the year
ended December 31, 2002 as a result of the sale of our CDPD subscribers as well
as a portion of our Cingular and Motient network subscribers, to EarthLink
during the fourth quarter of 2002. Additionally, during the third and fourth
quarters of 2003, we recorded one-time reductions of accruals for certain
subscriber-related costs recorded in prior periods of $763,000 and $750,000,
respectively.
Cost of equipment revenue. Cost of equipment revenue decreased to $1.2
million for the year ended December 31, 2003 from $8.5 million for the year
ended December 31, 2002. This decrease was primarily due to our outsourcing of
device provisioning to EarthLink, as well as decreased inventory related charges
of approximately $47,000 for the year ended December 31, 2003 compared to $1.6
million for the year ended December 31, 2002 The inventory related charges
primarily relate to wireless modems supporting laptop and older PALM OS based
models for which sales were lower than expected and a charge for a lower of cost
to market adjustment related to other equipment which remained unsold.
26
Cost of network operations. Cost of network operations decreased to $1.8
million for the year ended December 31, 2003 from $3.1 million for the year
ended December 31, 2002.
Sales and marketing. Sales and marketing expenses decreased to $1.1
million for the year ended December 31, 2003 from $8.0 million for the year
ended December 31, 2002. This decrease primarily was due to decreased
advertising and marketing activities of $2.0 million including advertising costs
paid to third parties of approximately $1.3 million and a decrease in salaries
and benefits for personnel performing sales and marketing activities of
approximately $3.5 million. Additionally, during the year ended December 31,
2003, we recorded a $372,000 one-time reduction of accruals for certain sales
and marketing expenses recorded in prior periods.
General and administrative. General and administrative expenses decreased
to $9.6 million for the year ended December 31, 2003 from $29.1 million for the
year ended December 31, 2002. This decrease primarily was due to decreased
professional fees for infrastructure buildout and general corporate activities
of approximately $9.6 million, decreased salaries and benefits for personnel
performing business development and general corporate activities of
approximately $2.7 million, amounts paid to third parties for professional
services of approximately $2.3 million, a decrease in our bad debt expense of
approximately $2.7 million, and decreased facility costs of approximately $1.6
million. Additionally, during the fourth quarter of 2003, we recorded one-time
reductions of deferred rent for certain long term lease related costs recorded
in prior periods of $347,000.
Research and development. Research and development expense decreased to
$1.2 million for the year ended December 31, 2003 from $3.5 million for the year
ended December 31, 2002. This decrease primarily was due to decreased salaries
and benefits for personnel performing research and development activities.
Amortization of other intangibles. Amortization of other intangibles
decreased for the year ended December 31, 2003 to $1.1 million from $1.5 million
for the year ended December 31, 2002. This decrease primarily was due to certain
of our other intangibles being fully amortized as of December 31, 2002.
Impairment of goodwill and other long-lived assets. During the second
quarter of 2003 and third quarter of 2002, we identified indicators of possible
impairment of our long-lived assets, principally goodwill and other acquired
intangible assets recorded upon the acquisitions of Wynd, Hotpaper and Outback.
Such indicators included the continued deterioration in the business climate for
wireless Internet service providers, significant declines in the market values
of our competitors in the wireless Internet services industry, recent changes in
our 2004 operating and cash flow forecasts, and changes in our strategic plans
for certain of our acquired businesses. With the assistance of independent
valuation experts, we performed asset impairment tests and determined the fair
value of the impaired long-lived assets for the respective acquired entities.
Fair value was determined primarily using the discounted cash flow method. A
write-down of goodwill and intangible assets totaling $193,000 and $8.4 million
were recorded during the second quarter of 2003 and third quarter of 2002,
respectively, reflecting the amount by which the carrying amount of the assets
exceed their respective fair values. The write-down consisted of $193,000 and
$8.4 million for goodwill during the second quarter of 2003 and third quarter of
2002, respectively. In addition, impairment charges related to property and
equipment totaling $1.2 million and $5.6 million were recorded during 2003 and
2002, respectively, in accordance with the Statement of Financial Accounting
Standard No. 144, "Accounting for Impairment of Long Lived Assets" and Statement
of Financial Accounting Standard No. 121, "Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of".
27
Gain on sale of subscribers. Gain on sale of subscribers resulted from our
comprehensive strategic alliance whereby EarthLink purchased all of the
Company's cellular digital packet data (CDPD) subscribers as well as certain of
the Company's Cingular and Motient network subscribers. As a result of this
agreement, we recorded a gain on the sale of subscribers of $1,756,000 during
2003.
Settlement Gains, net. The Company entered into agreements with certain of
its creditors to relieve the Company of certain debts. As a result, the Company
has recorded settlement gains totaling $85,000.
Interest (expense) income, net. The Company incurred interest expense of
$275,000 for the year ended December 31, 2003 compared to interest income of
$191,000 for the year ended December 31, 2002. This change was primarily due to
the amortization of deferred debt expense and discount recorded on bridge notes
payable.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we financed our operations through private placements
of our equity securities. We have incurred significant operating losses since
our inception and as of December 31, 2004 have an accumulated deficit of $268.9
million. During 2004, we incurred a net loss of $4.4 million and used $5.5
million of cash to fund operating activities. As of December 31, 2004 we had
$7,098,000 in cash and cash equivalents. In execution of our 2004 operating
plan, we took steps to reduce our annual payroll and took further actions to
reduce sales and marketing expenses. We anticipate continuing to generate
revenues from three primary sources, (i) recurring service revenue; (ii)
software revenue; and (iii) activation bounties. This will be partially offset
by increases in sales and marketing expenditures from levels incurred during
2004 as we introduce new products and services to the consumer marketplace. We
currently anticipate that our available cash resources will be sufficient to
fund our operating needs for at least the next 12 months. At this time, we do
not have any bank credit facility or other working capital credit line under
which we may borrow funds for working capital or other general corporate
purposes.
On December 19, 2003, we entered into definitive agreements with multiple
investors providing for the investors to purchase approximately 1.3 million
shares of our Common Stock, par value $.01 (the "Common Stock"), for an
aggregate purchase price of $14,500 in a private placement offering (the
"Financing"). As part of this Financing, on December 19, 2003, we received net
proceeds of approximately $800 from the issuance of 10% Senior Secured
Convertible Promissory Notes (the "Notes") and certain warrants. The Notes were
purchased by the investors at their par value in proportional amounts to their
aggregate investment commitments in the Financing. Upon stockholder approval and
closing of the Financing, the Notes and all accrued interest automatically
converted into Common Stock at a price of $12.00 per share, subject to certain
adjustments. We closed on the balance of the financing in March 2004. We issued
a total of 1.3 million shares which included 86,509 of shares relative to the
Bridge Note Conversion. We received net proceeds after expenses of approximately
$12 million.
28
Net cash used in operating activities was $5.5 million, $7.9 million and
$29.0 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The principal use of cash in each of these periods was to fund our
losses from operations.
Net cash (used in)/provided by investing activities was ($621,000), $2.6
million and ($448,000) for the years ended December 31, 2004, 2003 and 2002,
respectively. For the year ended December 31, 2004, we used cash in investment
activities principally to support a letter of credit in favor of Cingular, as
well as purchases of property, equipment and leasehold improvements. For the
year ended December 31, 2003, we provided cash by release of funds previously
restricted and through the sale of subscribers to Earthlink. These amounts were
partially offset from the purchases of property, equipment and leasehold
improvements as well as an acquisition of subscribers for our Wynd subsidiary.
For the year ended December 31, 2002, we used cash in investment activities
principally for purchases of property, equipment and leasehold improvements.
During 2005, we expect to use cash in investing activities principally through
capital expenditures.
Net cash provided by financing activities was $12.7 million and $914,000
for the years ended December 31, 2004 and 2003, respectively. This primarily
resulted from the above-mentioned financing and the issuance of common stock
from the exercise of stock options. Net cash used in financing activities was
$533,000 for the year ended December 31, 2002. This resulted primarily from
payments made on lease obligations and was partially offset by the issuance of
common stock upon the exercise of stock options.
As of December 31, 2004, our principal commitments consisted of
obligations outstanding under operating leases. As of December 31, 2004, future
minimum payments for non-cancelable operating leases having terms in excess of
one year amounted to $716,000, of which $291,000 is payable in 2005.
29
The following table summarizes our contractual obligations at December 31,
2004, and the effect such obligations are expected to have on our liquidity and
cash flow in future periods.
Less than 1-3 4-5 After 5
December 31, (In thousands) Total 1 Year Years Years Years
- --------------------------- ---------- ---------- ---------- ---------- ----------
Contractual Obligations:
Capital Lease
Obligations ........ $ 1 $ 1 $ -- $ -- $ --
Operating Lease
Obligations ........ 716 291 425 -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Cash
Obligations ........ $ 717 $ 292 $ 425 $ -- $ --
========== ========== ========== ========== ==========
We have employment agreements with certain of our key executives, which
provide for fixed compensation. Our maximum aggregate cash liability under the
agreements, if we terminated these employees, is approximately $175,000 at
December 31, 2004.
30
As of December 31, 2004, we had net operating loss carryforwards of
approximately $181.2 million for Federal income tax purposes that will expire
through 2022. The state tax benefit during 2004 of $732,000 is attributable to
our sale of certain state net operating loss carryforwards. For financial
reporting purposes, a valuation allowance has been recognized to offset the
deferred tax assets related to these carryforwards. Due to limitations imposed
by the Tax Reform Act of 1986, and as a result of a significant change in our
ownership in 1999, the utilization of net operating loss carryforwards that
arose prior to such ownership change is subject to an annual limitation of $1.4
million. In addition, we acquired additional operating losses through our
acquisitions of Wynd and Hotpaper. We believe that an ownership change has
occurred with respect to these entities. The effect of an ownership change would
be the imposition of an annual limitation on the use of net operating loss
carryforwards attributable to periods before such change. We have not performed
a detailed analysis to determine the amount of the potential limitations. In
addition, we have not performed a detailed analysis to determine the amount of
the potential limitations as a result of the Financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". The primary objectives of this
interpretation are to provide guidance on the identification of entities for
which control is achieved through means other than through voting rights
("variable interest entities") and how to determine when and which business
enterprise (the "primary beneficiary") should consolidate the variable interest
entity. This new model for consolidation applies to an entity in which either
(i) the equity investors (if any) do not have a controlling financial interest;
or (ii) the equity investment at risk is insufficient to finance that entity's
activities without receiving additional subordinated financial support from
other parties. In addition, FIN 46 requires that the primary beneficiary, as
well as all other enterprises with a significant variable interest entity, make
additional disclosures. Certain disclosure requirements of FIN 46 were effective
for financial statements issued after January 31, 2003. In December 2003, the
FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest
Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The
effective dates and impact of FIN 46 and FIN 46-R are as follows: (i)
Special-purpose entities ("SPEs") created prior to February 1, 2003. We must
apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R
at the end of the first interim or annual reporting period ending after December
15, 2003. (ii) Non-SPEs created prior to February 1, 2003. We are required to
adopt FIN 46-R at the end of the first interim or annual reporting period ending
after March 15, 2004. (iii) All entities, regardless of whether an APE, that
were created subsequent to January 31, 2003. The provisions of FIN 46 were
applicable for variable interests in entities obtained after January 31, 2003.
