United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 31, 2002.
|_| 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 0-23926
GEOWORKS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2920371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6550 Vallejo St., Suite 102, Emeryville, California 94608
(Address of principal executive offices) (Zip code)
510-428-3900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Preferred Stock Purchase Rights
(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. |X| Yes |_| 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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the Registrant's common stock held by
non-affiliates, based upon the closing sale price of the common stock on June
27, 2002, as reported on the Nasdaq SmallCap Market, was approximately
$3,066,505. Shares of the Registrant's common stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
common stock, based on Schedule 13D or G filings have been excluded since such
persons may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of June 27, 2002, there were 23,576,197 shares of the Registrant's common
stock outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement for its 2002 Annual
Meeting of Stockholders, which the Registrant intends to file within 120 days of
the Registrant's fiscal year-end (the "2002 Proxy Statement"), are incorporated
by reference into Part III of this Report.
GEOWORKS CORPORATION
Table of Contents
Page
----
PART I
Item 1. Business ......................................................... 3
Risk Factors ..................................................... 6
Item 2. Properties ....................................................... 11
Item 3. Legal Proceedings ................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders .............. 11
Item 4A. Directors and Executive Officers of the Registrant ............... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters .............................................. 14
Item 6. Selected Consolidated Financial Data ............................. 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....... 30
Item 8. Financial Statements and Supplementary Data ...................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................. 52
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 52
Item 11. Executive Compensation ........................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 52
Item 13. Certain Relationships and Related Transactions ................... 52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 53
2
PART I
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), regarding future events and management's plans and expectations. When
used in this Report, the words "believe", "estimate," "project," "intend,"
"expect" and "anticipate" and similar expressions are intended to identify such
forward-looking statements. Such statements are subject to certain risks and
uncertainties, including those discussed below, which could cause actual results
to differ materially from those projected. These statements include but are not
limited to our intentions and expectations regarding: our limited capital
resources; our dependence on a single revenue-generating customer; our ability
to manage and expand our professional services business; our listing on the
Nasdaq SmallCap Market; our ability to sell the AirBoss technology, our patents
or our legacy operating systems; our ability to terminate certain contractual
obligations on acceptable terms; economic conditions, and the market for
communications technology and services. These statements are subject to risks
and uncertainties that could cause actual results and events to differ
materially. Other factors that may contribute to such differences include, but
are not limited to, those discussed in the section of this Report titled "Risk
Factors Affecting Future Operating Results" beginning on page 6, as well as
those discussed elsewhere in this Report. Consequently, the inclusion of
forward-looking information should not be regarded as a representation by us or
any other person that our objectives or plans will be achieved or that the
identified risks are the only risks facing us. The reader is therefore cautioned
not to place undue reliance on the forward-looking statements contained in this
Report, which speak only as of the date this report was published. We undertake
no obligation to publicly release updates or revisions to these statements.
Item 1. BUSINESS
Summary
Geoworks Corporation is a provider of leading-edge software design and
engineering services to the mobile and handheld device industry. With nearly two
decades of experience developing operating systems, related applications and
wireless server technology, Geoworks has worked with many of the industry
leaders in mobile phones and mobile data applications. Our creativity and
software skills have been key components in the development of some of the
world's most innovative devices. Our current strategic business plans are based
on realizing the value of this professional services organization. We currently
anticipate that our available funds will be sufficient to meet our projected
needs for funding operations into the third quarter of fiscal 2003. This
projection is based on several factors and assumptions, and is subject to
numerous risks, as described below. Our success will be dependent on our ability
to capitalize on our substantial experience in order to increase the size of our
professional services team and expand our customer base beyond one primary
customer in a challenging environment with limited resources.
Historical Overview
From our initial public offering in 1994 through early 1999, we were focused on
developing and selling wireless operating systems for smart phones and PDA's
(personal digital assistants). Our customers were large mobile phone
manufacturers who paid us research and development fees to develop software and
agreed to pay us royalties based on the number of phones they shipped with our
operating system. This market did not develop as rapidly as we expected and in
mid-1998, several of the world's largest handset makers including Nokia,
Motorola, Ericsson and Matsushita, representing over half of our target market,
created a joint venture to develop their own mobile operating system. Therefore,
in response to the slow growth in the market, the increased competition and the
loss of key Original Equipment Manufacturers ("OEM") prospects, we shifted our
focus to the development of mobile server software for mobile commerce and
information services. By the fourth quarter of fiscal 1999, we had discontinued
development of our smart phone operating system (GEOS SC(TM)) and licensed the
source code, on a non-
3
exclusive basis, to one of our major OEM customers, whom we continued to support
through a professional services consulting agreement.
In the following year, our fiscal 2000, our research and development and sales
and marketing efforts were targeted at our mobile software and services, in
particular our Mobile ASP (Application Service Provider) offering, based on our
Mobile Server+ software. We also continued to provide engineering services to
some OEM customers, however such services were provided through professional
services consulting contracts, rather than as customer funded research with
potential product royalties.
In July 2000, we strengthened our software product and service offering by
acquiring the AirBoss Application Platform and the AirBoss Business Unit
("AirBoss") from Telcordia Technologies, Inc. ("Telcordia"). Telcordia and its
parent, Science Applications International Corporation (`SAIC") became our
largest shareholder with approximately 12% of our outstanding stock. We
established an office in New Jersey to continue the research, development, and
deployment of the AirBoss line of patented mobile communications software
products, as well as to service the various third parties whose contractual
rights with Telcordia were assigned to us as part of the acquisition. In June
2001, we reorganized our operations, exited the Mobile ASP market and
accelerated the integration of our two software platforms, Mobile Server+ and
the AirBoss Application Platform, into a single integrated product offering for
enterprise applications.
Through January 2001, we had been able to successfully raise capital through
public offerings, a number of private placements and through our employee stock
option plans. However, raising capital became increasingly difficult due to the
uncertainty in the market as a whole and in the wireless and telecommunications
industry, in particular. In August 2001, we engaged an investment bank to assist
us in considering our strategic alternatives.
In October 2001, as a result of market uncertainties and a lack of market
visibility, in particular the impact of delayed buying decisions by wireless
carriers for the types of products and services we provided with our AirBoss
Application Platform, we announced a number of cost cutting measures to conserve
our resources, including terminating approximately 45% of our workforce. Because
of continued market uncertainty and the inability to generate cash through
strategic alternatives, in January 2002, we announced our exit from the software
products business and additional cost cutting measures, including terminating
45% of our remaining workforce. In particular, our Board of Directors concluded
it would be in the best interest of our company to sell our AirBoss assets in
order to focus on realizing the value of our professional services business.
In April 2002, Steve W. Mitchell, our former Vice President of Human Resources
replaced David L. Grannan as President and Chief Executive Officer and Mr.
Grannan assumed the role of Chairman of the Board of Directors of the Company.
Three members of the Board of Directors also resigned in the quarter ended March
31, 2002 and we have since added Jim Judge, Frank S. Fischer and David J.
Domeier to the Board, effective March 8, June 6, and July 5, 2002, respectively.
Since the January 2002 announcements we have continued to explore the sale of
AirBoss and the source code for our other legacy products. Several patents were
sold during the fourth quarter of fiscal 2002 and we have terminated the leases
of our former facility in New Jersey and our Company headquarters in Alameda,
California and relocated our headquarters to a significantly smaller office
space in Emeryville, California. As of March 31, 2002, the employee terminations
announced in January 2002 were complete and operations now consist entirely of
personnel supporting the professional services business.
Our company was incorporated in California in 1983, and reincorporated in
Delaware in 1997. The Company's headquarters are now in Emeryville, California
and we have professional services teams located in Emeryville, California and
the United Kingdom. Our fiscal year commences on April 1 and ends on March 31.
You can visit our website at http://www.geoworks.com.
Our Professional Services Offering
4
We were founded on a philosophy of engineering excellence and quality. Our
engineering teams have built an international reputation for innovation,
professionalism and service, and have contributed to many major developments in
the operating system and application arenas.
The number and diversity of handheld devices that have come to market as a
result of Geoworks' involvement outnumber any other single software developer
that we know of for this class of device. Geoworks has global experience with
devices being developed for the European, Asian and American markets, including
the Nokia 9000-9210 Communicators, an advanced Mitsubishi product, the Seiko
Epson Locatio, and the Toshiba Dialo and original Genio product.
Our engineers, quality assurance technicians, and project managers have many
years of experience and a proven track record of technical innovation. Their
skills include a wide knowledge of the principles of creating components and
applications for real time operating systems (RTOS) and the constraints of small
handheld battery-powered devices. We have a substantial amount of accumulated
knowledge working on a variety of operating systems and environments including
Symbian, WinCE, Palm, RIM, Linux, Unix and Java as well as an understanding of
wireless data technologies including GSM, GPRS, CDMA and 1XRTT. We are
leveraging our capabilities to offer complete project management and software
engineering for complex projects that require experienced development teams who
can ensure completion in a timely and efficient manner.
The Geoworks professional services teams provide full software lifecycle
development and support, including design specification, software development,
project management and quality assurance. Our primary goal is to provide highly
skilled flexible teams to suit our customers' project needs. Over the past two
years our professional services contracts have been of a relatively long-term
nature, lasting from several months to a year in duration and involved teams of
3 to 10 engineers per project. The length and size of these contracts generally
reflected the full service nature of the services we provided. To increase
volume in our next fiscal year, we anticipate that we will have to secure a
number of smaller, short-term projects.
Customers and Markets
We have worked with industry leaders in mobile phones, mobile data applications,
data transmission equipment, mobile security equipment, and e-commerce services,
including Casio, Ericsson, HP, Mitsubishi, NEC, Nokia, Sharp, Seiko Epson,
SmartTrust (a wholly owned subsidiary of Sonera Corporation) and Toshiba.
In recent years, our major professional services customers have been
manufacturers of smart phones. These customers are located primarily in Europe
and Asia. These manufacturers, and the companies that provide software
consulting services to them, remain our target market and first priority.
However, we believe that our market can reasonably be expanded to include
manufacturers of other embedded devices. We believe that our professional
services teams' skill sets are particularly suited to embedded device projects
and that our experience with smart phones will enable us to offer consulting to
manufacturers of other embedded devices, including set top boxes.
We currently have one customer, Nokia, a manufacturer of mobile phones located
in Europe, who is expected to account for more than 80% of our professional
services revenues in the first quarter of fiscal 2003. The contracts we have
with this customer generally last several months and involve a number of
engineers. The loss of this customer, or a significant reduction in the level of
consulting we provide to this customer, could significantly harm our business.
As a result of our reorganization, our intent is to realize the value of our
professional services team, and we are now marketing our services to a number of
potential customers that we historically had not pursued. Our sales efforts are
coordinated from our offices in Macclesfield, England and Emeryville,
California.
The communications and wireless industries and markets have suffered
substantially during the recent economic downturn; however, we believe that the
development of mobile and embedded devices will continue into the foreseeable
future. As a relatively small provider, general economic conditions are
certainly a significant factor in our success. However, we believe that our
success will be more dependent
5
on our own sales and marketing efforts, subject to risks discussed below, rather
than the absolute size of the market opportunity.
Competition
Most of our professional services consulting opportunities have come out of our
relationships with customers for whom we previously provided operating system
development services, so we have a limited history of competing directly with
other consulting and professional services providers. We believe our competition
includes a wide range of companies, many of whom have significantly greater
resources. Moreover, as a consultant, the customer's ability and desire to
perform the work with its own staff is a substantial form of competition over
which we have little control.
Operations
Historically, our primary professional services customers have been located
outside of the United States. Currently 26 of our 42 employees are located in
our Macclesfield England office. The majority of our professional services staff
is based in the Macclesfield office. Additional professional services staff as
well as most of our general and administrative personnel staff are located in
our corporate headquarters in Emeryville, California. As a public company with
reporting obligations, we have greater administrative overhead requirements than
many private companies of our size would incur.
Employees
As of June 13, 2002, we had 42 employees, of whom 25 were employed in
professional services, 5 in sales and business development, and 12 in legal,
finance and administration. As with most businesses our size, a number of the
senior staff, including the President and CEO, the General Manager of our UK
office, and certain engineering personnel are also involved with the sales
efforts of the Company. None of our employees is represented by a labor union or
subject to a collective bargaining agreement, and we have not had a work
stoppage from any labor grievance or strike. We strive to attract and retain
qualified personnel by offering competitive compensation, benefits, equity
participation and good working conditions. Our success depends on the continued
service of our key management, technical, sales, and marketing personnel, and on
our ability to continue to attract and retain highly qualified employees.
Risk Factors Affecting Future Operating Results
You should consider carefully the risks and uncertainties described below and
the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we currently
deem immaterial also may become important or impair our business. If any of the
following risks actually occur, our business, financial condition and operating
results could be materially adversely affected and the trading price of our
common stock could decline.
We have limited financial resources, a history of operating losses and expect to
continue to incur losses in the future.
Since inception, we have experienced negative cash flow from operations and
expect to experience negative cash flow from operations for the next fiscal
year. We currently anticipate that our available funds will be sufficient to
meet our projected needs for funding operations into the third quarter of fiscal
2003. This projection is based on several factors and assumptions, in particular
that our professional services contract levels remain stable or grow and that
our customers continue to pay us on a timely basis, and is subject to numerous
risks. Our future capital needs and liquidity will be highly dependent upon a
number of variables, including how successful we are in realizing the value of
our professional services business, managing our operating expenses, selling the
AirBoss intellectual property and other legacy assets and how successful we are
in settling our contractual liabilities resulting from the reorganization
announced in January 2002. Moreover, our efforts over the last several months to
raise funds through strategic transactions or through the sale of AirBoss, our
legacy assets or our professional services business have been disappointing. As
a result, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If our available funds are insufficient to satisfy our
liquidity requirements, we may be required to revise our current operating
plans, to enter into other forms of strategic transactions, or to
6
consider bankruptcy or dissolution. These conditions raise substantial doubt
about our ability to continue as a going concern through the fiscal year ending
March 31, 2003.
We are currently dependent upon a single customer for a significant portion of
our revenue and the loss of this customer or a significant reduction in the
level of consulting we provide to this customer could significantly harm our
business.
One customer, Nokia, a manufacturer of mobile phones located in Europe, is
expected to account for more than 80% of our professional services revenues
in the first quarter of fiscal 2003. As part of our business strategy we are
working to increase and diversify our customer list, but we can not assure you
that we will be able to sustain our relationship with this particular
significant customer or increase the number of customers with which we work and
failure to do so would have a negative effect on our results of operations, our
cash position and the market price of our common stock.
Our reorganization may have a negative impact on our business.
In January 2002, we announced our intention to reorganize our business by
selling our core technology and certain legacy assets, reducing our operating
expenses, terminating certain employees and changing our business strategy to
focus on realizing the value of our professional services business, any of which
could have a material adverse effect on our business, financial condition and
ability to reduce losses or generate profits. To date we have sold several
patents, reduced our headcount such that our operations consist entirely of
employees supporting our professional services business, and negotiated
settlements on a number of contracts we terminated as result of the
reorganization. However, there can be no assurance that our reorganization plan
will have a positive effect on our cash position, financial results, operations,
and the market price of our common stock or public perception of us in the
marketplace.
If we do not successfully address the risks associated with operating a
professional services business, our business will be harmed.
As we announced in January 2002, we have reorganized in order to focus on
realizing the value of our professional services business. Professional services
businesses, and our professional services organization in particular, face
special risks and challenges, in addition to our dependence on one customer,
including risks associated with:
o our ability to grow and develop the business;
o our ability to provide satisfactory and quality services;
o the short-term nature of most professional services contracts,
including customer ability to terminate such contracts with little
or no notice;
o the difficulty of predicting revenues for project-based engagements,
which have in the past and will likely in the future make up the
majority of our engagements;
o competition;
o our reliance on the market for wireless operating systems, related
applications and wireless server technology, which is experiencing a
downturn;
o the mission-critical nature of our services for our clients'
operations;
o our ability to retain our professional services employees and hire
others; and
o our ability to avoid infringing the intellectual property rights of
others.
If we fail to generate sufficient revenues from our professional services
business or fail to manage the risks associated with operating a professional
services business, our business will be harmed. As a result, while we try to
stabilize and grow the professional services business, we will continue to
explore strategic alternatives for it.
It is difficult for us to forecast the level or source of our revenues for our
professional services business.
