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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to _________________
Commission File Number 0-18299
i3 MOBILE, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0335259
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
181 Harbor Drive 06902
Stamford, Connecticut (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (203) 428-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes_X__ No ___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class August 13, 2002
----- --------------
Common Stock, Par Value $.01 20,471,360
1
i3 MOBILE, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I - Financial Information
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheet as of June 30, 2002 and
December 31, 2001..................................................... 3
Consolidated Statement of Operations for the Three and Six
Months Ended June 30, 2002 and 2001................................... 4
Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 2002 and 2001................................... 5
Notes to Consolidated Financial Statements.............................. 6
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 8
Item 3. - Quantitative and Qualitative Disclosures about Market Risk.... 20
Part II - Other Information
Item 2. - Changes in Securities and Use of Proceeds .................... 20
Item 4. - Submission of Matters to a Vote of Security Holders .......... 20
Item 6. - Exhibits and Reports on Form 8-K.............................. 21
Signatures.............................................................. 22
2
i3 MOBILE, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
2002 2001
---------- -----------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 34,375 $ 52,612
Accounts receivable, net of allowances....................... 482 651
Deferred advertising......................................... - 2,245
Prepaid expenses and other current assets.................... 1,162 749
--------- ----------
Total current assets.................................. 36,019 56,257
Fixed assets, net ........................................... 9,100 11,423
Deposits and other non-current assets........................ 540 778
--------- ----------
Total assets.......................................... $ 45,659 $ 68,458
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 1,005 $ 1,827
Accrued liabilities ......................................... 5,719 3,363
Capital lease obligation, current portion ................... 258 568
--------- ----------
Total liabilities..................................... 6,982 5,758
Stockholders' equity:
Preferred stock; $.01 par value per share, 50,000 shares
authorized, none issued........................................ -- --
Common stock; $.01 par value per share, 75,000,000 shares
authorized, 24,805,640 and 24,788,740 shares issued ........... 248 248
Additional paid-in capital................................... 166,986 166,919
Notes receivable from stockholder ........................... (500) (500)
Deferred compensation........................................ (68) (133)
Accumulated deficit.......................................... (120,852) (98,871)
Treasury stock at cost, 4,334,280 and 2,230,800 shares ...... (7,137) (4,963)
--------- ----------
Stockholders' equity ................................. 38,677 62,700
--------- ----------
Total liabilities and stockholders' equity............ $ 45,659 $ 68,458
========== ============
NOTE: The balance sheet at December 31, 2001 has been derived from the audited
consolidated financial statements at that date.
See accompanying notes to consolidated financial statements.
3
i3 MOBILE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Net revenue........................................... $ 788 $ 1,349 $ 1,699 $ 2,682
-------- ------- -------- --------
Expenses:
Operating..................................... 1,859 907 3,557 1,784
Sales and marketing........................... 5,695 1,398 9,496 2,720
Product development........................... 1,379 2,307 2,858 3,428
General and administrative.................... 4,099 3,970 8,173 7,818
-------- ------- -------- --------
Total expenses........................................ 13,032 8,582 24,084 15,750
-------- ------- -------- --------
Operating loss........................................ (12,244) (7,233) (22,385) (13,068)
Interest income, net.................................. (195) (762) (404) (1,903)
-------- ------- -------- --------
Net loss.............................................. $(12,049) $(6,471) $(21,981) $(11,165)
======== ======= ======== ========
Net loss per share - basic and diluted ............... $ (0.57) $ (0.28) $ (1.01) $ (0.49)
======== ======= ======== ========
Shares used in computing net loss per share .......... 21,018 22,766 21,789 22,798
======== ======= ======== ========
See accompanying notes to consolidated financial statements.
4
i3 MOBILE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
----------- -----------
June 30, June 30,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flow from operating activities:
Net loss........................................................... $(21,981) $(11,165)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation....................................................... 3,034 1,989
Non-cash stock compensation charges................................ 108 293
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable......................... 169 (226)
Decrease in deferred advertising................................... 2,245 --
(Increase) in other assets......................................... (168) (441)
(Decrease) in accounts payable..................................... (822) (567)
Increase (decrease) in accrued liabilities......................... 2,356 (1,004)
-------- --------
Net cash (used) in operating activities................................. (15,059) (11,121)
-------- --------
Investing activities:
Purchase of fixed assets........................................... (711) (3,333)
-------- --------
Net cash (used) in investing activities................................. (711) (3,333)
-------- --------
Financing activities:
Payments on capital lease obligations.............................. (310) (409)
Proceeds from exercise of stock options............................ 17 55
Repayments of notes receivable - related parties................... -- (4)
Repurchase of common stock ........................................ (2,174) (320)
-------- --------
Net cash (used) in financing activities................................. (2,467) (678)
-------- --------
Decrease in cash and cash equivalents................................... (18,237) (15,132)
Cash and cash equivalents at beginning of period........................ 52,612 84,900
-------- --------
Cash and cash equivalents at end of period.............................. $ 34,375 $ 69,768
======== ========
See accompanying notes to consolidated financial statements.
5
i3 MOBILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1 - COMPANY OVERVIEW:
i3 Mobile, Inc., "i3" or the "Company", was incorporated in Delaware on
June 28, 1991. During 2001, the Company evolved from a company that distributed
customized text-based information to mobile devices under the "Powered by i3
Mobile" product brand into a company that it believes is among the first to
create a premium mobile subscription information and communication service for
telephones. This service, Pronto, is being marketed directly to consumers and
delivers information on demand 24 hours a day, combining the service of a mobile
concierge with the power of voice recognition technology.
Pronto provides telephone users with information accessible through the
Company's live operators and proprietary, automated flat menu voice recognition
system. The Company's live operators provide its subscribers with services such
as making restaurant reservations and providing driving directions. The
Company's live operators are also available to answer questions outside the
scope of its automated voice recognition system, and can assist subscribers if
the automated voice recognition system cannot properly answer the request. The
Company's automated content currently features news, stock quotes, sports,
weather, movie reviews and schedules and leisure categories such as horoscopes
and lottery results. The Company's content is automatically accessible in an
"ask a question/get an answer" format.
The Company also offers wireless alert products in many different
categories for mobile device consumers. These "Powered by i3 Mobile" products
are sold primarily through relationships with wireless network operators on a
subscription basis.