We do not have any arrangements with variable interest entities that will
require consolidation of their financial information in our financial
statements.
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" ("SFAS
151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). The provisions of SFAS 151 are effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The adoption of SFAS 151 is not expected to have a material effect on the
Company's financial condition or results of operations.
31
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB
Opinion 29 to eliminate the similar productive asset exception and establishes
that exchanges of productive assets should be accounted for at fair value,
rather than at carryover basis unless (1) neither the asset received nor the
asset surrendered has a fair value that is determinable within reasonable
limits, (2) the transaction is an exchange transaction to facilitate sales to
customers, or (3) the transaction lacks commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provisions of
SFAS 153 are effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have
a material effect on our financial condition or results of operations.
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment". SFAS
123R establishes that employee services received in exchange for share-based
payment result in a cost that should be recognized in the income statement as an
expense when the services are consumed by the enterprise. It further establishes
that those expenses be measured at fair value determined as of the grant date.
The provisions of SFAS 123R become effective as of the beginning of the first
interim reporting period that begins after June 15, 2005. We are currently
evaluating the effect the adoption of SFAS 123R will have on our financial
condition and results of operations.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We believe that we have limited exposure to financial market risks,
including changes in interest rates. At December 31, 2004, all of our available
excess funds were cash or cash equivalents. The value of our cash and cash
equivalents is not materially affected by changes in interest rates. A
hypothetical change in interest rates of 1.0% would result in an annual change
in net loss of approximately $70,000 based on cash and cash equivalent balances
at December 31, 2004. We currently hold no derivative instruments and do not
earn foreign-source income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and the notes thereto which contain supplementary
data required to be filed pursuant to this Item 8 are appended to this Annual
Report on Form 10-K. A list of the financial statements filed herewith is found
at "Item 15. Exhibits, Financial Statement Schedules".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As previously announced, on December 20, 2002, our Board of Directors,
acting upon the recommendation of our Audit Committee, decided to no longer
engage Ernst & Young LLP ("Ernst & Young") as our independent auditor and
engaged WithumSmith + Brown P.C. ("WSB") to serve as our independent auditor for
the year 2002.
Ernst & Young's reports on our consolidated financial statements for each
of the years ended December 31, 2001, 2000 and 1999 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles.
During the years ended December 31, 2001, 2000 and 1999 and through the
date of our announcement of a change in accountants, (the "Announcement Date"),
there were no disagreements with Ernst & Young on any matter of accounting
principle or practice, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Ernst & Young's satisfaction, would have
caused them to make reference to the subject matter in connection with their
report on our consolidated financial statements for such years; and there were
no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
During the years ended December 31, 2001, 2000 and 1999 and through the
Announcement Date, we did not consult with WSB with respect to the application
of accounting principles to a specific transaction, either completed or
proposed, or the type of audit opinion that might be rendered on our
consolidated financial statements, or any other matters or reportable events as
set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
33
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure controls and procedures. As of the end of the Company's most
recently completed fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) covered by this report, the Company carried out an
evaluation, with the participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer, concluded that the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Changes in internal controls over financial reporting. There have been no
changes in the Company's internal controls over financial reporting that
occurred during the Company's last fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
ITEM 9B. OTHER
None
34
PART III
ITEM 10. DIRECTORS.
We maintain a code of ethics applicable to our principal executive
officer, principal financial officer, principal accounting officer or
controller, and to persons performing similar functions. A copy of this code of
ethics is posted on our website accessible at
http://www.goamerica.com/Company_info/ethics_execs.php.
We will provide information that is responsive to this Item 10 in our
definitive proxy statement or in an amendment to this Annual Report not later
than 120 days after the end of the fiscal year covered by this Annual Report, in
either case under the caption "Directors and Executive Officers," and possibly
elsewhere therein. That information is incorporated in this Item 10 by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
We will provide information that is responsive to this Item 11 regarding
compensation paid to our executive officers in our definitive proxy statement or
in an amendment to this Annual Report not later than 120 days after the end of
the fiscal year covered by this Annual Report, in either case under the caption
"Executive Compensation," and possibly elsewhere therein. That information is
incorporated in this Item 11 by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
We will provide information that is responsive to this Item 12 regarding
ownership of our securities by some beneficial owners and our directors and
executive officers in our definitive proxy statement or in an amendment to this
Annual Report not later than 120 days after the end of the fiscal year covered
by this Annual Report, in either case under the caption "Security Ownership of
Certain Beneficial Owners and Management," and possibly elsewhere therein. That
information is incorporated in this Item 12 by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We will provide information that is responsive to this Item 13 regarding
transactions with related parties in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days after the end of the
fiscal year covered by this Annual Report, in either case under the caption
"Certain Relationships and Related Transactions," and possibly elsewhere
therein. That information is incorporated in this Item 13 by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
We will provide information that is responsive to this Item 14 regarding
accounting fees and services in our definitive proxy statement or in an
amendment to this Annual Report not later than 120 days after the end of the
fiscal year covered by this Annual Report, in either case under the caption
"Principal Accountant Fees and Services" or "Accounting Matters", and possibly
elsewhere therein. That information is incorporated in this Item 14 by
reference.
35
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS.
The following documents are filed as part of this report:
(a) (1) Consolidated Financial Statements and (2) Consolidated Financial
Statement Schedule
Reference is made to the Index to Consolidated Financial Statements and
Financial Statement Schedule on Page F-1.
All other schedules have been omitted because the required information is
not present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
(b) Exhibits.
Reference is made to the Exhibit Index on Page E-1.
36
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 this 31st day of March,
2005.
GOAMERICA, INC.
By: /s/ Daniel R. Luis
---------------------------
Daniel R. Luis,
Chief Executive Officer
37
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/ Aaron Dobrinsky Chairman of the Board March 31, 2005
- ----------------------
Aaron Dobrinsky
/s/ Daniel R. Luis Chief Executive Officer (Principal March 31, 2005
- ---------------------- Executive Officer)
Daniel R. Luis
/s/ Donald G. Barnhart Chief Financial Officer (Principal March 31, 2005
- ---------------------- Accounting Officer)
Donald G. Barnhart
/s/ Joseph Korb Director March 31, 2005
- ----------------------
Joseph Korb
/s/ Alan Docter Director March 31, 2005
- ----------------------
Alan Docter
/s/ Mark Kristoff Director March 31, 2005
- ----------------------
Mark Kristoff
/s/ King Lee Director March 31, 2005
- ----------------------
King Lee
/s/ David Lyons Director March 31, 2005
- ----------------------
David Lyons
38
EXHIBIT INDEX++
ITEM 15(c)
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1 Amended and Restated Certificate of Incorporation, as filed with the
Secretary of State of the State of Delaware on May 8, 2000
(Incorporated by reference to GoAmerica's Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on August 7,
2000) (File No. 000-29359)
3.2 Certificate of Amendment to Amended and Restated Certificate of
Incorporation, as filed with the Secretary of State of the State of
Delaware on May 14, 2004 (filed herewith) (File No. 000-29359)
3.3 Certificate of Amendment to Amended and Restated Certificate of
Incorporation, as filed with the Secretary of State of the State of
Delaware on October 1, 2004 (filed herewith) (File No. 000-29359)
3.4 By-laws (Incorporated by reference to GoAmerica's Registration
Statement on Form S-1 [which became effective on April 6, 2000]).
(File No. 333-94801)
4.1 Warrant Certificate, dated as of November 14, 2003, issued to
Stellar Continental LLC (Incorporated by reference to GoAmerica's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 24, 2003) (File No. 00-29359)
4.2 Warrant to Purchase Common Stock of GoAmerica, Inc., issued to Derek
Caldwell as nominee for Sunrise Securities Corp. (Incorporated by
reference to GoAmerica's Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 24, 2003) (File No.
00-29359)
4.3 Warrant to Purchase Common Stock of GoAmerica, Inc., issued to Amnon
Mandelbaum as nominee for Sunrise Securities Corp. (Incorporated by
reference to GoAmerica's Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 24, 2003) (File No.
00-29359)
10.1 Form of Invention Assignment and Non-Disclosure Agreement by and
between GoAmerica and its employees (Incorporated by reference to
GoAmerica's Registration Statement on Form S-1 [which became
effective on April 6, 2000]) (File No. 333-94801)
10.2 Form of Indemnification Agreement by and between GoAmerica and each
of its directors and executive officers (Incorporated by reference
to GoAmerica's Registration Statement on Form S-1 [which became
effective on April 6, 2000]) (File No. 333-94801)
10.3= Value Added Reseller Agreement by and between GoAmerica, Wynd and
Cingular Interactive, L.P., dated as of December 30, 2003
(Incorporated by reference to GoAmerica's Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 10, 2004)
(File No. 00-29359)
39
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.4= Reseller Agreement for Messaging Services by and between GoAmerica
and ARDIS Company (now Motient Communications Inc.), dated August
25, 1999 (Incorporated by reference to GoAmerica's Registration
Statement on Form S-1 [which became effective on April 6, 2000])
(File No. 333-94801)
10.5* Amended and Restated Employment Agreement by and between GoAmerica,
Inc. and Daniel R. Luis, dated as of May 6, 2002 (Incorporated by
reference to GoAmerica's Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission on August 2, 2002) (File No.
