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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
--- ---
0-23926
(Commission file number)
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GEOWORKS CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 94-2920371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 CRESCENT COURT, SUITE 1110
DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
(214) 661-7479
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date:
As of November 11, 2003, the Company had outstanding 29,869,808 shares of
Common Stock, $ 0.001 par value per share.
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1
GEOWORKS CORPORATION
INDEX
Page
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets: September 30, 2003 and March 31, 2003.................. 3
Condensed Consolidated Statements of Operations: Three and Six Months
ended September 30, 2003 and 2002 ......................................................... 4
Condensed Consolidated Statements of Cash Flows: Six Months ended
September 30, 2003 and 2002................................................................ 5
Notes to Condensed Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 15
Item 4. Procedures and Controls....................................................................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................................. 16
SIGNATURES............................................................................................. 17
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, March 31,
2003 2003
------------- ---------
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 524 $ 729
Accounts receivable, net ............................................ -- 31
Restricted cash ..................................................... 200 --
Prepaid expenses and other current assets ........................... 45 476
------ ------
$ 769 $1,236
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................... $ 7 $ 228
Accrued liabilities ................................................. 267 576
Deferred revenue .................................................... 53 179
------ ------
Total current liabilities ........................................ 327 983
Stockholders' equity ................................................... 442 253
------ ------
$ 769 $1,236
====== ======
See accompanying notes
3
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three months ended Six months ended
September 30 September 30
2003 2002 2003 2002
---------------------- ----------------------
Operating expenses:
Legal $ 12 $ 265 $ 30 $ 400
Other general and administrative 108 467 303 910
-------- -------- -------- --------
Total operating expenses 120 732 333 1,310
-------- -------- -------- --------
Operating loss (120) (732) (333) (1,310)
Other income (expense):
Interest income 1 4 1 11
-------- -------- -------- --------
Total other income, net 1 4 1 11
-------- -------- -------- --------
Loss before discontinued operations (119) (728) (332) (1,299)
Income (loss) from discontinued operations-
net of income taxes 78 24 167 (1,048)
-------- -------- -------- --------
Net income (loss) $ (41) $ (704) $ (165) $ (2,347)
======== ======== ======== ========
Loss before discontinued operations $ (0.00) $ (0.03) $ (0.01) $ (0.05)
Income (loss) from discontinued operations 0.00 0.00 0.01 (0.05)
-------- -------- -------- --------
Net (loss) per share-basic and diluted $ (0.00) $ (0.03) $ (0.00) $ (0.10)
======== ======== ======== ========
Shares used in net income (loss) per share
Computation-basic and diluted 29,867 22,971 28,460 23,274
======== ======== ======== ========
See accompanying notes.
4
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six months ended
September 30
2003 2002
--------------------------
Operating activities
Loss before discontinued operations $ (332) $(1,299)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation -- 41
Amortization of deferred compensation -- 50
Changes in assets and liabilities - continuing operations (308) --
------- -------
Cash used in operating activities - continuing operations (640) (1,208)
------- -------
Income (loss) from discontinued operations 167 (1,048)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation -- 91
Amortization of goodwill and other intangible assets -- 418
Write-down of goodwill and other long-lived assets -- 719
Changes in assets and liabilities - discontinued operations (86) (757)
------- -------
Cash provided by (used in) discontinued operations (577)
81
------- -------
Net cash used in operating activities (559) (1,785)
INVESTING ACTIVITIES
Purchases of property and equipment, net -- (33)
------- -------
Net cash used in investing activities -- (33)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 354 --
------- -------
Net cash provided by financing activities 354 --
------- -------
Net decrease in cash and cash equivalents (205) (1,818)
Cash and cash equivalents, beginning of period 729 3,136
------- -------
Cash and cash equivalents, end of period $ 524 $ 1,318
======= =======
See accompanying notes.
5
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements for the three and six months
ended September 30, 2003 and 2002 are unaudited and have been prepared in
accordance with accounting principles generally accepted in the United States of
America and instructions to Form 10-Q and Article 10 of the Regulation S-X.
