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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended MARCH 31, 1999.
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________.
Commission file number 0-23926
GEOWORKS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 94-2920371
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
960 ATLANTIC AVENUE, ALAMEDA, CALIFORNIA 94501
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(Address of principal executive offices) (Zip code)
510-814-1660
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on June 18,
1999 as reported on the Nasdaq National Market, was approximately $40,018,047.
Shares of Common Stock held by each executive officer and director and by
certain persons who own five percent (5%) or more of the outstanding Common
Stock have been excluded in that such persons may be deemed affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of June 18, 1999, there were 17,659,371 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 1999 Annual Meeting of Stockholders to be held on September 14, 1999 are
incorporated by reference into Items 10, 11, 12 and 13 of Part III hereof.
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GEOWORKS
TABLE OF CONTENTS
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Page
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PART 1
Item 1. Business 5
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 4A. Executive Officers of the Registrant 20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 54
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures 54
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PART I
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Many of the discussions in this Form 10-K 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 e-commerce and information services; the anticipated
development of markets for wireless content, mobile device commerce and
services, advertising-sponsored content services, Internet-to-wireless device
information services, and the Company's intention to integrate and market such
wireless content and service technologies for use by wireless device operators
and consumers; the status, timing and size of the market for mobile
communication devices; the Company's strategy for establishing its software and
server technology as a solution for the mobile device commerce market; the
Company's intention to fund and complete ongoing research and development
projects, including the ongoing development and improvement of its proprietary
software and services; 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; and
the Company's assessment of its exposures and continuing 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 and exploitation of the wireless device and wireless content
services markets, the activities of a limited number of device manufacturers,
and the fact that Company participates in but has no direct control over those
markets and 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 and
services on a timely basis; (iv) widespread adoption of mobile communication
devices may depend upon the commercial availability of complementary
relationships and technologies, such as wireless mobile network infrastructure,
encryption, and security technologies; (v) the Company anticipates the emergence
and potential impact of competitive products and services; (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
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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 10.
Readers should not rely on forward-looking statements contained herein, which
reflect the analysis of the management of Geoworks based on information known as
of the date of this report. 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.
ITEM 1. BUSINESS
Geoworks was incorporated in the state of California on September 27, 1983 and
was reincorporated in the state of Delaware on October 7, 1997. Geoworks is a
provider of mobile e-commerce and information services, software, and
professional technical services. The company offers information services,
including advertising-sponsored content, to the growing universe of mobile
devices. Based in Alameda, California, the Company has international offices in
Japan and the United Kingdom, and can be found on the World Wide Web at
http://www.geoworks.com.
The Company is transitioning from being a developer of operating system software
for the emerging market of smart phones to being a supplier of mobile e-commerce
and information services, software, and professional technical services. The
smart phone market emerged slower than all parties anticipated and there is
increasing competition for the operating systems used in smart phones. Geoworks
is leveraging its people, technology and experience to serve the device and
handset manufacturers with professional engineering services for planning,
specification, development and quality assurance of operating systems and
applications in multiple smart device markets. The software used for many of
these smart device projects is Geoworks proprietary software. In the future, the
Company expects to develop on platforms other than its own, using its
significant experience in wireless, small platforms and smart phones.
INDUSTRY BACKGROUND
The market for information services, or value-added services, is growing
rapidly. Geoworks plans to introduce products and services that are designed for
existing digital phones and pagers. The Company is focused on consumer-oriented
wireless services that bring Internet content to mobile devices, including
existing digital mobile handsets and alpha-numeric pagers. Out of the
approximately 70 million mobile customers in the United States today, more than
28 million Americans already have information services-capable devices. Growing
in popularity, mobile information services provide a new way to communicate
anytime and anywhere with a mobile device.
The Company believes that Internet-to-wireless information services is a market
on the verge of explosive growth. The consumer penetration of mobile devices and
Internet
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users continues to grow worldwide and represents a substantial market
opportunity for Geoworks. As such, Geoworks is not alone in entering, and
subsequently trying to carve out a leadership position, in this market.
Companies in telecom, software, Internet, and messaging-based services, as well
as device manufacturing, are all preparing to stake a claim. The Yankee Group
estimates that by the year 2001, mobile data service revenues will exceed $9
billion. Paul Kagan & Associates estimates the number at $6 billion. Europe has
a large penetration rate of digital mobile users who also use information
services. For example, in France industry sources report that an estimated 80%
of the digital mobile phone users also send and receive text messages on their
phones. In the United Kingdom the growth rate of mobile information services is
also expanding, with over 20% of current digital mobile phone customers also
sending and receiving text messages and signing up for additional mobile
information services. Geoworks believes near term growth in the domestic and
international mobile information services markets will be substantial.
THE GEOWORKS STRATEGY
Management believes that Geoworks is in a position to enter and lead the
Internet-to-wireless information services marketplace. Geoworks has deep roots
in the wireless industry and a proven track record for technical innovation.
Geoworks plans to use its technical expertise to be one of the first companies
to offer free, advertising-sponsored services delivered to many types of mobile
devices.
Geoworks is developing a transaction and advertising sponsorship business model
and intends to offer the services free to the consumer. The Company's
information services will be based on its proprietary technologies, including
the Premion Server+ technology. Geoworks plans to offer a range of
advertising-sponsored information services that relay Internet content to a
variety of mobile devices; including:
> CONSUMER INFORMATION SERVICES -- Geoworks intends to offer a variety of
services that turn generic mobile handsets into interactive information
sources. Geoworks' Premion(TM) Information Services provide tailored
information, such as news headlines, anniversary reminders and stock
quotes, or services that help customers accomplish tasks, such as ordering
theater tickets or receiving driving directions or restaurant reviews.
> e-COMMERCE SERVICES -- Geoworks intends to deliver mobile e-commerce
services to mobile customers through innovative technologies that offer new
ways to use the power of the Internet to facilitate consumer purchasing.
Geoworks' first commercial service, Discopro.com, is an
advertising-supported free service that allows consumers to receive
discounts and promotions from their preferred retailers directly to their
mobile devices anytime, anywhere.
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Geoworks makes the delivery of information and mobile commerce services easy
through its innovative server-based technology, Premion(TM) Server+. Premion(TM)
Server+ is a client/server application for the delivery of content to mobile
devices, such as digital mobile telephones or alphanumeric pagers. Premion(TM)
Server+ delivers a variety of data to a multitude of devices, and formats the
data clearly. The delivery is network, protocol and operating system neutral.
Premion(TM) Server+ supports a variety of protocols and is poised to support
future protocols such as the Wireless Access Protocol (WAP) now in development
and soon to be deployed worldwide.
Geoworks initially plans to offer Internet-to-wireless information services in
the United States and in the United Kingdom. The Company has also entered into
an evaluation license agreement with Toshiba to assist them in providing Premion
Server+ to a wide variety of mobile information services in the Japanese market.
Management expects this licensing model will extend the reach of mobile services
to more consumers using the Company's technology.
Geoworks also provides consumer electronics manufacturers with comprehensive
software development and technical services in support of the wireless market.
The Company's professional services are targeted at industry participants which
manufacture mobile applications, handsets and equipment. This includes, but is
not limited to, data peripherals, data terminals, data transmission equipment,
and mobile phones.
Geoworks also offers complete project management and software engineering for
complex projects requiring experienced development teams who can ensure
completion in a timely and efficient manner. Geoworks has more than a decade of
experience developing operating systems and related applications for small,
battery-powered mobile devices. Presently, six different models of
Geoworks-enabled handsets are available in more than 30 countries. Geoworks
provides professional services in support of its proprietary GEOS(R) operating
system technology and is proficient with other operating systems as well.
SALES AND MARKETING
The sale and marketing of engineering professional services contracted to large,
established companies is provided by the Company's in house direct sales staff
and senior management. The sale and marketing of Internet-to-wireless
information services is a cooperative process involving sponsorship, promotion,
and advertising arrangements with major on-line and brick-and-mortar retailers
which is handled by the Company's in-house sales staff.
The Company's marketing activities include formal and informal alliance and
affiliate relationships with major Internet companies, active public relations,
and Internet advertising. The Company attempts to leverage the greater
resources, experience and
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market presence of its business contacts to establish the Company's
Internet-to-wireless solutions for today's consumers, in the United States, the
United Kingdom, and Japan.
PRODUCT DEVELOPMENT
The Company expects to continue its research and development efforts in order to
increase product efficiency and reliability, and in order to support new
wireless functionality, such as the Wireless Application Protocol, as such
functionality becomes available for widespread deployment.
Historically, Geoworks developed wireless operating systems as well as wireless
server technology. Geoworks intends to continue investing in proprietary server
technology to support its wireless information services offerings. Geoworks does
not currently plan to make further investments in its legacy operating systems
except under professional services consulting contracts for use in specific
devices in conjunction with major customers.
COMPETITION
Industry analysts are predicting that the demand for mobile e-mail, Web browsing
and content services will grow substantially in the next five years. While such
data transmission has not been fully realized in the wireless industry yet,
Geoworks believes it is in a good position to exploit this growing market.
Geoworks possesses the experience and technological expertise needed to
accomplish this mission, but there is no assurance that it will maintain such
expertise or accomplish that goal.
Competition in the mobile information services arena is forming along two
distinct market segments: The first is the server providers who sell servers,
and sometimes content, to wireless carriers and, more recently, to Internet
portal companies. This group includes iKno from Motorola, phone.com, Saraide,
and Intelligent Information, Inc. Geoworks' Premion Server+ technology is
similar to these offerings in that a carrier could potentially use Premion
Server+ instead of various servers from these companies. The Company believes
that Premion Server+ contains more features and serves a wider variety of
subscriber devices and more types of content feeds than alternatives from
present competitors, but there is no assurance that Premion Server+ will be the
technology chosen.
The second distinct competitive segment involves providers of content and
transaction services. Geoworks views its competition within the field of
information services as the Internet content and transaction providers, as
opposed to traditional wireless carriers. Companies such as coolsavings.com,
netcentives.com, Yahoo, with its acquisition of Online Anywhere, and Microsoft,
with its acquisition of OmniBrowse represent the current competition in mobile
information services. Many of the Internet portals are also beginning to provide
their content and services to mobile device customers.
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Geoworks believes it will be one of the first companies to offer free,
advertising-sponsored services delivered to mobile devices; however, competition
in both market segments is intense and is expected to increase over the next 12
to 24 months as more and more alliances are formed. Many of Geoworks'
competitors have greater financial, technical and marketing resources than the
Company.
The Company competes primarily on the basis of the features, performance,
reliability and ability to provide a unique, advertising-sponsored free service
to consumers. This appeals to the need for perishable information on the go and
provides added value to the advertiser.
Geoworks offers the advertiser an excellent and cost-effective distribution
channel to relay promotional offers to consumers, thereby extending advertisers'
reach to mobile device users. This medium reaches a highly desirable and
specific demographic. Geoworks' services will allow the advertiser to target a
specific demographic that gives the advertiser the ability to communicate on a
one-to-one basis with their new potential customers. Customization and control
features will allow messages to be delivered in very personal, targeted formats.
Mobile devices are personal devices, not shared devices like wireline phones or
computers. Because of this, management believes that information and services
delivery to mobile devices could represent an even more compelling platform than
the desktop computer. The phone always travels with the customer, doubles as a
pager, and tends over time to become the main contact number.
INTELLECTUAL PROPERTY
The Company regards its software and development methods as proprietary and
relies upon a combination of patent, copyright, trademark and trade secret laws,
employee and third-party non-disclosure agreements, and license agreements to
establish and protect proprietary rights in its products and methods. The
Company has patents in the United States, the United Kingdom, Germany and
France, and pending applications in the United States and Europe.
There can be no assurance that any of the Company's intellectual property rights
can be successfully asserted in the future or that they will not be invalidated,
circumvented or challenged. In addition, certain foreign countries may not
protect the Company's intellectual property rights to the same extent as the
laws of the United States. The failure of the Company to protect its proprietary
information could have a material adverse effect on the Company's business,
operating results and financial condition.
From time to time, third parties, including competitors of the Company, may
assert exclusive patent, trademark, copyright and other intellectual property
rights over technologies or products that are important to the Company's
business. Further, from time to time, the Company may receive communications
from third parties asserting that
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features or content of certain of the Company's products infringe upon
intellectual property rights held by such third parties. In addition, the
Company may find cause to assert its own intellectual property rights in its
products and technologies against third parties whom the Company believes are
infringing such rights. The marked increase in the number of software and
business method patents being issued by the United States Patent and Trademark
Office can increase the risk of infringement claims. Patents have been granted
in recent years on fundamental technologies in software and software-based
business methods, and future patents may issue which relate to fundamental
technologies incorporated into the Company's products. As the number of patents,
copyrights and other intellectual property rights in the Company's market
increases, products based on the Company's technology may increasingly become
the subject of infringement claims both by and against the Company. There are no
pending or threatened infringement claims against the Company, but there can be
no assurance that third parties will not assert infringement claims against the
Company or that the Company will not assert infringement claims against others.
Litigation, in and of itself and regardless of its outcome, could result in
substantial cost and diversion of resources of the Company and could otherwise
have a material adverse effect on the Company's business, operating results and
financial condition.
EMPLOYEES
As of March 31, 1999, Geoworks employed 86 full-time employees, of whom 55 were
employed in research and development, 12 in sales and marketing, and 19 in
finance and administration. None of the Company's employees is represented by a
labor union or is subject to a collective bargaining agreement, and Geoworks has
never experienced a work stoppage related to a labor grievance or strike.