While we have had a substantial professional services practice for the last
three years, our business has historically been focused primarily on developing
and marketing software to support the mobile enterprise and wireless operator
markets. Although we have some legacy software products contracts that continue
to generate some revenue, we expect our professional services business to be the
only significant source of
7
revenue in the foreseeable future. We expect professional services revenues to
decline significantly from the $7.6 million reported in the fiscal year ended
March 31, 2002 because the professional services contract from which we derived
approximately 61% of such revenue during fiscal 2002 was not renewed when the
final project was completed in March 2002. As a result, it is not possible to
use our historical financial information regarding our professional services
business to predict our future operating results. In addition, this expired
contract was relatively long-term (one year), whereas our current professional
services opportunities are of a shorter-term or project nature. As a result, our
current professional services revenues are far more difficult to predict. Such
predictions are further complicated because our business strategies to develop
additional customers are still evolving.
Our inability to sell the AirBoss Application Platform and our legacy GEOS and
GEOS-SC operating systems and various patents could harm our business.
Although we have been able to sell certain patents since our reorganization was
announced in January, 2002, we continue to explore the sale of other
non-strategic assets. We may not be able to locate buyers for these assets on
acceptable terms. As a result we may be required to revise our current operating
plans, to sell the professional services business, to enter into other forms of
strategic transactions, or to consider bankruptcy or dissolution. Even if we are
able to locate a buyer or buyers who are willing to acquire these assets on
terms that our management and Board of Directors believe are in our best
interests, the sale of these assets involves a number of risks and
uncertainties, including but not limited to the following:
o the completion of some asset sales will be subject to a number of
conditions, some of which are beyond our control, potentially
including stockholder approval;
o the asset sale process may divert management's attention from
operating our professional services business and implementing our
new strategy;
o the asset sale process is expensive, and will involve legal,
accounting and financial advisor fees;
o the asset sale process could take several months, and we may not
have sufficient resources to finance, our business until the closing
of the transaction; and
o even if we are able to complete asset sales, we may not have
sufficient financial resources to operate our professional services
business until it is profitable and self sustaining.
Our stock will likely be delisted from the Nasdaq SmallCap Market.
Because we failed to meet the minimum net tangible assets, stockholders' equity
and bid price requirements of the Nasdaq National Market, we transferred from
the Nasdaq National Market to the Nasdaq SmallCap Market in May 2002. In order
to maintain our listing on the Nasdaq SmallCap Market, we must meet minimum
financial and other requirements. Nasdaq has notified us that we have until
August 28, 2002 to regain compliance with the $1.00 minimum bid requirement. If
our stock price fails to close at $1.00 or higher for 10 consecutive days prior
to that date, Nasdaq may determine that we are not in compliance with its
listing requirements and commence proceedings to have our stock delisted from
the SmallCap Market. Our stock price has been below $1.00 since January 14, 2002
and absent unforeseen circumstances, we may be forced to implement a significant
reverse stock split in order to meet this requirement. Moreover, as of the end
of our first fiscal quarter ending June 30, 2002, we anticipate that our
stockholders' equity will fall below the minimum requirement of the Nasdaq
SmallCap Market. Under such circumstances, there can be no assurance that our
common stock will remain listed on the Nasdaq SmallCap Market. There are also
circumstances where Nasdaq may exercise broad discretionary authority with
respect to delisting. If our common stock were delisted from the Nasdaq SmallCap
Market for any reason, the value of our common stock and its liquidity would be
impaired.
The loss of key personnel would harm the business.
Our success depends in large part on the continued service of our key technical,
marketing, sales, administrative and management personnel, and on our ability to
attract and retain qualified employees. The economic downturn, the depressed
state of the wireless communications industry, the reductions in our workforce
and fears associated with future reductions, the changes associated with our
reorganization and the challenges of working in an uncertain business
environment can have a negative influence on employee morale and productivity.
As part of the reorganization, we have experienced significant changes at the
executive level of management and on our Board of Directors. While we have met
Nasdaq's requirement
8
to have three independent members on the audit committee of our Board of
Directors, maintaining this requirement or attracting additional board members
may be challenging based our limited financial resources. Additionally, our
directors and officers insurance expires in September 2002, and we may encounter
difficulties renewing or obtaining adequate coverage on acceptable terms in the
future.
We have derived and expect to continue to derive most of our revenue from
international customers and the majority of our operations are located in
Macclesfield, England.
As of June 30, 2002, 26 of our 42 employees were based in Macclesfield, England.
In addition, international customers accounted for 72%, 78%, and 94% of our
total revenue in fiscal 2002, 2001, and 2000, respectively. Our primary
professional services customer is located outside of the United States and we
anticipate that international revenue will continue to represent a significant
portion of our future revenue. Furthermore, although our revenue is generally
denominated in U.S. dollars, fluctuations in currency exchange rates and changes
in our customers and potential customers' local economic conditions could have
adverse consequences on our ability to execute agreements with international
customers. Our business could be adversely affected by a variety of
uncontrollable and changing factors, including:
o unexpected changes in legal or regulatory requirements;
o cultural differences in the conduct of business;
o difficulty in attracting qualified personnel and managing foreign
activities;
o recessions in economies outside the United States;
o longer payment cycles for and greater difficulties collecting
accounts receivable;
o export controls, tariffs and other trade protection measures;
o fluctuations in currency exchange rates;
o nationalization, expropriation and limitations on repatriation of
cash;
o social, economic and political instability;
o natural disasters, acts of terrorism and war;
o taxation; and
o changes in United States laws and policies affecting trade, foreign
investment and loans.
A long-lasting downturn in the global economy that impacts the wireless
communications industry could continue to negatively affect our revenues and
operating results.
The global economy is in the midst of a slowdown that has had wide ranging
effects on markets that we serve, particularly the wireless communications
industry. This downturn has had a negative effect on our revenues. We cannot
predict the depth or duration of this downturn, and if it grows more severe or
continues for a long period of time, our ability to increase or maintain our
revenues may be impaired.
Mergers and acquisitions may disrupt our business.
Mergers and acquisitions could result in dilution, operating difficulties and
other harmful consequences. We may be acquired, merge with, dispose of, or
acquire technologies or businesses in the future that we believe complement or
expand our business, augment our market coverage, enhance our technical
capabilities or that may otherwise offer growth opportunities or increase value.
These transactions entail a number of risks, any of which could be harmful to
our business. These include:
o the possibility that we pay more or obtain less than the asset is
worth;
o the difficulty of integrating the operations and personnel of the
business;
o the potential disruption of our ongoing business;
o the distraction of management;
o the inability of management to maximize our financial and strategic
position;
o the difficulty of integrating each company's accounting, management
information, human resource and other administrative systems to
permit effective management, and the reduced efficiencies if such
integration is delayed or not implemented; and the impairment of
relationships with employees and customers.
We have limited experience in these types of transactions, and we cannot assure
you that we will identify appropriate parties, will be able to conclude such
transactions on favorable terms, or will be able to
9
integrate businesses successfully. Further, the financial consequences of these
transactions may include potentially dilutive issuances of equity securities,
one-time write-offs, and amortization expenses related to goodwill and other
intangible assets and the incurrence of contingent liabilities. These risks
could harm our business, financial condition and results of operations.
Recent terrorist activities and resulting military and other actions could
adversely affect our business.
The terrorist attacks in the United States have disrupted commerce throughout
the world. The continued threat of terrorism within the United States and other
countries and heightened security measures, as well as current military actions
in response to such threats, may cause significant disruption to the global
economy, including widespread recession. To the extent that such disruptions
result in a general decrease in demand for our products and services, our
inability to effectively market our products, or financial or operational
difficulties for our customers, our business and results of operations could be
materially and adversely affected. We are unable to predict whether the threat
of terrorism or various counter measures will result in any long-term commercial
disruptions or if such activities or responses will have any long-term material
adverse effect on our business, results of operations or financial condition.
Our certificate of incorporation, bylaws and stockholder rights plan and the
Delaware General Corporation Law include provisions that may be deemed to have
anti-takeover effects that may delay, defer or prevent a takeover.
Our certificate of incorporation includes a provision that requires the approval
of holders of at least two thirds of our voting stock as a condition to a merger
or certain other business transactions with, or proposed by, a holder of 15% or
more of our voting stock. This approval is not required in cases where our
directors approve the transaction or where certain minimum price criteria and
other procedural requirements are met. Our certificate of incorporation also
requires the approval of holders of at least 66 2/3% of our voting stock to
amend or change the provision relating to the transaction approval. Under our
bylaws, stockholders are not permitted to call special meetings of our
stockholders. Finally, our certificate of incorporation provides that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting rather than by any consent in writing. The
transaction approval, special meeting and other charter provisions may
discourage certain types of transactions involving an actual or potential change
in our control. These provisions may also discourage certain types of
transactions in which our stockholders might otherwise receive a premium for
their shares over then current market prices and may limit our stockholders'
ability to approve transactions that they may deem to be in their best
interests.
Further, we have distributed a dividend of one right for each outstanding share
of our common stock pursuant to the terms of our stockholder rights plan. These
rights will cause substantial dilution to the ownership of a person or group
that attempts to acquire us on terms not approved by our Board of Directors and
may have the effect of deterring hostile takeover attempts. In addition, our
Board of Directors has the authority to fix the rights and preferences of and
issue shares of preferred stock. This right may have the effect of delaying or
preventing a change in our control without action by our stockholders.
Securities class action litigation that could result in substantial costs and
divert management's attention and resources.
Securities class action lawsuits are often brought against companies following
reductions or periods of volatility in the market price of their securities. Due
to the volatility of our stock price and its decline in value, we are vulnerable
to securities class action lawsuits. Such litigation could result in substantial
costs and divert management's attention and resources.
Our activities may infringe the intellectual property rights of others.
If third parties claim we have infringed their intellectual property rights, we
may be forced to pay for expensive licenses, reengineer our work, engage in
expensive and time-consuming litigation, or stop marketing our services.
10
We may incur significant stock-based compensation charges related to our stock
option repricing in future periods.
Under the guidance in Financial Accounting Standards Board Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of Accounting Principles Board Opinion No. 25," we may incur
variable accounting costs related to certain stock options in connection with
our December 7, 2001 stock option repricing. These costs are based on the amount
by which the closing price of our common stock at the end of a reporting period
or the date of exercise, forfeiture, or cancellation without replacements, if
earlier, exceeds the $1.11 exercise price of the options granted in the
repricing. Refer to Note 9 to Consolidated Financial Statements for more
information on our stock option repricing.
We may not be able to capitalize on our intellectual property rights.
We continue to hold certain intellectual property rights. This intellectual
property could be misappropriated, which could force us to become involved in
expensive and time-consuming litigation or frustrate efforts to sell or market
it. And we may not possess the financial resources to take the necessary steps
to protect our intellectual property rights. Such misappropriation, our need to
incur expenses to protect it or our inability to pay to take such actions could
harm our business.
You should not unduly rely on forward-looking statements contained in this
Report because they are inherently uncertain.
This Report contains forward-looking statements that involve risks and
uncertainties. We use words such as "believe," "expect," "anticipate," "intend,"
"plan," "future," "may," "will," "should," "estimates," "potential," or
"continue" and similar expressions to identify forward-looking statements. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this report. The forward-looking statements contained in
this report are subject to the provisions of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks described above and elsewhere
in this document.
Item 2. PROPERTIES
In March 2002 our corporate headquarters were relocated from Alameda, California
to a smaller, less expensive space in Emeryville, California. We occupy
approximately 3,000 square feet in Emeryville under a sub-lease, which expires
in November 2002. The sub-lease gives us the option to extend the lease. In
addition, we occupy 7,000 square feet in an office facility in Macclesfield,
England under a lease that expires in 2006. We believe that our existing
facilities will be adequate to meet our needs through fiscal 2003.
Item 3. LEGAL PROCEEDINGS
In January 2002, we filed a demand for arbitration with the American Arbitration
Association in Oakland, California seeking payment of approximately $100,000,
which consists of $88,000 in notes receivable plus accrued interest, from Donald
G. Ezzell, former general counsel and chief operating officer of Geoworks, as
the balance due on a note made for the purchase of Geoworks stock by Mr. Ezzell
when hired in 1999. We believe that the payment became due on December 31, 2001.
Mr. Ezzell denies liability and claims fraud, breach of contract, securities law
violations, unfair business practices and the right to recission. The matter is
scheduled for a hearing in October 2002. Discovery has begun. We do not believe
Mr. Ezzell's contentions have merit and will continue to seek collection of the
sums due us to the extent practical or the cancellation of the stock if not paid
for.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended March 31, 2002.
11
Item 4A. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The members of the Board of Directors and executive officers of the Company are
as follows:
Name Age Position
---- --- --------
David L. Grannan 38 Chairman of the Board of Directors
Steve W. Mitchell 41 President and Chief Executive Officer, Director
Timothy J. Toppin 42 Vice President and Chief Financial Officer
John B. Balousek 57 Director
Stephen T. Baker 44 Director
Jim Judge 39 Director
Frank S. Fischer 55 Director
Mr. Grannan joined the Company in March 1998 as Vice President, Marketing and
Business Development. Mr. Grannan was appointed as President, and Chief
Executive Officer and Director by the Board of Directors in January 1999. In
March 2002, his employment was terminated. He continues to serve on the Board of
Directors as the Chairman. Prior to joining the Company, Mr. Grannan was an Area
Vice President at Sprint PCS from June 1997 to March 1998. Prior to his position
at Sprint PCS, Mr. Grannan worked at Accenture (formerly Andersen Consulting) in
the Communications Industry Group from May 1994 to June 1997, where he provided
strategic services for many organizations. Mr. Grannan began his career as a
Data Communications Officer in the United States Marine Corps. He holds a B.A.
from Indiana University and received his M.B.A. from the University of
California, Berkeley.
Mr. Mitchell joined the Company in November 2000 as Vice President of Human
Resources. The Board of Directors appointed Mr. Mitchell President, Chief
Executive Officer and Director in April 2002. At Geoworks Mr. Mitchell has been
a key member of the executive team responsible for significant organizational
and operational functions including human resources, corporate strategy and
operations management. Prior to assuming the CEO position at Geoworks, he served
as chief operating officer for Aureal Inc., a sound chip manufacturer. Mr.
Mitchell has previously held management positions at Nextel Communications where
he was involved in driving and supporting the rapid growth of the company and
was responsible for integration efforts with several acquisitions. Mr. Mitchell
also has a management recruitment background with Pacific Gas and Electric and
Management Recruiters International. Mr. Mitchell holds a B.A. in English from
the California State University at Hayward.
Mr. Toppin joined the Company in March 1999 as Controller and was promoted to
Vice President and Chief Financial Officer in September 2000. He has served as
the Company's Secretary since June 2000. Prior to Geoworks, Mr. Toppin was with
Digital Generation Systems, Inc. as Controller from April 1996 to December 1998
and as Planning and Accounting Manager from February 1995 through March 1996.
From 1987 to 1995, Mr. Toppin held a number of financial management positions at
BEI Electronics, Inc., and its subsidiary, Zinnanti Surgical Instruments. Mr.
Toppin was with the public accounting firm of Deloitte Haskins & Sells from 1983
to 1987. He holds a B.S. degree in business administration from the University
of California at Berkeley and is a Certified Public Accountant in the State of
California.
Mr. Balousek joined the Board of Directors in December 1998. Mr. Balousek was
Executive Vice President and a founder of PhotoAlley.com, a San Francisco based
start-up company providing electronic commerce services from 1998 through 1999.
In 1996 Mr. Balousek was named Chairman and Chief Executive Officer of True
North Technologies, the digital and interactive services company of Foote, Cone
& Belding Communications (FCB), an agency network of parent company True North
Communications. Mr. Balousek joined the San Francisco office of FCB, one of the
nation's leading advertising agencies, in 1979 and was named general manager of
the office in 1986. Mr. Balousek was named President of FCB West and a director
of the firm in 1989, and was named President and Chief Operating Officer of the
$5 billion agency in 1991. Prior to joining FCB, Mr. Balousek was in brand
management at Procter & Gamble. In addition to Geoworks, he currently serves as
a Director of Aptimus.com, Interland Corporation, formally Micron Electronics
Corp., Central Garden, and Pets Co, all publicly held companies, and EDB
Holdings, a privately held company. Mr. Balousek holds a B.A. degree from
Creighton University and a Masters degree from Northwestern University.
