<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended JUNE 30, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _____________ to _____________.
Commission file number 0-23926
GEOWORKS
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2920371
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
960 ATLANTIC AVENUE, ALAMEDA, CALIFORNIA 94501
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(Address of principal executive offices) (Zip code)
510-814-1660
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. [ ] Yes [ ] No
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE: 14,002,197 SHARES AS OF JUNE 30, 1996
<PAGE> 2
GEOWORKS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets: June 30, 1996 and March 31, 1996 2
Condensed consolidated statements of operations: Three months ended
June 30, 1996 and 1995 3
Condensed consolidated statements of cash flows: June 30, 1996 and 1995 4
Notes to condensed consolidated financial statements: June 30, 1996 5
Item 2. Management's discussion and analysis of financial condition and results
of operations 6-9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
</TABLE>
1
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PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
GEOWORKS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $11,514 $10,765
Marketable securities 35,607 39,625
Prepaid expenses and other current assets 180 216
------- -------
Total current assets 47,301 50,606
Furniture and equipment, net 2,908 2,132
Other assets 160 160
------- -------
$50,369 $52,898
======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,251 $ 1,240
Deferred revenue 4,397 5,529
Other current liabilities 980 707
------- -------
Total current liabilities 6,628 7,476
Other liabilities 878 965
------- -------
Total liabilities 7,506 8,441
Shareholders' equity 42,863 44,457
------- -------
$50,369 $52,898
======= =======
</TABLE>
See accompanying notes
2
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GEOWORKS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Net revenues:
License revenue and product sales $ 2,241 $ 272
Research and development fees 188 113
------- -------
Total net revenues 2,429 385
Operating expenses:
Cost of license revenue and product sales 72 16
Sales and marketing 1,371 964
Research and development 2,749 1,802
General and administrative 698 518
------- -------
Total operating expenses 4,890 3,300
------- -------
Operating loss (2,461) (2,915)
Other income (expense):
Interest income 575 119
Interest expense (45) (44)
------- -------
Loss before income taxes (1,931) (2,840)
Provision for income taxes -- --
------- -------
Net loss $(1,931) $(2,840)
======= =======
Net loss per share $ (0.14) $ (0.25)
======= =======
Shares used in per share
computation 13,967 11,302
======= =======
</TABLE>
See accompanying notes
3
<PAGE> 5
GEOWORKS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Operating activities:
Net loss $(1,931) $(2,840)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 310 275
Changes in operating assets and liabilities (842) (182)
------- -------
Net cash used in operating activities (2,463) (2,747)
------- -------
Investing activities:
Purchases of furniture and equipment (1,028) (183)
Sales of marketable securities 4,018 3,823
Other (36) 103
------- -------
Net cash provided by investing activities 2,954 3,743
------- -------
Financing activities:
Proceeds from sale/leaseback of equipment -- 73
Payments of obligations under capital leases (67) (45)
Net proceeds from issuance of common stock 309 22
Other 16 --
------- -------
Net cash provided by financing activities 258 50
------- -------
Net increase in cash and cash equivalents 749 1,046
Cash and cash equivalents at beginning of period 10,765 1,788
------- -------
Cash and cash equivalents at end of period $11,514 $ 2,834
======= =======
</TABLE>
See accompanying notes
4
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GEOWORKS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements for the three months ended
June 30, 1996 and 1995 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
operating results for the interim periods. The condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report to
Shareholders for the fiscal year ended March 31, 1996. The results of operations
for the three months ended June 30, 1996 are not necessarily indicative of the
results to be expected for the entire fiscal year.
2. Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from stock options are not
included in the computation as they are antidilutive. In accordance with
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares issued at prices below the public offering price during the
period beginning one year prior to the initial filing of the registration
statement for the initial public offering have been included in the calculation
as if they were outstanding for all periods prior to the offering (using the
treasury stock method and the initial public offering price).
3. In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," which is
effective for fiscal years beginning after December 15, 1995. SFAS No. 123
allows a company to adopt a new fair value-based method or continue to measure
compensation cost for its stock-based compensation plans using the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 (APB No. 25). The Company will continue to follow APB No. 25 but
will be required to make pro forma disclosures of net income or loss and
earnings per share as if the fair value-based method had been applied.
5
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net Revenues
Net revenues increased $2,044,000, or 531%, during the quarter ended
June 30, 1996 as compared to the corresponding quarter of the previous fiscal
year. The increase resulted primarily from the restructuring of an OEM license
agreement for which there was a non-refundable, prepaid royalty balance, which
had been recorded as deferred revenue and had not yet been fully amortized at
the time of restructuring. Revenue recognized upon this license agreement
restructuring was included in license revenue and product sales, and accounted
for $1,673,000, or 69%, of the Company's total net revenues during the quarter
ended June 30, 1996. There was no revenue of a similar nature recognized in the
corresponding quarter of the previous fiscal year. Revenue associated with this
license agreement restructuring caused license revenue and product sales to
increase $1,969,000, or 724%, during the quarter ended June 30, 1996 as compared
to the corresponding quarter of the previous fiscal year.