LIQUIDITY:
The Company has incurred substantial losses and negative cash flows
from operations in every fiscal period since inception. For the six months ended
June 30, 2002, the Company incurred a loss from operations of approximately
$22.4 million and negative cash flows of approximately $18.2 million. As of June
30, 2002, the Company had an accumulated deficit of approximately $120.9
million. Management expects operating losses and negative cash flows to continue
for the foreseeable future as the Company incurs ongoing costs and expenses
related to brand development, marketing and other promotional activities,
expansion of product offerings and development of relationships with other
businesses. During July 2002, the Company began the implementation of certain
cost savings measures to manage working capital. These included a reduction of
television marketing and other initiatives, a transition of the customer
provisioning and service activities of Pronto from an outside partner to an
in-house solution, the renegotiation and/or termination of certain of its
content relationships, and a reduction of approximately 10% of its workforce.
The reduction of workforce will result in a $0.4 million charge to the Company's
results of operations in the third quarter of 2002. Certain of these costs could
be further reduced if working capital continues to decrease significantly.
Future failures to generate sufficient revenues, raise additional capital or
reduce certain discretionary spending could have a material adverse effect on
the Company's ability to continue as a going concern and to achieve its intended
business objectives.
NOTE 2 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Certain information
and note disclosures normally included in financial statements have been omitted
pursuant to Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included in the accompanying unaudited financial
statements. Operating results for the three and six month periods ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2002.
6
For further information, refer to the consolidated financial statements
and footnotes thereto included in our annual report on Form 10-K for the year
ended December 31, 2001.
Certain reclassifications have been made for consistent presentation.
NOTE 3 - SIGNIFICANT CUSTOMERS:
During the six months ended June 30, 2002 and June 30, 2001, the
Company had two wireless network operator customers for its legacy wireless
alert product, which combined, accounted for approximately 75% of its total net
revenues for both periods. During April 2002, the Company received notice from
its largest wireless network operator customer, who accounted for 56% of net
revenues for the six month period ending June 30, 2002, that it will be
terminating its legacy wireless alert product with the Company effective
December 31, 2002.
NOTE 4 - ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The Company maintained an allowance for doubtful accounts of $0.1
million at June 30, 2002 and December 31, 2001, respectively.
NOTE 5 - STOCK REPURCHASES:
On April 16, 2001, the Company issued a press release announcing that
its Board of Directors had authorized a share repurchase program to acquire up
to 2.3 million shares of its common stock. Pursuant to this repurchase program,
such purchases will be made from time to time in the open market, subject to
general market and other conditions. The Company will finance the repurchase
program through existing cash resources. Shares acquired pursuant to this
repurchase program will become treasury shares and will be available for
reissuance for general corporate purposes. As of June 30, 2002, and December 31,
2001, 0.4 million shares and 0.3 million shares have been repurchased by the
Company under this plan at a weighted average repurchase price of $1.86 per
share and $2.12 per share, respectively.
During April 2002, the Company announced that it had purchased, through
a privately negotiated transaction, 1.5 million shares of the Company's common
stock, at $1.10 per share, from Keystone Ventures IV, L.P. and Keystone Ventures
V, L.P., which represented a discount to the fair market value of the shares at
the time of such repurchase. The Keystone entities had purchased the shares in a
private placement prior to the Company's April 2000 initial public offering.
During the three months ended June 30, 2002, the Company also
repurchased 0.5 million shares of its common stock from a former member of the
Company's Board of Directors. The average price of these repurchases were $0.85
per share, which represented no greater than the fair market value of the shares
at the time of such repurchases.
NOTE 6 - RELATED PARTY TRANSACTIONS:
On September 10, 2001, the Company entered into a note agreement with
RMU Management, LLC, ("RMU"), an entity controlled by a then member of the
Company's Board of Directors. Under the terms of the note agreement, as amended,
the Company agreed to lend RMU $0.5 million, until December 31, 2002, at an
interest rate equal to the prime rate plus two percent. The note is secured by
833,333 shares of the Company's common stock owned by RMU.
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes included in this document and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements and notes thereto for the years ended December
31, 2001, 2000 and 1999 included in our annual report on Form 10-K for the year
ended December 31, 2001, and presumes that readers have access to, and will have
read, "Management's Discussion and Analysis of Financial Conditions and Results
of Operations" contained in such Form 10-K.
OVERVIEW
From our inception in June 1991 until 2001, our business was comprised
of distributing customized text-based information to mobile devices under the
"Powered by i3 Mobile" product brand. During 2001, we evolved from a company
that distributed customized text-based information to mobile devices under the
"Powered by i3 Mobile" product brand into a company that we believe is among the
first to create a premium mobile subscription information and communication
service for telephones. This service, Pronto, is being marketed directly to
consumers and delivers information and service on demand 24 hours a day,
combining the service of a mobile concierge with the simplicity of flat-menu
voice recognition technology.
In fiscal 2001, we invested significant financial resources developing
Pronto and its supporting technology infrastructure. In addition, we spent
approximately $1 million on independent consumer research to identify specific
consumer needs and preferences in order to develop applications that are most
compelling to telephone users, especially mobile telephones. The Pronto
experience, unlike the experience afforded by the current "wireless internet,"
leverages the core voice interface functionality of telephones, rather than the
telephone keypad, to create a seamless user experience.
Pronto was test marketed in the Hartford/New Haven region of
Connecticut in the fourth quarter of 2001. We conducted a coordinated national
marketing campaign for Pronto during the second quarter of 2002. As of June 30,
2002 we had approximately 3,400 paying subscribers on our Pronto service.
We anticipate that our financial results for the remainder of 2002 and
during the first half of 2003 will be principally driven by our ability to
properly allocate the extent and timing of our limited cash resources to
technology development and other customer acquisition efforts and to the
enhancement of the capacity of the Pronto service call center infrastructure.
The application of these resources must be coordinated with and take into
account the projected rate of growth of our Pronto service subscriber base and
the pricing assumptions in our business model. Based on our marketing to date,
management has made significant estimates regarding the anticipated growth of
our subscriber base, taking into account many variables, certain of which are
outside our control. These variables include growth in the market for wireless
services, customer demand for our products and services, the efficacy of our
marketing efforts, and the reliability and speed of our technology
infrastructure and live operator service. We may decide to expand the
capabilities of our existing third party call center arrangement, acquire a call
center operation, or establish our own call center; each of these choices would
require significantly different levels of funding. This decision will be
influenced, in part, by the projected and actual rate of growth in the Pronto
service subscriber base and related revenue growth. Our business model requires
us to expand and improve our technology and call center capabilities in order to
properly service anticipated increased usage by a growing subscriber base. If
our subscriber base does not grow at projected rates, or if our pricing
assumptions are incorrect, then our up front expenses, including our decision
regarding call center alternatives, will exceed our revenues by amounts greater
than currently anticipated, which will accelerate our projected losses, place
additional pressure on our cash resources, and impact the estimated fair value
of our long-term assets.
