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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, 1997
[ ] 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
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(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
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(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
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: 15,525,754 SHARES AS OF JUNE 30, 1997
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GEOWORKS
INDEX
<TABLE>
<S> <C>
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets: June 30, 1997 and March 31, 1997 2
Condensed consolidated statements of operations: Three months ended
June 30, 1997 and 1996 3
Condensed consolidated statements of cash flows: June 30, 1997 and 1996 4
Notes to condensed consolidated financial statements: June 30, 1997 5
Item 2. Management's discussion and analysis of financial condition and results
of operations 6-13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14-17
Signature 18
</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,
1997 1997
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,386 $ 6,319
Marketable securities 26,721 30,501
Accounts receivable 1,911 475
Prepaid expenses and other current assets 592 907
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Total current assets 32,610 38,202
Furniture and equipment, net 3,682 3,546
Other assets 113 120
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$36,405 $41,868
======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,968 $ 1,628
Deferred revenue 1,820 1,919
Other current liabilities 1,265 1,029
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Total current liabilities 5,053 4,576
Other liabilities 499 739
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Total liabilities 5,552 5,315
Shareholders' equity 30,853 36,553
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$36,405 $41,868
======= =======
</TABLE>
See accompanying notes
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GEOWORKS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
June 30, June 30,
1997 1996
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<S> <C> <C>
Net revenues:
License revenue $ 849 $ 2,241
Research and development fees 824 492
Service revenue 225 --
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Total net revenues 1,898 2,733
Operating expenses:
Cost of license revenue 47 393
Sales and marketing 2,248 1,459
Research and development 4,899 3,064
General and administrative 894 841
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Total operating expenses 8,088 5,757
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Operating loss (6,190) (3,024)
Other income (expense):
Interest income 475 583
Interest expense (32) (91)
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Loss before income taxes (5,747) (2,532)
Provision for income taxes 37 --
======= =======
Net loss $(5,784) $(2,532)
======= =======
Net loss per share $ (0.37) $ (0.17)
======= =======
Shares used in per share
computation 15,512 15,017
======= =======
</TABLE>
See accompanying notes
3
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GEOWORKS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
June 30, June 30,
1997 1996
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<S> <C> <C>
Operating activities:
Net loss $(5,784) $ (2,532)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 369 324
Changes in operating assets and liabilities (791) (734)
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Net cash used in operating activities (6,206) (2,942)
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Investing activities:
Purchases of furniture and equipment (498) (1,062)
Sales of marketable securities (net of purchases) 3,780 4,018
Other 31 (143)
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Net cash provided by investing activities 3,313 2,813
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Financing activities:
Proceeds from notes payable to shareholders -- 47
Payments of obligations under capital leases (76) (71)
Net proceeds from issuance of common stock 36 3,351
Other -- 16
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Net cash provided by (used in) financing activities (40) 3,343
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Net increase (decrease) in cash and cash equivalents (2,933) 3,214
Cash and cash equivalents at beginning of period 6,319 11,052
------- --------
Cash and cash equivalents at end of period $ 3,386 $ 14,266
======= ========
</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, 1997 and 1996 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 consolidated
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 on Form 10-K for the fiscal year ended
March 31, 1997. The results of operations for the three months ended June 30,
1997 are not necessarily indicative of the results to be expected for the
entire fiscal year. Certain reclassifications have been made to the 1997
financial statements to conform to the current quarter's presentation.
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 February 1997,
the Financial Accounting Standards Board issued Statement No. 128, Earnings Per
Share, which is required to be adopted on December 31, 1997. The adoption of
this statement is not expected to have a significant effect on the historical
loss per share of the Company.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Safe Harbor Statement. 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 market,
the extent of the Company's investment in research and development in future
periods, and the extent to which royalty revenues increase as a percentage of
total revenues in future periods. Actual results may vary significantly due to
various risks and uncertainties, including the "Factors Affecting Future
Operating Results" set forth below, as well as the following: key markets may
not emerge to the degree or in the timing anticipated; new technologies are
inherently subject to development, timing, and consumer acceptance risks; the
Company has a history of operating losses and anticipated future losses; and
future results depend upon the establishment of licensing relationships with
leading market participants, introduction of successful products and services,
and achievement and maintenance of a competitive advantage.
