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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, 2003.
[ ] 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
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(Exact name of registrant as specified in its charter)
Delaware 94-2920371
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Crescent Court, Suite 1110, Dallas, Texas 75201
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(Address of principal executive offices) (Zip code)
214-661-7479
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, 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, 2003, as reported on the OTCBB, was approximately $3,356,132. 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, 2003, there were 29,752,120 shares of the Registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for its 2003 Annual
Meeting of Stockholders, which the Registrant intends to file within 120 days of
the Registrant's fiscal year-end (the "2003 Proxy Statement"), are incorporated
by reference into Part III of this Report.
1
GEOWORKS CORPORATION
Table of Contents
Page
----
PART I
Item 1. Business...........................................................4
Risk Factors.......................................................6
Item 2. Properties.........................................................8
Item 3. Legal Proceedings..................................................8
Item 4. Submission of Matters to a Vote of Security Holders................9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...............................................10
Item 6. Selected Consolidated Financial Data..............................11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........21
Item 8. Financial Statements and Supplementary Data.......................22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................45
PART III
Item 10. Directors and Executive Officers of the Registrant................45
Item 11. Executive Compensation............................................45
Item 12. Security Ownership of Certain Beneficial Owners and Management....45
Item 13. Certain Relationships and Related Transactions....................45
Item 14. Procedures and Controls...........................................45
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..46
Signatures
Exhibit Index
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 cash
resources; our significantly reduced level of operations, dependence on one
customer for almost all of our revenues; our ability to acquire, merge into an
operating business or develop new businesses, our ability to sell any of our
remaining assets; our ability to terminate certain contractual obligations on
acceptable terms; economic conditions, and the health of financial markets in
general. 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 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.
3
ITEM 1. BUSINESS
SUMMARY
Geoworks Corporation ("Geoworks" or the "Company", which may also be referred to
as "we", "us" or "our") was formerly a provider of leading-edge software design
and engineering services to the mobile and handheld device industry. As a result
of changes in the market and our own decreasing financial resources, our
operations were substantially scaled back through a number of restructuring
actions. In February 2003, we ceased ongoing business activity at our last
operating division, which had been located in Macclesfield, England. In April
2003, 25% of our newly issued common stock was sold in order to increase our
financial resources and improve our potential to make acquisitions or develop
new operations. In connection with this stock sale, a substantially new board of
directors and new operating management team was appointed. Our current strategic
business plans are based on realizing the value of the Company's remaining
intellectual assets and identifying new operations or a merger candidate.
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. In
response to the slow growth in the market, increased competition and the loss of
key original equipment manufacturer ("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, Mitsubishi Electric
Corporation ("Mitsubishi"), whom we continued to support through a professional
services consulting agreement through March 2002.
During fiscal year 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 broadened 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. 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 banker to
assist us in considering our strategic alternatives.
In October 2001, as a result of market uncertainties and a lack of market
visibility, 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 our inability to generate cash through
strategic alternatives, in January 2002, we announced a restructuring involving
our exit from the software products business and additional cost cutting
measures, including terminating 45% of our remaining workforce. In particular,
we concluded it would be in the best interest of our company to try to sell our
AirBoss assets in order to focus on realizing the value of our professional
services business.
4
Following the January 2002 restructuring announcement, we pursued a number of
measures to sell assets. Several patents were sold during the fourth quarter of
fiscal 2002 and the GEOS-SC source code was sold to Mitsubishi during the fourth
quarter of fiscal 2003. Additionally, we terminated the leases of our former
facilities in New Jersey and Alameda, California.
Our weak financial position made it increasingly difficult to maintain a viable
ongoing business in the UK. In particular, our UK employees had been recruited
heavily by third parties while a proposed sale of our UK subsidiary and its
professional services business to Teleca Ltd. (the "Proposed Sale") was under
consideration. These employees' perceived uncertainty only intensified when the
Proposed Sale was not approved by our stockholders as a result of our failure to
secure a quorum for the special shareholders meeting. Our limited resources made
it unlikely that we could continue covering our already reduced cost structure,
much less absorb the costs of any decrease or interruption in our revenues
associated with employee attrition or resulting customer dissatisfaction. Faced
with this significant possibility of failing to meet our obligations and in an
effort to minimize ongoing liabilities, we entered into a mutual release
agreement with Teleca (the "Release") that allowed Teleca to hire our former UK
employees and do business with our customers. In consideration of the Release,
Teleca agreed to pay us approximately $500,000, consisting of one half on
signing the Release and the balance after ninety days. Also, Teleca separately
agreed to assume our UK subsidiary's remaining lease obligations in exchange for
use of the subsidiary's equipment. By agreeing to enter the Release we estimate
that we have avoided approximately $300,000 of statutory employee severance and
over $400,000 of future lease obligations.
RECENT DEVELOPMENTS
In April 2003, we sold 7,377,905 million shares of our common stock
(representing 25% of our common stock after the transaction) to Newcastle
Partners L.P. ("Newcastle") and Mark E. Schwarz, an affiliate of Newcastle, for
total consideration of $325,000. This transaction increased our financial
resources and we believe it improves our potential to avoid bankruptcy and to
identify and close other strategic transactions or to develop new operations. In
connection with this stock sale, Mr. Schwarz and Steven J. Pully, who is also an
affiliate of Newcastle, joined the Board of Directors and a new operating
management team assumed the management of the Company. Steve Mitchell, the Chief
Executive Officer prior to the transaction, remains as a Director. He and the
other officers of the Company agreed to step down from their management
positions in connection with the transaction.
ORGANIZATION AND CURRENT BUSINESS
Our company was incorporated in California in 1983 and reincorporated in
Delaware in 1997. The Company's headquarters is in Dallas, Texas. Our fiscal
year commences on April 1 and ends on March 31.
Although we have essentially exited the software business and have no employees
devoted to generating software revenues, we have one remaining software contract
with Toshiba for the license of our Mobile Server+ software. This contract runs
through September 2004. Per the terms of the agreement, we receive annual
maintenance fees and 15% of the revenues generated by Toshiba from the use of
the software. Revenues generated from Toshiba were approximately $413,000,
$284,000 and $656,000 in fiscal year 2003, 2002 and 2001, respectively. We plan
to fulfill any maintenance requirements of Toshiba through subcontracting for
appropriate engineering support. See Note 1 to the Consolidated Financial
Statements for further discussion of major customers in discontinued operations.
Other than fulfilling the Toshiba contract, Geoworks currently has no business
operations other than seeking an acquisition, business combination or developing
new operations, the success of which cannot be guaranteed. The Company has no
current plan, proposals, agreements, understanding or arrangements to acquire or
merge with any specific business or company nor does it have current plans to
develop new operations. At this time, the Company does not expect to generate
any revenue from any sources other than Toshiba during the coming fiscal year
and generation of future revenue is subject to substantial risks as discussed in
the risk factors below.
EMPLOYEES
As of June 27, 2003, we had three employees. None of our employees are
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.
5
RISK FACTORS AFFECTING FUTURE OPERATING RESULTS
You should consider carefully the risks and uncertainties described below and
the other information in this report. The risks set forth below 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, the
trading price of our common stock could decline and the likelihood of there
being any potential return to stockholders would diminish.
WE HAVE LIMITED FINANCIAL RESOURCES AND A HISTORY OF OPERATING LOSSES, WE ARE
WINDING DOWN OPERATIONS AND WE EXPECT TO CONTINUE INCURRING LOSSES.
Since inception, we have experienced negative cash flow from operations, which
we expect to continue. We currently anticipate that our available funds will be
sufficient to meet our projected needs through fiscal 2004. This projection is
based on several factors and assumptions, in particular that our primary
customer continues 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
legacy assets and settling existing contractual liabilities. We do not consider
the sale of most of these assets to be likely, rather highly unlikely. As a
result, any projections of future cash needs and cash flows are subject to
substantial uncertainty.
WE ARE CURRENTLY DEPENDENT UPON A SINGLE CUSTOMER FOR ALL OF OUR REVENUE.
One customer, Toshiba, a diversified electronics company located in Japan,
accounted for approximately 25% of our revenues in the fourth quarter of fiscal
2003 and is currently projected to generate all of our limited revenue
thereafter. These revenues are attributable to license and maintenance fees for
our MS+ technology. As this revenue stream may be desirable to a potential
acquirer and may be necessary to satisfy our outstanding obligations, any
disruption or decrease in it could negatively impact our liquidity.
OUR INABILITY TO SELL OUR REMAINING LEGACY ASSETS COULD BE HARMFUL.