12
Mr. Baker joined the Company in October 1998 as Vice President and Chief
Financial Officer. He was appointed to the Board of Directors in October 1999.
He was promoted to President and Chief Operating Officer in September 2000. In
June 2001, he stepped down from a management role with the Company while
continuing to serve on the Board of Directors. From 1996 to 1998, he was Vice
President, Finance and Controller, for the Service Provider Messaging Group at
Lucent Technologies having started with Octel Communications prior to its
acquisition by Lucent. From 1995 to 1996, Mr. Baker was the CFO for the Software
Systems Group of Bell Communications Research. From 1993 to 1995 he was
Controller at Novell after the acquisition of Unix System Laboratories (USL). At
Unix System Laboratories, a worldwide software company, Mr. Baker was CFO from
1989 to 1993. Mr. Baker has also held a number of financial management and
operational positions with AT&T Corporation from 1981 through 1989. He holds a
B.A. from the University of Pennsylvania and an M.B.A. from the Columbia
University Graduate School of Business.
Mr. Judge joined the Geoworks Board of Directors in March 2002. Mr. Judge is
currently President and Founder of Cambridge Consulting Solutions, a strategic
and tactical marketing consulting and solutions firm founded in 1997. His client
list includes Hewlett-Packard, Cisco, RSA Securities, Novell, VERITAS Software
and BEA Systems. Mr. Judge has spent most of the past 15 years working with
large and mid-sized enterprises and start-ups, applying traditional business
development and product marketing approaches to new and emerging application
software and service delivery models. From 1995-1997 he was a marketing manager
at Hewlett-Packard. From 1985-1995 he held various marketing and operation
management positions at AT&T and one of its new software startups UNIX System
Laboratories. Mr. Judge received a B.A. from The University of North Carolina at
Greensboro and a M.B.A. with a concentration in Information Systems Marketing
from Wake Forest University.
Mr. Fischer joined the Geoworks Board of Directors in June 2002. Mr. Fischer is
currently the President and Chief Executive Officer and founder of Breadbox
Computer Company, LLC, a developer of applications for GEOS and Symbian OS,
which he founded in 1990. He served as Vice President of Strategic Initiatives
at MyTurn.com from June 2000 to March 2001. Between 1983 and 1989, Mr. Fischer
founded and served as the President of Desert Elevator Company, Small Business
Systems, and Homevision and Satellite Franchising, Inc. He held a number of
financial management positions with Ingersoll Rand and its subsidiaries from
1978 to 1983 and was with the public accounting firm of Price Waterhouse from
1974 to 1978. Mr. Fischer received a B.S. in Accounting from New York University
and is a Vietnam veteran with service in the United States Coast Guard from
1966-1970.
13
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Changes in common stock market value
Our common stock has traded on the Nasdaq SmallCap Market since May 2002, under
the symbol "GWRX". Previously it traded on the Nasdaq National Market under the
same symbol. The following table sets forth the high and low closing sales
prices for our common stock as reported by Nasdaq for the quarters indicated:
High Low
For the quarter ended:
March 31, 2002 $ 1.14 $ 0.26
December 31, 2001 1.49 0.52
September 30, 2001 1.59 0.62
June 30, 2001 2.70 1.19
For the quarter ended:
March 31, 2001 $ 5.09 $ 1.17
December 31, 2000 7.06 1.22
September 30, 2000 16.19 7.38
June 30, 2000 25.75 9.00
Registered Holders
As of June 24, 2002, there were 298 registered holders of record of our common
stock and approximately 17,000 beneficial holders of our common stock. We have
never declared or paid any cash dividends on our common stock. Since we
currently intend to retain all future earnings to finance operations, we do not
anticipate paying any cash dividends in the foreseeable future.
The equity compensation plan disclosures required by this item are incorporated
herein by reference to our 2002 Proxy Statement.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below is qualified in its entirety by reference to, and
should be read in conjunction with, Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations," ("MD&A") and the
"Consolidated Financial Statements" and notes thereto included elsewhere in this
Report on Form 10-K. As a result of certain material developments affecting our
business since the beginning of fiscal 1999, which are discussed in the MD&A,
period to period comparisons of our financial results are difficult, may not be
useful and are not indicative of our future performance.
14
Condensed Consolidated Statements of Operations Data:
(in thousands, except per share data)
Year ended March 31
2002 2001 2000 1999 1998
Net revenues:
Professional services $ 7,559 $ 8,343 $ 7,004 $ 1,228 $ --
Software and related services 4,135 8,222 4,815 4,239 7,266
Research and development fees -- -- 320 3,315 5,651
--------------------------------------------------------
Total net revenues 11,694 16,565 $ 12,139 8,782 12,917
Operating expenses:
Cost of services 5,167 6,735 4,919 867 155
Sales and marketing 5,785 8,607 5,577 4,951 6,613
Research and development 7,674 9,202 4,100 13,810 18,543
General and administrative 4,160 7,079 3,338 3,634 3,596
Amortization of goodwill and other intangible assets 5,227 5,410 -- -- --
Purchased in-process research and development -- 1,378 -- -- --
Restructuring charges (reversal) 3,272 -- (589) 1,790 --
Write-down of goodwill and other long-lived assets 27,557 -- -- -- --
--------------------------------------------------------
Total operating expenses 58,842 38,411 17,345 25,052 28,907
--------------------------------------------------------
Operating loss (47,148) (21,846) (5,206) (16,270) (15,990)
Other income (expense):
Other income 4,494 265 4,049 -- --
Interest income 191 840 646 612 1,427
Interest expense (8) (4) (10) (31) (158)
--------------------------------------------------------
Total other income, net 4,677 1,101 4,685 581 1,269
--------------------------------------------------------
Loss before income taxes (42,471) (20,745) (521) (15,689) (14,721)
Provision for income taxes 129 313 452 149 148
--------------------------------------------------------
Net loss $(42,600) $(21,058) $ (973) $(15,838) $(14,869)
========================================================
Net loss per share- basic and diluted $ (1.81) $ (0.99) $ (0.05) $ (0.97) $ (0.95)
========================================================
Shares used in net loss per share
computaion - basic and diluted 23,555 21,190 17,866 16,260 15,687
========================================================
15
Consolidated Balance Sheet Data:
(in thousands)
March 31
2002 2001 2000 1999 1998
-----------------------------------------------------------
Cash and cash equivalents $ 3,136 $ 13,713 $ 17,204 $ 13,715 $ 19,981
Working capital 1,033 10,616 14,286 12,379 20,095
Total assets 6,729 56,263 41,459 18,183 27,463
Deferred revenue 424 1,128 1,629 1,498 778
Long-term obligations, net of
current portion -- 128 -- -- 231
Accumulated deficit (153,710) (111,110) (90,052) (89,079) (73,241)
Stockholders' equity 3,297 49,731 36,632 13,374 23,392
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Summary
As a result of our reorganization announced in January 2002, we are now focused
on realizing the value of our professional services organization. Therefore,
much of the following discussion of our historical operating results,
particularly the results of operations for our software products and related
services business, will not be useful with respect to understanding our ongoing
operations. However, a historical overview is provided to give insight as to how
our operating results for the past three years have been significantly affected
by a number of strategic business decisions and events.
Historical Overview
From our initial public offering in 1994 through early 1999, we were focused on
developing and selling wireless operating systems for smart phones and PDA's
(personal digital assistants). Our customers were large mobile phone
manufacturers who paid us research and development fees to develop software and
agreed to pay us royalties based on the number of phones they shipped with our
operating system. This market did not develop as rapidly as we expected and in
mid-1998, several of the world's largest handset makers including Nokia,
Motorola, Ericsson and Matsushita, representing over half of our target market,
created a joint venture to develop their own mobile operating system. Therefore,
in response to the slow growth in the market, the increased competition and the
loss of key Original Equipment Manufacturers ("OEM") prospects, we shifted our
focus to the development of mobile server software for mobile commerce and
information services. By the fourth quarter of fiscal 1999, we had discontinued
development of our smart phone operating system (GEOS SC(TM)) and licensed the
source code, on a non-exclusive basis, to one of our major OEM customers, whom
we continued to support through a professional services consulting agreement.
In the following year, our fiscal 2000, our research and development and sales
and marketing efforts were targeted at our mobile software and services, in
particular our Mobile ASP (Application Service Provider) offering, based on our
Mobile Server+ software. We also continued to provide engineering services to
some OEM customers, however such services were provided through professional
services consulting contracts, rather than as customer funded research with
potential product royalties.
In July 2000, we strengthened our software product and service offering by
acquiring the AirBoss Application Platform and the AirBoss Business Unit
("AirBoss") from Telcordia Technologies, Inc. ("Telcordia"). Telcordia and its
parent, Science Applications International Corporation ('SAIC") became our
largest shareholder with approximately 12% of our outstanding stock. We
established an office in New Jersey to continue the research, development, and
deployment of the AirBoss line of patented mobile communications software
products, as well as to service the various third parties whose contractual
rights with Telcordia were assigned to us as part of the acquisition. In June
2001, we reorganized our operations, exited the Mobile ASP market and
accelerated the integration of our two software platforms, Mobile Server+ and
the AirBoss Application Platform, into a single integrated product offering for
enterprise applications.
Through January 2001, we had been able to successfully raise capital through
public offerings, a number of private placements and through our employee stock
option plans. However, raising capital became increasingly difficult due to the
uncertainty in the market as a whole and in the wireless and telecommunications
industry, in particular. In August 2001, we engaged an investment bank to assist
us in considering our strategic alternatives.
In October 2001, as a result of market uncertainties and a lack of market
visibility, in particular the impact of delayed buying decisions by wireless
carriers for the types of products and services we provided with our AirBoss
Application Platform, we announced a number of cost cutting measures to conserve
our resources, including terminating approximately 45% of our workforce. Because
of continued market uncertainty and the inability to generate cash through
strategic alternatives, in January 2002, we announced our exit from the software
products business and additional cost cutting measures, including terminating
45% of our remaining workforce. In particular, our Board of Directors concluded
it would be in the best
17
interest of our company to sell our AirBoss assets in order to focus on
realizing the value of our professional services business.
In April 2002, Steve W. Mitchell, our former Vice President of Human Resources
replaced David L. Grannan as President and Chief Executive Officer and Mr.
Grannan assumed the role of Chairman of the Board of Directors of the Company.
Three members of the Board of Directors also resigned in the quarter ended March
31, 2002 and we have since added Jim Judge, Frank S. Fischer and David J.
Domeier to the Board, effective March 8, June 6, and July 5, 2002, respectively.
Since the January 2002 announcements we have continued to explore the sale of
AirBoss and the source code for our other legacy products. Several patents were
sold during the fourth quarter of fiscal 2002 and we have terminated the leases
of our former facility in New Jersey and our Company headquarters in Alameda,
California and relocated our headquarters to a significantly smaller office
space in Emeryville, California. As of March 31, 2002, the employee terminations
announced in January 2002 were complete and operations now consist entirely of
personnel supporting the professional services business.
In the following discussion, readers should focus on the results and comments
regarding our professional services business, keeping in mind that this
discussion reflects management's current beliefs, intentions and expectations.
Statements made in this discussion are subject to risks and uncertainties that
could cause actual results and events to differ materially.
Results of Operations
Net Revenues
Year Ended Change Year Ended Change
------------------ ---------------- ------------------ ------------------
March March March March
31, 2002 31, 2001 $ % 31, 2001 31, 2000 $ %
-------- -------- -------- ---- -------- -------- ------- -------
Net revenues (in thousands):
Professional services $ 7,559 $ 8,343 $ (784) (9)% $ 8,343 $ 7,004 $ 1,339 19%
Software and related services 4,135 8,222 (4,087) (50) 8,222 4,815 3,407 71
Research and development fees -- -- -- -- -- 320 (320) (100)
------------------------------------------------------------------------------
Total net revenues $11,694 $16,565 $(4,871) (29)% $16,565 $12,139 $ 4,426 36%
==============================================================================
Fiscal 2002 vs. 2001
Net revenues. Net revenues in fiscal 2002 decreased by $4,871,000, or 29% to
$11,694,000, in comparison with fiscal 2001. The decrease is primarily due to
reduced software and related services sales, and this result was a primary
factor in our decision to exit the software product business.
Professional services revenue. Professional services revenue in fiscal 2002
decreased by $784,000, or 9%, to $7,559,000 in comparison with fiscal 2001. This
reduction reflects a decrease in the number of hours billed and lower average
billing rates during the fiscal year ended March 31, 2002 as compared to the
prior fiscal year and is the result of customer budget constraints and the lack
of new customers. In particular, during fiscal 2002 we renewed some contracts
with rates up to 20% lower than the expiring contracts due to the budget
constraints of one of our primary customers and reduced the number of hours we
worked for our other primary customer as a result of its budget reductions.
We expect our professional services business to be our primary source of revenue
in the future. Our future success is dependent on our ability to diversify the
professional services customer base, which included two primary clients through
March 31, 2002, and to operate this business profitably. Our two primary
professional services customers generated 61% and 39%, respectively, of our
fiscal 2002 professional services revenues. The contract with one of these
primary customers, which generated $4,624,000, or 61%, of our professional
services revenue for the fiscal 2002, expired on March 31, 2002 and has not been
renewed. We do not expect to generate significant revenue from this customer for
the foreseeable future. We believe we have a good relationship with our
remaining primary customer and have contracted for similar levels of consulting
in the quarter ended June 30, 2002. We have contracts with this customer, which
extend into the future as far as March 2003 and total bookings of approximately
$1.1 million as of
18
the end of fiscal 2002. As a result of the non-renewal of one of our two primary
customers, historical results for our professional services business should not
be used to predict our future operating results.
Software and related services revenue. Software and related services revenue
decreased by $4,087,000, or 50%, to $4,135,000, in comparison with fiscal 2001.
This decrease is primarily due to reduced royalty revenues from products
utilizing our legacy operating systems. We were unable to replace the
anticipated losses in legacy royalties with increased revenues from the AirBoss
software applications. Substantial reductions were experienced in all three
revenue subcategories: license and royalty revenues, software customization and
revenues from other services. License and royalty revenues for fiscal 2002 were
$2,872,000 and included $1,750,000 of non-recurring license fees and royalties
in connection with the conclusion of an AirBoss license agreement with a
customer. The fiscal 2001 license and royalty revenues of $3,879,000 had been
generated primarily from legacy operating systems royalties. Comparable legacy
operating system royalty revenues in fiscal 2002 were $419,000, a decrease of
89%. Operating system royalties have decreased as expected, due to the fact that
most of the products containing our operating systems have reached the
conclusion of their life cycles.
Software customization revenues, a combination of license and service fees
earned when our AirBoss software platform was tailored for a specific customer,
were generated solely from Airboss products. Customization revenue for fiscal
2002 was $839,000, a decrease of 73% from fiscal 2001, primarily due to the loss
of our subcontract with Telcordia, when its contract with Telkom South Africa
("TSA") was terminated in March 2001.
Total revenue from our AirBoss product line, including software license,
customization and service revenues totaled approximately $3,300,000 for fiscal
2002, as compared to approximately $3,500,000 for the fiscal 2001. While this
decline in total year over year AirBoss revenues is only 6%, these revenue
levels fell short of management's expectations and were a primary factor in the
decision to exit the software products business and reorganize to focus on
realizing the value of our professional services business.
The remainder of our software and related services revenue in fiscal 2002 was
generated from our Flex UI licensing program. Such revenues have totaled
approximately $300,000 and $500,000, in the fiscal 2002 and 2001, respectively.
The Flex UI licensing program began in fiscal 2001. The Flex UI patents were
sold in the last quarter of fiscal 2002.
Fiscal 2001 vs. 2000
Net revenues. Net revenues in fiscal 2001 increased by $4,426,000, or 36%, in
comparison with fiscal 2000. This increase was primarily due to the growth in
software and related services revenue, in particular revenues generated from
AirBoss products and services as a result of our July 2000 acquisition.
Professional services revenue. Professional services revenue in fiscal 2001
increased by $1,339,000, or 19%, in comparison with fiscal 2000. Professional
services revenue increased based on both an increased number of hours worked and
an increase in our rates as compared to the same periods of the prior year. We
had two primary customers for these services for fiscal 2001, as compared to
three such customers for fiscal 2000. Our professional service projects involved
consulting related to technology previously developed by us, as well as
development of new technologies supporting mobile communications.