In addition to revenue recognized upon the license agreement
restructuring discussed above, license revenue and product sales for the quarter
ended June 30, 1996 included $350,000 of source code license fees paid by an OEM
customer. Revenues associated with source code license fees and license
agreement restructurings are non-recurring. As a result of these one-time
events, revenues for the quarter ended June 30, 1996 are not indicative of
revenues to be recognized in future periods. The remainder of license revenue
and product sales during the quarter ended June 30, 1996 consisted of royalties
on units sold by OEM licensees and royalties from software republishers.
Revenue related to research and development fees in the quarter ended
June 30, 1996 increased $75,000, or 66%, compared to the corresponding quarter
of the previous fiscal year. Research and development fees represent amounts
received pursuant to contracts with OEM licensees under which the Company is
reimbursed for a portion of its development costs related to specific products
up to the amounts specified in the contracts. The Company is typically paid by
the OEM licensee as certain project milestones are achieved. Revenue under these
research and development arrangements is recognized under the percentage of
completion method.
Operating Expenses
Cost of Revenues. The Company's gross margin percentage was 97% in the
quarter ended June 30, 1996 and 96% in the corresponding quarter of the previous
fiscal year. Cost of revenues for both periods consisted of license payments to
third parties for software that is incorporated into the Company's software.
Sales and Marketing. Sales and marketing expense increased $407,000,
or 42%, during the quarter ended June 30, 1996 as compared to the corresponding
quarter of the previous fiscal year. The increase resulted from the Company's
continuing emphasis on opportunities in the consumer computing device (CCD)
market. As this market has evolved, the Company has dedicated additional
resources towards content and services for wireless devices, and has also
expanded its services to VARs and other outside developers of software for the
CCD market. To support these activities, staffing and related costs for travel,
benefits, and facilities increased in the quarter ended June 30, 1996, as
compared to the corresponding quarter of the previous fiscal year.
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Research and Development. Research and development expense increased
$947,000, or 53%, during the quarter ended June 30, 1996 as compared to the
corresponding period of the previous fiscal year. The increase was due primarily
to the continuing expansion of the Company's engineering staff, which resulted
in higher compensation costs and related increases in costs for employee
benefits, travel, and facilities. The Company expects that research and
development expense will continue to increase in future periods as the Company
expands its efforts to develop products for the emerging CCD market.
General and Administrative. General and administrative expense
increased $180,000, or 35%, during the quarter ended June 30, 1996 as compared
to the corresponding period of the previous fiscal year. Higher compensation and
recruiting costs were the primary cause for this increase. The significant
increase in recruiting costs resulted from the Company's efforts to increase
staffing for strategic positions within the marketing and engineering functions
of the Company.
Other Income (Expense)
Interest income rose $456,000, or 383%, during the quarter ended June
30, 1996 as compared to the corresponding period of the previous fiscal year.
The increase was attributable to the significantly higher balances available to
the Company for short-term investment as a direct result of the Company's
secondary public offering of common stock and concurrent sale of common stock to
a private investor in November 1995. These concurrent equity offerings raised
over $40 million for the Company. Interest expense increased $1,000, or 2%, for
the quarter ended June 30, 1996 as compared to the corresponding period of the
previous fiscal year. This increase was caused by increased borrowings under
capital leases of furniture and equipment.
Provision for Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Income
tax expense consists of foreign income tax withholding on foreign source
royalties paid to the Company. The Company has a July 31 year end for income tax
purposes. As of March 31, 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $37,246,000 and for state
income tax purposes of approximately $14,449,000. The Company also had research
and development credit carryforwards for federal income tax purposes of
approximately $1,255,000 and for state income tax purposes of approximately
$561,000. Pursuant to the Tax Reform Act of 1986, annual utilization of the
Company's net operating loss and tax credit carryforwards is partially limited.
Liquidity and Capital Resources
The Company's cash, cash equivalents, and marketable securities
declined to $47.1 million at June 30, 1996 from $50.4 million at March 31, 1996.
This decrease of $3.4 million resulted primarily from the use of cash during the
period of $2.4 million for operating activities and $1.0 million for the
purchase of furniture and equipment. The Company expects to incur additional
substantial losses at least through its fiscal year ending March 31, 1997, but
anticipates that its existing capital resources will be adequate to satisfy its
operating and capital requirements throughout the fiscal year.
