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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, 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)
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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.)
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 November 7, 2002, the Company had outstanding 22,184,757 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, 2002 and March 31, 2002............ 3
Condensed Consolidated Statements of Operations: Three and Six Months
ended September 30, 2002 and 2001 ..................................................... 4
Condensed Consolidated Statements of Cash Flows: Six Months ended
September 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... 10
Risk Factors............................................................................ 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................. 25
Item 4. Evaluation of Disclosure Controls and Procedures........................................ 25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .................................... 26
Item 5. Other Information ...................................................................... 26
Item 6. Exhibits and Reports on Form 8-K........................................................ 27
SIGNATURES AND CERTIFICATIONS...................................................................... 29
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, March 31,
2002 2002
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 1,318 $ 3,136
Accounts receivable, net.................................................... 492 823
Prepaid expenses and other current assets................................... 269 362
--------------- --------------
Total current assets...................................................... 2,079 4,321
Property and equipment, net.................................................... 306 405
Long-term investments.......................................................... 2 2
Goodwill and other intangible assets, net...................................... 508 2,001
--------------- --------------
$ 2,895 $ 6,729
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 550 $ 554
Accrued liabilities......................................................... 1,295 2,310
Deferred revenue............................................................ 188 424
--------------- --------------
Total current liabilities................................................. 2,033 3,288
Other accrued liabilities...................................................... -- 144
Stockholders' equity........................................................... 862 3,297
--------------- --------------
$ 2,895 $ 6,729
=============== ==============
See accompanying notes
3
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
------------------------ ------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net revenues:
Professional services ................................ $ 775 $ 1,520 $ 1,651 $ 3,536
Software and related services (1) .................... 249 484 384 1,724
-------- -------- -------- --------
Total net revenues ................................. 1,024 2,004 2,035 5,260
Operating expenses:
Cost of professional services ........................ 625 1,198 1,295 2,440
Cost of software and related services ................ -- 165 -- 390
Sales and marketing .................................. 212 2,091 496 4,314
Research and development ............................. -- 2,264 -- 5,558
General and administrative ........................... 834 1,033 1,519 2,568
Amortization of goodwill and other intangible assets . 118 1,941 418 3,891
Restructuring charges ................................ -- -- -- 2,291
Write-down of goodwill and other long-lived assets ... -- 14,769 719 15,428
-------- -------- -------- --------
Total operating expenses ........................... 1,789 23,461 4,447 36,880
-------- -------- -------- --------
Operating loss .......................................... (765) (21,457) (2,412) (31,620)
Other income (expense):
Other income ......................................... 60 3,994 60 3,994
Interest income ...................................... 4 40 11 144
Interest expense ..................................... (2) (3)
-------- -------- -------- --------
Loss before income taxes ................................ (701) (17,425) (2,341) (27,485)
Provision for income taxes .............................. 3 62 6 123
-------- -------- -------- --------
Net loss ................................................ $ (704) $(17,487) $ (2,347) $(27,608)
======== ======== ======== ========
Net income (loss) per share--basic and diluted .......... $ (0.03) $ (0.74) $ (0.10) $ (1.17)
======== ======== ======== ========
Shares used in per share computation--basic and diluted - 22,971 23,570 23,274 23,498
======== ======== ======== ========
$ 87 $ 396 $ 206 $ 399
======== ======== ======== ========
(1) Revenues from related parties
See accompanying notes
4
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
------------------------------
September 30, September 30,
2002 2001
-------------- --------------
Operating activities:
Net loss..................................................................... $ (2,347) $ (27,608)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation............................................................... 132 843
Amortization of goodwill and other intangible assets....................... 418 4,069
Non-cash restructuring and write-down of goodwill and other long lived
assets 719 15,428
Amortization of deferred compensation...................................... 50 (207)
Gain on sale of long-term investments...................................... -- (3,994)
Changes in operating assets and liabilities................................ (772) 2,292
-------------- -------------
Net cash used in operating activities........................................... (1,800) (9,177)
-------------- -------------
Investing activities:
Purchases of property and equipment - net.................................... (33) (1,605)
Proceeds from sales of long-term investments ................................ -- 3,994
-------------- -------------
Net cash provided by (used in) investing activities............................. (33) 2,405
-------------- -------------
Financing activities:
Payments of capital lease and debt obligations............................... -- (15)
Net proceeds from issuance of common stock................................... -- 478
-------------- -------------
Net cash provided by financing activities....................................... -- 463
-------------- -------------
Foreign currency translation adjustments........................................ 15 (98)
-------------- -------------
Net decrease in cash and cash equivalents....................................... (1,818) (6,407)
Cash and cash equivalents at beginning of period................................ 3,136 13,713
-------------- -------------
Cash and cash equivalents at end of period...................................... $ 1,318 $ 7,306
============== =============
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, 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
Stockholders on Form 10-K for the fiscal year ended March 31, 2002. The results
of operations for the three and six months ended September 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 and six months
ended September 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 and six moths ended September 30, 2002
and 2001, the calculation would have included the common stock
equivalent effects of 5,073,349 and 6,352,137 stock options
outstanding, respectively
3. Comprehensive Loss
Comprehensive loss consists of the following (in thousands):
Three Months Ended Six Months Ended
September 30 September 30
--------------------------------------------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
Net loss........................................... $ (704) $ (17,487) $ (2,347) $ (27,608)
Realized gains on investment and derivative
instruments........................................ (4,037) (4,037)
Foreign currency translation adjustments........... 5 (37) 15 (98)
------------- ------------- ------------- --------------
Comprehensive loss................................. $ (699) $ (21,561) $ (2,332) $ (31,743)
============== ============= ============= ==============
6
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Restructuring Charges
The fiscal 2003 activities relating to restructuring consisted of resolving
obligations that arose from the various reorganizations and restructurings
during fiscal 2002. No new restructuring charges were recorded in fiscal 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 ................................... (240) (485) (79) (804)
------- ------ ------ --------
313 25 92 430
Less:
Current portion of restructuring charges
(accrued liabilities) ....................... (313) (25) (92) (430)
------- ------ ------ --------
Non-current portion of restructuring charges
(other accrued liabilities) ................. $ -- $ -- $ -- $ --
======= ====== ====== ========
7
GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Write-down of Goodwill and Other Long-lived Asset Charges
On July 24, 2000, the Company 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 intangible assets and goodwill. These
intangible assets were amortized over their respective estimated useful lives,
and through fiscal 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 2002.