Software and related services revenue. Software and related services revenue in
fiscal 2001 increased $3,407,000, or 71%, in comparison with fiscal 2000. This
increase is primarily due to the addition of AirBoss product revenues.
The largest portion of software and related services revenue was derived from
the sale of our AirBoss software and the related software customization.
Customization contracts also include the potential for additional license fees
and maintenance services. For fiscal 2001, such software and customization
services revenues were approximately $3,100,000. Software and customization
services revenues included services provided to Telcordia, a related party, to
support an installation of AirBoss software for TSA. In addition, AirBoss
software was customized for Cingular Interactive, formerly BellSouth Wireless
Data. No such software and customization services revenues were recorded for
fiscal 2000.
AirBoss products and customers accounted for approximately $3,500,000 of fiscal
2001 revenues. Included in the fiscal 2001 AirBoss revenues was $2,555,000 from
Telcordia, a related party.
19
The remaining fluctuations in software and related services revenues are due
primarily to decreased license fees, and royalty revenues for fiscal 2001, as
compared to fiscal 2000. Prior to fiscal 2001, our license and other revenues
had been generated primarily by operating system and various application
software we developed that were included in smart phones. As the last of these
products containing the Geoworks operating systems reached the conclusion of
their life cycles, the license revenue from these legacy products continued to
diminish. In addition, because we had licensed operating system source code and
terminated a number of license agreements over the prior three fiscal years, the
number of OEM license agreements which could generate royalty revenues
decreased.
Software and related services revenue also includes license fees generated from
our Flex UI licensing program. For fiscal 2001, we recorded approximately
$500,000 in Flex UI licensing revenues.
Research and development fee revenue. Research and development fee revenue for
fiscal 2000 was related to an OEM contract with a single customer. As discussed
above, we had adopted a new business model and OEM funded research and
development contracts were not being actively pursued since fiscal 1999. No such
revenue was recorded after fiscal 2000.
Operating Expenses
Cost of Professional Services. Cost of professional services are those expenses
incurred to provide professional services consulting, including compensation,
travel, other direct costs, and facilities overhead. Cost of professional
services decreased by $193,000, or 4%, to $4,575,000 for fiscal 2002 in
comparison with fiscal 2001. The decrease is attributable to the decreased
volumes of professional service activity and revenue as compared with the prior
fiscal years. In particular, decreased labor costs as the number of professional
services personnel at the end of fiscal 2002 decreased by approximately 29% to
22 employees in comparison to the number of personnel at the end of fiscal 2001.
Decreases in direct labor costs were offset by increased costs of consultants
who were engaged to fulfill specific responsibilities and expertise with respect
to one of our primary professional services customers.
Cost of professional services increased $184,000, or 4%, to $4,768,000 in fiscal
2001 as compared to fiscal 2000. This increase is a result of the increased
volumes of professional service activity and revenue as compared with the prior
fiscal year.
Gross margin percentages on professional services revenues were 39%, 43%, and
35% during fiscal 2002, 2001 and 2000, respectively. Gross margin is calculated
as our professional services revenues less cost of professional services. Gross
margin percentage is calculated as our gross margin divided by our professional
services revenues. The gross margin recognized on such services is subject to
several variables, including the average rates charged for these services, our
ability to hire and retain engineering personnel at competitive rates, the
relative use of more expensive subcontracted consultants, and the utilization
rates of engineering personnel. During fiscal 2002 we renewed some contracts
with rates up to 20% lower than the expiring contracts due to the budget
constraints of our customers. In addition, our utilization rates were not as
high in fiscal 2002 in comparison to the prior fiscal year, primarily due to
client delays in renewing our expiring contracts. Also, we utilized
subcontracted consultants at a higher level in fiscal 2002 than in the prior
year due to particular project needs. As a result of these changes, our gross
margin percentages decreased in fiscal 2002 as compared to fiscal 2001. Gross
margin percentages improved in fiscal 2001 as compared to fiscal 2000 because of
increased rates for such services and decreased average costs resulting from an
improved mix of the engineering resources used to provide these services.
In the future, because of our shift of focus to professional services, we
anticipate that the professional services business will absorb a significantly
higher portion of the facilities overhead costs, which is expected to negatively
impact its gross margin percentages. In addition, in order to retain our team
after the loss of customers, we have been required to take some lower margin
contracts while business opportunities with better margins are being pursued.
Cost of Software and Related Services. Cost of software and related services is
comprised primarily of expenses incurred to provide software customization
services, including labor, direct costs and related overhead of these projects,
as well as license payments to third parties for software that is incorporated
into our software. Cost of software and related services expense decreased by
$1,375,000, or 70%, to $592,000 during fiscal 2002, in comparison with fiscal
2001. In fiscal 2002 and 2001, such costs were incurred
20
primarily to provide customization services for our AirBoss line of software and
the decrease in such costs in fiscal 2002 is the result of the decrease in the
related revenue as compared to the prior year.
Also included in the costs of software and related services are license payments
to third parties for software that is incorporated into our software. Such costs
were a small portion of the costs of software and related services, $13,000 and
$47,000, in fiscal 2002 and 2001, respectively and totaled $335,000 in fiscal
2000. The decrease in such costs over the three years is due to a reduced
proportion of the related revenues being subject to such fees in each fiscal
year.
Cost of software and related services increased by $1,632,000, or 487%, to
$1,967,000 for fiscal 2001 in comparison with fiscal 2000. The increase in
fiscal 2001 is primarily because we began providing software and related
customization services after our acquisition of AirBoss in July 2000.
As a result of our January 2002 reorganization we do not currently expect to
incur significant levels of such costs in the foreseeable future.
Sales and Marketing. Sales and marketing expenses include salaries, benefits,
sales commissions, travel and related facilities overhead expense for our sales
and marketing personnel. Sales and marketing expense decreased by $2,822,000, or
33%, to $5,785,000, during fiscal 2002, in comparison with fiscal 2001. The
decrease in sales and marketing expenses was primarily attributable to the
reductions we made to our workforce in fiscal 2002 to decrease our expenses and
to shift our strategic focus to our professional services business. The cost
cutting measures also resulted in reduced spending on marketing programs. The
number of sales and marketing personnel employed as of March 31, 2002 decreased
by approximately 91% to 4 employees in comparison to the number of these
personnel as of March 31, 2001.
Sales and marketing expense increased by $3,030,000, or 54%, to $8,607,000,
during fiscal 2001, in comparison with fiscal 2000. This increase was due
primarily to an increase in personnel and business activity, including business
development, as we expanded our efforts to market our new products and services,
particularly the AirBoss Application Platform, Mobile Server+, and Mobile ASP
offerings and launched our Mobile Business Alliance Program.
We expect absolute spending on sales and marketing expenses to decrease in the
near future, however these resources will now be focused on developing the
professional services business, rather than on software products as in the prior
two fiscal years.
Research and Development. Research and development expenses consist primarily of
salaries and benefits for software engineers, contract development fees, costs
of computer equipment used in software development and related facilities
overhead expense. Research and development expense decreased by $1,528,000, or
17%, to $7,674,000, during fiscal 2002, in comparison with fiscal 2001.
Decreased research and development expenses were the result of the various
reorganizations and related cost cutting measures, in particular the reductions
in workforce implemented during in fiscal 2002. The number of research and
development personnel employed as of March 31, 2002 decreased by approximately
92% to 7 employees in comparison to the number of personnel as of March 31,
2001. Because of our January 2002 reorganization and cost cutting measures,
development of the AirBoss application platform has ended and therefore we
expect research and development expenses to be minimal in the near future as we
focus on growing the professional services business.
Research and development expense increased by $5,102,000, or 124% to $9,202,000,
during fiscal 2001, in comparison with fiscal 2000. This increase was
attributable principally to increased staffing and related costs, including
recruiting expenses, as we expanded our research and development efforts. In
particular, our efforts focused on software development for the AirBoss
Application Platform and Mobile Server+.
General and Administrative. General and administrative expenses include costs
for human resources, finance, legal, general management functions, and the
related facilities overhead. General and administrative expense decreased by
$2,919,000, or 41%, to $4,160,000, during fiscal 2002, in comparison with fiscal
2001. The primary reason for the decrease in general and administrative expenses
is reduced legal expenses as a result of the settlement of a patent dispute in
December 2000. Legal fees were $2,340,000, or approximately 33% of the total
general and administrative expense for fiscal 2001, primarily
21
for the legal expenses related to a patent dispute with Openwave Systems Inc.,
formerly Phone.com ("Openwave"), which we settled by entering into a
royalty-free patent cross-license agreement. Additionally, the number of general
and administrative personnel employed as of March 31, 2002 decreased by
approximately 69%, to 12 employees, in comparison to the number of personnel as
of March 31, 2001.
General and administrative expense increased by $3,741,000 or 112%, to
$7,079,000, during fiscal 2001, in comparison to fiscal 2000. This increase was
due to increased legal expense incurred primarily as a result of the patent
dispute with Openwave, as well as the increased personnel costs required to
build the administrative infrastructure to support the new business plan and the
AirBoss acquisition.
We expect our general and administrative expenses to decrease in fiscal 2003 as
a result of the reductions in force which have accompanied the various
reorganizations during fiscal 2002.
Amortization of goodwill and other intangible assets. Amortization of goodwill
and other intangible assets of $5,227,000 during fiscal 2002 and $5,410,000
during fiscal 2001 was attributable to the amortization of goodwill and other
purchased intangible assets resulting from our July 2000 acquisition of AirBoss.
Amortization of goodwill and other intangible assets for fiscal 2002 was for
twelve months whereas for fiscal 2001, amortization was for the nine months
after our purchase of AirBoss. The fiscal 2002 amortization was lower despite
the longer period because the underlying intangibles base was reduced during
fiscal 2002 by writedowns due to value impairments discussed below and in the
Notes to Condensed Consolidated Financial Statements.
Write-down of goodwill and other long-lived assets. We review long-lived and
intangible assets for impairment in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," whenever events
or circumstances indicate the carrying value of an asset may not be recoverable.
As a result of these reviews, write-downs of goodwill and other long-lived
assets of $27,557,000 were recorded for fiscal 2002, as discussed below.
Non-cash asset impairment charges of $3,391,000 were recorded during fiscal 2002
to write down equipment no longer being used in operations as a result of the
reorganizations and headcount reductions made during the year, net of estimated
recoveries.
Since our acquisition of AirBoss in July 2000, we have performed quarterly
assessments of the carrying values of intangible assets recorded in connection
with our acquisition of AirBoss. The assessments have been performed in light of
the significant negative industry and economic trends impacting current
operations, the decline in our stock price, expected future revenue growth
rates, and continued operating losses. When such an event occurs, management
determines whether there has been impairment by comparing the anticipated
undiscounted future net cash flows to the related asset's carrying value. If an
asset is considered impaired, the asset is written down to fair value, which is
determined based either on discounted cash flows or residual value, depending on
the nature of the asset. As a result of these assessments, we concluded that the
decline in market conditions was significant and "other than temporary". As a
result, we recorded write downs of $14,769,000 and $9,397,000 in the three
months ended September 30, 2001 and December 31, 2001, respectively, based on
the amount by which the carrying amount of these assets exceeded their estimated
fair value using discounted cash flows. We believe that these write downs are
consistent with our decision to sell the AirBoss technology and focus on
realizing the value of our professional services business.
Fair value was determined based on discounted estimated future cash flows from
the AirBoss product line. The assumptions supporting the estimated future cash
flows, including the discount rate and estimated terminal values and estimated
net realizable value, reflect management's best estimates. The discount rates
used represent the risk-adjusted cost of capital. As of March 31, 2002, the
value of AirBoss goodwill and other intangibles assets included in our
consolidated balance sheet is $2,001,000. There can be no assurance that we will
be able to obtain this fair value from any purchaser of the AirBoss technology
or business. For further discussion see Note 4 to the Consolidated Financial
Statements.
Purchased in-process research and development. Due to the AirBoss acquisition in
July 2000, we incurred a non-recurring, non-cash expense for purchased
in-process research and development costs of $1,378,000
22
in the three months ended September 30, 2000. See further discussion in the Note
4 to the Consolidated Financial Statements.
Restructuring charges. We recorded restructuring charges of $3,272,000 during
fiscal 2002. These charges relate to the cost-cutting measures we adopted and
announced in June and October 2001 and January 2002. The Board of Directors
approved these actions and the resulting restructuring charges consisting of
severance and related payments for a total of 153 terminated employees, accrual
for related lease and contract termination costs as a result of these actions.
In fiscal 2002, we recorded severance and related payments of $1,713,000, of
which $1,160,000 in severance and related payments had been paid as of March 31,
2002. We anticipate that $409,000 of the remaining severance and related
payments will be paid over the course of fiscal 2003 and that the remaining
severance and related payments of $144,000 will be paid in the following year.
For further discussion, see Note 12 to the Consolidated Financial Statements.
In fiscal 2002 we recorded $1,559,000 of charges for the lease and contract
termination costs that we estimated that we will be obligated to pay as a result
of our restructuring and reorganizations. As of March 31, 2002 we had $681,000
remaining in accrued restructure liabilities to cover balances outstanding at
that time for such liabilities, which remained to be paid. This amount is
subject to a number of variables and will be dependent upon the results of our
efforts to negotiate settlements to these contractual liabilities.
In connection with our restructuring and reorganization announced in January
2002, a ten-year facility lease in Morganville, New Jersey was terminated for
approximately $767,000 in cash and non-cash considerations. This settlement
included the transfer of assets with a remaining book value of $214,000 which
were written off in connection with the termination and was included in
restructuring charges for the quarter ended March 31, 2002. Office facilities in
Alameda, California with a remaining lease term through January 2005 were
returned to the lessor's possession in March 2002 and a lease termination
agreement was negotiated in May 2002. We settled this liability for
approximately $400,000 in cash and other non-cash consideration, which is
accrued at March 31, 2002.
We have returned equipment from a number of non-cancelable operating leases to
the respective lessors. Cancellation and other charges are currently under
negotiation with these vendors. We had aggregate future minimum payment
obligations under these leases of approximately $209,000 as of March 31, 2002.
The amounts we estimated by to settle these leases have been included in the
restructuring charges.
We cannot be sure that our current estimates of the costs associated with these
restructuring actions and reorganization will not change.
Variable non-cash stock compensation
On November 5, 2001, we announced an offer to our employees with outstanding
stock options to exchange such options for new options to purchase a different
number of shares of common stock priced as of December 7, 2001. The offer was
voluntary and had to be accepted by individual option holders within twenty
business days after receipt of the offer. In order to participate in the
exchange, an optionee had to exchange all of his or her existing options.
Options issued in the exchange vest and become exercisable in twelve monthly
increments and include an acceleration provision in the event of a change in
control. The first vest date was December 31, 2001. The options were granted on
December 7, 2001 with an exercise price of $1.11 per share, which was the
closing price for our common stock as reported by the Nasdaq National Market on
that date. The options expire on December 7, 2003. Other than changes to the
number of shares, exercise price, the vesting schedule, and the expiration date,
the new options have substantially the same terms as the exchanged options.
The exchange resulted in the voluntary cancellation of employee stock options of
3,550,264 shares of common stock with varying exercise prices in exchange for
employee stock options to purchase a total of 3,275,000 shares of common stock
with an exercise price of $1.11 per share.
This offer to exchange options constituted a stock option repricing for
financial accounting purposes, requiring us to use variable accounting to
measure stock compensation expense potentially arising from the
options that were subject to the offer, including options retained by eligible
optionees who elected not to participate in the offer. As these new options
vest, at the end of each reporting period, we must recognize
23
stock compensation expense based on the excess, if any, of the quoted market
price of our common stock over the exercise price. Subsequent declines in the
intrinsic value of these new options and the retained options may result in
reversal of previously recognized expense. After the options become fully
vested, any additional compensation due to changes in intrinsic value will be
recognized as compensation expense immediately. Such variable accounting will
continue until each option is exercised, or forfeited, or canceled.
Because the closing price of our common stock as reported by Nasdaq on December
31, 2001 and March 31, 2002 was less than the new option exercise price, no
stock compensation was record for the year ended March 31, 2002.