Prepaid expenses and other current assets decreased $36,000 from March
31, 1996 to June 30, 1996 due to the amortization during the quarter of the
Company's prepaid annual insurance
7
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premiums. Furniture and equipment, net of depreciation, increased $776,000 from
March 31, 1996 to June 30, 1996, due to furniture and equipment purchases for
new employees, leasehold improvements related to office expansions, and ongoing
enhancements to the Company's computer equipment used for research and
development. Accounts payable and accrued liabilities increased $11,000 at June
30, 1996 as compared to March 31, 1996, due principally to higher accrual
balances in the current fiscal year for marketing events and for third party
software royalties. Deferred revenue at June 30, 1996 fell $1,132,000 from March
31, 1996, as the Company earned, and therefore recognized as revenue, certain
advance royalty payments collected in previous periods under contracts with OEM
customers. The amount of such advance royalty payments recognized as revenue
during the quarter ended June 30, 1996 exceeded the amount of actual payments
collected during the period, causing the balance in deferred revenue to decline.
The significant change in the Company's deferred revenue balance during the
quarter was attributable primarily to the recognition as revenue of $1,673,000
in connection with the restructuring of an OEM license agreement for which there
had been a non-refundable, prepaid royalty balance. Other current liabilities
increased $273,000 from March 31, 1996 to June 30, 1996 as a result of higher
accrual balances for certain incentive compensation and employee benefit
programs. Lease obligations decreased $87,000 from March 31, 1996 to June 30,
1996, as monthly lease payments amortized outstanding principal balances.
Future Operating Results
Since its inception in 1983, the Company has incurred significant
losses, has had substantial negative cash flow, and has realized limited
revenues. At June 30, 1996, the Company had an accumulated deficit of $43.5
million, and had incurred operating losses of approximately $9.9 million, $10.2
million, and $7.9 million in the fiscal years ended March 31, 1996, 1995 and
1994, respectively. The Company expects to continue to incur substantial annual
operating losses at least through its fiscal year ending March 31, 1997. The
Company's plans to achieve profitability include focusing on the mobile segment
of the CCD market in the near term, establishing additional relationships with
CCD manufacturers, continuing to enhance the Company's GEOS system software, and
offering CCD aftermarket services and products. The duration and outcome of any
of these efforts is uncertain, and the Company's future operating results will
depend upon the emergence of the CCD market, the Company's ability to establish
licensing relationships with leading CCD hardware manufacturers, the
introduction by those manufacturers of successful CCDs, and the Company's
ability to achieve and maintain a competitive advantage.
Limited retail sales of first generation CCDs incorporating the
Company's software have adversely affected, and will continue to adversely
affect, the amount of license revenue realized by the Company. The limited sales
to date indicate a slow adoption rate for the device category, which has had and
will continue to have a material adverse effect on the Company's operating
results. In particular, the Casio Z-7000, a first generation personal digital
assistant which was based upon the Company's GEOS system software and introduced
in 1994, achieved only modest unit sales. Sharp Electronics Corporation and
Toshiba Corporation each developed a GEOS-based device, and subsequently elected
to cancel introduction of such devices into the market. License revenue from the
education CCD market fell short of Company expectations, causing the Company to
discontinue its development efforts in this segment and restructure its
licensing agreement with IBM/Eduquest. The Brother Ensemble, a personal desktop
publishing system, and the Hewlett-Packard OmniGo 100, a second generation
electronic organizer, both contain the Company's software and were both
introduced during calendar year 1995. However, it is not clear these devices
will make a significant favorable contribution to the Company's operating
results based upon unit shipments reported to date. Many factors relating to
these and other CCDs are not within the control of the Company, and there can be
no assurance as to the timing of release or
8
<PAGE> 10
success of any such products, the impact they may have on adoption rates within
the CCD market, or the effect they may have on the Company's operating results.
Because the Company has focused its development resources towards
products in the mobile segment of the CCD market, its efforts to develop
products for other CCD market segments have been deferred indefinitely.
Ultimately, the Company expects that its long-term results will depend upon its
success in developing and marketing aftermarket products and services that
operate on GEOS-based CCDs. There can be no assurance that the CCD market will
evolve as anticipated or that the Company will be able to develop and market
aftermarket products and services successfully in order to execute its business
plan.
The Company's operating results have in the past been, and are expected
in the future to be, subject to significant fluctuations on both a quarterly and
annual basis. Specifically, the Company expects that its operating results will
fluctuate as a result of the timing and success of the Company's efforts to
establish and maintain relationships with significant CCD market participants;
the introduction and market acceptance of new GEOS-based CCDs by these
participants; the introduction and distribution of new system and application
software by the Company; actions by competitors of the Company; and actions by
its partners. License revenue related to OEM customer products which contain the
Company's software is contingent upon those customers' success in meeting
anticipated shipment dates, obtaining market acceptance for their products, and
realizing significant sales volume of those products. The Company's results are
also affected by the timing and extent of product development, engineering, and
sales and marketing expenses. The Company presently intends to devote
substantial resources towards product development, which may affect its
investment and performance in other activities and in turn affect reported
operating results in future periods. In addition, the Company's results may be
affected by seasonal and other fluctuations in demand for CCDs and for related
software products and services, as well as by the general state of the domestic
and global economies. The Company expects the CCD market to be characterized by
significant seasonal swings in demand similar to those in the consumer
electronics market, in which demand typically peaks in the fourth calendar
quarter of each year.