In fiscal 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. The Company 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
Balance at Amortization Transaction September 30,
March 31, 2002 Expense Write-downs Reductions 2002
Technology ......... $1,730 $360 $719 $356 $295
Patents ............ 271 58 -- -- 213
------ ---- ---- ---- ----
$2,001 $418 $719 $356 $508
====== ==== ==== ==== ====
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 stockholder. 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 are
negligible and subject to offset. Additionally, Geoworks and Telcordia agreed to
terminate their AirBoss value added reseller agreement. In a separate
transaction, the Company and SAIC revised an existing license agreement to grant
SAIC a non-exclusive source code license to the AirBoss technology and the right
to make derivative works based on AirBoss. The agreement also terminated the
Company's ongoing maintenance obligations under the license and eliminated both
parties' ability to terminate the license for convenience. In return, SAIC
agreed to transfer 1,391,440 shares of Geoworks stock back to the Company for
cancellation. The carrying value of the Company's intangible assets was reduced
by the amount of the reduction in the cash liability due to Telcordia and the
fair value of the Geoworks shares returned to the Company in these transactions.
The return of Geoworks shares was valued based on the market value of Geoworks
shares at August 21, 2002, the date of the agreement. The Board of Directors
approved these transactions based on the recommendation of the Audit Committee.
8
6. Definitive Agreement to Sell UK Professional Services Business and Plan
of Liquidation and Dissolution
On September 23, 2002, the Company signed a definitive agreement to sell its UK
professional services business to Teleca Ltd , a wholly owned subsidiary of
Teleca AB. The agreement is subject to stockholder approval and various third
party consents, including those of Nokia and Toshiba, whose contracts are
required to be assigned in connection with the sale. The terms require Teleca to
pay $2.3 million dollars for the Macclesfield-based business with $.3 million
held back as an offset to potential claims until March 31, 2004. The UK
subsidiary is required to have approximately $.5 million in net assets at
closing.
If conditions to the sale to Teleca are satisfied, this transaction is expected
to close prior to the end of the current calendar year and would leave Geoworks
with a very small professional services team in Emeryville as well as some
executive and administrative staff. Management has recommended, in the absence
of desirable alternatives, the winding up of the Company as soon as practicable.
The Board of Directors approved the plan of liquidation and dissolution on
October 24, 2002, subject to shareholder approval.
On October 30, 2002, the Company filed a definitive proxy statement to obtain
stockholder approval of this sale to Teleca and to obtain stockholder approval
for its plan of liquidation and dissolution at a Special Meeting planned for
December 11, 2002.
9
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: the proposed sale, subject
to stockholder approval, of our UK professional services business and the
subsequent winding down and dissolution of our company; the amount and timing of
distributions to our stockholders in connection with the winding down and
dissolution of our company, if any; 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; the recent delisting from the
Nasdaq SmallCap Market of our common stock and the availability thereafter, if
any, of a market for our common stock; our ability to sell the AirBoss
technology, our patents, our legacy operating systems or any of our other
remaining assets; 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" beginning on page
19, 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.
Definitive Agreement to Sell the Company's UK Professional Services Business and
Plan of Liquidation and Dissolution
On September 23, 2002, the Company signed a definitive agreement to sell its UK
professional services business to Teleca Ltd ("Teleca"), a wholly owned
subsidiary of Teleca AB. The agreement is subject to stockholder approval and
various third party consents, including those of Nokia and Toshiba, whose
contracts are required to be assigned in connection with the sale. The terms
require Teleca to pay $2.3 million dollars for the Macclesfield based business
with $.3 million held back as an offset to potential claims until March 31,
2004. The UK subsidiary is required to have approximately $.5 million in net
assets at closing.
If conditions to the sale to Teleca are satisfied, this transaction is expected
to close prior to the end of the current calendar year and would leave Geoworks
with a very small professional services team in Emeryville as well as some
executive and administrative staff. Management has recommended, in the absence
of desirable alternatives, the winding up of the company as soon as practicable.
The Board of Directors approved the plan of liquidation and dissolution on
October 24, 2002, subject to shareholder approval.
The liquidation process is time consuming and expensive. Management is currently
exploring and evaluating alternatives to implementing the plan of liquidation
and dissolution as well as continuing the efforts to market our legacy software
assets -- AirBoss(TM), GEOS(R), GEOS SC and Mobile Server+(TM). (An option to
purchase Mobile Server+ was given to Teleca in connection with the agreement to
sell our UK professional services business.)