000-29359)
10.6* Employment Agreement by and between GoAmerica and Aaron Dobrinsky,
dated as of May 6, 2002 (Incorporated by reference to GoAmerica's
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 2, 2002) (File No. 000-29359), as amended by
Amendment No. 1, dated as of March 10, 2004 (Incorporated by
reference to GoAmerica's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 10, 2004) (File No.
00-29359)
10.7* Employment Agreement by and between GoAmerica and Joseph Korb, dated
as of May 6, 2002 (Incorporated by reference to GoAmerica's
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 2, 2002) (File No. 000-29359), as terminated by
an Agreement, dated as of March 10, 2004 (Incorporated by reference
to GoAmerica's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 10, 2004) (File No. 00-29359)
10.8* Employment Agreement by and between GoAmerica and Jesse Odom, dated
as of May 6, 2002 (Incorporated by reference to GoAmerica's
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 2, 2002) (File No. 000-29359)
10.9* Employment Agreement by and between GoAmerica and Donald G.
Barnhart, dated as of March 10, 2004 (Incorporated by reference to
Amendment No. 2 to GoAmerica's Annual Report on Form 10-K filed with
the Securities and Exchange Commission on April 29, 2004) (File No.
000-29359)
10.10* Services Agreement by and between GoAmerica and David Lyons, dated
as of March 1, 2005 (filed herewith)
10.11* GoAmerica Communications Corp. 1999 Stock Option Plan (Incorporated
by reference to GoAmerica's Registration Statement on Form S-1
[which became effective on April 6, 2000]) (File No. 333-94801)
10.12* GoAmerica, Inc. 1999 Stock Plan (Incorporated by reference to
GoAmerica's Registration Statement on Form S-1 [which became
effective on April 6, 2000]) (File No. 333-94801)
10.13 GoAmerica, Inc. Employee Stock Purchase Plan (Incorporated by
reference to GoAmerica's Registration Statement on Form S-1 [which
became effective on April 6, 2000]) (File No. 333-94801)
40
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.14 Lease Agreement dated as of April 1, 2004, by and between GoAmerica
Communications Corp. and Stellar Continental LLC (filed herewith),
as amended by Amendment No. 1 dated as of August 1, 2004, (filed
herewith)
10.15 Purchase Agreement, dated as of December 19, 2003, by and between
GoAmerica, Inc. and the Investors set forth therein (Incorporated by
reference to GoAmerica's Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 24, 2003) (File No.
000-29359)
10.16 Registration Rights Agreement, dated as of December 19, 2003, by and
between GoAmerica, Inc. and the Investors set forth therein
(Incorporated by reference to GoAmerica's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 24,
2003) (File No. 000-29359)
10.17 Acquisition Agreement, dated as of September 25, 2002, between
EarthLink, Inc., GoAmerica, Inc. and GoAmerica Communications Corp.
(Incorporated by reference to GoAmerica's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 10,
2002) (File No. 000-29359)
10.18 Sales Agent Agreement, dated as of September 25, 2002, between
EarthLink, Inc., GoAmerica, Inc. and GoAmerica Communications Corp.
(Incorporated by reference to GoAmerica's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 10,
2002) (File No. 000-29359)
10.19 Technology Development Agreement, dated as of September 25, 2002,
between EarthLink, Inc., GoAmerica, Inc. and GoAmerica
Communications Corp. (Incorporated by reference to GoAmerica's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 10, 2002) (File No. 000-29359)
10.20 License Agreement, dated as of September 25, 2002, between
EarthLink, Inc., GoAmerica, Inc. and GoAmerica Communications Corp.
(Incorporated by reference to GoAmerica's Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 10,
2002) (File No. 000-29359)
21.1 List of subsidiaries of GoAmerica, Inc. (filed herewith)
23.1 Consent of WithumSmith+Brown, P.C. (filed herewith)
31.1 Certification pursuant to Rule 13a-14(a) or 15d-14(a) (filed
herewith)
31.2 Certification pursuant to Rule 13a-14(a) or 15d-14(a) (filed
herewith)
32.1 Certification pursuant to 18 U.S.C. Section 1350 (filed herewith)
32.2 Certification pursuant to 18 U.S.C. Section 1350 (filed herewith)
99.1 Risk Factors (filed herewith)
41
= Confidential treatment has been requested and granted (subject to
applicable renewals) for a portion of this Exhibit. Confidential
materials have been omitted and filed separately with the Securities
and Exchange Commission.
* Management contract or compensatory plan required to be filed as an
exhibit to this form pursuant to Item 15(c).
++ Certain schedules and exhibits to the documents listed in this index
are not being filed herewith or have not been previously filed
because we believe that the information contained therein is not
material. Upon request therefore, we agree to furnish supplementally
a copy of any schedule or exhibit to the Securities and Exchange
Commission.
42
GOAMERICA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Report of Independent Registered Public Accounting Firm.................... F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003............... F-3
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002......................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002...................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Financial Statement Schedule:
Valuation and Qualifying Accounts and Reserves for the years ended
December 31, 2004, 2003 and 2002...................................... F-32
All other schedules have been omitted because the required information is
not present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors,
GoAmerica, Inc.
We have audited the accompanying consolidated balance sheets of GoAmerica,
Inc. as of December 31, 2004 and 2003, and the related consolidated statements
of operations, stockholders' equity and cash flows for the years ended December
31, 2004, 2003 and 2002. Our audits also included the consolidated financial
statement schedule for the years ended December 31, 2004, 2003 and 2002 as
listed in the index at Item 15(a). 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 in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of GoAmerica, Inc.
as of December 31, 2004 and 2003, and the consolidated results of their
operations and their cash flows for the years ended December 31, 2004, 2003 and
2002 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such consolidated financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ WithumSmith + Brown, P.C.
New Brunswick, New Jersey
February 28, 2005
F-2
GOAMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
----------------------
2004 2003
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 7,098 $ 568
Accounts receivable, less allowance for doubtful accounts of
$603 in 2004 and $1,213 in 2003 ................................ 1,530 1,737
Other receivables ................................................. 732 534
Merchandise inventories, net ...................................... 123 213
Prepaid expenses and other current assets ......................... 219 115
--------- ---------
Total current assets ................................................. 9,702 3,167
Restricted cash ...................................................... 604 --
Property, equipment and leasehold improvements, net .................. 940 1,606
Trade names, net of accumulated amortization of $4,388 in 2004
and $4,019 in 2003 ............................................... 184 553
Other intangible assets, net of accumulated amortization of $6,755
in 2004 and $6,442 in 2003, respectively ......................... 455 251
Goodwill, net ........................................................ 6,000 6,000
Deferred debt and other financing expense, net ....................... -- 1,091
Other assets ......................................................... 101 297
--------- ---------
Total assets ......................................................... $ 17,986 $ 12,965
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 348 $ 1,472
Accrued expenses .................................................. 538 3,040
Bridge note payable, net of discount of $390 in 2003 .............. -- 625
Deferred revenue .................................................. 285 673
Other current liabilities ......................................... 1 13
--------- ---------
Total current liabilities ............................................ 1,172 5,823
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized: 4,351,943 in 2004 ....
and 2003; issued and outstanding: none in 2004 and 2003 ........ -- --
Common stock, $.01 par value; authorized: 200,000,000 in 2004 .....
and 2003; issued : 2,117,339 in 2004 and 684,739 in 2003, ......
respectively ................................................... 21 7
Additional paid-in capital ........................................ 285,854 271,566
Accumulated deficit ............................................... (268,875) (264,431)
Treasury stock, at cost, 24,063 shares in 2004 and none in 2003 ... (186) --
--------- ---------
Total stockholders' equity ........................................... 16,814 7,142
--------- ---------
Total liabilities and stockholders' equity ........................... $ 17,986 $ 12,965
========= =========
SEE ACCOMPANYING NOTES.
F-3
GOAMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
REVENUES:
Subscriber .......................................... $ 5,588 $ 10,108 $ 29,017
Equipment ........................................... 181 1,042 6,560
Other ............................................... 453 728 335
----------- ----------- -----------
6,222 11,878 35,912
COSTS AND EXPENSES:
Cost of subscriber revenue .......................... 2,539 2,669 20,434
Cost of equipment revenue ........................... 260 1,152 8,537
Cost of network operations .......................... 733 1,828 3,074
Cost of other revenue ............................... 201 -- --
Sales and marketing ................................. 597 1,072 8,038
General and administrative .......................... 5,625 9,617 29,082
Research and development ............................ 507 1,209 3,456
Depreciation and amortization of fixed assets ....... 804 1,912 4,342
Amortization of other intangibles ................... 682 1,081 1,483
Impairment of goodwill .............................. -- 193 8,400
Impairment of other long-lived assets ............... -- 1,202 5,582
----------- ----------- -----------
11,948 21,935 92,428
----------- ----------- -----------
Loss from operations ..................................... (5,726) (10,057) (56,516)
OTHER INCOME (EXPENSE):
Gain on sale of subscribers ......................... -- 1,756 --
Settlement gains, net ............................... 1,494 85 --
Interest (expense) income, net ...................... (944) (275) 191
----------- ----------- -----------
550 1,566 191
----------- ----------- -----------
Net loss before benefit from income taxes ................ (5,176) (8,491) (56,325)
Income tax benefit .................................. 732 284 436
----------- ----------- -----------
Net loss ................................................. $ (4,444) $ (8,207) $ (55,889)
=========== =========== ===========
Basic net loss per share ................................. $ (2.49) $ (12.10) $ (83.04)
=========== =========== ===========
Diluted net loss per share ............................... $ (2.49) $ (12.10) $ (83.00)
=========== =========== ===========
Weighted average shares used in computation of basic net
loss per share ...................................... 1,785,403 678,240 673,072
Weighted average shares used in computation of diluted net
loss per share ...................................... 1,785,403 678,240 673,365
SEE ACCOMPANYING NOTES.
