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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, 1998, 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 000-23926
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
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date:
COMMON STOCK, .001 PAR VALUE PER SHARE: 16,149,947 SHARES AS OF DECEMBER 31,
1998
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GEOWORKS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets: December 31, 1998 and March 31, 1998 2
Condensed consolidated statements of operations: Three and nine months ended
December 31, 1998 and December 31, 1997 3
Condensed consolidated statements of cash flows: Nine months ended
December 31, 1998 and December 31, 1997 4
Notes to condensed consolidated financial statements 5
Item 2. Management's discussion and analysis of financial condition and results
of operations 6-21
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
</TABLE>
1
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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,
1998 1998
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,156 $ 8,738
Marketable securities 7,352 11,243
Accounts receivable (billed) 2,538 1,546
Accounts receivable (unbilled) 1,866
Prepaid expenses and other current assets 445 542
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Total current assets 11,491 23,935
Furniture and equipment, net 2,349 3,301
Other assets 220 227
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$14,060 $27,463
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LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,023 $ 1,669
Deferred revenue 1,587 778
Other current liabilities 903 1,393
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Total current liabilities 3,513 3,840
Other liabilities 187 231
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Total liabilities 3,700 4,071
Stockholders' equity 10,360 23,392
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$14,060 $27,463
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</TABLE>
See accompanying notes
2
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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
--------------------------- ---------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net revenues:
License revenue $ 285 $ 1,671 $ 710 $ 3,276
Research and development fees 1,560 2,276 3,736 5,633
Service revenue 109 76 294 377
-------- -------- -------- --------
Total net revenues 1,954 4,023 4,740 9,286
Operating expenses:
Cost of license revenue 6 30 37 116
Sales and marketing 1,312 1,270 3,958 5,050
Research and development 3,372 4,602 11,721 13,415
General and administrative 818 923 2,638 2,721
-------- -------- -------- --------
Total operating expenses 5,508 6,825 18,354 21,302
-------- -------- -------- --------
Operating loss (3,554) (2,802) (13,614) (12,016)
Other income (expense):
Interest income 130 288 496 1,123
Interest expense (5) (25) (25) (101)
-------- -------- -------- --------
Loss before income taxes (3,429) (2,539) (13,143) (10,994)
Provision for income taxes 59 44 118 88
-------- -------- -------- --------
Net loss $ (3,488) $ (2,583) $(13,261) $(11,082)
======== ======== ======== ========
Net loss per share - basic and diluted $ (0.22) $ (0.16) $ (0.83) $ (0.71)
======== ======== ======== ========
Shares used in per share computation 16,112 15,760 16,030 15,638
======== ======== ======== ========
</TABLE>
See accompanying notes
3
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GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
Dec. 31, Dec. 31,
1998 1997
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<S> <C> <C>
Operating activities:
Net loss $(13,261) $(11,082)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,001 1,095
Changes in operating assets and liabilities 1,052 (3,387)
-------- --------
Net cash used in operating activities (11,208) (13,374)
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Investing activities:
Sales of marketable securities (net of purchases) 3,891 11,287
Purchases of furniture and equipment (net of retirements) (159) (971)
Other (7) 34
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Net cash provided by investing activities 3,725 10,350
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Financing activities:
Payments of obligations under capital leases (336) (248)
Net proceeds from issuance of common stock 237 1,388
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Net cash (used in) provided by financing activities (99) 1,140
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Net decrease in cash and cash equivalents (7,582) (1,884)
Cash and cash equivalents at beginning of period 8,738 6,319
======== ========
Cash and cash equivalents at end of period $ 1,156 $ 4,435
======== ========
</TABLE>
See accompanying notes
4
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GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements for the three and nine months
ended December 31, 1998 and 1997 are unaudited but reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
included in the Company's Annual Report to Stockholders and Form 10-K for the
fiscal year ended March 31, 1998. The results of operations for the three months
ended December 31, 1998 are not necessarily indicative of the results to be
expected for the entire fiscal year.
2. In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128") which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share and includes the dilutive
effect of the assumed exercise of stock options using the treasury stock method.
Shares used in computing basic and diluted net loss per share are based on the
weighted-average shares outstanding in each period. The effect of outstanding
stock options is excluded from the calculation of diluted net loss per share as
their inclusion would be antidilutive. Net loss per share amounts for all
periods have been presented in conformity with the requirements of FAS 128.
3. In 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("FAS 130") and Statement No. 131 "Disclosure
about Segments of an Enterprise and Related Information" ("FAS 131"). Geoworks
(the "Company") has adopted these statements in fiscal year 1999. FAS 130
establishes new standards for reporting and displaying comprehensive income and
its components. The Company's comprehensive loss for the three and nine months
ended December 31, 1998 does not differ materially from the reported net loss.
FAS 131 requires disclosure of certain information regarding operating segments,
products and services, geographic areas of operation, and major customers.
Adoption of these statements has not had a material effect on the Company's
consolidated financial position, results of operations, or cash flows.
4. 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. At December 31, 1998,
there were no unbilled accounts receivable as all earned fees had been invoiced.
5. In September 1998, the Company executed a settlement agreement with an OEM
customer to resolve a contract dispute. The customer had alleged a material
breach of contractual obligations by the Company, and disputed the amount of
research and development fees payable. The effect of the settlement, under the
percentage-of-completion method, was to lower the Company's revenue and accounts
receivable by $740,000 during the current fiscal year.
5
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
Many of the discussions in this Form 10-Q for Geoworks Corporation
("Geoworks" or the "Company") are forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 ( the "Exchange Act"). Words such as
"expects," "anticipates," "believes," "intends," "plans," "seeks," "estimates,"
and variations of such words and similar expressions are intended to identify
these forward-looking statements. In particular, discussions of the following
topics include forward-looking statements: the anticipated emergence, timing and
size of the market for mobile communicating devices, particularly smart and
enhanced phones; the Company's strategy for establishing its software as a
standard solution for the smart and enhanced phone markets; competition in the
market for mobile communicating devices; the Company's intention to fund and
complete ongoing research and development projects, including the ongoing
development and improvement of the latest version of its software; the Company's
intention to attract new OEM licensees and to develop additional devices with
existing licensees; the Company's intention to expand the market for its
software by leveraging its existing licensees; the development of a market for
wireless content and services; the Company's intention to integrate and market
such wireless content and service technologies for use by wireless mobile
operators and mobile communicating device manufacturers; and the Company's
assessment of its exposures and remedial efforts in connection with "Year 2000"
issues.