On October 30, 2002, the Company filed a definitive proxy statement to obtain
stockholder approval of this sale to Teleca and to obtain stockholder approval
for its plan of liquidation and dissolution. There can be no assurance that the
sale to Teleca will close or that the plan of liquidation and dissolution will
be approved by stockholders. Additional details on the definitive agreement to
sell our UK professional services business and the plan of liquidation and
dissolution are available in our other filings with the Securities and Exchange
Commission
10
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 stockholder with approximately 12% of our outstanding stock. We
established an office in New Jersey to continue the research, development, and
deployment of the AirBoss line of patented mobile communications software
products, as well as to service the various third parties whose contractual
rights with Telcordia were assigned to us as part of the acquisition. In June
2001, we reorganized our operations, exited the Mobile ASP market and
accelerated the integration of our two software platforms, Mobile Server+ and
the AirBoss Application Platform, into a single integrated product offering for
enterprise applications.
Through January 2001, we had been able to successfully raise capital through
public offerings, a number of private placements and through our employee stock
option plans. However, raising capital became increasingly difficult due to the
uncertainty in the market as a whole and in the wireless and telecommunications
industry, in particular. In August 2001, we engaged an investment bank to assist
us in considering our strategic alternatives.
In October 2001, as a result of market uncertainties and a lack of market
visibility, in particular the impact of delayed buying decisions by wireless
carriers for the types of products and services we provided with our AirBoss
Application Platform, we announced a number of cost cutting measures to conserve
our resources, including terminating approximately 45% of our workforce. Because
of continued market uncertainty and the inability to generate cash through
strategic alternatives, in January 2002, we announced our exit from the software
products business and additional cost cutting measures, including terminating
45% of our remaining workforce. In particular, our Board of Directors concluded
it would be in the best interest of our company to sell our AirBoss assets in
order to focus on realizing the value of our professional services business.
In April 2002, Steve W. Mitchell, our former Vice President of Human Resources,
replaced David L. Grannan as President and Chief Executive Officer and Mr.
Grannan assumed the role of Chairman of the Board of Directors of the Company.
Three members of the Board of Directors also resigned in the quarter ended March
31, 2002 and we have since added 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.
11
In the current fiscal year our operating focus has been 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 our teams in the US and UK. [During the
six-month period ended September 20, 2002, we added four additional customers,
two in the US and two in the UK, however the revenue generated from these new
customer contracts, approximately $270,000, is significantly less than $1
million plus per quarter recorded from Mitsubishi in the prior year, as
discussed in the results of operations below. Consequently, although we have
been able to maintain a small team of engineers in the US, the financial results
of our professional services business have suffered. 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 the contract we had with Mitsubishi
and the contracts we have with Nokia, our primary customer in fiscal 2003.
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. Moreover, in the
event that the sale of our UK professional services business to Teleca closes
and the plan of liquidation is approved, much of the forward- looking material
pertaining to the professional services business will no longer be applicable.
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.
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
12
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 Six Months Ended Change
--------------------- ------------ ---------------------- ---------------
September September September September
30, 2002 30, 2001 $ % 30, 2002 30, 2001 $ %
--------------------- ------ ---- ---------- ---------- ------- -----
Net revenues (in thousands):
Professional services................ $ 775 $ 1,520 $ (745) (49)% $ 1,651 $ 3,536 $ (1,885) (53)%
Software and related services........ 249 484 (235) (49) 384 1,724 (1,340) (78)
--------- --------- ------ ---- ---------- --------- -------- ----
Total net revenues...................... $ 1,024 $ 2,004 $ (980) (49)% 2,035 $ 5,260 $ (3,225) (39)%
========= ========= ====== ==== ========== ========= ======== ====
Net Revenues
Professional services revenue. Professional services revenue decreased by
$745,000, or 49%, and $1,885,000, or 53%, in the three and six months ended
September 30, 2002, respectively, in comparison with the corresponding periods
of the prior fiscal year. The decreases are attributable to a decrease in the
number of hours billed for client projects during the periods, resulting
primarily from the non-renewal of our contract with one of our two primary
customers, Mitsubishi, which had accounted for approximately $1.2 and $2.6
million of revenue in the three and six months ended September 30, 2001. We do
not expect to generate revenue from this customer for the foreseeable future.
Professional services revenues from our remaining primary customer, Nokia,
increased by 110% and 51% in the three and six months ended September 30, 2002,
respectively, as compared to the same periods of the prior fiscal year. Nokia
professional services revenues were increased as compared to the prior fiscal
year primarily because we had experienced a reduction in the volume of services
provided to Nokia due to a short term gap between the conclusion of contracts
and the signing of new contracts with Nokia in the three months ended September
20, 2001. We also added four additional customers representing approximately
$270,000 in revenues under short term contracts in the six months ended
September 30, 2002, which partially offset the loss of Mitsubishi revenues.
As discussed above, we have entered into a definitive agreement to sell our UK
professional services business which accounts for the vast majority of our
professional services revenue. As this business is now our primary source of
revenue, such revenue will not be recurring if the sale is concluded. If the
sale of the UK business is not concluded, our future success will continue to be
dependent on our ability to diversify and grow the professional services
customer base and to operate this business profitably. During the six months
ended September 30, 2002, Nokia generated 86% of our professional services
revenue. In the same period(s) of the prior fiscal year, Mitsubishi and Nokia,
generated 74% and 26%, 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
decreased by $235,000, or 49%, and $1,340,000, or 78%, in the three and six
months ended September 30, 2002, respectively, in comparison with the
corresponding periods of the prior fiscal year. These substantial decreases
reflect 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. Software and related
services revenue in the three months ended September 30, 2002 includes
approximately $150,000 recorded to recognize a deposit received from an original
equipment manufacturer, which became recognizable as a result of its failure to
meet minimum shipping requirements under a licensing and distribution agreement
made in fiscal year 1999. The remainder of the software and related services
revenues for the three and six months ended September 30, 2002 came 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 six months ended September 30, 2002, revenues from the Mobile
Server+ license with Toshiba, a
13
related party, were approximately $210,000. 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 and will be
assigned to Teleca in connection with the proposed sale of our UK professional
services business.