Because the Company recognizes royalty-based license revenue upon
receipt of quarterly sales reports from licensees of its software, the timing of
the Company's revenues is also affected by the timing of receipt of these
reports. The Company's operating results may also vary as a result of the
receipt of one-time technology license or engineering fees, and the recognition
as revenue of paid but unamortized advance royalties under OEM agreements
(currently recorded as deferred revenue) upon the restructuring or termination
of such agreements or upon product discontinuation. Amounts recognized upon such
restructurings or terminations have accounted for in the past, and could account
for in the future, a material portion of the Company's revenue, with no
corresponding cash flow benefit in the period in which the revenue is
recognized. Shortfalls in the Company's revenues or results of operations in
comparison with levels expected by securities analysts could have an immediate
and significant adverse effect on the trading price of the Company's common
stock. Moreover, the Company' stock price is subject to the volatility generally
associated with technology stocks and may also be affected by broader market
trends unrelated to the Company's specific performance.
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such statements include those referring to the Company's future plans,
capital needs and operating results, the acceptance of the activities and
products of the Company and its partners in the CCD market, the extent of the
Company's investment in research and development in future periods, and the
development of the CCD market in general. Actual events and results could differ
materially from those projected in the forward-looking statements as a result of
a variety of factors, including those risk factors set forth in the preceding
five paragraphs and elsewhere in this report, especially those regarding the
Company's operating results and future activities and those regarding the CCD
market itself.
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ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.33 Amendment Number One to Collateral License Agreement (CLA)
Number A92267-00; Amendment Number Four to Description of
Licensed Work (DLW) Agreement Number A92407-00 to said
CLA; and Amendment Number Three to Statement of Work
Agreement Number A92377-00, effective as of April 17,
1996*
10.34 Addendum Number Two to Technology License Agreement
between the Company and Brother International Corporation,
effective as of June 28, 1996*
* Confidential treatment requested.
b) Reports on Form 8-K
No reports on Form 8-K were filed in this quarter.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August , 1996
--
GEOWORKS
by: /s/ Daniel L. Sicotte
--------------------------------------
Daniel L. Sicotte
Treasurer
(Duly Authorized Officer and Principal
Financial Officer)
11
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GEOWORKS
EXHIBITS
TABLE OF CONTENTS
Exhibit No. Description
10.33 Amendment Number One to Collateral License Agreement (CLA)
Number A92267-00; Amendment Number Four to Description of
Licensed Work (DLW) Agreement Number A92407-00 to said CLA;
and Amendment Number Three to Statement of Work Agreement
Number A92377-00, effective as of April 17, 1996*
10.34 Addendum Number Two to Technology License Agreement between
the Company and Brother International Corporation, effective
as of June 28, 1996*
* Confidential treatment requested.
12
<PAGE> 1
EXHIBIT 10.33
CONFIDENTIAL TREATMENT REQUESTED
---------------------------
### This portion has been
omitted and filed
separately pursuant to a
request of confidential
treatment.
---------------------------
April 16, 1996
Geoworks
960 Atlantic Avenue
Alameda, CA 94501
Attention: Jordan J. Breslow, Vice President and General Counsel
Subject: Amendment Number One (1) to Collateral License Agreement (CLA)
Number A92267-00 dated July 7, 1992; Amendment Number Four (4)
to Description of Licensed Work (DLW) Agreement Number
A92407-00 dated July 7, 1992 to said CLA; and Amendment Number
Three (3) to Statement of Work (SOW) Agreement Number
A92377-00 dated July 7, 1992
Reference: Master Works Agreement Number A92266-00 dated July 7, 1992
This Amendment when executed will be Amendment Number One (1) to the subject
Collateral License Agreement ("CLA"), Amendment Number Four (4) to the subject
Description of Licensed Work ("DLW"), and Amendment Number Three (3) to the
subject Statement of Work ("SOW") between International Business Machines
Corporation ("IBM") and Geoworks ("Geoworks").
IBM and Geoworks agree to the following:
1. As of the date last signed below, IBM shall have a perpetual, fully
paid-up license to the Licensed Works. On that date, IBM shall have
completed all of its royalty payment obligations under the CLA, the DLW
and related Contract Documents. Without limiting the generality of the
foregoing, the parties acknowledge and agree that IBM shall thereafter
have no obligation to account to Geoworks or pay royalties for IBM's
exercise of its fully paid-up license.
2. Geoworks and IBM acknowledge and agree that as of the date last signed
below, Geoworks shall have no obligation to refund or credit to IBM any
prepaid royalties, engineering fees or license fees paid prior to said
date, except as set forth in the following paragraph regarding
penalties payable to Geoworks to IBM.