Results of Operations
Acquisition of Eden Group, Ltd.
In February 1997, the Company acquired all the outstanding stock of
Eden Group Ltd. ("Eden"), a UK software publisher. The acquisition has been
accounted for as a pooling-of-interests, and the historical consolidated
financial statements of the Company for all periods prior to the acquisition
have been restated to include the financial position, results of operations,
and cash flows of Eden.
Net Revenues
Net revenues decreased $835,000, or 31%, during the quarter ended June
30, 1997 in comparison with the corresponding quarter of the previous fiscal
year. The decrease was attributable primarily to the restructuring of an OEM
license agreement during the quarter ended June 30, 1996. At the time of this
restructuring, there was a non-refundable, prepaid royalty balance related to
the agreement which had been recorded as deferred revenue but not yet fully
amortized. Revenue recognized upon this license agreement restructuring was
included in license revenue for the quarter ended June 30, 1996, and accounted
for $1,673,000, or 61%, of the Company's total net revenues for that quarter.
License revenues decreased $1,392,000, or 62%, in the quarter ended June 30,
1997 in comparison with the corresponding quarter of the previous fiscal year,
primarily as a result of revenues associated with the aforementioned license
restructuring in the quarter ended June 30, 1996.
During the quarter ended June 30, 1997, license revenue consisted
principally of technology access fees and royalties on units sold by OEM
licensees. Technology access fees include fees for source code licenses and
other transfers of the company's technology and intellectual property rights.
Revenues associated with technology access fees and license agreement
restructurings are non-recurring. Accordingly, revenues for both quarters
presented are not indicative of revenues to be recognized in future periods.
The Company believes that royalties from OEM and other licensees will represent
an increasing portion of the Company's revenues in future periods.
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Revenue related to research and development fees increased $332,000,
or 67%, during the quarter ended June 30, 1997, in comparison with 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. The extent to which such
revenue is reported can vary considerably among periods, depending upon the
specific terms of the Company's contracts with OEM licensees and the relative
level of development effort devoted towards projects on which research and
development fees are charged. The substantial increase in research and
development fees during the quarter ended June 30, 1997 over the corresponding
period in the previous fiscal year resulted from higher reimbursement levels
specified in the Company's contracts with OEM licensees, and the fact that
there was a greater number of projects in process for which such fees are
charged.
Service revenue of $225,000 in the quarter ended June 30, 1997
represents amounts earned for the support and maintenance of software licensed
by OEM customers, and fees earned in connection with software workshops
sponsored by the Company for the benefit of current and prospective OEM
licensees.
Operating Expenses
Cost of License Revenue. The Company's gross margin percentage on
license revenue was 94% in the quarter ended June 30, 1997 and 82% in the
corresponding quarter of the previous fiscal year. Cost of license revenue for
the current period consisted of license payments to third parties for software
that is incorporated into the Company's software. Cost of revenue for the
quarter ended June 30, 1996, in addition to third party software licenses,
included a one-time charge of $320,000 to terminate a technology contract which
had been entered into during a prior fiscal year. Without this one-time
charge, the Company's gross margin percentage on license revenue for the
quarter ended June 30, 1996 would have been 97%.
Sales and Marketing. Sales and marketing expense increased $789,000,
or 54%, during the quarter ended June 30, 1997 in comparison with the
corresponding quarter of the previous fiscal year. This increase resulted
principally from the Company's expanded emphasis on international sales
activities, and from certain non-recurring charges of approximately $300,000
resulting from a staff reorganization. As the market for smart phones and
related wireless products and services has evolved, the Company has focused
increasingly on opportunities in Europe and Asia. To address these geographical
markets, the Company has increased its sales activities in overseas locations
and as a result incurred higher staffing and travel costs.
Research and Development. Research and development expense increased
$1,835,000, or 60%, during the quarter ended June 30, 1997 in comparison with
the corresponding period of the previous fiscal year. This 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. Additionally, the Company made
payments of $480,000 during the current quarter to outside developers for the
license of software to be incorporated into future products. As the
technological feasibility of the future products has yet to be established,
these payments have been charged to research and development expense in the
current quarter. The Company expects that research and development expense
will continue to increase in future periods as the Company expands its efforts
to develop products and services for the emerging market for smart phones and
other mobile communicating devices.