The Company endeavors to maintain competitive compensation, benefits, equity
participation and work condition policies to assist in attracting and retaining
qualified personnel.
The Company's future success depends in large part on the continued service of
its key technical, marketing and management personnel and on its ability to
continue to attract and retain qualified employees, particularly highly skilled
engineers. The competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The Company does not have employment contracts with most of its key
personnel. The loss of key employees could have a material adverse effect on the
Company's business, operating results and financial condition.
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 March 31, 1999, the
Company had an
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accumulated deficit of $89.1 million, and had incurred operating losses of
approximately $16.3 million, $16.0 million, and $15.5 million in the fiscal
years ended March 31, 1999, 1998, and 1997, respectively. The Company expects to
continue to incur substantial annual operating losses in the fiscal year ending
March 31, 2000, and it is unclear how soon thereafter, if ever, the Company will
operate profitably. 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 mobile e-commerce and
information services, but there can be no assurance that such a plan will be
successfully implemented. 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 mobile devices. Specifically, the Company is focusing on its
Professional Services consulting business, as well as introducing the Premion
Server+, a server product that delivers mobile information services to digital
mobile phones and pagers. 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, and
the Company's ability to establish business relationships with leading industry
partners, to introduce successful products and services, to generate additional
revenues through mobile e-commerce and information services, and to achieve and
maintain a competitive advantage should such a market develop.
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, 2000. The Company expects to
incur additional substantial losses for the fiscal year ending March 31, 2000,
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.
Competition in Mobile E-Commerce and Information Services. Significant
competition will exist in the mobile e-commerce and information services arena.
Competition will
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come from service providers and Internet content and transaction providers.
Companies with significantly greater financial, technical and marketing
resources and greater name recognition are currently offering or are reported to
be developing mobile e-commerce and information services that may compete
directly with the Company's information services. These companies include
Motorola, Phone.com, Saraide, Intelligent Information, Inc., coolsavings.com,
netcentives.com, Microsoft, Yahoo and other Internet portals.
The mobile e-commerce and information services marketplace is expected to evolve
very rapidly. There can be no assurance that the Company's competitors will not
develop or market mobile e-commerce and information services that are superior
to those of the Company or achieve greater market acceptance than those of the
Company.
Competition in Mobile Communication Device Operating Systems. The Company
expects intense competition among mobile communicating device operating systems
to the extent a market develops for such mobile 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 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 1998, Psion, Ericsson, Motorola, and Nokia announced a joint venture
named Symbian that will license Psion's EPOC operating system to smart phone
manufacturers. In May of 1999, Matsushita also joined the joint venture. Through
Symbian, these companies are seeking to introduce an operating system platform
in the smart phone
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market which would directly compete with the Company's GEOS-SC system software,
and together they have contributed over $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.
Dependence On Development Of Mobile Device Content And Services. The Company
believes its long-term financial success is dependent on its ability to derive
revenue from the delivery of 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, advertising revenue
associated with mobile information services, transaction revenue from mobile
information services 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 market.
Further, the Company has historically marketed operating systems and
applications, and has only limited experience marketing server and client
applications and mobile e-commerce and information services. There can be no
assurance that the Company will be able to offer sufficiently attractive
products and services to generate significant revenue. Moreover, the Company may
be required to respond to competitive products and services. Finally, practical
and effective mobile 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 mobile distribution
will prove to be feasible or that the Company's technology will be suitable for
the distribution infrastructure as it develops. If the Company is unable to
derive significant revenue from one or more of the foregoing sources, there will
be material adverse impact to its long-term business, results of operations and
financial condition.
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 application software products and new mobile e-commerce and information
services. Broad acceptance of Geoworks' existing and yet to be released products
and services in new markets is critical to Geoworks' future success. Geoworks
has made progress toward this development goal, but acceptance of its newly
developed products and services in the market is uncertain.
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Because of the short product life cycles and intense competition expected in the
mobile communicating device market and mobile e-commerce and information
services markets, the timeliness of new product and service introductions and
shipments can be critical to whether a particular product or service will ever
achieve market acceptance. There can be no assurance that the Company will be
able to develop, introduce and ship new products or services on a timely basis.
Furthermore, from time to time, the Company and others may announce new
products, features, technologies or services that have the potential to replace
or shorten the life cycle of the Company's existing product and service
offerings. There can be no assurance that announcements by the Company or by its
competitors will not cause customers to defer purchasing existing products or
use the services of the Company. Delays or difficulties associated with
developing or introducing new products or services could have a material adverse
effect on the Company's business and results of operations.
Dependence On Limited Number Of Revenue Generating Customers. In fiscal year
1999, one OEM customer accounted for greater than half of the Company's total
net revenues, and three OEM customers collectively accounted for 90%. During
fiscal year 1998, three customers accounted collectively for greater than half
of the Company's total net revenues, and four customers collectively accounted
for 74% of the Company's total net revenues. Therefore, a termination or decline
in the Company's business relationship with any of its existing 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 royalty revenue 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's research and development revenue is dependent on a limited number
of contracts with customers. This revenue is constrained by the available
research and development employees currently on staff and the rate at which new
highly skilled technical resources could be hired. The Company derives a
substantial portion of its revenue from customers 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 customers and
from customers who market their products within Asia.
History of Disappointing Revenue from Previous Generation Products.
Historically, the Company emphasized the licensing of its operating system
software to manufacturers of smart phones and non-communicating mobile devices,
such as personal digital assistants and handheld electronic organizers. The
smart phone market has emerged slower than anticipated and there is increasing
competition for the operating systems used in smart phones. The Nokia 9000,
Toshiba Dialo, Toshiba Genio and Mitsubishi Moem-D have had only modest unit
sales. The 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
14
<PAGE> 15
sales. With the exception of the Palm Pilot product from 3COM (which does not
incorporate the Company's software), products in the non-communicating 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.
Royalty Revenues from the Smart Phone Market. The Company's historical efforts
have been 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 has in the past depended upon the
emergence of a new market for these products. The Company derives royalty
revenue on a per unit basis and total royalty revenue depends on the volume of
smart phone devices shipped. 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. The Company has developed the operating system software for six
smart phone products which are currently shipping. Although these devices have
received positive reviews and several industry 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. Further, there can be no
assurance that royalty revenues will ever provide a meaningful contribution to
the Company's overall financial results.
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 introduction and acceptance of the
Company's mobile e-commerce and information services; 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; and
actions by competitors of the Company. 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 mobile e-commerce and information services will vary
based on the market success of the advertising sponsored services model and the
ability of the Company to derive a transaction fee from mobile e-commerce
services. Revenue from research and development fees can vary considerably
15
<PAGE> 16
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. Revenue from international operations has accounted
for the majority of the Company's revenue in each of the last three fiscal
years. The Company anticipates that such international revenue will continue to
represent a significant portion of the Company's future revenue. Revenue from
international sources is 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 or 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
16
<PAGE> 17
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.
Dependence on Key Personnel. The Company's future success depends in large part
on the continued service of its key technical, marketing, sales, administrative
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 and services. 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 employment
contracts with its key employees. In October 1998, the Company appointed Stephen
T. Baker as Vice President and 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, former Vice President, Marketing.
In January 1999, Lars Stenstedt was promoted to Vice President, Sales and
Business Development; Rhonda Jobe was promoted to Vice President, Marketing; and
Adam de Boor was appointed Vice President and Chief Technical Officer. In May
1999, Wendy Nemeroff, Vice President and General Counsel resigned. The loss of
key employees, as well as changes in the Company's executive management, could
have a material adverse effect on the Company's business, operating results, and
financial condition.
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"). Like many organizations, the Company faces risk 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's ongoing efforts 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.
17
<PAGE> 18
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 and has
been reviewed with the Board of Directors. No outside services or consultants
have been retained in the review process. To date, the Company has spent less
than $100,000 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.
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.
For the Company's internal management information and communication systems, a
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 PBX system to ensure its Year 2000 compliance, and will purchase a new
voicemail system this year. The Company's 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 review
involved upgrading the Company's building security systems. The Company intends
to continue its review of its internal systems and operations for
18
<PAGE> 19
Year 2000 compliance, but does not anticipate that such additional reviews will
uncover exposures of a material nature which have not been previously
identified.
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 2. PROPERTIES
Geoworks' corporate headquarters are located in Alameda, California, in a
facility consisting of approximately 40,000 square feet of office space under a
lease giving the Company renewal rights through 2005. The Company leases an
additional 9,640 square feet of office space in Berkeley, California. The
Company operates a subsidiary, Geoworks Kabushiki Kaisha, in Tokyo, Japan, which
leases office facilities from the Company's independent agent, Aisys
Corporation. The Company operates a second subsidiary in Macclesfield, England,
which leases office facilities consisting of approximately 7,000 square feet,
under a lease which expires in 2006. The Company believes that its existing
facilities will be adequate to meet its needs in fiscal year 2000 and that
additional space will be available if needed. At the present time the Company
has excess capacity at its Alameda and Berkeley facilities which may be
sub-leased.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings whose resolution would have
a material adverse effect on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended March 31, 1999.
19
<PAGE> 20
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The members of the Board of Directors and executive officers of the Company are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gordon E. Mayer 41 Chairman of the Board of Directors
John B. Balousek 54 Director
Bernard A. Bianchino 50 Director
Brian Dougherty 42 Director
Eric E. Schmidt 44 Director
David L. Grannan 35 President and Chief Executive Officer, Director
Stephen T. Baker 41 Vice President, Chief Financial Officer
and Secretary
Adam de Boor 35 Vice President and Chief Technology Officer
Rhonda Jobe 52 Vice President, Marketing
Lars Stenstedt 38 Vice President, Sales and Business Development
</TABLE>
Mr. Mayer became Chairman of the Board of Directors of the Company in May 1997.
Mr. Mayer served as President from July 1993 to January 1998, and as Chief
Executive Officer from March 1994 to June 1998. Prior to joining Geoworks, Mr.
Mayer was an "Entrepreneur in Residence" with Merrill, Pickard, Anderson, and
Eyre, a venture capital and investment management firm that manages private
investment funds. From July 1991 to June 1992, Mr. Mayer was President and Chief
Executive Officer of InfoChip Inc., a developer of data compression hardware and
software. From February 1988 to July 1991, Mr. Mayer was Vice President, Sales
and Marketing for Proxim, Inc., a supplier of OEM wireless data communications
products. Mr. Mayer attended Purdue University, where he earned a B.S. and M.S.
in Electrical Engineering.
Mr. Bianchino joined the Company's Board of Directors in July 1998. Since
September 1995, Mr. Bianchino has been Chief Business Development Officer of
Sprint Spectrum L.P., a wireless PCS company. Prior to that, Mr. Bianchino was
Executive Vice President, General Counsel and External Affairs, of Qwest
Corporation from August 1994 to September 1995. Prior to that, Mr. Bianchino was
Vice President, Law - General Business for Sprint Corporation from October 1991
to August 1994, and Associate General Counsel of US Sprint from May 1987 to
October 1991. Mr. Bianchino holds a B.A. degree in American citizenship and a
J.D. degree from Washburn University.
Mr. Dougherty founded Geoworks in 1983 and served as Chairman of the Board of
the Company from its inception to May 1997. Mr. Dougherty also served as Chief
Executive Officer of the Company from its inception to March 1994. Mr. Dougherty
served as a member of the Board of Directors from the Company's inception
through May 1997. Mr. Dougherty re-joined the Company's Board of Directors again
in July 1998. Mr. Dougherty is currently the Chairman of the Board of Wink
Communications, Inc., a provider of interactive television software, which he
founded in October 1994. Mr.
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<PAGE> 21
Dougherty has also held the position of Chief Technology Officer at Wink since
January 1997 and was Wink's Chief Executive Officer from October 1994 to January
1997. Mr. Dougherty is also the Chairman of the Board of Global PC, a developer
of a low cost PC platform, which he co-founded in February 1998. Mr. Dougherty
has also served as a director of NeoMagic, a semiconductor company, since
December 1996. Mr. Dougherty holds a B.S. in Electrical Engineering from the
University of California at Berkeley.
Mr. Balousek joined the Company's Board of Directors in December 1998. Mr.
Balousek is currently executive vice president and a founder of Photo Alley, a
San Francisco-based start-up company providing electronic commerce services. In
1996, Mr. Balousek was named chairman and chief executive officer of True North
Technologies, the digital and interactive services company of Foote, Cone &
Belding Communications (FCB) parent company, True North Communications. Mr.
Balousek joined the San Francisco office of FCB, one of the nation's leading
advertising agencies, in 1979 and was named general manager of the office in
1986. Mr. Balousek was named president of FCB West and a director of the firm in
1989, and was named president and chief operating officer of the $5 billion
agency in 1991. Prior to joining FCB, Mr. Balousek was in brand management at
Procter & Gamble. He currently serves as a director of Transilluminant, a
privately held company. Mr. Balousek holds a BA degree from Creighton University
and a master's degree from Northwestern University.
Mr. Grannan joined the Company in March 1998 as Vice President, Marketing. The
Board of Directors appointed Mr. Grannan as President and Chief Executive
Officer in January 1999. Prior to joining the Company, Mr. Grannan was Area Vice
President of Sales & Marketing at Sprint PCS from June 1997 to March 1998. Prior
to his position at Sprint PCS, Mr. Grannan worked at Andersen Consulting in the
Communications Industry Group from April 1994 to June 1997, where he provided
strategic services for many organizations. Mr. Grannan began his career as a
Data Communications Officer in the United States Marine Corps. He holds a BA
from Indiana State University and received his MBA from the University of
California, Berkeley in 1993.