The software revenues recognized in the six months ended September 30, 2001 of
the prior fiscal year consisted of $1,026,000 from the AirBoss product line,
$443,000 from legacy operating systems royalties and applications and $255,000
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 $573,000, or 48%, to $625,000 for the three months ended
September 30, 2002 as compared to the same period of the prior fiscal year. For
the six months ended September 30, 2002, cost of professional services decreased
by $1,145,000, or 47%, to $1,295,000 as compared to the six months ended
September 30, 2001. These decreases are due to the reduced level of professional
services provided as discussed above, which was due primarily 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 decreases in cost
of professional services are primarily attributable to reduced costs as the team
was reduced and the consultants were not required in the three and six months
ended September 30, 2002. This decrease was partially offset by increased costs
of our UK staff. UK staff costs increased approximately 78%, as the team was
increased based on increased billings and opportunities with our primary
customer in the UK and our other sales prospects.
We have approximately the same number of professional services employees at
September 30, 2002 as we did at September 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 67%, whereas US staff has decreased by
73% at September 30, 2002 as compared to September 30, 2001. As the market
salary rates for UK staff in general, are less than their US counterparts, we
have experienced an 18% decrease in payroll costs in the six months ended
September 30, 2002 as compared to the six months ended September 30, 2001.
Gross margin percentages on professional services revenues were 19% and 21%
during the three months ended September 30, 2002 and 2001, respectively, and 22%
and 31% during the six months ended September 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.
Gross margin percentages have declined in the three and six months ended
September 30, 2002 as compared to the same periods of the prior fiscal year
because of several factors: in particular, although our average rates of
compensation expense were less due to the shift to increased use of UK staff,
the average billing rates for the three and six months ended September 30, 2002
were significantly lower than in the prior year periods 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. Also, we have added professional services staff in the UK office
in order to increase our revenue generating potential and we have incurred
additional expenses to hire and train these personnel. 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
14
software and related services expense decreased $165,000 and $390,000, or 100%,
to zero during the three and six months ended September 30, 2002, respectively,
as compared with the same periods of the prior fiscal year, 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 $1,879,000, or
90%, to $212,000, and by $3,818,000, or 89%, to $496,000, during the three and
six months ended September 30, 2002 and 2001, respectively. These decreases in
sales and marketing expenses were 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 September 30, 2002 was 2 as compared
to 34 at September 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 $2,264,000 and
$5,558,000, or 100%, to zero, during the three and six months ended September
30, 2002, respectively, as compared with the same periods of the prior fiscal
year. The number of research and development employees at September 30, 2002 was
zero as compared to 59 at September 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
$199,000, or 19%, to $834,000, and by $1,049,000, or 41%, to $1,519,000, during
the three and six months ended September 30, 2002 and 2001, respectively.
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 September 30, 2002 was 10 as
compared to 16 at September 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. In addition, during the
three months ended September 30, 2002, we have incurred approximately $150,000
of legal and professional fees in connection with the preparation and signing of
the definitive agreement to sell the UK professional services business to
Teleca.
Amortization of goodwill and other intangible assets. Amortization of goodwill
and other intangible assets of $418,000 during the six months ended September
30, 2002 and $3,891,000 during the six months ended September 30, 2001 was
attributable to the amortization of goodwill and other purchased intangible
assets resulting from our July 2000 acquisition of AirBoss. The amortization for
the three and six months ended September 30, 2002 was lower than in the same
periods of the prior fiscal year because the underlying intangibles base was
reduced during fiscal 2002 and the first quarter of fiscal 2003 by writedowns
due to value impairments.
Write-down of goodwill, intangibles and other long-lived assets. In fiscal 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
15
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 September 30, 2002, the
value of AirBoss goodwill and other intangibles assets included in our
consolidated balance sheet is $508,000. 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
September 30, 2002 employee stock options to purchase 1,785,000 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.
Because the closing price of the Company's common stock as reported by the
Nasdaq SmallCap Market on June 30 and September 30, 2002 was less than the new
option exercise price, no stock compensation has been recorded during fiscal
2003 nor has any been recorded from the date of issuance.
Subsequent to the stock option repricing, 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 $133,000, or 92%, to $11,000, for
the six months ended September 30, 2002, in comparison to the six months ended
September 30, 2001. This decrease is attributable primarily to lower cash
balances available for short-term investment.
16
Interest Expense. Interest expense was not significant in the six months ended
September 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
$6,000 for the six months ended September 30, 2002 and $123,000 for the six
months ended September 30, 2001. The decrease is due to the decreased level of
royalties received in the current fiscal year as compared to the same period of
the prior year.
Liquidity and Capital Resources
Our total cash and cash equivalents were $1,318,000 at September 30, 2002,
compared with $3,136,000 at March 31, 2002. Net cash used by operations in the
six months ended September 30, 2002 was $1,800,000. This level of cash usage is
significantly lower than in the six months ended September 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
six months ended September 30, 2002, excluding non-cash amortization of goodwill
and other intangible assets, and the write-down of goodwill, and intangibles was
$1,276,000 and this resulted in the use of approximately the same amount of
cash. In addition our net changes in working capital, principally changes in our
current assets and liabilities on the balance sheet, used cash of $772,000.