8
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
Net Revenue. Net revenue decreased 42% to $0.8 million for the three
months ended June 30, 2002 from $1.3 million for the three months ended June 30,
2001. This decrease was attributable to a $0.3 million decrease in subscription
revenues from wireless network operators as well as $0.3 million of
non-recurring development revenues recognized during the 2001 period. These
declines were partially offset by $0.1 million in revenues realized from the
Pronto product offering in the 2002 period. We would anticipate that
subscription revenues from wireless network operators will continue to decrease
substantially in the future as we de-emphasize this legacy product and implement
our Pronto service. During April 2002, we received notice from our largest
wireless network operator customer, who accounted for 50% of net revenues for
the three-month period ending June 30, 2002, that it will be terminating its
legacy wireless alert product with us effective December 31, 2002. There can be
no certainty as to the impact that the development and offering of Pronto will
have on our net revenue.
Operating Expenses. Operating expenses increased by 105% to $1.9
million for the three months ended June 30, 2002 from $0.9 million for the three
months ended June 30, 2001. The increase was primarily attributed to the cost of
expanding our live operator, customer service and customer acquisition costs in
connection with the marketing and offering of Pronto in the 2002 period. During
the remainder of 2002, we will continue to incur substantial operating expenses
relating to our various Pronto-related requirements.
Sales and Marketing Expenses. Sales and marketing expenses increased by
307% to $5.7 million for the three months ended June 30, 2002 from $1.4 million
for the three months ended June 30, 2001. The increase from the 2001 period is
primarily attributed to direct marketing initiatives for Pronto in the 2002
period which included television, direct mail, on-line and print advertising, of
which approximately $1.3 million arose from our fulfillment of our commitment to
purchase television advertising in such amount from the National Broadcasting
Company, Inc. As of June 30, 2002, we are contractually obligated to purchase
for cash approximately $1.0 million in the aggregate in advertising from CNN
Newsource Inc. and ESPN Inc. This $1.0 million commitment is scheduled to be
fulfilled as follows, $0.3 million is to be purchased by September 30, 2002,
$0.4 million by December 31, 2002, and $0.3 million by June 30, 2003. We
anticipate that sales and marketing expenses will decrease, as compared to the
second quarter of 2002, reflecting our recent cost management initiatives.
Product Development Expenses. Product development expenses decreased by
40% to $1.4 million for the three months ended June 30, 2002 from $2.3 million
for the three months ended June 30, 2001. The decrease was primarily as a result
of reduced outside labor costs during the 2002 period which were associated with
the creation of Pronto in the 2001 period.
General and Administrative Expenses. General and administrative
expenses increased by 3% to $4.1 million for the three months ended June 30,
2002 from $4.0 million for the three months ended June 30, 2001. This increase
from the June 30, 2001 period was primarily attributable to depreciation which
increased $0.5 million as compared to the 2001 period due to our capital
investing activities undertaken in 2001, offset by $0.4 million reduction in
personnel and related costs.
Interest Income, Net. Net interest income was $0.2 million for the
three months ended June 30, 2002 as compared to $0.8 million for the three
months ended June 30, 2001. The decrease was attributable to a lower amount of
funds invested in the 2002 period as compared to 2001 as well as lower average
returns on investments due to a general decrease in interest rates. We expect
net interest income to decline in the near future as we continue to reduce the
amount of funds invested.
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
Net Revenue. Net revenue decreased 37% to $1.7 million for the six
months ended June 30, 2002 from $2.7 million for the six months ended June 30,
2001. This decrease was attributable to a $0.6 million decrease in subscription
revenues from wireless network operators as well as $0.5 million of
non-recurring development revenues recognized during the 2001 period offset by
$0.1 million in revenues realized from the Pronto product offering in the 2002
period. We would anticipate that subscription revenues from wireless network
operators will continue to decrease substantially in the future as we
de-emphasize this legacy product and implement our Pronto service. During April
2002, we received notice from our largest
9
wireless network operator customer, who accounted for 56% of net revenues for
the six months ending June 30, 2002, that it will be terminating its legacy
wireless alert product with us effective December 31, 2002. There can be no
certainty as to the impact that the development and offering of Pronto will have
on our net revenue.
Operating Expenses. Operating expenses increased by 99% to $3.6 million
for the six months ended June 30, 2002 from $1.8 million for the six months
ended June 30, 2001. The increase was primarily attributed to the cost of
expanding our live operator, customer service and customer acquisition costs in
connection with the marketing and offering of Pronto in the 2002 period. During
the remainder of 2002, we will continue to incur substantial operating expenses
relating to our various Pronto-related requirements.
Sales and Marketing Expenses. Sales and marketing expenses increased by
249% to $9.5 million for the six months ended June 30, 2002 from $2.7 million
for the six months ended June 30, 2001. The increase from the June 30, 2001
period is primarily attributed to $4.3 million in direct marketing initiatives
in the 2002 period which included television, direct mail, on-line and print
advertising as well as our utilization of non-cash media credits with the
National Broadcasting Company, Inc. which reduced our deferred advertising
asset, amounting to $2.2 million of expense. The increase in the sales and
marketing expenses for the six month period ended June 30, 2002 is attributable
to increased marketing of our Pronto product. As of June 30, 2002, we are
contractually obligated to purchase for cash approximately $1.0 million in the
aggregate in advertising from CNN Newsource Inc. and ESPN Inc. This $1.0 million
commitment is scheduled to be fulfilled as follows, $0.3 million to be purchased
by September 30, 2002, $0.4 million by December 31, 2002, and $0.3 million by
June 30, 2003. We anticipate that sales and marketing expenses will decrease, as
compared to the six months ended June 30, 2002, reflecting our recent cost
management initiatives.
Product Development Expenses. Product development expenses decreased by
17% to $2.9 million for the six months ended June 30, 2002 from $3.4 million for
the six months ended June 30, 2001. The decrease was primarily as a result of
reduced outside labor costs during the 2002 period which were associated with
the creation of Pronto in the 2001 period.
General and Administrative Expenses. General and administrative
expenses increased by 5% to $8.2 million for the six months ended June 30, 2002
from $7.8 million for the six months ended June 30, 2001. This increase from the
June 30, 2001 period was primarily attributable to an increase in depreciation
of $1.0 million as compared to the prior year period due to our capital
investing activities undertaken in 2001, partially offset by a $0.4 million
reduction in personnel and related costs.