Although we have been able to sell certain assets since the reorganization
announced in January 2002 and we continue to explore the sale of our remaining
assets, including MS+, there are very few active prospects. We may not be able
to locate buyers for these assets on acceptable terms. Even if we are able to
locate a buyer or buyers who are willing to acquire these assets on terms that
we believe are in our best interests, the sale of these assets involves a number
of risks and uncertainties.
WE MAY BE UNABLE TO REDEPLOY OUR ASSETS SUCCESSFULLY.
As part of our strategy to limit operating losses and enable the Company to
redeploy its assets and use its cash and cash equivalent assets to enhance
stockholder value, we are pursuing a strategy of identifying suitable merger
partners, acquisition candidates or developing new operations. We may not be
successful in acquiring such a business or in operating any business that we
acquire or develop. Failure to redeploy our assets successfully will prevent us
from becoming profitable.
ANY ACQUISITIONS THAT WE ATTEMPT OR COMPLETE COULD PROVE DIFFICULT TO INTEGRATE
OR REQUIRE A SUBSTANTIAL COMMITMENT OF MANAGEMENT TIME AND OTHER RESOURCES.
Acquisitions involve a number of unique risks including: (i) completing due
diligence successfully; (ii) exposure to unforeseen liabilities of acquired
companies; and (iii) increased risk of costly and time-consuming litigation,
including stockholder lawsuits. We may be unable to address these problems
successfully. Moreover, our future operating results will depend to a
significant degree on our ability to integrate acquisitions (if any)
successfully and manage operations while also controlling our expenses. We may
be unable to select, manage or absorb or integrate any future acquisitions
successfully, particularly acquisitions of large companies. Any acquisition,
even if effectively integrated, may not benefit our stockholders.
6
WE MAY BE UNABLE TO REALIZE THE BENEFITS OF OUR NET OPERATING LOSS ("NOL")
CARRYFORWARDS.
NOLs may be carried forward to offset federal and state taxable income in future
years and eliminate income taxes otherwise payable on such taxable income,
subject to certain adjustments. Based on current federal corporate income tax
rates, our NOL and other carryforwards could provide a benefit to us, if fully
utilized, of significant future tax savings. However, our ability to use these
tax benefits in future years will depend upon the amount of our otherwise
taxable income. If we do not have sufficient taxable income in future years to
use the tax benefits before they expire, we will lose the benefit of these NOL
carryforwards permanently. Consequently, our ability to use the tax benefits
associated with our substantial NOL will depend largely on our success in
identifying suitable merger partners and/or acquisition candidates, and once
identified, successfully consummate a merger with and/or acquisition of these
candidates.
Additionally, if we underwent an ownership change, the NOL carryforward
limitations would impose an annual limit on the amount of the taxable income
that may be offset by our NOL generated prior to the ownership change. If an
ownership change were to occur, we would be unable to use a significant portion
of our NOL to offset taxable income. In general, an ownership change occurs
when, as of any testing date, the aggregate of the increase in percentage points
of the total amount of a corporation's stock owned by "5-percent shareholders"
(within the meaning of the NOL carryforward limitations) whose percentage
ownership of the stock has increased as of such date over the lowest percentage
of the stock owned by each such "5-percent shareholder" at any time during the
three-year period preceding such date, is more than 50 percentage points. In
general, persons who own 5% or more of a corporation's stock are "5-percent
shareholders," and all other persons who own less than 5% of a corporation's
stock are treated, together, as a single, public group "5-percent shareholder,"
regardless of whether they own an aggregate of 5% of a corporation's stock.
The amount of NOL carryforwards that we have claimed has not been audited or
otherwise validated by the U.S. Internal Revenue Service. The IRS could
challenge our calculation of the amount of our NOL or our determinations as to
when a prior change in ownership occurred and other provisions of the Internal
Revenue Code may limit our ability to carry forward our NOL to offset taxable
income in future years. If the IRS was successful with respect to any such
challenge, the potential tax benefit of the NOL carryforwards to us could be
substantially reduced.
ANY TRANSFER RESTRICTIONS IMPLEMENTED BY THE COMPANY TO PRESERVE OUR NOL MAY NOT
BE EFFECTIVE OR MAY HAVE SOME UNINTENDED NEGATIVE EFFECTS.
The Company may seek to preserve its NOL through an amendment of its certificate
of incorporation and/or bylaws, which would impose restrictions on the transfer
of the Company's capital stock. Any transfer restrictions on the Company's
capital stock will be designed to restrict only those transfers that could
result in an impermissible ownership change limiting our ability to utilize our
NOL. Although any transfer restriction imposed on our capital stock is intended
to reduce the likelihood of an impermissible ownership change, there is no
guarantee that such restriction would prevent all transfers that would result in
an impermissible ownership change.
Any transfer restrictions will require any person attempting to acquire a
significant interest in the Company to seek the approval of our Board of
Directors. This may have an "anti-takeover" effect because our Board of
Directors may be able to prevent any future takeover. Similarly, any limits on
the amount of capital stock that a stockholder may own could have the effect of
making it more difficult for stockholders to replace current management.
Additionally, because transfer restrictions will have the effect of restricting
a stockholder's ability to dispose of or acquire our common stock, the liquidity
and market value of our common stock might suffer.
OUR STOCK IS ILLIQUID.
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 and we were
delisted from the Nasdaq SmallCap Market in November 2002. Our stock is
currently quoted on the Over the Counter Bulletin Board (OTCBB), and has traded
as low as $0.015 per share. Since our common stock is delisted and is trading at
a price below $5.00 per share it is subject to certain other rules of the
Securities Exchange Act of 1934. Such rules require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
"penny stock". "Penny stock" is defined as any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
7
Such rules require the delivery of a disclosure schedule explaining the penny
stock market and the risks associated with that market before entering into any
penny stock transaction. Disclosure is also required to be made about
compensation payable to both the broker-dealer and the registered representative
and current quotations for the securities. The rules also impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors. For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and must receive the purchaser's written consent to the
transaction prior to the sale. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stocks. The additional
burdens imposed upon broker-dealers by such requirements could discourage
broker-dealers from effecting transactions in our common stock. This could
severely limit the market liquidity of our common stock and the ability of a
stockholder to sell the common stock.
ANY LITIGATION COULD RESULT IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S
ATTENTION AND RESOURCES.
Securities class action lawsuits are often brought against companies under
various legal theories. Also, 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
abandon efforts to conclude a change in control transaction. Any litigation
could result in substantial costs, eliminate the prospects for any change of
control transaction and force bankruptcy.
DEPENDENCE ON KEY PERSONNEL; POTENTIAL NEED FOR ADDITIONAL PERSONNEL
The Company's performance is substantially dependent on the services and on the
performance of its officers and directors. The Company's performance also
depends on its ability to attract, hire, retain, and motivate its officers and
key employees. The loss of the services of any of the executive officers or
other key employees could have a material adverse effect on the Company's
business, prospects, financial condition, and results of operations. The Company
has not entered into long-term employment agreements with any of its key
personnel and currently has no "Key Man" life insurance policies. The Company's
future success may also depend on it's ability to identify, attract, hire,
train, retain, and motivate other highly skilled technical, managerial,
marketing, and customer service personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to
successfully attract, assimilate, or retain sufficiently qualified personnel.
The failure to attract and retain the necessary technical, managerial,
marketing, and customer service personnel could have a material adverse effect
on the Company's 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
The Company's headquarters are located in Dallas, Texas. The Company also leases
approximately 1,000 square feet in Emeryville, California for storage of
historical records and equipment pursuant to a month to month operating lease.
ITEM 3. LEGAL PROCEEDINGS
There are currently no legal proceedings against the Company. The Company is not
aware of any threatened or pending litigation.
8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(i.) On October 30, 2002, we filed a definitive proxy to obtain stockholder
approval of a share sale to Teleca and to obtain stockholder approval for our
plan of liquidation and dissolution if other desirable alternatives were not to
arise in the near future. Management had recommended both proposals. The Special
Meeting of Stockholders, scheduled for December 11, 2002, was adjourned until
January 8, 2003 due to lack of a quorum. The meeting was subsequently cancelled
on January 8, 2003 due to lack of a quorum. Although, management expended
significant costs and efforts to obtain a quorum, including hiring a proxy
solicitor, sending multiple mailings to stockholders and calling a number of
stockholders personally to encourage them to vote, a quorum was not attained in
the legally prescribed time frame.
The matters described below were voted on at the Special Meeting of
Stockholders, although a quorum was not attained, the votes cast with respect to
each matter were as indicated.
1. To approve the sale of our UK professional services business to Teleca
Limited pursuant to an Agreement for the Sale and Purchase of the Entire Issued
Share Capital of Geoworks Limited dated September 23, 2002.