Actual results may vary materially from such forward-looking
statements, due to various risks and uncertainties. In particular, those risks
include, but are not limited to, the following: (i) the Company's business is
critically dependent upon the emergence of a new market and on the activities of
a limited number of device manufacturers, and the Company has no direct control
over those activities; (ii) the Company's success depends upon the acceptance of
its existing and future technologies by existing and new market participants;
(iii) development by the Company of its technologies is subject to the
scheduling and delivery risks inherent in the development of complex
technologies, and such risks have in the past caused product delays and may in
the future affect the Company's ability to develop and release new products on a
timely basis; (iv) the Company anticipates the emergence and potential impact of
competitive products and services; (v) widespread adoption of mobile
communicating devices may depend upon the commercial availability of
complementary relationships and technologies, such as a wireless mobile network
infrastructure; (vi) the Company does not control the development, timing or
commercial distribution of its licensees' products, and there can be no
assurance that such devices will be released to the public or that the Company
will receive any significant revenue therefrom; and (vii) the Company has
historically experienced significant losses and disappointing revenue from past
products. Please refer to the detailed discussions of these and other risk
factors at Factors Affecting Future Operating Results, beginning on page 12.
Readers are cautioned not to place undue reliance on forward-looking
statements contained herein, which reflect the analysis of the management of
Geoworks only as of the date hereof. Geoworks does not undertake any obligation
to release publicly the results of any revision to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
6
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Results of Operations
Three Months Ended December 31, 1998 and December 31, 1997
Net Revenues
Net revenues decreased $2,069,000, or 51%, during the three months
ended December 31, 1998, in comparison with the corresponding quarter of the
previous fiscal year. Substantial decreases in license revenue and revenue from
research and development fees in the current quarter more than offset a small
increase in service revenue.
During the three months ended December 31, 1998, license revenue
decreased $1,386,000, or 83%, in comparison with the corresponding quarter of
the previous fiscal year. In December 1997, the Company recognized revenue of
$1,340,000 in connection with license payments received from two different OEM
customers. These payments were non-recurring, and there was no such one-time
revenue recognized during the current quarter. For the three months ended
December 31, 1998, license revenue consisted principally of royalties on units
sold by OEM customers. Revenues associated with technology license fees, or with
any change to the terms of license agreements resulting from termination,
amendment, or restructuring, are non-recurring. Accordingly, license revenue for
the three months ended December 31, 1997 is not indicative of revenues to be
recognized in future periods. Further, the Company's realization of anticipated
license and royalty revenue from OEM customers is inherently uncertain due to
potential delays and risks in the commercial release and acceptance of new
products.
Revenue related to research and development fees decreased $716,000, or
31%, during the three months ended December 31, 1998, in comparison with the
corresponding quarter of the previous fiscal year. Research and development fees
represent amounts received for consulting services, and amounts received
pursuant to contracts with OEM customers 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
customer 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 customers, the relative level of development effort
devoted towards projects on which research and development fees are charged, the
relative level of utilization of the Company's development staff, and the fee
rates negotiated with OEM customers. The substantial decrease in research and
development fees during the three months ended December 31, 1998 over the
corresponding period in the previous fiscal year occurred as the Company
completed its development work on several major OEM projects. As work on these
projects concluded, the Company assigned development staff onto projects with
lower reimbursement rates and also reduced staffing levels through attrition. As
of December 31, 1998, the Company had approximately $822,000 of potential
additional revenue to earn in research and development fees under the terms of
current consulting agreements and contracts with OEM customers.
Service revenue of $109,000 for the three months ended December 31,
1998 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
customers. The increase of $33,000 in service revenue over the
7
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corresponding period of the previous fiscal year related to higher fees earned
in connection with software workshops sponsored by the Company.
Operating Expenses
Cost of License Revenue. The Company's gross margin percentage on
license revenue was nearly 100% for the three months ended December 31, 1998,
and 98% in the corresponding quarter of the previous fiscal year. Cost of
license revenue for both periods consisted of license payments to third parties
for software that is incorporated into the Company's software.
Sales and Marketing. Sales and marketing expense increased $42,000, or
3%, during the three months ended December 31, 1998 in comparison with the
corresponding quarter of the previous fiscal year. The Company engaged outside
firms to conduct certain market research and product marketing initiatives
during the current quarter, and as a result increases in program spending
outpaced reductions in staffing and related personnel costs.
Research and Development. Research and development expense decreased
$1,230,000, or 27%, during the three months ended December 31, 1998 in
comparison with the corresponding quarter of the previous fiscal year. This
decrease was attributable principally to reductions in staffing and related
personnel costs as the Company has narrowed the scope of its research and
development activities.
General and Administrative. General and administrative expense
decreased $105,000, or 11%, during the three months ended December 31, 1998 in
comparison with the corresponding quarter of the previous fiscal year. A
significant decrease in outside legal fees during the current quarter, together
with other administrative cost-saving measures, accounted for this reduction.
Other Income (Expense)
Interest income declined $158,000, or 55%, during the three months
ended December 31, 1998 in comparison with the corresponding quarter of the
previous fiscal year. This decrease was attributable to lower balances available
to the Company for short-term investment in the current period as a direct
result of the cash used to fund the Company's operations over the preceding 12
months. Interest expense decreased $20,000, or 80%, during the three months
ended December 31, 1998 in comparison with the corresponding quarter of the
previous fiscal year. Monthly payments by the Company of capital lease
obligations amortized outstanding principal balances and accordingly reduced
computed interest expense.
8
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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. As of March 31, 1998, the Company had net
operating loss carryforwards for U.S. income tax purposes of approximately
$67,000,000, for U.K. income tax purposes of approximately $7,000,000, and for
state income tax purposes of approximately $14,000,000. The Company also had
research and development credit carryforwards for federal income tax purposes of
approximately $2,000,000 and for state income tax purposes of approximately
$780,000. 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.
Nine Months Ended December 31, 1998 and December 31, 1997
Net Revenues
Net revenues decreased $4,546,000, or 49%, during the nine months ended
December 31, 1998, in comparison with the corresponding period of the previous
fiscal year. All categories of revenue declined in the current fiscal year
relative to the preceding fiscal year.
During the nine months ended December 31, 1998, license revenue
decreased $2,566,000, or 78%, in comparison with the corresponding period of the
previous fiscal year. In December 1997, the Company recognized revenue of
$1,340,000 in connection with license payments received from two different OEM
customers. In June 1997, the Company recognized revenue of $650,000 in
connection with a source code license. In September 1997, the Company recognized
revenue of $532,000 upon the termination of a license agreement with an OEM
customer. Pursuant to the original agreement, the customer had made
non-refundable payments of advance royalties which at the time of the
termination had yet to be earned as revenue. There has been no such revenue
during the current fiscal year to compare with any of these one-time revenue
events from the preceding fiscal year, and license revenue has declined as a
result. For the nine months ended December 31, 1998, license revenue has
consisted principally of royalties on units sold by OEM customers and, to a
small extent, technology license fees. Revenues associated with licenses of
source code, technology license fees, or any change to the terms of license
agreements resulting from termination, amendment, or restructuring, are
non-recurring. Accordingly, license revenue for the nine months ended December
31, 1997 is not indicative of revenues to be recognized in future periods.
Further, the Company's realization of anticipated license and royalty revenue
from OEM customers is inherently uncertain due to potential delays and risks in
the commercial release and acceptance of new products.