Mr. Baker joined the Company in October 1998 as Vice President and Chief
Financial Officer. From August 1996 to October 1998, he was Vice President,
Finance and Controller, for the Service Provider Messaging Group at Lucent
Technologies having started with Octel Communications prior to its acquisition
by Lucent. From July 1995 to August 1996, Mr. Baker was the CFO for the Software
Systems Group of Bell Communications Research. From June 1993 to July 1995 he
was Controller at Novell after the acquisition of Unix System Laboratories
(USL). At Unix System Laboratories, a worldwide software company, Mr. Baker was
CFO from February 1989 to June 1993. Mr. Baker has also held a number of
financial management positions with AT&T Corporation from August 1981 through
February 1989. He holds a BA from the University of Pennsylvania and an MBA from
the Columbia University Graduate School of Business.
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<PAGE> 22
Mr. de Boor joined the Company in May 1988, and became Vice President and Chief
Technology Officer in January 1999. Mr. de Boor has played a key role in the
design and implementation of Geoworks' GEOS operating system, and served as Lead
Architect for release 3.0 of GEOS. In recent years Mr. de Boor has designed,
managed, and served as lead programmer for Geoworks' enhanced phone and
proprietary server technology projects. Mr. de Boor holds a BS in Computer
Science from the University of California, Berkeley.
Ms. Jobe joined the Company in January 1998 as a product manager and was
promoted to Director of Marketing. Ms. Jobe became Vice President, Marketing in
January 1999. Before joining Geoworks, Ms. Jobe served as the Manager of the
Wireless Data Group for AirTouch Cellular from April 1994 to January 1998. Ms.
Jobe spent August 1993 to April 1994 with Dell Computer as Mobil Products
Communications Manager. Prior to that, Ms. Jobe acquired more than 25 years of
wireless industry experience in a variety of marketing management and software
development management positions at Motorola. Ms. Jobe attended Arizona State
University with a concentration in Computer Science and business management. Ms.
Jobe also attended the University of Michigan with a concentration on new
product development.
Mr. Stenstedt joined the Company in June 1994, and became Vice President of
Sales and Business Development in January 1999. Previously, Mr. Stenstedt served
the Company in a variety of sales, marketing and business development positions,
including opening and managing Geoworks' office in Tokyo, Japan from 1995 to
1997. While in Japan, Mr. Stenstedt was responsible for business development and
sales to Japanese and Korean OEM partners and operators. Prior to joining
Geoworks, Mr. Stenstedt spent 7 years with Seagate Technology in engineering,
marketing and sales. Mr. Stenstedt has also worked for ITSYS, Inc., Tulin
Corporation and Rehrig Pacific. Mr. Stenstedt holds a BS in Mechanical
Engineering from Stanford University and an MBA degree from Walter A. Haas
School of Business at the University of California, Berkeley.
22
<PAGE> 23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
CHANGES IN COMMON STOCK MARKET VALUE
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "GWRX." The following table sets forth the high and low last reported
sales prices for the Company's Common Stock as reported by the Nasdaq National
Market for the quarters indicated:
<TABLE>
<CAPTION>
JUN 30 SEP 30 DEC 31 MAR 31
------ ------ ------ ------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED $3.3125 - 7.3750 $1.3125 - 3.5000 $1.0000 - $5.6875 $3.0000 - 6.0000
MARCH 31, 1999
Common stock
price per share
FISCAL YEAR ENDED $5.5625 - 8.6250 $5.7825 - 17.5000 $8.7500 - 16.5000 $ 5.8125 - 9.8750
MARCH 31, 1998
Common stock
price per share
</TABLE>
CHANGES IN EQUITY COMPOSITION
As announced in the Company's press release of February 16, 1999, the
Company sold 1,219,512 shares of common stock to Amazon.com, Inc. ("Amazon") at
a price of $4.10 per share for total proceeds to the Company of $5 million. As a
result of this transaction Amazon has an ownership interest of approximately
seven percent in the Company. Under the terms of the agreement, Amazon also
assumed the real and personal property leases of the Company's Seattle office,
and purchased most of the tangible assets of the office, principally equipment
and related personal property, for an additional $250,000.
REGISTERED HOLDERS
There were approximately 300 registered stockholders as of May 31, 1999,
and approximately 7,500 beneficial holders as of May 31, 1999. The Company has
not paid or declared cash dividends and has no present plans to do so.
23
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA
The data set is qualified in its entirety by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the "Consolidated Financial Statements" and
notes thereto included elsewhere in this Form 10-K.
SELECTED FINANCIAL DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
30-JUN-98 30-SEP-98 31-DEC-98 31-MAR-99
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Year Ended March 31, 1999
Net revenues
License revenue $ 132 $ 293 $ 285 $ 3,164
Research and development fees 1,285 891 1,560 807
Service revenue 76 109 109 71
------- ------- ------- -------
Total net revenues 1,493 1,293 1,954 4,042
Operating Expenses:
Cost of license revenue 18 13 6 3
Sales and marketing 1,243 1,403 1,312 993
Research and development 4,640 3,709 3,372 2,916
General and administrative 911 909 818 996
Restructuring charges -- -- -- 1,790
------- ------- ------- -------
Total operating expenses 6,812 6,034 5,508 6,698
------- ------- ------- -------
Operating loss (5,319) (4,741) (3,554) (2,656)
Other income (expense):
Interest income 195 171 130 116
Interest expense (18) (2) (5) (6)
------- ------- ------- -------
Loss before income taxes (5,142) (4,572) (3,429) (2,546)
Provision for income taxes 31 29 59 30
------- ------- ------- -------
Net loss $(5,173) $(4,601) $(3,488) $(2,576)
Net loss per share-
basic and diluted $ (0.32) $ (0.29) $ (0.22) $ (0.15)
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
30-JUN-97 30-SEP-97 31-DEC-97 31-MAR-98
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Year Ended March 31, 1998
Net revenues
License revenue $ 849 $ 755 $ 1,671 $ 1,922
Research and development fees 824 2,533 2,276 1,633
Service revenue 225 76 76 77
------- ------- ------- -------
Total net revenues 1,898 3,364 4,023 3,632
Operating Expenses:
Cost of license revenue 47 39 30 39
Sales and marketing 2,248 1,533 1,270 1,563
Research and development 4,899 3,913 4,602 5,128
General and administrative 894 904 923 875
------- ------- ------- -------
Total operating expenses 8,088 6,389 6,825 7,605
Operating loss (6,190) (3,025) (2,802) (3,973)
Other income (expense):
Interest income 475 360 288 304
Interest expense (32) (44) (25) (57)
------- ------- ------- -------
Loss before income taxes (5,747) (2,709) (2,539) (3,726)
Provision for income taxes 37 7 44 60
------- ------- ------- -------
Net loss $(5,784) $(2,716) $(2,583) $(3,786)
Net loss per share-
Basic and diluted $ (0.37) $ (0.17) $ (0.16) $ (0.24)
</TABLE>
25
<PAGE> 26
CONSOLIDATED BALANCE SHEET SUMMARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital 12,379 20,095 33,626 43,585 7,122
Total assets 18,183 27,463 41,868 54,040 19,085
Deferred revenue 1,498 778 1,919 5,529 8,311
Long-term obligations -- 231 739 2,927 2,527
Redeemable convertible preferred stock -- -- -- -- 1,626
Accumulated deficit (89,079) (73,241) (58,372) (44,896) (35,491)
Stockholders' equity 13,374 23,392 36,553 43,312 6,757
</TABLE>
26
<PAGE> 27
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total net revenues $ 8,782 $ 12,917 $ 11,096 $ 6,279 $ 5,327
Cost of revenues 40 155 624 122 473
Sales and marketing 4,951 6,613 7,108 4,510 5,272
Research and development 14,637 18,543 13,698 9,109 6,520
General and administrative 3,634 3,596 3,708 3,254 3,557
Restructuring charges 1,790 -- -- -- --
Cost of merger -- -- 1,450 -- --
------------------------------------------------------------
Total operating expenses 25,052 28,907 26,588 16,995 15,822
------------------------------------------------------------
Operating loss (16,270) (15,990) (15,492) (10,716) (10,495)
Other income (expense)
Interest income 612 1,427 2,324 1,377 475
Interest expense (31) (158) (244) (372) (357)
------------------------------------------------------------
Total other income 581 1,269 2,080 1,005 118
------------------------------------------------------------
Loss before income taxes (15,869) (14,721) (13,412) (9,711) (10,377)
------------------------------------------------------------
Provision for income taxes 149 148 64 -- 175
------------------------------------------------------------
Net loss $(15,838) $(14,869) $(13,476) $ (9,711) $(10,552)
------------------------------------------------------------
Net loss per share-
basic and diluted $ (0.97) $ (0.95) $ (0.88) $ (0.75) $ (1.09)
Shares used in per share computation 16,260 15,687 15,234 13,032 9,674
</TABLE>
27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Acquisition of Eden Group, Ltd. In February 1997, the Company acquired all the
outstanding stock of Eden Group, Ltd. ("Eden"), a U.K. software publisher. The
acquisition has been accounted for as a pooling-of-interests, and the historical
consolidated financial statements of the Company for all periods prior to the
acquisition have been restated to include the financial position, results of
operations, and cash flows of Eden.
Net Revenues. Net revenues in fiscal year 1999 decreased $4,135,000, or 32%,
versus net revenues in fiscal year 1998. All categories of revenue declined in
the current fiscal year relative to the preceding fiscal year. Net revenues
consist of license revenue, research and development fees and services revenue.
License revenue in fiscal year 1999 decreased $1,323,000, or 25%, in comparison
with the previous fiscal year. The Company recognized license revenue from three
primary types of transactions in each period. During fiscal 1999, revenues from
the restructure or termination of existing license agreements totaled $2,000,000
versus $1,883,000 during the previous fiscal year. In fiscal year 1999 this
revenue resulted from an agreement with a single OEM customer while agreements
with three different OEM customers were restructured or terminated in fiscal
year 1998. At the time of these agreements, the Company either agreed to accept
one-time settlement payments in lieu of its right to all or a portion of future
royalties or the Company was able to recognize the non-refundable portion of
prepaid royalty deposits it had already received. During fiscal 1999, revenues
from the sale of source code developed by the Company were $1,000,000 versus
$650,000 for the previous fiscal year. The remainder of the Company's license
revenue is the result of royalties and to a lesser extent, technology license
fees, resulting from the use of the Company's technology in units sold by its
OEM customers. Such revenue was reduced to $874,000 in fiscal year 1999 versus
$2,664,000 in fiscal year 1998, primarily as a result of the restructure and
termination agreements discussed above which changed the terms of the Company's
compensation agreements with those OEM customers.
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 and are therefore 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.
28
<PAGE> 29
Revenue related to research and development fees decreased $2,723,000, or 37%,
during fiscal year 1999, in comparison with fiscal year 1998. Research and
development fees represent amounts received for non-recurring engineering
services as well as 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 year ended March 31, 1999, versus
the prior year occurred because the Company completed its development work on
several major OEM projects. As work on these larger projects concluded, the
Company assigned development staff to smaller projects with reduced staffing
requirements, (some of which had lower reimbursement rates.) These reductions in
contract requirements resulted in staffing reductions achieved through attrition
and restructure directives. In the latter half of fiscal 1999, the Company began
providing some of its non-recurring engineering services on a consulting basis
rather than as OEM research and development funded in connection with potential
royalty or license agreements. Such services can be offered at relatively higher
rates, but do not generally have the additional revenue potential provided by a
royalty or license agreement. Additionally, the Company settled a contract
dispute with an OEM customer during fiscal 1999 and under the
percentage-of-completion method, the effect of this settlement was to lower the
Company's revenue and the corresponding accounts receivable in the current
fiscal year by $740,000.
Service revenue for fiscal year 1999 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 $89,000 in service
revenue in fiscal 1999 compared to fiscal year 1998 is a result of reduced
support fees earned in connection with software licensed to OEM customers.
Net revenues in fiscal year 1998 increased $1,821,000, or 16%, in comparison
with fiscal year 1997. This increase was primarily due to growth in research and
development fee revenue which more than offset declines in license revenue
versus the previous year. The substantial increase during fiscal year 1998 in
research and development fees resulted from higher reimbursement levels
specified in the Company's contracts with OEM licensees and because there were a
greater number of projects in process for which such fees were charged. The
decline in license revenue in fiscal year 1998 was due to reduced volume of
non-recurring revenue transactions, including source code licenses and the
29
<PAGE> 30
termination or restructuring of OEM license agreements, versus the prior year.
In addition, service revenue also increased in fiscal year 1998 versus the prior
year due to additional fees earned in connection with software workshops offered
by the Company for the benefit of current and prospective OEM clients.
OPERATING EXPENSES
Cost of License Revenue. The Company's gross margin percentage on license
revenue was 99% in fiscal year 1999, 97% in fiscal year 1998, and 91% in fiscal
year 1997. In general, cost of license revenue consists of license payments to
third parties for software that is incorporated into the Company's software. The
cost of license revenue as a percentage of net revenues has decreased over these
three years as the volume of revenue related to shipments of OEM products which
utilized Company and third party software has decreased. During fiscal year 1997
cost of license revenue included a one-time charge of $320,000 to terminate a
technology contract which had been entered into during a prior fiscal year.