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General and Administrative. General and administrative expense
increased $53,000, or 6%, during the quarter ended June 30, 1997 as compared to
the corresponding period of the previous fiscal year. This increase was due
primarily to a specific consulting engagement related to the Company's equity
programs.
Other Income (Expense)
Interest income declined $108,000, or 19%, during the quarter ended
June 30, 1997 as compared to the corresponding period of the previous fiscal
year. The decrease was attributable to lower balances available to the Company
for short-term investment in the current period as a direct result of the
Company's operating deficits over the preceding 12 months. Interest expense
decreased $59,000, or 65%, for the quarter ended June 30, 1997 as compared to
the corresponding period of the previous fiscal year. This decrease resulted
from the repayment in the final quarter of fiscal year 1997 of notes payable to
shareholders which had been outstanding during the quarter ended June 30, 1996.
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, 1997, the Company had net operating loss
carryforwards for U.S. income tax purposes of approximately $55,370,000, for
U.K. income tax purposes of $4,073,000, and for state income tax purposes of
approximately $18,090,000. The Company also had research and development
credit carryforwards for federal income tax purposes of approximately
$1,718,000 and for state income tax purposes of approximately $708,000.
Utilization of the company's U.S. net operating loss and research credit
carryforwards will be subject to an annual limitation due to the "change of
ownership" provisions of the Tax Reform Act of 1986. The annual limitation may
result in the expiration of net operating loss and research credit
carryforwards before utilization.
Liquidity and Capital Resources
The Company's cash, cash equivalents, and marketable securities
declined to $30.1 million at June 30, 1997 from $36.8 million at March 31,
1997. This decrease of $6.7 million resulted primarily from the use of cash
during the period of $6.2 million for operating activities and $500,000 for the
purchase of furniture and equipment. The Company expects to incur additional
substantial operating losses at least through its fiscal year ending March 31,
1998, but anticipates that its existing capital resources will be adequate to
satisfy its operating and capital requirements throughout the fiscal year.
At June 30, 1997, the Company had a balance in accounts receivable of
$1,911,000, an increase of $1,436,000 from the corresponding balance at March
31, 1997. The balance consisted of amounts due to the Company from OEM
licensees for research and development fees and licenses of source code. The
increase in accounts receivable at June 30, 1997 resulted from source code fees
collectible from an OEM licensee and engineering fees accrued under the
percentage-of-completion method. Prepaid expenses and other current assets
decreased $315,000 from March 31, 1997 to June 30, 1997 due primarily to the
amortization during the quarter of the Company's
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prepaid annual insurance premiums. Furniture and equipment, net of
depreciation, increased $136,000 from March 31, 1997 to June 30, 1997, as a
result of furniture and equipment purchases for new employees, the integration
of the Company's new office facilities in the UK, and ongoing enhancements to
the Company's computer equipment used for research and development.
Accounts payable and accrued liabilities increased $340,000 at June
30, 1997 as compared to March 31, 1997, due principally to higher balances in
the current fiscal year for short-term equipment lease obligations and accrued
office rents. During the quarter ended June 30, 1997, certain balloon
payments due at the end of the equipment leases became payable within 12 months
and therefore were classified as current liabilities. Deferred revenue
decreased $99,000 from March 31, 1997 to June 30, 1997, as the Company
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, 1997 exceeded
the amount of any payments collected during the period, causing the balance in
deferred revenue to decline. Other current liabilities increased $236,000 from
March 31, 1997 to June 30, 1997 as a result of higher accrual balances for
certain incentive compensation and employee benefit programs, as well as
expense accruals for a staffing reorganization during the quarter ended June
30, 1997. Other liabilities decreased $240,000 from March 31, 1997 to June 30,
1997, as monthly payments reduced outstanding principal balances on capital
lease obligations, and certain balloon payments due at the conclusion of the
equipment leases became payable within 12 months and therefore were classified
as current liabilities.