Other Income (Expense)
Other Income. Other income of $3,994,000 was recorded in the second quarter of
fiscal 2002, as a result of the sale of the remaining 480,000 shares of our
investment in Wink Communications, Inc. ("Wink") and the conversion to cash of
the related derivative instruments. See further discussion in the Note 3 to the
Consolidated Financial Statements. In addition, we recorded other income of
$500,000 during fourth quarter of fiscal 2002 as a result of the sale of certain
patents. In the fiscal 2001 and 2000, we sold 10,800 and 75,000 shares of Wink
common stock for gains of $265,000 and $4,049,000, respectively.
Interest Income. Interest income decreased by $649,000, or 77%, to $191,000,
during fiscal 2002, in comparison to fiscal 2001. This decrease is attributable
primarily to lower cash balances available for short-term investment.
Interest income increased by $194,000, or 30% to $840,000, during fiscal 2001,
as compared to fiscal 2000. This increase was attributable to the increased
balances of cash available for short-term investment. In particular, we
generated cash proceeds of $4,049,000 from the sales of our investment in Wink
in the third and fourth quarters of fiscal 2000 and we received $11,100,000 from
the issuance of our common stock in the year ended March 31, 2001. The equity
proceeds were from a September 2000 private placement of $5,000,000 with
Integral Capital Partners, a January 2001 private placement of $5,000,000 with
iValue Creation Company, a subsidiary of Toshiba Corporation, exercises under
our employee stock option plans, and purchases under our employee stock purchase
plan.
Interest Expense. Interest expense was not significant in fiscal 2002, 2001 and
2000, as we had minimal balances of capital lease and debt outstanding. As we
implement our new business plans, we may consider financing alternatives that
could increase the amount of interest expense incurred in the future.
Provision for Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Income tax expense consists of
foreign income tax withholding on foreign source royalties paid us. As of March
31, 2002, we had net operating loss carryforwards for U.S. federal income tax
purposes of approximately $110,844,610, and for U.K. income tax purposes of
approximately $21,011,000, and for state income tax purposes of approximately
$34,905,000. We also had research and development credit carryforwards for
federal income tax purposes of approximately $2,627,000 and for state income tax
purposes of approximately $293,000. Utilization of our U.S. net operating loss
and research credit carryforwards will be subject to annual limitations based on
the "change of ownership" provisions of the Tax Reform Act of 1986. These
limitations may result in the expiration of net operating loss and research
credit carryforwards before utilization.
Significant Accounting Policy Judgments and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires that we make estimates and
judgments, which affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those related to
intangible assets, bad debt, income taxes, restructuring charges, contingencies
such as litigation, and other complexities typical in our industry. We
24
base our estimates on historical experience and other assumptions that we
believe are reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions.
Revenue recognition. Professional services projects involve consulting related
to technology previously developed by us, as well as development of new
technologies supporting mobile communications. Professional services revenues
are generally billed and recognized based on time and materials expended by us
at contracted rates.
Software and related services revenue consists of software license, royalty and
related service revenues, including software customization and maintenance. Such
revenues include software license fees, which are accounted for in accordance
with SOP 97-2 "Software Revenue Recognition," from customers who purchased our
products or royalties from hardware manufacturers that incorporate our software
products into their systems. In addition, we have licensed certain technology
and intellectual property and sold source code to third parties to be used in
the development of their own service offerings and products. Revenues from the
license of products, technology, intellectual property, and the sale of source
code are recognized when evidence of an agreement exists, when we have performed
under the terms of the related contract, when such revenues are fixed and
determinable and when collectibility is probable.
Software customization, maintenance and related services revenues are billed and
recognized based on contracted rates, the percentage of completion method or
ratably over the contract period based on the terms of the contract. Advance
payments of license or service fees are recorded as deferred revenue and
recognized as the products or services are delivered.
If a customer transaction includes both software licenses and service elements,
the total arrangement fee is allocated to each of the elements using the
residual method, under which revenue is allocated to undelivered elements based
on vendor-specific objective evidence of fair values of such undelivered
elements and the residual amounts of revenue are allocated to the delivered
elements.
Research and development fees are primarily amounts received pursuant to
contracts with original equipment manufacturers ("OEMs") under which we were
reimbursed for a portion of our development costs related to specific products
up to the amounts specified in the contracts. We are typically paid by the OEM
as it achieves certain project milestones. Revenue under these research and
development arrangements is recognized under the percentage-of-completion method
based on the relationship of costs incurred to date to total anticipated project
costs.
Write-down of goodwill and other long-lived assets. We review our long-lived
assets, including intangible assets, for impairment whenever events or changes
in circumstances indicate that the carrying value of such assets may not be
recoverable. Factors considered important that could result in an impairment
review include significant underperformance relative to expected historical or
projected future operating results, significant changes in the manner of use of
acquired assets or the strategy for our business, significant negative industry
or economic trends, a significant decline in our stock price for a sustained
period of time, and our market capitalization relative to net book value.
Impairments are recognized based on the difference between the fair value of the
asset and its carrying value, and fair value is generally measured based on
discounted cash flow analyses. We recorded write-downs of goodwill and other
long-lived assets of $27,557,000 in fiscal 2002. If there are no additional
transactions for our AirBoss technology in the future, we may be required to
record additional impairment charges. We will be required to adopt SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," during the
first quarter of fiscal 2003, This statement addresses financial accounting and
reporting for the impairment of certain long-lived assets and for long-lived
assets to be disposed of. We are in the process of evaluating the impact of
implementation on our financial position and results of operations.
Liquidity and Capital Resources
Our total cash and cash equivalents were $3,136,000 at March 31, 2002, compared
with $13,713,000 at March 31, 2001. Our net loss for fiscal 2002 is the primary
reason for the decline in our cash balance. Our net loss for fiscal 2002,
excluding non-cash amortization of goodwill and other intangible assets, and the
write-down of goodwill, intangibles and other long-lived assets, was $9,816,000,
and this is the primary reason for the decline in our cash balance. These
restructurings and reorganizations were necessary as our operating results
deteriorated during the year. In particular, our revenues decreased by over $4.9
million to
25
$11.7 million. Our cash usage from operations during fiscal 2002 would have been
even higher if we did not reduce spending based on our assessments of business
and revenue opportunities. In connection with the restructuring and
reorganizations we implemented during fiscal 2002 we significantly reduced
headcount and our operating expense structure. The total number of personnel
employed as of March 31, 2002 has decreased by approximately 77% to 45 employees
in comparison to the number of personnel as of March 31, 2001. Our fiscal 2002
expenses, excluding non-cash charges for amortization, restructuring costs,
purchased in process research and development, and the write-down of goodwill
and long-lived assets, decreased by $8.8 million to $22.8 million. We expect to
incur additional substantial operating losses at least through fiscal 2003,
which will continue to have a negative impact on liquidity and capital
resources.
Purchases of property and equipment during fiscal 2002 and 2001 totaled
$1,802,000 and $3,025,000, respectively. The capital spending in fiscal 2002 was
primarily to prepare a facility for occupancy by the former AirBoss employees,
who had previously occupied offices rented from Telcordia after the AirBoss
acquisition in July 2000.
As we announced in January 2002 as part of reorganization, we are seeking buyers
for AirBoss and our legacy assets. We may not be able to locate a buyer for
these assets on acceptable terms before our financial resources have been
depleted, which may require us to consider bankruptcy or dissolution.
As of March 31, 2002 the Company has future minimum payments of approximately
$660,000 remaining under the non-cancelable operating leases having terms in
excess of one year.
Given the ongoing market softness, economic uncertainty and the significant
change in our business plan, our ability to forecast future revenue is limited.
Although we have repeatedly taken actions to reduce our expense rates, we expect
to incur additional operating losses, at least through fiscal 2003. We currently
anticipate that our available funds will be sufficient to meet our projected
needs to fund operations into the third quarter of fiscal 2003. This projection
is based on several factors and assumptions, in particular that our professional
services contract levels remain stable or grow and that our customers continue
to pay us on a timely basis, and is subject to numerous risks. Our future
capital needs and liquidity will be highly dependent upon a number of variables,
including how successful we are in realizing the value of our professional
services business, managing our operating expenses, selling the AirBoss
intellectual property and other legacy assets and how successful we are in
settling our contractual liabilities resulting from the reorganization announced
in January 2002. Moreover, our efforts over the last several months to raise
funds through strategic transactions or through the sale of AirBoss, our legacy
assets or our professional services business have been disappointing. As a
result, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If our available funds are insufficient to satisfy our
liquidity requirements, we may be required to revise our current operating
plans, to enter into other forms of strategic transactions, or to consider
bankruptcy or dissolution. These conditions raise substantial doubt about our
ability to continue as a going concern through the year ending March 31, 2003.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," which establishes financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations", and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." It requires that all business combinations in the scope
of this statement be accounted for using one method, the purchase method. The
provisions of this statement apply to all business combinations initiated after
June 30, 2001, and also applies to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or later.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition, and after they have been initially recognized in the financial
26
statements. The provisions of this statement are effective starting with fiscal
years beginning after December 15, 2001. We will adopt SFAS No. 142 during the
first quarter of fiscal 2003, and we are in the process of evaluating the impact
of implementation on our financial position and results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal periods. This
statement supersedes SFAS No. 121 and APB Opinion No. 30, however, this
statement retains the requirement of APB Opinion No. 30 to report discontinued
operations separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in a distribution to owners) or is classified as held for sale.
This statement addresses financial accounting and reporting for the impairment
of certain long-lived assets and for long-lived assets to be disposed of. We
will adopt SFAS No. 144 during the first quarter of fiscal 2003, and we are in
the process of evaluating the impact of implementation on our financial position
and results of operations.
27
Selected Consolidated Financial Data
Quarterly Financial Information (unaudited)
(in thousands, except per share data)
Quarter Ended
31-Mar-02 31-Dec-01 30-Sep-01 30-Jun-01
Net revenues:
Professional services $ 2,295 $ 1,728 $ 1,520 $ 2,016
Software and related services 135 2,276 484 1,240
----------------------------------------------------
Total net revenues 2,430 4,004 2,004 3,256
Operating expenses:
Cost of professional services 1,025 1,110 1,198 1,242
Cost of software and related services 6 196 165 225
Sales and marketing 478 993 2,091 2,223
Research and development 808 1,308 2,264 3,294
General and administrative 753 839 1,033 1,535
Amortization of goodwill and
other intangible assets 300 1,036 1,941 1,950
Write-down of goodwill and other
long-lived assets -- 12,129 14,769 659
Restructuring charges 581 400 -- 2,291
----------------------------------------------------
Total operating expenses 3,951 18,011 23,461 13,419
----------------------------------------------------
Operating loss (1,521) (14,007) (21,457) (10,163)
Other income (expense):
Other income 500 -- 3,994 --
Interest income 26 21 40 104
Interest expense (1) (4) (2) (1)
----------------------------------------------------
Loss before income taxes (996) (13,990) (17,425) (10,060)
Provision for income taxes 4 2 62 61
----------------------------------------------------
Net loss $ (1,000) $ (13,992) $ (17,487) $ (10,121)
====================================================
Net loss per share - basic and diluted $ (0.04) $ (0.59) $ (0.74) $ (0.43)
====================================================
28
Quarterly Financial Information (unaudited)
(in thousands, except per share data)
Quarter Ended
31-Mar-01 31-Dec-00 30-Sep-00 30-Jun-00
Net revenues:
Professional services $ 2,342 $ 2,157 $ 2,352 $ 2,055
Software and related services 2,427 2,131 1,126 1,975
----------------------------------------------------
Total net revenues 4,769 4,288 3,478 4,030
Operating expenses:
Cost of professional services 1,308 1,207 1,064 1,189
Cost of software and related services 725 913 311 18
Sales and marketing 2,585 2,541 2,008 1,473
Research and development 2,702 2,537 2,317 1,646
General and administrative 1,704 2,393 1,669 1,313
Amortization of goodwill and
other intangible assets 2,029 2,028 1,353 --
Purchased in-process research
and development -- -- 1,378 --
----------------------------------------------------
Total operating expenses 11,053 11,619 10,100 5,639
----------------------------------------------------
Operating loss (6,284) (7,331) (6,622) (1,609)
Other income (expense):
Other income -- -- 265 --
Interest income 164 221 227 228
Interest expense (4) -- -- --
----------------------------------------------------
Loss before income taxes (6,124) (7,110) (6,130) (1,381)
Provision for income taxes 50 61 29 173
----------------------------------------------------
Net loss $ (6,174) $ (7,171) $ (6,159) $ (1,554)
====================================================
Net loss per share - basic and diluted $ (0.27) $ (0.32) $ (0.29) $ (0.08)
====================================================
29
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
We have derived and expect to continue to derive most of our revenue from
international customers and the majority of our operations are located in
Macclesfield, England. Although our invoices to customers are generally
denominated in U.S. dollars, our international subsidiary uses the local
currency as their functional currency. Our cash accounts in foreign countries
are kept at the minimal levels necessary for operations. As the result of the
above, we are exposed to foreign exchange rate fluctuations and as these
exchange rates vary, the subsidiaries results, when translated, may vary from
expectations and adversely impact our results of operations.
30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
The Board of Directors and Stockholders
Geoworks Corporation
We have audited the accompanying consolidated balance sheets of Geoworks
Corporation as of March 31, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 2002. 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 auditing standards generally accepted
in the 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 Geoworks
Corporation at March 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2002, in conformity with accounting principles generally accepted in
the United States.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and the cash required to fund such losses raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are described in Note 1. The consolidated financial
statements for the year ended March 31, 2002 do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that might result from
the outcome of this uncertainty.
/s/ Ernst & Young LLP
San Francisco, California
May 1, 2002,
except for Note 14, as to which the date is
June 11, 2002
31
Geoworks Corporation
Consolidated Balance Sheets
(In thousands)
March 31
2002 2001
------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,136 $ 13,713
Accounts receivable, net of allowances $100 and $0 in 2002 and 2001,
respectively 823 2,769
Prepaid expenses and other current assets 362 538
------------------------
Total current assets 4,321 17,020
Property and equipment, net 405 3,576
Long-term investments and derivative instruments 2 4,038
Goodwill and other intangible assets, net 2,001 31,556
Other assets -- 73
------------------------
Total assets $ 6,729 $ 56,263
========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 554 $ 2,374
Accrued liabilities 2,310 2,874
Deferred revenue 424 1,128
Current portion of capital lease obligations -- 28
------------------------
Total current liabilities 3,288 6,404
Capital lease obligations, net of current portion -- 128
Other accrued liabilities 144 --
Stockholders' equity:
Preferred stock, no par value; 2,000 shares authorized;
no shares issued and outstanding in 2002 and 2001 -- --
Common stock, no par value; 80,000 shares authorized;
23,576 in 2002 and 23,423 in 2001 shares issued and outstanding 157,264 157,082
Accumulated deficit (153,710) (111,110)
Notes receivable from stockholders (88) (88)
Deferred compensation (217) (318)
Accumulated other comprehensive income 48 4,165
------------------------
Total stockholders' equity 3,297 49,731
------------------------
Total liabilities and stockholders' equity $ 6,729 $ 56,263
========================
See accompanying notes.
32
Geoworks Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
Year ended March 31
2002 2001 2000
--------------------------------
Net revenues:
Professional services $ 7,559 $ 8,343 $ 7,004
Software and related services (1) 4,135 8,222 4,815
Research and development fees -- -- 320
--------------------------------
Total net revenues 11,694 16,565 12,139
Operating expenses:
Cost of professional services 4,575 4,768 4,584
Cost of software and related services 592 1,967 335
Sales and marketing 5,785 8,607 5,577
Research and development 7,674 9,202 4,100
General and administrative 4,160 7,079 3,338
Amortization of goodwill and other intangible assets 5,227 5,410 --
Purchased in-process research and development -- 1,378 --
Restructuring charges (reversal) 3,272 -- (589)
Write-down of goodwill and other long-lived assets 27,557 -- --
--------------------------------
Total operating expenses 58,842 38,411 17,345
--------------------------------
Operating loss (47,148) (21,846) (5,206)
Other income (expense):
Other income 4,494 265 4,049
Interest income 191 840 646
Interest expense (8) (4) (10)
--------------------------------
Total other income, net 4,677 1,101 4,685
--------------------------------
Loss before income taxes (42,471) (20,745) (521)
Provision for income taxes 129 313 452
--------------------------------
Net loss $(42,600) $(21,058) $ (973)
================================
Net loss per share - basic and diluted $ (1.81) $ (0.99) $ (0.05)
================================
Shares used in per share computation 23,555 21,190 17,866
================================
(1) Revenues from related party (Note 4) $ 452 $ 2,555 --
================================
See accompanying notes.
