================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
--------------
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to____________.
0-23926
(Commission file number)
--------------
GEOWORKS CORPORATION
(Exact name of registrant as specified in its charter)
--------------
Delaware 94-2920371
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6550 Vallejo Street, Suite 102
Emeryville, California 94608
(Address of principal executive offices) (Zip Code)
(510) 428-3900
(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 August 12, 2002, the Company had outstanding 23,576,197 shares of
Common Stock, $ 0.001 par value per share.
================================================================================
GEOWORKS CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
June 30, 2002 and March 31, 2002............................. 3
Condensed Consolidated Statements of Operations:
Three Months ended June 30, 2002 and 2001 ................... 4
Condensed Consolidated Statements of Cash Flows:
Three Months ended June 30, 2002 and 2001.................... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9
Risk Factors Affecting Future Operating Results................. 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 24
SIGNATURES................................................................ 25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 30, March 31,
2002 2002
------ ------
ASSETS
Current assets:
Cash and cash equivalents ......................... $1,630 $3,136
Accounts receivable, net .......................... 895 823
Prepaid expenses and other current assets ......... 308 362
------ ------
Total current assets ........................... 2,833 4,321
Property and equipment, net .......................... 331 405
Long-term investments ................................ 2 2
Goodwill and other intangible assets, net ............ 982 2,001
------ ------
$4,148 $6,729
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 428 $ 554
Accrued liabilities ............................... 1,593 2,310
Deferred revenue .................................. 360 424
------ ------
Total current liabilities ...................... 2,381 3,288
Other accrued liabilities ............................ 79 144
Stockholders' equity ................................. 1,688 3,297
------ ------
$4,148 $6,729
====== ======
See accompanying notes
3
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
June 30,
-----------------------
2002 2001
-------- --------
Net revenues:
Professional services ........................................ $ 876 $ 2,016
Software and related services (1) ............................ 135 1,240
-------- --------
Total net revenues ........................................ 1,011 3,256
Operating expenses:
Cost of professional services ................................ 670 1,242
Cost of software and related services ........................ -- 225
Sales and marketing .......................................... 284 2,223
Research and development ..................................... -- 3,294
General and administrative ................................... 685 1,535
Amortization of goodwill and other intangible assets ......... 300 1,950
Write down of purchased intangible and other long lived assets 719 659
Restructuring charges ........................................ -- 2,291
-------- --------
Total operating expenses .................................. 2,658 13,419
-------- --------
Operating loss .................................................. (1,647) (10,163)
Other income (expense):
Interest income .............................................. 7 104
Interest expense ............................................. -- (1)
-------- --------
Loss before income taxes ........................................ (1,640) (10,060)
Provision for income taxes ...................................... 3 61
-------- --------
Net loss ........................................................ $ (1,643) $(10,121)
======== ========
Net loss per share basic and diluted ............................ $ (0.07) $ (0.43)
======== ========
Shares used in per share computation basic and diluted .......... 23,576 23,425
======== ========
(1) Revenues from a related party ........................... $ 120 $ --
======== ========
See accompanying notes
4
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
----------------------
June 30, June 30,
2002 2001
------- --------
Operating activities:
Net loss .................................................................. $(1,643) $(10,121)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ........................................................... 68 412
Amortization of goodwill and other intangible assets ................... 300 1,950
Provision for doubtful accounts ........................................ 10 --
Write-down of other intangible assets .................................. 719 --
Amortization of deferred compensation and other ........................ 25 71
Changes in operating assets and liabilities ............................ (1,000) 3,388
------- --------
Net cash used in operating activities ........................................ (1,521) (4,300)
------- --------
Investing activities:
Purchases of property and equipment ....................................... (14) (800)
Proceeds from sales and disposals of property and equipment ............... 20 --
------- --------
Net cash provided by (used in) investing activities .......................... 6 (800)
------- --------
Financing activities:
Payments of capital lease and debt obligations ............................ -- (6)
------- --------
Net cash used in financing activities ........................................ -- (6)
------- --------
Foreign currency translation adjustments ..................................... 9 (61)
------- --------
Net decrease in cash and cash equivalents .................................... (1,506) (5,167)
Cash and cash equivalents at beginning of period ............................. 3,136 13,713
------- --------
Cash and cash equivalents at end of period ................................... $ 1,630 $ 8,546
======= ========
See accompanying notes
5
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements for the three months ended June
30, 2002 and 2001 are unaudited but reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the consolidated financial position and results of
operations for the interim periods. 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, 2002. The results of operations for the three
months ended June 30, 2002 are not necessarily indicative of the results to be
expected for the entire fiscal year.
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. To date, the
Company has incurred substantial operating losses and cash flow deficits, and
expects to incur additional operating losses in fiscal 2003. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company is trying to improve these conditions by way of increased revenues
from professional services, sales or, licensing of non-strategic assets and
technology, and by resolving certain contractual liabilities. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period's presentation.
2. 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" ("FAS 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 months ended June 30, 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 the three months ended June 30, 2002 and 2001, the
calculation would have included the common stock equivalent effects of 5,341,206
and 6,387,045 stock options outstanding, respectively.
3. Comprehensive Loss
Comprehensive loss consists of the following (in thousands):
Three Months Ended
June 31,
----------------------
2002 2001
------- --------
Net loss .......................................... $(1,643) $(10,121)
Foreign currency translation adjustments .......... 9 (61)
------- --------
Comprehensive loss ................................ $(1,634) $(10,182)
======= ========
6
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Restructuring Charges
The fiscal year 2003 activities relating to restructuring consisted of resolving
obligations that arose from the various reorganizations and restructurings
during fiscal year 2002. No new restructuring charges were recorded in fiscal
year 2003.
In June 2001, the Company reorganized its operations, exited the Mobile ASP
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 approximately 22% of its workforce. In October 2001, as a
result of market uncertainties and a lack of market visibility, in particular
the impact of delayed buying decisions by wireless carriers for the types of
products and services the Company provided with the AirBoss Application
Platform, the Company announced a number of cost cutting measures to conserve
its resources, including terminating approximately 45% of its workforce. Because
of continued market uncertainty and the inability to generate cash through
strategic alternatives, in January 2002, the Company announced its exit from the
software products business and additional cost cutting measures, including
terminating 45% of its remaining workforce. In particular, the Company's Board
of Directors concluded it would be in the best interest of the Company to sell
the AirBoss assets and to focus on realizing the value of the professional
services business.