Revenue related to research and development fees decreased $1,897,000,
or 34%, during the nine months ended December 31, 1998, in comparison with the
corresponding period of the previous fiscal year. Research and development fees
represent amounts received for consulting services, and amounts received
pursuant to contracts with OEM customers 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
customer 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
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Company's contracts with OEM customers, the relative level of development effort
devoted towards projects on which research and development fees are charged, the
relative level of utilization of the Company's development staff, and the fee
rates negotiated with OEM customers. The substantial decrease in research and
development fees during the nine months ended December 31, 1998 in comparison
with the corresponding period of the previous fiscal year occurred as the
Company completed its development work on several major projects. As work on
these projects concluded, the Company assigned development staff onto projects
with lower reimbursement rates and also reduced staffing levels through
attrition. Additionally, the Company settled a contract dispute with an OEM
customer during the nine months ended December 31, 1998. Under the
percentage-of-completion method, the effect of this settlement was to lower the
Company's estimate of revenue and corresponding accounts receivable in the
current fiscal year by $740,000. As of December 31, 1998, the Company had
approximately $822,000 of potential additional revenue to earn in research and
development fees under the terms of current contracts with OEM customers.
Service revenue of $294,000 for the nine months ended December 31, 1998
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. The decrease of $83,000 in service revenue in the current year
related to higher fees earned in the previous fiscal year for software workshops
sponsored by the Company.
Operating Expenses
Cost of License Revenue. The Company's gross margin percentage on
license revenue was 95% for the nine months ended December 31, 1998, and 96% in
the corresponding period of the previous fiscal year. Cost of license revenue
for both periods consisted of license payments to third parties for software
that is incorporated into the Company's software.
Sales and Marketing. Sales and marketing expense decreased $1,092,000,
or 22%, during the nine months ended December 31, 1998 in comparison with the
corresponding period of the previous fiscal year. The Company has narrowed the
scope of its product plans and marketing activities during the current fiscal
year, and as a result has lowered its staffing and achieved certain other cost
reductions in its sales and marketing programs. Additionally, there was a
non-recurring charge of approximately $300,000 during the previous fiscal year
for a reorganization of staff in certain sales and marketing functions.
Research and Development. Research and development expense decreased
$1,694,000, or 13%, during the nine months ended December 31, 1998 in comparison
with the corresponding period of the previous fiscal year. This decrease was
attributable principally to reductions in staffing and related costs, as the
Company has narrowed the scope of its research and development activities and
reduced the amounts paid to outside developers for the license of software to be
incorporated into future products.
General and Administrative. General and administrative expense
decreased $83,000, or 3%, during the nine months ended December 31, 1998 in
comparison with the corresponding period of the previous fiscal year. Reductions
in travel expense more than offset increases in fees paid for certain
professional services during the current fiscal year.
Other Income (Expense)
10
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Interest income declined $627,000, or 56%, during the nine months ended
December 31, 1998 in comparison with the corresponding period of the previous
fiscal year. This decrease was attributable to lower balances available to the
Company for short-term investment in the current period as a direct result of
the cash used to fund the Company's operations over the preceding 12 months.
Interest expense decreased $76,000, or 75%, during the nine months ended
December 31, 1998 in comparison with the corresponding period of the previous
fiscal year, as monthly payments by the Company of capital lease obligations
amortized outstanding principal balances and accordingly reduced computed
interest expense.
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. As of March 31, 1998, the Company had net
operating loss carryforwards for U.S. income tax purposes of approximately
$67,000,000, for U.K. income tax purposes of approximately $7,000,000, and for
state income tax purposes of approximately $14,000,000. The Company also had
research and development credit carryforwards for federal income tax purposes of
approximately $2,000,000 and for state income tax purposes of approximately
$780,000. 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 $8.5 million at December 31, 1998 from $20.0 million at March 31,
1998. This decrease of $11.5 million resulted principally from the use of cash
during the period to fund the Company's operations. The Company expects to incur
additional substantial operating losses for the remainder of 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 the
current fiscal year. The Company is currently developing a plan to ensure that
its capital requirements will be met for the forthcoming 12 months.
At December 31, 1998, the Company had a balance in accounts receivable
of $2,538,000, a decrease of $874,000 from the corresponding balance at March
31, 1998. The balance consisted primarily of amounts earned under consulting
agreements and amounts recorded as revenue by the Company under the
percentage-of-completion method. During the nine months ended December 31, 1998,
the Company executed a settlement agreement to resolve a contract dispute with
an OEM customer, and consistent with the settlement terms of the agreement, the
Company lowered its estimate of accounts receivable by $740,000 during the
present fiscal year. Additionally, payments received from OEM customers in
connection with the achievement of engineering milestones exceeded the amount of
revenue recorded under the percentage-of-completion method, causing the balance
in accounts receivable to decline further. Approximately $1,785,000 of the
balance in accounts receivable at December 31, 1998 was collected in a single
payment from an OEM customer in early January 1999. Prepaid expenses and other
current assets decreased $97,000 from March 31, 1998 to December 31, 1998,
primarily because certain deposits the Company had paid in the previous fiscal
year were refunded during the period. These deposits were made in connection
with capital equipment leases and foreign incorporation requirements. Furniture
and equipment, net of depreciation, decreased $952,000 from March 31, 1998 to
December 31, 1998, as depreciation of existing furniture and equipment exceeded
purchases of new furniture and equipment during the nine months ended December
31, 1998.
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Accounts payable and accrued liabilities decreased $646,000 at December
31, 1998 in comparison with March 31, 1998, due principally to lower balances in
the current fiscal year for short-term equipment lease obligations and accrued
office rent. In the current fiscal year, the Company made scheduled balloon
payments to equipment lessors and significantly reduced the outstanding
principal balance of its short-term debt obligations. Deferred revenue increased
$809,000 from March 31, 1998 to December 31, 1998, as the Company received
advance royalty payments from OEM customers which exceeded the amount of such
payments earned and therefore recognized as revenue within the period. Other
current liabilities decreased $490,000 from March 31, 1998 to December 31, 1998,
attributable primarily to the amortization in the current fiscal year of
severance obligations which had been accrued in previous periods. Also, balances
for certain employee benefit and incentive compensation programs have declined
during the current fiscal year as the Company's total number of employees has
declined.