Factors Affecting Future Operating Results
History Of Operating Losses; Anticipated Future Losses. Since its inception in
1983, the Company has realized limited revenues, incurred significant losses,
and experienced substantial negative operating cash flow. As of June 30, 1997,
the Company had an accumulated deficit of $64.2 million, and had incurred
operating losses of approximately $15.5 million, $10.7 million, and $10.5
million in the fiscal years ended March 31, 1997, 1996 and 1995, respectively,
and an operating loss of $6.2 million for the quarter ended June 30, 1997. The
Company expects to continue to incur substantial annual operating losses at
least through its fiscal year ending March 31, 1998, and it is unclear how soon
thereafter, if ever, the Company will operate profitably. The Company's
strategic plan to achieve profitability includes focusing in the near term on
the smart phone segment of the market for mobile communicating devices. The
Company's objective is to establish its operating system software as a leading
operating system for this market in the near term, and to leverage this position
by developing and marketing products and services to the installed base of smart
phone devices. The duration and outcome of any of these efforts is uncertain,
and the Company's future operating results will depend upon the growth rate of
the smart phone market segment, the Company's ability to establish licensing
relationships with leading smart phone hardware manufacturers, the introduction
by those manufacturers of successful smart phone products, the emergence of
wireless content and services for smart phones to spur demand and generate
additional revenues, and the Company's ability to achieve and maintain a
competitive advantage should such market develop.
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Dependence On Emergence Of Smart Phone Market. The Company's efforts are
currently concentrated on developing and marketing operating system software and
applications for use in smart phones and other mobile communicating devices.
The Company's success depends upon the development of a new market for these
products. Although the market for cellular telephones is well-established and
is currently growing at an appreciable rate, the smart phone market is in the
early stages of development, and to date no smart phone device has achieved
broad market acceptance or been shipped in volume. In August 1996, Nokia
released a smart phone in selected geographic markets which incorporates the
Company's GEOS software. Although the device has received positive reviews and
several awards, the market acceptance of these products has not yet been fully
established. More generally, the failure of these or any other early, highly
publicized products, or the discontinuance of any such products by their
manufacturers, could significantly affect the marketability of other similar or
related products and components and the development of the market. The Company
has no control over the pricing of devices incorporating the Company's operating
system and, therefore, cannot guarantee that any devices will reach the desired
price points to achieve mass market acceptance.
In addition, the Company's long-term results will depend upon its
success in developing and marketing aftermarket wireless content products and
services that operate on smart phones. There can be no assurance, however,
that the wireless content and services market will develop as anticipated or
that the Company will be able to execute its business plan successfully.
Risks of Software Product Development, Including Risk of Developing Next
Generation Operating System. The Company's future success will depend on its
ability to develop and release, on a timely basis, new operating system and
application software products and upgrades and new aftermarket products and
services. In particular, Geoworks intends to introduce a next generation of
its operating system software that, unlike its current GEOS technology, will be
processor-independent, i.e., not limited to processors based upon the Intel x86
architecture. Broad acceptance of Geoworks' existing and yet to be released
products in new markets, including markets that may be characterized by greater
usage of non-Intel microprocessors, is critical to Geoworks' future success.
Although Geoworks has made significant progress toward this development goal
through its acquisition of the Eden Group, Ltd. and through ensuing development
efforts, adaptation and/or development of core technology for a different
microprocessor architecture can be technically difficult, time consuming and
subject to delays. There can be no assurance that Geoworks will be successful
in this development effort. Further, there can be no assurance that Geoworks
will be successful in marketing and selling products developed for non-Intel
microprocessors.
Disappointing Revenue from Past Products. Prior to its concentration on
software for the emerging smart phone market, the Company licensed its operating
system software to manufacturers of non-communicating mobile devices, such as
personal digital assistants and handheld electronic organizers. These
non-communicating devices - in particular the Hewlett-Packard OmniGo and Casio
Z-7000 -- as well as several of those introduced by competitors, such as the
Apple Newton, Sony MagicLink and Motorola Envoy, have achieved only modest unit
sales to date. As a result of the slow adoption rates in these device
categories, the Company has failed to generate significant royalty revenues in
connection with its licensing efforts to date, and its operating results have
been affected adversely. The Casio Z-7000, a first-generation personal digital
assistant based upon the Company's system software, has been discontinued.