FOR 8,572,891
AGAINST 1,047,837
ABSTAIN 151,419
NON-VOTE 12,412,610
2. To approve and adopt the Plan of Liquidation and Dissolution described in the
Proxy.
FOR 8,067,152
AGAINST 1,517,236
ABSTAIN 187,759
NON-VOTE 12,412,610
3. To transact such other business as may properly come before the special
meeting or any adjournment thereof.
FOR 5,989,209
AGAINST 1,597,250
ABSTAIN 2,185,686
NON-VOTE 12,412,610
9
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 been traded and quoted on the Over the Counter Bulletin
Board (OTCBB) since November 2002 under the symbol GWRX.OB. It was previously
traded on the SmallCap Market and the Nasdaq National Market under the symbol
GWRX. We transferred from the Nasdaq National Market to the Nasdaq SmallCap
Market in May 2002 and we were delisted from the Nasdaq SmallCap Market in
November 2002. The following table sets forth the high and low closing sales
prices for our common stock as reported by Nasdaq or the OTCBB for the quarters
indicated:
High Low
---- ---
For the quarter ended:
----------------------
March 31, 2003 $ .03 $ .01
December 31, 2002 .10 .01
September 30, 2002 .16 .04
June 30, 2002 .36 .11
For the quarter ended:
----------------------
March 31, 2002 $1.14 $ .26
December 31, 2001 1.49 .52
September 30, 2001 1.59 .62
June 30, 2001 2.70 1.19
REGISTERED HOLDERS
As of June 27, 2003, there were 311 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 2003 PROXY STATEMENT.
10
ITEM 6. SELECTED 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. Certain amounts have been reclassified in prior fiscal
years to conform to the current year presentation. Due to the material
developments affecting our business since the beginning of fiscal 1999, which
are discussed in the MD&A, and the material uncertainties we currently face,
the data reflected herein may not be useful or indicative of the Company's
future financial condition or results of operations. Substantially all of our
results of operations with the exception of certain corporate office legal and
general and administrative expenses have been reclassfied as discontinued
operations in the Consolidated Statements of Operations for all periods
presented.
Condensed Consolidated Statements of Operations Data:
(in thousands, except per share data)
Year ended March 31
2003 2002 2001 2000 1999
Operating expenses:
Legal $ 887 $ 701 $ 3,009 $ 861 $ 932
General and administrative 1,699 3,073 3,661 2,332 2,227
------------------------------------------------------------------
Total operating expenses 2,586 3,774 6,670 3,193 3,159
------------------------------------------------------------------
Operating loss (2,586) (3,774) (6,670) (3,193) (3,159)
Other income (expense):
Other income -- 3,994 265 4,049 --
Interest income 15 191 840 646 612
Interest expense -- (8) (4) (10) (31)
------------------------------------------------------------------
Total other income, net 15 4,177 1,101 4,685 581
------------------------------------------------------------------
Income (loss) before discontinued operations (2,571) 403 (5,569) 1,492 (2,578)
Loss from discontinued operations - net of income taxes (576) (43,003) (15,489) (2,465) (13,260)
------------------------------------------------------------------
Net loss $ (3,147) $(42,600) $(21,058) $ (973) $(15,838)
==================================================================
Income (loss) before discontinued operations per
share- basic and diluted $ (0.11) $ 0.02 $ (0.26) $ 0.09 $ (0.16)
Loss from discontinued operations (0.03) (1.83) (0.73) (0.14) (0.81)
------------------------------------------------------------------
Net loss per share- basic and diluted $ (0.14) $ (1.81) $ (0.99) $ (0.05) $ (0.97)
==================================================================
Shares used in net loss per share
computation - basic and diluted 22,718 23,555 21,190 17,866 16,260
==================================================================
11
CONSOLIDATED BALANCE SHEET DATA:
(in thousands)
March 31
2003 2002 2001 2000 1999
---------------------------------------------------------------------
Cash and cash equivalents $ 729 $ 3,136 $ 13,713 $ 17,204 $ 13,715
Working capital 253 1,033 10,616 14,286 12,379
Total assets 1,236 6,729 56,263 41,459 18,183
Deferred revenue 179 424 1,128 1,629 1,498
Long-term obligations, net of
current portion -- -- 128 -- --
Accumulated deficit (156,857) (153,710) (111,110) (90,052) (89,079)
Stockholders' equity $ 253 $ 3,297 $ 49,731 $ 36,632 $ 13,374
12
SELECTED CONSOLIDATED FINANCIAL DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter Ended
March 31, December 31, September 30, June 30,
2003 2002 2002 2002
---------------------------------------------------
Operating expenses:
Legal $ 304 $ 183 $ 265 $ 135
General and administrative 356 433 467 443
---------------------------------------------------
Total operating expenses 660 616 732 578
---------------------------------------------------
Operating loss (660) (616) (732) (578)
Other income (expense):
Other income -- -- -- --
Interest income 2 2 4 7
Interest expense -- -- -- --
---------------------------------------------------
Income (loss) before discontinued operations (658) (614) (728) (571)
Income (loss) from discontinued operations -
net of taxes 764 (292) 24 (1,072)
---------------------------------------------------
Net income (loss) $ 106 $ (906) $ (704) $(1,643)
===================================================
Income (loss) before discontinued operations
per share- basic and diluted $ (0.03) $ (0.03) $ (0.03) $ (0.02)
Income (loss) from discontinued operations 0.04 (0.01) -- (0.06)
---------------------------------------------------
Net loss per share- basic and diluted $ 0.01 $ (0.04) $ (0.03) $ (0.08)
===================================================
13
SELECTED CONSOLIDATED FINANCIAL DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Quarter Ended
March 31, December 31, September 30, June 30,
2002 2001 2001 2001
Operating expenses:
Legal $ 98 $ 126 $ 198 $ 279
General and administrative 452 655 772 1,194
---------------------------------------------------
Total operating expenses 550 781 970 1,473
---------------------------------------------------
Operating loss (550) (781) (970) (1,473)
Other income (expense):
Other income -- -- 3,994 --
Interest income 26 21 40 104
Interest expense (1) (4) (2) (1)
---------------------------------------------------
Income (loss) before discontinued operations (525) (764) 3,062 (1,370)
Loss from discontinued operations - net of taxes (475) (13,228) (20,549) (8,751)
---------------------------------------------------
Net income (loss) $ (1,000) $(13,992) $(17,487) $(10,121)
===================================================
Income (loss) before discontinued operations
per share- basic and diluted $ (0.02) $ (0.03) $ 0.14 $ (0.05)
Loss from discontinued operations (0.02) (0.57) (0.88) (0.38)
---------------------------------------------------
Net loss per share- basic and diluted $ (0.04) $ (0.60) $ (0.74) $ (0.43)
===================================================
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
AS PART OF OUR STRATEGY TO LIMIT OPERATING LOSSES AND ENABLE THE COMPANY TO
REDEPLOY ITS ASSETS AND USE ITS CASH AND CASH EQUIVALENT ASSETS TO ENHANCE
STOCKHOLDER VALUE, WE HAVE SOLD THE MAJORITY OF OUR ASSETS, WHICH REPRESENTED
SUBSTANTIALLY ALL OF OUR REVENUE-GENERATING OPERATIONS AND RELATED ASSETS, ALL
AS FURTHER DESCRIBED HEREIN. THE INFORMATION APPEARING BELOW, WHICH RELATES TO
PRIOR PERIODS, IS THEREFORE NOT INDICATIVE OF THE RESULTS WHICH MAY BE EXPECTED
FOR ANY SUBSEQUENT PERIODS. FUTURE PERIODS WILL PRIMARILY REFLECT GENERAL AND
ADMINISTRATIVE EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE
COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS THROUGH AN ACQUISITION, MERGER OR
DEVELOPMENT OF NEW OPERATIONS.
OPERATIONS CEASED IN THE UK
By January 2003, our primary remaining revenue generating operations were
located in our Macclesfield, England facility. However, our weak financial
position made it increasingly difficult to maintain a viable ongoing business
there. In particular, our UK employees had been recruited heavily by third
parties. These employees' perceived uncertainty only intensified when the
Proposed Sale was not approved as a result of our failure to secure a quorum for
the special stockholders meeting. Our limited resources made it unlikely that we
could cover our already reduced cost structure for much longer, much less absorb
the costs of any decrease or interruption in our revenues associated with
employee attrition or resulting customer dissatisfaction. Faced with this
significant possibility of failing to meet our obligations, on February 1, 2003,
we entered into the Release, which allowed Teleca to hire our former UK
employees and do business with our customers in an effort to minimize our
liabilities.
