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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 DECEMBER 31, 1997, or
[ ] 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 CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 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
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(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
AS OF DECEMBER 31, 1997, THE COMPANY HAD OUTSTANDING 15,789,286 SHARES OF COMMON
STOCK, $0.001 PAR VALUE PER SHARE.
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GEOWORKS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets: December 31, 1997 and March 31, 1997 2
Condensed consolidated statements of operations: Three and nine months
ended December 31, 1997 and December 31, 1996 3
Condensed consolidated statements of cash flows: Nine months ended
December 31, 1997 and December 31, 1996 4
Notes to condensed consolidated financial statements 5
Item 2. Management's discussion and analysis of financial condition
and results of operations 6-14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
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PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Dec. 31, March 31,
1997 1997
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,435 $ 6,319
Marketable securities 19,214 30,501
Accounts receivable (billed) 1,106 --
Accounts receivable (unbilled) 2,667 475
Prepaid expenses and other current assets 631 907
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Total current assets 28,053 38,202
Furniture and equipment, net 3,386 3,546
Other assets 313 120
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$31,752 $41,868
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EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,570 $ 1,628
Deferred revenue 1,760 1,919
Other current liabilities 1,190 1,029
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Total current liabilities 4,520 4,576
Other liabilities 307 739
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Total liabilities 4,827 5,315
Shareholders' equity 26,925 36,553
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$31,752 $41,868
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</TABLE>
See accompanying notes
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GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
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Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net revenues:
License revenue $ 1,671 $ 2,733 $ 3,276 $ 6,160
Research and development fees 2,276 839 5,633 2,805
Service revenue 76 100 377 200
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Total net revenues 4,023 3,672 9,286 9,165
Operating expenses:
Cost of license revenue 30 210 116 630
Sales and marketing 1,270 1,803 5,050 5,049
Research and development 4,602 3,467 13,415 9,766
General and administrative 923 971 2,721 2,919
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Total operating expenses 6,825 6,451 21,302 18,364
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Operating loss (2,802) (2,779) (12,016) (9,199)
Other income (expense):
Interest income 288 517 1,123 1,866
Interest expense (25) (89) (101) (265)
------- ------- -------- --------
Loss before income taxes (2,539) (2,351) (10,994) (7,598)
Provision for income taxes 44 55 88 55
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Net loss $(2,583) $(2,406) $(11,082) $ (7,653)
======= ======= ======== ========
Net loss per share -- basic $ (0.16) $ (0.16) $ (0.71) $ (0.51)
======= ======= ======== ========
Shares used in per share
computation -- basic 15,760 15,237 15,638 15,176
======= ======= ======== ========
</TABLE>
See accompanying notes
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GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
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Dec. 31, Dec. 31,
1997 1996
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<S> <C> <C>
Operating activities:
Net loss $(11,082) $ (7,653)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 1,095 999
Changes in operating assets and liabilities (3,387) (3,576)
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Net cash used in operating activities (13,374) (10,230)
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Investing activities:
Purchases of furniture and equipment (net of retirements) (971) (1,885)
Sales of marketable securities (net of purchases) 11,287 4,832
Other 34 (40)
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Net cash provided by investing activities 10,350 2,907
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Financing activities:
Proceeds from notes payable to shareholders -- 375
Payments of obligations under capital leases (248) (294)
Net proceeds from issuance of common stock 1,388 3,914
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Net cash provided by financing activities 1,140 3,995
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Net decrease in cash and cash equivalents (1,884) (3,328)
Cash and cash equivalents at beginning of period 6,319 11,052
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Cash and cash equivalents at end of period $ 4,435 $ 7,724
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</TABLE>
See accompanying notes
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GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements for the three months and nine
months ended December 31, 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
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 on Form 10-K for the fiscal year ended March 31, 1997.
The results of operations for the three months and nine months ended December
31, 1997 are not necessarily indicative of the results to be expected for the
entire fiscal year.