Without this one-time charge, the Company's gross margin percentage on license
revenue would have been 95% during fiscal year 1997.
Sales and Marketing. Sales and marketing expense decreased $1,662,000, or 25%,
during fiscal year 1999 in comparison with fiscal year 1998. 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 fiscal year
1998 in connection with a reorganization of staff in certain sales and marketing
functions.
Sales and marketing expense decreased $495,000, or 7%, during fiscal year 1998
in comparison with fiscal year 1997. Cost savings from reductions in domestic
staffing and marketing programs offset the Company's expanded emphasis on
international sales activities during fiscal year 1998.
Research and Development. Research and development expense decreased $3,906,000,
or 21%, during fiscal year 1999 in comparison to fiscal year 1998. This decrease
was attributable principally to reductions in staffing and related costs,
including restructure moves made in the fourth quarter. Such staff reductions
were necessary as the Company reacted to the reduced level of OEM funded
research. The Company also has narrowed the scope of its internal research and
development activities and reductions in the amounts paid to outside developers
for services and the license of software to be incorporated into future
products.
Research and development expense increased $4,845,000, or 35%, during fiscal
year 1998 in comparison with fiscal year 1997. This increase was due primarily
to the expansion of the Company's engineering staff, which resulted in higher
compensation costs and related increases in costs for employee benefits and
facilities overhead.
30
<PAGE> 31
Additionally, during fiscal year 1998 there was an increase in the number of
joint development projects with various OEM licensees in Europe and Asia that
resulted in significant increases in travel expenses for the Company's
engineering staff. The Company also made payments of $630,000 during fiscal year
1998 to outside developers for the license of software to be incorporated into
future products. As the technological feasibility of the future products had yet
to be established, these payments were charged to research and development
expense.
General and Administrative. General and administrative expense increased
$38,000, or 1%, during fiscal year 1999 in comparison with fiscal year 1998.
These expenses were essentially flat for the year as increased professional fees
were offset by decreases in a number of other expenses.
General and administrative expense decreased $112,000, or 3%, during fiscal year
1998 in comparison with fiscal year 1997. This decrease was attributable
primarily to a reduction in staffing costs, as certain duplicate functions were
eliminated following the business combination of Geoworks and Eden in February
1997.
Restructuring Charges. During the fourth quarter of fiscal 1999, the Company
recorded restructuring charges of $1,790,000 as a result of actions taken to
better align its cost structure with revenue projections as the Company shifts
its resources to support a business plan focused on opportunities in the mobile
e-commerce and information services market. During the quarter, the Company
reduced its workforce by 27%, vacated one facility and consolidated those
operations in a remaining facility, which is also partially vacant. The
restructure charges consist of $247,000 in severance costs and charges of
$501,000 for the write-off of fixed assets, and $1,042,000 for the accrual of
lease commitment liabilities as a result of these actions.
Cost of Merger. Certain non-recurring transaction charges were incurred in
connection with the Company's acquisition of Eden during fiscal year 1997. These
expenditures amounted to $1,450,000 and consisted principally of professional
fees and regulatory charges.
OTHER INCOME (EXPENSE)
Interest Income. Interest income declined $815,000, or 57%, during fiscal year
1999 in comparison with fiscal year 1998. Interest income declined $897,000, or
39%, during fiscal year 1998 in comparison with fiscal year 1997. These
decreases were attributable to lower balances available to the Company for
short-term investment as result of the cash used to fund the Company's
operations in each year.
Interest Expense. Interest expense decreased $127,000, or 80%, during fiscal
year 1999 in comparison with fiscal year 1998. This decrease is primarily due to
reduced debt
31
<PAGE> 32
outstanding as a result of regularly scheduled payments of capital lease
obligations outstanding. Interest expense decreased $86,000, or 35%, during
fiscal year 1998 in comparison with fiscal year 1997. This decrease was
primarily due to reduced debt outstanding for fiscal 1998 due to the repayment
in the fourth quarter of fiscal year 1997 of interest-bearing notes payable to
stockholders of Eden which had been outstanding throughout the first eleven
months of fiscal year 1997.
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, 1999, the Company had net operating loss
carryforwards for U.S. income tax purposes of approximately $87,000,000, for
U.K. income tax purposes of approximately $5,000,000, 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
$800,000. Utilization of the Company's U.S. net operating loss and research
credit carryforwards will be subject to a annual limitations based on the
"change of ownership" provisions of the Tax Reform Act of 1986. These
limitations may result in the expiration of net operating loss and research
credit carryforwards before utilization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current sources of liquidity included cash, cash equivalents, and
marketable securities totaling $13.7 million at March 31, 1999. This balance is
down from $20.0 million and $36.8 million at March 31, 1998 and 1997,
respectively. These balances have decreased principally as a result of the cash
used in operating activities, including working capital changes. The Company
expects to incur additional substantial operating losses at least through its
fiscal year ending March 31, 2000, but anticipates that its existing capital
resources will be adequate to satisfy its operating and capital requirements at
least through March 31, 2000. An additional potential source of liquidity
available to the Company may be its ownership of 565,800 shares of common stock
of Wink Communications, Inc., a privately held company, and 540,000 shares of
common stock of Global PC, Inc., another privately held company.
The Company's investing activities, exclusive of marketable securities
transactions, consisted of purchases of furniture, equipment and leasehold
improvements of $216,000, $1,269,000 and $2,292,000 in the fiscal years 1999,
1998, and 1997 respectively, and the sales of equipment, land and buildings
totaling $483,000 in fiscal year 1999. These purchases have steadily decreased
since 1997 when the Company was expanding and establishing its infrastructure.
Purchasing has also decreased due to reduced Company operations and personnel
cutbacks during fiscal year 1999.
32
<PAGE> 33
Payments of capital lease and debt obligations were $557,000, $340,000, and
$284,000 in fiscal years 1999, 1998 and 1997 respectively, primarily due to
regularly scheduled payments of the related liabilities incurred prior to fiscal
year 1997. In fiscal 1999 these payments include $194,000 to retire the debt
outstanding on the property the Company sold which had previously been owned by
Eden.
Proceeds from the issuance of common stock were approximately $5.9 million, $1.7
million and $4.4 million in fiscal years 1999, 1998, and 1997, respectively.
Private placements provided cash of $5.0 million from Amazon.com in fiscal year
1999 and $3.0 million from an investment made in Eden in fiscal year 1997, prior
to the Company's acquisition of Eden. The remainder of the proceeds have been
generated from Company stock option and employee stock purchase plans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
33
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
The Board of Directors and Shareholders
Geoworks Corporation
We have audited the accompanying consolidated balance sheets of Geoworks
Corporation as of March 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Geoworks
Corporation at March 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Francisco, California
April 21, 1999
34
<PAGE> 35
Geoworks Corporation
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,760 $ 8,738
Marketable securities 11,955 11,243
Accounts receivable:
Billed 3,102 1,546
Unbilled -- 1,866
Prepaid expenses and other current assets 371 542
--------- --------
Total current assets 17,188 23,935
Property and equipment, net 973 3,301
Other assets 22 227
--------- --------
Total assets $ 18,183 $ 27,463
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 504 $ 256
Accrued liabilities 2,774 2,302
Lease and facility obligations due within one year 33 504
Deferred revenue 1,498 778
--------- --------
Total current liabilities 4,809 3,840
Lease and facility obligations due after one year -- 231
Stockholders' equity:
Common stock, no par value; 40,000 shares authorized; 17,629
shares issued and outstanding (1998 - 15,856 shares)
102,376 96,518
Accumulated deficit (89,079) (73,241)
Note receivable from stockholder (67) (67)
Accumulated other comprehensive income 144 182
--------- --------
Total stockholders' equity 13,374 23,392
--------- --------
Total liabilities and stockholders' equity $ 18,183 $ 27,463
========= ========
</TABLE>
See accompanying notes.
35
<PAGE> 36
Geoworks Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License revenue $ 3,874 $ 5,197 $ 6,620
Research and development fees 4,543 7,266 4,176
Service revenue 365 454 300
-------- -------- --------
Total net revenues 8,782 12,917 11,096
Operating expenses:
Cost of license revenue 40 155 624
Sales and marketing 4,951 6,613 7,108
Research and development 14,637 18,543 13,698
General and administrative 3,634 3,596 3,708
Restructuring charges 1,790 -- --
Cost of merger -- -- 1,450
-------- -------- --------
Total operating expenses 25,052 28,907 26,588
-------- -------- --------
Operating loss (16,270) (15,990) (15,492)
Other income (expense):
Interest income 612 1,427 2,324
Interest expense (31) (158) (244)
-------- -------- --------
Total other income (expense) 581 1,269 2,080
-------- -------- --------
Loss before income taxes (15,689) (14,721) (13,412)
Provision for income taxes 149 148 64
-------- -------- --------
Net loss $(15,838) $(14,869) $(13,476)
======== ======== ========
Net loss per share - basic and diluted $ (.97) $ (.95) $ (0.88)
======== ======== ========
Shares used in per share computation 16,260 15,687 15,234
======== ======== ========
</TABLE>
See accompanying notes.
36
<PAGE> 37
Geoworks Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
Notes Accumulated
Common Stock Receivable Other Total
---------------- Accumulated From Deferred Comprehensive Stockholders'
Shares Amount Deficit Stockholders Compensation Income Equity
---------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1996 14,624 $ 88,448 $(44,896) $(122) $(175) $ 57 $ 43,312
Common stock issued under stock option
and stock purchase plans 318 1,341 -- -- -- -- 1,341
Common stock issued in private placement,
net of offering costs 444 3,043 -- -- -- -- 3,043
Conversion of notes payable to
stockholders to common stock 85 2,019 -- -- -- -- 2,019
Payments received from stockholders -- -- -- 54 -- -- 54
Amortization of deferred compensation -- -- -- -- 143 -- 143
Foreign currency translation adjustment -- -- -- -- -- 117 117
Net loss -- -- (13,476) -- -- -- (13,476)
--------
Comprehensive loss -- -- -- -- -- -- (13,359)
---------------- --------------------------------------------------------------------
Balances at March 31, 1997 15,471 94,851 (58,372) (68) (32) 174 36,553
Common stock issued under stock option
and stock purchase plans 385 1,667 -- -- -- -- 1,667
Payments received from stockholder -- -- -- 1 -- -- 1
Amortization of deferred compensation -- -- -- -- 32 -- 32
Foreign currency translation adjustment -- -- -- -- -- 8 8
Net loss -- -- (14,869) -- -- -- (14,869)
--------
Comprehensive loss -- -- -- -- -- -- (14,861)
---------------- --------------------------------------------------------------------
Balances at March 31, 1998 15,856 96,518 (73,241) (67) -- 182 23,392
Common stock issued under stock option
and stock purchase plans 553 905 -- -- -- -- 905
Common stock issued in private placement,
net of offering costs 1,220 4,953 -- -- -- -- 4,953
Foreign currency translation adjustment -- -- -- -- -- (38) (38)
Net loss -- -- (15,838) -- -- -- (15,838)
--------
Comprehensive loss -- -- -- -- -- -- (15,876)
---------------- --------------------------------------------------------------------
Balances at March 31, 1999 17,629 $102,376 $(89,079) $ (67) $ -- $ 144 $ 13,374
================ ====================================================================
</TABLE>
See accompanying notes
37
<PAGE> 38
Geoworks Corporation
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(15,838) $(14,869) $(13,476)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,559 1,415 1,221
Non-cash restructuring charges 1,543 -- --
Amortization of deferred compensation -- 32 143
Other -- -- 264
Changes in operating assets and liabilities:
Accounts receivable 310 (2,937) (475)
Other assets 376 258 (158)
Deferred revenues 720 (1,141) (3,610)
Other current liabilities (466) 336 255
------------------------------------
Net cash used in operating activities (11,796) (16,906) (15,836)
INVESTING ACTIVITIES
Purchases of property and equipment (216) (1,269) (2,292)
Sales of property and equipment 483 -- --
Purchases of marketable securities (10,712) (13,449) (62,655)
Sales of marketable securities 10,000 20,912 52,383
Maturities of marketable securities -- 11,795 19,396
------------------------------------
Net cash (used in) provided by investing activities (445) 17,989 6,832
FINANCING ACTIVITIES
Payment of capital lease and debt obligations (557) (340) (284)
Proceeds from issuance of common stock 5,858 1,667 4,384
Proceeds from notes receivable from stockholder -- 1 54
------------------------------------
Net cash provided by financing activities 5,301 1,328 4,154
Foreign currency translation adjustments (38) 8 117
------------------------------------
Net (decrease) increase in cash and cash equivalents (6,978) 2,419 (4,733)
Cash and cash equivalents, beginning of year 8,738 6,319 11,052
------------------------------------
Cash and cash equivalents, end of year $ 1,760 $ 8,738 $ 6,319
====================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING/FINANCING ACTIVITIES
Conversion of notes payable to stockholders and related accrued
interest to common stock $ -- $ -- $ 2,019
====================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments $ 31 $ 158 $ 244
====================================
Income tax payments $ 149 $ 148 $ 64
====================================
</TABLE>
See accompanying notes.
38
<PAGE> 39
Geoworks Corporation
Notes to Consolidated Financial Statements
March 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY
Geoworks Corporation (the "Company") is a provider of mobile e-commerce and
information services, software and professional technical services. The Company
has previously developed and marketed operating system and application software
for the wireless device market and many of its current service offerings are
based on the technology it has developed.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries located in Japan and the United Kingdom. All
significant intercompany balances and transactions have been eliminated.