In consideration of the Release, Teleca agreed to pay the Company approximately
$500,000, one half on signing the Release and the balance in May 2003. Also,
Teleca separately agreed to assume our UK subsidiary's remaining lease
obligations in exchange for use of the subsidiary's equipment. By agreeing to
enter the Release we estimate that we avoided approximately $300,000 of
statutory employee severance and over $400,000 of future lease obligations.
As our operations have been reduced, we have made every reasonable effort to
meet our obligations, to limit our liabilities, to conserve resources and to
limit contingent liabilities in order to increase the number of potential
opportunities for continuing the Company. In addition, in April 2003, we issued
additional common stock representing 25% of our common stock in order to
increase our financial resources and improve our potential for additional
transactions or developing new operations. In connection with this stock sale, a
substantially new board of directors and new operating management team was
appointed. Our current strategic business plans are based on realizing the value
of the Company's remaining assets and identifying new operations or a merger
candidate.
ACCOUNTING FOR DISCONTINUED OPERATIONS
After ceasing operations in the UK, we have essentially exited the software
business and have no meaningful revenue generating assets or personnel. As a
result, consistent with US Generally Accepted Accounting Principles ("GAAP"),
most of our operating activity over the past three years has been disclosed in
our financial statements under the caption, "Loss from discontinued operations -
net of taxes."
We do have one remaining software contract, with Toshiba, for the license of our
Mobile Server+ software. This contract runs through September 2004. Any future
proceeds or costs generated from this contract will also be also be accounted
for as being part of discontinued operations.
As a result of our significantly reduced revenue generating activities and the
expected substantional reduction in general and administrative expenses, much of
the following discussion of our historical operating results is not relevant to
our continued operations. Consequently, readers should focus on the company's
liquidity, and should keep 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.
15
RESULTS OF OPERATIONS
FISCAL YEARS ENDED MARCH 31, 2003, MARCH 31, 2002 AND MARCH 31, 2001
LEGAL EXPENSES
In addition to third party legal fees, legal expenses include salaries, benefits
and related facilities overhead expense for the Company's in house legal
personnel. Legal expenses increased by $186,000, or 27%, to $887,000 in fiscal
2003 as compared to $701,000 in fiscal 2002. Approximately $100,000 of this
increase was due to the efforts to close a transaction for the sale of the UK
subsidiary as further described in the Historical Overview above. The remaining
increase in legal expenses from fiscal 2002 to fiscal 2003 was due to non-cash
charges resulting from the amortization of deferred compensation related to
option grants. These options which were granted in fiscal 2001 have now been
fully amortized.
Legal expenses decreased by $2,308,000, or 77%, to $701,000 in fiscal 2002 as
compared to $3,009,000 in fiscal 2001. Third party legal fees decreased by
$2,100,000 to approximately $225,000 in fiscal year 2002 from approximately
$2,325,000 in fiscal 2001. Fiscal year 2001 third party legal fees had been
significantly higher, primarily due to the litigation expenses resulting from a
patent dispute with Openwave Systems Inc., formerly Phone.com, which we settled
by entering into a royalty-free patent cross-license agreement. In addition, the
remaining costs of our legal department, principally compensation and the
related facilities overhead, were reduced by approximately $200,000 due to
reduced staffing and other cost reductions resulting from restructuring actions
in fiscal 2002.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include the costs for human resources,
finance, general management functions and related facilities overhead. General
and administrative expenses decreased by $1,374,000, or 45%, to $1,699,000,
during fiscal 2003, as compared to fiscal 2002. The expenses decreased primarily
due to reduced compensation, including temporary labor, and reduced facilities
overhead, resulting from the restructuring actions and cost reduction efforts
made over the course of fiscal 2002 and 2003.
General and administrative expenses decreased by $588,000 or 16%, to $3,073,000,
during fiscal 2002, in comparison to fiscal 2001. This decrease was due to the
restructuring and cost reductions made during fiscal 2002. In particular,
compensation, temporary labor costs and travel expenses were all significantly
reduced and accounted for most of the decrease.
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. 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 vesting 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 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.
16
Because the closing price of our common stock as reported by Nasdaq and the
OTCBB has been less than the $1.11 option price on the last day of each of the
calendar quarters since the grant, no stock compensation has been recorded for
the years ended March 31, 2003 and 2002.
OTHER INCOME.
Other income decreased by $3,994,000, or 100%, to $0, during fiscal 2003, as
compared to fiscal 2002. 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 Note 1 to
the Consolidated Financial Statements.
Other income increased by $3,729,000, or 1,407%, to $3,994,000, during fiscal
2002, as compared to fiscal 2001. In fiscal 2001, we sold 10,800 shares of Wink
common stock, resulting in a gain of $265,000 and in fiscal 2002 we sold our
remaining 480,000 shares of Wink common stock as discussed above.
INTEREST INCOME
Interest income decreased by $176,000, or 92%, to $15,000, during fiscal 2003,
as compared to fiscal 2002. This decrease was attributable to lower cash
balances available for short-term investment as our cash resources were depleted
by our operations.
Interest income decreased by $649,000, or 77%, to $191,000, during fiscal 2002,
as compared to fiscal 2001. This decrease was attributable to lower cash
balances available for short-term investment as our cash resources were depleted
by our operations.
INTEREST EXPENSE
Interest expense was not significant in fiscal years 2003, 2002 and 2001 as we
had minimal balances of capital lease and debt outstanding. 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, 2003, we had net operating loss carryforwards for U.S. federal income tax
purposes of approximately $122,872,000 and for U.K. income tax purposes of
approximately $3,853,000 and for state income tax purposes of approximately
$31,637,000. We also had research and development credit carryforwards for
federal income tax purposes of approximately $3,426,000 and for state income tax
purposes of approximately $1,506,000. 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.
17
LOSS FROM DISCONTINUED OPERATIONS.
The condensed results of discontinued items are summarized as follows:
Year ended March 31
-------------------------------------
2003 2002 2001
-------------------------------------
Total net revenues $ 3,440 $ 11,694 $ 16,565
Operating expenses (excluding items discussed below) 3,067 19,012 24,953
Amortization of goodwill and other intangible assets 487 5,227 5,410
Purchased in-process research and development -- -- 1,378
Restructuring charges (reversal) (96) 3,272 --
Write-down of goodwill and other long-lived assets 1,158 27,557 --
------------------------------------
Total operating expenses 4,616 55,068 31,741
------------------------------------
Operating loss from discontinued operations (1,176) (43,374) (15,176)
Other income, principally asset sales and gain 646 500 --
------------------------------------
Loss before income taxes (530) (42,874) (15,176)
Provision for income taxes 46 129 313
------------------------------------
Loss from discontinued operations - net of taxes $ (576) $(43,003) $(15,489)
====================================
NET REVENUES
Net revenues decreased by $8,254,000, or 71%, to $3,440,000, during fiscal 2003,
as compared to fiscal 2002. Net revenues have decreased as the number of revenue
generating personnel and contracts declined. In particular, as a result of our
restructuring efforts, our fiscal 2003 revenue was composed entirely of
professional services consulting revenue. Revenues from contracts with Nokia and
Mitsubishi (expired in March 2002) declined approximately $400,000 and
$4,600,000, respectively, from fiscal 2003 to 2002. The remaining decrease in
revenues from fiscal 2003 to 2002 was due to the decline in AirBoss related
revenues.
Net revenues decreased by $4,871,000, or 30%, to $11,694,000, during fiscal
2002, as compared to fiscal 2001. Fiscal 2002 revenue decreased as compared to
fiscal 2001 primarily due to reduced royalty revenues from products using legacy
software operating systems developed prior to our acquisition of the AirBoss
group in July 2000. We were unable to replace these anticipated losses in legacy
royalties with increased revenues from the AirBoss software applications. The
loss of our largest customer for the AirBoss software, a subcontract with
Telcordia Technologies on their contract with Telkom South Africa and increasing
market softness for the AirBoss software, eventually resulted in a number of the
restructuring actions we took in fiscal 2002.
OPERATING EXPENSES
Operating expenses do not include corporate office legal and general and
administrative expenses which have not been classified as discontinued
operations. Excluding the corporate office items discussed above operating
expenses decreased by $15,945,000, or 84% to $3,067,000, during fiscal 2003, as
compared to fiscal 2002. The reductions in these operating expenses reflect the
cost reductions and restructuring efforts made in order to reduce our cost
structure to meet the decreasing levels of revenues. By fiscal 2003, these
operating expenses were solely to support our efforts to realize the value of
our professional services business, and were primarily incurred in the UK. Sales
and marketing and research and development expenses were decreased in fiscal
year 2002 and then essentially eliminated in fiscal 2003.