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 suffered substantial negative operating cash flow. As of December 31, 1998,
the Company had an accumulated deficit of $86.5 million, and had incurred
operating losses of approximately $16.0 million, $15.5 million, and $10.7
million in the fiscal years ended March 31, 1998, 1997, and 1996, respectively,
and an operating loss of $13.6 million for the nine months ended December 31,
1998. The Company expects to continue to incur substantial annual operating
losses for the remainder of its fiscal year ending March 31, 1999, and it is
unclear how soon thereafter, if ever, the Company will operate profitably. The
Company is currently developing a plan to ensure that its capital requirements
will be met for the forthcoming 12 months. The Company's strategic plan to
achieve profitability includes reducing its operating expenses and maximizing
its revenues in the near term by increasing consulting revenues and focusing on
the smart and enhanced phone segments of the market for mobile communicating
devices. The Company's objective is to leverage its position as a leading
provider of operating system software for the smart phone market by developing
and marketing other products and services to the installed base of devices and
future wireless devices. Specifically, the Company is focusing on developing and
marketing its Premion Interface+ microbrowser for enhanced phones, and its
Premion Server +, a server product that delivers wireless information to digital
wireless phones. The company's strategy includes extending the reach of data
available on the World Wide Web to wireless devices through its technology. 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 these markets, the
Company's ability to establish licensing relationships with leading hardware
manufacturers, the introduction by those manufacturers of successful products,
the emergence of wireless content and services for smart phones to spur demand
for the smart phone market and generate additional revenues, and the Company's
ability to achieve and maintain a competitive advantage should such a 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, from enhanced phones to the higher end of
smart communicators. The Company's success depends upon the emergence of a new
market for these products. Although the market for wireless mobile 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 the
United States. In August 1996, Nokia released a smart phone in selected
geographic markets which incorporates the Company's GEOS(R) software. An
upgraded version of this product began shipping in North America in December
1997. Nokia recently announced that the third generation of this smart phone
product would begin shipping to worldwide markets. In July 1997, Toshiba
released a smart phone for the Japanese market named the Genio that incorporates
the Company's operating system software. Toshiba released a successor product
named the Dialo for the Japanese market in October 1998. In November 1998,
Mitsubishi introduced the Moem-D product, a communications device specifically
for the Japanese market which incorporates the Company's GEOS(R)-SC(TM)
operating system software. Although these devices have received positive reviews
and several awards, their market acceptance has been limited and they have yet
to make a meaningful contribution to the Company's royalty revenues or operating
results. More generally, the failure, delay in shipment, or cancellation of any
product in this new category, or the discontinuation of any such product by its
manufacturer, 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 commercial release or 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. Further,
there can be no assurance that the market for smart phones will emerge. The
Company believes that in any case such market will not emerge before the year
2000.
The development of the smart phone market, like that of other computer and
consumer electronics markets, is dependent upon the simultaneous development of
a substantial infrastructure of related and supporting products and services,
including hardware and software products, distribution channels and services,
communications services, and maintenance and support services. The Company has
only limited influence over and, therefore, is substantially dependent upon, the
activities of third parties for the development of this infrastructure. The
success of smart phones also depends on a number of other general market factors
outside the Company's control, including but not limited to consumer acceptance
of particular smart phone concepts and features.
In addition, the Company's long-term results will be affected by the
success of the market for wireless content products and services that operate on
smart phones. There can be no assurance that the wireless content and services
market will develop in a manner which is favorable to the Company's prospects.
Risks of Software Product Development and Risk of Delays. 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 for
smart communicators, new applications for enhanced phones, and new aftermarket
products and services. Geoworks most recently introduced a new generation of its
operating system software called GEOS(R)-SC(TM) that, unlike its predecessor
GEOS technology, is processor-independent, i.e., not limited to processors based
upon the Intel x86 architecture. Further, Geoworks is currently developing
software technologies for enhanced phones. 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. Geoworks has made progress toward this development
goal,
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but acceptance of its newly developed products 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
continuing to market and sell products developed for non-Intel microprocessors,
or will be successful in future development efforts.
Further, because of the short product life cycles and intense competition
expected in the mobile communicating device market, the timeliness of new
product introductions and shipments can be critical to whether a particular
product will ever achieve market acceptance. There can be no assurance that the
Company will be able to develop, introduce and ship new products or upgrades on
a timely basis. Furthermore, from time to time, the Company and others may
announce new products, features or technologies that have the potential to
replace or shorten the life cycle of the Company's existing product offerings.
There can be no assurance that announcements by the Company or by its
competitors will not cause customers to defer purchasing existing products of
the Company or its hardware partners, or cause distributors and dealers to
return products. Delays or difficulties associated with developing or
introducing new products could have a material adverse effect on the Company's
business and results of operations.
The Company has historically engaged in significant customization of its
GEOS system software for each mobile communicating device hardware partner. The
software development and customization process is inherently unpredictable.
Development time and the achievability of design objectives may not be
determinable until very late in the development process. Problems and delays in
product development or customization may result in the delay or cancellation of
planned product or service offerings by the Company and its strategic partners,
and consequently could have a material adverse effect on the Company's operating
results. In the past, the Company has experienced significant delays in the
completion of development and customization projects and the release of new
products to mobile communicating device hardware partners. Consequently, the
partners' payment of research and development fees and license revenue from
these partners has also been delayed or withheld, and in several cases the
partners have elected not to commercialize the products under development. Such
delays have resulted from a number of factors, including, but not limited to,
changes in specifications initiated by the Company's hardware partners. The
extent of these delays has varied depending upon the size and scope of the
project and the nature of the problems encountered. There can be no assurance
that the Company will be able to prevent similar problems and delays in the
future, which would have material adverse effects on the Company's operating
results. Furthermore, complex software products often contain errors, and
significant errors may go undetected for some time. Discovery of significant
errors may delay or cancel product releases and, if not discovered until after
product release, may necessitate recall of products by the Company and its
strategic partners and expose the Company to substantial expense and claims for
reimbursement.
Competition. The Company expects there will be intense competition among
mobile communicating device operating systems, to the extent a market develops
for such communicating devices. Although the Company believes that the diverse
segments of the mobile communicating device market will provide opportunities
for more than one operating system, it is possible that a single operating
system supplier may dominate in one or more segments of the market. Companies
with significantly greater financial, technical, and marketing resources and
greater name recognition than the Company, such as Symbian (a joint venture
involving Psion, Ericsson, Motorola, and Nokia), Microsoft, Sun Microsystems,
Microware, and 3COM (through its Palm Computing division), have each developed
or are reported to be developing operating systems that may compete directly
with the Company's current operating system software. Further, developers of
real-time operating systems and low-end operating system software may attempt to
adapt their products for the smart phone market, thus providing operating
systems that compete with the
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Company's offerings in terms of size and battery life. Each of these systems
represents an effort to deliver an operating system for use in mobile
communicating devices, and one or more of these systems may include or improve
upon features which the Company believes currently give the GEOS and GEOS-SC
system software an advantage in mobile communicating devices over competing
operating systems. Moreover, a number of the Company's current licensees have
also established relationships with certain of these competing companies, and
future licensees may do the same. In addition, manufacturers may choose to
develop or acquire proprietary operating systems for their mobile communicating
devices and thereby compete directly with the Company. There can be no assurance
that the Company's competitors will not develop or market mobile communicating
device operating system or application software products that are superior to
those of the Company, that are offered at lower prices than those of the
Company, or that achieve greater market acceptance than those of the Company.
In June of 1998, Psion, Ericsson, Motorola, and Nokia announced a joint
venture named Symbian that will license Psion's EPOC operating system to smart
phone manufacturers. Through Symbian, the partners are seeking to introduce an
operating system platform in the smart phone market which would directly compete
with the Company's GEOS-SC system software, and together they have contributed
approximately $150 million to capitalize the venture. Collectively, Ericsson,
Motorola, and Nokia hold a dominant position as suppliers in the worldwide
market for wireless mobile telephones, of which smart phones represent a market
segment. While Symbian is in its early stages and its ultimate impact on the
Company is difficult to assess, this joint venture could have a material adverse
effect on the Company's business and results of operations.