F-4
GOAMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
----------------- ADDITIONAL DEFERRED
NUMBER PAID-IN EMPLOYEE ACCUMULATED
OF SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
--------- ------ ---------- ------------ -----------
BALANCE AT JANUARY 1, 2002 ................. 671,254 $ 7 $ 269,583 $ (2,842) $ (200,335)
Issuance of common stock pursuant to:
exercise of employee stock
options .............................. 2,888 -- 114 -- --
employee stock purchase plan ........... 1,065 -- 64 -- --
Adjustment to deferred employee
compensation for terminations .......... -- -- (213) 213 --
Amortization of deferred employee
compensation ........................... -- -- -- 2,315 --
Net loss ................................. -- -- -- -- (55,889)
--------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 2002 ............... 675,207 7 269,548 (314) (256,224)
Issuance of common stock pursuant to:
exercise of employee stock
options .............................. 8,931 -- 258 -- --
employee stock purchase plan ........... 601 -- 13 -- --
Issuance of warrant to settle lease
commitment ............................. -- -- 440 -- --
Issuance of warrant to placement agent
to secure bridge note financing ........ -- -- 292 -- --
Fair value of warrants issued to
investors as part of bridge note
financing .............................. -- -- 487 -- --
Value of beneficial conversion
feature of convertible bridge
note financing ......................... -- -- 528 -- --
Amortization of deferred employee
compensation ........................... -- -- -- 314
Net loss ................................. -- -- -- -- (8,207)
--------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 2003 ............... 684,739 7 271,566 -- (264,431)
Issuance of common stock pursuant to:
exercise of employee stock
options .............................. 6,776 -- 173 -- --
exercise of warrants ................... 50,652 -- 13 -- --
equity financing, net of expenses ......1,224,304 12 12,197 -- --
conversion of bridge note payable ...... 86,509 1 1,014 -- --
acquisition of intangible assets ....... 54,671 1 441 -- --
Issuance of common stock pursuant
to settlement agreements ............... 9,688 -- 450 -- --
Purchase of treasury stock ............... -- -- -- -- --
Net loss ................................. -- -- -- -- (4,444)
--------- ------ ---------- ------------ -----------
BALANCE AT DECEMBER 31, 2004 ...............2,117,339 $ 21 $ 285,854 $ -- $ (268,875)
========= ====== ========== ============ ===========
TOTAL STOCK-
HOLDERS'
TREASURY STOCK EQUITY
----------------- ------------
NUMBER
OF SHARES AMOUNT
--------- ------
BALANCE AT JANUARY 1, 2002 ................. -- $ -- $ 66,413
Issuance of common stock pursuant to:
exercise of employee stock
options .............................. -- -- 114
employee stock purchase plan ........... -- -- 64
Adjustment to deferred employee
compensation for terminations .......... -- -- --
Amortization of deferred employee
compensation ........................... -- -- 2,315
Net loss ................................. -- -- (55,889)
------ ------ ------------
BALANCE AT DECEMBER 31, 2002 ............... -- -- 13,017
Issuance of common stock pursuant to:
exercise of employee stock
options .............................. -- -- 258
employee stock purchase plan ........... -- -- 13
Issuance of warrant to settle lease
commitment ............................. -- -- 440
Issuance of warrant to placement agent
to secure bridge note financing ........ -- -- 292
Fair value of warrants issued to
investors as part of bridge note
financing .............................. -- -- 487
Value of beneficial conversion
feature of convertible bridge
note financing ......................... -- -- 528
Amortization of deferred employee
compensation ........................... -- -- 314
Net loss ................................. -- -- (8,207)
------ ------ ------------
BALANCE AT DECEMBER 31, 2003 ............... -- -- 7,142
Issuance of common stock pursuant to:
exercise of employee stock
options .............................. -- -- 173
exercise of warrants ................... -- -- 13
equity financing, net of expenses ...... -- -- 12,209
conversion of bridge note payable ...... -- -- 1,015
acquisition of intangible assets ....... -- -- 442
Issuance of common stock pursuant
to settlement agreements ............... -- -- 450
Purchase of treasury stock ............... 24,063 (186) (186)
Net loss ................................. -- -- (4,444)
------ ------ ------------
BALANCE AT DECEMBER 31, 2004 ............... 24,063 $ (186) $ 16,814
====== ====== ============
SEE ACCOMPANYING NOTES.
F-5
GOAMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
-------- -------- --------
OPERATING ACTIVITIES
Net loss ........................................................ $ (4,444) $ (8,207) $(55,889)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ............................... 1,486 2,993 5,825
Amortization of debt discount and deferred financing costs .. 1,014 248 --
Impairment of goodwill ...................................... -- 193 8,400
Impairment of other long-lived assets ....................... -- 1,202 5,582
Provision for losses on accounts receivable ................. 239 534 3,221
Common stock issued for interest expense .................... 19 -- --
Settlement gains, net ....................................... (1,494) -- --
Accrued loss on sublease .................................... -- 509 --
Gain on sale of subscribers ................................. -- (1,756) --
Non-cash employee compensation .............................. -- 314 2,315
Non-cash warrant expense .................................... -- 440 --
Other non-cash charges ...................................... -- 7 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ............... (32) 3,509 (329)
Increase in other receivables ............................ (198) (534) --
Decrease in inventory .................................... 90 833 6,921
(Increase) decrease in prepaid expenses and other current
assets ................................................ (104) 405 1,853
Decrease in accounts payable ............................. (1,124) (3,374) (4,982)
Decrease in accrued expenses and other current liabilities (564) (3,496) (1,532)
Decrease in deferred revenue ............................. (388) (1,733) (399)
-------- -------- --------
Net cash used in operating activities ........................... (5,500) (7,913) (29,014)
INVESTING ACTIVITIES
Purchase of property, equipment and leasehold improvements ...... (138) (35) (451)
Proceeds from the sale of subscribers ........................... -- 1,756 --
Acquisition of subscribers ...................................... -- (368) --
Acquisition of intangible assets ................................ (75) -- --
Change in other assets and restricted cash ...................... (408) 1,232 3
-------- -------- --------
Net cash provided by (used in) investing activities ............. (621) 2,585 (448)
FINANCING ACTIVITIES
Issuance of common stock, net of related expenses ............... 12,981 271 178
Issuance of note payable and warrant, net of financing costs of
$215 ........................................................ -- 800 --
Payments made for deferred financing costs ...................... (139) (112) --
Purchase of treasury stock ...................................... (186) -- --
Payments made on capital lease obligations ...................... (5) (45) (711)
-------- -------- --------
Net cash provided by (used in) financing activities ............. 12,651 914 (533)
-------- -------- --------
Increase (decrease) in cash and cash equivalents ................ 6,530 (4,414) (29,995)
Cash and cash equivalents at beginning of year .................. 568 4,982 34,977
-------- -------- --------
Cash and cash equivalents at end of year ........................ $ 7,098 $ 568 $ 4,982
======== ======== ========
SEE ACCOMPANYING NOTES.
F-6
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
GoAmerica, Inc. (the "Company") is a wireless data communications service
provider, offering solutions primarily for consumers who are deaf, hard of
hearing and/or speech-impaired. The Company currently develops, markets and
supports most of these services through Wynd Communications Corporation
("Wynd"), a wholly owned subsidiary of the Company. Wynd Communications offers
enhanced services known as WyndTell(R) and WyndPower(TM), which assist deaf or
hard of hearing customers in communicating from most major metropolitan areas in
the continental United States and parts of Canada. Additionally, GoAmerica
continues to support customers who use its proprietary software technology
called Go.Web(TM). GoWeb is designed for use mainly by enterprise customers to
enable secure wireless access to corporate data and the Internet on numerous
wireless computing devices. The Company's revenues are derived principally from
subscriptions to its value-added wireless data services, for which customers
typically pay monthly recurring fees. The Company derives additional revenue
from the sale of wireless communications devices and commissions from the
acquisition of subscribers on behalf of various wireless network providers.
The Company is highly dependent on EarthLink, Inc. ("Earthlink") for
billing and collections, customer support and technical support for certain of
the Company's subscribers. Additionally, the Company is highly dependent on
EarthLink and other third parties for wireless communication devices and
wireless network connectivity.
The Company operates in a highly competitive environment subject to rapid
technological change and emergence of new technology. Although management
believes its services are transferable to emerging technologies, rapid changes
in technology could have an adverse financial impact on the Company.
The Company has incurred significant operating losses since its inception
and, as of December 31, 2004, has an accumulated deficit of $268,875. During
2004, the Company incurred a net loss of $4,444 and used $5,500 of cash to fund
operating activities. As of December 31, 2004 the Company had $7,098 in cash and
cash equivalents.
F-7
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of GoAmerica,
Inc. and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Cash Equivalents
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less when purchased.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of certain revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Significant estimates that affect the financial statements include,
but are not limited to: collectibility of accounts receivable, amortization
periods and recoverability of long-lived assets.
Receivables and Credit Policies
Accounts receivable are uncollateralized customer obligations due under
normal trade terms requiring payment within 30 days from the invoice date.
Accounts receivable are stated at the amount billed to the customer. Interest is
not billed or accrued. Accounts receivable in excess of 90 days old are
considered delinquent. Payments of accounts receivable are allocated to the
specific invoices identified on the customer's remittance advice or, if
unspecified, are applied to the oldest unpaid invoices.
The carrying amount of accounts receivable is reduced by a valuation
allowance that reflects the Company's best estimate of the amounts that may not
be collected. This estimate is based on reviews of all balances in excess of 90
days from the invoice date and based on an assessment of current
creditworthiness, estimates the portion, if any, of the balance that will not be
collected. The Company reviews its valuation allowance on a quarterly basis.
Merchandise Inventories
Merchandise inventories, principally wireless devices, are stated at the
lower of cost (first-in, first-out) basis or market. Inventories are recorded
net of a reserve for excess and obsolete merchandise.
F-8
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation is provided on the straight-line method over the estimated useful
lives of the related assets ranging from two to seven years. Expenditures for
maintenance and repairs are charged to expense as incurred.
Computer Software Developed or Obtained For Internal Use
All direct internal and external costs incurred in connection with the
application development stage of software for internal use are capitalized. All
other costs associated with internal use software are expensed when incurred.
Amounts capitalized are included in property, equipment and leasehold
improvements and are amortized on a straight-line basis over three years
beginning when such assets are placed in service.
Goodwill and Intangible Assets
Goodwill and intangible assets result primarily from acquisitions
accounted for under the purchase method. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), goodwill and intangible assets with indefinite lives
are not amortized but are subject to impairment by applying a fair value based
test. Intangible assets with finite useful lives related to developed
technology, customer lists, trade names and other intangibles are being
amortized on a straight-line basis over the estimated useful life of the related
asset, generally one to five years. Recoverability of Intangible and Other Long
Lived Assets
In accordance with SFAS No.142, the Company reviews the carrying value of
goodwill and intangible assets with indefinite lives annually or in certain
circumstances as required. The Company measures impairment losses by comparing
carrying value to fair value. Fair value is determined using discounted cash
flow methodology.