Accordingly, they do not include all of the information in notes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the consolidated financial position and results of operations
for the interim periods have been included. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with Management's Discussion and Analysis
of Financial Condition and Results of Operations, included in Geoworks
Corporation's (the "Company's") Annual Report to Shareholders on Form 10-K for
the fiscal year ended March 31, 2003. The results of operations for the three
and six months ended September 30, 2003 are not necessarily indicative of the
results to be expected for the entire fiscal year.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period's presentation.
2. SIGNIFICANT EVENTS
In April 2003, we sold 7,377,905 million shares of our common stock ("Stock
Sale") (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. Pursuant to the stock purchase agreement
entered into in connection with the Stock Sale, $200,000 of the proceeds from
the Stock Sale are being held in restricted cash. 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.
3. NET LOSS PER SHARE
Basic net loss per share information for all periods is presented in accordance
with the requirements of Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"). 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 the three and six months ended
September 30, 2003 and 2002, 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. There were no dilutive common stock
equivalents for the three and six months ended September 30, 2003. For the three
and six months ended September 30, 2002, the calculation would have included the
common stock equivalent effects of 89 and 487,961 stock options outstanding,
respectively.
6
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. STOCK COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS 123 as amended by
SFAS 148 and applies APB Opinion 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 2004 and 2003 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):
Three months ended Six months ended
--------------------------------------------------------
September 30 September 30
--------------------------------------------------------
2003 2002 2003 2002
Net loss, as reported $ (41) $ (704) $ (165) $ (2,347)
Net loss, pro forma $ (41) $ (1,382) $ (165) $ (3,697)
Loss per share:
Basic and diluted - as reported $ 0.00 $ (0.03) $ (0.00) $ (0.10)
Basic and diluted - pro forma $ 0.00 $ (0.06) $ (0.00) $ (0.16)
5. COMPREHENSIVE LOSS
"Other comprehensive income (loss)" refers to revenues, expenses and gains and
losses that are not included in net income (loss) but rather are recorded in
stockholders' equity. The components of comprehensive loss for the three and six
months ended September 30, 2003 and 2002 were as follows (in thousands):
Three months ended Six months ended
September 30 September 30
---------------------------------------------
2003 2002 2003 2002
------------------- -------------------
Net loss ............................... $ (41) $ (704) $ (165) $(2,347)
Foreign currency translation adjustments -- 5 15
------------------- -------------------
Comprehensive loss ..................... $ (41) $ (699) $ (165) $(2,332)
=================== ===================
6. RESTRUCTURING CHARGES
The activities relating to restructuring during the six months ended September
30, 2003 consisted of terminating existing contract relationships that arose
from the various reorganizations and restructurings during the year ended March
31, 2003. No new restructuring charges were recorded in the six months ended
September 30, 2003. Restructuring liabilities as of September 30, 2003 and March
31, 2003 are included in accrued liabilities in the accompanying balance sheets.
The following table summarizes the restructuring activity (in thousands):
CONTRACT
TERMINATION
COSTS
Restructuring liabilities at March 31, 2003 .... $ 91
Amounts paid ................................... (15)
----
Restructuring liabilities at June 30, 2003 ..... $ 76
Amounts paid ................................... (30)
----
Balance, September 30, 2003 .................... $ 46
====
7
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. DISCONTINUED OPERATIONS
In February 2003, the Company ceased ongoing business activity of its remaining
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.
As a result of previous restructurings 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 the three and six months ended September 30, 2002 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
three and six months ended September 30, 2003.