Interest Income, Net. Net interest income was $0.4 million for the six
months ended June 30, 2002 as compared to $1.9 million for the six months ended
June 30, 2001. The decrease was attributable to a lower amount of funds invested
in the 2002 period as compared to 2001 as well as lower average returns on
investments due to a general decrease in interest rates. We expect net interest
income to decline in the near future as we continue to reduce the amount of
funds invested.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception we have financed our operations primarily through
sales of our common and preferred securities and the issuance of long-term debt,
which has resulted in aggregate cash proceeds of $130.1 million through June 30,
2002. We have incurred substantial losses and negative cash flows from
operations in every fiscal period since inception. For the six months ended June
30, 2002, we have incurred a loss from operations of approximately $22.4 million
and negative cash flows from operations of $18.2 million. As of June 30, 2002,
we have an accumulated deficit of approximately $120.9 million.
Net cash used in operating activities was $15.1 million for the six
months ended June 30, 2002 and $11.1 million for the six months ended June 30,
2001. The principal use of cash in each of these periods was to fund our losses
from operations.
We believe that our current cash and cash equivalents will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. We anticipate utilizing our
cash and cash equivalents to invest in product development to further refine our
content delivery and business systems support and to fund
10
expected losses from operations. Specifically, we anticipate such utilization to
include subscriber acquisition efforts as well as operating expenses associated
with our Pronto product offering, such as call center, live operator and
associated expenses, ongoing refinement of our speech recognition technology,
and expanded content acquisition. In addition, we may incur significant uses of
cash in connection with possible strategic acquisitions. We anticipate our
overall cash expenditures in 2002 will exceed the total cash used in 2001. The
anticipated cash expenditures for the remainder of 2002 include approximately
$2.5 million of non-cancelable commitments which include, among other things,
rent, marketing and technology commitments. Because we implemented in 2002 a
business model focusing on the direct to consumer marketing of the Pronto suite
of services, and, during 2002, will continue to de-emphasize our legacy wireless
alert product offering, we anticipate that our historical source of revenues
will diminish, and that we will incur negative operating margins through 2002
and into 2003 and net losses throughout 2002 and 2003 as we incur significant
marketing, sales and development expenses in connection with Pronto. While we
anticipate that revenues from Pronto will eventually replace and exceed those
from our legacy wireless alert business, there can be no assurance of this
occurrence. In addition, we may not generate revenues at levels sufficient to
cover anticipated expenses, resulting in ongoing net losses and depletion of our
cash resources. Certain of these expenses could be further reduced if working
capital further decreases significantly. In such event, we would need to seek
and obtain additional financing; there can be no assurance we will be able to do
so on favorable terms, or at all. Future failures to generate sufficient
revenues, raise additional capital or reduce certain discretionary spending
could have a material adverse effect on our ability to continue as a going
concern and to achieve our intended business objectives. During July 2002, we
began the implementation of certain cost savings measures to manage our working
capital. These included a reduction of television marketing and other
initiatives, a transition of the customer provisioning and service activities of
Pronto from an outside partner to an in-house solution, the renegotiation and/or
termination of certain of our content relationships, and a reduction of
approximately 10% of our workforce.
Net cash used in investing activities was $0.7 million for the six
months ended June 30, 2002 compared to $3.3 million for the six months ended
June 30, 2001. The decrease in the 2002 period was principally attributed to a
reduction of capitalized expenses related to Pronto as compared to the 2001
period.
Net cash used in financing activities was $2.5 million for the six
months ended June 30, 2002 and $0.7 million for the six months ended June 30,
2001. The principal uses of cash in the 2002 period were $2.2 million for the
purchase of treasury stock and $0.3 million for the repayment of certain capital
lease obligations. The principal uses of cash in the 2001 period were $0.4
million for the repayment of certain capital lease obligations and $0.3 million
for the purchase of treasury stock.
As of June 30, 2002, we had cash and cash equivalents of $34.4 million and
working capital of $29.0 million.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" ("FAS 145") was issued. FAS 145 updates,
clarifies and simplifies existing accounting pronouncements and is generally
effective for transactions occurring after May 15, 2002. The adoption of this
statement did not have a material impact on the Company's financial position or
results of operations.
In June 2002, Statement of Financial Accounting Standards No. 146, "Accounting
for Exit or Disposal Activities" ("FAS No. 146") was issued. FAS No. 146
addresses the accounting for costs to terminate a contract that is not a capital
lease, costs to consolidate facilities and relocate employees, and involuntary
termination benefits under one-time benefit arrangements that are not an ongoing
benefit program or an individual deferred compensation contract. A liability for
contract termination costs should be recognized and measured at fair value
either when the contract is terminated or when the entity ceases to use the
right conveyed by the contract. A liability for one-time termination benefits
should be recognized and measured at fair value at the communication date if the
employee would not be retained beyond a minimum retention period (i.e., either a
legal notification period or 60 days, if no legal requirement exists). For
employees which will be retained beyond the minimum retention period, a
liability should be accrued ratably over the future service period. The
provisions of the statement will
11
be effective for disposal activities initiated after December 31, 2002. The
Company is currently evaluating the financial impact of adoption of SFAS No.
146.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. When used in this report,
the words "believe," "anticipate," "think," "intend," "plan," "expect,"
"project," "will be" and similar expressions identify such forward-looking
statements. The forward looking statements included herein are based on current
expectations and assumptions that involve a number of risks and uncertainties,
including the statements in Liquidity and Capital Resources regarding the
adequacy of funds to meet funding requirements. Our actual results may differ
significantly from the results discussed in the forward-looking statements. A
number of uncertainties exist that could affect our future operating results,
including, without limitation, the growth rate of the market for wireless
products, consumer awareness of our products, the progress and cost of
development of our products and services, the timing and market acceptance of
those products and services, our ability to manage our cash resources until we
are able to generate revenues and profitable operations from our Pronto product,
our history of losses, competitive economic conditions, and general economic
factors. We have incurred significant operating losses since our inception.
There can be no assurance that we will be able to achieve or maintain
profitability in the future. In light of the significant risks and uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such statements should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
Before deciding to invest in i3 Mobile or to maintain or increase your
investment, you should carefully consider the risks described below, in addition
to the other information contained in this report and in our other filings with
the SEC. Additional risks and uncertainties not presently known to us may also
affect our business operations. If any of these risks actually occur, our
business, financial condition or results of operations could be seriously
harmed. In that event, the market price of our common stock could decline and
you may lose all or part of your investment.
We have a new product and business model, which makes predictions of
our future results of operations difficult.
During 2001 we initiated our current business model involving offering
subscription-based voice-activated premium wireless content and services, and in
the fall of 2001 we launched local consumer testing of our current "Pronto"
service offering. We conducted a national marketing and sales campaign for
Pronto during the second quarter of 2002. Due to our new product offering and
business model, and evolving consumer preferences in our industry, it is
difficult to predict our future results of operations. Investors must consider
our business, industry and prospects in light of the risks and difficulties
typically encountered by companies in rapidly evolving and intensely competitive
markets requiring significant capital expenditures such as those in which we are
engaged.