33
Geoworks Corporation
Consolidated Statements of Stockholders' Equity
(In thousands)
Notes
Common Stock Receivable
---------------------- Accumulated From Deferred
Shares Amount Deficit Stockholders Compensation
--------------------------------------------------------------------
Balances at March 31, 1999 17,629 $ 102,376 $ (89,079) $ (67) $ --
Common stock issued under stock option and
stock purchase plans 856 3,254 -- (182) --
Payments received from stockholders -- -- -- 67 --
Comprehensive income (loss):
Unrealized gains on investments -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Net loss -- -- (973) -- --
Comprehensive income -- -- -- -- --
------------------------------------------------------------------
Balances at March 31, 2000 18,485 105,630 (90,052) (182) --
Common stock issued under stock option and
stock purchase plans 315 1,114 -- -- --
Common stock issued in private placements 1,606 9,986 -- -- --
Common stock issued for acquisition of AirBoss 3,017 39,949 -- -- --
Payments received from stockholders -- -- -- 94 --
Deferred compensation -- 403 -- -- (403)
Amortization of deferred compensation -- -- -- -- 85
Comprehensive income (loss):
Unrealized loss on investments -- -- -- -- --
Unrealized gain on derivative instruments -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Net loss -- -- (21,058) -- --
Comprehensive loss -- -- -- -- --
------------------------------------------------------------------
Balances at March 31, 2001 23,423 157,082 (111,110) (88) (318)
Common stock issued under stock option and
stock purchase plans 153 161 -- -- (11)
Stock options granted for services -- 21 -- -- --
Amortization of deferred compensation -- -- -- -- 112
Comprehensive income (loss):
Realized gains on investment and
derivative instruments -- -- -- -- --
Unrealized loss on investment -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Net loss -- -- (42,600) -- --
Comprehensive loss -- -- -- -- --
------------------------------------------------------------------
Balances at March 31, 2002 23,576 $ 157,264 $(153,710) $ (88) $ (217)
==================================================================
Accumulated
Other Total
Comprehensive Stockholders'
Income Equity
-----------------------------
Balances at March 31, 1999 $ 144 $ 13,374
Common stock issued under stock option and
stock purchase plans -- 3,072
Payments received from stockholders -- 67
Comprehensive income (loss):
Unrealized gains on investments 21,177 21,177
Foreign currency translation adjustment (85) (85)
Net loss -- (973)
---------
Comprehensive income -- 20,119
---------------------------
Balances at March 31, 2000 21, 236 36,632
Common stock issued under stock option and
stock purchase plans -- 1,114
Common stock issued in private placements -- 9,986
Common stock issued for acquisition of AirBoss -- 39,949
Payments received from stockholders -- 94
Deferred compensation -- --
Amortization of deferred compensation -- 85
Comprehensive income (loss):
Unrealized loss on investments (18,778) (18,778)
Unrealized gain on derivative instruments 1,636 1,636
Foreign currency translation adjustment 71 71
Net loss -- (21,058)
---------
Comprehensive loss -- (38,129)
---------------------------
Balances at March 31, 2001 4,165 49,731
Common stock issued under stock option and
stock purchase plans -- 150
Stock options granted for services -- 21
Amortization of deferred compensation -- 112
Comprehensive income (loss):
Realized gains on investment and
derivative instruments (3,994) (3,994)
Unrealized loss on investment (43) (43)
Foreign currency translation adjustment (80) (80)
Net loss -- (42,600)
---------
Comprehensive loss -- (46,717)
---------------------------
Balances at March 31, 2002 $ 48 $ 3,297
===========================
See accompanying notes.
34
Geoworks Corporation
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31
2002 2001 2000
------------------------------------
Operating activities
Net loss $(42,600) $(21,058) $ (973)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 1,294 1,059 721
Amortization of goodwill and other intangible assets 5,227 5,410 --
Provision for doubtful accounts 100 -- --
Purchased in-process research and development -- 1,378 --
Non-cash restructuring charges (reversal) 214 -- (589)
Write-down of goodwill and other long-lived assets 27,557 -- --
Amortization of deferred compensation 112 85 --
Gain on sale of long-term investments and other assets (4,494) (265) (4,049)
(Gain) loss on disposal of property and equipment 29 (6) --
Stock options granted for services 21 -- --
Changes in operating assets and liabilities, net of business
combination:
Accounts receivable 1,831 (1,067) 1,610
Prepaid expenses and other assets 176 (122) (20)
Other assets -- (62) --
Deferred revenue (704) (501) 131
Accounts payable (1,820) 1,201 669
Accrued liabilities and other (241) 599 (163)
------------------------------------
Net cash used in operating activities (13,298) (13,349) (2,663)
Investing activities
Purchases of property and equipment (1,802) (3,025) (937)
Proceeds from sales and disposals of property and equipment 75 6 16
Sales of long-term investments 3,994 265 4,049
Sales of other assets 500 -- --
Purchase price adjustment on AirBoss acquisition -- 1,352 --
------------------------------------
Net cash provided by (used in) investing activities 2,767 (1,402) 3,128
Financing activities
Payment of capital lease obligations (114) (5) (30)
Proceeds from issuance of common stock 150 11,100 3,254
Payments received on notes receivable from stockholder -- 94 67
Issuance of stockholder notes -- -- (182)
------------------------------------
Net cash provided by financing activities 36 11,189 3,109
Foreign currency translation adjustments (82) 71 (85)
------------------------------------
Net (decrease) increase in cash and cash equivalents (10,577) (3,491) 3,489
Cash and cash equivalents, beginning of year 13,713 17,204 13,715
------------------------------------
Cash and cash equivalents, end of year $ 3,136 $ 13,713 $ 17,204
====================================
Supplemental disclosure of cash flow information
Cash paid for interest $ 8 $ 4 $ 10
====================================
Cash paid for income taxes $ 129 $ 313 $ 452
====================================
Supplemental disclosure of non-cash investing and financing activity
Acquisition of AirBoss $ -- $ 40,150 $ --
====================================
Property and equipment acquired under capital lease $ -- $ 161 $ --
====================================
See accompanying notes.
35
Geoworks Corporation
Notes to Consolidated Financial Statements
March 31, 2002
1. Summary of Significant Accounting Policies
Company
Geoworks Corporation ("the Company") is a provider of software design and
engineering services to the mobile and handheld device industry. With nearly two
decades of experience developing operating systems, related applications and
wireless server technology, the Company has worked with many of the industry
leaders in mobile phones and mobile data applications.
During fiscal 2002, various reorganizations and restructurings were implemented.
Although the Company has provided software design and engineering services
through its professional services teams for several years, prior to the
reorganization announced in January 2002, the Company was focused on providing
carrier-class mobile Internet infrastructure software enabling personalized
real-time access to corporate and Internet data. This business model was built
around the licensing of proprietary software platforms for mobile solutions, in
particular the Geoworks AirBoss Application Platform, to wireless carriers and
enterprises around the world and is no longer being pursued.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. To date, the Company has
incurred substantial operating losses and cash flow deficits, and expects to
incur additional operating losses in fiscal 2003. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is trying to improve these conditions by way of increased revenues
from professional services, sales or, licensing of non-strategic assets and
technology, and by resolving certain contractual liabilities. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries located in Japan, New Jersey, and the United
Kingdom. All significant intercompany balances and transactions have been
eliminated.
Foreign Currency Translation
The Company's international subsidiaries use the local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and revenue and expense accounts are
translated at average exchange rates during each period. Resulting translation
adjustments are recorded directly to a separate component of stockholders'
equity. Foreign currency transaction gains and losses have not been material.
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 amounts reported in the financial statements and
accompanying notes. For the Company, these estimates include allowances, and
certain assets and liabilities. Actual results could differ from those
estimates, and such difference could be material to the consolidated financial
position and results of operations.
36
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Professional services projects involve consulting related to technology
previously developed by us, as well as development of new technologies
supporting mobile communications. Professional services revenues are generally
billed and recognized based on time and materials expended by the Company at
contracted rates.
Software and related services revenue consists of software license, royalty and
related service revenues, including software customization and maintenance. Such
revenues include software license fees, which are accounted for in accordance
with SOP 97-2 "Software Revenue Recognition," from customers who purchased the
Company's products or royalties from hardware manufacturers that incorporate the
Company software products into their systems. In addition, the Company has
licensed certain technology and intellectual property and sold source code to
third parties to be used in the development of their own service offerings and
products. Revenues from the license of products, technology, intellectual
property, and the sale of source code are recognized when evidence of an
agreement exists, when the Company has performed under the terms of the related
contract, when such revenues are fixed and determinable and when collectibility
is probable.
Software customization, maintenance and related services revenues are billed and
recognized based on contracted rates, the percentage of completion method or
ratably over the contract period based on the terms of the contract. Advance
payments of license or service fees are recorded as deferred revenue and
recognized as the products or services are delivered.
If a customer transaction includes both software licenses and service elements,
the total arrangement fee is allocated to each of the elements using the
residual method, under which revenue is allocated to undelivered elements based
on vendor-specific objective evidence of fair values of such undelivered
elements and the residual amounts of revenue are allocated to the delivered
elements.
Research and development fees are primarily amounts received pursuant to
contracts with original equipment manufacturers ("OEMs") under which the Company
has reimbursed for a portion of our development costs related to specific
products up to the amounts specified in the contracts. The Company is typically
paid by the OEM as it achieves certain project milestones. Revenue under these
research and development arrangements is recognized under the
percentage-of-completion method based on the relationship of costs incurred to
date to total anticipated project costs.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits with original maturities of
three months or less and are stated at cost, which approximates fair value.
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash, cash equivalents and trade accounts receivable.
Cash and cash equivalents are held in federally insured or well-established
financial institutions. The Company sells its products primarily to, and has
trade accounts receivable with, original equipment manufacturers and
telecommunications companies in the United States and abroad. As a general
policy, collateral is not required for accounts receivable; however, the Company
periodically monitors the need for an allowance for doubtful accounts based upon
expected collections of accounts receivable and specific identification of
uncollectible accounts. Additionally, customers' financial condition and credit
worthiness are regularly evaluated. At March 31, 2002, the Company established
an allowance of $100,000 related to certain customer. There were no such amounts
accrued at March 31, 2001 and 2000. Historical losses have not been material.
37
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
1. Summary of Significant Accounting Policies (continued)
Derivative Financial Instruments
Derivative financial instruments entered into in November 2000 were designated
to hedge the fair value of the Company's investment in Wink Communications
common stock. Derivative instruments were recorded at fair value as determined
by the difference between the market value of the underlying hedged securities
and their stated selling prices per the derivative contracts. Any unrealized
gain or loss on the derivative instruments were recorded in accumulated other
comprehensive income. The amount of the ineffectiveness of the hedge was not
material; thus, no amounts were recorded in the consolidated statement of
operations. The derivative instruments were settled during fiscal 2002, which
resulted in a realized gain of $3,514,000.
Capitalized Software
The Company has not capitalized any software development expenses for its
products as such expenses have been incurred prior to the Company's products
attaining technological feasibility or such costs have been reimbursed by third
parties in connection with OEM license agreements. Software development expenses
incurred for product enhancements after the product has reached technological
feasibility have not been material and, accordingly, have been charged to
operations as incurred.
Property and Equipment
Property and equipment are stated at cost, or at fair value after certain asset
write-downs. Depreciation and amortization are computed using the straight-line
method over estimated useful lives of three to four years. Assets acquired under
capital lease obligations and leasehold improvements are amortized using the
straight-line method over the shorter of the useful lives of the assets or the
terms of the leases.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," long-lived assets (primarily property, plant and equipment,
goodwill, and other intangible assets) held and used by the Company or to be
disposed of are reviewed for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. When such an event occurs, management determines whether there has
been impairment by comparing the anticipated undiscounted future net cash flows
to the related asset's carrying value. If an asset is considered impaired, the
asset is written down to fair value, which is determined based either on
discounted cash flows or residual value, depending on the nature of the asset.
During fiscal 2002, the Company identified such possible impairment indicators
to include, but not limited to, the significant negative industry and economic
trends impacting current operations, declines in the Company's stock price,
expected future growth rates, and continued operating losses. Forecasted
undiscounted cash flows from AirBoss business unit were determined to be less
then the carrying values of the related assets. Accordingly the Company
performed discounted cash flow analysis to determine fair value, which has
resulted in non-cash write-downs totaling $24,166,000 in fiscal 2002 of the
goodwill and other intangible assets resulting from the Company's acquisition of
the AirBoss business unit from Telcordia Technologies, Inc. in July 2000.
Research and Development Expense
Research and development expense includes both internally funded development and
projects funded in part by customers. Total research and development expenses on
projects for which OEM funding was received was $182,000 for fiscal 2000. Total
revenue recognized on projects for which OEM funding was received was $320,000
in fiscal 2000. No such expenses were recognized in fiscal 2002 and 2001.
38
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
1. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include cash
equivalents, long-term investments, and derivative instruments, approximate
their fair values based on quoted market values of the instruments.
Major Customers
Revenues from three major customers accounted for 40%, 28% and 17%, respectively
of net revenues for fiscal 2002. Revenues from two of these and one additional
major customer accounted for 32%, 31% and 15%, respectively of net revenues for
fiscal 2001. Revenues from two of these and one additional major customer
accounted for 39%, 31% and 18%, respectively of net revenues for fiscal 2000.
Accounting for Stock-Based Compensation
In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has elected to apply the intrinsic-value method under
Accounting Principles Board ("APB") Opinion No. 25 and related Interpretations
in accounting for its stock option and stock purchase plans. A summary of the
pro forma effects on reported net loss and net loss per share for fiscal 2002,
2001 and 2000 as if the Company had elected to recognize compensation cost based
on the fair value of the options granted at grant date as prescribed by SFAS No.
123 is presented in Note 9.
Net Loss Per Share
Basic and diluted net income (loss) per share information for all periods is
presented in accordance with the requirements of SFAS No. 128, "Earnings per
Share." Basic earnings per share is computed using the weighted average number
of shares of common stock outstanding during the period and excludes any
dilutive effects of outstanding common stock equivalents. The effect of
potentially dilutive stock options has been excluded from the computation of
diluted net loss per share because the effect of their inclusion would be
antidilutive.
If the Company had reported net income for fiscal 2002, 2001 and 2000, the
calculation of diluted earnings per share for those periods would have included
the effect of dilutive common stock options, computed using the treasury stock
method. For fiscal ended 2002, 2001 and 2000, the calculation would have
included the common stock equivalent effect of 138,000, 1,569,000, and 1,994,000
shares, respectively.
Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," public business enterprises are required to report
financial and other information about operating segments of the entity for which
such information is available and is utilized by the chief operating decision
maker. SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic area, and major customers (see Note 11). The
Company operates as one business segment.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which the liability method is used to
account for income taxes. Deferred tax assets and liabilities are determined
based on differences between the 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.
39
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
1. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," which establishes financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations", and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." It requires that all business combinations in the scope
of this statement be accounted for using one method, the purchase method. The
provisions of this statement apply to all business combinations initiated after
June 30, 2001, and also applies to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001, or later.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which establishes financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition, and after they have been initially recognized in the financial
statements. The provisions of this statement are effective starting with fiscal
years beginning after December 15, 2001. The Company will adopt SFAS No. 142
during the first quarter of fiscal 2003, and is in the process of evaluating the
impact of implementation on the financial position and results of operations of
the Company.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal periods. This
statement supersedes SFAS No. 121 and APB Opinion No. 30, however, this
statement retains the requirement of APB Opinion No. 30 to report discontinued
operations separately from continuing operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, by
abandonment, or in a distribution to owners) or is classified as held for sale.
This statement addresses financial accounting and reporting for the impairment
of certain long-lived assets and for long-lived assets to be disposed of. The
Company will adopt SFAS No. 144 during the first quarter of fiscal 2003, and is
in the process of evaluating the impact of implementation on the financial
position and results of operations of the Company.