Sharp and Toshiba have each developed a non-communicating device on the
Company's system software and subsequently elected to cancel introduction of
such devices into the market. (More recently, Toshiba introduced the GENIO, a
mobile communicating device for the Japanese market which is based on the
Company's system software.) Other market participants have announced
restructurings of their efforts relating to similar products. In addition,
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sales of low-cost, GEOS-based educational computer systems fell short of the
Company's expectations, causing the Company to discontinue its development
efforts in this segment and restructure its licensing agreement with
IBM/Eduquest. During calendar year 1995, Brother released the Ensemble, a
personal desktop publishing system, and Hewlett-Packard announced and shipped
its OmniGo 100, a second generation electronic organizer. Both of these products
are based on the Company's operating system software. Royalty revenues earned
on reported unit shipments of these products, however, have been modest to date,
and it is unlikely that they will ever make a significant favorable contribution
to the Company's operating results. Collectively, these third-party product
terminations and disappointments have resulted in the Company recognizing
lower-than-expected recurring license revenues in the current fiscal quarter and
previous fiscal years.
Dependence On Limited Number Of Manufacturers, Particularly Nokia. The
Company's business is critically dependent upon the timely introduction and
successful marketing and sale by a limited number of consumer product companies
of smart phones based upon the Company's operating system software. In August
1996, Nokia released in selected geographic markets a smart phone which
incorporates the Company's GEOS software. This has yet to generate significant
royalty revenue or make a material, favorable contribution to the Company's
operating results. It is unclear what effect in the long term this new product
will have on the Company's reported royalties or the adoption rate of smart
phones. The Company has no direct control over any particular smart phone's
hardware design, product functionality, pricing strategy, release dates, market
positioning, product promotion or distribution, all of which affect the
product's success and, therefore, the Company's business results. In addition,
foreign currency fluctuations may limit the ability of foreign consumer product
companies to achieve production costs low enough to meet the pricing
requirements of the smart phone market or otherwise affect the pricing of their
products in foreign markets, to the extent that pricing is denominated in U.S.
dollars. If a particular smart phone does not achieve broad market acceptance
and generate anticipated sales volume, the Company's operating system royalties
from such product and the Company's opportunity for aftermarket sales of
products and services to users of such product will be materially adversely
affected. Furthermore, under the terms of the Company's agreements with
hardware manufacturers, the manufacturer is generally permitted to add product
enhancements or new products to the agreement. In such event, the Company may
be obligated to apply unamortized advance payments under such agreements against
license revenue to be earned by the Company on per unit sales of such
products. The Company may incur additional research and development
expenses to provide software for such products. Any such activities are
generally subject to reaching agreement on specifications, delivery, pricing
and additional payments.
Dependence On Development Of Wireless Content And Services. Even if the
general smart phone market develops as anticipated by the Company and the
Company's operating system software becomes a leading platform for hardware
devices, the Company's long-term financial success is also dependent on its
ability to derive revenue from the delivery of wireless content and services
for mobile communicating devices. The Company's plan for generating such
revenue includes: sales by the Company of internally developed client and
server software and services for, as well as upgrades to and associated
products for, smart phones based upon the Company's operating system; recurring
license revenue from communication services providers; and electronic
distribution by the Company of its own and third-party content, applications
and services. There can be no assurance, however, that the Company will be able
to derive significant revenue from any of these sources. The Company currently
offers only a very limited number of aftermarket applications in selected smart
phone market segments. The Company's wireless server and client development
resources, experience and market presence are more limited than those of many
other developers. There can be no assurance that the Company will be able to
successfully develop additional aftermarket products or services or obtain
distribution rights to third-party products or content, or that any such
products or content will achieve acceptance in the market. Further, the
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Company has historically marketed an integrated package of operating system and
applications, and has only limited experience marketing server and client
applications to communication service providers. There can be no assurance that
the Company will be able to offer sufficiently attractive products to generate
significant revenue. Moreover, the Company may be required to respond to
competitive products and to customer demands by including features of its
aftermarket products or services in updated versions of the Company's operating
system software. To the extent that the Company is required to so include such
products and services, the Company may be unable to derive the level of revenue
from such products and services that the Company would derive if such products
or services were sold separately. While, in the past, the Company has been
able to obtain recurring license revenue from certain communication services
providers, there can be no assurance that the Company will be able to obtain
similar arrangements with other providers. Finally, practicable and effective
wireless distribution of content and services is an unproven concept which
depends on many factors for success, including the size of the data and
applications to be distributed and the presence of an appropriate
infrastructure. Accordingly, there can be no assurance that wireless
distribution will prove to be feasible. Regardless of the success of the
Company's operating system software, if the Company is unable to derive
significant revenue from one or more of the foregoing aftermarket sources, the
Company's long-term business, results of operations and financial condition will
be materially adversely affected.