The restructuring charges consist of severance payments to the terminated
employees, accrual for related contract termination costs 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
Restructuring liabilities at March 31, 2002 ............... $ 553 $ 510 $ 171 $ 1,234
Amounts paid .............................................. (175) (485) (40) (700)
----- ----- ----- -------
378 25 131 534
Less:
Current portion of restructuring charges (accrued
liabilities) ........................................... (299) (25) (131) (455)
----- ----- ----- -------
Non-current portion of restructuring charges (other accrued
liabilities) ........................................... $ 79 $ -- $ -- $ 79
===== ===== ===== =======
7
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Write-down of Goodwill and Other Long-lived Asset Charges
On July 24, 2000, we acquired substantially all of the assets of an established,
separate, and unincorporated division of Telcordia Technologies, Inc.
("Telcordia"), consisting of Telcordia's AirBoss Business Unit, which operated a
software and wireless technology services business ("AirBoss"). The transaction
was accounted for using the purchase method of accounting and gave rise to the
recognition of purchased intangibles and goodwill. These intangible assets were
amortized over their respective estimated useful lives to their estimated
residual values, and through fiscal year 2002, reviewed for impairment in
accordance with FASB Statement No. 121, "Accounting for the Impairment of
Long-lived Assets and Long-lived Assets to be Disposed Of." These reviews and
the decision to sell the AirBoss assets resulted in the recording of write down
of goodwill and other intangible assets of $27.6 million during fiscal year
2002.
In fiscal year 2003, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which requires goodwill to be tested for impairment under
certain circumstances, and written down when impaired, rather than being
amortized as previous standards required. Furthermore, SFAS 142 requires
purchased intangible assets other than goodwill to be amortized over their
useful lives unless these lives are determined to be indefinite. 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. In the three months ended
June 30, 2002, the Company recorded a non-cash, write-down of the remaining
AirBoss intangible assets of $719,000 to the current estimated realizable value.
The following table presents details of the activity of the Company's intangible
assets (in thousands):
Balance at Amortization Balance at
March 31, 2002 Expense Write-downs June 30, 2002
Technology ....... $1,730 $271 $719 $740
Patents .......... 271 29 -- 242
Acquired workforce -- -- -- --
Goodwill ......... -- -- -- --
------ ---- ---- ----
$2,001 $300 $719 $982
====== ==== ==== ====
6. Subsequent Event
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. The carrying value
of the Company's intangible assets will be reduced by the fair value of the
reduction of the obligation to Telcordia. The audit committee of the board of
directors reviewed this transaction, concluded that it was in the best interests
of the Company and recommended that the full board of directors approve it.
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 capital
resources; our dependence on one customer for almost all of our revenues; our
ability to manage and expand our professional services business; our listing on
the Nasdaq SmallCap Market; our ability to sell the AirBoss technology, our
patents or our legacy operating systems; our ability to terminate certain
contractual obligations on acceptable terms; economic conditions, and the market
for communications technology and services. These statements are subject to
risks and uncertainties that could cause actual results and events to differ
materially. Other factors that may contribute to such differences include, but
are not limited to, those discussed in the section of this Report titled "Risk
Factors Affecting Future Operating Results" beginning on page 17, as well as
those discussed elsewhere in this Report. Consequently, the inclusion of
forward-looking information should not be regarded as a representation by us or
any other person that our objectives or plans will be achieved or that the
identified risks are the only risks facing us. The reader is therefore cautioned
not to place undue reliance on the forward-looking statements contained in this
Report, which speak only as of the date this Report was published. We undertake
no obligation to publicly release updates or revisions to these statements.
Historical Overview
From our initial public offering in 1994 through early 1999, we were focused on
developing and selling wireless operating systems for smart phones and PDA's
(personal digital assistants). Our customers were large mobile phone
manufacturers who paid us research and development fees to develop software and
agreed to pay us royalties based on the number of phones they shipped with our
operating system. This market did not develop as rapidly as we expected and in
mid-1998, several of the world's largest handset makers including Nokia,
Motorola, Ericsson and Matsushita, representing over half of our target market,
created a joint venture to develop their own mobile operating system. Therefore,
in response to the slow growth in the market, the increased competition and the
loss of key Original Equipment Manufacturers ("OEM") prospects, we shifted our
focus to the development of mobile server software for mobile commerce and
information services. By the fourth quarter of fiscal 1999, we had discontinued
development of our smart phone operating system (GEOS SC(TM)) and licensed the
source code, on a non-exclusive basis, to one of our major OEM customers,
Mitsubishi Electric Corporation ("Mitsubishi") whom we continued to support
through a professional services consulting agreement through March 2002.
In the following year, our fiscal 2000, our research and development and sales
and marketing efforts were targeted at our mobile software and services, in
particular our Mobile ASP (Application Service Provider) offering, based on our
Mobile Server+ software. We also continued to provide engineering services to
some OEM customers, however such services were provided through professional
services consulting contracts, rather than as customer funded research with
potential product royalties.
In July 2000, we 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 with approximately 12% of our outstanding stock. We
established an office in New Jersey to continue the research, development, and
deployment of the AirBoss line of patented mobile communications software
products, as well as to service the various third parties whose contractual
rights with Telcordia were assigned to us as part of the acquisition. In June
2001, we reorganized our operations, exited the Mobile ASP market and
accelerated the integration of our two software platforms, Mobile Server+ and
the AirBoss Application Platform, into a single integrated product offering for
enterprise applications.
9
Through January 2001, we had been able to successfully raise capital through
public offerings, a number of private placements and through our employee stock
option plans. However, raising capital became increasingly difficult due to the
uncertainty in the market as a whole and in the wireless and telecommunications
industry, in particular. In August 2001, we engaged an investment bank to assist
us in considering our strategic alternatives.