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," long-lived assets used in operations are
reviewed for impairment whenever events or changes in circumstances indicate
that carrying amounts may not be recoverable. For long-lived assets to be held
and used, the Company recognizes an impairment loss only if its carrying amount
is not recoverable through its undiscounted cash flows and measures the
impairment loss based on the difference between the carrying amount and fair
value.
F-9
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Revenue and Deferred Revenue
The Company derives subscriber revenue from the provision of wireless
communication services. Subscriber revenue consists of monthly charges for
access and usage and is recognized as the service is provided. Also included in
subscriber revenue are one-time non-refundable activation fees. Equipment
revenue is recognized upon shipment and transfer of title to the end user.
Consulting revenue, included in other revenue, is recognized as the related
services are provided. Software and prepaid revenues through December 31, 2004
were insignificant.
Cost of Revenues
Cost of subscriber revenue consists principally of airtime costs charged
by carriers. Cost of equipment revenue consists of the cost of equipment sold.
Income Taxes
Deferred income taxes are determined using the asset and liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is recorded
when the expected recognition of a deferred tax asset is considered to be
unlikely.
Advertising Costs
Advertising costs are expensed as incurred. During 2004, 2003 and 2002,
advertising expense was approximately $17, $23 and $1,019, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
F-10
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Stock-Based Employee Compensation
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees", using an intrinsic value approach to measure compensation
expense, if any. Under this method, compensation expense is recorded on the date
of the grant only if the current market price of the underlying stock exceeds
the exercise price. Options issued to non-employees are accounted for in
accordance with SFAS 123, "Accounting for Stock-Based Compensation", and
Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services", using a fair value approach. SFAS
No. 123 established accounting and disclosure requirements using a fair
value-basis method of accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123. Had the Company elected to recognize
compensation cost based on fair value of the stock options at the date of grant
under SFAS 123, such costs would have been recognized ratably over the vesting
period of the underlying instruments and the Company's net loss and net loss per
common share would have increased to the pro forma amounts indicated in the
table below.
Year ended December 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Net loss ................................... $ (4,444) $ (8,207) $ (55,889)
Deduct: Stock-based employee compensation
expense included in reported net loss .... -- 314 2,315
Add: Total stock-based employee
compensation expense determined under fair
value based method for all awards ........ (3,048) (3,968) (6,966)
---------- ---------- ----------
Pro forma net loss ......................... $ (7,492) $ (11,861) $ (60,540)
========== ========== ==========
Loss per share - basic, as reported ........ $ (2.49) $ (12.10) $ (83.04)
========== ========== ==========
Loss per share - diluted, as reported ...... $ (2.49) $ (12.10) $ (83.00)
========== ========== ==========
Pro forma loss per share - basic ........... $ (4.20) $ (17.49) $ (89.95)
========== ========== ==========
Pro forma loss per share - diluted ......... $ (4.20) $ (17.49) $ (89.91)
========== ========== ==========
The pro forma results above are not intended to be indicative of or a
projection of future results. Refer to Note 14 for assumptions used in computing
the fair value amounts above.
F-11
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Earnings (Loss) Per share
The Company computes net loss per share under the provisions of SFAS No.
128, "Earnings per Share" (SFAS 128), and SEC Staff Accounting Bulletin No. 98
(SAB 98).
Under the provisions of SFAS 128 and SAB 98, basic loss per share is
computed by dividing the Company's net loss for the period by the
weighted-average number of shares of common stock outstanding during the period.
Diluted net loss per share excludes potential common shares if the effect is
antidilutive. The weighted average number of shares utilized in arriving at
basic loss per share reflects an adjustment for 293 common shares for the year
ended December 31, 2002 for shares held in escrow as a result of the 2001 and
2000 acquisitions. Diluted loss per share is determined in the same manner as
basic loss per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method.
As the Company had a net loss, the impact of the assumed exercise of the stock
options and warrants is anti-dilutive and as such, these amounts (except for
warrants issued for nominal consideration) have been excluded from the
calculation of diluted loss per share. For the years ended December 31, 2004,
2003 and 2002, 290,780, 181,900 and 170,876 of common stock equivalent shares
were excluded from the computation of diluted net loss per share.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. The Company maintains a significant portion of its cash and cash
equivalents with two financial institutions. At times these balances exceed the
FDIC insured limit.
As of December 31, 2004 and 2003, the Company had 16% and 17%,
respectively, of its accounts receivable with Earthlink. For the years ended
December 31, 2004 and 2003, the Company generated 14% and 13% of its total
revenue from Earthlink. The Company performs periodic credit evaluations of its
customers but generally does not require collateral.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and notes payable approximate their fair values due to the short
maturity of these items.
Segment Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for the way that a public enterprise
reports information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company operates in a single segment.
The chief operating decision maker allocates resources and assesses the
performance associated with wireless services, and related equipment sales on a
single segment basis. Consulting and prepaid calling services are not a material
component of the Company's business.
F-12
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Reclassifications
The Company has reclassified certain prior year information to conform
with current year presentation.
Recent Accounting Pronouncements
In January 2003, the FASB issued interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". The primary objectives of this
interpretation are to provide guidance on the identification of entities for
which control is achieved through means other than through voting rights
("variable interest entities") and how to determine when and which business
enterprise (the "primary beneficiary") should consolidate the variable interest
entity. This new model for consolidation applies to an entity in which either
(i) the equity investors (if any) do not have a controlling financial interest;
or (ii) the equity investment at risk is insufficient to finance that entity's
activities without receiving additional subordinated financial support from
other parties. In addition, FIN 46 requires that the primary beneficiary, as
well as all other enterprises with a significant variable interest entity, make
additional disclosures. Certain disclosure requirements of FIN 46 were effective
for financial statements issued after January 31, 2003. In December 2003, the
FASB issued FIN 46 (revised December 2003), "Consolidation of Variable Interest
Entities" ("FIN 46-R") to address certain FIN 46 implementation issues. The
effective dates and impact of FIN 46 and FIN 46-R are as follows: (i)
Special-purpose entities ("SPEs") created prior to February 1, 2003. The Company
must apply either the provisions of FIN 46 or early adopt the provisions of FIN
46-R at the end of the first interim or annual reporting period ended after
December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The Company
was required to adopt FIN 46-R at the end of the first interim or annual
reporting period ending after March 15, 2004. (iii) All entities, regardless of
whether an SPE, that were created subsequent to January 31, 2003; the
interpretation applies immediately. The Company does not have any arrangements
with variable interest entities that will require consolidation of their
financial information in the Company's financial statements.
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" ("SFAS
151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). The provisions of SFAS 151 are effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The adoption of SFAS 151 is not expected to have a material effect on the
Company's financial condition or results of operations.
F-13
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB
Opinion 29 to eliminate the similar productive asset exception and establishes
that exchanges of productive assets should be accounted for at fair value,
rather than at carryover basis unless (1) neither the asset received nor the
asset surrendered has a fair value that is determinable within reasonable
limits, (2) the transaction is an exchange transaction to facilitate sales to
customers, or (3) the transaction lacks commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The provisions of
SFAS 153 are effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have
a material effect on the Company's financial condition or results of operations.
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment". SFAS
123R establishes that employee services received in exchange for share-based
payment result in a cost that should be recognized in the income statement as an
expense when the services are consumed by the enterprise. It further establishes
that those expenses be measured at fair value determined as of the grant date.
The provisions of SFAS 123R become effective as of the beginning of the first
interim reporting period that begins after June 15, 2005. The Company is
currently evaluating the effect the adoption of SFAS 123R will have on the
Company's financial condition and results of operations.
F-14
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. LEASE SETTLEMENT
On January 10, 2003, the Company entered into a sublease agreement to
partially offset the cost of unused office space at 401 Hackensack Avenue. The
sublease agreement was set to expire in April 2007. As a result of this
agreement, the Company recorded a loss on sublease of $610 in 2003.
The Company entered into two agreements, each dated as of November 14,
2003, with Stellar Continental LLC ("Stellar"), the lessor of the Company's
corporate headquarters at 433 Hackensack Avenue and its office at 401 Hackensack
Avenue, both located in Hackensack, New Jersey (collectively, the "Hackensack
Offices"). The agreements consist of a Surrender Agreement and a new Lease
Agreement as well as a Warrant Certificate (collectively, the "Long Term Lease
Settlement").
The Long Term Lease Settlement enabled the Company to cure all prior
defaults under the previous lease (the "Original Lease", as described below) and
terminated all parties' rights and obligations under the Original Lease, in
exchange for (i) Stellar's right to retain $556 previously drawn on the
Company's letter of credit that secured the Original Lease, (ii) the Company's
issuance of a warrant to Stellar that allows Stellar to acquire up to 12,500
shares of the Company's Common Stock at an exercise price of $36.80 per share at
any time prior to November 14, 2008 and (iii) the execution of a new lease
between the Company and Stellar for office space at 433 Hackensack Avenue (see
note 11). The Long Term Lease Settlement also requires the Company to rent from
Stellar any new office space in the Hackensack, New Jersey area that it may
require over the term of the new short term lease, on terms no less favorable
than the New Lease. The sublease agreement described above was effectively
cancelled by these settlements. Therefore, the Company reversed the remaining
$509 of unamortized loss on sublease as of December 31, 2003.
The warrant to purchase 12,500 shares of the Company's common stock at a
price of $36.80 per share was immediately exercisable at the date of grant and
expires in five years therefrom. The warrant had an estimated fair market value
at the date of grant of approximately $440, as determined by using the
Black-Scholes method and was recognized by the Company during the fourth quarter
of 2003 as an offset to the reversal of the loss on sublease described above.
Both items are included in settlement gains, net in the accompanying 2003
statement of operations. Such warrant remains outstanding as of December 31,
2004.
4. SETTLEMENT GAINS AND CHANGES IN ESTIMATES
SETTLEMENT GAINS, NET
In December 2003, the Company entered into agreement with a creditor to
settle an obligation for less than the recorded amount by making a final cash
payment to this vendor prior to December 31, 2003. The Company recorded a gain
on settlement of approximately $64 relating to this transaction and has included
this item in settlement gains, net in the accompanying statement of operations.