3. As of the date last signed below, Schedule G ("Performance Standards")
of the MWA shall be modified to provide that any ### incurred by
Geoworks thereunder shall be ###
<PAGE> 2
4. The Contract and Technical Coordinators identified in Sections 3 and 4
of SOW are deleted and replaced with the following:
Contract Coordinators
For IBM For Geoworks
### Leland J. Lievano
Geoworks
960 Atlantic Avenue
Alameda, CA 94501
Technical Coordinators
For IBM For Geoworks
### Clayton Jung
Geoworks
960 Atlantic Avenue
Alameda, CA 94501
Except as specifically amended by this Amendment, all other terms and conditions
of the referenced Agreements, as previously amended, shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their respective authorized representatives.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO:
INERNATIONAL BUSINESS GEOWORKS
MACHINES CORPORATION
- ------------------------------- -------------------------------
Signature Signature
- ------------------------------- -------------------------------
Print Name Print Name
- ------------------------------- -------------------------------
Title Title
- ------------------------------- -------------------------------
Date Date
<PAGE> 1
EXHIBIT 10.34
CONFIDENTIAL TREATMENT REQUESTED
---------------------------
### This portion has been
omitted and filed
separately pursuant to a
request of confidential
treatment
---------------------------
GEOWORKS - BROTHER
ADDENDUM NUMBER TWO TO
TECHNOLOGY LICENSE AGREEMENT
This Addendum Number Two is effective as of June 28, 1996 (the "Effective
Date"), by and between GEOWORKS, a California corporation ("GEOWORKS"), and
Brother International Corporation, a Delaware Corporation ("BROTHER").
RECITALS
A. BROTHER is a developer, manufacturer, and distributor of computer and
consumer electronics equipment.
B. GEOWORKS is a developer, manufacturer, distributor, and publisher of
computer software technologies.
C. GEOWORKS and BROTHER have previously entered into a Technology License
Agreement, effective as of September 30, 1994, pursuant to which
GEOWORKS granted to BROTHER the right to embed certain GEOWORKS
technologies in a consumer computing device ("the TLA").
D. GEOWORKS and BROTHER subsequently entered into Amendment Number One to
the TLA, effective March 29, 1996, pursuant to which GEOWORKS granted
to BROTHER the right to receive, study, use and modify the Source and
Object Code to the Release ### Development Branch for Project ###, so
that BROTHER could undertake independent development of certain
consumer computing devices based upon said Release ### Development
Branch software.
E. GEOWORKS now wishes to grant to BROTHER the right to receive, study,
use and modify the Source Code to ### of the GEOWORKS GEOS(R) computer
software, together with the Source Code to a ###, so that BROTHER can
undertake independent development of certain consumer computing devices
based upon such GEOS ### and ###.
AGREEMENT
1
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1. INCORPORATION BY REFERENCE
For the convenience of the Parties, the terms and conditions of the TLA are
incorporated herein by this reference. All terms and conditions of the TLA shall
remain in full force and effect, except where expressly modified by this
Addendum.
2. DEFINITIONS
2.1 "Source Code" means the GEOWORKS computer code identified in Exhibit
A, in human readable form.
2.2 "Object Code" means the GEOWORKS computer code identified in Exhibit
A, including code constituting BROTHER's Derivative Works, in a form
which is appropriate for execution or interpretation by a computer,
but that would not be convenient to human understanding of program
logic.
2.3 "Tools" means the GEOWORKS programming tools, internal programming
documentation and know-how relating to the Source Code, including the
tools identified in Exhibit A and such additional documentation and
know-how as GEOWORKS may provide to BROTHER hereunder.
2.4 "Authorized Personnel." Employees of BROTHER and Affiliates of BROTHER
who are authorized by BROTHER to have access to the Source Code, as
identified in Exhibit A
2.5 "Designated Locations." The locations specified in Exhibit A of this
Addendum Number One at which BROTHER will conduct its activities
involving the licensed Source Code. Additional locations may, at
GEOWORKS' discretion, be granted on prior written approval.
2.6 "Derivative Work" means: (1) for material subject to copyright
protection, any work which is based upon one or more pre-existing
works of the Source Code, such as a revision, modification,
translation, abridgment, condensation, expansion, collection,
compilation or any other form in which such pre-existing works may be
recast, transformed or adapted; (2) for patentable or patented
materials, any adaptation, subset, addition, improvement or
combination of the Source Code; and (3) for material subject to trade
secret protection, any new material, information or data relating to
and derived from the Source Code.
2.7 ### shall not be limited to the scope of the definition in the TLA,
but shall include any BROTHER application.
2.8 "Product" means any BROTHER product that is based upon, embeds,
incorporates or is distributed with the Source Code, Object Code or
Derivative Works.