In October 2001, as a result of market uncertainties and a lack of market
visibility, in particular the impact of delayed buying decisions by wireless
carriers for the types of products and services we provided with our AirBoss
Application Platform, we announced a number of cost cutting measures to conserve
our resources, including terminating approximately 45% of our workforce. Because
of continued market uncertainty and the inability to generate cash through
strategic alternatives, in January 2002, we announced our exit from the software
products business and additional cost cutting measures, including terminating
45% of our remaining workforce. In particular, our Board of Directors concluded
it would be in the best interest of our company to sell our AirBoss assets in
order to focus on realizing the value of our professional services business.
In April 2002, Steve W. Mitchell, our former Vice President of Human Resources,
replaced David L. Grannan as President and Chief Executive Officer and Mr.
Grannan assumed the role of Chairman of the Board of Directors of the Company.
Three members of the Board of Directors also resigned in the quarter ended March
31, 2002 and we have since added James M. Judge, Frank S. Fischer and David J.
Domeier to the Board, effective in March, June, and July 2002, respectively.
Since the January 2002 announcements we have continued to explore the sale of
AirBoss and the source code for our other legacy products. Several patents were
sold during the fourth quarter of fiscal 2002 and we have terminated the leases
of our former facility in New Jersey and our Company headquarters in Alameda,
California and relocated our headquarters to a significantly smaller office
space in Emeryville, California. As of April 1, 2002, operations consisted
entirely of personnel supporting the professional services business.
In the quarter ended June 30, 2002 our business focus was on managing our
professional services business, in particular adding additional customers. As
Mitsubishi, the primary customer of our US based professional services team,
which generated $4,624,000, or 61%, of our professional services revenue, for
fiscal 2002, did not renew its contract when it concluded in March 2002, we have
actively marketed the services of the US team and added two additional customers
in the US. However the revenue from these new customer contracts, approximately
$131,000, was significantly less than $1 million plus per quarter recorded by
the US team in the prior year, as discussed in the results of operations below.
Consequently, although we were able to maintain a small team of engineers in the
US, which increases our future potential, the financial results of our
professional services business suffered. We are also actively marketing the
professional services capabilities of our team in the UK and have added two
additional customers in the UK since June 30, 2002. Our contracts with all of
the customers we have added in the current fiscal year are for significantly
smaller amounts and shorter in duration than contract we had with Mitsubishi and
the contracts we have with Nokia, our current primary customer of the UK office.
As a result of our decision to exit from the software products business during
the last quarter of fiscal 2002, much of the following discussion of our
historical operating results is not relevant to our current business.
Consequently, readers should focus on the results and discussion of our
professional services business, keeping in mind that this discussion reflects
management's current beliefs, intentions and expectations. Statements made in
this discussion are subject to risks and uncertainties that could cause actual
results and events to differ materially.
Critical Accounting Policies
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,
contingencies such as litigation, and other complexities typical in our
industry. 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.
10
We believe the accounting policies described below, among others, are the ones
that most frequently require us to make estimates and judgments, and therefore
are critical to the understanding of our results of operations:
Revenue Recognition and Allowances. 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.
Probability of collection is assessed on a customer by customer basis. Customers
are subjected to a credit review process that evaluates the customers' financial
position and ultimately their ability to pay. If it is determined from the
outset of an arrangement that collection is not probable based upon our review
process, revenue is recognized upon cash receipt.
We also maintain a separate allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
analyze accounts receivable and historical bad debts, customer concentrations,
customer solvency, current economic and geographic trends, and changes in
customer payment terms and practices when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of our customers
deteriorates, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Intangible Assets. Certain intangible assets such as technology and patents are
amortized to operating expense over time. When impairment indicators are
identified with respect to recorded intangible assets, the values of the assets
are determined using discounted future cash flow techniques, which are based on
estimated future operating results. Significant management judgment is required
in the forecasting of future operating results which are used in the preparation
of projected discounted cash flows and should different conditions prevail,
material write downs of net intangible assets could occur.
Income taxes. 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. The
determination of our tax provision is subject to judgments and estimates due to
operations outside the United States.
Results of Operations
Three Months Ended Change
---------------------- ----------------------
June 30, June 30, $ %
2002 2001
------ ------ ------- ----
Net revenues (in thousands):
Professional services ....... $ 876 $2,016 $(1,140) (57)%
Software and related services 135 1,240 (1,105) (89)
------ ------ ------- ----
Total net revenues ............. $1,011 $3,256 $(2,245) (69)%
====== ====== ======= ====
Net Revenues
Professional services revenue. Professional services revenue in the three months
ended June 30, 2002 decreased by $1,140,000, or 57%, to $876,000 in comparison
with the three months ended June 30, 2001. The decrease was attributable to a
decrease in the number of hours billed for client projects during the quarter,
resulting primarily from the non-renewal of our contract with one of our two
primary customers, Mitsubishi, which had accounted for approximately $1.4
million dollars of revenue in the three months ended June 30, 2001. We do not
expect to generate significant revenue from this customer for the foreseeable
future. Professional services revenues from our remaining primary customer,
Nokia, were increased by 20% as compared to the same quarter of the prior year
and we added two customers under shorter term contracts in the quarter ended
June 30, 2002, which partially offset the loss of Mitsubishi revenues.
11
As our professional services business is now our primary source of revenue, our
future success is dependent on our ability to diversify and grow the
professional services customer base, which included one primary customer (Nokia)
through the three months ended June 30, 2002, and to operate this business
profitably. This customer generated 85% of the professional services revenue in
the three months ended June 30, 2002. In the same period of the prior fiscal
year, the three months ended June 30, 2001, we had two primary professional
services customers, Mitsubishi and Nokia, who generated 69% and 31% of our
professional services revenues, respectively. As a result of the non-renewal of
our contract with Mitsubishi, historical results for our professional services
business should not be used to predict our future operating results.
Software and related services revenue. Software and related services revenue in
the three months ended June 30, 2002 decreased by $1,105,000, or 89%, to
$135,000, in comparison with the three months ended June 30, 2001. This
substantial decrease reflects our decision to exit from the software products
business, in particular the AirBoss application product line, as announced in
January 2002, to focus on realizing the value of our professional services
business. The software and related services revenues for the three months ended
June 30, 2002 come primarily from a continuing Mobile Server+ contract with
Toshiba for which license and maintenance support fees are being recognized into
revenue over the remaining contract term. The contract also allows us to share
in the revenue of the licensee. For the three months ended June 30, 2002,
revenues from the Mobile Server+ license with Toshiba, a related party, were
approximately $120,000. We do not expect to generate significant software
revenues from our current software and related services contracts. The noted
contract for Mobile Server+ expires in 2004.