2. Property and Equipment
Property and equipment consist of the following (in thousands):
March 31
2002 2001
-----------------
Equipment $ 693 $6,043
Furniture and fixtures 79 1,002
Leasehold improvements 190 850
-----------------
962 7,895
Less accumulated depreciation and amortization 557 4,319
-----------------
Property and equipment, net $ 405 $3,576
=================
Property and equipment includes $161,000 for equipment under capital lease at
March 31, 2001. No such capital leases were included in property and equipment
at March 31, 2002.
40
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
3. Long-Term Investments and Derivative Instruments
Long-term investments and derivative instruments were as follows (in thousands):
March 31
2002 2001
-----------------
Wink Communications, Inc. $ -- $2,400
Other 2 2
-----------------
Total long-term investments 2 2,402
Derivative instruments related to investments -- 1,636
-----------------
Total long-term investments and derivative instruments $ 2 $4,038
=================
In connection with the transfer of certain technology and rights to a privately
held company, Wink Communications Inc. ("Wink"), the Company received a minority
interest in the company in a previous fiscal year. In August 1999, Wink
completed an initial public offering of its common stock.
The Company's marketable equity securities and its long-term investments are
classified as available-for-sale. The carrying value of the Company's
investments in Wink was determined based on the closing price of the common
shares at each balance sheet date. The fair value of these assets fluctuated
with the market price of Wink common shares as well as the value of a series of
derivative instruments the Company entered into in November 2000 to hedge
against a decline in value of its investment in Wink. These derivative
instruments ensured that the minimum value of the Wink investment should be at
least $4,036,000 at maturity or expiration of the instruments. However, the
maximum value of the Wink investments was limited to $7,397,000, depending on
the common share price of Wink at maturity or expiration.
During September 2001, the Company sold the Wink investment and converted the
related derivative instruments to cash. A total of 480,000 common shares of Wink
were sold at a realized gain, including the effect of liquidating the related
derivative instruments, of $3,994,000. The derivative instruments were
liquidated shortly before their scheduled maturity or expiration dates; hence
the realized value was below the minimum value.
Gains recognized on the sale of these investments are reported as other income.
For fiscal 2001, 10,800 shares of Wink were sold at a gain of $265,000.
4. Acquisition of AirBoss
On July 24, 2000, the Company acquired substantially all of the assets of an
established, separate, and unincorporated division of Telcordia Technologies,
Inc. ("Telcordia"), a subsidiary of Science Applications International
Corporation ("SAIC"). The acquired division consisted of Telcordia's AirBoss
Business Unit, which operated a software and wireless technology services
business ("AirBoss").
Effective as of the closing of the acquisition, the Company established an
office in New Jersey to continue the research, development, and deployment of
the AirBoss line of patented mobile communications software products, as well as
to service the various third parties whose contractual rights with Telcordia
were assigned to, and assumed by, the Company as part of the acquisition. In
connection with the acquisition, Telcordia terminated the employment of
twenty-five individuals, who were then immediately hired by the Company.
The acquisition was accounted for as a purchase business combination.
Accordingly, the purchase consideration was allocated to the tangible and
identifiable intangible assets acquired based on fair values as of the closing
date. No liabilities were assumed in the transaction. The valuation of
intangible assets acquired was determined in conjunction with an independent
valuation report.
41
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
4. Acquisition of AirBoss (continued)
The total purchase price of approximately $39.9 million consisted of
approximately 3,018,000 shares of Geoworks' common stock. The fair value per
share of common stock issued is based on an average of the closing prices
adjacent the May 16, 2000 announcement of the acquisition. The acquisition
expenses of $250,000 consisted mainly of legal, accounting, and financial
advisory fees.
The fair value of assets acquired was as follows (in thousands):
Current assets $ 504
Goodwill and other intangible assets:
Developed technology 4,732
Core technology 1,605
Acquired workforce 616
Patents 1,048
Goodwill 30,316
--------
38,317
Acquired in-process research and development 1,378
--------
39,695
--------
Total purchase price 40,199
Less: Purchase price adjustment on AirBoss acquisition (1,352)
--------
$ 38,847
========
In fiscal 2002, the Company recorded non-cash, asset impairment charges on its
goodwill and other intangible assets. The remaining intangible assets, developed
technology, core technology, and patents, are being amortized over two to four
years. Amortization expense of the acquired intangible assets was $5,227,000 and
$5,410,000 for the years ended March 31 2002 and 2001, respectively.
Acquired in-process research and development of $1,378,000 was charged to
operations during the quarter ended September 30, 2000.
The Company has entered into various contracts with Telcordia to provide AirBoss
software to various customers of Telcordia. Revenues from Telcordia for fiscal
2001 were approximately $ 2,555,000. At March 31, 2001, accounts receivable from
Telcordia were approximately $1,078,000, of which approximately $218,000 was
unbilled. Accounts payable to Telcordia at March 31, 2001 were approximately
$398,000.
For fiscal 2002, revenues from Telcordia or SAIC were approximately $452,000. At
March 31, 2002, accounts receivable from Telcordia or SAIC were approximately
$3,000, all of which had been billed. Accounts payable to Telcordia or SAIC at
March 31, 2002 were approximately $304,000.
5. Write-down of Goodwill and Other Long-lived Asset Charges
The Company recorded non-cash, asset impairment charges of $3,391,000 in fiscal
2002 in order to write down equipment that was no longer being used in
operations, net of estimated recoveries. No such charges were recorded in fiscal
2001. These charges were primarily attributable to the corporate restructurings
described in Note 12.
The Company recorded additional non-cash, asset impairment charges of
$24,166,000 in fiscal 2002 based on its analysis of the goodwill and other
intangible assets related to the July 2000 acquisition of the AirBoss business
unit from Telcordia Technologies, Inc. Forecasted undiscounted cash flows from
this business unit were less that the carrying values of the related assets.
Accordingly the Company performed a discounted cash flow analysis, which has
resulted in non-cash write-downs in fiscal 2002.
42
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
6. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
March 31
2002 2001
----------------------
Accrued compensation $ 245 $ 1,268
Accrued restructuring costs 1,090 --
Accrued professional fees 285 395
Other accrued liabilities 690 1,211
----------------------
Total $ 2,310 $ 2,874
======================
7. Income Taxes
The income tax provisions of $129,000, $313,000, and $452,000 for fiscal 2002,
2001, and 2000, respectively, consist primarily of foreign withholding tax
payments made with respect to royalties received from original equipment
manufacturers. The fiscal 2002 provision also includes $50,000 for foreign
withholding tax payment on a sale of patents. .
Significant components of the Company's net deferred income tax assets are as
follows (in thousands):
March 31,
2002 2001
----------------------
Operating loss carryforwards $ 50,038 $ 44,460
Tax credit carryforwards 2,920 3,692
Purchased intangible assets 17,926 8,824
Capitalized research expenditures 2,762 2,844
Deferred revenue 173 463
Other, net 54 295
----------------------
Total deferred tax assets 73,873 60,578
Unrealized gain on marketable securities -- (1,654)
Valuation allowance on deferred tax assets (73,873) (58,924)
----------------------
Net deferred tax assets $ -- $ --
======================
The changes in the valuation allowance for fiscal 2002 and 2001 were $14,949,000
and $16,636,000, respectively.
Deferred tax assets relating to net operating loss carryforwards as of March 31,
2002 include approximately $4,900,000 associated with stock option activity for
which any subsequently recognized tax benefits will be credited directly to
stockholders' equity.
As of March 31, 2002, the Company has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $110,844,610, U.K. income tax
purposes of approximately $21,011,000, and state income tax purposes of
approximately $34,905,000. The Company also has federal and state research and
development credit carryforwards of approximately $2,627,000 and $293,000
respectively. The net operating loss and the research and development tax credit
carryforwards expire in various years from 2002 through 2021.
43
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
7. Income Taxes (continued)
Utilization of the Company's U.S. net operating loss and tax credit
carryforwards will be subject to an annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of net operating loss and tax credit
carryforwards before utilization.
8. Commitments
The Company leases its remaining office facilities and certain equipment under
noncancelable lease agreements that require the Company to pay operating costs,
including property taxes, insurance and maintenance. Rent expense was $971,000,
$1,212,000, and $518,000 for fiscal 2002, 2001, and 2000, respectively.
In connection with the Company's January 2002 restructuring and reorganization,
a ten-year operating lease for a facility in Morganville, New Jersey was
renegotiated and terminated in a cash and non-cash settlement totaling $767,000.
This cost has been included in restructuring charges for the quarter ended March
31, 2002. The irrevocable standby letter of credit for $500,000 associated with
the lease was cancelled and the funds collateralizing the letter of credit were
released to Geoworks and paid to the landlord.
In March 2002, the Company vacated its facilities in Alameda, California and
accrued $400,000 for lease termination costs. The remaining lease commitments on
this lease have been excluded from the schedule of minimum lease payments,
below.
In conjunction with restructuring, various equipment under non-cancelable
operating leases has been returned to the respective lessors. Cancellation and
other charges are currently under negotiation with these vendors. The potential
future lease liability would have been approximately $209,000 as of March 31,
2002 under the terms of the original contracts. The amounts estimated by the
company to settle these leases have been included in the restructuring charges.
The remaining lease commitments on these leases have been excluded from the
schedule of minimum lease payment, below.
Future minimum payments under remaining non-cancelable operating leases having
terms in excess of one year are due as follows (in thousands):
Fiscal Year
-----------
2003 $ 201
2004 139
2005 122
2006 119
2007 79
-------
Total minimum lease payments $ 660
=======
9. Stockholders' Equity
Preferred Stock
The Company's Articles of Incorporation authorizes the issuance of two million
shares of preferred stock, none of which is issued or outstanding. The Board of
Directors has the authority to issue the preferred stock with rights,
preferences, privileges and restrictions, including vesting rights, without any
further vote or action by the shareholders. A total of 500,000 shares of
Preferred Stock have been reserved for issuance under the Company's Shareholder
Rights Plan.
44
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
9. Stockholders' Equity (continued)
Shareholder Rights Plan
On March 1, 2001, the Board of Directors adopted a Shareholder Rights Plan
("Rights Plan") pursuant to which preferred stock purchase rights were
distributed as a dividend at the rate of one right for each share of Geoworks
common stock held as of March 9, 2001. Each right will entitle the holders of
the company's common stock to purchase one one-thousandth of a share of Series A
Junior Participating Preferred Stock at an exercise price of $20, subject to
adjustment in certain cases to prevent dilution. The rights are evidenced by the
common stock certificates and are not exercisable or transferable apart from the
common stock until the earlier of ten days after the date on which a person or
group of affiliated persons has acquired beneficial ownership of 15% or more of
the common stock (an "Acquiring Entity"), such date as determined by the Board
of Directors after the public announcement of the commencement of a bona fide
tender or exchange offer (as determined by the Board of Directors) that would
result in the Acquiring Entity owning 15% or more of the common stock on March
9, 2011 (the "Expiration Date"). Further, in the event a person or group of
affiliates persons becomes an Acquiring Entity, the rights generally entitle
each right holder (except the Acquiring Entity) to purchase that number of
shares of the company's common stock which equals the exercise price of the
right divided by one-half of the current market price of the common stock if any
person becomes the beneficial owner of 15% or more of the common stock. If an
Acquiring Entity purchases at least 15% of the Company's common stock, but has
not acquired 50%, the Board of Directors may exchange the rights (except those
of the Acquiring Entity) for one share of common stock per right. In addition,
under certain circumstances, if the Company is involved in a merger or other
business combination in which the company is not the surviving corporation, the
rights entitle the holder to buy common stock of the Acquiring Entity with a
market value of twice the exercise price of each right.
The Company is generally entitled to redeem the rights for $.005 per right at
any time on or prior to the earlier of the close of business on the tenth day
following a public announcement that a person or group of affiliated persons has
become an Acquiring Entity or the Expiration Date. The rights, which do not have
voting rights, will expire on the Expiration Date, unless redeemed or exchanged
earlier by the Company pursuant to the Rights Plan.
Stock Option Plans
Under the Company's stock option plans, incentive and nonqualified stock options
may be granted to employees, consultants and outside directors, to purchase a
maximum of 9,435,000 common shares. The exercise price of the stock options is
determined by the Company's Board of Directors on the date of grant and is at
least equal to the fair market value of the stock on the grant date. Options for
new employees generally vest monthly over a one to four year time period.
45
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
9. Stockholders' Equity (continued)
Stock Option Plans (continued)
The following table summarizes activity under the Company's stock option plans:
Options Outstanding
Number Weighted-Average
of Shares Exercise Price
-------------------------------
Balance at March 31, 1999 3,314,000 $ 4.88
Granted 1,235,000 7.30
Exercised (737,000) 4.08
Forfeited (1,221,000) 6.05
---------------------------
Balance at March 31, 2000 2,591,000 5.83
Granted 4,157,000 9.68
Exercised (241,000) 3.02
Forfeited (666,000) 9.24
---------------------------
Balance at March 31, 2001 5,841,000 8.30
Granted 4,509,000 1.31
Exercised (10,000) 1.22
Forfeited (7,327,000) 6.33
---------------------------
Balance at March 31, 2002 3,013,000 $ 2.64
===========================
Options available for grant at March 31, 2002 6,422,000
===========
The weighted average fair value at grant date of options granted during fiscal
2002, 2001 and 2000 was $1.20, $8.87, and $5.88, per share, respectively.
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercisable Prices Shares Life (years) Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------
$ 0.56 - 0.83 45,000 5.07 $ 0.70 15,000 $ 0.69
1.11 - 1.11 2,221,000 1.69 1.11 725,000 1.11
1.81 - 4.13 369,000 7.35 3.14 282,000 3.13
6.25 - 11.75 248,000 8.16 9.45 179,000 9.39
13.19 - 15.63 130,000 7.96 14.96 130,000 14.96
-------------------------------------------------------------------
3,013,000 3.23 $ 2.64 1,331,000 $ 4.00
===================================================================
46
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
9. Stockholders' Equity (continued)
Stock Option Repricing
On November 5, 2001, the Company announced an offer to its employees with
outstanding stock options to exchange such options for new options to purchase a
different number of shares of common stock priced as of December 7, 2001. The
offer was voluntary and had to be accepted by individual option holders within
twenty business days after receipt of the offer. In order to participate in the
exchange, an optionee had to exchange all of his or her existing options.
Options issued in the exchange vest and become exercisable in twelve monthly
increments, with acceleration in the event of a change in control. The first
vest date was December 31, 2001. The options were granted on December 7, 2001
with a price of $1.11 per share, which was the closing price for the Company's
common stock as reported by the Nasdaq National Market on that date. The options
expire on December 7, 2003. Other than changes to the exercise price, the
vesting schedule, and the expiration date, the new options have substantially
similar terms as the exchanged options.
The exchange resulted in the voluntary cancellation of employee stock options to
purchase a total of 3,550,264 shares of common stock with varying exercise
prices in exchange for employee stock options to purchase a total of 3,275,000
shares of common stock with an exercise price of $1.11 per share.
This offer to exchange options constituted a stock option repricing for
financial accounting purposes, requiring the Company to use variable accounting
to measure stock compensation expense potentially arising from the options that
were subject to the offer, including options retained by eligible optionees who
elected not to participate in the offer.
As these new options vest at the end of each reporting period, beginning with
the three months ended December 31, 2001, the Company will measure and recognize
stock compensation expense based on the excess, if any, of the quoted market
price of the Company's common stock over the exercise price. Subsequent declines
in the intrinsic value of these new options and the retained options may result
in reversal of previously recognized expense. After the options become fully
vested, any additional compensation due to changes in intrinsic value will be
recognized as compensation expense immediately. Such variable accounting will
continue until each option is exercised, or forfeited, or canceled.
Because the closing price of the Company's common stock as reported by the
Nasdaq National Market on December 31, 2001 and March 31, 2002 was less than the
new option exercise price, no stock compensation was recorded.
Employee Stock Purchase Plan
Under the Company's employee stock purchase plan, employees meeting certain
eligibility criteria may purchase shares of the Company's common stock, subject
to certain limitations, at not less than 85% of fair market value as defined in
the plan. A total of 950,000 shares have been reserved for issuance under the
plan. In fiscal 2002, 2001, and 2000, 143,000 shares, 71,000 shares, and 69,000
shares, respectively, were issued under the plan at average prices of $1.06,
$4.56, and $2.07 per share, respectively. At March 31, 2002, a total of 391,000
shares were available for issuance under the plan.