2. In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which has been adopted by the Company. Net loss per
share -- basic is computed using the weighted average number of shares of common
stock outstanding. Common equivalent shares from stock options, which would be
included under the diluted method, are excluded in the computation as they are
antidilutive.
3. In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," ("SFAS 130") and Statement No. 131
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). The Company is required to adopt these Statements in fiscal year 1999.
SFAS 130 establishes new standards for reporting and displaying comprehensive
income (loss) and its components. SFAS 131 requires disclosure of certain
information regarding operating segments, products and services, geographic
areas of operation and major customers. Adoption of these Statements is expected
to have no impact on the Company's consolidated financial position, results of
operations or cash flows.
4. At December 31, 1997, the Company had a balance of $2,667,000 in unbilled
accounts receivable. This balance consisted of research and development fees
which were accrued into revenue under the percentage-of-completion method but
unbilled as of the date of the balance sheet. Research and development fees are
billed by the Company in accordance with installment payment schedules
stipulated in license agreements with OEMs. Unbilled accounts receivable
balances result when revenue earned under the percentage-of-completion method
exceeds the amount billed to OEM licensees pursuant to the terms of their
respective agreements.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS 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, and the acceptance
of the activities and products of the Company and its partners in the market.
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; the Company is dependent upon the actions of its
customers concerning the development and release of their products, and there
can be no assurance that the Company's licensees will commercialize such
products or that the Company will derive revenues therefrom; 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 increased $121,000, or 1%, during the nine months ended
December 31, 1997 in comparison with the corresponding period of the previous
fiscal year. This increase occurred as growth in research and development fee
revenue and service revenue offset declines in license revenue in the current
fiscal year.
License revenue decreased $2,884,000, or 47%, in the nine months ended
December 31, 1997 in comparison with the corresponding period of the previous
fiscal year, primarily as a result of the termination or restructuring of four
OEM license agreements during the nine months ended December 31, 1996. At the
time these four agreements were terminated or restructured, there was a
non-refundable prepaid royalty balance related to each agreement which had been
recorded as deferred revenue but not yet fully amortized. Revenue recognized
upon the termination or restructuring of these license agreements was included
in license revenue during the nine months ended December 31, 1996, and accounted
for $3,336,000, or 54%, of the Company's license revenue for that period. By
contrast, revenue related to the restructuring of license agreements or
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to the termination of products by OEM licensees accounted for only $638,000, or
19% of license revenue, during the nine months ended December 31, 1997.
During the nine months ended December 31, 1997, license revenue
consisted principally of royalties on units sold by OEM licensees, source code
license fees and other one-time payments, and amounts recognized upon the
termination of products by OEM licensees. Revenues associated with source code
license fees, one-time payments, and product terminations are non-recurring.
Accordingly, revenues for all periods presented are not indicative of revenues
to be recognized in future periods. Further, the Company may not realize
previously anticipated license revenue from one or more of its current OEM
licensees, due to delays and uncertainties affecting the ultimate shipment of
their products.
Revenue related to research and development fees increased $2,828,000,
or 101%, during the nine months ended December 31, 1997, in comparison with the
corresponding period of the previous fiscal year. Research and development fees
represent amounts earned 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 amount of such revenue 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 nine months
ended December 31, 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 from the fact that there was a greater number
of projects in process for which such fees are charged. As of December 31, 1997,
the Company had approximately $3,250,000 of potential additional revenue to earn
in research and development fees under the terms of current contracts with OEM
licensees. There can be no assurance that the Company will meet the milestones
required to earn such fees.
Service revenue of $377,000 for the nine months ended December 31, 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 prospective OEM licensees. The
increase of $177,000 in service revenue over the corresponding period of the
previous fiscal year related to fees earned in connection with software
workshops sponsored by the Company, as such workshops were offered for the first
time by the Company in the current fiscal year.