We have a history of losses and may not be able to generate sufficient
net revenue from our new business in the future to achieve or sustain
profitability.
We have incurred losses since inception and expect that our net losses
and negative cash flow will continue for the foreseeable future as we seek to
implement our business plan, expand our service infrastructure, attract
subscription customers and grow our business. To date, our revenues have largely
come from our legacy "Powered by i3 Mobile" SMS alerts distribution
arrangements, and it is anticipated that this revenue stream will decrease as we
develop and expand our new business. We cannot assure you that we will ever
generate sufficient net revenue to achieve or sustain profitability.
A high percentage of our expenses are, and will continue to be, fixed.
We may also incur significant new costs related to possible acquisitions and the
integration of new technologies. We expect to continue to incur significant
expenses for product development, sales and marketing, call center operation,
customer support, developing distribution channels
12
and general and administrative expenses as we seek to increase our product and
service offerings, expand into new markets and market our Pronto service. In
particular, given our early stage of development, our significant operating
expenses, the rate at which consumers subscribe to Pronto, and the rate at which
competition in our industry is intensifying, we may not be able to maintain
adequate operating margins. Our ability to achieve and sustain profitability
will depend on the accuracy of our expense projections and revenue growth
projections and on our ability to generate and sustain substantially higher
revenue, while maintaining reasonable cost and expense levels, as we seek to
increase our product offerings, customer base, geographic reach and
technological advantages. As a result, if we fail to increase our revenue, or if
we experience delays in generating revenue, we would incur continuing
substantial operating losses. We do not anticipate achieving profitability for
the remainder of 2002 and into 2003.
The accuracy of our subscriber base and expense projections are
critical to our profitability.
We anticipate that our financial results for the remainder of 2002 and
during the first half of 2003 will be principally driven by our ability to
properly allocate the extent and timing of our limited cash resources to
technology development, our customer acquisition efforts and to the enhancement
of the capacity of the Pronto service call center infrastructure. The
application of these resources must be coordinated with and take into account
the projected rate of growth of our Pronto service subscriber base and the
pricing assumptions in our business model. Based on our marketing to date,
management has made significant estimates regarding the anticipated growth of
our subscriber base, taking into account many variables, certain of which are
outside our control. These variables include growth in the market for wireless
services, customer demand for our products and services, the efficacy of our
customer acquisition efforts, and the reliability and speed of our technology
infrastructure and live operator service. We may decide to expand the
capabilities of our existing third party call center arrangement, acquire a call
center operation, or establish our own call center; each of these choices would
require significantly different levels of funding. This decision will be
influenced, in part, by the projected and actual rate of growth in the Pronto
service subscriber base and related revenue growth. Our business model requires
expanding and improving the technology and call center capabilities in order to
properly service anticipated increased usage by a growing subscriber base, and
if our subscriber base, which as of June 30, 2002 was approximately 3,400
subscribers, does not grow at projected rates, or our pricing assumptions are
incorrect, then our up front expenses, including our decision regarding call
center alternatives, will exceed our revenues by amounts greater than currently
anticipated, accelerate our projected losses, place additional pressure on our
cash resources and impact the estimated fair value of our long-term assets. As
of June 30, 2002, the number of subscribers for the Pronto service was
significantly below the number projected by management for such date.
Our reliance on certain suppliers and vendors could adversely affect
our ability to provide our Pronto brand services to our subscribers on a timely
and cost-efficient basis.
We currently rely on iNetNow, Inc. to provide the live operator aspect
of the Pronto service and we internally provide the customer service and
provisioning aspects of the Pronto service. The initial term of our agreement
with iNetNow expired on April 30, 2002 and is currently on automatic monthly
renewals until October 31, 2002, unless earlier terminated. Our reliance on
iNetNow, Inc. involves a number of risks, including the long-term financial
viability of this vendor, and the inability to control quality and timing of
delivery of services. If iNetNow, Inc. is unable or unwilling to continue
supporting our products in required volumes and at high quality levels, or if
this agreement is terminated, we will have to identify, qualify and select
acceptable alternative service providers. Significant interruptions may result
as it is possible that an alternate source may not be available to us when
needed or be in a position to satisfy our requirements at acceptable prices and
quality. Although iNetNow has not indicated to us that they will terminate our
agreement, nor do we have reason to believe that they will, they have the right
to do so later in 2002. There can be no assurance we will be able avoid
termination of this agreement. Any significant interruption in call center
operations would result in us having to reduce our support of our customers,
which in turn could have a material adverse effect on our customer relations,
business, financial condition and results of operations. We may not be able to
effectively manage our relationship with iNetNow, Inc. and they may not meet our
future requirements for quality.
13
The market for wireless content services is new, and our business will
suffer if the market does not develop as we expect or if the usage of wireless
content products does not continue to grow.
The wireless content services market is new and may not grow or be
sustainable. It is possible that our services may never achieve market
acceptance or be well received by consumers. We have a limited number of
customers and we have not yet provided our services on the scale that is
anticipated in the future. We incur operating expenses based largely on
anticipated revenue trends that are difficult to predict given the recent
emergence of the premium wireless content and concierge services market. If
general wireless product usage does not continue to increase, or the market for
premium wireless content service does not develop, or develops more slowly than
we expect, demand for our Pronto services may be limited and our business,
financial condition and operating results could be harmed.
Our success will be dependent on increasing awareness of the Pronto
brand.
We have incurred significant expenditures in order to increase
awareness of our Pronto services and brand name through sales and marketing and
other promotional activities. Promoting and positioning this brand will depend
largely on the success of our ability to provide high quality services and our
marketing efforts. In order to promote our brand, we will need to expend
significant financial resources marketing Pronto and otherwise increase our
financial commitment to create and maintain brand loyalty among users of Pronto.
Further, there can be no assurance that any new users attracted to the Pronto
brand will maintain an ongoing customer relationship with our products. If we
fail to promote and maintain our Pronto brand or continue to incur substantial
expenses in an attempt to promote and maintain our Pronto brand or if our
existing or future strategic relationships fail to promote our Pronto brand or
increase brand awareness, our business, financial condition and operating
results would be materially adversely affected.
We will invest a significant amount of our resources to develop,
market, and support our products and services and may not realize any return on
this investment.
We plan to invest a significant amount of our resources to develop,
market and support our products and services, particularly in connection with
Pronto. Accordingly, our success will depend on our ability to generate
sufficient revenue from sales of these products and services to offset the
expenses associated with developing, marketing and supporting them.