Summarized financial information for the results of discontinued operations is
as follows (in thousands):
Three months ended Six months ended
September 30 September 30
------- ------- ------- -------
2003 2002 2003 2002
------- ------- ------- -------
Total net revenues $ 81 $ 1,024 $ 185 $ 2,035
Operating expenses: (excluding items discussed below)
Cost of revenues, sales and marketing, research and
development and general and administrative expenses -- 879 11 1,940
Amortization of goodwill and other intangible assets -- 118 -- 418
Write-down of goodwill and other long-lived assets -- -- -- 719
------- ------- ------- -------
Total operating expenses -- 997 11 3,077
------- ------- ------- -------
Income (loss) before income taxes 81 27 174 (1,042)
Provision for income taxes 3 3 7 6
------- ------- ------- -------
Income (loss) from discontinued operations - net of taxes $ 78 $ 24 $ 167 $(1,048)
======= ======= ======= =======
Revenues from related parties $ 81 $ 90 $ 185 $ 210
======= ======= ======= =======
Assets and liabilities attributable to the discontinued businesses were as
follows (in thousands):
September 30 March 31
2003 2003
--------------------------
Current assets $ 20 $ 52
Current liabilities $156 $ 45
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
titled "Risk Factors Affecting Future Operating Results" of Part I of our Annual
Report on Form 10-K, as amended, for the fiscal year ended March 31, 2003, and
those discussed below. 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.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our discussion and analysis of financial condition and results of operations is
based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these Condensed Consolidated
Financial Statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses, and related
disclosure of contingent assets and liabilities. We evaluate, on an ongoing
basis, our estimates and judgments, including those related to revenue
recognition, bad debts, intangible assets, income taxes, restructuring charges
and contingencies such as litigation. We base our estimates on historical
experience and other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from those estimates.
The Company believes the following critical accounting policies include the more
significant estimates and assumptions used by management in the preparation of
its Condensed Consolidated Financial Statements.
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.
9
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.
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. Significant management
judgment is required in determining the provision for income taxes, deferred tax
assets and liabilities, and any valuation allowance recorded against the net
deferred tax assets.
10
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.
ACCOUNTING FOR DISCONTINUED OPERATIONS
After ceasing operations in the UK effective February 1, 2003, 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 for the
three and six months ended September 30, 2003 and 2002 has been disclosed in our
financial statements under the caption, " Income (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 accounted for as
being part of discontinued operations.
As a result of our significantly reduced revenue generating activities and the
expected substantial 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.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
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 decreased by $253,000, or 95%, and $370,000, or 93%
for the three and six months ended September 30, 2003, respectively, as compared
to the corresponding periods of the prior fiscal year. The majority of legal
expenses for the three and six months ended September 30, 2003 related to
regulatory filings with the Securities and Exchange Commission. The large
decreases from the prior fiscal periods as compared to the current fiscal
periods is due to the departure of our in-house legal staff effective May 1,
2003, lower outside legal cost accruals and non-cash charges resulting from the
amortization of deferred compensation related to option grants. The non-cash
charges related to the options, which were granted in fiscal 2001 and were fully
amortized by March 31, 2003.
OTHER 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 $359,000, or 77%, and $607,000, or 67%
for the three and six months ended September 30, 2003, respectively, as compared
to the corresponding periods of the prior fiscal year. The expenses decreased
primarily due to reduced headcount and reduced facilities costs resulting from
the restructuring actions and cost reduction efforts made over the course of
fiscal 2002 and 2003.
11
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, forfeited, or canceled.
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
through September 30, 2003.
INTEREST INCOME
Interest income decreased by $3,000, or 75%, and $10,000 or 91% % for the three
and six months ended September 30, 2003, respectively, as compared to the
corresponding periods of the prior fiscal year. These decreases were
attributable to smaller cash balances available for short-term investment as our
cash resources were depleted by our operations.
PROVISION FOR INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Income tax expense
consists primarily of foreign income tax withholding on foreign source royalties
paid to the Company. The provision for income tax expense was $7,000 for the six
months ended September 30, 2003 and $6,000 for the six months ended September
30, 2002. The increase is due to the increased level of royalties received in
the current fiscal periods as compared to the same periods of the prior fiscal
year.