2
<PAGE> 3
3. GRANT OF LICENSES.
GEOWORKS hereby grants to BROTHER the following:
3.1 Source Code Access: a non-exclusive, non-transferable license, for the
term of the this Addendum, to receive, install on secure computer
systems (as set forth below), and examine the Source Code.
3.2 Source Code Modifications. a non-exclusive, non-transferable license,
for the term of this Addendum, to modify the Source Code in order to
create one or more Derivative Works.
3.3 Object Code Distribution: a non-exclusive, non-transferable license,
for the term of the TLA, to distribute Object Code embedded in BROTHER
Products, in accordance with Sections 2.1, 2.2, 2.3 and 2.4 of the
TLA. BROTHER shall have no right to distribute the Source Code, and no
right to distribute any Derivative Works in Source Code form.
3.4 Tools License: a non-exclusive, non-transferable license, for the term
of the TLA, to use the Tools in order to exercise the Source Code
Modification rights granted hereunder.
3.5 No sublicense. BROTHER may not sublicense, assign, or otherwise
transfer any of its Source Code rights in this Addendum Number Two.
4. ENSEMBLE DISTRIBUTION
Upon written request, GEOWORKS shall grant to BROTHER a non-exclusive,
non-transferable license, for the term of the TLA, to distribute the Ensemble(R)
Object Code, as identified in Exhibit A, on diskettes or other portable media,
for use by End-Users in connection with a ###.
5. PROPRIETARY RIGHTS
5.1 Except as the Parties may agree otherwise in writing, and except as
set forth in Section 5.2 concerning patents, all title and all trade
secrets, copyrights and trademarks to all modifications to the Source
Code shall belong to GEOWORKS. To the extent that BROTHER might
otherwise have any claim of ownership of such rights, BROTHER hereby
assigns all such title and proprietary rights to GEOWORKS. All such
modifications shall be licensed to BROTHER under the terms and
conditions of this Agreement. BROTHER agrees that BROTHER will assist
GEOWORKS, at GEOWORKS' expense, in every proper way with respect to
GEOWORKS' proprietary rights in such modifications, in all countries,
including without limitation: (i) the disclosure to GEOWORKS of all
pertinent information and data with respect to modifications, (ii) the
execution of all applications, specifications, oaths, assignments and
all other instruments which GEOWORKS shall deem necessary and/or
useful in order to apply for and obtain copyrights,
3
<PAGE> 4
trademarks and other protection, and in order to assign and convey to
GEOWORKS, its successors, assigns and nominees the sole and exclusive
rights, title and interest in and to such modifications, and (iii)
consultation, assistance and being available for testimony in any
action or proceeding to enforce such rights. BROTHER further agrees
that its obligations under this paragraph shall continue after the
termination of this Agreement with respect to any and all
modifications to be assigned to and/or owned by GEOWORKS under the
provisions of this Agreement.
5.2 BROTHER may apply for and hold in its name any patents (including
industrial designs capable of protection by design registration or
design patent) for any Derivative Work created by BROTHER during the
term of this Agreement. GEOWORKS shall provide BROTHER with all
signatures and documents reasonably necessary for filing patent
applications and obtaining patents, provided that BROTHER shall file
such applications at its own expense. GEOWORKS shall be granted a
fully paid-up, royalty-free, non-exclusive license to all such
patents.
5.3 GEOWORKS may not license any modifications or Derivative Works created
by BROTHER to any third party without BROTHER'S prior written
approval.
6. SOURCE CODE RESTRICTIONS
6.1 Brother acknowledges that Geoworks considers the Source Code to be
Confidential Information and to contain proprietary and trade secret
information of Geoworks. Brother agrees not to provide, disclose,
reproduce in any form, or give access to such Source Code to any third
party or employee other than the Authorized Personnel. BROTHER agrees
that Authorized Personnel shall be informed of and abide by the terms
and conditions of this Agreement. Upon BROTHER's prior written request
and consultation with GEOWORKS, GEOWORKS may authorize BROTHER to
provide controlled access to the Source Code to independent
contractors, provided that such contractors agree in writing to abide
by the terms and conditions of this Agreement and such additional
restrictions as GEOWORKS may reasonably require for the protection of
the Source Code.
6.2 BROTHER shall hold the Source Code in strict confidence. BROTHER shall
investigate all unauthorized attempts to gain access to the Source
Code, and immediately notify GEOWORKS concerning any breach of Source
Code confidentiality, whether or not such breach was inadvertent.