In February 1997, Geoworks Corporation acquired Eden Group, Ltd. The acquisition
was accounted for as a pooling-of-interests and the historical consolidated
financial statements of Geoworks Corporation for all periods prior to the date
of the acquisition have been restated to include the financial position, results
of operations and cash flows of Eden Group, Ltd. Costs of the merger are
included in the consolidated results of operations for fiscal year ended March
31, 1997.
RECLASSIFICATIONS
Certain fiscal year 1998 and 1997 balances have been reclassified to conform to
the fiscal year 1999 presentation.
FOREIGN CURRENCY TRANSLATION
The Company's international subsidiaries use the local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and revenue and expense accounts are
translated at average exchange rates during each period. Resulting translation
adjustments are recorded directly to a separate component of stockholders'
equity. Foreign currency transaction gains and losses have not been material.
39
<PAGE> 40
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION
License revenue represents revenue from hardware manufacturers that incorporate
the Company's software products into their systems, software publishers who
produce customized versions of the Company's software for specific markets, and
communication services providers whose services are accessed through products
utilizing the Company's operating system software. Revenues from products or
technology licensed to original equipment manufacturers ("OEMs") are recognized
when the related products or technology is accepted by the OEM customer. Advance
payments of license fees (prepaid royalties) are recorded as deferred revenue
and recognized as license revenue as products containing the licensed software
are sold and reported by the licensee. If an OEM license agreement is terminated
(through contract termination or as a result of product discontinuation), any
remaining deferred revenue related to unamortized prepaid royalties is
recognized as revenue, provided that the Company has no material obligations
remaining under the agreement.
Research and development fees are primarily amounts received pursuant to
contracts with OEMs 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 as it achieves certain
project milestones. Revenue under these research and development arrangements is
recognized under the percentage-of-completion method based on the relationship
of costs incurred to date to total anticipated project costs. In addition, per
the terms of the related contracts, certain research and development fees are
recognized based solely on the consulting time and materials expended by the
Company.
Service revenue represents amounts earned for the support and maintenance of
software licensed by OEM customers.
40
<PAGE> 41
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Unbilled accounts receivable result when research and development fees
recognized as revenue under the percentage-of-completion method exceed amounts
invoiced to date to OEMs under the terms of the contracts. Amendments to or
changes in the original contract terms as well as adjustments to estimated
contract costs can affect amounts ultimately realized by the Company. As a
result, actual gross profit realized on research and development arrangements
may differ from estimates used by the Company in recording gross profit on
contracts in progress and such differences could be material to the financial
statements.
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), was
issued in October 1997 by the American Institute of Certified Public Accountants
("AICPA") and was amended by Statement of Position ("SOP 98-4"). The Company
adopted SOP 97-2 effective April 1, 1998. Based on its interpretation of SOP
97-2 and SOP 98-4, the Company believes its current revenue recognition policies
and practices are consistent with these pronouncements. Additionally, the AICPA
issued SOP 98-9 in December 1998, which provides certain amendments to SOP 97-2,
and is effective for transactions, entered into by the Company beginning April
1, 2000. Full implementation guidelines for these pronouncements have not yet
been issued. Once available, such implementation guidelines could lead to
unanticipated changes in our current revenue recognition policies and these
changes could affect the timing of the Company's future revenues and results of
operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and highly liquid U.S.
government securities with original maturities of three months or less and are
stated at cost, which approximates fair value.
MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("FAS No.
115"), management is required to determine the appropriate classification of its
debt and equity securities at the time of purchase and reevaluate such
designation as of each balance sheet date. The Company has classified all of its
marketable securities as available-for-sale.
41
<PAGE> 42
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES (CONTINUED)
Available-for-sale securities are carried at amounts which approximate fair
value. Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale debt and equity securities are included in
interest and other income.
The Company's available for sale securities consist of equity securities,
principally mutual funds, at March 31, 1999 and 1998. Unrealized gains and
losses at March 31, 1999 and 1998, and realized gains and losses for the years
then ended, were not significant.
CAPITALIZED SOFTWARE
The Company has not capitalized any software development expenses for its
products as such expenses have been incurred prior to the Company's products
attaining technological feasibility or such costs have been reimbursed by third
parties in connection with OEM license agreements. Software development expenses
incurred for product enhancements after the product has reached technological
feasibility have not been material and, accordingly, have been charged to
operations as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of four
years. Assets acquired under capital lease obligations and leasehold
improvements are amortized using the straight-line method over the shorter of
the useful lives of the assets or the terms of the leases.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense includes both internally funded development and
projects funded in part by customers. Total research and development expenses on
projects for which OEM funding was received were $5,144,000, $7,590,000 and
$7,439,000 for fiscal years 1999, 1998 and 1997, respectively, of which
$4,543,000, $7,266,000 and $4,176,000 was funded and recognized as revenue in
fiscal years 1999, 1998 and 1997, respectively.
42
<PAGE> 43
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MAJOR CUSTOMERS
Revenues from three major customers accounted for 57%, 17% and 16% of net
revenues for fiscal year 1999. Revenues from four major customers accounted for
29%, 18%, 16% and 11% of net revenues for fiscal year 1998. Revenues from four
major customers accounted for 20%, 17%, 10% and 10% of total revenues for fiscal
year 1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("FAS 123"), the Company has
elected to apply the intrinsic-value method under Accounting Principles Board
Opinion No. 25 ("APB Opinion 25") and related Interpretations in accounting for
its stock option and stock purchase plans. A summary of the pro forma effects on
reported net loss and net loss per share for fiscal years 1999, 1998 and 1997 as
if the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by FAS 123 is presented
in Note 5.
NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is presented
under the requirements of FASB Statement No. 128, "Earnings per Share" ("FAS
128"). Basic earnings per share has been computed using the weighted average
number of shares of common stock outstanding during the period and excludes any
dilutive effects of outstanding stock options. Potentially dilutive stock
options have also been excluded from the computation of diluted net loss per
share as their inclusion would be antidilutive. If the Company had reported net
income, the calculation of diluted earnings per share would have included the
effect of common equivalent shares related to outstanding stock options
(Note 5).
43
<PAGE> 44
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE LOSS
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income
(loss) and its components. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, be included in comprehensive income (loss). Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
SEGMENT INFORMATION
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company operates as one business
segment and the adoption of SFAS 131 had no significant effect on results of
operations or the financial position of the Company.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31
1999 1998
-----------------
<S> <C> <C>
Equipment $1,980 $5,063
Furniture and fixtures 987 971
Leasehold improvements 732 838
Land and buildings -- 484
-----------------
Property and equipment, gross 3,699 7,356
Less accumulated depreciation and amortization 2,726 4,055
-----------------
Property and equipment, net $ 973 $3,301
=================
</TABLE>
44
<PAGE> 45
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
3. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31
1999 1998
--------------------
<S> <C> <C>
Accrued compensation $ 981 $1,393
Accrued facility lease liabilities 1,042 --
Other 751 909
--------------------
Total $2,774 $2,302
====================
</TABLE>
4. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"), under
which the liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Significant components of the Company's net deferred income tax assets are as
follows (in thousands):
<TABLE>
<CAPTION>
March 31
1999 1998
-------------------------
<S> <C> <C>
Operating loss carryforwards $ 32,934 $ 26,855
Tax credit carryforwards 2,903 2,507
Purchased intangible assets 10,441 11,248
Capitalized research expenditures 2,713 1,958
Deferred revenue 614 319
Other, net 874 290
-------------------------
Total deferred tax assets 50,479 43,177
Valuation allowance on deferred tax assets (50,479) (43,177)
-------------------------
Net deferred tax assets $ -- $ --
=========================
</TABLE>
45
<PAGE> 46
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
The income tax provisions of $149,000 and $148,000 for fiscal years 1999 and
1998, respectively, consist of foreign withholding tax payments made with
respect to royalties received from original equipment manufacturers.
The increases in the valuation allowance for fiscal years 1999 and 1998 were
$7,302,000 and $16,998,000, respectively.
Deferred tax assets relating to net operating loss carryforwards as of March 31,
1999 include approximately $5,000,000 associated with stock option activity for
which any subsequently recognized tax benefits will be credited directly to
stockholders' equity.
As of March 31, 1999, the Company has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $86,900,000, U.K. income tax
purposes of approximately $5,000,000, and state income tax purposes of
approximately $14,200,000. The Company also has federal and state research and
development credit carryforwards of approximately $2,101,000 and $802,000
respectively. The net operating loss and the research and development tax credit
carryforwards expire in various years from 2000 through 2019.
Utilization of the Company's U.S. net operating loss and tax credit
carryforwards will be subject to an annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of net operating loss and tax credit
carryforwards before utilization.
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's Articles of Incorporation authorize two million shares of
preferred stock, none of which is issued or outstanding. The Board of Directors
has the authority to issue the preferred stock with rights, preferences,
privileges and restrictions, including vesting rights, without any further vote
or action by the shareholders.
46
<PAGE> 47
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Under the Company's stock option plans, incentive and nonqualified stock options
may be granted to employees, consultants and outside directors, to purchase a
maximum of 6,944,000 common shares. The exercise price of the stock options is
determined by the Company's Board of Directors on the date of grant and is at
least equal to the fair market value of the stock on the grant date. Options for
new employees generally vest 25% on the first anniversary of the recipient's
hire date and 1/48 per month thereafter. Options for continuing employees
generally vest 1/48 per month from the date of grant. Options expire ten years
from the date of grant.
STOCK OPTION PLANS
The following table summarizes activity under the Company's stock option plans:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
------------------------------
<S> <C> <C>
Balance at March 31, 1996 2,215,000 $ 8.25
Granted 1,439,000 19.06
Exercised (292,000) 2.66
Forfeited (190,000) 11.05
------------------------------
Balance at March 31, 1997 3,172,000 13.43
Granted 1,767,000 7.77
Exercised (303,000) 11.10
Forfeited (1,603,000) 17.43
------------------------------
Balance at March 31, 1998 3,033,000 8.95
Granted 4,174,000 3.38
Exercised (443,000) 1.59
Forfeited (3,450,000) 7.04
------------------------------
Balance at March 31, 1999 3,314,000 4.88
==============================
Outstanding options exercisable at March 31, 1999
1,017,000 $ 7.10
==============================
Options available for grant at March 31, 1999 1,424,000
==========
</TABLE>
The weighted average fair value at grant date of options granted during fiscal
years 1999, 1998 and 1997 was $2.82, $8.51 and $12.15 per share, respectively.
47
<PAGE> 48
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercisable Contractual Exercise Exercise
Prices Shares Life Price Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .27- 2.06 726,000 6.17 $ 1.77 155,000 $ 1.18
3.13- 3.38 1,091,000 9.69 3.30 232,000 3.26
3.63- 4.19 869,000 9.15 3.81 161,000 3.90
4.38-13.00 356,000 6.87 8.03 286,000 8.32
16.50-29.00 272,000 7.12 18.79 183,000 18.22
========= =========
3,314,000 1,017,000
========= =========
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's employee stock purchase plan, employees meeting certain
eligibility criteria may purchase shares of the Company's common stock, subject
to certain limitations, at not less than 85% of fair market value as defined in
the plan. A total of 400,000 shares have been reserved for issuance under the
plan. In fiscal years 1999, 1998 and 1997, 110,000 shares, 83,000 shares and
26,000 shares, respectively, were issued under the plan at average prices of
$1.81, $6.32 and $18.83 per share, respectively. At March 31, 1999, a total of
180,000 shares were available for issuance under the plan.
48
<PAGE> 49
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK COMPENSATION
The Company has adopted the disclosure-only provisions of FAS 123 and applies
APB Opinion 25 and related interpretations in accounting for its stock option
and employee stock purchase plans. Had compensation cost for the Company's stock
plans been determined based on the fair value at the grant date for awards
during fiscal years 1999, 1998 and 1997, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Net loss, as reported $(15,838) $(14,869) $(13,476)
Net loss, pro forma (19,911) (17,697) (17,850)
Net loss per share - basic and diluted, as reported
(0.97) (0.95) (0.88)
Net loss per share - basic and diluted, pro forma
(1.22) (1.13) (1.17)
</TABLE>
The effect on net loss and net loss per share may not be indicative of the
effects on net loss and net loss per share in future years.
The fair value of each option as of date of grant has been estimated using the
Black-Scholes option-pricing model with the following assumptions used for
fiscal years 1999, 1998 and 1997: expected volatility calculations based on
historical data (1.164, 0.996 and 0.893, respectively) and risk free interest
rates based on U.S. government strip bonds on the date of grant with maturities
equal to the expected option lives of five years (5.21%, 6.12% and 6.27%,
respectively). No dividends are assumed.
NOTE RECEIVABLE FROM STOCKHOLDER
The note receivable from stockholder arose from the sale of the Company's common
stock to an officer and is secured by the shares of common stock issued. The
note is due October 4, 2000, accrues interest at 5.0%, and is also secured by a
deed of trust on such officer's principal residence.
49
<PAGE> 50
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
6. RETIREMENT PLAN
The Company has a deferred compensation plan for substantially all employees.
Under this plan, which qualifies under Section 401(k) of the Internal Revenue
Code, eligible employees may contribute up to 15% of their pretax salary,
subject to certain limitations.
The Company may, at its discretion, contribute amounts to the 401(k) plan. No
employer contributions were made during fiscal years 1999, 1998 or 1997.