Acceptance Of Geoworks Technology. The Company's success in establishing its
current or its anticipated future operating system software and applications
software as leading software solutions in the mobile communicating device market
is critically dependent on the Company's ability to establish and sustain
business relationships with key mobile communicating device market participants.
The Company has already established relationships with several mobile
communicating device hardware manufacturers and other companies which the
Company believes will be significant participants in the mobile communicating
device and services markets. Despite the importance of these relationships, the
Company must secure additional strategic design wins and licensing relationships
with its existing licensees and with other market participants in order to
establish the Company's software as a viable platform. Accordingly, there can be
no assurance that the Company's existing licenses will result in sustained
license relationships, successful products, or substantial revenues for the
Company. Furthermore, even if the Company is able to establish and sustain
relationships with particular participants in the mobile communicating device
market, the Company's success depends upon the development by the Company and
others of aftermarket application products and services for mobile communicating
device products in order to derive revenue from aftermarket products and
services. There can be no assurance that the Company will be able to establish
any such relationships, that the Company's software will be accepted or that
successful aftermarket products and services will be developed or licensed.
Dependence On Complementary Technologies. In certain mobile communicating
device market segments, widespread adoption and use of mobile communicating
devices may depend on the commercial availability of other technologies and
business relationships. For example, widespread use of wireless mobile
telephones for data transfer in the United States or other regions may depend
upon the development of a wireless mobile network infrastructure capable of
digital transmission, as well as reliable, affordable and convenient wireless
transmission of data. For mobile communicating devices to achieve consumer-level
pricing, technologies which reduce the cost of manufacturing and the cost of
goods may need to be developed and implemented. These cost reductions will also
require the Company's OEM licensees to achieve economies of scale in
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manufacturing. There can be no assurance that such complementary technologies
will develop, or that such cost and price reductions can be achieved.
History of 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 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, achieved only modest unit
sales. 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 its licensing efforts to date, and its
operating results have been affected adversely as a result. Several of the
Company's previous 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 previous fiscal years.
Adequacy of Capital Resources to Execute Business Plan. The Company
anticipates that its existing capital resources will be adequate to satisfy its
operating and capital requirements at least through March 31, 1999. The Company
is currently developing a plan to ensure that its capital requirements will be
met for the forthcoming 12 months. The Company expects to incur additional
substantial losses for the remainder of its fiscal year ending March 31, 1999,
and may require substantial additional capital beyond that time to successfully
execute its business plan and achieve profitability. The Company's long-term
capital requirements will depend upon many factors, including, but not limited
to, revenue from operations, working capital requirements, investment in product
development and sales and marketing activities, and capital expenditures.
Historically, the Company has relied upon the sale of equity securities, advance
payments of license revenue and engineering fees, and short-term loans as
sources of funding. In the event the Company requires additional financing to
execute its business plan, there can be no assurance that such additional
financing will be available or that, if available at all, the terms of such
financing would be favorable to the Company or to its stockholders without
substantial dilution of their ownership and rights. If adequate funds are not
available to satisfy either short-term or long-term requirements, the Company
may be required to significantly curtail the scale of its operations, forego
market opportunities, or obtain funds through arrangements with strategic
partners or others that may require the Company to relinquish material rights to
certain of its technologies or potential markets.
Dependence On Limited Number Of Manufacturers. In the current fiscal year,
one OEM customer alone has accounted for greater than half of the Company's
total net revenues, and three OEM customers collectively have accounted for
greater than 80% of the Company's total revenues (exclusive of the $740,000
reduction in estimated revenues resulting from the settlement of a contract
dispute). During fiscal year 1998, three customers accounted collectively for
greater than half of the Company's total net revenues, and four customers each
accounted individually for greater than 10% of the Company's total net revenues.
A termination or decline in the Company's business relationship with any one of
these customers could have a material adverse impact on the Company's business,
financial condition, and results of operations, and there can be no assurance
that the Company will be able to sustain these relationships and derive
comparable revenues therefrom in future periods. 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 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
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Company will derive revenues therefrom. In August 1996, Nokia released in
selected geographic markets a smart phone which incorporates the Company's GEOS
software. An upgraded version of this product began shipping in North America in
December 1997. Nokia recently announced that the third generation of this smart
phone product would begin shipping to worldwide markets. In July 1997, Toshiba
released a smart phone for the Japanese market named the Genio that incorporates
the Company's operating system software. Toshiba released a successor product
named the Dialo for the Japanese market in October 1998. In November 1998,
Mitsubishi introduced the Moem-D product, a communications device specifically
for the Japanese market which incorporates the Company's GEOS(R)-SC(TM)
operating system software. These products have yet to generate significant
royalty revenue or make material, favorable contributions to the Company's
operating results. It is unclear whether these products will in the long term
have a beneficial impact 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. Even if currency translation between foreign markets and the
U.S. market remain stable, there are risks that changes and difficulties in
foreign local economies could adversely affect the Company's business results.
In particular, the Company derives a substantial portion of its revenue from
licensees in Japan, and views the whole of the Asian region as strategic to its
business objectives. Continuing economic difficulties within Asia have had, and
may continue to have, a material adverse effect on the Company's ability to
generate revenue from Asian licensees and from licensees who market their
products within Asia. 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 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 software becomes a leading software solution for hardware devices, the
Company believes its 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 and upon other operating
systems; recurring license revenue from communication services providers; and
integration by the Company of 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, content or services will achieve acceptance in the
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market. Further, the Company has historically marketed 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 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 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 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 phones based upon or using the
Company's software; the introduction and distribution of new system and
application software by the Company; the extent to which the Company can
negotiate and subsequently earn research and development fees from customers;
the ability of the Company to effectively manage its costs; 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
customers 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 research and development and sales and
marketing expenses. The Company has traditionally devoted substantial resources
toward research and development, which has affected its investment and
performance in other activities and in turn affected reported operating results.
While the Company has taken recent measures to reduce its research and
development expenditures, its investment in research and development remains
significant relative to its investment in other aspects of the Company's
operations. 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, Japanese 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.
International Operations. International revenue has accounted for the
majority of the Company's revenue in each of the last three fiscal years, and
for the first nine months of the current fiscal year. The Company anticipates
that international revenue will continue to represent a significant portion of
the Company's future revenue. Revenue from international sources is
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subject to certain inherent risks, including changes in local economic
conditions, changes in regulatory requirements and tariffs, potential
difficulties in the collection of accounts receivable, and unfavorable tax
consequences. In particular, the Company derives a substantial portion of its
revenue from licensees in Japan, and views the whole of the Asian region as
strategic to its business objectives. Continuing economic difficulties within
Asia have had, and may continue to have, a material adverse effect on the
Company's ability to generate revenue from Asian licensees and from licensees
who market their products within Asia. Although the Company's revenue is
generally denominated in U.S. dollars, fluctuations in currency exchange rates
and changes in local economic conditions could have adverse consequences on the
Company's ability to execute agreements with international customers, and as a
result could adversely affect the Company's ability to generate revenue from
technology licensing and from research and development fees. Additionally,
royalty income from licensees in certain countries, such as Japan and Finland,
is subject to the withholding of income taxes. The amount and mix of the
Company's revenue derived from such licensees will impact the Company's
provision for income taxes. Differences in the amount and mix of the Company's
revenue actually derived from licensees subject to foreign withholding taxes as
compared to amounts forecast by the Company may adversely impact the Company's
income tax rate.