6.3 The Source Code shall be placed on designated computer systems located
at BROTHER's Designated Locations (the "Secure Rooms"). BROTHER shall
implement sufficient security procedures to limit access to the Source
Code to Authorized Personnel. Once loaded, the Source Code and any
backup copy shall be placed in a secure vault. When those other than
Authorized Personnel are in the Secure Room, the visible Source Code
must be concealed. The Source Code in electronic form must not be
moved from the Secure Room unless Geoworks consents in writing. All
hard copy produced from the Source Code must be labeled
4
<PAGE> 5
"GEOWORKS CONFIDENTIAL INFORMATION--UNAUTHORIZED USE IS STRICTLY
PROHIBITED" and must be shredded after use or stored in the Secure
Room. Similarly, any backup copy made of the Source Code must be
labeled "GEOWORKS CONFIDENTIAL INFORMATION--UNAUTHORIZED USE IS
STRICTLY PROHIBITED" and must be stored in a locked desk drawer, file
cabinet or safe in the Secure Room. BROTHER shall maintain logs
recording all access to the Source Code, including names of personnel
using the Source Code and times of access. The Secure Room, the
designated computer system and access logs shall be available for
inspection by GEOWORKS.
6.4 BROTHER agrees to take all reasonable precautions and to implement
procedures to minimize the risk of theft or unauthorized copying of
the Source Code, and to take appropriate action by instruction,
agreement, or otherwise with the Authorized Personnel. Such measures
may include, for example, the following: When loaded onto a disk, the
Source Code will be loaded onto a file system with access provisions
restricted to Authorized Personnel. Only Authorized Personnel may have
root privilege and accounts on the designated computer system
containing the Source Code. At the end of each day on which the Source
Code is used, the disk containing the Source Code will be taken off
line, and the designated computer system containing the Source Code
will be disconnected from all networks. Network access to the machine
containing the Source Code will be restricted to authorized personnel
only. The authorized Personnel's user IDs and passwords to the system
on which the Source Code resides must be different than those used on
other systems of BROTHER. The passwords must be changed at least on
each six month anniversary of the effective date of this Addendum
Number One. Passwords must be randomly selected, non-obvious and
non-trivial. Dial-up facilities must be protected by a secure
call-back system or other secure method. Before any physical storage
media containing the Source Code is released for reuse, it will be
degaussed or completely overwritten. BROTHER's operating system audit
for the designated computer system on which the source could resides
must be turned on, and the audit log must be available for inspection
by Geoworks.
6.5 BROTHER agrees (1) to preserve the Source Code from any liens,
encumbrances, and claims of any individual or entity; (2) not to use
or permit the use of the Source Code in any manner likely to cause
damage to any portion of them; (3) not to permit any part of the
Source Code to be removed from the Designated Locations, without
GEOWORKS' prior written consent; and (4) if Source Code is not already
so marked by GEOWORKS, then to clearly mark them "GEOWORKS
CONFIDENTIAL INFORMATION--UNAUTHORIZED USE IS STRICTLY PROHIBITED."
6.6 BROTHER agrees to implement reasonable precautions and procedures to
ensure that Authorized Personnel who have had access to the Source
Code do not incorporate any portion of the Source Code, or any of the
Confidential Information or trade secrets contained in the Source
Code, in any other software developed by BROTHER unless such other
software is a royalty-bearing Product, or is incorporated in a
royalty-bearing Product.
5
<PAGE> 6
7. LICENSE FEE
BROTHER agrees to pay a ### Source Code Access Fee of ###. Said sum shall not
constitute a royalty or an advance against royalties, or a credit against any
future payment obligations, and shall be non-refundable.
The fee shall be payable as follows:
###
Said sum shall constitute consideration for the following:
7.1 The Source Code and Tools licenses granted to BROTHER in Section 3 of
this Agreement and all available documentation of functional
specifications for all programs provided in Exhibit A;
7.2 The right to receive any major upgrade, minor upgrade or Error
correction to the Source Code or Tools released by GEOWORKS on or
before ###; and
7.3 Reasonable technical support and Source Code and Tools alteration
engineering services in connection with the transfer of the Licensed
Technology to BROTHER through ###.
8. MAJOR UPGRADE OPTION
If GEOWORKS releases a major Upgrade to the GEOS Licensed Source Code ### on or
after ###, BROTHER shall be have the option to include such Upgrade within the
scope of this Agreement. In that event, BROTHER shall pay to a GEOWORKS ###
license fee of ###. Said sum shall not constitute a royalty or an advance
against royalties, or a credit against any future payment obligations, and shall
be non-refundable. Said sum shall constitute consideration for the right to
include such Upgrade within the Source Code licenses granted to BROTHER in
Section 3 of this Agreement.
9. SUPPORT OPTION FEE
If, after ###, BROTHER desires technical support, Error correction and/or
consultation in connection with its modification of the Source Code, then
BROTHER may request to enter into an annual maintenance agreement with GEOWORKS.
GEOWORKS shall accept BROTHER's request in good faith. The annual fee and other
terms and conditions of such maintenance agreement will be determined in writing
by mutual agreement of the parties.