There are many risks that we face in doing so. In particular, we will
need to improve the reliability of our voice recognition system to reduce the
number of calls that fail over to the live operator for basic requests of news,
sports and weather. Additionally, the rapidly changing technological environment
in which we operate can require the frequent introduction of new products,
resulting in short product lifecycles. Accordingly, if our products and services
do not quickly achieve market acceptance, they may become obsolete before we
have generated enough revenue from their sales to realize a sufficient return on
our investment.
As a result, we expect to incur significant expenses and losses for the
remainder of 2002 and into 2003. If we incur substantial development, sales and
marketing expenses that we are not able to recover, and we are not able to
compensate for such expenses, our business, financial condition and results of
operations would be materially adversely affected.
If we do not have sufficient capital to fund our operations, we may be
forced to discontinue product development, reduce our sales and marketing
efforts or forego attractive business opportunities.
We may not have sufficient capital to fund our operations and
additional capital may not be available on acceptable terms, if at all. Any of
these outcomes could adversely impact our ability to respond to competitive
pressures or could prevent us from conducting all or a portion of our planned
operations. The speed at which we have utilized our available capital increased
substantially during the three months ended June 30, 2002 as we launched Pronto
nationally on a direct-to-consumer basis. We expect that the cash we receive
through our operations and our currently available cash resources will be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds, and
additional financing may not be available on acceptable terms, if at all. We
also may require additional capital to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
If we issue additional equity securities to raise funds, the ownership
percentage of existing shareholders
14
will be reduced. If we incur debt, the debt will rank senior to our common
shares, we will incur debt service costs and we will likely have to enter into
agreements that will restrict our operations in some respects and our ability to
declare dividends to the holders of our common shares.
If we fail to enhance Pronto to meet changing customer requirements and
technological advances, our operations would be materially adversely affected.
The timely development of new or enhanced products and services is a
complex and uncertain process and although we believe we currently have the
funding to add anticipated new features and functionalities to Pronto, we may
not have sufficient resources to successfully and accurately anticipate
technological and market trends, or to successfully manage long development
cycles. We may also experience design, marketing and other difficulties that
could delay or prevent our development, introduction or marketing of our Pronto
services, as well as new products and enhancements. We may also be required to
collaborate with third parties to develop our products and may not be able to do
so on a timely and cost-effective basis, if at all. If we are not able to
develop new products or enhancements to existing products on a timely and
cost-effective basis, or if our new products or enhancements fail to achieve
market acceptance, our business, financial condition and results of operations
would be materially adversely affected.
If we are not able to establish relationships with a variety of
distribution partners, we may not be able to increase our sales and grow our
business.
We believe that our future success is dependent upon establishing
successful relationships with a variety of distribution partners including
wireless network operators, Internet portals, business enterprises, national
retail chains and selected vertical retail outlets. We cannot be certain that we
will be able to reach agreement with distribution partners on a timely basis or
at all, or that any of our current or future distribution partners will devote
adequate resources to selling our products. If we cannot establish these
relationships, we may not be able to increase our sales and grow our business.
We rely on third-party software and technology, the loss of which could
force us to use inferior substitute technology or to cease offering our
products.
We rely on third party intellectual property licenses. For example, we
have entered into a license agreement with Nuance Communications, Inc. for use
of their speech recognition technology. In addition, we use, and will use in the
future, some third-party software that may not be available in the future on
commercially reasonable terms, or at all. We could lose our ability to use this
software if the agreements are terminated or if the rights of our suppliers to
license it were challenged by individuals or companies which asserted ownership
of these rights. The loss of, or inability to maintain or obtain, any required
intellectual property could require us to use substitute technology, which could
be more expensive or of lower quality or performance, or force us to develop the
technology ourselves or cease offering our products. Moreover, some of our
license agreements from third parties are non-exclusive and, as a result, our
competitors may have access to some of the technologies used by us. Any
significant interruption in the supply of any licensed software could cause a
decline in product sales, unless and until we are able to replace the
functionality provided by this licensed software. We also depend on these third
parties to deliver and support reliable products, enhance their current
products, develop new products on a timely and cost-effective basis, and respond
to emerging industry standards and other technological changes. The failure of
these third parties to meet these criteria could materially harm our business.
We depend on third parties for content, and the loss of access to this
content could harm our business.
We do not create all of our own content. Rather, we acquire rights to
information from numerous third-party content providers, and our future success
is dependent upon our ability to maintain relationships with these content
providers and enter into new relationships with other content providers. We
typically license content through one or a combination of the following formats:
a revenue-sharing arrangement, a one-time fee, a periodic fee or a fee for each
query from subscribers. If we fail to enter into and maintain satisfactory
arrangements with content providers, our business will suffer.
We may be subject to liability for our use or distribution of
information that we receive from third parties.
15
We obtain content and commerce information from third parties. When we
integrate and distribute this information through Pronto, we may be liable for
the data that is contained in that content. This could subject us to legal
liability for such things as defamation, negligence, intellectual property
infringement and product or service liability. Many of our content agreements do
not provide us with indemnity protection. Even if a given contract does contain
indemnity provisions, these provisions may not cover a particular claim. Our
insurance coverage may be inadequate to cover fully the amounts or types of
claims that might be made against us. Any liability that we incur as a result of
content we receive from third parties could adversely affect our financial
results. We also gather personal information from users in order to provide
personalized services. Gathering and processing this personal information may
subject us to legal liability for negligence, defamation, invasion of privacy,
product or service liability. We may also be subject to laws and regulations,
both in the United States and abroad, regarding user privacy.
We rely heavily on our proprietary technology, but we may be unable to
adequately protect or enforce our intellectual property rights.
Our success depends significantly upon our proprietary technology. To
protect our proprietary rights, we rely on a combination of copyright and
trademark laws, trade secrets, confidentiality agreements with employees and
third parties and protective contractual provisions. Despite our efforts to
protect our proprietary rights, unauthorized parties may copy aspects of our
products or services or obtain and use information that we regard as
proprietary. In addition, others could possibly independently develop
substantially equivalent intellectual property. If we do not effectively protect
our intellectual property our business could suffer. If we cannot adequately
protect our intellectual property, our competitive position may suffer.
Companies in the software industry have frequently resorted to litigation
regarding intellectual property rights. We may have to litigate to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of other parties' proprietary rights. Similarly, we cannot
ensure that our employees will comply with the confidentiality agreements that
they have entered into with us, or they will not misappropriate our technology
for the benefit of a third party. If a third party or any employee breaches the
confidentiality provisions in our contracts or misappropriates or infringes on
our intellectual property, we may not have adequate remedies. In addition, third
parties may independently discover or invent competing technologies or reverse
engineer our trade secrets, software or other technology.