The software revenues recognized in the three months ended June 30, 2001 of the
prior fiscal year consisted of $748,000 from the AirBoss product line, $279,000
from legacy operating systems royalties and applications and $212,000 from our
Flex UI licensing program. The Flex UI patents were sold in the last quarter of
fiscal 2002.
Operating Expenses
Cost of Professional Services. Cost of professional services are those expenses
incurred to provide professional services consulting, including compensation,
travel, other direct costs, and facilities overhead. Cost of professional
services decreased by $572,000, or 46%, to $670,000 for the three months ended
June 30, 2002 in comparison with the three months ended June 30, 2001. The
decrease is due to the reduced level of professional services provided as
discussed above, which was due to the non-renewal of the contract of one of our
two primary professional services customers from the prior fiscal year.
Our professional services personnel are currently located in the Emeryville,
California ("US staff") and Macclesfield, England ("UK staff"). In the fiscal
year ended March 31, 2002, our US staff and the costs of consultants engaged to
assist them were expended primarily to serve, Mitsubishi. The decrease in cost
of professional services is primarily attributable to reduced costs as the team
was reduced and the consultants were not required in the three months ended June
30, 2002. This decrease was partially offset by increased costs, approximately
20%, incurred based on increased billings to our primary customer in the UK.
We have approximately the same number of professional services employees at June
30, 2002 as we did at June 30, 2001. However the ratio between US staff and UK
staff has changed based on the related customer billing levels and
opportunities. UK staff has increased by 27%, whereas US staff has decreased by
58% at June 30, 2002 as compared to June 30, 2001. As the market salary rates
for UK staff in general, are less then their US counterparts, we have
experienced a 25% decrease in payroll costs in the three months ended June 30,
2002 as compared to the three months ended June 30, 2001.
Gross margin percentages on professional services revenues were 24% and 38%
during the three months ended June 30, 2002 and 2001, respectively. Gross margin
is calculated as our professional services revenues less cost of professional
services. Gross margin percentage is calculated as our gross margin divided by
our professional services revenues. The gross margin recognized on such services
is subject to several variables, including the average rates charged for these
services, the average rates of compensation of our engineering personnel, our
ability to hire and retain engineering personnel at competitive rates, the
relative use of more expensive subcontracted consultants, currency exchange
rates and the utilization rates of engineering personnel.
12
Gross margin percentages have declined in the three months ended June 30, 2002
as compared to the three months ended June 30, 2001 because of several factors:
in particular, although our average rates of compensation were less due to the
shift to increased use of UK staff, the average billing rates for the three
months ended June 30, 2002 were significantly lower as a result of the non
renewal of the Mitsubishi contract. In addition, we contracted for near break
even business in our Emeryville office in order to maintain the team for future
opportunities. Finally, the gross margin percentage is lower because the
professional services business is absorbing a higher portion of the facilities
overhead costs as a result of the termination of the software business
employees. To maintain our professional services staff, we may be required to
take additional low margin contracts and/or experience lower utilization rates,
both of which can reduce our margins.
Cost of Software and Related Services. Cost of software and related services is
comprised primarily of expenses incurred to provide software customization
services, including labor, direct costs and related overhead of these projects,
as well as license payments to third parties for software that is incorporated
into our software. Cost of software and related services expense decreased
$225,000, or 100%, to zero during the three months ended June 30, 2002 as
compared with the three months ended June 30, 2001 primarily as a result of our
exit from the software products business. Our current software and related
services revenues do not require such costs or payments and we do not expect to
incur any significant level of such costs in the foreseeable future.
Sales and Marketing. Sales and marketing expenses include salaries, benefits,
sales commissions, travel and related facilities overhead expense for our sales
and marketing personnel. Sales and marketing expense decreased by $1,939,000, or
87%, to $284,000, during the three months ended June 30, 2002 in comparison with
the three months ended June 30, 2001. The decrease in sales and marketing
expenses was primarily attributable to the reductions we made to our workforce
in fiscal 2002 to decrease our expenses and to shift our strategic focus to our
professional services business. The cost cutting measures also resulted in
significantly reduced spending on marketing programs. The number of sales and
marketing employees at June 30, 2002 was 5 as compared to 34 at June 30, 2001.
Research and Development. Research and development expenses consist primarily of
salaries and benefits for software engineers, contract development fees, costs
of computer equipment used in software development and related facilities
overhead expense. Research and development expense decreased by $3,294,000, or
100%, to zero, during the three months ended June 30, 2002 in comparison with
the three months ended June 30, 2001. The number of research and development
employees at June 30, 2002 was zero as compared to 61 at June 30, 2001. Because
of our January 2002 reorganization and cost cutting measures, development of the
AirBoss application platform has ended and therefore we expect research and
development expenses to be minimal in the foreseeable future as we focus on
growing the professional services business.
General and Administrative. General and administrative expenses include costs
for human resources, finance, legal, general management functions, and the
related facilities overhead. General and administrative expense decreased by
$850,000, or 55%, to $685,000, during the three months ended June 30, 2002 in
comparison with the three months ended June 30, 2001. Decreased general and
administrative expenses were the result of the various reorganizations and cost
cutting measures implemented during fiscal 2002. The number of general and
administrative employees at June 30, 2002 was 11 as compared to 25 at June 30,
2001. As a public company with reporting obligations, we have greater general
and administrative expense requirements than many private companies of our size
would incur.
Amortization of goodwill and other intangible assets. Amortization of goodwill
and other intangible assets of $300,000 during the three months ended June 30,
2002 and $1,950,000 during the three months ended June 30, 2001 were
attributable to the amortization of goodwill and other purchased intangible
assets resulting from our July 2000 acquisition of AirBoss. The amortization for
the three months ended June 30, 2002 was lower than in the same period of the
prior fiscal year because the underlying intangibles base was reduced during
fiscal 2002 by writedowns due to value impairments.