7. COMMITMENTS
The Company leases its office facilities and certain computer equipment under
noncancelable lease agreements which require the Company to pay operating costs,
including property taxes, insurance and maintenance. Rent expense was
$1,247,000, $1,287,000 and $1,207,000 for fiscal years 1999, 1998 and 1997,
respectively.
The Company also leases certain furniture and equipment under noncancelable
capital lease agreements. Amortization of assets under capital leases is
included in depreciation expense. As of March 31, 1999, substantially all of
this leased equipment has been amortized and retired. At March 31, 1998, the
cost and related accumulated amortization were $1,258,000 and $1,104,000,
respectively.
50
<PAGE> 51
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS (CONTINUED)
Future minimum payments under noncancelable operating leases having terms in
excess of one year and capital leases are due as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year Leases Leases
- ----------- ----------------
<S> <C> <C>
2000 $1,089 $29
2001 1,112 --
2002 776 --
2003 134 --
2004 and thereafter 493 --
----------------
$3,604 29
======
Less amount representing interest 1
---
$28
===
</TABLE>
Lease and facility obligations in the accompanying consolidated balance sheet
also include deferred rent expense in the amount of $5,000 relating to a
facility operating lease.
8. INFORMATION BY GEOGRAPHIC AREA
Information regarding operating information and identifiable assets by
geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Revenues:
U.S. Operations:
Domestic revenues $ 517 $ 3,226 $ 4,843
Export revenues:
Japan 6,771 3,603 2,684
Europe 1,472 5,843 1,543
Foreign Operations (principally Europe) 22 245 2,026
-------------------------------
$ 8,782 $12,917 $11,096
===============================
</TABLE>
51
<PAGE> 52
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
8. INFORMATION BY GEOGRAPHIC AREA (CONTINUED)
<TABLE>
<CAPTION>
Year ended March 31
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Operating loss:
U.S. Operations $(12,756) $(12,562) $(14,054)
Foreign Operations (3,514) (3,428) (1,438)
------------------------------------------
$(16,270) $(15,990) $(15,492)
==========================================
</TABLE>
<TABLE>
<CAPTION>
March 31
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Identifiable assets:
U.S. Operations $17,315 $26,034 $38,375
Foreign Operations 868 1,429 3,493
-------------------------------------
$18,183 $27,463 $41,868
=====================================
</TABLE>
9. RESTRUCTURING CHARGES
During the fourth quarter of fiscal 1999, the Company recorded restructuring
charges of $1.8 million as a result of actions taken to better align its cost
structure with revenue projections as the Company shifts its resources to
support a business plan focused on opportunities in the mobile e-commerce and
information services market. During the quarter, the Company terminated
approximately 27% of its workforce, vacated one facility and consolidated those
operations in a remaining facility, which is also partially vacant. The
restructure charges consist of severance costs for the termination of 33
employees, 32 of which were terminated prior to March 31, 1999, as well as
related charges for the write-off of property and equipment and the accrual of
lease commitment liabilities (net of expected sublease income) as a result of
these actions.
52
<PAGE> 53
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
9. RESTRUCTURING CHARGES (CONTINUED)
The following table summarizes the restructuring activity (in thousands):
<TABLE>
<CAPTION>
Total Accrued
Restructuring Amount Liabilities at
Charges Amount Paid Written Off March 31, 1999
---------------------------------------------------------
<S> <C> <C> <C> <C>
Severance and related charges $ 247 $ 59 $ -- $ 188
Write-off of property and equipment 501 -- 501 --
Accrual of lease commitments 1,042 -- -- 1,042
---------------------------------------------------------
$1,790 $ 59 $ 501 $1,230
=========================================================
</TABLE>
The Company expects the accrued liabilities for severance and related charges to
be paid by the end of the fiscal year 2000. The lease commitments extend through
January 2002.
10. ACQUISITION OF EDEN GROUP, LTD.
In February 1997, the Company acquired Eden Group, Ltd. ("Eden"), a U.K.
publisher of operating system and application software for mobile computing and
communications products. The Company issued approximately 1,282,000 shares of
its common stock to Eden in exchange for all outstanding shares of capital stock
and stock options of Eden. The transaction was accounted for as a
pooling-of-interests. The Company's consolidated financial statements for all
periods prior to the date of the acquisition have been restated to include the
financial position, results of operations and cash flows of Eden. The
consolidated statements of operations for the year ended March 31, 1997 include
the results of operations of Eden for the same period.
11. OTHER INVESTMENTS
In connection with the transfer of certain technology and rights to two
privately held companies, Wink Communications, Inc. ("Wink") and Global PC, Inc.
("Global PC"), the Company received a minority equity interest in each of these
companies. The costs of developing the related technologies were previously
charged to operations; accordingly no value has been attributed to these
interests in the accompanying consolidated financial statements. The Wink and
Global PC transactions took place in fiscal years 1995 and 1999, respectively.
The Company holds interests of 6% or less in each company. A Director of
Geoworks Corporation serves as the Chairman of both Wink and Global PC.
53
<PAGE> 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to executive officers
is incorporated herein by reference from Item 4A of Part I of this Form 10-K.
The information required by this Item with respect to directors and compliance
with the reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934 is incorporated herein by reference from the Company's definitive proxy
statement filed in connection with its 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement filed in connection with
its 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement filed in connection with
its 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement filed in connection with
its 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements. The following Consolidated Financial
Statements of Geoworks and Report of Independent Auditors are
included in Item 8
Report of Independent Auditors
54
<PAGE> 55
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and have therefore been omitted.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit Description of Document
------- -----------------------
<S> <C>
2.1 Recommended Offer to Purchase the Entire Issued
Share Capital of Eden Group Ltd. (incorporated by
reference to Exhibit 2.1 to Registrant's report on
Form 8-K filed March 10, 1997)
2.2 Warranty and Covenant Agreement in relation to Eden
Group Limited (incorporated by reference to Exhibit
2.2 to Registrant's report on Form 8-K filed March
10, 1997)
2.3 Escrow Agreement (incorporated by reference to
Exhibit 2.3 to Registrant's report on Form 8-K
filed March 10, 1997)
2.4 Agreement of Merger dated October 7, 1997, between
Registrant and Registrant's predecessor
corporation, Geoworks, a California corporation
(incorporated by reference to Exhibit 2.01 to
Registrant's report on Form 8-K filed October 27,
1997)
3.1 Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.01 to
Registrant's report on Form 8-K filed October 27,
1997)
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C>
3.2 Bylaws of Registrant (incorporated by reference to
Exhibit 3.02 to Registrant's report on Form 8-K
filed October 27, 1997)
10.1 Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.1 to Registrant's report on
Form 10-Q for the quarter ended September 30, 1997)
10.2 1987 Stock Option Plan (incorporated by reference
to Exhibit 10.2 to Registrant's Registration
Statement on Form S-1 (File No. 33-78104),
effective June 22, 1994)*
10.3 1994 Stock Plan, as amended through May 27, 1997
(incorporated by reference to Exhibit 4.03 to
Registrant's Registration Statement on Form S-8
(File No. 333-39863)*
10.4 Employee Stock Purchase Plan and Form of
Subscription Agreement (incorporated by reference
to Exhibit 10.4 to Registrant's Registration
Statement on Form S-1 (File No. 33-78104),
effective June 22, 1994)*
10.5 Lease dated December 30, 1993 for facilities
located at 960 Atlantic Avenue, Alameda, California
(incorporated by reference to Exhibit 10.16 to
Registrant's Registration Statement on Form S-1
(File No. 33-78104), effective June 22, 1994)
10.6 Amendment Number Five to lease for facilities
located at 960 Atlantic Avenue, Alameda, CA, dated
March 15, 1996 (incorporated by reference to
Exhibit 10.29 to Registrant's report on Form 10-K
for the year ended March 31, 1996)
10.7 Lease dated September 30, 1994 for facilities
located at 2001 Center Street, Berkeley, California
(incorporated by reference to Exhibit 10.22 to
Registrant's original Annual Report on Form 10-K or
amendments thereto on Form 10-KA for the year ended
March 31, 1995)
10.8 Amendment Numbers One and Two to lease for
facilities located at 2001 Center Street, Berkeley,
CA, dated January 18, 1996 and February 29, 1996,
respectively (incorporated by reference to Exhibit
10.30 to Registrant's report on Form 10-K for the
year ended March 31, 1996)
10.9 Master Lease Agreement between LINC Capital
Management Services, LTD. and Geoworks dated
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C>
December 8, 1994 (incorporated by reference to
Exhibit 10.24 to Registrant's original Annual
Report on Form 10-K or amendments thereto on Form
10-K/A for the year ended March 31, 1995)
10.10 Corporate Technology Agreement between Toshiba
Corporation and Geoworks dated March 17, 1993
(incorporated by reference to Exhibit 10.12 to
Registrant's Registration Statement on Form S-1
(File No. 33-78104), effective June 22, 1994)###
10.11 Amendment Number One to Corporate Technology
Agreement between the Company and Toshiba
Corporation dated June 30, 1994 (incorporated by
reference to Exhibit 10.17 to Registrant's report
on Form 10-Q for the quarter ended June 30,
1994)###
10.12 Amendment Number Three to Corporate Technology
Agreement between the Company and Toshiba
Corporation dated September 29, 1995 (incorporated
by reference to Exhibit 10.27 to Registrant's
report on Form 10-Q for the quarter ended December
31, 1995)###
10.13 Addendum to Corporate Technology Agreement between
Geoworks and Toshiba, dated December 16, 1996
(incorporated by reference to Exhibit 10.39 to
Registrant's report on Form 10-Q for the quarter
ended December 31, 1996)###
10.14 Geoworks - Brother Technology License Agreement,
effective as of September 30, 1994 (incorporated by
reference to Exhibit 10.18 to Registrant's report
on Form 10-Q for the quarter ended September 30,
1994)###
10.15 Addendum Number One to Technology License Agreement
between Geoworks and Brother, dated March 29, 1996
(incorporated by reference to Exhibit 10.31 to
Registrant's report on Form 10-K for the year ended
March 31, 1996)###
10.16 Addendum Number Two to Technology License Agreement
between Geoworks and Brother International
Corporation, dated June 28, 1996 (incorporated by
reference to Exhibit 10.34 to Registrant's report
on Form 10-Q for the quarter ended June 30,
1996)###
</TABLE>
57
<PAGE> 58
<TABLE>
<S> <C>
10.17 Software Development and Licensing Agreement
between Nokia Mobile Phones Ltd. and Geoworks dated
December 2, 1994 (incorporated by reference to
Exhibit 10.23 to Registrant's original Annual
Report on Form 10-K or amendments thereto on Form
10-KA for the year ended March 31, 1995)###
10.18 Technology License Agreement dated January 12, 1996
between Geoworks and Ericsson Mobile Communications
(incorporated by reference to Exhibit 10.28 to
Registrant's report on Form 10-K for the year ended
March 31, 1996)###
10.19 Supplemental Stock Option Plan (incorporated by
reference to Exhibit 10.35 to Registrant's report
on Form 10-Q for the quarter ended September 30,
1996)*
10.20 Technology License Agreement between Geoworks and
NEC Corporation, dated April 26, 1996 (incorporated
by reference to Exhibit 10.36 to Registrant's
report on Form 10-Q for the quarter ended September
30, 1996)###
10.21 1997 Supplemental Stock Plan (incorporated by
reference to Exhibit 4.1 to Registrant's
Registration Statement on Form S-8 filed March 25,
1997)*
10.22 Form of Stock Option Agreement under the 1997
Supplemental Stock Plan (incorporated by reference
to Exhibit 4.2 to Registrant's Registration
Statement on Form S-8 filed March 25, 1997)*
10.23 Separation Agreement and General Release between
the Registrant and David Edward John Crisp dated
March 16, 1998 (incorporated by reference to
Exhibit 10.23 to Registrant's report on Form 10-K
for the year ended March 31, 1998)*
10.24 Separation Agreement and General Release between
Registrant and Jordan J. Breslow, dated June 30,
1998 (incorporated by reference to Exhibit 10.24 to
Registrant's report on Form 10-Q for the quarter
ended June 30, 1998)*
10.25 Executive Employment Agreement between Geoworks and
David L. Grannan, dated January 10, 1999
(incorporated by reference to Exhibit 10.25 to
Registrant's report on form 10-Q for the quarter
ended December 31, 1998)*
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C>
10.26 Purchase Agreement between Geoworks Corporation and
Amazon.com, Inc. dated February 12, 1999
10.27 Amendment Number One to Geoworks Corporation -
Mitsubishi Electric Corporation Technology
Agreement, effective March 25, 1999###p
21.1 List of subsidiaries (incorporated by reference to
Exhibit 21.1 to Registrant's Form 10-K for the year
ended March 31, 1997)
23.1 Consent of Independent Auditors (see sequentially
numbered Page 62)
24.1 Power of Attorney (see Page 61)
27.1 Financial Data Schedule
</TABLE>
### Confidential treatment has been granted as to
portions thereof
###p Confidential treatment has been requested and
is pending as to portions thereof
* Management contract or compensatory plan or
arrangement
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the quarter ended on March 31,
1999.
(c) EXHIBITS
See Item 14 (a) 3 above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14 (a) 2 above.