Our products may infringe the intellectual property rights of others,
and resulting claims against us could be costly and require us to enter into
disadvantageous license or royalty arrangements.
The software industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement and the violation of intellectual property rights. Although we
attempt to avoid infringing known proprietary rights of third parties, we may be
subject to legal proceedings and claims for alleged infringement by us or as
licensees of third-party proprietary rights, such as patents, trade secrets,
trademarks or copyrights, from time to time in the ordinary course of business.
From time to time, we have received, and we may receive in the future, notice of
claims of infringement of other parties' proprietary rights. Any such claims
could be time-consuming, result in costly litigation, divert management's
attention, cause product or service release delays, require us to redesign our
products or services or require us to enter into royalty or licensing
agreements. If a successful claim of infringement were made against us and we
could not develop non-infringing technology or license the infringed or similar
technology on a timely and cost-effective basis, our business could suffer.
Furthermore, former employers of our employees may assert that these employees
have improperly disclosed confidential or proprietary information to us. Any of
these results could harm our business. We may be increasingly subject to
infringement claims as the number of, and number of features of, our products
grow.
Our failure to respond to rapid change in the market for voice
interface services could cause us to lose revenue and harm our business.
The voice interface services industry is relatively new and rapidly
evolving. Our success will depend substantially upon our ability to enhance our
existing Pronto product release and to develop and introduce, on a timely and
cost-effective basis, new versions with features that meet changing end-user
requirements and incorporate technological advancements. If we are unable to
develop new enhanced functionalities or technologies to adapt to these
16
changes, or if we cannot offset a decline in revenue from existing products with
revenues from new products, our business would suffer. Commercial acceptance of
our products and technologies will depend on, among other things, the ability of
our products and technologies to meet and adapt to the needs of our target
markets, and the performance and price of our products and our competitors'
products.
If our products contain defects, we could be exposed to significant
product liability claims and damage to our reputation.
Because our products are partially designed to provide critical
communications services, we may be subject to significant liability claims. Our
agreements with customers typically contain provisions intended to limit our
exposure to certain liability claims, but may not preclude all potential claims
resulting from a defect in one or more of our products. Although we believe that
we maintain adequate product liability insurance covering certain damages
arising from implementation and use of our products, our insurance may not be
sufficient to cover us against all possible liability. Liability claims could
also require us to spend significant time and money in litigation or to pay
significant damages. As a result, any such claims, whether or not successful,
could seriously damage our reputation and have a material adverse effect on our
business, financial condition and results of operations.
If we fail to comply with regulations and evolving industry standards,
sales of our existing and future products could be adversely affected.
We are not currently subject to direct regulation by the Federal Communications
Commission or any other governmental agency, other than laws and regulations
applicable to businesses in general. However, in the future, we may be subject
to regulation by the FCC or another regulatory agency. In addition, the wireless
carriers who supply us airtime are subject to regulation by the FCC and
regulations that affect them could increase our costs or reduce our ability to
continue selling and supporting our services. While we believe that our products
comply with all current governmental laws, regulations and standards, we cannot
assure you that we will be able to continue to design our products to comply
with all necessary requirements in the future. In addition, we may be required
to customize our products to comply with various industry or proprietary
standards promoted by our competitors. Our key competitors may establish
proprietary standards, which they do not make available to us. As a result, we
may not be able to achieve interoperability with their products.
We may otherwise deem it necessary or advisable to modify our products
to address actual or anticipated changes in the regulatory environment. Failure
of our products to comply, or delays in compliance, with the various existing,
anticipated, and evolving industry regulations and standards could adversely
affect sales of our existing and future products. Moreover, the enactment of new
laws or regulations, changes in the interpretation of existing laws or
regulations or a reversal of the trend toward deregulation in the
telecommunications industry, could have a material adverse effect on our
customers, and thereby materially adversely affect our business, financial
condition and operating results.
If we fail to manage the growth of our operations, our business will be
adversely affected.
In connection with the implementation and national launch of Pronto, we
have rapidly and significantly expanded our operations. This expansion has
placed significant new demands on our managerial, operational and financial
resources. To manage the expected growth of our operations and personnel, we
will be required to improve existing and implement new operational, financial
and management controls, reporting systems and procedures; hire, train, motivate
and manage our personnel; and effectively manage multiple relationships with our
customers, suppliers and other parties. In addition, our success depends, in
part, on our ability to provide prompt, accurate and complete service to our
customers on a competitive basis, and our ability to purchase and promote
products, manage sales and marketing activities and maintain efficient
operations through our management information systems. A significant disruption
in our management information systems could adversely affect our relations with
our customers and our ability to manage our operations and would have a material
adverse effect on our business, financial condition and operating results. There
can be no assurance that we will successfully manage the development and
expansion of our new business.
Our business will suffer if we are unable to hire, retain and motivate
highly qualified employees.
17
Our future success depends on our ability to identify, attract, hire,
train, retain and motivate highly skilled technical, managerial, sales and
marketing and business development personnel. Our services and the industries to
which we provide our services are relatively new. As a result, qualified
technical personnel with experience relevant to our business are scarce and
competition to recruit them is intense. If we fail to successfully attract,
assimilate and retain a sufficient number of highly qualified technical,
managerial, sales and marketing, business development and administrative
personnel, our business could suffer.
Stock options are an important means by which we compensate employees.
We face a significant challenge in retaining our employees if the value of these
stock options is either not substantial enough or so substantial that the
employees leave after their stock options have vested. To retain our employees,
we expect to continue to grant new options, subject to vesting, which could be
dilutive to our current stockholders. If our stock price does not increase
significantly above the prices of our options, we may also need to issue new
options or grant additional shares of stock in the future to motivate and retain
our employees.
We do not plan to pay any dividends.
Investors who need income from their holdings should not purchase our
shares. We intend to retain any future earnings to fund the operation and
expansion of our business. We do not anticipate paying cash dividends on our
shares in the future. As a result, our common stock is not a good investment
from people who need income from their holdings.
Insiders own a large percentage of our stock, which could delay or
prevent a change in control and may negatively affect your investment.
As of June 30, 2002, our officers, directors and affiliated persons
beneficially owned approximately 34% of our voting securities. J. William
Grimes, our Chairman, beneficially owned approximately 24% of our voting
securities as of that date. These stockholders will be able to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions,
which could have the effect of delaying or preventing a third party from
acquiring control over us and could affect the market price of our common stock.
In addition, some of our executive officers have stock option grants which
provide for accelerated vesting upon a change in control if their employment is
actually or constructively terminated as a result. The interests of those
holding this concentrated ownership may not always coincide with our interests
or the interests of other stockholders, and, accordingly, they could cause us to
enter into transactions or agreements that we would not otherwise consider.