12
Results of discontinued operations are as follows (in thousands):
Three months ended Six months ended
September 30 September 30
------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Total net revenues $ 81 $ 1,024 $ 185 $2,035
Operating expenses: (excluding items discussed below)
Cost of revenues, sales and marketing, research and
development and general and administrative expenses -- 879 11 1,940
Amortization of goodwill and other intangible assets -- 118 -- 418
Write-down of goodwill and other long-lived assets -- -- -- 719
------- ------- ------- -------
Total operating expenses -- 997 11 3,077
------- ------- ------- -------
Income (loss) before income taxes 81 27 174 (1,042)
Provision for income taxes 3 3 7 6
------- ------- ------- -------
Income (loss) from discontinued operations - net of taxes $ 78 $ 24 $ 167 $(1,048)
======= ======= ======= =======
Revenues from related parties $ 81 $ 90 $ 185 $ 210
======= ======= ======= =======
NET REVENUES
Net revenues decreased by $943,000, or 92%, and $1,850,000, or 91% for the three
and six months ended September 30, 2003, respectively, as compared to the
corresponding periods of the prior fiscal year. The substantial decrease in
revenues is the result of discontinuing our operations in the UK in the fourth
quarter of fiscal 2003. During the six months ended September 30, 2003 Toshiba,
our only remaining customer, provided all of our limited revenue. These revenues
are attributable to license and maintenance fees for our MS+ technology.
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 $879,000 or 100%, and $1,929,000, or 99% for the three and
six months ended September 30, 2003, respectively, as compared to the
corresponding periods of the prior fiscal year. The reductions in these
operating expenses reflect our discontinuing of our remaining operating division
in the UK in the fourth quarter of fiscal 2003. The operating expenses for the
six months ended September 30, 2003 represent maintenance cost associated with
our contract with Toshiba our only remaining customer.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill and other intangibles decreased by $118,000, or 100%,
and $418,000, or 100% for the three and six months ended September 30, 2003,
respectively, as compared to the corresponding periods of the prior fiscal year.
The $418,000 of amortization recorded for the six months ended September 30,
2002 related to certain technologies and patents for which the values were
subsequently written off.
WRITE-DOWN OF GOODWILL AND OTHER LONG-LIVED ASSETS
Write-down of goodwill and other long-lived assets decreased by $719,000, or
100% to $0, during the six months ended September 30, 2003, as compared to the
six months ended September 30, 2002. A $719,000 write-down was recorded in the
quarter ended June 30, 2002 which related to certain intangble assets from the
AirBoss acquisition. Subsequently, these intangibles were completely written off
in the third quarter of 2002.
13
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $524,000 at September 30, 2003, compared with
$729,000 at March 31, 2003. The overall decrease in cash and cash equivalents is
due primarily to cash used in operating activities- continuing operations offset
by cash providing by operating activities-discontinued operations and the
proceeds from the Stock Sale and the exercise of employee stock options.
Pursuant to the stock purchase agreement entered into in connection with the
Stock Sale, $200,000 of the proceeds from the Stock Sale are being held in
restricted cash.
We expect to incur additional losses from our continuing operations at least
through fiscal 2004, which will continue to have a negative impact on liquidity
and capital resources.
Purchases of property and equipment, net of proceeds from sales, for the three
and six months ended September 30, 2003 and 2002 were $0, and $33,000,
respectively. In general, capital spending is done only to meet customer
requirements.
As of March 31, 2003, the Company has no minimum payments remaining under
non-cancelable operating leases.
Our only customer, Toshiba, a diversified electronics company located in Japan,
accounted for 100% of our revenues in the quarter ended September 30, 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.
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. Our future cash needs are also subject to the cash needs of any new
business that we may enter into. As a result of the foregoing, any projections
of future cash needs and cash sources are subject to substantial uncertainty.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK
There have been no material changes to our exposure to market risk since March
31, 2003.
ITEM 4. PROCEDURES AND CONTROLS
The Company carried out an evaluation as of the end of the period covered by
this report, 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(c) 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.
15
PART II. OTHER INFORMATION
ITEM 1. ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
31.1 Controls and Procedures Certification of the Chief Executive Officer dated November 14, 2003
31.2 Controls and Procedures Certification of the Chief Financial Officer dated November 14, 2003
32.1 Certification Pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer dated November
14, 2003.
32.2 Certification Pursuant to 18 U.S.C. Section 1350 of the Chief Financial Officer dated November
14, 2003.
b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 2003:
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
executive officer.
GEOWORKS CORPORATION
Date: November 14, 2003 By: /s/ John P. Murray
--------------------------------
John P. Murray
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
By: /s/ Mark E. Schwarz
-------------------------------
Mark E. Schwarz
Chief Executive Officer
(Duly Authorized Officer and
Chief Executive Officer)
17