For the quarter ended December 31, 1997, total net revenues increased
$351,000, or 10%, over total net revenues for the corresponding quarter of the
previous fiscal year. Increases in revenue from research and development fees
more than offset reductions in license revenue and in service revenue for the
respective quarters. Research and development fees increased $1,437,000, or
171%, during the quarter ended December 31, 1997 in comparison with the
corresponding quarter of the previous fiscal year. This substantial increase
resulted from higher reimbursement levels specified in the Company's contracts
with OEM licensees, and from the fact that there were more projects in process
for which such fees are charged. License revenue in the quarter ended December
31, 1997 decreased $1,062,000, or 39%, from the corresponding quarter of the
previous fiscal year. This decrease was attributable principally to the
termination of two OEM license
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agreements in the quarter ended December 31, 1996, which accounted for revenues
of $1,102,000 in that quarter. There was no such revenue reported in the quarter
ended December 31, 1997.
License revenue for the quarter ended December 31, 1997 included
one-time payments from two different licensees which accounted for $1,340,000,
or 80% of license revenue for the quarter. The amount of revenue generated by
these two transactions approximated the amount of revenue that was attributable
to one-time payments and royalties on units sold by OEM licensees in the quarter
ended December 31, 1996.
Operating Expenses
Cost of License Revenue. The Company's gross margin percentage on
license revenue was 96% for the nine months ended December 31, 1997 and 90% in
the corresponding period of the previous fiscal year. Cost of license revenue
during the current fiscal year consisted of license payments to third parties
for software that is incorporated into the Company's software. Cost of license
revenue for the nine months ended December 31, 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 would have been 95% for the nine months ended December 31, 1996. Gross
margin percentage on license revenue was 98% for the quarter ended December 31,
1997 and 92% for the corresponding quarter of the previous fiscal year.
Sales and Marketing. There was no significant change in sales and
marketing expense during the nine months ended December 31, 1997 in comparison
with the corresponding period of the previous fiscal year. Cost savings from
reductions in domestic staffing and marketing programs offset the Company's
expanded emphasis on international sales activities in the current fiscal year.
Sales and marketing expense decreased $533,000, or 30%, during the
quarter ended December 31, 1997 in comparison with the corresponding quarter of
the previous fiscal year. This decrease resulted primarily from decreased
spending on marketing events, and from reductions in staffing and related
overhead costs for product marketing and developer outreach activities.
Research and Development. Research and development expense increased
$3,649,000, or 37%, during the nine months ended December 31, 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 and facilities overhead. Additionally, the increase in the
current fiscal year in the number of joint development projects with OEM
licensees in Europe and Asia has resulted in significant increases in travel
expenses for the Company's engineering staff. The Company also made payments of
$580,000 during the current fiscal year 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.
Research and development expense increased $1,135,000, or 33%, during
the quarter ended December 31, 1997 in comparison with the corresponding quarter
of the previous fiscal year, as a result of the staffing and travel increases
explained above.
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General and Administrative. General and administrative expense decreased
$198,000, or 7%, during the nine months ended December 31, 1997 in comparison
with the corresponding period of the previous fiscal year. This decrease was
attributable primarily to a reduction in staffing costs, as certain duplicate
functions were eliminated following the business combination of Geoworks and
Eden in February 1997.
General and administrative expense decreased $48,000, or 5%, during the
quarter ended December 31, 1997 in comparison with the corresponding quarter of
the previous fiscal year. This decrease occurred principally as a result of a
reduction in staffing costs between the two periods.
Other Income (Expense)
Interest income declined $743,000, or 40%, during the nine months ended
December 31, 1997 in comparison with 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 $164,000, or 62%, during the nine months ended December 31, 1997 in
comparison with the corresponding period of the previous fiscal year. This
decrease resulted from the repayment in the fourth quarter of fiscal year 1997
of notes payable to shareholders of Eden which had been outstanding throughout
the nine months ended December 31, 1996.