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 termination,
amendment, or restructuring of such agreements or upon product discontinuation.
Amounts recognized upon such termination, amendment, or restructuring 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 software to 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 Key Personnel. The Company's future success depends in large
part on the continued service of its key technical, sales, and management
personnel, and on its ability to attract and retain qualified employees,
particularly highly skilled software design engineers involved in the
development of new products. The competition in the high technology industry for
such personnel is intense, and there can be no assurance that the Company will
be successful in attracting and retaining such personnel. With the exception of
certain executive positions, the Company does not have any employment contracts
in place for key employees. In October 1998, the Company appointed Stephen T.
Baker as Chief Financial Officer. In January 1999, David A. Thatcher resigned
his position as the Company's President and Chief Executive Officer and was
replaced by David L. Grannan. The loss of key employees, as well as changes in
the Company's executive
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management, could have a material adverse effect on the Company's business,
operating results, and financial condition.
Dependence on Year 2000 Compliance. Without modifications, many currently
installed computer systems and applications are not capable of adequately
responding to the change from the 20th century to the 21st century, potentially
resulting in operating difficulties ("Year 2000"). To the extent such Year 2000
issues cause significant delay in, or cancellation of, decisions to purchase the
Company's products or product support, or to the extent internal management and
communication systems are disrupted, the Company's business, results of
operations and financial condition could be materially adversely affected.
The Company's software products operate as a conduit for data from smart phones
and other mobile communicating devices to application software developed by
third parties. The Company has no control as to whether such hardware devices
and third party software will accurately process Year 2000 data. The Company
faces additional risk to the extent that suppliers of products, services and
systems purchased by the Company and others with whom the Company transacts
business are not Year 2000 compliant. The Company has initiated efforts to
address these potential problems, but there can be no assurance that the Company
will identify and remedy all significant Year 2000 problems in a timely fashion,
that remedial efforts in this regard will not involve significant time and
expense, or that such problems will not have a material adverse effect on the
Company's business, results of operations and financial condition.
Based on its assessment to date, the Company believes that the current versions
of its products, as well as its internal management information and other
systems, are either Year 2000 compliant or will not require substantial effort
or cost to become Year 2000 compliant. The Company's review of its Year 2000
issues has been conducted internally by company management and personnel. No
outside services or consultants have been retained in the review process. To
date, the Company has expended approximately $35,000 on costs associated with
Year 2000 compliance, as most of the necessary software upgrades and other
remediation efforts to date have been covered under existing maintenance and
warranty agreements with vendors. The Company does not believe that any such
additional costs will become material in the future. Should Year 2000 problems
arise in their most severe form, the Company believes that royalty revenues
associated with OEM products could be adversely affected due to the recall or
delay in commercial release of such products, and further believes that in the
worst case scenario certain internal functions, in particular telecommunication
features such as voicemail, could be disrupted. Additionally, the Company may be
obligated to certain of its OEM customers for legal damages or additional
development work should it be determined that the Company's software products
failed to perform as warranted. However, the Company believes there is only a
remote chance that such severe outcomes could occur, and believes that it cannot
reasonably estimate the range of lost revenues or additional costs, if any, that
would result should such outcomes occur. The Company has yet to adopt a
contingency plan to address the most severe effects of the Year 2000 problem,
but intends to develop and adopt such a plan within the next nine months.
With respect to the Company's software products and remediation efforts, the
Company and its OEM hardware partners have imposed systematic testing procedures
in the product development process to ensure that the software and the products
into which it is incorporated are Year 2000 compliant. To date, there have been
no performance problems detected related to Year 2000 issues which have
significantly affected or delayed product development schedules or the
commercial release dates of the products under development. Testing routines
will be continuously applied to products as they are developed, and the Company
will continue to undertake reasonable and diligent efforts in future development
activities to detect and correct any Year 2000 issues.
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For the Company's internal management information and communication systems, a
preliminary review of each system has occurred, and a remediation program
appropriate to any detected exposure has been adopted. The Company estimates
that the aggregate cost of these remediation programs will not exceed $100,000,
and expects that the majority of any costs incurred will relate to the upgrade
of certain telecommunication systems such as voicemail. The Company purchased an
upgrade to its voicemail system at a cost of approximately $31,000 to ensure its
Year 2000 compliance. The Company's preliminary review has also addressed
certain aspects of the Company's operations which are traditionally considered
to be outside the scope of standard information and communication systems. The
most significant remediation program identified in this part of the Company's
preliminary review involves upgrades to the Company's building security systems.
The Company estimates that the cost of such upgrades will not exceed $10,000. To
date, the Company has purchased a security system upgrade at one of its office
facilities at a cost of approximately $4,000. The Company intends to continue
its review of its internal systems and operations for Year 2000 compliance over
the next nine months, but does not anticipate that such additional reviews will
uncover exposures of a material nature which have not been previously
identified.
As the Company utilizes third-party software, telecommunications, and other
technology components in both its internal information systems and its external
product offerings, these products and services affect the Company's ability to
achieve Year 2000 compliance. The Company recognizes its dependence upon these
outside parties, and has successfully obtained legal indemnification for Year
2000 problems from certain key suppliers of third-party software and services.
However, there are a significant number of developers, suppliers, and
contractors who have not specifically indemnified the Company for the effects of
Year 2000 problems, and the Company remains exposed to the extent these
components supplied by third parties fail to properly handle the change to the
Year 2000. The Company has included these third-party products and services in
its review of existing internal information systems, and in the case of its
product development activities has subjected these outside components to its
standard testing procedures. Based upon these efforts, Company does not
presently believe these third-party products and services present a material
risk to the Company's business. There can be no assurance, however, that the
Company's procedures have identified or will identify all potential Year 2000
problems, or that a material adverse effect on the Company's financial condition
and operating results could be avoided in the event third-party products and
services fail to properly handle the change to the Year 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.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
21
<PAGE> 23
PART 2 -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.25 Executive Employment Agreement between Geoworks and David L.
Grannan dated January 10, 1999
27.1 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed in this quarter.