Fluctuations in Operating Results. 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 smart phone market participants; the introduction by these
participants and market acceptance of new smart phones based upon the Company's
operating system software; 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 OEM customers' success
in meeting anticipated shipment dates, obtaining market acceptance for their
products, and realizing significant sales volume of those products. Revenue
from research and development fees can vary considerably among periods,
depending upon the specific terms of the Company's contracts with OEM licensees
and the relative level of development effort devoted toward projects on which
research and development fees are charged. 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 toward 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 smart phones and for related software
products and services, as well as by the general state of the domestic and
global economies. The Company expects that the market for smart phones and
other mobile communicating devices could ultimately reflect 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.
Non-Recurring Revenues. The Company's operating results may also vary as a
result of the receipt of one-time technology access 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 restructuring or termination have accounted in the past,
and could account in the future, for a material portion of the Company's
revenue, with no corresponding cash flow benefit in the period in which the
revenue is recognized.
12
<PAGE> 14
Effect Of Wholesale Prices On Royalties. Royalties from the license of the
Company's operating system to mobile communicating device hardware
manufacturers are expected to represent a significant component of the
Company's future revenues. The royalties the Company receives from these
licenses are usually correlated to the wholesale or comparable transfer price
of the mobile communicating devices in which the Company's software is
incorporated. The price of mobile communicating devices is expected to decline
over time, as a result of competitive pressures and consumer demands, and due
to the efforts of the Company's OEM customers to achieve increased sales volume
through price reductions. To the extent that the Company's royalty is
determined as a percentage of said price, or to the extent that the Company
responds to market pressures by reducing the amount of fixed-dollar royalties,
any such reduction in the wholesale or comparable transfer price will have a
material adverse effect on the royalty per unit the Company receives. There can
be no assurance that an increase in sales volume will result from a decline in
the wholesale or comparable price and thereby compensate for any decline in
royalties per unit which the Company receives from its OEM licensees.
Volatility Of Stock Price. 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's 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.
13
<PAGE> 15
PART 2 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
2.1 Recommended Offer to Purchase the Entire Issued Share Capital
of Eden Group Limited (formerly filed as an Exhibit 2.1 with
the Registrant's report on Form 8-K filed March 10, 1997)
2.2 Warranty and Covenant Agreement in relation to Eden Group
Limited (formerly filed as Exhibit 2.2 with the Registrant's
report on Form 8-K filed March 10, 1997)
2.3 Escrow Agreement (formerly filed as Exhibit 2.3 with the
Registrant's report on Form 8-K filed March 10, 1997)
3.1 Articles of Incorporation of Registrant (formerly filed as
Exhibit 3.1 with the Registrant's Registration Statement on
Form S-1 (File No. 33- 78104), effective June 22, 1994)
3.2 Bylaws of Registrant (formerly filed as Exhibit 3.2 with the
Registrant's Registration Statement on Form S-1 (File No.
33-78104), effective June 22, 1994)
10.1 Form of Indemnification Agreement (formerly filed as Exhibit
10.1 with the Registrant's Registration Statement on Form S-1
(File No. 33-78104), effective June 22, 1994)
10.2 1987 Stock Option Plan (formerly filed as Exhibit 10.2 with
the Registrant's Registration Statement on Form S-1 (File No.