For the reasons noted above, the Company experienced decreases in
interest income and interest expense during the quarter ended December 31, 1997
in comparison with the corresponding quarter of the previous fiscal year.
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 approximately $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 $23.6 million at December 31, 1997 from $36.8 million at March 31, 1997. This
decrease of $13.2 million resulted principally from the use of cash during the
period of $13.4 million for operating
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activities. The Company expects to incur additional substantial operating losses
at least through its fiscal year ending March 31, 1999, but anticipates that its
existing capital resources will be adequate to satisfy its operating and capital
requirements throughout this time period.
At December 31, 1997, the Company had a balance in accounts receivable
of $3,773,000, an increase of $3,298,000 from the corresponding balance at March
31, 1997. The balance consisted principally of amounts accrued or billed by the
Company for research and development fees. The increase in accounts receivable
at December 31, 1997 resulted primarily from research and development fees
accrued under the percentage-of-completion method. As revenue from research and
development fees has increased significantly during the current fiscal year, the
balance in accounts receivable for accrued research and development fees has
increased as well. At December 31, 1997, the balance in accounts receivable
consisted of $1,106,000 in billed revenues and $2,667,000 in accrued but
unbilled revenues. Prepaid expenses and other current assets decreased $276,000
from March 31, 1997 to December 31, 1997 due primarily to a reduction in the
amounts recoverable by the Company for prepaid taxes and various cost
reimbursements from outside third parties. Furniture and equipment, net of
depreciation, decreased $160,000 from March 31, 1997 to December 31, 1997, as
depreciation of furniture and equipment on hand exceeded purchases of new
furniture and equipment during the nine months ended December 31, 1997.
Accounts payable and accrued liabilities decreased $58,000 at December
31, 1997 in comparison with March 31, 1997, due principally to reduced balances
in accrued liabilities for marketing programs and acquisition costs. Deferred
revenue decreased $159,000 from March 31, 1997 to December 31, 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 nine months ended December 31,
1997 exceeded the amount of payments collected during the period, causing the
balance in deferred revenue to decline. Other current liabilities increased
$161,000 from March 31, 1997 to December 31, 1997 primarily as a result of
higher accrual balances for certain incentive compensation and employee benefit
programs. Other liabilities decreased $432,000 from March 31, 1997 to December
31, 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. Since becoming a
public company in 1994, the Company has never been profitable. As of December
31, 1997, the Company had an accumulated deficit of $69.5 million, and had
incurred operating losses of approximately $11.1 million, $15.5 million, $10.7
million, and $10.5 million in the nine months ended December 31, 1997, and the
fiscal years ended March 31, 1997, 1996 and 1995, respectively. The Company
expects to continue to incur substantial annual operating losses at least
through its fiscal year ending March 31, 1999, 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
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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.
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. In August 1996, Nokia released a smart phone in selected
geographic markets which incorporates the Company's GEOS(R) software. The
product began shipping in North America in December 1997. In July 1997, Toshiba
released a smart phone for the Japanese market which incorporates the Company's
operating system software. Although these devices have received positive reviews
and several awards, their market acceptance has yet to be fully established. The
failure, delay in shipment, or cancellation of any product in this new category
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 upon 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 has recently introduced a new generation of
its operating system software that, unlike its predecessor GEOS technology, is
processor-independent, i.e., not limited to processors based upon the Intel x86
architecture. Broad acceptance of Geoworks' existing and future products in new
markets, including markets that may be characterized by greater usage of
non-Intel microprocessors, is critical to Geoworks' future success. With its
latest GEOS-SC release, Geoworks has made significant progress toward this
development goal, but acceptance of the release in the market is uncertain and
the 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
marketing and selling products developed for non-Intel microprocessors, or will
be successful in future development efforts.