22
<PAGE> 24
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 11, 1999
GEOWORKS CORPORATION
by: /s/ Stephen T. Baker
----------------------------------------
Stephen T. Baker
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
23
<PAGE> 25
GEOWORKS CORPORATION
EXHIBITS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.25 Executive Employment Agreement between Geoworks and
David L. Grannan dated January 10, 1999
27.1 Financial Data Schedule
</TABLE>
24
<PAGE> 1
EXHIBIT 10.25
January 10, 1999
Dave Grannan
Geoworks Corporation
960 Atlantic Avenue
Alameda, California 94501
Re: Executive Employment Agreement
Dear Dave:
This will serve as your Executive Employment Agreement ("Agreement"),
effective as of January 10, 1999. This Agreement is between Geoworks
Corporation, which I refer to as the "Company", and you, referred to as the
"Executive." This Agreement is made with reference to the fact that the Company
desires to retain your services as its President and Chief Executive Officer,
and appoint you as a member of the Board of Directors, upon the terms and
conditions detailed herein. Likewise, you desire to be employed by the Company
upon the terms and conditions detailed herein. Accordingly, the Agreement is as
follows:
1. EMPLOYMENT. The Company hereby employs Executive, and Executive hereby
agrees to serve as the Company's President and Chief Executive Officer, and as a
member of the Board of Directors, during the Term (defined below) with duties
normal and customary to such positions. Executive agrees to serve at the
direction of the Company's Board of Directors and perform such services as are
necessary to the faithful execution of his duties on behalf of the Company.
During the Term, Executive shall serve the Company diligently and devote all
business time, attention, energy, ability and best efforts to the business needs
of the Company.
2. TERM OF EMPLOYMENT.
(a) The initial term of employment (the "Term") shall be for a period
of two years commencing on January 10, 1999 unless earlier terminated (i) upon
death of Executive, (ii) at the option of the Company upon 90 days' prior
written notice to Executive in the event of the inability to perform by reason
of injury, physical or mental illness or other incapacity of Executive for a
period exceeding 90 continuous days, (iii) at the option of Executive if there
is a Change of Control (defined below), (iv), subject to Section 4(d) below,
upon the discharge of Executive by the Board of Directors of the Company for
Cause (defined below) or (v) subject to Section 4(e) below, voluntarily by
Executive, or by the Company for convenience without Cause, upon 30 days prior
written notice. Renewal or extensions of the Term may occur upon such terms and
conditions as mutually agreed. Executive understands he can be terminated for
convenience subject to the terms and conditions of this Agreement.
(b) For purposes of this Agreement, "Cause" shall mean Executive's
(i) drug, alcohol or other substance abuse materially affecting Executive's
performance, (ii) commission of a crime related to Executive's employment, (iii)
conviction of any felony, (iv) a material breach of any provision of this
Agreement, or (v) a material and repeated failure to follow Company policy or
procedure, which breach under clause (iv) or failure under clause (v) continues
after the Company shall have given to Executive notice thereof and a reasonable
opportunity to cure same; provided that no such notice or opportunity to cure
shall be required if a unanimous vote of the Board of Directors of the Company
<PAGE> 2
(excluding Executive) shall determine that the giving of any such notice and
opportunity to cure would cause severe and immediate harm to the Company.
(c) For purposes of this Agreement, "Change of Control" shall mean
any sale of all or substantially all of the assets of the Company, any merger or
consolidation of the Company with and into another entity where the Company is
not the surviving entity or where Executive's position or duties are
substantially changed, or any transfer (in a single transaction or in a series
of related transactions) of more than 25% of the outstanding common stock of the
Company.
3. COMPENSATION. As compensation for Executive's services hereunder and
in consideration of the agreements set forth herein, the Company shall pay
Executive an annual Base Salary and Bonus (subject to normal withholding), and
other benefits, all payable at the same time and in the same manner as the
Company normally pays compensation and benefits to its executive personnel. The
Company shall provide the Base Salary, Bonus, and other benefits, as follows:
(a) INITIAL BASE SALARY. The Company shall initially pay Executive an
annual base salary equal to $175,000 (the "Base Salary").
(b) REVIEW OF BASE SALARY AND PERFORMANCE INCENTIVES. Base Salary
shall be reviewed annually by the Board of Directors and may, at the discretion
of the Board of Directors, be increased accordingly. Bonus, Stock Options, and
other performance incentives, shall be revisited and reviewed semi-annually by
the Board of Directors, and may, at the discretion of the Board, be increased
accordingly.
(c) BONUS. For each calendar year during the Term, the Company shall
award Executive a bonus of 30% of Base Salary (payable quarterly) based upon
achievement of performance objectives for Executive and the Company for such
calendar year (or portion thereof), as may be determined by the Board of
Directors. The Board of Directors may, in its discretion, award additional
performance bonuses to Executive.
(d) STOCK OPTIONS. The Company will grant to Executive prior to
January 31, 1999 two options to purchase Common Stock of the Company, as
follows:
(i) 50,000 shares at the Strike Price per share vesting in a
lump sum on the fourth anniversary of the date of grant
(provided that Executive continues to serve as an employee
of the Company on that fourth anniversary date); provided
that such vesting shall accelerate and vest in a lump sum on
the Stabilization Date; and
(ii) 160,000 shares at the Strike Price per share vesting in
accordance with the Company's 1994 Stock Plan, as amended.
For purposes of this Agreement, "Strike Price" shall mean the price
determined by the Board of Directors on the date of grant. "Stabilization Date"
shall mean the 25th consecutive calendar day upon which the Company's common
stock closing trading price as reported in the Wall Street Journal is maintained
above $6.00 per share following the Company's first achievement of quarterly
results that include net income before interest, taxes, depreciation and
amortization (EBITDA) (i.e., "Financial Break Even" results). Company agrees to
re-negotiate and amend the definition of Stabilization Date in the event of a
sale of any major assets of the Company.
<PAGE> 3
(e) OTHER BENEFITS. Executive shall be entitled to participate in the
Company's executive benefit programs with fringe benefits, perquisites, and
other benefits of employment as follows:
(i) The Company shall provide medical and dental insurance
coverage for Executive and his spouse and children, with all
premiums paid by the Company;
(ii) At all times, the Company shall provide Executive with
disability insurance coverage on the same basis as in (e)(i)
above;
(iii) The Company shall reimburse Executive for all reasonable
travel, entertainment, professional development, and other
documented expenses incurred by Executive in the performance
of Executive's duties; and
(iv) During the Term, Executive shall be entitled to 15 vacation
or personal days in each calendar year, subject to proration
in respect of periods of less than a calendar year.
Executive shall be entitled to be paid for accrued but
unused vacation or personal days.
4. EARLY TERMINATION AND SEVERANCE.
(a) Executive shall not be entitled to severance compensation under
this provision if Executive quits his employment voluntarily.
(b) If Executive's employment is terminated during the Term because
of death or disability under Section 2(a)(i) or (ii), then Executive shall be
entitled to, and the Company shall pay to Executive or his estate, an amount
equal to Executive's then current Base Salary for a period of ninety (90) days
thereafter.
(c) If Executive's employment voluntarily terminates during the Term
pursuant to Section 2(a)(iii) following a Change of Control, then Executive
shall be entitled to, and the Company shall pay to Executive as severance
compensation, an amount equal to Executive's then current Base Salary for the
remainder of the Term of this Agreement, but not less than eighteen months,
payable in equal monthly installments, and the Company shall for such concurrent
time period pay and maintain in full force and effect the Other Benefits in
Sections 3(e)(i)-(ii), and 100% of Executive's shares granted under Section 3(d)
herein shall vest on the date of termination.