Operating expenses do not include corporate office legal and general and
administrative expenses which have not been classified as discontinued
operations. Excluding the corporate office items discussed above operating
expenses decreased by $5,941,000, or 24% to $19,012,000, during fiscal 2002, as
compared to fiscal 2001. During fiscal 2002, we shifted our strategic focus to
our professional services business and significantly decreased a number of cost
and expenses, including: research and development expenses, sales and marketing
expenses and cost of software and related services.
18
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill and other intangible assets was attributable to the
amortization of goodwill and other purchased intangible assets resulting from
our July 2000 acquisition of AirBoss. The rates of amortization per year
decreased in each successive year because the underlying intangibles base was
reduced during fiscal 2003 and 2002 by writedowns due to value impairments
discussed below and in the Notes to 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 in the three months ended September 30, 2000.
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. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets, "(which superceded SFAS 121 in
fiscal 2003) 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 $1,158,000, $27,557,000 and $0 were
recorded for fiscal 2003, 2002, and 2001, respectively, as discussed below.
During fiscal 2002, non-cash asset impairment charges of $3,391,000 were
recorded to write down equipment no longer being used in operations as a result
of the reorganizations and headcount reductions made during the year. The
remaining impairment charges for fiscal 2002 of $24,166,000 related to our
AirBoss acquisition. 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.
During fiscal 2003, the company recorded write-downs of the remaining $1,158,000
of certain technology intangibles related to the AirBoss acquisition.
OTHER INCOME, PRINCIPALLY ASSET SALES AND GAIN
During fiscal 2003, the Company recorded gains from the sale of certain patents
and assets of $313,000 and recorded a net gain of $333,000 from the Teleca
Release as more fully described in Note 1 to the Consolidated Financial
Statements.
During fiscal 2002, the Company recorded gains from the sale of certain patents
of approximately $500,000.
RESTRUCTURING CHARGES.
During the fourth quarter of fiscal 2003 severance charges of $96,000 were
reversed per the terms of a settlement agreement with a former CEO of the
Company.
During fiscal 2002, we recorded restructuring charges of $3,272,000. These
charges relate to the cost-cutting measures we adopted and announced in June
2001, October 2001 and January 2002. The Board of Directors approved these
actions and the resulting restructuring charges which consisted of severance
cost for a total of 153 terminated employees and an accrual for related lease
and contract termination costs.
For further discussion of the elements of discontinued operations, see the Notes
to the Consolidated Financial Statements.
19
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 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.
WRITE-DOWN OF GOODWILL AND OTHER LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," 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 on discounted cash flows or residual value,
depending on the nature of the asset.
Prior to the adoption of SFAS No. 144 in fiscal 2003, the Company accounted for
long-lived assets in accordance with SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $729,000 at March 31, 2003, compared with
$3,136,000 at March 31, 2002. Our operating loss of $2,586,000 for fiscal 2003
is the primary reason for the decline in our cash balance from fiscal 2002 to
fiscal 2003. We expect to incur additional operating losses at least through
fiscal 2004, which will continue to have a negative impact on liquidity and
capital resources.
Purchases of property and equipment totaled $33,000, $1,802,000 and $3,025,000,
in fiscal years 2003, 2002 and 2001, respectively. In general, fiscal 2003
capital spending was done only to meet customer requirements. Capital spending
in the prior two years was made in connection with our business plans at that
time.
20
As of March 31, 2003 the Company has no minimum payments remaining under
non-cancelable operating leases.
We currently anticipate that our available funds will be sufficient to meet our
projected needs to fund operations through fiscal 2004. This projection is based
on several factors and assumptions, 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 managing our operating expenses, selling
assets and how successful we are in settling our remaining contractual
liabilities. Moreover, our efforts over the last several months to raise funds
through the sale of our legacy assets have been disappointing. As a result of
the foregoing, any projections of future cash needs and cash sources are subject
to substantial uncertainty.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (referred to as EITF) Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, not at the date of an
entity's commitment to an exit plan as required under EITF Issue No. 94-3. The
provisions of SFAS No. 146 are effective for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 may affect the
timing of recognizing future restructuring costs and the amounts recognized
under such costs. SFAS No. 146 is not expected to have a material impact on the
Consolidated Financial Statements.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that the Company recognize the fair value for guarantee
and indemnification arrangements issued or modified by the Company after
December 31, 2002, if these arrangements are within the scope of the
Interpretation. In addition, the Company must continue to monitor the conditions
that are subject to the guarantees and indemnifications, as required under
previously existing generally accepted accounting principles, in order to
identify if a loss has occurred. If the Company determines it is probable that a
loss has occurred then any such estimable loss would be recognized under those
guarantees and indemnifications. Some of the software licenses granted by the
Company contain provisions that indemnify licensees of the Company's software
from damages and costs resulting from claims alleging that the Company's
software infringes the intellectual property rights of a third party. The
Company has historically received only a limited number of requests for
indemnification under these provisions and has not been required to make
material payments pursuant to these provisions. Accordingly, the Company has not
recorded a liability related to these indemnification provisions. The Company
does not have any guarantees or indemnification arrangements other than the
indemnification clause in some of its software licenses. The Company will be
required to implement the provisions of FIN 45 as of April 1, 2003 and does not
believe that FIN 45 will have a material impact on its financial position,
results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We have derived and expect to continue to derive most of our revenue from
international customers. 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, when translated, may vary from expectations and adversely
impact our results of operations.
21
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, 2003, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 2003, and the consolidated results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
/s/ Novogradac & Company LLP
San Francisco, California
May 23, 2003
22
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 the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two 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 the consolidated results of its operations
and its cash flows for each of the two 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
and the reclassification of discontinued operations discussed in Note 3, as to
which the date is June 23, 2003
23
GEOWORKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31
2003 2002
--------------------------
Assets
Current assets:
Cash and cash equivalents $ 729 $ 3,136
Accounts receivable, net of allowances $0 and $100 in 2003 and 2002,
respectively 31 823
Prepaid expenses and other current assets 476 362
------------------------
Total current assets 1,236 4,321
Property and equipment, net -- 405
Goodwill and other intangible assets, net -- 2,003
------------------------
Total assets $ 1,236 $ 6,729
========================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 228 $ 554
Accrued liabilities 576 2,310
Deferred revenue 179 424
------------------------
Total current liabilities 983 3,288
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; 22,134 in
2003 and 23,576 in 2002 shares issued and outstanding 157,110 157,264
Accumulated deficit (156,857) (153,710)
Note receivable from stockholders -- (88)
Deferred compensation -- (217)
Accumulated other comprehensive income -- 48
------------------------
Total stockholders' equity 253 3,297
------------------------
Total liabilities and stockholders' equity $ 1,236 $ 6,729
========================
See accompanying notes.
24
GEOWORKS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended March 31
2003 2002 2001
Operating expenses:
Legal $ 887 $ 701 $ 3,009
Other general and administrative 1,699 3,073 3,661
------------------------------------
Total operating expenses 2,586 3,774 6,670
------------------------------------
Operating loss (2,586) (3,774) (6,670)
Other income (expense):
Other income -- 3,994 265
Interest income 15 191 840
Interest expense
-- (8) (4)
------------------------------------
Total other income, net 15 4,177 1,101
------------------------------------
Income (loss) before discontinued operations (2,571) 403 (5,569)
Loss from discontinued operations - net of income taxes (576) (43,003) (15,489)
-------------------------------------
Net loss $ (3,147) $(42,600) $(21,058)
=====================================
Income (loss) before discontinued operations per share-
basic and diluted $ (0.11) $ 0.02 $ (0.26)
Loss from discontinued operations (0.03) (1.83) (0.73)
-------------------------------------
Net loss per share- basic and diluted $ (0.14) $ (1.81) $ (0.99)
=====================================
Shares used in net loss per share
computation - basic and diluted 22,718 23,555 21,190
=====================================
See accompanying notes.
25
GEOWORKS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Notes
Common Stock Receivable
--------------------- Accumulated From
Shares Amount Deficit Stockholders
--------------------------------------------------
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 -- --
Amortization of deferred compensation -- -- -- --
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)
Common stock issued under stock option and
stock purchase plans 153 161 -- --
Stock options granted for services -- 21 -- --
Amortization of deferred compensation -- -- -- --
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)
Common stock cancelled in connection with
software license agreement (1,392) (153) -- --
Settlement of shareholder note receivable (50) (1) -- 88
Amortization of deferred compensation -- -- -- --
Comprehensive income (loss): -- -- -- --
Foreign currency translation adjustment -- -- -- --
Net loss -- -- (3,147) --
Comprehensive loss -- -- -- --
-------------------------------------------------
Balances at March 31, 2003 22,134 $ 157,110 $(156,857) $ --
=================================================
See accompanying notes.