We have implemented anti-takeover provisions that could make it more
difficult to acquire us.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us
without the consent of our board of directors, even if doing so would be
beneficial to our stockholders. For example, a takeover bid otherwise favored by
a majority of our stockholders might be rejected by our board of directors. Last
year, we changed our charter to include provisions classifying our board of
directors into three groups so that the directors in each group will serve
staggered three-year terms, which would make it difficult for a potential
acquirer to gain control of our board of directors. We are also afforded the
protections of Section 203 of the Delaware General Corporation Law, which
provides certain restrictions against business combinations with interested
stockholders.
Our stock price may be volatile due to factors outside of our control.
Since our initial public offering on April 6, 2000, our stock price has
been extremely volatile. During that time, the stock market in general, and The
Nasdaq National Market and the securities of technology companies in particular,
has experienced extreme price and trading volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of individual companies. The following factors, among others, could
cause our stock price to fluctuate: actual or anticipated variations in
operating results; announcements of operating results and business conditions by
our customers and suppliers; announcements by our competitors relating to new
customers, technological innovation or new services; economic developments in
our industry as a whole; and general market conditions. These broad market
fluctuations may materially adversely affect our stock price, regardless of
18
our operating results. Our stock price may fluctuate due to variations in our
operating results.
Certain provisions of our charter documents provide for limited
personal liability of subscribers of our board of directors.
Our certificate of incorporation and by-laws contain certain provisions
which reduce the potential liability of subscribers of our board of directors
for certain monetary damages and provide for indemnity of other persons. We are
unaware of any pending or threatened litigation against us or our directors that
would result in any liability for which any of our directors would seek
indemnification or other protection.
Our common stock may be subject to delisting from the national Nasdaq
market.
Our common stock is currently trading on the Nasdaq National Market
("Nasdaq"). By letter dated June 12, 2002 from Nasdaq, we have been made aware
that we do not currently meet the listing criteria for continued listing on
Nasdaq. In order to maintain listing on Nasdaq, it is required, among other
things, that our common stock have a minimum bid price of $1. The Nasdaq
requirements further state that a deficiency shall exist if such minimum bid
price remains below $1 for a period of thirty consecutive business days. In
addition, if our stock price is below $5 per share, we must maintain minimum net
tangible assets of at least $4 million. Although, we have ninety (90) calendar
days from the date of such correspondence to regain compliance and avoid a
delisting of our securities, no assurance can be given as to our ability to meet
the standards of the Nasdaq National Market maintenance requirements. If we are
unable to demonstrate compliance with the Nasdaq criteria for maintaining our
listing, our common stock could be subject to delisting. If our common stock
were to be delisted from trading on the Nasdaq National Market and were neither
re-listed thereon nor listed for trading on the Nasdaq Small Cap Market or other
recognized securities exchange, trading, if any, in the common stock may
continue to be conducted on the OTC Bulletin Board or in the non-Nasdaq
over-the-counter market. Delisting would result in limited release of the market
price of the common stock and limited news coverage of our company and services
and could restrict investors' interest in our common stock and materially
adversely affect the trading market and prices for our common stock and our
ability to issue additional securities or to secure additional financing.
Information that we may provide to investors from time to time is
accurate only as of the date we disseminate it, and we undertake no obligation
to update the information.
From time to time, we may publicly disseminate forward-looking
information or guidance in compliance with Regulation FD promulgated by the
Securities and Exchange Commission. This information or guidance represents our
outlook only as of the date that we disseminated it, and we undertake no
obligation to provide updates to this information or guidance in our filings
with the Securities and Exchange Commission or otherwise.
If our revenue and operating results fall below analysts' and
investors' expectations, our stock price could significantly decline.
Our quarterly operating results have fluctuated in the past and are
likely to fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. If our quarterly or annual operating
results do not meet the expectations of investors and securities analysts, the
trading price of our common stock could significantly decline. As a result of
any of these factors, our quarterly or annual operating results could fall below
the expectations of public market analysts and investors. In this event, the
price of our common stock could significantly decline.
19
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes
in interest rates. We do not currently transact significant business in foreign
currencies and, accordingly, are not subject to exposure from adverse movements
in foreign currency exchange rates. Our exposure to market risks for changes in
interest rates relates primarily to corporate debt securities. We place our
investments with high credit quality issuers and, by policy, limit the amount of
the credit exposure to any one issuer. Our general policy is to limit the risk
of principal loss and ensure the safety of invested funds by limiting market and
credit risk. All highly liquid investments with a maturity of less than three
months at the date of purchase are considered to be cash equivalents.
As of June 30, 2002 we had no debt outstanding. We currently have no
plans to incur debt during the next twelve months. As such, changes in interest
rates will only impact interest income. The impact of potential changes in
hypothetical interest rates on budgeted interest income in 2002 has been
estimated at approximately $0.4 million or approximately 1% of budgeted net loss
for each 1% change in interest rates.
Part II
Other Information
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 11, 2002, we amended our certificate of incorporation to increase
the number of shares of authorized common stock from 50 million to 75 million
shares. Such amendment was approved by our stockholders at the 2002 Annual
Meeting of Stockholders held on May 22, 2002.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 22, 2002, we held our Annual Meeting of Stockholders. In connection
with the meeting, we solicited proxies from our stockholders pursuant to
Regulation 14A of the Securities Exchange Act of 1934. At the meeting, our
stockholders (1) elected W. Peter Daniels and Roger L. Werner as directors; (2)
authorized a proposal to amend our Certificate of Incorporation to increase the
number of shares of authorized common stock from 50 million to 75 million; and
(3) ratified the selection by the Board of Directors of PricewaterhouseCoopers
LLP as our independent auditors.
The following tables summarize the votes cast at the meeting on the
matters brought before the stockholders:
1. Election Of Directors
FOR AGAINST WITHHELD NOT VOTED
W. Peter Daniels 17,287,677 1,113,034
Roger L. Werner 17,287,677 1,113,034
2. Amendment of Certificate of Incorporation to Increase the Number of
Authorized Shares of Common Stock from 50 Million To 75 Million
VOTES FOR AGAINST WITHHELD NOT VOTED
17,226,089 1,168,457 6,165
3. Ratification of PricewaterhouseCoopers LLP as Independent Auditors of the
Company for Fiscal Year 2002
VOTES FOR AGAINST WITHHELD NOT VOTED
17,296,954 1,095,542 8,215
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2002
i3 MOBILE, INC.
By:/s/ Edward J. Fletcher
-----------------------
Senior Vice President of Finance
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