(d) If Executive is terminated by the Company for Cause during the
Term under Section 2(b)(i) - (iv), then Executive shall be entitled to, and the
Company shall pay to Executive as severance compensation, an amount equal to one
month of Executive's then current Base Salary, the Company shall concurrently
pay and maintain in full force and effect for one month the Other Benefits in
Sections 3(e)(i)-(ii), and none of Executive's remaining unvested shares granted
herein under Section 3(d) shall vest on the date of termination.
(e) If Executive is terminated by the Company during the Term
pursuant to Section 2(a)(v) [i.e., for convenience rather than Cause pursuant to
Section 2(a)(iv), or for death or disability pursuant to Sections 2 (a)(i) or
(ii)], then Executive shall be entitled to, and the Company shall
<PAGE> 4
pay to Executive as severance compensation, an amount equal to Executive's then
current Base Salary for the remainder of the Term of this Agreement, but not
less than eighteen months, payable in equal monthly installments; and the
Company shall for such concurrent time period pay and maintain in full force and
effect the Other Benefits in Sections 3(e)(i)-(ii); and on the date of
termination [for convenience rather than for Cause pursuant to Section 2(a)(iv)
or death or disability] the vesting restrictions on Executive's remaining
unvested Stock Options granted under Section 3(d) will accelerate and lapse as
follows: (i) all vesting restrictions on Executive's 160,000 share option
granted under Section 3(d)(ii) will accelerate and lapse; and (ii) all vesting
restrictions on Executive's 50,000 share option granted under Section 3(d)(i)
will be deemed to accelerate and lapse as to 25,000 shares in any event and as
to all 50,000 shares in the event that the Stabilization Date occurs within 180
days following the date of termination. The Company agrees that such vesting
acceleration is proper in such circumstances as it fairly reflects Executive's
previous contributions and efforts.
5. CONFIDENTIALITY.
(a) Executive acknowledges that during his employment or association
with the Company (whether prior to or subsequent to the date hereof), Executive
may access to or developed Confidential Information. "Confidential Information"
means all data, information, know-how, legal information, techniques, technical
plans, terms sheets, documentation, customer lists, business plans, marketing
plans, financial information, and the like, in whatever form or medium, and
whether or not designated or marked "Confidential" or the like, which: (1)
relate to the business of the Company and/or its predecessors and (a) which have
not been disclosed by the Company or its predecessors to the general public or
to the Company's trade or industry, and (b) which Executive knows or has good
reason to know are not generally known to the general public or to the Company's
trade or industry; or (2) are received by the Company from a third party under
an ongoing obligation of confidentiality to the third party.
(b) Executive shall not use or disclose (directly or indirectly) any
Confidential Information (whether or not developed by Executive) at any time or
in any manner, except as required in the course of employment with the Company
or as directed by a court of competent jurisdiction after notice to the Company.
The obligations of this paragraph are continuing and survive the termination of
Executive's employment with the Company.
(c) All Confidential Information, documents, and equipment relating
to the business of the Company, whether prepared by Executive or otherwise
coming into Executive's possession, are the exclusive property of the Company,
and must not be removed from any of its premises except as required in the
course of employment with the Company. All such Confidential Information,
documents, and equipment shall be promptly returned by Executive to the Company
upon the request of the Company, and on any termination of Executive's
employment with the Company.
(d) Following termination or resignation, Executive shall refrain
from soliciting employees of the Company for a period of one (1) year.
6. MISCELLANEOUS.
(a) NOTICES. All notices or other communications hereunder shall be
deemed to have been duly given and made on the date of receipt if in writing and
if served by personal delivery upon the party for which it is intended or
delivered by registered or certified mail, return receipt request, or by
reputable overnight courier to the person at the address indicated, or such
other address as may be designated in writing hereafter, in the same manner, by
such person: If to the Company, at its
<PAGE> 5
principal executive offices marked "Attention: Chairman of the Board"; or If to
Executive, to his most recent address appearing in the Company's records.
(b) AMENDMENT; WAIVER. Any provision of this Agreement may be amended
or waived if, and only if, such amendment or waiver is in writing and signed, in
the case of an amendment, by the Company and Executive, or in the case of a
waiver, by the party against whom the waiver is to be effective. No failure or
delay by either party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
(c) ASSIGNMENT. Executive shall not have either the right or power to
assign or delegate any provision of this Agreement (including by operation of
law) and any purported such assignment or delegation shall be void. The Company
may assign its benefits under this Agreement (in whole but not in part) only to
a person into or with which the Company is merged or consolidated or to which
all or substantially all of the assets of the Company are sold.
(d) ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral or written, with
respect to such matters.
(e) PARTIES IN INTEREST. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing in this Agreement, express or implied, is intended to
confer upon any person other than the parties hereto, or their successors or
permitted assigns, any rights or remedies under or by reason of this Agreement.
(f) GOVERNING LAW. This agreement shall be governed by and construed
in accordance with the laws of the State of California.
(g) SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable, the remainder of this Agreement shall nevertheless remain in
full force and effect. If any provision is held invalid or unenforceable with
respect to any particular circumstances, it shall nevertheless remain in full
force and effect in all other circumstances.
(h) HEADINGS. The section headings herein are for convenience only
and shall not affect the construction of this Agreement.
(i) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed, shall be deemed to be an original
and all of which together shall constitute one instrument.
(j) ATTORNEY'S FEES. In the event of any legal action for breach of
this Agreement, the prevailing party shall be entitled to reasonable attorney's
fees, costs and expenses incurred in connection therewith.
(k) AUTHORIZATION. This Agreement has been approved by the
Compensation Committee and duly authorized by the Board of Directors.
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
Very truly yours,
GEOWORKS CORPORATION
By: /s/ Gordon E. Mayer
-----------------------------------
Gordon E. Mayer
Chairman of the Board
"Executive":
/s/ David Grannan
-------------------------------------
David Grannan
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF GEOWORKS AS OF DECEMBER 31, 1998, 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-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,156,000
<SECURITIES> 7,352,000
<RECEIVABLES> 2,538,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,491,000
<PP&E> 7,518,000
<DEPRECIATION> (5,169,000)
<TOTAL-ASSETS> 14,060,000
<CURRENT-LIABILITIES> 3,513,000
<BONDS> 0
0
0
<COMMON> 96,687,000
<OTHER-SE> (86,327,000)
<TOTAL-LIABILITY-AND-EQUITY> 14,060,000
<SALES> 0
<TOTAL-REVENUES> 4,740,000
<CGS> 0
<TOTAL-COSTS> 37,000
<OTHER-EXPENSES> 18,317,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,000
<INCOME-PRETAX> (13,143,000)
<INCOME-TAX> 118,000
<INCOME-CONTINUING> (13,261,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,261,000)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