59
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: June 25, 1999
GEOWORKS CORPORATION
By: /s/David L.Grannan
-----------------------------------
David L. Grannan
President and Chief Executive Officer
60
<PAGE> 61
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gordon E. Mayer and David L. Grannan and each of
them acting individually, as such person's true and lawful attorneys-in-fact and
agents, each with full power of substitution, for such person, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his or her substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David L. Grannan President and Chief Executive June 25, 1999
- -------------------------- Officer, and Director (Principal
David L. Grannan Executive Officer)
/s/ Gordon E. Mayer Chairman of the Board June 25, 1999
- --------------------------
Gordon E. Mayer
/s/ Brian P. Dougherty Director June 25, 1999
- --------------------------
Brian P. Dougherty
/s/ Eric E. Schmidt Director June 25, 1999
- --------------------------
Eric E. Schmidt
/s/ Bernard A. Bianchino Director June 25, 1999
- --------------------------
Bernard A. Bianchino
/s/ John B. Balousek Director June 25, 1999
- --------------------------
John B. Balousek
/s/ Stephen T. Baker Vice President, Chief Financial June 25, 1999
- -------------------------- Officer and Secretary (Principal
Stephen T. Baker Financial Officer)
</TABLE>
61
<PAGE> 62
GEOWORKS CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
Exhibit 10.26 Purchase Agreement between Geoworks Corporation
and Amazon.com, Inc. dated February 12, 1999
Exhibit 10.27 Amendment Number One to Geoworks Corporation -
Mitsubishi Electric Corporation Technology
License Agreement, effective March 25, 1999
###p
###p Confidential Treatment Pending
Exhibit 23.1 Consent of Independent Auditors
</TABLE>
63
<PAGE> 1
Exhibit 10.26
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is made and entered into as of February 12,
1999, by and among Geoworks Corporation, a Delaware corporation (the "Company")
and Amazon.com, Inc., a Delaware corporation (the "Purchaser").
The Parties agree as follows:
ARTICLE I - PURCHASE OF ASSETS, ASSIGNMENT AND
ASSUMPTION OF LEASES, EMPLOYEE ARRANGEMENTS
AND STOCK PURCHASE
1.1 PURCHASE OF TANGIBLE ASSETS AND ASSIGNMENT AND ASSUMPTION OF LEASES AT
CLOSING
(a) Subject to the terms and conditions of this Agreement, at the
Closing (as defined below), the Company hereby agrees to sell, assign, transfer,
convey and deliver to the Purchaser, and the Purchaser hereby agrees to
purchase, acquire and accept from the Company, all of the Company's right, title
and interest in and to all of the tangible assets of every type and description
of the Company located at the Company's office at 1107 N.E. 45th Street, Suite
120, Seattle, Washington (the "Seattle Office"), whether real, personal or
mixed, and whether or not reflected on the books and records of the Company, at
a purchase price of $250,000 (the "Tangible Asset Purchase Price"). Such assets
shall be free and clear of all liens, mortgages, pledges, deeds of trust,
security interests, charges, encumbrances, and other adverse claims or interests
of any kind ("Encumbrances"). The assets being purchased by Purchaser pursuant
to this Agreement are collectively referred to herein as the "Acquired Tangible
Assets." The Acquired Tangible Assets include, without limitation, all of the
Company's right, title and interest in, to and under all equipment, machinery,
goods, computer hardware, office furniture, fixtures, office materials and
supplies, tooling, spare parts, leasehold improvements and other tangible
personal property, including, without limitation, the equipment described in
Exhibit A, and all rights to the warranties received from the manufacturers and
distributors of all such equipment and personal property and any related claims,
credits, rights of recovery and setoffs with respect to such equipment and
personal property.
<PAGE> 2
(b) The Company will not transfer to the Purchaser and the Purchaser
will not acquire the assets identified on Exhibit B attached hereto (the
"Excluded Assets"), which are specifically excluded from the Acquired Tangible
Assets and which will remain the Company's property.
(c) Subject to the terms and conditions hereof, at the Closing (as
defined below), the Purchaser agrees to assume and accept from the Company all
of the Company's right, title and interest in and to the leases of the Company
listed on Exhibit C attached hereto (the "Leases") and the Company agrees to
sell, assign, transfer, convey and deliver to Purchaser the Leases. The
Purchaser will assume from the Company the liabilities and obligations of the
Company under the Leases attributable to the period after the Closing.
(d) The Purchaser will not assume from the Company any liabilities
other than the liabilities of the Company under the Leases attributable to the
period after the Closing. All other liabilities shall remain obligations and
liabilities of the Company.
(e) The Tangible Asset Purchase Price shall be allocated among the
Acquired Tangible Assets according to a purchase price allocation statement (the
"Allocation") to be agreed upon by the parties within 15 business days after the
Closing Date (as defined below), attached as Exhibit D. The Allocation will be
binding on the Purchaser and the Company for all federal, state and local tax
purposes. The parties agree to report the Allocation consistently therewith on
Internal Revenue Service Form 8594 and to attach Form 8594 to their respective
federal income tax forms for the 1999 tax year. The failure to comply with the
reporting obligations set forth in this Section 1.1(e) will constitute a
material breach of this Agreement.
(f) All title, recording and transfer fees payable or assessable in
connection with the sale and transfers contemplated by this Agreement, together
with any and all sales taxes payable or assessable in connection with the sale
and transfers contemplated by this Agreement, if any, will be borne by the
Company. All compliance with bulk sale laws of the state of Washington arising
in connection with sales and transfers contemplated by this Agreement, if any,
shall be borne by the Purchaser.
(g) Notwithstanding anything in this Agreement to the contrary, this
Agreement will not constitute an agreement to assign any Lease or any claim,
right or benefit arising thereunder or resulting therefrom if the agreement to
assign or attempt to assign, without the consent of a third party, would
constitute a breach thereof or in any way adversely affect the rights of the
Company or the Purchaser thereunder. Until such consent is obtained, or if an
attempted assignment thereof would be
-2-
<PAGE> 3
ineffective or would adversely affect the rights of the Company or the Purchaser
thereunder so that the Purchaser would not in fact receive all such rights, the
Purchaser and the Company will cooperate with each other in any arrangement
designed to provide for the Purchaser the benefits of any such claim, contract,
license or other agreement. Any transfer or assignment to the Purchaser by the
Company of any contract or agreement that requires the consent or approval of
any third party will, without reducing or adversely affecting the obligations of
the Company to transfer or assign such Lease set forth in this Article I or the
representations of the Company set forth in Article III, be made subject to such
consent or approval being obtained.
1.2 OFFERS OF EMPLOYMENT
Subject to the terms and conditions hereof, prior to the Closing, the
Purchaser will offer to each employee of the Company listed on Exhibit E
attached hereto (collectively, the "Seattle Office Employees") a position with
the Purchaser that includes compensation and benefit arrangements which, when
taken together, are at or above such Seattle Office Employee's employment
arrangement with the Company.
1.3 AUTHORIZATION AND SALE OF THE SHARES
Subject to the terms and conditions hereof, at the Closing, the Company
will issue and sell to the Purchaser, and the Purchaser will purchase from the
Company, 1,219,512 shares (the "Shares") of the Company's common stock, par
value $.001 per share (the "Common Stock") at a purchase price of $4.10 per
share for a total purchase price of $5,000,000 (the "Share Purchase Price").
ARTICLE II - THE CLOSING
2.1 CLOSING DATE
The consummation of the purchase and sale of the Shares hereunder (the
"Closing") shall be held at the offices of Perkins Coie LLP, 1201 Third Avenue,
Seattle, Washington 98101 at 10:00 a.m., on February 12, 1999 or at such other
time and place as the Company and the Purchaser mutually agree upon in writing
(the "Closing Date").
2.2 DELIVERY
At the Closing, the Purchaser shall deliver payment of the Share
Purchase Price for the Shares and the Tangible Asset Purchase Price for the
Acquired Tangible Assets by wire transfer. Within three business days of the
Closing Date, the Company shall cause to be delivered to the Purchaser
certificate(s) representing the Shares.
-3-
<PAGE> 4
2.3 DOCUMENTS TO BE DELIVERED BY THE COMPANY
The Company shall deliver to the Purchaser at the Closing:
(a) a certificate executed by the President of the Company certifying
that the representations and warranties made by the Company in Article III
hereof are true and correct as of the Closing and that the Company has performed
all obligations and conditions herein required to be performed or observed by it
on or prior to the Closing;
(b) an opinion of counsel substantially in the form attached as
Exhibit F hereto; and
(c) any consent to assignment by third parties to any Lease, if
required by the terms of such Lease, except for such consents to be obtained
after the Closing as set forth on Exhibit C.
2.4 DOCUMENTS TO BE DELIVERED BY THE COMPANY AND THE PURCHASER
The Company and the Purchaser shall each execute and deliver to each
other:
(a) the Bill of Sale substantially in the form attached as Exhibit G
hereto;
(b) the Assignment and Assumption Agreement substantially in the form
attached as Exhibit H hereto; and
(c) the Cross-Receipt substantially in the form attached as Exhibit I
hereto.
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF
THE COMPANY
The Company hereby represents and warrants to the Purchaser as of the
date of this Agreement as follows:
3.1 ORGANIZATION
The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware. The Company has all
requisite corporate power and authority to own, operate and lease its property
and to carry on its business as now being conducted. The Company is duly
qualified as a foreign corporation to do business and is in good standing in
each jurisdiction in which the character of properties occupied, owned or held
under lease by the Company, or the nature of the business conducted by the
Company, makes such qualification
-4-
<PAGE> 5
necessary, except where the failure to be so qualified would not have a material
adverse effect on the business, operations, assets, liabilities or condition
(financial or otherwise) of the Company (a "Material Adverse Effect").
3.2 VALID ISSUANCE OF COMMON STOCK
The Shares, when issued and paid for in accordance with this Agreement,
will be duly authorized, validly issued, fully paid, non-assessable, free of
pre-emptive rights and issued in compliance with all applicable federal or state
securities laws.
3.3 AUTHORITY; NO CONFLICT; REQUIRED FILINGS AND CONSENTS
(a) The Company has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated by
this Agreement. The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of the Company. This
Agreement has been duly executed and delivered by the Company, and constitutes
the valid and binding obligation of the Company, enforceable in accordance with
its terms, except to the extent that enforceability may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other laws affecting the
enforcement of creditors' rights generally and by general principles of equity.
(b) The execution and delivery by the Company of this Agreement does
not, and consummation of the transactions contemplated by this Agreement will
not, (i) conflict with, or result in any violation or breach of any provision
of, the Certificate of Incorporation or Bylaws of the Company, (ii) result in
any violation or breach of, or constitute (with or without notice or lapse of
time, or both) a default (or give rise to a right of termination, cancellation
or acceleration of any obligation or loss of any material benefit) under, any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, contract or other agreement, instrument or obligation to which the
Company is a party or by which any of its properties or assets may be bound, or
(iii) to the Company's knowledge, conflict or violate any permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or any of its properties or assets, except
in the case of (ii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which would not have a Material Adverse Effect on
the Company and its subsidiaries, taken as a whole.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other
-5-
<PAGE> 6
governmental authority or instrumentality ("Governmental Entity") is required by
or with respect to the Company in connection with the execution and delivery of
this Agreement or the consummation of the transactions contemplated hereby,
except for such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws.
3.4 COMMISSION FILINGS; NASDAQ LISTING
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") all forms, reports and documents required to be filed with
the Commission by the Company pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), since June 22, 1994 (collectively, the "Company
Commission Reports"). The Company Commission Reports (i) comply in all material
respects with the applicable requirements of the Exchange Act, and (ii) do not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) The Common Stock is listed on the Nasdaq National Market.
3.5 CORPORATE CHARTER
The Company previously has furnished to the Purchaser true and complete
copies of the Company's Delaware Certificate of Incorporation and Bylaws as
currently in effect, including all amendments thereto.
3.6 STOCKHOLDERS CONSENT
No consent or approval of the stockholders of the Company is required or
necessary for the Company to enter into this Agreement or to consummate the
transactions contemplated hereby and thereby.
3.7 SEATTLE OFFICE CONTRACTS
(a) Exhibit C contains a true and complete list of all contracts,
agreements, arrangements and understandings, oral or written, to which the
Company is a party or by which the Company is bound, that relate to or involve
the Seattle Office.
(b) The Leases are valid, binding and enforceable in accordance with
their terms against each party thereto and are in full force and effect; the
Company has performed all obligations imposed on it thereunder and neither the
Company nor, to the knowledge of the Company, any other party thereto is in
default thereunder, nor is
-6-
<PAGE> 7
there any event that with notice or lapse of time, or both, would constitute a
default thereunder. True and complete copies of each Lease have been delivered
to the Purchaser. The Company has not received notice, nor is the Company
otherwise aware, that any party to any such Lease intends to cancel, terminate
or refuse to renew such Lease or to exercise or decline to exercise any option
or right thereunder.
3.8 NO IMPEDIMENTS TO HIRING SEATTLE OFFICE EMPLOYEES
The Company has not made statements or counter proposals to any Seattle
Office Employee designed to impede the Purchaser's hiring of such employee. The
Company has:
(a) encouraged each Seattle Office Employee to give full and
appropriate consideration to the Purchaser's offer of employment;
(b) recommended to each Seattle Office Employee that he or she accept
the Purchaser's offer of employment; and
(c) advised each Seattle Office Employee of their greater long-term
employment prospects in the Seattle job market by accepting the Purchaser's
offer of employment.