These balance sheet changes in our operating assets and liabilities provided
working capital of $32,000 net, however working capital of $804,000 was used to
settle liabilities resulting from our reorganizations and restructurings
announced in our prior fiscal year, including paid severance of $240,000 and
lease termination and contract settlement fees totaling $564,000. The
restructuring and reorganizations we implemented during fiscal 2002 did
significantly reduce our headcount and operating expense structure. The total
number of employees at September 30, 2002 was 41 as compared to 155 at September
30, 2001. Our expenses for the six months ended September 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 $12 million to $3.3 million from $15.3 million in the six
months ended September 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 six months ended September 30, 2002
and 2001 were $33,000, and $1,605,000, respectively. The capital spending in the
six months ended September 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 discussed above, we are seeking stockholder approval to sell the UK
professional services business to Teleca, however, there can be no assurance
that such a sale will be approved by our stockholders or that other conditions
to closing will be satisfied. As we announced in January 2002 as part of
reorganization, we are also seeking buyers for AirBoss and our legacy assets. We
may not be able to close the Teleca deal or locate a buyer for these other
assets on acceptable terms before our financial resources have been depleted,
which may require us to consider bankruptcy or dissolution.
As of September 30, 2002 the Company has future minimum payment obligations of
approximately $644,000 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 $291,000 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. If our sale
of the UK professional services
17
business to Teleca does not close, we currently anticipate that our available
funds will be sufficient to meet our projected needs to fund operations into the
fourth 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 two years to raise funds through strategic transactions or
through the sale of AirBoss or our legacy assets 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 under any circumstances can be an
expensive and time consuming process and offers little prospect of any
significant distributions to stockholders. If the sale of the UK professional
services business to Teleca does not close, these conditions raise substantial
doubt about our ability to continue as a going concern through the fiscal year
ending March 31, 2003.
RISK FACTORS
Risks Related to the Sale of our UK Professional Services Business to Teleca
Because of the closing conditions in the share purchase agreement and the
possibility that the purchaser may terminate the agreement in specific
instances, we can not be sure when, or even if, the sale transaction will be
completed
The closing of the sale of our UK professional services business is subject to
the satisfaction of a number of closing conditions, including the requirement
that we obtain stockholder approval of the share sale and certain customer
consents. In addition, the purchaser may terminate the agreement if:
o We do not cure any breach of a covenant in the purchase agreement;
o We fail to provide audited financial statements for Geoworks Limited for
the year ending March 31, 2002; or
o The sale is not completed before January 31, 2003.
We cannot guarantee that we will be able to meet the closing conditions of the
Share Purchase Agreement, in particular stockholder and third party approvals.
If we are unable to meet the conditions, the purchaser does not have to purchase
the UK Professional Services business. We also cannot be sure that other
circumstances, for example, a material adverse event, will not arise that give
the purchaser the right to terminate the agreement prior to closing. Under
certain circumstances, the purchaser's termination of the asset purchase
agreement would require us to pay them a termination fee of $250,000.
If the sale is not approved or does not close, our board of directors will be
forced to evaluate other alternatives, which are expected to be far less
favorable to us than the sale to Teleca, for example, the UK Subsidiary could be
sold to its employees and we may be forced to seek bankruptcy protection.
Risks Related to the Plan of Liquidation and Dissolution
You will not know the exact amount or timing of the liquidation distributions at
the time of the special meeting, and there may be no distributions at all.
In our proxy we have attempted to provide some guidance with respect to
management's expectations regarding the value of our net assets, our future
expenses and liabilities, and the amounts of distributions, if any, to be made
to our stockholders; however, this guidance is based on our current knowledge,
the amounts are only general estimates, and the actual amounts will differ. The
board of directors will establish a contingency reserve for known and unknown
liabilities, and the adequacy of that reserve will be reviewed prior to making
cash distributions to stockholders. We cannot assure you that the amount you
will receive in liquidation will equal or exceed the price or prices at which
the common stock has recently traded or may trade in the future. Moreover, there
may be no distributions at all.
18
Assuming we are able to reduce or settle certain current and long-term
liabilities, we currently anticipate distributing one to five cents per share in
the aggregate. However, the distribution of our assets to stockholders may be
delayed or less than we estimate due to a number of reasons, including the fact
that a creditor of ours might seek an injunction against our making the proposed
distributions to you under the Plan on the grounds that the amounts to be
distributed are needed to provide for the payment of our expenses and
liabilities, including those that may be in dispute.
You could be liable to return some or all of the amount you receive from us if
the amount of our contingency reserve does not cover all of our liabilities and
expenses.
If the Plan is approved by the stockholders, a certificate of dissolution is
expected to be filed with the State of Delaware dissolving Geoworks Corporation.
Under the Delaware General Corporation Law, we will continue to exist for three
years after the dissolution becomes effective or for a longer period if the
Delaware Court of Chancery requires us to, for the purpose of prosecuting and
defending suits against us and enabling us to dispose of our property, to
discharge liabilities and to distribute to our stockholders any remaining
assets.
Under Delaware law, if we fail to create an adequate contingency reserve for
payment of our expenses and liabilities, you could be held liable for payment to
our creditors of your proportional share of amounts owed to creditors in excess
of the contingency reserve. In that regard, your liability would be limited to
the amounts previously received by you from us (and from any liquidating trust).
Accordingly, you could be required to return all distributions previously made
to you. In such an event, you could receive nothing from us under the Plan.
Moreover, you could incur a net tax cost if you paid taxes on the amounts
received from us and then have to repay such amounts back to our creditors.
Unless you are able to get a corresponding reduction in taxes in connection with
your repayment, you may end up having paid taxes on monies that you have had to
return.
We cannot assure you that the contingency reserve established by us will be
adequate to cover all of our expenses and liabilities.