Disappointing Revenue from Previous Generation 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
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handheld electronic organizers. These non-communicating devices -- in particular
the Hewlett-Packard OmniGo and Casio Z-7000 -- as well as those introduced by
competitors -- such as the Apple Newton, Sony MagicLink and Motorola Envoy --
have achieved only modest unit sales to date. With the exception of the Palm
Pilot product from 3Com (which does not incorporate the Company's software),
products in these device categories have experienced low adoption rates. The
Company has failed to generate significant royalty revenues in connection with
any of its licensing efforts to date, and its operating results have been
affected adversely. Royalty revenues earned on reported unit shipments of these
previous products have been modest, and several of the Company's
previous-generation licensees have canceled products prior to introduction, or
discontinued them after experiencing disappointing sales. Collectively, these
third-party product cancellations, 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. 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 which
incorporate the Company's operating system software. The Company is dependent
upon the actions of its customers concerning the development and release of
their products, and there can be no assurance that the Company's licensees will
commercialize such products or that the Company will derive revenues therefrom.
Through the first nine months of fiscal year 1998, three licensees of the
Company's software had accounted collectively for greater than half of the
Company's total net revenues. During this same period, four licensees had
accounted individually for greater than 10% of the Company's total net revenues.
In August 1996, Nokia released in selected geographic markets a smart phone
which incorporates the Company's GEOS software. This product 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 suffer material adverse
effects. 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 the agreement against
license revenue to be earned by the Company on per unit sales of such additional
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
12
<PAGE> 14
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; license revenue from
communication services providers; and 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 Company has historically marketed an 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 the Company has been able to obtain
recurring license revenue in the past 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
cellular distribution of content and services is an unproven concept which
depends upon 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 cellular
distribution will prove to be feasible, or that the Company's technology will be
suitable for the distribution infrastructure as it develops. 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 suffer material adverse effects.
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 subsequent 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. While revenue from research
and development fees has been rising during the current fiscal year, there is no
assurance that this pattern will continue in future fiscal periods. 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
13
<PAGE> 15
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 believes 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 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 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.
Effect Of Wholesale Prices On Royalties. Royalties from the license of the
Company's operating system to smart phone and mobile communicating device
hardware manufacturers may 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 smart phones and other 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.
Dependence on Year 2000 Compliance of Third-Party Products. The Company's
software products operate as a conduit for data from handheld devices to
application software developed by third parties. The Company has no control as
to whether the hardware devices and application software that the Company's
software supports will accurately process date and time data from, into and
between the 20th and 21st centuries. The company and its business may suffer
adverse effects should the third-party products with which the Company's
software functions fail to accommodate the change in date from December 31, 1999
to January 1, 2000.
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.
14
<PAGE> 16
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
15
<PAGE> 17
PART 2 -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 27, 1997 announcing
its reincorporation in the state of Delaware.
16
<PAGE> 18
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: February 7, 1998
GEOWORKS CORPORATION
by: /s/ David A. Thatcher
------------------------------------
David A. Thatcher
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
17
<PAGE> 19
GEOWORKS CORPORATION
EXHIBITS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET OF GEOWORKS AS OF DECEMBER 31, 1997, AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 4,435,000
<SECURITIES> 19,214,000
<RECEIVABLES> 3,773,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,053,000
<PP&E> 7,060,000
<DEPRECIATION> (3,674,000)
<TOTAL-ASSETS> 31,752,000
<CURRENT-LIABILITIES> 4,520,000
<BONDS> 0
0
0
<COMMON> 96,171,000
<OTHER-SE> (69,246,000)
<TOTAL-LIABILITY-AND-EQUITY> 31,752,000
<SALES> 0
<TOTAL-REVENUES> 9,286,000
<CGS> 0
<TOTAL-COSTS> 116,000
<OTHER-EXPENSES> 21,186,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,000
<INCOME-PRETAX> (10,994,000)
<INCOME-TAX> 88,000
<INCOME-CONTINUING> (11,082,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,082,000)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)<F1>
<FN>
<F1>INTEREST INCOME ON SECURITIES -- $1,123,000
</FN>
</TABLE>