13
Write-down of goodwill, intangibles and other long-lived assets. In fiscal year
2003, we adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets, which requires goodwill to be tested for
impairment under certain circumstances, and written down when impaired, rather
than being amortized as previous standards required. Furthermore, SFAS 142
requires purchased intangible assets other than goodwill to be amortized over
their useful lives unless these lives are determined to be indefinite.
Since our acquisition of AirBoss in July 2000, we have performed quarterly
assessments of the carrying values of intangible assets recorded in connection
with our acquisition of AirBoss. The assessments have been performed in light of
the significant negative industry and economic trends impacting current
operations, the decline in our stock price, expected future revenue growth
rates, and continued operating losses. When such an event occurs, management
determines whether there has been impairment by comparing the anticipated
undiscounted future net cash flows to the related asset's carrying value. If an
asset is considered impaired, the asset is written down to its estimated 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 $719,000 in the three
months ended June 30, 2002 based on the amount by which the carrying amount of
these assets exceeded their estimated fair value using discounted cash flows. We
believe that this write down is consistent with our decision to sell the AirBoss
technology and focus on realizing the value of our professional services
business.
Fair value was determined based on discounted estimated future cash flows from
the AirBoss product line. The assumptions supporting the estimated future cash
flows, including the discount rate and estimated terminal values and estimated
net realizable value, reflect management's best estimates. The discount rates
used represent the risk-adjusted cost of capital. As of June 30, 2002, the value
of AirBoss goodwill and other intangibles assets included in our consolidated
balance sheet is $982,000. There can be no assurance that we will be able to
obtain this estimated fair value from any purchaser of the AirBoss technology or
business. See further discussion in the Note 5 in the Notes to Condensed
Consolidated Financial Statements.
Variable non-cash stock compensation
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
the 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. As of June 30,
2002 employee stock options to purchase 1,957,084 of these 3,275,000 options
remain outstanding.
This offer to exchange options constituted a stock option repricing for
financial accounting purposes, requiring the Company to use variable accounting
to measure stock compensation expense potentially arising from the options that
were subject to the offer, including options retained by eligible optionees who
elected not to participate in the offer. As these new options vest, at the end
of each reporting period, beginning with the three months ended December 31,
2001, the Company measures and recognizes 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.
14
Because the closing price of the Company's common stock as reported by the
Nasdaq SmallCap Market on June 30, 2002 was less than the new option exercise
price, no stock compensation was recorded for the three months ended June 30,
2002, nor has any been recorded from the date of issuance.
On June 11, 2002, the Company issued options to acquire 2,800,000 common shares
with an exercise price of $0.11 to its employees and directors. These options
vest monthly over a one-year period. These options are not subject to the
current variable accounting requirements.
Other Income (Expense)
Interest Income. Interest income decreased by $97,000, or 93%, to $7,000, during
the three months ended June 30, 2002, in comparison to the three months ended
June 30, 2001. This decrease is attributable primarily to lower cash balances
available for short-term investment.
Interest Expense. Interest expense was not significant in the three months ended
June 30, 2002 and 2001 as we had minimal balances of capital lease and debt
outstanding. As we continue our efforts to grow our professional services
business, we may consider financing alternatives that could increase the amount
of interest expense incurred in the future.
Provision for Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). 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
$3,000 for the three months ended June 30, 2002 and $61,000 for the three months
ended June 30, 2001. The decrease is due to the decreased level of royalties
received in the current quarter as compared to the same period of the prior
year.
Liquidity and Capital Resources
Our total cash and cash equivalents were $1,630,000 at June 30, 2002, compared
with $3,136,000 at March 31, 2002. Net cash used by operations in the three
months ended June 30, 2002 was $1,521,000. This level of cash usage is
significantly lower than in the three months ended June 30, 2001 due to various
reorganizations and related cost cutting measures, in particular the reductions
in workforce implemented during in fiscal 2002. Our net loss for the three
months ended June 30, 2002, excluding non-cash amortization of goodwill and
other intangible assets, and the write-down of goodwill, and intangibles was
$624,000 and this resulted in the use of approximately the same amount of cash.
In addition changes in working capital used $1,000,000, of which $300,000 was
for continuing operation purposes and $700,000, including paid severance of
$175,000 and lease termination and contract settlement fees totaling $525,000,
was as a result of our reorganization and restructurings announced in the prior
fiscal year. The restructuring and reorganizations we implemented during fiscal
2002 did significantly reduce our headcount and operating expense structure. The
total number of employees at June 30, 2002 was 43 as compared to 160 at June 30,
2001. Our expenses for the three months ended June 30, 2002, excluding non-cash
charges for amortization, restructuring costs, asset impairment charges, and the
write-down of goodwill, intangibles and other long-lived assets, decreased by
$6.9 million to $1.6 million from $8.5 million in the three months ended June
30, 2001. Although we have cut costs substantially, we expect to incur
additional significant operating losses at least through fiscal 2003, which will
continue to have a negative impact on liquidity and capital resources.
Purchases of property and equipment for the three months ended June 30, 2002 and
2001 were $14,000, and $800,000, respectively. The capital spending in the three
months ended June 30, 2001 was primarily due to the relocation and consolidation
of the AirBoss offices in New Jersey. Current capital spending has been
curtailed and is generally only authorized when necessary to increase service to
a customer.
As we announced in January 2002 as part of reorganization, we are seeking buyers
for AirBoss and our legacy assets. We may not be able to locate a buyer for
these assets on acceptable terms before our financial resources have been
depleted, which may require us to consider bankruptcy or dissolution.
15
As of June 30, 2002 the Company has future minimum payments of approximately
$601,000 remaining under non-cancelable operating leases having terms in excess
of one year excluding liabilities under restructuring. These leases pertain
primarily to our facility in Macclesfield, England. In addition, we have
recorded current liabilities totaling approximately $335,000 which are estimated
to be adequate to resolve the contractual liabilities remaining as a result of
contract terminations or disputes arising as a result of the restructuring and
reorganization activities of the prior fiscal year.
Given the ongoing market softness, economic uncertainty and the significant
change in our business plan, our ability to forecast future revenue is limited.