47
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
9. Stockholders' Equity (continued)
Stock Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123 and
applies APB Opinion No. 25 and related interpretations in accounting for its
stock option and employee stock purchase plans. Had compensation cost for the
Company's stock plans been determined based on the fair value at the grant date
for awards during fiscal 2002, 2001, and 2000 the Company's net loss and net
loss per share would have been increased to the pro forma amounts indicated
below (in thousands, except per share amounts):
Year ended March 31
2002 2001 2000
------------------------------------------
Net loss, as reported $ (42,600) $ (21,058) $ (973)
Net loss, pro forma (51,541) (31,473) (4,561)
Net loss per share - basic and diluted, as reported $ (1.81) $ (0.99) $ (0.05)
Net loss per share - basic and diluted, pro forma (2.19) (1.49) (0.26)
The fair value of each option as of date of grant has been estimated using the
Black-Scholes option-pricing model with the following assumptions used for
fiscal 2002, 2001, and 2000: expected volatility calculations based on
historical data (2.149, 1.481, and 1.086, respectively) and risk-free interest
rates based on U.S. government strip bonds on the date of grant (2.41%, 6.41%,
and 5.94%, respectively) with maturities equal to the expected option lives of
five years. No dividends are assumed.
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance as of March 31, 2002 is as follows:
Employee stock options outstanding 3,013,000
Employee stock options available for grant 6,422,000
Employee stock purchase plan shares available for grant 391,000
---------
Total 9,826,000
=========
10. Retirement Plan
The Company has a deferred compensation plan for substantially all employees.
Under this plan, which qualifies under Section 401(k) of the Internal Revenue
Code, eligible employees may contribute up to 15% of their pretax salary,
subject to certain limitations.
During the first three quarters of fiscal 2002, the Company matched 70% of the
basic contribution of 1% to 6% of total employee compensation and such matching
amounts vest 20% per year over a five-year period. The matching policy was
discontinued during the fourth quarter of fiscal 2002 as part of the
cost-cutting measures to conserve the Company's resources. The Company
contributed $179,000, and $149,000 during fiscal 2002 and 2001, respectively. No
employer contributions were made during fiscal 2000.
48
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
11. Information by Geographic Area
Information regarding operating information and identifiable assets by
geographic area is as follows (in thousands):
Year ended March 31
2002 2001 2000
------------------------------------------
Revenues:
U.S. revenues $ 3,286 $ 3,703 $ 716
Foreign revenues:
Japan 5,189 7,788 5,542
Europe 3,219 5,074 5,881
------------------------------------------
$ 11,694 $ 16,565 $ 12,139
==========================================
Year ended March 31
2002 2001 2000
------------------------------------------
Operating loss:
U.S. operations $(43,435) $(17,192) $ (2,078)
Foreign operations (3,713) (4,654) (3,128)
------------------------------------------
$(47,148) $(21,846) $ (5,206)
==========================================
March 31
2002 2001 2000
------------------------------------------
Identifiable assets:
U.S. operations $ 6,310 $ 55,390 $ 40,673
Foreign operations 419 873 786
------------------------------------------
$ 6,729 $ 56,263 $ 41,459
==========================================
12. Restructuring Charges
Fiscal 2002
In June 2001, the Company reorganized its operations, exited the Mobile ASP
(Application Service Provider) market, and accelerated the integration of its
two software platforms, Mobile Server+ and the AirBoss Application Platform,
into a single integrated product offering for enterprise applications. In
connection with this reorganization, the Company terminated 43 employees, or
approximately 22% of its workforce, and recorded restructuring charges of
$2,291,000 for the three months ended June 30, 2001. Most of the terminated
employees were from the Alameda, California location. The remaining Alameda
employees were consolidated into a portion of the Company's Alameda facility and
the vacated portion of the facility became available for sublease.
In October 2001, the Company implemented a number of cost-cutting measures to
conserve its resources. The Company terminated 70 employees, or 45% of its
workforce, and recorded restructuring charges of $400,000 for the three months
ended December 31, 2001.
49
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
12. Restructuring Charges (continued)
In January 2002, the Company announced the implementation of a number of
additional cost-cutting measures to further conserve its resources. The Company
terminated an additional 40 employees, or 45% of its workforce between January
and April 2002, primarily from its AirBoss and headquarters staff. The Company
relocated its headquarters from Alameda, California to smaller, less expensive
space in Emeryville, California. As a result of the reorganization, the Company
recorded additional restructuring and related charges of $581,000 in the three
months ended March 31, 2002 and announced changes in its management and Board of
Directors.
The restructuring charges consist of severance payments to the terminated
employees, accrual for related contract termination costs (related primarily to
computer hosting capacity for the Mobile ASP business) and the lease termination
costs as a result of these actions.
The following table summarizes the restructuring activity (in thousands):
Severance Lease Contract
and related termination, termination
charges costs costs Total
-----------------------------------------------------------------
Total restructuring expense for 2002 ... $ 1,713 $ 1,388 $ 171 $ 3,272
Amounts paid ........................... (1,160) (664) -- (1,824)
Assets written-off ..................... -- (214) -- (214)
-----------------------------------------------------------------
553 510 171 1,234
Less:
Current portion of restructuring charges
(accrued liabilities) ............... (409) (510) (171) (1,090)
-----------------------------------------------------------------
Non-cash portion of restructuring
charges (other accrued liabilities) . $ 144 $ -- $ -- $ 144
=================================================================
Asset impairment charges resulting from these restructuring actions are further
described in Note 5.
50
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2002
12. Restructuring Charges (continued)
Fiscal 2000
During the fourth quarter of fiscal 1999, the Company recorded restructuring
charges of approximately $1.8 million as a result of actions taken to better
align its cost structure with revenue projections as the Company shifted its
resources to support a business plan focused on opportunities in the mobile
e-commerce and information services market. During the quarter, the Company
terminated approximately 27% of its workforce, vacated one facility and
consolidated those operations in a remaining facility, which was also partially
vacant. The restructuring charges consisted of severance costs for the
termination of 33 employees, 32 of which were terminated prior to March 31,
1999, as well as related charges for the write-off of property and equipment and
the accrual of lease commitment liabilities (net of expected sublease income) as
a result of these actions.
During the fourth quarter of fiscal 2000, based on improved operating results
and improved business opportunities, the Company reoccupied the space in its
primary facility that it had previously intended to vacate. As a result, the
remaining lease commitment accrual, $589,000, was reversed.
The following table summarizes the restructuring activity (in thousands):
Severance Write-off of Accrual of
and related property and lease
charges equipment commitments Total
---------------------------------------------------------------------
Total restructuring charges $ 247 $ 501 $ 1,042 $ 1,790
Amount paid (59) -- -- (59)
Write-off of property and equipment -- (501) -- (501)
---------------------------------------------------------------------
Accrued liabilities at March 31, 1999 188 -- 1,042 1,230
Amounts paid (188) -- (453) (641)
Reversal of accrued lease commitments -- -- (589) (589)
---------------------------------------------------------------------
Accrued liabilities at March 31, 2000 $ -- $ -- $ -- $ --
=====================================================================
13. Legal Proceedings
In January 2002, the Company filed a demand for arbitration with the American
Arbitration Association in Oakland, California seeking payment of approximately
$100,000, which consists of $88,000 in notes receivable plus accrued interest,
from Donald G. Ezzell, former general counsel and chief operating officer of
Geoworks, as the balance due on a note made for the purchase of Geoworks stock
by Mr. Ezzell when hired in 1999. The Company believes that the payment became
due on December 31, 2001. Mr. Ezzell denies liability and claims fraud, breach
of contract, securities law violations, unfair business practices and the right
to recission. The matter is scheduled for a hearing in October 2002. Discovery
has begun. The Company does not believe that Mr. Ezzell's contentions have merit
and will continue to seek collection of the sums due it to the extent practical
or the cancellation of the stock if not paid for.
14. Subsequent Event
On June 11, 2002, the Company issued options to acquire 2,800,000 common shares
with an exercise price of $0.11 to its employees and directors. These shares
vest monthly over a one-year period subject to acceleration for a change in
control.
51
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to executive officers and
directors is incorporated herein by reference from Item 4A of Part I of this
Form 10-K. The information required by this Item with respect to compliance with
the reporting requirements of Section 16(a) of the Securities Exchange Act of
1934 is incorporated herein by reference to our 2002 Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to our
2002 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The information required by this Item is incorporated herein by reference to our
2002 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to our
2002 Proxy Statement.
52
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements.
The following Consolidated Financial Statements of Geoworks and
Report of Independent Auditors are included in Item 8 of this report
on Form 10-K.
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
All schedules are omitted, because they are not required, are not
applicable, or the information is included in the consolidated
financial statements and notes thereto.
3. Exhibits.
The following exhibits are filed as part of, or incorporated by
reference into, this report on Form 10-K:
Exhibit Number /Description of Document
---------------------------------------
3.1a Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.01 to Registrant's report on Form 8-K
filed October 27, 1997.)
3.1b Certificate of Amendment of Certificate of Incorporation of
the Registrant, filed November 3, 2000, with the Secretary of
State of the State of Delaware. (Incorporated by to Exhibit
3.1.a to Registrant's report on Form 10-Q filed for the
quarter ending September 30, 2000 on November 14, 2000.)
3.1c Certificate of Designations of Series A Junior Participating
Preferred Stock of the Registrant, filed March 12, 2001, with
the Secretary of State of the State of Delaware (incorporated
by reference to Exhibit 1 to the Registrant's registration
statement on Form 8-A, filed March 12, 2001.)
3.2a Bylaws of the Registrant (incorporated by reference to Exhibit
to Registrant's report on Form 8-K filed October 27, 1997.)
3.2b Amendment to Bylaws of the Registrant to separate the
executive positions of Chief Executive Officer and President
incorporated by reference to Exhibit 4.1 on Form 10-Q filed on
February 14, 2001.
4.1a Shareholder Rights Plan, dated as of March 9, 2001, between
the Registrant and Mellon Investor Services, L.L. C.
(incorporated by reference to Exhibit 1 to the Registrant's
registration statement on Form 8-A, filed March 12, 2001.)
53
4.1b Specimen Stock Certificate (incorporated by reference to
Exhibit [4.1] to Registrant's Registration Statement on Form
S-1 (File No. 33-78104), effective June 22, 1994.)
10.1 Form of Indemnification Agreement between the Registrant and
each of its officers and directors (incorporated by reference
to Exhibit 10.1 to Registrant's report on Form 10-Q for the
quarter ended September 30, 1997.)
10.2 1994 Stock Plan, as amended through May 27, 1997 (incorporated
by reference to Exhibit 4.03 to Registrant's Registration
Statement on Form S-8 (File No. 333-39863) filed November 10,
1997.)*
10.3 Form of Stock Option Agreement under the 1994 Stock Plan.*
10.4 Employee Stock Purchase Plan and Form of Subscription
Agreement (incorporated by reference to Exhibit 10.4 to
Registrant's Registration Statement on Form S-1 (File No.
33-78104), effective June 22, 1994.)*
10.5 Supplemental Stock Option Plan effective August 5, 1996
(incorporated by reference to Exhibit 4.1 filed with the
Registrant's Registration Statement on Form S-8 filed August
5, 1996.) *
10.6 Form of Stock Option Agreement under the Supplemental Stock
Option Plan (incorporated by reference to Exhibit 4.2 filed
with Registrant's Registration Statement on Form S-8 filed
August 5, 1996.) *
10.7 1997 Supplemental Stock Plan (incorporated by reference to
Exhibit 4.1 to Registrant's Registration Statement on Form S-8
filed March 25, 1997.)*
10.8 Form of Stock Option Agreement under the 1997 Supplemental
Stock Plan (incorporated by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-8 filed March
25, 1997.) *
10.9 Executive Employment Agreement between Geoworks and David L.
Grannan, dated January 10, 1999 (incorporated by reference to
Exhibit 10.25 to Registrant's report on Form 10-Q for the
quarter ended December 31, 1998.)*
10.10 Amendment to Executive Employment Agreement between Geoworks
and David Grannan dated November 21, 2000.*
10.11 Agreement for Software Development Subcontracting, dated
November 4, 1999, between Nokia Mobile Phones Ltd. and
Geoworks Corporation (incorporated by reference to exhibit
10.29 to Registrant's report on Form 10-Q for the quarter
ended December 31, 1999.) ###
10.12 Intellectual Property Assignment Agreement dated March 15,
2002 with Access Co., Ltd.
10.13 Lease dated December 30, 1993 for facilities located at 960
Atlantic Avenue, Alameda, California (incorporated by
reference to Exhibit 10.16 to Registrant's Registration
Statement on Form S-1 (File No. 33-78104), effective June 22,
1994.)
54
10.14 Settlement Agreement and Release dated May 31, 2002 between
Alameda Real Estate Investments, a California limited
partnership, and Geoworks Corporation.
10.15 Lease dated November 21, 2000 between Toubin Realty II, LLC
and Geoworks and incorporated by reference to Exhibit 10.27 on
Form 10-K for the year ended March 31, 2001 filed June 29,
2001.
10.16 Termination of Lease dated March 27, 2002 between Toubin
Realty II, LLC, First Washington State Bank and Geoworks
Corporation.
10.17 Employment agreement with Stephen T. Baker, dated as of July
1, 2000 and incorporated by reference to Exhibit 10.35 to
Registrant's Report on Form 10-Q for the quarter ended
September 30, 2000 filed on November 14, 2000.
10.18 Exhibit 1, 2 & 3 to the Joint motions to terminate proceedings
in the US District Court and the ITC. The exhibits constitute
the publicly filed versions of the settlement between Geoworks
Corporation and Openwave Systems Inc., formally Phone.com
entered into December 28, 2000. (Incorporated by reference to
Exhibit 10.35 to Registrant' Report Form 10Q for the quarter
ended December 31, 2000 filed on February 14, 2001.) ###
21.1 List of Subsidiaries (incorporated by reference to Exhibit
21.1 to Registrant's Form 10-K for the year ended March 31,
2001 filed on July 2, 2001.)
23.1 Consent of Independent Auditors (see sequentially numbered
Page 58)
24.1 Power of Attorney (see Page 57)
### Confidential treatment has been granted as to portions thereof
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter ended
March 31, 2002:
(1) January 29, 2002 Press Release (Item 5). The Company announced its
financial results for the third fiscal quarter and nine months ended
December 31, 2001.
(2) March 7, 2002 Press Release (Item 5). The Company issued a press
release entitled "Geoworks Names Steve Mitchell New President and CEO."
The press release announced that the Company:
o appointed Steve Mitchell president and chief executive officer
o accepted the resignation of Dave Grannan as president and chief
executive officer;
o named Mr. Grannan chairman of the board of directors;
o promoted Ashley Griffiths to vice president of worldwide sales and
marketing;
o appointed Jim Judge as a new member of the board of directors; and
o accepted the resignations of Kevin Neylon, former chairman of the
board, Andrew Cole and Kevin Fitzgerald from the board of directors.
(c) Exhibits.
55
See Item 14 (a) 3 above.
(d) Financial Statement Schedules.
See Item 14 (a) 2 above
56
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.
Date: June 28, 2002
GEOWORKS CORPORATION
By: /s/ Steve W. Mitchell
-------------------------------
Steve W. Mitchell
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David L. Grannan and Steve W. Mitchell and each
of them acting individually, as such person's true and lawful attorneys-in-fact
and agents, each with full power of substitution, for such person, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this report on Form 10-K, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his or her substitutes, may do or cause to be done by virtue
hereof.
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/ Steve W. Mitchell President, Chief Executive Officer, June 28, 2002
- ------------------------------- and Director (Principal Executive
Steve W. Mitchell Officer)
/s/ David L. Grannan Chairman of the Board June 28, 2002
- -------------------------------
David L Grannan
/s/ John B. Balousek Director June 28, 2002
- -------------------------------
John B. Balousek
/s/ Jim Judge Director June 28, 2002
- -------------------------------
Jim Judge
/s/Frank S. Fischer Director June 28, 2002
- -------------------------------
Frank S. Fischer
/s/ Stephen T. Baker Director June 28, 2002
- -------------------------------
Stephen T. Baker
/s/ Timothy J. Toppin Vice President, Chief June 28, 2002
- ------------------------------- Financial Officer (Principal
Timothy J. Toppin Financial Officer)
57