Our delisting from the Nasdaq SmallCap Market may impair the value of our common
stock and make it difficult or impossible for our stockholders to sell their
shares
Our stock was delisted from the Nasdaq SmallCap Market on November 6, 2002.
Because Nasdaq delisted our common stock, your ability to obtain price
quotations and buy and sell shares may be materially impaired. Since then the
shares have been traded on the over the counter market bulletin board, but there
can be no assurance that they will continue to do so. In particular, we do not
know if any brokers will continue to make a market in the shares. If you are
unable to sell, your ability to take a tax loss may be delayed until you receive
a distribution or are notified that your holdings are worthless as a result of
our the actions under our plan of liquidation and dissolution.
You may not buy or sell shares after the plan is implemented when we close our
stock transfer books
We will close our stock transfer books after the filing of the certificate of
dissolution in Delaware, after which you will no longer be able to transfer
shares, except by will, intestate succession or operation of law. If you are
unable to sell, your ability to take a tax loss may be delayed until you receive
a distribution or are notified that your holdings are worthless.
Use of a liquidating trust may have adverse tax consequences
We may need to contribute our assets to a liquidating trust as part of the
winding up. As stockholders will be deemed to have received a liquidating
distribution equal to their pro rata share of the value of the net assets
distributed to a liquidating trust for tax purposes, the distribution of
non-transferable interests the liquidating trust to you could result in tax
liability without your being readily able to realize the value of such interests
to pay such taxes or otherwise.
Risks Related to Our Business
If the sale to Teleca or the plan of liquidation are not approved by our
stockholders, our board of directors intends to continue exploring strategic
alternatives for our business. Possible alternatives include selling all of our
stock or
19
remaining assets, selling the UK professional services business to the employees
of our UK subsidiary, Geoworks Limited, changing the format and business
strategy of our remaining business, expanding the scope of our business through
relationships with third parties or seeking bankruptcy protection. At this time,
the board of directors does not know which alternatives might be considered, or
what impact any alternative might have on stockholder value. Any alternative we
select may have unanticipated negative consequences. The risks below describe
the risks related to our business if we continue as a going concern. You should
consider carefully these 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.
Our auditors have issued a "going concern" audit report.
The report of independent auditors on our consolidated financial statements for
the fiscal year ended March 31, 2002 states that because of operating losses and
a working capital deficiency, there is substantial doubt about our ability to
continue as a going concern. A "going concern" report indicates that the
financial statements have been prepared assuming we will continue as a going
concern and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Your ability to buy or sell shares is limited as a result of our delisting.
Our shares were delisted from the Nasdaq SmallCap Market on November 6, 2002.
Since then the shares have been traded on the over the counter market bulletin
board, but there can be no assurance that they will continue to do so. In
particular, we do not know if any brokers will continue to make a market in the
shares.
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. If the sale of our UK professional services business to Teleca does not
close, we currently anticipate that our available funds will be sufficient to
meet our projected needs for funding operations into the fourth 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 and our other legacy assets. 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. Moreover,
management has recommended that we wind up our business as soon as practical and
the board of directors has approved a plan of liquidation and dissolution
subject to stockholder approval. These conditions raise substantial doubt about
our ability to continue as a going concern through the fiscal year ending March
31, 2003. Bankruptcy or liquidation can be an expensive and time consuming
process and offers little prospect of any significant distributions to
stockholders.
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 86% of our professional services revenues in the first and second
quarters 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.
20
Our reorganization may have a negative impact on our business.
In January 2002, we announced our intention to reorganize our business by
selling our core technology and certain legacy assets, reducing our operating
expenses, terminating certain employees and changing our business strategy to
focus on realizing the value of our professional services business, any of which
could have a material adverse effect on our business, financial condition and
ability to reduce losses or generate profits. To date we have sold several
patents, reduced our headcount such that our operations consist entirely of
employees supporting our professional services business, and negotiated
settlements on a number of contracts we terminated as result of the
reorganization. However, there can be no assurance that our reorganization plan
will have a positive effect on our cash position, financial results, operations,
and the market price of our common stock or public perception of us in the
marketplace.
If we do not successfully address the risks associated with operating a
professional services business, our business will be harmed.
As we announced in January 2002, we have reorganized in order to focus on
realizing the value of our professional services business. Professional services
businesses, and our professional services organization in particular, face
special risks and challenges, in addition to our dependence on one customer,
including risks associated with:
o our ability to grow and develop the business;
o our ability to provide satisfactory and quality services;
o the short-term nature of most professional services contracts, including
customer ability to terminate such contracts with little or no notice;
o the difficulty of predicting revenues for project-based engagements, which
have in the past and will likely in the future make up the majority of our
engagements;
o competition;
o our reliance on the market for wireless operating systems, related
applications and wireless server technology, which is experiencing a
downturn;
o the mission-critical nature of our services for our clients' operations;
o our ability to retain our professional services employees and hire others;
and
o our ability to avoid infringing the intellectual property rights of
others.
If we fail to generate sufficient revenues from our professional services
business or fail to manage the risks associated with operating a professional
services business, our business will be harmed. As a result, while we try to
stabilize and grow the professional services business, we will continue to
explore strategic alternatives for it.
It is difficult for us to forecast the level or source of our revenues for our
professional services business.
While we have had a substantial professional services practice for the last
three years, our business has historically been focused primarily on developing
and marketing software to support the mobile enterprise and wireless operator
markets. Although we have some legacy software products contracts that continue
to generate some revenue, we expect our professional services business to be the
only significant source of 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.