Although we have repeatedly taken actions to reduce our expense rates, we expect
to incur additional operating losses, at least through fiscal 2003. We currently
anticipate that our available funds will be sufficient to meet our projected
needs to fund operations through the third quarter of fiscal 2003. This
projection is based on several factors and assumptions, in particular that our
professional services contract levels remain stable or grow and that our
customers continue to pay us on a timely basis, and is subject to numerous
risks. Our future capital needs and liquidity will be highly dependent upon a
number of variables, including how successful we are in realizing the value of
our professional services business, managing our operating expenses, selling the
AirBoss intellectual property and other legacy assets and how successful we are
in settling our contractual liabilities resulting from the reorganization
announced in January 2002. Moreover, our efforts over the last several months to
raise funds through strategic transactions or through the sale of AirBoss, our
legacy assets or our professional services business have been disappointing. As
a result, any projections of future cash needs and cash flows are subject to
substantial uncertainty. If our available funds are insufficient to satisfy our
liquidity requirements, we may be required to revise our current operating
plans, to enter into other forms of strategic transactions, or to consider
bankruptcy or dissolution. Liquidation can be an expensive and time consuming
process and offers little prospect of any significant distributions to
shareholders. These conditions raise substantial doubt about our ability to
continue as a going concern through the fiscal year ending March 31, 2003.
16
Risk Factors Affecting Future Operating Results
You should consider carefully the risks and uncertainties described below and
the other information in this report. They are not the only ones we face.
Additional risks and uncertainties that we are not aware of or that we currently
deem immaterial also may become important or impair our business. If any of the
following risks actually occur, our business, financial condition and operating
results could be materially adversely affected and the trading price of our
common stock could decline.
We have limited financial resources, a history of operating losses and expect to
continue to incur losses in the future.
Since inception, we have experienced negative cash flow from operations and
expect to experience negative cash flow from operations for the next fiscal
year. We currently anticipate that our available funds will be sufficient to
meet our projected needs for funding operations through the third quarter of
fiscal 2003. This projection is based on several factors and assumptions, in
particular that our professional services contract levels remain stable or grow
and that our customers continue to pay us on a timely basis, and is subject to
numerous risks. Our future capital needs and liquidity will be highly dependent
upon a number of variables, including how successful we are in realizing the
value of our professional services business, managing our operating expenses,
selling the AirBoss intellectual property and other legacy assets and how
successful we are in settling our contractual liabilities resulting from the
reorganization announced in January 2002. Moreover, our efforts over the last
several months to raise funds through strategic transactions or through the sale
of AirBoss, our legacy assets or our professional services business have been
disappointing. As a result, any projections of future cash needs and cash flows
are subject to substantial uncertainty. If our available funds are insufficient
to satisfy our liquidity requirements, we may be required to revise our current
operating plans, to enter into other forms of strategic transactions, or to
consider bankruptcy or dissolution. Liquidation can be an expensive and time
consuming process and offers little prospect of any significant distributions to
shareholders. These conditions raise substantial doubt about our ability to
continue as a going concern through the fiscal year ending March 31, 2003.
We are currently dependent upon a single customer for a significant portion of
our revenue and the loss of this customer or a significant reduction in the
level of consulting we provide to this customer could significantly harm our
business.
One customer, Nokia, a manufacturer of mobile phones located in Europe,
accounted for 85% of our professional services revenues in the first quarter of
fiscal 2003. As part of our business strategy we are working to increase and
diversify our customer list, but we cannot assure you that we will be able to
sustain our relationship with this particular significant customer or increase
the number of customers with which we work and failure to do so would have a
negative effect on our results of operations, our cash position and the market
price of our common stock.
Our reorganization may have a negative impact on our business.
In January 2002, we announced our intention to reorganize our business by
selling our core technology and certain legacy assets, reducing our operating
expenses, terminating certain employees and changing our business strategy to
focus on realizing the value of our professional services business, any of which
could have a material adverse effect on our business, financial condition and
ability to reduce losses or generate profits. To date we have sold several
patents, reduced our headcount such that our operations consist entirely of
employees supporting our professional services business, and negotiated
settlements on a number of contracts we terminated as result of the
reorganization. However, there can be no assurance that our reorganization plan
will have a positive effect on our cash position, financial results, operations,
and the market price of our common stock or public perception of us in the
marketplace.
17
If we do not successfully address the risks associated with operating a
professional services business, our business will be harmed.
As we announced in January 2002, we have reorganized in order to focus on
realizing the value of our professional services business. Professional services
businesses, and our professional services organization in particular, face
special risks and challenges, in addition to our dependence on one customer,
including risks associated with:
o our ability to grow and develop the business;
o our ability to provide satisfactory and quality services;
o the short-term nature of most professional services contracts,
including customer ability to terminate such contracts with little
or no notice;
o the difficulty of predicting revenues for project-based engagements,
which have in the past and will likely in the future make up the
majority of our engagements;
o competition;
o our reliance on the market for wireless operating systems, related
applications and wireless server technology, which is experiencing a
downturn;
o the mission-critical nature of our services for our clients'
operations;
o our ability to retain our professional services employees and hire
others; and
o our ability to avoid infringing the intellectual property rights of
others.
If we fail to generate sufficient revenues from our professional services
business or fail to manage the risks associated with operating a professional
services business, our business will be harmed. As a result, while we try to
stabilize and grow the professional services business, we will continue to
explore strategic alternatives for it.
It is difficult for us to forecast the level or source of our revenues for our
professional services business.
While we have had a substantial professional services practice for the last
three years, our business has historically been focused primarily on developing
and marketing software to support the mobile enterprise and wireless operator
markets. Although we have some legacy software products contracts that continue
to generate some revenue, we expect our professional services business to be the
only significant source of revenue in the foreseeable future. We expect
professional services revenues to decline significantly from the $7.6 million
reported in the fiscal year ended March 31, 2002 because the professional
services contract from which we derived approximately 61% of such revenue during
fiscal 2002 was not renewed when the final project was completed in March 2002.
As a result, it is not possible to use our historical financial information
regarding our professional services business to predict our future operating
results. In addition, this expired contract was relatively long-term (one year),
whereas our current professional services opportunities are of a shorter-term or
project nature. As a result, our current professional services revenues are far
more difficult to predict. Such predictions are further complicated because our
business strategies to develop additional customers are still evolving.