26A
GEOWORKS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Accumulated
Other Total
Deferred Comprehensive Stockholders'
Compensation Income Equity
------------------------------------------
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 (403) -- --
Amortization of deferred compensation 85 -- 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 (318) 4,165 49,731
Common stock issued under stock option and
stock purchase plans (11) -- 150
Stock options granted for services -- -- 21
Amortization of deferred compensation 112 -- 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 $ (217) $ 48 $ 3,297
Common stock cancelled in connection with
software license agreement -- -- (153)
Settlement of shareholder note receivable -- -- 87
Amortization of deferred compensation 217 -- 217
Comprehensive income (loss):
Foreign currency translation adjustment -- (48) (48)
Net loss -- -- (3,147)
------------------------------------
Comprehensive loss -- -- (3,195)
-----------------------------------
Balances at March 31, 2003 $ -- $ -- $ 253
===================================
See accompanying notes.
26B
GEOWORKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year ended March 31
2003 2002 2001
--------------------------------
OPERATING ACTIVITIES
Income (loss) from continuing operations $ (2,571) $ 403 $ (5,569)
Adjustments to reconcile loss to net cash used in operating activities:
Depreciation 25 200 81
Amortization of deferred compensation 217 112 85
Gain on sale of long-term investments and other assets -- (3,994) (265)
(Gain) loss on other assets 2 29 (6)
Stock options granted for services -- 21 --
Shareholder note 87 -- --
Changes in assets and liabilities - continuing operations (253) (400) 337
--------------------------------
Cash used in operating activities - continuing operations (2,493) (3,629) (5,337)
--------------------------------
Loss from discontinued operations (576) (43,003) (15,489)
Adjustments to reconcile loss to net cash used in operating activities:
Depreciation 174 1,094 978
Amortization of goodwill and other intangible assets 487 5,227 5,410
Provision for doubtful accounts -- 100 --
Purchased in-process research and development -- -- 1,378
Non-cash restructuring charges (reversal) (97) 214 --
Write-down of goodwill and other long-lived assets 1,158 27,557 --
Gain on sale of assets and other income (326) (500) --
Changes in assets and liabilities - continuing operations (958) (358) (289)
--------------------------------
Cash provided by (used in) operating activities - discontinued operations (138) (9,669) (8,012)
--------------------------------
Net cash used in operating activities (2,631) (13,298) (13,349)
INVESTING ACTIVITIES
Purchases of property and equipment (33) (1,802) (3,025)
Proceeds from sales and disposals of property and equipment 25 75 6
Sales of long-term investments -- 3,994 265
--------------------------------
Purchase Price adjusted on AirBoss acquisition -- -- 1,352
Proceeds from sales of equipment and other assets 280 500 --
--------------------------------
Net cash provided by (used in) investing activities 272 2,767 (1,402)
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 150 11,100
Payments received on notes receivable from stockholder -- -- 94
--------------------------------
Payments under capital lease obligations -- (114) (5)
--------------------------------
Net cash provided by financing activities -- 36 11,189
--------------------------------
Foreign currency translation adjustments (48) (82) 71
--------------------------------
Net (decrease) increase in cash and cash equivalents (2,407) (10,577) (3,491)
Cash and cash equivalents, beginning of year 3,136 13,713 17,204
--------------------------------
Cash and cash equivalents, end of year $ 729 $ 3,136 $ 13,713
================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ -- $ 8 $ 4
================================
Cash paid for income taxes $ 46 $ 129 $ 313
================================
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
27
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY
Geoworks Corporation ("the Company") provided 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 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 provided software design and engineering services through
its professional services teams for several years, prior to the reorganization
announced in January 2002, the Company 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.
During fiscal 2003, the Company ceased operations in the UK and entered into a
mutual release agreement with Teleca Ltd. ("Teleca") which allowed Teleca to
hire the Company's former UK employees and to engage in business with the
Company's former customers. In consideration of the release, Teleca agreed to
pay the Company approximately $520,000, one half on signing the release in
February 2003 and the balance after ninety days. Also, Teleca separately agreed
to assume the UK subsidiary's remaining lease obligations in exchange for the
subsidiary's equipment, which had a net book value of approximately $190,000.
The proceeds received by the Company in connection with the release exceed the
carrying value of the UK subsidiary's net assets and the Company recorded a net
gain of $333,000 for the year ended March 31, 2003 as a result of the release.
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.
28
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION ON DISCONTINUED OPERATIONS
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's 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.
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 customers. There were no such
amounts accrued at March 31, 2003. Historical losses have not been material.
29
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS AND LONG TERM INVESTMENTS
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.
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.
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. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," 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 2003 and 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 $1,158,000 and $24,166,000 in fiscal
2003 and 2002 respectively, 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. In addition, 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.
30
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
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, approximate their fair values based on quoted market values of the
instruments.
MAJOR CUSTOMERS IN DISCONTINUED OPERATIONS
Revenues from three major customers accounted for 72%, 12% and 8%, respectively
of net revenues for fiscal 2003. For fiscal 2002, revenues from one of these and
two additional major customers accounted for 40%, 28% and 17%, respectively of
net revenues. Revenues from two of these major customers of fiscal 2002 and one
additional major customer accounted for 32%, 31% and 15%, respectively of net
revenues for fiscal 2001.
STOCK COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123 as
amended by SFAS 148 and applies APB Opinion No. 25 and related interpretations
in accounting for its stock option and employee stock purchase plans. No
stock-based employee compensation cost is reflected in net loss, as all options
granted under those plans have an exercise price equal to the market value of
the underlying common stock on the date of grant. Had compensation cost for the
Company's stock plans been determined based on the fair value at the grant date
for awards during fiscal 2003, 2002 and 2001 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):
Years ended December 31,
------------------------------------------------------
2003 2002 2001
------------------------------------------------------
Net income, as reported $ (3,147) $ (42,600) $ (21,058)
---------- ---------- ----------
Net loss, pro forma $ (4,981) $ (51,541) $ (31,473)
---------- ---------- ----------
Loss per share:
Basic and diluted - as reported (0.14) (1.81) (0.99)
Basic and diluted - pro forma (0.22) (2.19) (1.49)
----- ------ -----
The weighted-average fair value for stock options granted were calculated using
the Black-Scholes option-pricing model based on the following assumptions:
2003 2002 2001
------------------------------------------------------
Volatility 4.756 2.149 1.481
Weighted-average estimated life 5 years 5 years 5 years
Weighted-average risk-free interest rate 3.45% 2.41% 6.41%
Dividend yield -- -- --
31
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 2003, 2002 and 2001, 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 and 2001, the calculation would have included the
common stock equivalent effect of 138,000 and 1,569,000 shares, respectively.
There were no dilutive common stock equivalents in fiscal 2003.
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. 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.
32
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (referred to as EITF) Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, not at the date of an
entity's commitment to an exit plan as required under EITF Issue No. 94-3. The
provisions of SFAS No. 146 are effective for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 may affect the
timing of recognizing future restructuring costs and the amounts recognized
under such costs. SFAS No. 146 is not expected to have a material impact on the
Consolidated Financial Statements.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that the Company recognize the fair value for guarantee
and indemnification arrangements issued or modified by the Company after
December 31, 2002, if these arrangements are within the scope of the
Interpretation. In addition, the Company must continue to monitor the conditions
that are subject to the guarantees and indemnifications, as required under
previously existing generally accepted accounting principles, in order to
identify if a loss has occurred. If the Company determines it is probable that a
loss has occurred then any such estimable loss would be recognized under those
guarantees and indemnifications. Some of the software licenses granted by the
Company contain provisions that indemnify licensees of the Company's software
from damages and costs resulting from claims alleging that the Company's
software infringes the intellectual property rights of a third party. The
Company has historically received only a limited number of requests for
indemnification under these provisions and has not been required to make
material payments pursuant to these provisions. Accordingly, the Company has not
recorded a liability related to these indemnification provisions. The Company
does not have any guarantees or indemnification arrangements other than the
indemnification clause in some of its software licenses. The Company will be
required to implement the provisions of FIN 45 as of April 1, 2003 and does not
believe that FIN 45 will have a material impact on its financial position,
results of operations or cash flows.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
March 31
2003 2002
-----------------
Equipment $ 10 $693
Furniture and fixtures -- 79
Leasehold improvements -- 190
-------------
10 962
Less accumulated depreciation and amortization 10 557
-------------
Property and equipment, net $ -- $405
=============
There was no equipment under capital leases in property and equipment at March
31, 2003 and 2002.