F-15
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In December 2003, the Company executed a series of settlement agreements
with various vendors that provided, upon their consummation, for the reduction
of amounts owed by the Company to these vendors. Generally, the terms of the
settlement agreements called for the Company to make fixed cash payments or the
issuance of shares of the Company's common stock. The consummation of the
settlement agreements was contingent upon the Company's complying with all of
the terms of the individual agreements, certain of which are as follows:
o Cash payments of approximately $300 to vendors with which the
Company had established settlement agreements.
o Establishment of a standby letter of credit in favor of Cingular,
which resulted in restricted cash in the amount of $600.
All such terms and conditions were satisfied in 2004 and, as a result, the
Company recorded approximately $1,621 in additional settlement gains during the
year ended December 31, 2004. In addition, approximately $450 of vendor
liabilities were satisfied through the issuance of 9,688 shares of the Company's
common stock.
On December 23, 2003, the Company executed a settlement agreement with
Eastern Computer Exchange, Inc. ("Eastern Computer") with respect to certain
payment obligations pursuant to two equipment leases (the "Leases") by agreeing
to pay Eastern Computer $350 upon closing the financing discussed in Note 5 in
exchange for a full release of the Company and its affiliates of the claim filed
by Eastern Computer. Previously, Eastern Computer had taken back the equipment
covered under the Leases. This settlement enabled the Company to cure all prior
defaults under the Leases. The Company recorded a loss on this settlement of $7,
which is included in settlement gains, net in the accompanying 2003 statement of
operations.
CHANGES IN ESTIMATES
During the year ended December 31, 2003, the Company, as part of its
strategic realignment, reviewed certain liability provisions and accrued
expenses based on recent discussions with vendors and recorded the following
adjustments:
o A $347 reduction of general and administrative expenses relating to
the elimination of an accrued liability for deferred rent on the
Company's lease obligations at 401 and 433 Hackensack Avenue (see
note 3).
o A $1,513 reduction of accruals for certain subscriber related costs
based upon a finalization of amounts owed to vendors.
F-16
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
o A $372 reduction of accruals for certain sales and marketing costs
recorded in prior periods.
The above amounts were recorded as changes in estimates and reductions of
the related expenses in the accompanying 2003 statement of operations.
5. BRIDGE NOTE PAYABLE AND EQUITY FINANCING
On December 19, 2003, the Company entered into definitive agreements with
multiple investors providing for the investors to purchase approximately 1.3
million shares of the Company's Common Stock, par value $.01 (the "Common
Stock"), for an aggregate purchase price of $14,500 in a private placement
offering (the "Financing"). As part of this Financing, on December 19, 2003, the
Company received net proceeds of approximately $800 from the issuance of 10%
Senior Secured Convertible Promissory Notes (the "Notes") and certain warrants.
The Notes were purchased by the investors at their par value in proportional
amounts to their aggregate investment commitments in the Financing. Upon
stockholder approval and closing of the Financing, the Notes and all accrued
interest automatically converted into Common Stock at a price of $12.00 per
share, subject to certain adjustments.
The notes contain a beneficial conversion feature, which has been
calculated in the amount of approximately $528 and is reflected as a deferred
debt expense in the accompanying 2003 balance sheet. This amount was being
amortized as interest expense through March 2004 when it was converted to
equity.
In addition to the Notes, the Company granted to the investors warrants to
purchase 16,916 shares of the Company's common stock at a price of $12.00 per
share. These warrants were immediately exercisable at the date of grant and
expire in five years. The warrants had an estimated fair market value at the
date of grant of approximately $487, as determined using the Black-Scholes
method, which discount was amortized as interest expense over the life of the
debt. The Note Payable is shown on the Balance Sheet at December 31, 2003 net of
unamortized discount in the amount of $390. Such warrants remain outstanding as
of December 31, 2004.
On March 10, 2004, the Company's stockholders at a special meeting of the
stockholders approved the following:
o Approved the issuance of 1,224,304 shares of the Company's common
stock in exchange for cash consideration of $12,209, net of
expenses.
o Authorized the Board of Directors to amend the Company's restated
certificate of incorporation to effect a reverse stock split at one
of five different ratios.
o Authorize the Board of Directors to amend the Company's restated
certificate of incorporation to increase the number of shares of
common stock the Company is authorized to issue from 200,000,000 to
350,000,000 shares, resulting in an increase in the total number of
authorized shares of capital stock from 204,351,943 to 354,351,943.
The Board of Directors did not act on this approval to increase the
Company's authorized shares prior to the Company's 2004 annual
meeting of stockholders, so this authorization has expired.
F-17
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As a result, the Company issued a total of 1,310,813 shares of its common
stock, comprised of the 1,224,304 shares referred to above and 86,509 upon the
mandatory conversion of the Bridge Notes Payable and related accrued interest.
The Company received net proceeds of approximately $12,000 after deducting the
$714 cash payment made to the offering placement agent and deferred offering
expenses such as professional fees.
6. RELATIONSHIP WITH EARTHLINK, INC.
On September 25, 2002, the Company formed a comprehensive relationship
with EarthLink by entering into a series of agreements pursuant to which, among
other things (i) EarthLink purchased all of the Company's CDPD subscribers as
well as certain of the Company's Cingular and Motient network subscribers
(collectively, the "transferred subscribers"); (ii) EarthLink purchased the
Company's rights under a credit for $1,400 of inventory from a hardware
manufacturer, receiving the Company's equipment pricing at a discount; (iii) the
Company and EarthLink will market each other's wireless services in exchange for
commissions and/or recurring revenue shares; (iv) EarthLink will provide
billing, customer support and network services to most subscribers of the
Company's technology; and (v) the Company and EarthLink will collaborate on
developing new applications and extensions of existing technology, including
EarthLink-branded wireless data services, as well as new technologies.
As a result of this relationship and the transfer of subscribers, the
Company received and recorded approximately $1,756 of gains on sales of
subscribers during 2003 and had remaining $50 and $100 of deferred revenue as of
December 31, 2004 and 2003, respectively.
F-18
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. ACQUISITION OF INTANGIBLE ASSETS
On December 1, 2004, the Company acquired certain assets from Global
Interactive, a provider of wireless products, services, and accessories. The
total purchase price of approximately $442 included the issuance of 30,000
shares of the Company's common stock valued at $12.23 per share. The total
purchase price has been recorded as an intangible asset and is being amortized
over 12 months.
On September 1, 2004, the Company purchased certain assets relating to
prepaid telephone calling cards from H. Edward Torres. The total purchase price
of approximately $75 was satisfied through the issuance of 24,671 shares of the
Company's common stock. The total purchase price has been recorded as an
intangible asset and is being amortized over 12 months.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Impairment Charge Recorded Under SFAS No. 142
During the first half of 2003, the Company identified indicators of
impairment, including changes in the Company's 2003 and 2004 operating and cash
flow forecasts, and changes in its strategic plans for certain of its acquired
businesses, which required that the Company evaluate the appropriateness of the
carrying value of its long-lived assets, principally goodwill recorded upon the
acquisitions of Outback. A write-down of goodwill totaling $193 was recorded
during the second quarter of 2003, reflecting the amount by which the carrying
amount of the respective reporting unit exceeded its respective fair value as
determined utilizing estimates of future discounted cash flows.
During the first half of 2002, the Company completed the first of the
required impairment tests of goodwill and indefinite lived intangible assets as
of January 1, 2002, and no adjustment to the carrying value of goodwill was
required at that time. During the third quarter of 2002, the Company identified
indicators of impairment, including then recent changes in the Company's 2002
and 2003 operating and cash flow forecasts, and then recent changes in its
strategic plans for certain of its acquired businesses, which required that the
Company evaluate the appropriateness of the carrying value of its long-lived
assets, principally goodwill recorded upon the acquisitions of Wynd and
Hotpaper.com, Inc. ("Hotpaper"). A write-down of goodwill totaling $8,400 was
recorded during the third quarter of 2002, reflecting the amount by which the
carrying amount of the respective reporting units exceeded their respective fair
values as determined utilizing estimates of future discounted cash flows. The
Company's annual impairment test indicated that no further impairment had
occurred in the fourth quarter of 2002 or during 2003 and 2004 relative to Wynd.
F-19
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes the activity in Goodwill for the periods
indicated:
Years Ended December 31,
2004 2003 2002
-----------------------------------------------
Beginning balance, net $ 6,000 $ 6,193 $ 14,593
Impairment charge -- (193) (8,400)
-----------------------------------------------
Ending balance, net $ 6,000 $ 6,000 $ 6,193
===============================================
F-20
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes other intangible assets subject to
amortization at the dates indicated:
December 31, 2004 December 31, 2003
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------------------------------------------- -------------------------------------------
Trade Names $ 4,572 $ (4,388) $ 184 $ 4,572 $ (4,019) $ 553
Technology 3,017 (3,017) -- 3,017 (2,925) 92
Customer Lists 2,258 (2,258) -- 2,258 (2,168) 90
Other 935 (480) 455 418 (349) 69
------------------------------------------- -------------------------------------------
$ 10,782 $ (10,143) $ 639 $ 10,265 $ (9,461) $ 804
=========================================== ===========================================
Aggregate future amortization expense for the above intangible assets is
estimated to be:
Years Ending December 31, 2005: $ 639
9. IMPAIRMENT OF OTHER LONG-LIVED ASSETS
During the years ended December 31, 2003 and 2002, the Company identified
indicators of possible impairment of its other long-lived assets. Such
indicators included the continued deterioration in the business climate for
wireless Internet service providers, significant declines in the market values
of the Company's competitors in the wireless Internet services industry, recent
changes in the Company's operating and cash flow forecasts, and changes in our
strategic plans. Based on these factors, the Company initiated significant
reductions in its workforce resulting in impairment to its property and
equipment, principally software and furniture and fixtures. The impairment
charge was calculated assuming no salvage value to be obtained from the assets.
As a result, the Company recorded impairment charges of $1,202 and $5,582 during
the years ended December 31, 2003 and 2002, respectively, for assets no longer
in use. Included in the charge for 2003 is $445, relating to equipment given
back to Eastern Computer upon the Company's default on related lease obligations
(see note 4).
10. SUPPLEMENTAL BALANCE SHEET INFORMATION
Merchandise inventories:
During 2004, the Company recorded a write-down of approximately $84 in
order to reflect inventory at the lower of cost or market. The write-down
primarily relates to a lower of cost to market adjustment for wireless PDA
models which remained unsold.