6
<PAGE> 7
10. ROYALTIES
BROTHER agrees to pay to GEOWORKS a per-unit royalty for each Product Shipment
of any Product which incorporates, is based upon or is distributed with the
Source Code licensed hereunder and/or a Derivative Work, or any portion thereof.
The royalty shall ### for the first ### cumulative units of all such Products,
and ### for all Product units sold thereafter. The foregoing royalties shall
include any royalties payable by GEOWORKS to third parties for technologies
included within the Source Code.
11. MINIMUM VOLUME COMMITMENT
BROTHER will pay GEOWORKS a minimum ### in royalties over a period not to exceed
the ### commencing upon the earlier of (i) the quarter in which the first
royalty-bearing Product Shipment (as set forth in Section 10) occurs, or (ii)
the quarter ending ###. On or before the last day of each such quarter, until
the ### is paid in full, BROTHER shall pay GEOWORKS the actual royalties earned
or the following minimum amounts, whichever is greater:
###
Such payments shall not constitute an advance against royalties or a credit
against any future payment obligations, and shall be non-refundable.
12. DISCLAIMERS
12.1 Any warranty against infringement, indemnity obligation or maintenance
or support obligation given by GEOWORKS to BROTHER under the
provisions of the TLA shall not apply to BROTHER's modifications or to
Derivative Works, or to portions of the Source Code affected by
BROTHER's modifications. All such warranties, indemnity obligations
and maintenance and support obligations under the TLA, including
technical support by GEOWORKS, shall remain in effect with respect to
the unmodified Licensed Technology, unmodified Source Code and
unmodified Object Code.
12.2 The ### has not been fully tested and is licensed to BROTHER in 'AS
IS' condition. GEOWORKS shall cooperate with BROTHER but shall not be
responsible for further testing or removing Errors from the ###.
13. TERM OF AGREEMENT AND TERMINATION
13.1 Term. The term of this Agreement shall begin on the Effective Date and
shall continue for a period of four (4) years, unless terminated
earlier in accordance with this Agreement. The Agreement may be
renewed or extended by mutual Agreement, ### to BROTHER.
7
<PAGE> 8
13.2 Term of TLA. The term of the TLA is hereby amended, and shall be equal
to the Term of this Amendment.
13.3 Return of Materials. Within thirty (30) days of such termination or
expiration (or immediately upon termination in the case of a
termination for breach by BROTHER), BROTHER shall return all copies of
the Source Code, including without limitation master diskettes and
tapes, user manuals, and Product Materials. BROTHER may retain only
such copies of the Source Code as it may reasonably require for its
internal use in providing continued First Level Customer Support to
its end-user customers.
14. PUBLIC RELATIONS
Neither Party shall issue any press releases or otherwise disclose the terms of
this Agreement without the prior written consent of the other Party, which shall
not be unreasonably withheld, except as may be required by law. Without limiting
the foregoing, BROTHER shall not announce or advertise that it is a licensee of
GEOWORKS' source code.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective
Date.
GEOWORKS BROTHER
- ------------------------------------ ------------------------------------
Signature Signature
- ------------------------------------ ------------------------------------
Print Name Print Name
Title Title
------------------------------ ------------------------------
June 28, 1996 June 28, 1996
8
<PAGE> 9
EXHIBIT A
IDENTIFICATION OF THE SOURCE AND OBJECT CODE
GEOS Operating System ###
###
###
Ensemble suite of applications:
GeoPlanner
GeoDraw
GeoWrite
GeoCalc
GeoManager
GeoFile
GeoComm
Preferences
Book Reader
Scrapbook
Solitaire
Uki
IDENTIFICATION OF THE TOOLS
1. Bindery (Object code)
2. Compilation, source control, debugging, and build tools
###
###
###
Other tools, if released by GEOWORKS during the term of this Agreement and
requested by BROTHER
AUTHORIZED PERSONNEL / DESIGNATED LOCATIONS
Full-time, technical employees of BROTHER at the following locations:
9
<PAGE> 10
U.S. _____________________________________________
Japan ____________________________________________
Europe ___________________________________________
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF GEOWORKS AS OF JUNE 30, 1996 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE QUARTER THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 11,514,000
<SECURITIES> 35,607,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,301,000
<PP&E> 4,926,000
<DEPRECIATION> 2,018,000
<TOTAL-ASSETS> 50,369,000
<CURRENT-LIABILITIES> 6,628,000
<BONDS> 0
0
0
<COMMON> 86,390,000
<OTHER-SE> (43,527,000)
<TOTAL-LIABILITY-AND-EQUITY> 50,369,000
<SALES> 0
<TOTAL-REVENUES> 2,429,000
<CGS> 0
<TOTAL-COSTS> 72,000
<OTHER-EXPENSES> 4,808,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,000
<INCOME-PRETAX> (1,931,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,931,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,931,000)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
<FN>
Interest income on securities -- $575,000 (Item 5-03(b)7)
</FN>
</TABLE>