21
Although we have been able to sell certain patents since our reorganization was
announced in January 2002, we continue to explore the sale of other
non-strategic assets. We may not be able to locate buyers for these assets on
acceptable terms. As a result we may be required to revise our current operating
plans, to sell the professional services business, to enter into other forms of
strategic transactions, or to consider bankruptcy or dissolution. Even if we are
able to locate a buyer or buyers who are willing to acquire these assets on
terms that our management and board of directors believe are in our best
interests, the sale of these assets involves a number of risks and
uncertainties, including but not limited to the following:
o the completion of some asset sales will be subject to a number of
conditions, some of which are beyond our control, potentially including
stockholder approval;
o the asset sale process may divert management's attention from operating
our professional services business and implementing our new strategy;
o the asset sale process is expensive, and will involve legal, accounting
and financial advisor fees;
o the asset sale process could take several months, and we may not have
sufficient resources to finance, our business until the closing of the
transaction; and
o even if we are able to complete asset sales, we may not have sufficient
financial resources to operate our professional services business until it
is profitable and self-sustaining.
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 proposed sale of our UK professional
services business, the proposed plan of liquidation, 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.
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 September 30, 2002, 31 of our 41 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:
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.
22
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 and the work that precedes and follows them 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 ifsuch 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.
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
23
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 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.
24
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.
Item 4. Evaluation of Disclosure Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after evaluating
the effectiveness of the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c))
as of a date (the "Evaluation Date") within 90 days before the filing date of
this quarterly report, have concluded that as of the Evaluation Date, our
disclosure controls and procedures were adequate and effective for the purposes
set forth in the definition of the Exchange Act rules.
(b) Changes in internal controls.
There were no significant changes in our internal controls or to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the Evaluation Date.
25
PART II. OTHER INFORMATION
Item 4. -- Submission of Matters to a vote of security holders
(a) The Company held its Annual Meeting of Stockholders on September 17, 2002.
(b) The Company's Board of Directors is elected at each Annual Meeting of
Stockholders. The Directors elected at the meeting were: Stephen T. Baker, John
B. Balousek, David J. Domeier, Frank S. Fischer, David L. Grannan, James M.
Judge, and Steve W. Mitchell.
(c) The matters described below were voted on at the Annual Meeting of
Stockholders, and the votes cast with respect to each matter and with respect to
the election of directors for each nominee were as indicated.
1. To elect directors to serve until the next Annual Meeting of
Stockholders and until their successors are duly elected.
NOMINEE FOR WITHHELD
------- --- --------
Stephen T. Baker 20,176,136 295,855
John B. Balousek 19,995,511 476,480
David J. Domeier 20,003,775 468,216
Frank S. Fischer 20,180,726 291,265
David L. Grannan 20,141,247 330,744
James M. Judge 19,996,011 475,980
Steve W. Mitchell 20,171,975 300,016
2. To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for fiscal year ending March 31, 2003.
FOR 20,360,688
AGAINST 72,296
ABSTAIN 39,007
NON-VOTE 3,422,155
Item 5. Other Information
a.) Definitive Agreement to Sell UK Professional Services Business and Plan of
Liquidation and Dissolution
On September 23, 2002, we signed a definitive agreement to sell our UK
professional services business to Teleca Ltd , a wholly owned subsidiary of
Teleca AB. The agreement is subject to stockholder approval and various third
party consents, including those of Nokia and Toshiba, whose contracts are
required to be assigned in connection with the sale. The terms require Teleca to
pay $2.3 million dollars for the Macclesfield-based business with $.3 million
held back as an offset to potential claims until March 31, 2004. The UK
subsidiary should have approximately $.5 million in net assets at closing.
If conditions to the sale to Teleca are satisfied, this transaction is expected
to close prior to the end of the current calendar year and would leave Geoworks
with a very small professional services team in Emeryville as well as some
executive and administrative staff. Management has recommended, in the absence
of desirable alternatives, the winding up of the company as soon as practicable.
The Board of Directors approved the plan of liquidation and dissolution on
October 24, 2002, subject to shareholder approval.
The liquidation process is time consuming and expensive. Management is currently
exploring and evaluating alternatives to implementing the plan of liquidation
and dissolution as well as continuing the efforts to market our legacy software
assets -- AirBoss(TM), GEOS(R), GEOS SC and Mobile Server+(TM). (An option to
purchase
26
Mobile Server+ was given to Teleca in connection with the agreement to
sell our UK professional services business.)
On October 30, 2002, we filed a definitive proxy statement to obtain stockholder
approval of this sale to Teleca and to obtain stockholder approval for our plan
of liquidation and dissolution (the "Special Meeting Proxy Statement"). There
can be no assurance that the sale to Teleca will close or that the plan of
liquidation and dissolution will be approved by stockholders. Additional details
on the definitive agreement to sell our UK professional services business and
our plan of liquidation and dissolution can be found in the Special Meeting
Proxy Statement and our other filings with the Securities and Exchange
Commission.