F-21
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Additionally, during 2003 and 2002, the Company recorded reserves for
excess inventory quantities of approximately $47 and $5,889, respectively. As of
December 31, 2004, the Company had applied all reserves for excess inventory
quantities to the related merchandise inventory.
Property, equipment and leasehold improvements:
Property, equipment and leasehold improvements consists of the following:
December 31,
-----------------
2004 2003
------- -------
Furniture, fixtures and equipment ............. $ 754 $ 754
Computer equipment and software ............... 6,903 6,765
Leasehold improvements ........................ 265 265
------- -------
7,922 7,784
Less: accumulated depreciation and amortization 6,982) (6,178)
------- -------
$ 940 $ 1,606
======= =======
Accrued expenses:
Accrued expenses consisted of the following:
December 31,
-----------------
2004 2003
------- -------
Settlement arrangements with vendors .......... $ -- $ 2,072
Professional fees ............................. 169 427
Carrier services .............................. 109 360
Employee compensation ......................... 128 130
Consideration for acquired intangibles ........ 45 --
Acquired subscriber withheld consideration .... 44 --
Inventory purchases ........................... 22 --
Dealer commissions ............................ 7 6
Marketing expenses ............................ 3 15
Other ......................................... 11 30
------- -------
$ 538 $ 3,040
======= =======
F-22
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. COMMITMENTS AND CONTINGENCIES
On February 15, 2002, Eagle Truck Lines Inc. (a/k/a Air Eagle, Inc.) filed
suit against GoAmerica, Inc. in the Superior Court of the State of California
for the County of Los Angeles seeking payment of $590, plus other damages,
expenses, interest and costs of suit. This action was removed to the United
States District Court for the Central District of California and subsequently,
pursuant to a motion brought by GoAmerica, transferred to the District of New
Jersey where GoAmerica was moved to have it consolidated with the action
described in the next paragraph. Air Eagle alleged that GoAmerica, as successor
in interest to Flash, failed to perform its obligations under a consulting
contract dated July 2, 1999 (the "Contract"), by and between Flash and Air
Eagle. Air Eagle alleged that GoAmerica assumed the rights and liabilities under
this Contract as a result of its purchase of substantially all of the assets of
Flash in November 2000. On September 19, 2003, Air Eagle filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court for the Central
District of California. In December 2004, the parties agreed and received court
approval to settle this litigation in consideration of GoAmerica's paying Air
Eagle $140 and Air Eagle principals' agreeing to assist GoAmerica in the
Company's litigation against the Flash Defendants below.
In a separate but related matter, on July 31, 2002, GoAmerica filed suit
against Flash and certain former officers and shareholders of Flash (the "Flash
Defendants") in the United States District Court for the District of New Jersey
for violations of federal and state securities law and common law fraud in
connection with the sale of the assets of Flash to GoAmerica. In October 2002,
each of the Flash Defendants filed answers to GoAmerica's complaint denying all
of the Company's charges, with one of the Flash Defendants adding counterclaims
against the Company and certain named officers alleging, among other things,
fraudulent misrepresentation, violations of state securities law and unjust
enrichment in excess of $1,000. The other Flash Defendants have been granted
leave to amend their answer to include substantially similar counterclaims
against the Company and Company officer defendants. The Company filed a motion
to dismiss the Flash Defendants' counterclaims, and the Flash Defendants filed
cross-motions for judgment on the pleadings and for summary judgment seeking
dismissal of the Company's claims against them. On March 2, 2005, all of the
Flash Defendants' counterclaims against the Company and the Company officer
defendants were dismissed, and the Flash Defendants' cross-motions to dismiss
the Company's claims against them were denied in all respects other than the
common law fraud claim. The Company is exploring its options as a result of
these favorable dismissals.
In September 2003, Michael Marts, an individual residing in California,
sued Boundless Depot, Scott Johnson and Robert Rademacher (collectively, the
"Boundless Depot Defendants"), among others, with respect to claims for breach
of contract by some or all of the Boundless Depot Defendants. Wynd
Communications was named as a co-defendant in this action (the "Marts Action")
as the successor-in-interest to the Deafwireless assets that Wynd and the
Company acquired as of March 1, 2003 from the Boundless Depot Defendants
pursuant to an asset purchase agreement dated as of February 8, 2003 (the
"Deafwireless Agreement"). All of the claims, aggregating approximately $433,
arose prior to execution of the Deafwireless Agreement, with more than half of
the damages claimed arising prior to 2003. Wynd and the Company are no longer
parties to the Marts Action pursuant to their motion to dismiss being granted on
March 17, 2005.
In a separate but related matter, on September 22, 2004, two of the
Boundless Depot Defendants sued GoAmerica and Wynd Communications in the
Superior Court of the State of California for the County of Los Angeles,
claiming damages of $1,000 dollars for GoAmerica's refusal to pay unattained
contingent consideration, comprising cash and/or GoAmerica Common Stock, to
Boundless Depot in connection with the Deafwireless Agreement. We believe that
the contractual contingencies of the Deafwireless Agreement were not met and
that the Boundless Depot Defendants remain in breach of their indemnity
obligations under the Deafwireless Agreement with respect to the Marts Action;
therefore the Company does not believe that any of the contingent consideration
is owed. Moreover, even if all contingencies under the Deafwireless Agreement
had been attained, the Company believes that the damages claimed in this case
are excessive since the aggregate value of such contingent consideration would
not be material. The Company intends to defend this action vigorously and may
elect to pursue counterclaims.
F-23
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Future minimum capital lease payments and future minimum lease payments
relating to office space under noncancelable operating leases as of December 31,
2004 are as follows:
Capital
Year ending December 31, Leases Operating Leases
- ------------------------------------------------------- ---------------- ----------------
2005 .................................................. $ 1 $ 291
2006 .................................................. -- 285
2007 .................................................. -- 140
2008 .................................................. -- --
2009 .................................................. -- --
Thereafter ............................................ -- --
---------------- ----------------
Total minimum lease payments .......................... 1 $ 716
================
Less amount representing interest ..................... (--)
----------------
Present value of net minimum capital ..................
lease payments ...................................... 1
Less current portion of capital lease obligations ..... (1)
----------------
Obligations under capital lease, net of current portion $ --
================
During 2004, 2003 and 2002 total rent expense was approximately $277,
$2,139 and $3,282, respectively.
At December 31, 2004, a standby letter of credit totaling approximately
$600 was outstanding as security deposit in favor of Cingular. As of December
31, 2004, $604 of cash held in the Company's bank accounts was restricted to
secure this letter of credit. As of December 31, 2003, the Company had no
standby letters of credit outstanding.
During 2002, the Company entered into employment agreements with certain
of its key executives which provide for fixed compensation. These agreements
generally continue until terminated by the employee or the Company and, under
certain circumstances, provide for salary continuance for a specified period.
The Company's maximum aggregate liability under the agreements if these
employees were terminated is approximately $175 at December 31, 2004.
12. BENEFIT PLAN
The Company has established a defined contribution plan under Section
401(k) of the Internal Revenue Code, which provides for voluntary employee
contributions of up to 15 percent of compensation for employees meeting certain
eligibility requirements. The Company contributes to the plan up to a maximum of
3 percent.
13. STOCKHOLDERS' EQUITY
On December 19, 2003, the Company granted Sunrise Securities Corp. a
warrant to purchase 10,150 shares of the Company's common stock at a price of
$12.00 per share as part of their compensation for securing bridge financing for
the Company as described in note 5. This warrant was immediately exercisable at
the date of grant. The warrant had an estimated fair market value at the date of
grant of approximately $292 and was recorded as additional deferred debt
expense. Such warrant was exercised during 2004.
F-24
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A one for ten reverse stock split was effected during May 2004.
Additionally, a one for eight reverse stock split was effected during October
2004. The Company retained the current par value of $.01 per share for all
shares of common stock. All references in the financial statements to the number
of shares outstanding, per share amounts, and stock option data of the Company's
common stock have been restated to reflect the effect of both of the reverse
stock splits for all periods presented. Stockholders' equity reflects both of
the reverse stock splits by reclassifying from "Common stock" to "Additional
paid in capital " an amount equal to the par value of the reduced shares arising
from the reverse splits.
On May 20, 2004, the Company's Board of Directors authorized the
repurchase of up to 62,500 shares of its Common Stock pursuant to a new stock
buyback program. As of December 31, 2004, the Company had repurchased an
aggregate of 24,063 shares of its Common Stock at an average price of $7.778 per
share. All purchases under the program have been made in the open market at the
Company's discretion.
The Company also issued warrants in 2003 relating to the settlement of
their lease obligations (see note 3) and as part of the bridge note financing
(see note 5).
As of December 31, 2004, the Company had reserved shares of common stock
for issuance as follows:
Exercise of common stock options...................................... 127,408
Exercise of common stock purchase warrants............................ 85,338
Employee stock purchase plan.......................................... 48,335
14. STOCK OPTION PLANS AND OTHER STOCK-BASED COMPENSATION
On August 3, 1999, the Company adopted the GoAmerica Communications Corp.
1999 Stock Option Plan. This plan provided for the granting of awards to
purchase shares of common stock. No further options will be made under the
GoAmerica Communications Corp. 1999 Stock Option Plan.
In December 1999, the Company's Board of Directors adopted the GoAmerica,
Inc. 1999 Stock Plan (the "Plan") as a successor plan to the GoAmerica
Communications Corp. 1999 Stock Option Plan, pursuant to which 60,000 additional
shares of the Company's common stock have been reserved for issuance to selected
employees, non-employee directors and consultants. In May 2001, the Company's
shareholders approved an increase in the maximum number of shares issuable under
the Plan from 60,000 to 132,809 shares.
F-25
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Under the terms of the Plan, a committee of the Company's Board of
Directors may grant options to purchase shares of the Company's common stock to
employees and consultants of the Company at such prices that may be determined
by the committee. The Plan provides for award grants in the form of incentive
stock options and non-qualified stock options. Options granted under the Plan
generally vest annually over 4 years and expire after 10 years.