33
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
3. DISCONTINUED OPERATIONS
In February 2003, we ceased ongoing business activity at our last operating
division (located in the UK) because of continued market uncertainty and the
inability to generate cash through strategic alternatives. The Company announced
that it was ceasing operations in the UK and entered into a mutual release
agreement with Teleca Ltd. ("Teleca") which allowed Teleca to hire the Company's
former UK employees and to engage in business with the Company's former
customers. In consideration of the release, Teleca agreed to pay the Company
approximately $520,000, one half on signing the release and the balance after
ninety days. Also, Teleca separately agreed to assume the UK subsidiary's
remaining lease obligations in exchange for the subsidiary's equipment, which
had a net book value of approximately $190,000. The proceeds received in
connection with the release exceeded the carrying value of the UK subsidiary's
net assets and the Company recorded a net gain of approximately $333,000.
As a result of these restructurings (see Note 10) and ceasing operations in the
UK, the Company no longer has any employees engaged in revenue generating
activities and the historical results of substantially all of the Company's
operating activities are shown as discontinued operations. Interest has not been
allocated to discontinued operations. Income taxes were all allocated to
discontinued operations because they relate primarily to foreign withholding tax
on royalties and sale of patents.
Financial information previously reported in the statement of operations and
cash flows for the years ended March 31, 2002 and 2001 have been reclassified to
present substantially all of the Company's operations, as discontinued
operations (with the exception of corporate office legal and general and
administrative expenses), consistent with the presentation for the year ended
March 31, 2003.
Summarized financial information for the results of discontinued operations is
as follows (in thousands):
Year ended March 31
------------------------------------
------------------------------------
2003 2002 2001
------------------------------------
Total net revenues $ 3,440 $ 11,694 $16,565
Operating expenses
Cost of revenues, sales and marketing, research
and development and general and administrative
expenses 3,067 19,012 24,953
Amortization of goodwill and other intangible assets 487 5,227 5,410
Purchased in-process research and development -- -- 1,378
Restructuring charges (reversal) (96) 3,272 --
Write-down of goodwill and other long-lived assets 1,158 27,557 --
------------------------------------
Total operating expenses 4,616 55,068 31,741
------------------------------------
Operating loss from discontinued operations (1,176) (43,374) (15,176)
Other income, principally asset sales and gain 646 500 --
------------------------------------
Loss before income taxes (530) (42,874) (15,176)
Provision for income taxes 46 129 313
------------------------------------
Loss from discontinued operations - net of taxes $ (576) $(43,003) $(15,489)
====================================
Revenues from related parties $ 413 $ 737 $ 2,555
====================================
34
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
3. DISCONTINUED OPERATIONS (CONTINUED)
Assets and liabiliites attributale to discontinued business were as follows (in
thousands:)
March 31
2003 2002
---------------------------------
Current assets $ 52 $ 311
Noncurrent assets -- 2,266
Current liabilities 45 749
Noncurrent liabilities -- --
35
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
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").
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.
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 intangible assets related to the July 2000 acquisition of the AirBoss
business unit were amortized over two to four years. Amortization expense was
$487,000, $5,227,000 and $5,410,000 for the years ended March 31 2003, 2002 and
2001, respectively. The Company recorded additional non-cash, asset impairment
charges of $1,158,000 and $24,166,000 in fiscal 2003 and 2002, respectively,
based on its analysis of the goodwill and other intangible assets related to the
July 2000 AirBoss acquisition. Forecast undiscounted cash flows from this
business were less that the carrying values of the related assets. Accordingly
the Company performed a discounted cash flow analyses, which has resulted in the
non-cash write-downs in those years.
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.
In August 2002, the Company agreed to settle an obligation of approximately
$290,000 to Telcordia for $100,000, to be paid in installments of $50,000 on
August 2, 2002, $25,000 by December 31, 2002 and an additional $25,000 by March
31, 2003. Telcordia is a wholly owned subsidiary of Science Applications
International Corporation ("SAIC"), the Company's largest shareholder. The
Company also assigned to Telcordia any future amounts payable to Geoworks from
SAIC under a non exclusive, object code license to the AirBoss technology with
SAIC executed in October 2001. Management believes that these amounts would be
negligible and subject to offset. Additionally, Geoworks and Telcordia agreed to
terminate their AirBoss value added reseller agreement early.
In a separate transaction, the Company and SAIC revised an existing license
agreement to grant SAIC a non-exclusive source code license to the AirBoss
technology and the right to make derivative works based on AirBoss. The
agreement also terminated the Company's maintenance obligations and eliminated
both parties' ability to terminate the agreement early. In return, SAIC agreed
to transfer 1,391,440 shares of Geoworks stock back to the Company for
cancellation. The carrying value of the Company's intangible assets was reduced
by the fair value of the liabilities relieved and the Geoworks common stock
returned in these transactions. The Geoworks common shares returned were valued
based on the market value of Geoworks shares at August 21, 2002, the date of the
agreement. The Board of Directors approved these transactions based on the
recommendation of the Audit Committee.
In addition, 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 10.
36
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
March 31
2003 2002
------------------------
Accrued compensation $ 231 $ 245
Accrued restructuring costs 91 1,090
Accrued professional fees 152 285
Other accrued liabilities 102 690
------ ------
Total $ 576 $2,310
====== ======
6. INCOME TAXES
The income tax provisions of $46,000, $129,000 and $313,000 for fiscal 2003,
2002 and 2001 respectively, consist primarily of foreign withholding tax
payments made with respect to royalties and maintenance payments from original
equipment manufacturers. The fiscal 2003 and 2002 provisions also include
$18,000 and $50,000 for foreign withholding tax payments on sale of patents.
Significant components of the Company's net deferred income tax assets are as
follows (in thousands):
March 31,
2003 2002
------------------------
Operating loss carryforwards $ 49,652 $ 50,038
Tax credit carryforwards 4,932 2,920
Purchased intangible assets 19,207 17,926
Capitalized research expenditures 2,292 2,762
Deferred revenue 74 173
Other, net -- 54
----------------------
Total deferred tax assets 76,157 73,873
Valuation allowance on deferred tax assets (76,157) (73,873)
----------------------
Net deferred tax assets $ -- $ --
======================
The changes in the valuation allowance for fiscal 2003 and 2002 were $2,284,000
and $14,949,000, respectively.
Deferred tax assets relating to net operating loss carryforwards as of March 31,
2003 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, 2003, the Company has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $122,872,000, U.K. income tax
purposes of approximately $3,853,000, and state income tax purposes of
approximately $31,637,000. The Company also has federal and state research and
development credit carryforwards of approximately $3,426,000 and $1,506,000,
respectively. The net operating loss and the research and development tax credit
carryforwards expire in various years from 2004 through 2021.
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.
37
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
7. COMMITMENTS
During fiscal 2003, the Company leased office facilities and certain equipment
under operating lease agreements. Rent expense was $176,000, $971,000 and
$1,212,000 for fiscal 2003, 2002 and 2001, respectively. There are no
noncancellable lease commitments at March 31, 2003.
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. There is no remaining lease
commitments on this lease.
In conjunction with restructuring in 2002, various equipment under
non-cancelable operating leases has been returned to the respective lessors. 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. There are no remaining lease commitments under these leases.
8. 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.
UPDATE
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.
38
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
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.
On May 15, 2003, the Company amended the Rights Plan to amend the definition of
Acquiring Entity as the Beneficial Owner of 4.99% or more of the Voting Stock
and the definition of Exempt Person to be the Beneficial Owner of 4.99% or more
of Voting Stock as of May 9, 2003. The purpose of the amendment to the Rights
Agreement is to seek to prevent possible limitations on the Company's use of its
Federal net operating loss carryforwards and certain income tax credits.
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.
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, 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
Granted 2,879,000 0.11
Exercised -- --
Forfeited (2,048,000) 1.07
------------------------
Balance at March 31, 2003 3,844,000 $ 1.15
========================
Options available for grant at March 31, 2003 5,591,000
==========
The weighted average fair value at grant date of options granted during fiscal
2003, 2002 and 2001 was $ 0.11, $1.20, and $8.87, per share, respectively.
39
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
--------------------------------------------------------------------
Weighted
Average Weighted
Remaining Weighted Average
Exercisable Contractual Average Exercise
Prices Shares Life (years) Exercise Price Shares Price
- -------------------------------------------------------------------------------------------------
$ 0.11 - 0.11 1,969,000 9.20 $ 0.11 1,686,000 $ 0.11
$ 0.28 - 0.64 33,000 2.54 0.52 33,000 $ 0.52
1.11 - 1.11 1,435,000 0.69 1.11 1,435,000 1.11
1.81 - 4.13 262,000 6.13 2.87 262,000 2.87
9.00 - 13.19 145,000 7.24 10.58 145,000 10.58
-----------------------------------------------------------------------------
3,844,000 5.68 $ 1.07 3,561,000 $ 1.15
=============================================================================
Of the 3,844,000 options outstanding at March 31, 2003, 895,000 options belong
to former UK employees who left the employment of the Company at January 31,
2003. These options lapsed at April 30, 2003 without being exercised.
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.