b.) Delisting from the Nasdaq SmallCap Market
The Company's common stock was delisted from the Nasdaq Stock Market effective
with the open of business on November 6, 2002. The delisting was a result of the
Company's failure to meet the Nasdaq maintenance standards for the minimum bid
price and the minimum shareholders equity requirements. The likelihood of this
action was disclosed in multiple prior filings with the Securities and Exchange
Commission and additionally in a press release dated September 4, 2002, which
announced that the Company had received a notice of delisting, subject to
appeal, from Nasdaq.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
10.1 License Agreement by and between Geoworks Corporation and Science
Applications International,dated October 24, 2001 filed as an
exhibit to Form 8-K on August 29, 2002
10.2 Amended License Agreement by and between Geoworks Corporation and
Science Applications International, dated August 23, 2002 filed as
an exhibit to Form 8-K on August 29, 2002
99.2 Agreement for the Sale and Purchase of the Entire Issued Share
Capital of Geoworks Ltd. dated September 23, 2002 and filed as an
exhibit to Form 8-K filed September 27, 2002
b) Reports on Form 8-K
i) The Company filed a report on Form 8-K on August 29, 2002 that
reported that the Company had agreed to amend an existing
non-exclusive object code license (the "License") to its AirBoss
technology (the " AirBoss Software") to Science Applications
International Corporation ("SAIC"), a beneficial owner of over 10%
of the Registrant's outstanding common stock in order to, among
other things:
o Grant a non-exclusive source code license to SAIC;
o Grant SAIC the right to make derivative works based upon
the AirBoss Software;
o Terminate the Registrant's ongoing maintenance
obligations under the License; and
o Eliminate the parties' ability to terminate the License
for convenience.
In return SAIC agreed to transfer 1,391,440 of its shares of common
stock back to the Company for cancellation. As a result, the number
of outstanding shares of common stock will be reduced to
approximately 22,184,756 and the number of shares of common stock
beneficially owned by SAIC (and its affiliate Telcordia Venture
Capital Corporation) will be reduced to 1,391,441 (or approximately
6.3% of the outstanding shares). It was also reported that the
carrying value of the Company's intangible assets would be reduced
by the fair value of the cancelled shares and that the audit
27
committee of the Company's board of directors reviewed this
transaction and concluded that it was in the best interests of the
Company.
ii) The Company filed a report on Form 8-K on September 6, 2002 with
respect to a press release dated September 4, 2002 that announced
that on August 29, 2002 the Company received notice from The Nasdaq
Stock Market that its common stock would be delisted from the Nasdaq
SmallCap Market on September 6, 2002, primarily due to
non-compliance with its minimum bid and minimum net equity rules,
unless the Company elected to appeal this action. The Company filed
an appeal on September 4, 2002, which stayed the delisting pending a
hearing, which took place on October 4, 2002. Nevertheless, the
Company announced that it expects that its common stock will be
delisted after the hearing. The press release also contained
cautionary statements identifying important factors that could cause
actual results to differ materially from those described in
forward-looking statements made by the Company in the press release.
iii) The Company filed a report on Form 8-K on September 27, 2002
with respect to a press release dated September 23, 2002 that
announced that it had entered into an agreement to sell its UK
professional services business, including its wholly owned UK
subsidiary and its largest customer contracts, to Teleca Ltd, a
wholly owned subsidiary of Teleca AB, in exchange for approximately
$2,300,000 in cash, $300,000 of which is deferred until March 31,
2004. It was also disclosed that the closing of the transaction,
which the parties expect will take place by the end of 2002, is
subject to various customary closing conditions, including the
approval of the Registrant's stockholders and the approval of each
of Nokia and Toshiba to the assignment of their respective contracts
and that the UK subsidiary is required to have approximately
$500,000 in net assets upon closing.
The press release included the announcement that the Company
anticipated that the transaction would be followed by its winding up
pursuant to a plan of liquidation and dissolution, which would also
be subject to the approval of the Company's stockholders and that in
the interim management would continue to explore strategic
alternatives.
28
Signatures, and Certifications of the Chief Executive Officer and the Chief
Financial Officer of the Company.
The following pages include the Signatures page for this Form 10-Q, and two
separate Certifications of the Chief Executive Officer (CEO) and the Chief
Financial Officer (CFO) of the company.
The first form of Certification is required by Rule 13a-14 under the Securities
Exchange Act of 1934 (the Exchange Act) in accord with Section 302 of the
Sarbanes-Oxley Act of 2002 (the Section 302 Certification). The Section 302
Certification includes references to an evaluation of the effectiveness of the
design and operation of the company's "disclosure controls and procedures" and
its "internal controls and procedures for financial reporting". Item 4 of Part I
of this Quarterly Report presents the conclusions of the CEO and the CFO about
the effectiveness of such controls based on and as of the date of such
evaluation (relating to Item 4 of the Section 302 Certification), and contains
additional information concerning disclosures to the Company's Audit Committee
and independent auditors with regard to deficiencies in internal controls and
fraud (Item 5 of the Section 302 Certification) and related matters (Item 6 of
the Section 302 Certification).
The second form of Certification is required by section 1350 of chapter 63 of
title 18 of the United States Code.
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 13, 2002 By:/s/ Timothy J. Toppin
---------------------------------------
Timothy J. Toppin
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
CERTIFICATION
I, Steve W. Mitchell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Geoworks Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
29
CERTIFICATION (continued)
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ Steve W. Mitchell
----------------------
Steve W. Mitchell
Chief Executive Officer
I, Timothy J. Toppin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Geoworks Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ Timothy J. Toppin
----------------------
Timothy J.Toppin
Chief Financial Officer
and Principal Accounting
Officer
30
CERTIFICATION (continued)
Each of the undersigned hereby certifies, for the purposes of section 1350 of
chapter 63 of title 18 of the United States Code, in his capacity as an officer
of Geoworks Corporation, that, to his knowledge, the Quarterly Report of
Geoworks Corporation on Form 10-Q for the period ended September 30, 2002, fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in such report fairly presents, in
all material respects, the financial condition and results of operations of
Geoworks Corporation.
Date: November 13, 2002 By: /s/ Steve W. Mitchell
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Steve W. Mitchell
Chief Executive Officer
Date: November 13, 2002 By: /s/ Timothy J. Toppin
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Timothy J. Toppin
Chief Financial Officer and
Principal Accounting Officer