The following table summarizes activity on a combined basis for the plans
during 2004, 2003 and 2002:
Number of Weighted-Average
Options Exercise Price
--------------- ---------------
Outstanding at January 1, 2002 ......... 76,189 $ 376.00
Granted ................................ 72,453 $ 66.40
Exercised .............................. (2,888) $ 40.00
Cancelled .............................. (30,451) $ 403.20
---------------
Outstanding at December 31, 2002 ....... 115,303 $ 177.60
Granted ................................ 12,188 $ 24.80
Exercised .............................. (8,931) $ 40.00
Cancelled .............................. (41,605) $ 292.00
---------------
Outstanding at December 31, 2003 ....... 76,955 $ 105.60
Granted ................................ 10,000 $ 2.35
Exercised .............................. (6,776) $ 29.23
Cancelled .............................. (9,799) $ 118.14
---------------
Outstanding at December 31, 2004 ....... 70,380 $ 116.66
===============
Exercisable at December 31, 2004 ....... 48,459 $ 127.20
===============
Exercisable at December 31, 2003 ....... 40,076 $ 157.60
===============
Exercisable at December 31, 2002 ....... 53,303 $ 219.20
===============
Available for grant at December 31, 2004 57,028 --
===============
The following table summarizes information about fixed price stock options
outstanding at December 31, 2004:
Outstanding Exercisable
------------------------------------------------------ -----------------------------------
Weighted-Average
Number Weighted-Average Remaining Number Weighted-Average
Range of Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
- ------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
$2.35 10,000 $ 2.35 9.8 years 3,333 $ 2.35
$20.00-$26.40 28,672 $ 23.86 5.5 years 16,515 $ 23.95
$36.00-$44.80 5,875 $ 44.12 7.0 years 7,094 $ 44.64
$56.80-$84.80 4,471 $ 84.64 5.6 years 4,532 $ 84.64
$104.80-$156.80 11,565 $ 146.93 7.9 years 7,195 $ 144.34
$162.40-$195.20 3,096 $ 166.54 5.8 years 3,089 $ 166.55
$401.60-$600.00 5,963 $ 432.58 6.1 years 5,963 $ 432.58
$637.60-$661.60 13 $ 637.60 6.8 years 13 $ 637.60
$1200.00-$1280.00 725 $1268.97 6.6 years 725 $1268.97
---------------- ----------------
70,380 48,459
================ ================
F-26
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For certain options granted during 2000 and 1999, the Company has recorded
pursuant to APB No. 25 approximately $8,457 and $7,799, respectively, of
deferred compensation expense representing the difference between the exercise
price and the market value of the common stock on the date of grant. These
amounts were being amortized over the vesting period of each option and amounted
to approximately $314 and $2,315 during the years ended December 31, 2003 and
2002, respectively.
The following table discloses, for the year ended December 31, 2004, 2003
and 2002, the number of options granted and certain weighted-average
information:
Year ended December 31,
---------------------------------------------------------------------------------------------------------
2004 2003 2002
--------------------------------- --------------------------------- ---------------------------------
Number of Fair Exercise Number of Fair Exercise Number of Fair Exercise
Options Value Price Options Value Price Options Value Price
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Exercise price
greater than
market price ... -- $ -- $ -- -- $ -- $ -- -- $ -- $ --
Exercise price
equals market
price .......... 10,000 2.35 2.35 12,188 24.80 24.80 72,453 66.40 66.40
Exercise price
less than market
price .......... -- -- -- -- -- -- -- -- --
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123 (see note
1). For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The fair value
for these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions for 2004, 2003 and 2002:
weighted-average risk-free interest rate of 4.20%, 4.20% and 4.03% respectively;
expected volatility of 0.80; no dividends; and a weighted-average expected life
of the options of 2.0 years, 2.0 years and 3.0 years, respectively.
In December 1999, the Company's Board of Directors adopted the Employee
Stock Purchase Plan effective upon the Company's initial public offering of its
common stock, which was completed on April 12, 2000. The Company initially
reserved 50,000 shares of common stock for issuance under the plan. During 2003
and 2002, there were 600 and 1,065 shares, respectively, sold pursuant to the
plan.
F-27
15. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
--------------------
2004 2003
-------- --------
Deferred tax assets:
Net operating loss carryforwards ................. $ 70,587 $ 71,710
Deferred compensation ............................ 8,635 8,635
Reserves and accruals ............................ 626 461
Amortization of Goodwill ......................... 4,024 3,964
Other ............................................ 2,388 2,701
Less valuation allowance ............................. (86,261) (87,302)
-------- --------
Deferred tax assets .................................. 1 169
Deferred tax liabilities:
Intangible assets ................................ (1) (169)
-------- --------
Net deferred tax assets .............................. $ -- $ --
======== ========
A reconciliation setting forth the differences between the effective tax
rate of the Company and the U.S. statutory rate is as follows:
Year ended December 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Statutory federal income tax (benefit) at 34% ............... $ (1,511) $ (2,764) $(19,002)
State income tax (benefit), net of federal benefit .......... (372) (122) (1,911)
Non-deductible expenses, primarily impairment of goodwill ... 2,193 1,350 4,130
Increase in valuation allowance ............................. (1,042) 1,252 16,347
-------- -------- --------
Total ....................................................... $ (732) $ (284) $ (436)
======== ======== ========
The state tax benefits recorded in 2004, 2003 and 2002 of $732, $284 and
$436, respectively, are attributable to the Company's sa le of certain state net
operating loss carryforwards.
At December 31, 2004, the Company had a federal and state net operating
loss ("NOL") carryforward of approximately $181,200 and $149,500, respectively.
The federal NOL carryforwards expire beginning in 2011 and state NOL's beginning
in 2005. The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss and tax credit carryforwards in
periods following a corporate "ownership change." In general, for federal income
tax purposes, an ownership change is deemed to occur if the percentage of stock
F-28
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of a loss corporation owned (actually, constructively and, in some cases,
deemed) by one or more "5% shareholders" has increased by more than 50
percentage points over the lowest percentage of such stock owned during a
three-year testing period. During 1999, such a change in ownership occurred. As
a result of the change, the Company's ability to utilize certain of its net
operating loss carryforwards will be limited to approximately $1,400 of taxable
income, per year. In addition, the Company acquired additional net operating
losses through its acquisitions of Wynd and Hotpaper. The Company believes that
an ownership change has occurred with respect to these entities. The effect of
an ownership change would be the imposition of an annual limitation on the use
of net operating loss carryforwards attributable to periods before the change.
The Company has not performed a detailed analysis to determine the amount of the
potential limitations. In addition, the Company has not performed a detailed
analysis to determine the amount of the potential limitations as a result of the
March financing.
F-29
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below summarizes the Company's unaudited quarterly operating
results for years ended December 31, 2004 and 2003.
Quarter Ended
2004 March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Net revenue and other income ......... $ 1,948 $ 1,597 $ 1,370 $ 1,307
Cost of revenue ...................... (1,195) (974) (733) (831)
Operating expenses ................... (1,865) (1,651) (1,511) (1,702)
Depreciation and amortization expenses (532) (399) (267) (288)
Settlement gains, net ................ 1,621 -- (140) 13
Interest (expense) income, net ....... (1,065) 36 38 47
Benefit from income taxes ............ -- -- -- 732
Net (loss) ........................... $ (1,088) $ (1,391) $ (1,243) $ (722)
Net (loss) per common share:
- Basic .......................... $ (1.09) $ (0.68) $ (0.61) $ (0.35)
- Diluted ........................ $ (1.09) $ (0.68) $ (0.61) $ (0.35)
2003 March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Net revenue and other income ......... $ 3,103 $ 3,331 $ 3,123 $ 2,321
Cost of revenue ...................... (1,846) (1,533) (1,610) (660)
Operating expenses ................... (4,578) (3,056) (1,942) (2,322)
Depreciation and amortization expenses (814) (944) (581) (654)
Impairment of long-lived assets ...... -- (1,245) -- (150)
Gain on sale of subscribers .......... 1,180 565 11 --
Settlement gains, net ................ -- -- -- 85
Interest income, net ................. (12) 3 (4) (262)
Benefit from income taxes ............ -- -- -- 284
Net (loss) ........................... $ (2,967) $ (2,879) $ (1,003) $ (1,358)
Net (loss) per common share:
- Basic .......................... $ (4.39) $ (4.26) $ (1.48) $ (1.98)
- Diluted ........................ $ (4.39) $ (4.26) $ (1.48) $ (1.98)
F-30
GOAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17. SUPPLEMENTAL CASH FLOW INFORMATION
The table below presents the Company's supplemental disclosure of cash
flow information for the years ended December 31, 2004, 2003 and 2002.
YEARS ENDED DECEMBER 31,
----------------------------
2004 2003 2002
------- ------- -------
Supplemental disclosure of cash flow information:
Interest paid ............................................. $ 32 $ 21 $ 91
Non-cash investing and financing activities:
Beneficial conversion feature of convertible bridge note
payable ................................................ -- 528 --
Conversion of bridge note payable into common stock ....... 1,015 -- --
Application of deferred financing costs against proceeds
from the sale of stock ................................. 606 -- --
Issuance of shares for vendor settlements ................. 450 -- --
Issuance of shares to acquire intangible assets ........... 442 -- --
Issuance of warrant to placement agent to secure financing -- 292 --
Restricted cash utilized to pay accrued expenses .......... -- 556 --
Conversion of capital lease obligation into an account
payable ................................................. -- 152 --
Accrued expenses related to acquisition of subscribers .... -- 50 --
Accrued expenses related to the incurrence of deferred
financing expense ...................................... -- 70 --
F-31
SCHEDULE II
GOAMERICA, INC.
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
BALANCE AT ADDITIONS: BALANCE AT
BEGINNING OF CHARGED TO COSTS END OF
PERIOD AND EXPENSES DEDUCTIONS PERIOD
--------------- --------------- --------------- ---------------
YEAR ENDED DECEMBER 31, 2004
Allowance for doubtful accounts $ 1,213 $ 239 $ 849(1) $ 603
Inventory Reserve -- 84 84(3) --
YEAR ENDED DECEMBER 31, 2003
Allowance for doubtful accounts $ 3,418 $ 534 $ 2,739(1) $ 1,213
Inventory Reserve -- 47 47(3) --
Sales allowances, discounts &
returns 513 134 647(2) --
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts $ 2,675 $ 3,221 $ 2,478(1) $ 3,418
Inventory Reserve 4,740 5,889 10,629(3) --
Sales allowances, discounts &
returns 1,378 2,686 3,551(2) 513
(1) Uncollectible accounts written-off, net of recoveries.
(2) Returns and discounts charged to reserve.
(3) Inventory discounts charged to reserve.
F-32