33-78104), effective June 22, 1994)*
10.3 1994 Stock Plan and Form of Stock Option Agreement (formerly
filed as Exhibit 10.3 with the Registrant's report on Form
10-Q for the quarter ended September 30, 1996)*
10.4 Employee Stock Purchase Plan and Form of Subscription
Agreement (formerly filed as Exhibit 10.4 with the
Registrant's Registration Statement on Form S-1 (File No.
33-78104), effective June 22, 1994)*
10.5 Software License Agreement between Canon Business Machines,
Inc. and Geoworks dated April 5, 1993 (formerly filed as
Exhibit 10.10 with the Registrant's report on Form 10-Q for
the quarter ended December 31, 1996)
10.6 Corporate Technology Agreement between Toshiba Corporation and
Geoworks dated March 17, 1993 (formerly filed as Exhibit 10.12
with the Registrant's Registration Statement on Form S-1 (File
No. 33-78104), effective June 22, 1994)###
14
<PAGE> 16
10.7 Third Amended and Restated Registration Rights Agreement dated
March 4, 1994 between Geoworks and certain Holders of Common
Stock and Preferred Stock (formerly filed as Exhibit 10.15
with the Registrant's Registration Statement on Form S-1 (File
No. 33-78104), effective June 22, 1994)
10.8 Lease dated December 30, 1993 for facilities located at 960
Atlantic Avenue, Alameda, California (formerly filed as
Exhibit 10.16 with the Registrant's Registration Statement on
Form S-1 (File No. 33-78104), effective June 22, 1994)
10.9 Amendment Number One to Corporate Technology Agreement between
the Company and Toshiba Corporation (formerly filed as Exhibit
10.17 with the Registrant's report on Form 10-Q for the
quarter ended June 30, 1994)###
10.10 Geoworks - Brother Technology License Agreement, effective as
of September 30, 1994 (formerly filed as Exhibit 10.18 with
the Registrant's report on Form 10-Q for the quarter ended
September 30, 1994)###
10.11 Geoworks - Hewlett-Packard Company Technology License
Agreement, effective as of September 21, 1994 (formerly filed
as Exhibit 10.20 with the Registrant's report on Form 10-Q for
the quarter ended September 30, 1994)###
10.12 Lease dated September 30, 1994 for facilities located at 2001
Center Street, Berkeley, California (formerly filed as Exhibit
10.22 with the Registrant's original Annual Report on Form
10-K or amendments theretoon Form 10-KA for the year ended
March 31, 1995)
10.13 Software Development and Licensing Agreement between Nokia
Mobile Phones Ltd. and Geoworks dated December 2, 1994
(formerly filed as Exhibit 10.23 with the Registrant's
original Annual Report on Form 10-K or amendments thereto on
Form 10-KA for the year ended March 31, 1995) ###
10.14 Master Lease Agreement between LINC Capital Management
Services, LTD. and Geoworks dated December 8, 1994 (formerly
filed as Exhibit 10.24 with the Registrant's original Annual
Report on Form 10-K or amendments thereto on Form 10-KA for
the year ended March 31, 1995)
10.15 Amendment No. 1 to Software License Agreement dated June 15,
1995 between Geoworks and Tandy Corporation (formerly filed as
Exhibit 10.25 with the Registrant's Registration Statement on
Form S-3 (File No.33-97060))
10.16 Agreement to Purchase and Sell Common Stock dated November 3,
1995 between Toshiba and Geoworks (formerly filed as Exhibit
10.26 with the Registrant's Form 8-K or amendments thereto on
Form 8-KA on November 6, 1995)
15
<PAGE> 17
10.17 Amendment Number Three to Corporate Technology Agreement
between the Company and Toshiba Corporation (formerly filed as
Exhibit 10.27 with the Registrant's report on Form 10-Q for
the quarter ended December 31, 1995) ###
10.18 Technology License Agreement dated January 12, 1996 between
Geoworks and Ericsson Mobile Communications (formerly filed as
Exhibit 10.28 with Registrant's report on Form 10-K for the
year ended March 31, 1996)###
10.19 Amendment Number Five to lease for facilities located at 960
Atlantic Avenue, Alameda, CA, dated March 15, 1996 (formerly