Our inability to sell the AirBoss Application Platform and our legacy GEOS and
GEOS-SC operating systems and various patents could harm our business.
Although we have been able to sell certain patents since our reorganization was
announced in January 2002, we continue to explore the sale of other
non-strategic assets. We may not be able to locate buyers for these assets on
acceptable terms. As a result we may be required to revise our current operating
plans, to sell the professional services business, to enter into other forms of
strategic transactions, or to consider bankruptcy or dissolution. Even if we are
able to locate a buyer or buyers who are willing to acquire these assets on
terms that our management and Board of Directors believe are in our best
interests, the sale of these assets involves a number of risks and
uncertainties, including but not limited to the following:
18
o the completion of some asset sales will be subject to a number of
conditions, some of which are beyond our control, potentially
including stockholder approval;
o the asset sale process may divert management's attention from
operating our professional services business and implementing our
new strategy;
o the asset sale process is expensive, and will involve legal,
accounting and financial advisor fees;
o the asset sale process could take several months, and we may not
have sufficient resources to finance, our business until the closing
of the transaction; and
o even if we are able to complete asset sales, we may not have
sufficient financial resources to operate our professional services
business until it is profitable and self-sustaining.
Our stock will likely be delisted from the Nasdaq SmallCap Market.
Because we failed to meet the minimum net tangible assets, stockholders' equity
and bid price requirements of the Nasdaq National Market, we transferred from
the Nasdaq National Market to the Nasdaq SmallCap Market in May 2002. In order
to maintain our listing on the Nasdaq SmallCap Market, we must meet minimum
financial and other requirements. Nasdaq has notified us that we have until
August 28, 2002 to regain compliance with the $1.00 minimum bid requirement. If
our stock price fails to close at $1.00 or higher for 10 consecutive days prior
to that date, Nasdaq may determine that we are not in compliance with its
listing requirements and commence proceedings to have our stock delisted from
the SmallCap Market. Our stock price has been below $1.00 since January 14, 2002
and absent unforeseen circumstances, we may be forced to implement a significant
reverse stock split in order to meet this requirement. Moreover, as of the end
of our first fiscal quarter ended June 30, 2002, our stockholders' equity has
fallen below the minimum requirement of the Nasdaq SmallCap Market. Under such
circumstances, there can be no assurance that our common stock will remain
listed on the Nasdaq SmallCap Market. There are also circumstances where Nasdaq
may exercise broad discretionary authority with respect to delisting. If our
common stock were delisted from the Nasdaq SmallCap Market for any reason, the
value of our common stock and its liquidity would be impaired.
The loss of key personnel would harm the business.
Our success depends in large part on the continued service of our key technical,
marketing, sales, administrative and management personnel, and on our ability to
attract and retain qualified employees. The economic downturn, the depressed
state of the wireless communications industry, the reductions in our workforce
and fears associated with future reductions, the changes associated with our
reorganization and the challenges of working in an uncertain business
environment can have a negative influence on employee morale and productivity.
As part of the reorganization, we have experienced significant changes at the
executive level of management and on our Board of Directors. While we have met
Nasdaq's requirement to have three independent members on the audit committee of
our Board of Directors, maintaining this requirement or attracting additional
board members may be challenging based our limited financial resources.
Additionally, our directors and officers insurance expires in September 2002,
and we may encounter difficulties renewing or obtaining adequate coverage on
acceptable terms in the future.
We have derived and expect to continue to derive most of our revenue from
international customers and the majority of our operations are located in
Macclesfield, England.
As of June 30, 2002, 27 of our 43 employees were based in Macclesfield, England.
In addition, international customers accounted for 72%, 78%, and 94% of our
total revenue in fiscal 2002, 2001, and 2000, respectively. Our primary
professional services customer is located outside of the United States and we
anticipate that international revenue will continue to represent a significant
portion of our future revenue. Furthermore, although our revenue is generally
denominated in U.S. dollars, fluctuations in currency exchange rates and changes
in our customers and potential customers' local economic conditions could have
adverse consequences on our ability to execute agreements with international
customers or impact our operating margins as we pay our UK personnel in British
pounds sterling. Our business could be adversely affected by a variety of
uncontrollable and changing factors, including:
19
o unexpected changes in legal or regulatory requirements;
o cultural differences in the conduct of business;
o difficulty in attracting qualified personnel and managing foreign
activities;
o recessions in economies outside the United States;
o longer payment cycles for and greater difficulties collecting
accounts receivable;
o export controls, tariffs and other trade protection measures;
o fluctuations in currency exchange rates;
o nationalization, expropriation and limitations on repatriation of
cash;
o social, economic and political instability;
o natural disasters, acts of terrorism and war;
o taxation; and
o changes in United States laws and policies affecting trade, foreign
investment and loans.
A long-lasting downturn in the global economy that impacts the wireless
communications industry could continue to negatively affect our revenues and
operating results.
The global economy is in the midst of a slowdown that has had wide ranging
effects on markets that we serve, particularly the wireless communications
industry. This downturn has had a negative effect on our revenues. We cannot
predict the depth or duration of this downturn, and if it grows more severe or
continues for a long period of time, our ability to increase or maintain our
revenues may be impaired.
Mergers and acquisitions may disrupt our business.
Mergers and acquisitions could result in dilution, operating difficulties and
other harmful consequences. We may be acquired, merge with, dispose of, or
acquire technologies or businesses in the future that we believe complement or
expand our business, augment our market coverage, enhance our technical
capabilities or that may otherwise offer growth opportunities or increase value.
These transactions entail a number of risks, any of which could be harmful to
our business. These include:
o the possibility that we pay more or obtain less than the asset is
worth;
o the difficulty of integrating the operations and personnel of the
business;
o the potential disruption of our ongoing business;
o the distraction of management;
o the inability of management to maximize our financial and strategic
position;
o the difficulty of integrating each company's accounting, management
information, human resource and other administrative systems to
permit effective management, and the reduced efficiencies if such
integration is delayed or not implemented; and the impairment of
relationships with employees and customers.