40
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION REPRICING (CONTINUED)
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, March 31, 2003 and 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 2003, 2002 and 2001, 0 shares, 143,000 shares, and 71,000
shares, respectively, were issued under the plan at average prices of $---,
$1.06, and $4.56 per share, respectively. At March 31, 2003, a total of 391,000
shares were available for issuance under the plan.
41
GEOWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
Common stock reserved for future issuance as of March 31, 2003 is as follows:
Employee stock options outstanding 3,844,000
Employee stock options available for grant 5,591,000
Employee stock purchase plan shares available for grant 391,000
---------
Total 9,826,000
=========
OTHER
In January 2003, the Company settled a dispute regarding a note receivable from
a stockholder who was formerly an employee of the Company. The note was
cancelled, the 50,000 shares of Company common stock held as collateral for the
note were returned and cancelled, the Company was paid the interest receivable
on the note, and the stockholder and the Company agreed to release each other
from all claims. The Company recorded a loss of approximately $87,000
representing the difference between the value of the collateral and the face
value of the note at the time of the settlement. This non-cash expense is
included in general and administrative expense for year ended March 31, 2003.
9. 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. No employer
contributions were made during fiscal 2003. The Company contributed $179,000,
and $149,000 during fiscal 2002 and 2001, respectively.
42
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2003
10. RESTRUCTURING CHARGES
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.
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)
------------------------------------------------------------
Balance, March 31, 2002 553 510 171 1,234
Amounts paid (456) (510) (80) (1,046)
Reversal of excess accruals (97) (97)
------------------------------------------------------------
Balance, March 31, 2003 $ -- $ -- $ 91 $ 91
============================================================
The reversal of severance charges occurred during the fourth quarter of fiscal
2003 when the liability to a former CEO was reduced per the terms of a
settlement agreement.
Asset impairment charges resulting from these restructuring actions are further
described in Note 1.
43
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2003
11. SUBSEQUENT EVENT
On May 1, 2003, the Company issued a press release entitled "Geoworks Announces
Investment and Board and Management Changes." The press release announced that
the Registrant had sold approximately 7.4 million newly issued shares of its
common stock to Newcastle Partners, L.P. and Mark E. Schwarz, an affiliate of
Newcastle, for $325,000. $200,000 of the proceeds from the newly issued shares
are being held in escrow pursuant to the stock purchase agreement. As a result,
the purchasers now own 25% of the Company's securities. In conjunction with the
investment, two of the Company's three board members resigned and Mr. Schwarz
and Steven J. Pully, both of Newcastle, were appointed to fill their board
seats. In addition, the remaining management team of the Company agreed to step
down. Mr. Schwarz and John Murray, also of Newcastle, will assume the positions
of CEO and CFO, respectively.
44
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On May 13, 2003, The Company filed an 8-K disclosing the engaging of Novogradac
& Company LLP to serve as its independent accountants for the fiscal year
ended March 31, 2003. On May 8, 2003, Ernst & Young LLP was replaced as the
Company's independent auditors. The Company replaced Ernst & Young LLP as a
result of financial considerations following the recent change in control of the
Company's Board of Directors. In connection with the audits of the Company's
consolidated financial statements for each of the two fiscal years ended March
31, 2002, and in the subsequent interim period to May 8, 2003, there were no
disagreements with Ernst & Young LLP on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Ernst & Young LLP would have
caused Ernst & Young LLP to make reference to the matter in their report.
The decision to change independent accountants was approved by the Board of
Directors of the Company.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 2003 Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to our
2003 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The information required by this Item is incorporated herein by reference to our
2003 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to our
2003 Proxy Statement.
Item 14. PROCEDURES AND CONTROLS
Within 90 days prior to the date of filing of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's officers performing the function of principal executive officer (the
"Principal Executive Officer") and the principal financial officer (the
"Principal Financial Officer"), of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934. Based on this evaluation, the Principal Executive Officer
and Principal Financial Officer concluded that the Company's disclosure controls
and procedures are effective for gathering, analyzing and disclosing the
information the Company is required to disclose in the reports it files under
the Securities Exchange Act of 1934, within the time periods specified in the
SEC's rules and forms. The Principal Executive Officer and Principal Financial
Officer also concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company required to be included in the Company's periodic SEC filings. In
connection with the new rules, the Company is in the process of further
reviewing and documenting its disclosure controls and procedures, including its
internal controls and procedures for financial reporting, and may from time to
time make changes designed to enhance their effectiveness and to ensure that the
Company's systems evolve with its business.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of this evaluation.
45
PART IV
Item 15. 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.)
4.1b Amendment to Shareholder Rights Plan, dated as of May 15, 2003,
between the Registrant and Mellon Investor Services, L.L. C.
(incorporated by reference to Exhibit 4.1 to the Registrant's
registration statement on Form 8-K, filed May 15, 2003.)
46
4.1c 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.) *
10.11 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. (incorporated by reference to Exhibit 10.12 to the
Registrant's report on Form 10K for the year ended March 31, 2002.)
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.)
10.14 Settlement Agreement and Release dated May 31, 2002 between Alameda
Real Estate Investments, a California limited partnership, and
Geoworks Corporation. (incorporated by reference to Exhibit 10.12 to
the Registrant's report on Form 10K for the year ended March 31,
2002.)
10.15 Lease dated November 21, 2000 between Toubin Realty II, LLC and
Geoworks. (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.
(incorporated by reference to Exhibit 10.16 to the Registrant's
report on Form 10K for the year ended March 31, 2002.)
10.17 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.) ###
10.18 Mutual Release between Teleca and Geoworks dated February 1, 2003.
10.19 Exchange Agreement between Teleca and Geoworks Ltd. Dated February
1, 2003.
47
10.20 Settlement Agreement and Mutual General Release between Geoworks
Corporation and Geoworks Ltd. and Donald G. Ezzell and DGE Capital
Group dated January 8, 2003.
10.21 Stock Purchase Agreement dated as of April 30, 2003 by and between
Newcastle Partners, L.P., Mark E. Schwarz and Geoworks Corporation.
(incorporated by reference to Exhibit 99.2 from the Form 8-K/A dated
April 30, 2003.)
10.22 Letter agreement dated August 2, 2002 between Telcordia
Technologies, Inc. and Geoworks Corporation. (incorporated by
reference to Exhibit 10.20 from Form 10Q for the period ended
June 30, 2002.)
10.23 Amended License Agreement by and between Geoworks Corporation and
Science Applications International, dated August 23, 2002 filed as
an exhibit to Form 8-K on August 29, 2002 (incorporated by reference
to Exhibit 10.2 from the Form 10Q for the period ending 9/30/02.)
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
24.1 Power of Attorney (see Page 50)
99.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
### 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, 2003:
The Company filed a Form 8-K on January 8, 2003 announcing that the
Registrant cancelled its special stockholders meeting, originally
scheduled to be held on December 11, 2002 and subsequently adjourned
to January 8, 2003, due to failure to achieve a quorum. The purpose
of the meting had been to consider a proposal to sell the
Registrant's UK professional services business and a proposal to
adopt a plan of liquidation and distribution of the Registrant.
48
(c) Exhibits.
See Item 15 (a) 3 above.
(d) Financial Statement Schedules.
See Item 15 (a) 2 above
49
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 30, 2003
GEOWORKS CORPORATION
By: /s/ Mark E. Schwarz
-------------------------------------
Mark E. Schwarz
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Mark E. Schwarz and Steven J. Pully 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/ Mark E. Schwarz President, Chief Executive Officer, June 30, 2003
- ----------------------- and Director (Principal Executive
Mark E. Schwarz Officer)
/s/ Steven J. Pully Director and Secretary June 30, 2003
- -----------------------
Steven J. Pully
/s/ Steve W. Mitchell Director June 30, 2003
- -----------------------
Steve W. Mitchell
/s/ John P. Murray Chief Financial Officer June 30, 2003
- ----------------------- (Principal Financial Officer)
John P. Murray
50
CERTIFICATION
I, Mark E. Schwarz, certify that:
1. I have reviewed this annual report on Form 10-K of Geoworks Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the registrant's board
of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls;
b) and any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 30, 2003 /s/ Mark E. Schwarz
-----------------------
Mark E. Schwarz
Principal Executive Officer
51
CERTIFICATION
I, John P. Murray, certify that:
1. I have reviewed this annual report on Form 10-K of Geoworks Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the registrant's board
of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls;
b) and any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 30, 2003 /s/ John P. Murray
----------------------------
John P. Murray
Principal Financial Officer
52