filed as Exhibit 10.29 with Registrant's report on Form 10-K
for the year ended March 31, 1996)
10.20 Amendment Numbers One and Two to lease for facilities located
at 2001 Center Street, Berkeley, CA, dated January 18, 1996
and February 29, 1996, respectively (formerly filed as Exhibit
10.30 with Registrant's report on Form 10-K for the year ended
March 31, 1996)
10.21 Addendum Number One to Technology License Agreement between
Geoworks and Brother, dated March 29, 1996 (formerly filed as
Exhibit 10.31 with Registrant's report on Form 10-K for the
year ended March 31, 1996) ###
10.22 International Business Machines Corporation, Letter Agreement
dated April 16, 1996 (formerly filed as Exhibit 10.33 with the
Registrant's report on Form 10-Q for the quarter ended June
30, 1996)###
10.23 Addendum Number Two to Technology License Agreement between
Geoworks and Brother International Corporation, dated June 28,
1996 (formerly filed as Exhibit 10.34 with the Registrant's
report on Form 10-Q for the quarter ended June 30, 1996)###
10.24 Supplemental Stock Option Plan (formerly filed as Exhibit
10.35 with the Registrant's report on Form 10-Q for the
quarter ended September 30, 1996)*
10.25 Technology License Agreement between Geoworks and NEC
Corporation, dated April 26, 1996 (formerly filed as Exhibit
10.36 with the Registrant's report on Form 10-Q for the
quarter ended September 30, 1996)###
10.26 Amendment Number One to Technology License Agreement between
Sharp Corporation and Geoworks, dated September 13, 1996
(formerly filed as Exhibit 10.37 with the Registrant's report
on Form 10-Q for the quarter ended September 30, 1996)
10.27 Amendment Number One to Software License Agreement dated
December 5, 1996 between Casio Computer Co., Ltd. and Geoworks
(formerly filed as Exhibit 10.38 with the Registrant's report
on Form 10-Q for the quarter ended December 31, 1996)
16
<PAGE> 18
10.28 Addendum to Corporate Technology Agreement between Geoworks
and Toshiba, dated December 16, 1996 (formerly filed as
Exhibit 10.39 with the Registrant's report on Form 10-Q for
the quarter ended December 31,1996)###
10.29 1997 Supplemental Stock Plan (formerly filed as Exhibit 4.1
with the Registrant's Registration Statement on Form S-8 filed
March 25, 1997)*
10.30 Form of Stock Option Agreement under the 1997 Supplemental
Stock Plan (formerly filed as Exhibit 4.2 with the
Registrant's Registration Statement on Form S-8 filed March
25, 1997) *
27.1 Financial Data Schedule
### Confidential treatment has been granted as to portions
thereof
* Management contract for compensatory plan or arrangement
b) Reports on Form 8-K
No reports on Form 8-K were filed in this quarter.
17
<PAGE> 19
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: July 31, 1997
GEOWORKS
by: /s/ Daniel L. Sicotte
----------------------------
Daniel L. Sicotte
Treasurer
18
<PAGE> 20
GEOWORKS
EXHIBITS
TABLE OF CONTENTS
27.1 Financial Data Schedule
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains Summary Financial Information extracted from (A) the
Consolidated Balance Sheet of Geoworks as of June 30, 1997, and the Consolidated
Statement of Operations for the quarter then ended, and is qualified in its
entirety by reference to such (B) Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,386,000
<SECURITIES> 26,721,000
<RECEIVABLES> 1,911,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,610,000
<PP&E> 6,348,000
<DEPRECIATION> (2,666,000)
<TOTAL-ASSETS> 36,405,000
<CURRENT-LIABILITIES> 5,053,000
<BONDS> 499,000
0
0
<COMMON> 94,818,000
<OTHER-SE> (63,965,000)
<TOTAL-LIABILITY-AND-EQUITY> 36,405,000
<SALES> 0
<TOTAL-REVENUES> 1,898,000
<CGS> 0
<TOTAL-COSTS> 47,000
<OTHER-EXPENSES> 8,041,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,000
<INCOME-PRETAX> (5,747,000)
<INCOME-TAX> 37,000
<INCOME-CONTINUING> (5,784,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,784,000)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