We have limited experience in these types of transactions, and we cannot assure
you that we will identify appropriate parties, will be able to conclude such
transactions on favorable terms, or will be able to integrate businesses
successfully. Further, the financial consequences of these transactions may
include potentially dilutive issuances of equity securities, one-time
write-offs, and amortization expenses related to goodwill and other intangible
assets and the incurrence of contingent liabilities. These risks could harm our
business, financial condition and results of operations.
20
Recent terrorist activities and resulting military and other actions could
adversely affect our business.
The terrorist attacks in the United States have disrupted commerce throughout
the world. The continued threat of terrorism within the United States and other
countries and heightened security measures, as well as current military actions
in response to such threats, may cause significant disruption to the global
economy, including widespread recession. To the extent that such disruptions
result in a general decrease in demand for our products and services, our
inability to effectively market our products, or financial or operational
difficulties for our customers, our business and results of operations could be
materially and adversely affected. We are unable to predict whether the threat
of terrorism or various counter measures will result in any long-term commercial
disruptions or if such activities or responses will have any long-term material
adverse effect on our business, results of operations or financial condition.
Our certificate of incorporation, bylaws and stockholder rights plan and the
Delaware General Corporation Law include provisions that may be deemed to have
anti-takeover effects that may delay, defer or prevent a takeover.
Our certificate of incorporation includes a provision that requires the approval
of holders of at least two thirds of our voting stock as a condition to a merger
or certain other business transactions with, or proposed by, a holder of 15% or
more of our voting stock. This approval is not required in cases where our
directors approve the transaction or where certain minimum price criteria and
other procedural requirements are met. Our certificate of incorporation also
requires the approval of holders of at least 66 2/3% of our voting stock to
amend or change the provision relating to the transaction approval. Under our
bylaws, stockholders are not permitted to call special meetings of our
stockholders. Finally, our certificate of incorporation provides that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting rather than by any consent in writing. The
transaction approval, special meeting and other charter provisions may
discourage certain types of transactions involving an actual or potential change
in our control. These provisions may also discourage certain types of
transactions in which our stockholders might otherwise receive a premium for
their shares over then current market prices and may limit our stockholders'
ability to approve transactions that they may deem to be in their best
interests.
Further, we have distributed a dividend of one right for each outstanding share
of our common stock pursuant to the terms of our stockholder rights plan. These
rights will cause substantial dilution to the ownership of a person or group
that attempts to acquire us on terms not approved by our Board of Directors and
may have the effect of deterring hostile takeover attempts. In addition, our
Board of Directors has the authority to fix the rights and preferences of and
issue shares of preferred stock. This right may have the effect of delaying or
preventing a change in our control without action by our stockholders.
Securities class action litigation could result in substantial costs and divert
management's attention and resources.
Securities class action lawsuits are often brought against companies following
reductions or periods of volatility in the market price of their securities. Due
to the volatility of our stock price and its decline in value, we are vulnerable
to securities class action lawsuits. Such litigation could result in substantial
costs and divert management's attention and resources.
Our activities may infringe the intellectual property rights of others.
If third parties claim we have infringed their intellectual property rights, we
may be forced to pay for expensive licenses, reengineer our work, engage in
expensive and time-consuming litigation, or stop marketing our services.
We may incur significant stock-based compensation charges related to our stock
option repricing in future periods.
Under the guidance in Financial Accounting Standards Board Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of Accounting Principles Board Opinion No. 25," we may incur
variable accounting costs related to certain stock options in connection with
our December 7, 2001 stock option repricing. These costs are based on the amount
by which the closing price of our common stock at the end of a reporting period
or the date of exercise, forfeiture, or cancellation without replacements, if
earlier, exceeds the $1.11 exercise price of the options granted in the
repricing. Refer to Note 9 to Consolidated Financial Statements in the Company's
Form 10-K filed with the SEC on July 1, 2002 for more information on our stock
option repricing.
21
We may not be able to capitalize on our intellectual property rights.
We continue to hold certain intellectual property rights. This intellectual
property could be misappropriated, which could force us to become involved in
expensive and time-consuming litigation or frustrate efforts to sell or market
it. And we may not possess the financial resources to take the necessary steps
to protect our intellectual property rights. Such misappropriation, our need to
incur expenses to protect it or our inability to pay to take such actions could
harm our business.
You should not unduly rely on forward-looking statements contained in this
Report because they are inherently uncertain.
This Report contains forward-looking statements that involve risks and
uncertainties. We use words such as "believe," "expect," "anticipate," "intend,"
"plan," "future," "may," "will," "should," "estimates," "potential," or
"continue" and similar expressions to identify forward-looking statements. You
should not place undue reliance on these forward-looking statements, which apply
only as of the date of this report. The forward-looking statements contained in
this report are subject to the provisions of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks described above and elsewhere
in this document.
22
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk
We have derived and expect to continue to derive most of our revenue from
international customers and the majority of our operations are located in
Macclesfield, England. Although our invoices to customers are generally
denominated in U.S. dollars, our international subsidiary uses the local
currency as their functional currency. Our cash accounts in foreign countries
are kept at the minimal levels necessary for operations. As the result of the
above, we are exposed to foreign exchange rate fluctuations and as these
exchange rates vary, the subsidiary's results, when translated, may vary from
expectations and adversely impact our results of operations.
23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
10.19 Full and Final Release dated July 30, 2002 between Air IQ Inc.,
formerly known as eDispatch.com Wireless Data, Inc. and Geoworks
Corporation.
10.20 Letter agreement dated August 2, 2002 between Telcordia
Technologies, Inc. and Geoworks Corporation.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
The Company filed an report on Form 8-K on June 17, 2002 with respect to a
press release dated May 29, 2002 that announced the Company's financial
results for the fourth quarter and fiscal year ended March 31, 2002,
provided guidance with respect to future operating results and reported on
the Company's ongoing efforts to sell certain assets. The press release
stated that the Company expected that the opinion of its independent
auditors with respect to the consolidated financials statements for its
fiscal year ended March 31, 2002 would express uncertainty about the
Company's ability to continue as a going concern. The press release also
contained cautionary statements identifying important factors that could
cause actual results of the Company to differ materially from those
described in forward-looking statements of the Company made therein.
24
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: August 12, 2002 By:/s/ Timothy J. Toppin
----------------------------
Timothy J. Toppin
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
25