3.9 NO ENCUMBRANCES
The Company has taken all actions with respect to the transactions
contemplated by this Agreement that are necessary or required to transfer the
Acquired Tangible Assets and the Leases to the Purchaser free and clear of all
Encumbrances. The Company owns all right, title and interest in and to the
Acquired Tangible Assets, free and clear of all Encumbrances of any other person
or entity. The execution and delivery of this Agreement will convey, transfer
and assign to the Purchaser good and marketable title to the Acquired Tangible
Assets and associated proprietary rights free and clear of all Encumbrances of
any person or entity.
3.10 IRREVOCABLE INSTRUCTIONS TO ISSUE CERTIFICATES
The Company has delivered to its transfer agent irrevocable instructions
to issue certificates representing the Shares to the Purchaser within three
business days of the Closing Date.
-7-
<PAGE> 8
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF
THE PURCHASER
The Purchaser hereby represents and warrants to the Company as of the
date of this Agreement as follows:
4.1 AUTHORITY
The Purchaser has all requisite legal and corporate power to enter into
this Agreement, to purchase the Shares hereunder, and to perform its obligations
under the terms of this Agreement.
4.2 AUTHORIZATION
All corporate action on the part of the Purchaser necessary for the
purchase of the Shares and the performance of the Purchaser's obligations
hereunder has been taken. This Agreement when executed and delivered by the
Purchaser will constitute a valid and legally binding obligation of the
Purchaser, enforceable in accordance with its terms, except to the extent that
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratorium or other laws affecting the enforcement of creditors'
rights generally and by general principles of equity.
4.3 PURCHASE ENTIRELY FOR OWN ACCOUNT
This Agreement is made with the Purchaser in reliance upon the
Purchaser's representation to the Company, which by the Purchaser's execution of
this Agreement the Purchaser hereby confirms, that the Shares to be acquired by
the Purchaser will be acquired for investment for the Purchaser's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that the Purchaser has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, the Purchaser further represents that the Purchaser does not
presently have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person or to any third
person, with respect to any of the Shares. The Purchaser has not been formed for
the specific purpose of acquiring the Shares.
4.4 INVESTMENT EXPERIENCE
The Purchaser is an "accredited investor" as defined in Rule 501(a)
under the Securities Act of 1933, as amended (the "Securities Act"). Purchaser
is aware of the Company's business affairs and financial condition and has had
access to and has acquired sufficient information about the Company to reach an
informed and
-8-
<PAGE> 9
knowledgeable decision to acquire the Shares. The Purchaser has such business
and financial experience as is required to give it the capacity to protect its
own interests in connection with the purchase of the Shares. The Purchaser is
not a "broker" or a "dealer" as defined in the Exchange Act.
4.5 RESTRICTED SECURITIES
The Purchaser understands that the Shares are characterized as
"restricted securities" under applicable U.S. federal and state securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that, pursuant to these laws and applicable
regulations, the Purchaser must hold the Shares indefinitely unless they are
registered with the Commission and qualified by state authorities, or an
exemption from such registration and qualification requirements is available.
4.6 LEGENDS
The Purchaser understands that the Shares, and any securities issued in
respect thereof or exchanged therefor, will bear a legend substantially similar
to the following:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE LAW, AND NO
INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR
OTHERWISE TRANSFERRED UNLESS (a) THERE IS AN EFFECTIVE REGISTRATION
STATEMENT UNDER SUCH ACT COVERING ANY SUCH TRANSACTION INVOLVING THESE
SECURITIES OR (b) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL,
ACCEPTABLE TO THE COMPANY, FOR THE HOLDER OF THESE SECURITIES STATING
THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR THE COMPANY
OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM
REGISTRATION.
ARTICLE V - COVENANTS
5.1 SHARES LISTED ON THE NASDAQ NATIONAL MARKET
By or before the time the Shares shall become publicly tradeable
pursuant to the applicable U.S. securities laws, the Company shall take all
reasonable actions to
-9-
<PAGE> 10
list the Shares on the Nasdaq National Market, provided that the Company shall
not be obligated to register the Shares under the Securities Act.
5.2 NO IMPEDIMENTS TO HIRING SEATTLE OFFICE EMPLOYEES
After the Closing, the Company shall not to make statements or counter
proposals to any Seattle Office Employee designed to impede the Purchaser's
hiring or retention of such employee.
ARTICLE VI - INDEMNIFICATION
6.1 INDEMNIFICATION BY THE COMPANY
The Company will defend, indemnify and hold harmless the Purchaser and
its officers, directors and stockholders from and against any claims, losses,
liabilities, actions, damages, costs and expenses (including reasonable
attorney's fees) incurred by the Purchaser or its officers, directors or
stockholders arising out of or in connection with:
(a) any breach of the representations or warranties made by the
Company under this Agreement or in any certificate, agreement or other
instrument delivered by the Company pursuant to this Agreement;
(b) any failure by the Company to perform any of its covenants or
agreements contained in this Agreement or in any certificate, agreement or other
instrument delivered by the Company pursuant to this Agreement; or
(c) any Seattle Office Employee who does not accept the Purchaser's
offer of employment.
The maximum aggregate liability for indemnification under this Section 6.1 shall
be limited to $5,250,000.
6.2 INDEMNIFICATION BY THE PURCHASER
The Purchaser will defend, indemnify and hold harmless the Company and
its officers, directors and stockholders from and against any claims, losses,
liabilities, actions, damages, costs and expenses (including reasonable
attorney's fees) incurred by the Company or its officers, directors or
stockholders arising out of or in connection with:
-10-
<PAGE> 11
(a) any breach of the representations or warranties made by the
Purchaser under this Agreement or in any agreement or other instrument delivered
by the Purchaser pursuant to this Agreement; or
(b) any failure by the Purchaser to perform any of its covenants or
agreements contained in this Agreement or in any agreement or other instrument
delivered by the Purchaser pursuant to this Agreement.
The maximum aggregate liability for indemnification under this Section 6.2 shall
be limited to $5,250,000.
ARTICLE VII - MISCELLANEOUS
7.1 GOVERNING LAW
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Washington applicable to contracts executed in and to
be performed in that state.
7.2 SURVIVAL
The representations, warranties, covenants and agreements made herein
shall survive the closing of the transactions contemplated hereby.
7.3 SUCCESSORS AND ASSIGNS
Except as otherwise expressly provided herein, the provisions hereof
shall inure to the benefit of, and be binding upon, the successors, assigns,
heirs, executors and administrators of the parties hereto.
7.4 ENTIRE AGREEMENT; AMENDMENT
This Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement among the parties
with regard to the subjects hereof and thereof. Any term of this Agreement may
be amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Purchaser.
7.5 NOTICES AND OTHER COMMUNICATIONS
Every notice or other communication required or contemplated by this
Agreement by either party shall be delivered either by (i) personal delivery,
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<PAGE> 12
(ii) postage prepaid return receipt requested registered or certified mail or
the equivalent of registered or certified mail under the laws of the country
where mailed, (iii) nationally recognized overnight courier, such as Federal
Express or UPS, or (iv) facsimile with a confirmation copy sent simultaneously
by postage prepaid, return receipt requested, registered or certified mail, in
each case addressed to the Company or the Purchaser as the case may be at the
following address:
To the Purchaser: Amazon.com, Inc.
1516 Second Avenue
Seattle, Washington 98101
Attn: Ryan Sawyer
Facsimile: (206) 694-2082
With a copy to: Perkins Coie LLP
1201 Third Avenue
Seattle, Washington 98101
Attn.: Michael Deal
Facsimile: (206) 583-8500
To the Company: Geoworks Corporation
960 Atlantic Avenue
Alameda, California 94510
Attn.: Stephen T. Baker
Facsimile: (510) 814-4250
With a copy to: Donald G. Ezzell
Arter & Hadden
725 S. Figueroa Street, Suite 3400
Los Angeles, California 90017
Facsimile: (213) 617-9255
or at such other address as the intended recipient previously shall have
designated by written notice to the other party (with copies to counsel as may
be indicated above). Notice by registered or certified mail shall be effective
on the date it is officially recorded as delivered to the intended recipient by
return receipt or equivalent, and in the absence of such record of delivery, the
effective date shall be presumed to have been the fifth (5th) business day after
it was deposited in the mail. All notices delivered in person or sent by courier
shall be deemed to have been delivered to and received by the addressee and
shall be effective on the date of personal delivery; notices delivered by
facsimile with simultaneous confirmation copy by registered or
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<PAGE> 13
certified mail shall be deemed delivered to and received by the addressee and
effective on the date sent. Notice not given in writing shall be effective only
if acknowledged in writing by a duly authorized representative of the party to
whom it was given.
7.6 DELAYS OR OMISSIONS
No delay or omission to exercise any right, power or remedy accruing to
either party hereto, upon any breach or default of the other party under this
Agreement, shall impair any such right, power or remedy nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any holder of any
breach or default under this Agreement, or any waiver on the part of any holder
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies either under this Agreement, or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.
7.7 SPECIFIC PERFORMANCE
Each of the parties hereto acknowledges and agrees that the other party
hereto would be damaged irreparably in the event any of the provisions of this
Agreement are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the parties hereto agrees the other party
hereto will be entitled to an injunction to prevent breaches of the provisions
of this Agreement and to enforce specifically this Agreement and the terms and
provisions of this Agreement in any competent court having jurisdiction over the
parties, in addition to any other remedy to which they might be entitled at law
or in equity.
7.8 SEPARABILITY OF AGREEMENTS; SEVERABILITY OF THIS AGREEMENT
In case any provision of this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
7.9 PARTIES IN INTEREST
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall
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<PAGE> 14
confer upon any other person or entity any right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement.
7.10 FINDER'S FEES
Each party hereto (i) represents and warrants that it has retained no
finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold the other party
harmless of and from any liability for commission or compensation in the nature
of a finder's fee to any broker or other person or firm (and the costs and
expenses of defending against such liability or asserted liability) for which
the party in breach of this representation and warranty, or any of its employees
or representatives, is responsible.
7.11 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument. Execution and delivery of this Agreement by exchange of facsimile
copies bearing the facsimile signature of a party hereto shall constitute a
valid and binding execution and delivery of this Agreement by such party. Such
facsimile copies shall constitute enforceable original documents.
7.12 ATTORNEYS' FEES
If any action or proceeding shall be commenced to enforce this Agreement
or any right arising in connection with this Agreement, the prevailing party in
such action or proceeding shall be entitled to recover from the other party, the
reasonable attorneys' fees, costs and expenses incurred by such prevailing party
in connection with such action or proceeding or negotiation to avoid such action
or proceeding.
7.13 EXPENSES
Each party shall bear its own expenses incident to negotiations,
preparation, authorization and consummation of this Agreement and the
transactions contemplated hereby, including, without limitation, all fees and
expenses of its counsel, whether or not such transaction is consummated.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
AMAZON.COM, INC.
By: /s/ Randy Tinsley
------------------------------
Its: Treasurer
-----------------------------
GEOWORKS CORPORATION
By: /s/ Lars Stenstedt
------------------------------
Its: Vice President, Sales
-----------------------------
and Business Development
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<PAGE> 1
Confidential Treatment ### Confidential portions
Requested omitted and filed separately
with the Commission
Exhibit 10.27
AMENDMENT #1
TO GEOWORKS-MELCO TECHNOLOGY LICENSE AGREEMENT
This Amendment #1 to the Geoworks-MELCO Technology License Agreement concluded
on November 12, 1997, is made and effective the 25th day of March, 1999
("EFFECTIVE DATE") by and between Geoworks Corporation, a Delaware corporation
whose principal address is 960 Atlantic Avenue, Alameda, California 94501 USA
("GEOWORKS"), and Mitsubishi Electric Corporation, a corporation duly organized
and existing under the laws of Japan, having its principal office at 2-2-3,
Marunouchi, Chiyoda-ku, Tokyo 100-8310, Japan ("MELCO").
WHEREAS
(A) MELCO is a developer, manufacturer and distributor of computer and
consumer electronics equipment, radio communication equipment and
wireless and circuit-switched handset equipment.
(B) Geoworks is a developer, manufacturer, distributor, and publisher of
computer software technologies.
(C) Geoworks now wishes to grant to MELCO ### so that MELCO can undertake
independent development of certain devices based upon the Geoworks
software.
(D) Geoworks and MELCO now wish to amend certain financial, licensing and
other terms of their agreement.
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1. TECHNOLOGY LICENSE AGREEMENT
The Parties agree that all the terms and conditions of the Technology
License Agreement signed on November 12, 1997 (hereafter "Agreement"),
including the definitions of terms and expressions in said Agreement,
shall remain in full force and effect with the exception to those terms
and conditions amended or added herein. The Parties agree to amend the
following accordingly numbered sections of the Agreement to the
following effect:
1.1 Exhibits
Exhibits A-1, A-2, etc.
Sub-Section (3) of Exhibits A-1, A-2 etc. in Section 1.1 is hereby
deleted in its entirety.
1.3 Entire Agreement
Section 1.3 is hereby amended as follows:
"Entire Agreement
This Amendment #1 to the Technology License Agreement signed on November
12, 1997, the Technology License Agreement and the Exhibits to these
documents state the entire agreement between the Parties and supersede
all prior communications, written or oral, between the Parties regarding
this subject matter. No terms in any purchase order or other forms shall
apply, even if such purchase order or other forms are accepted by either
Party. No amendment or modification of the Agreement or this Amendment
may be made except by an instrument in writing signed by both Parties."
2. DEFINITIONS
2.4 Licensed Technology
Section 2.4 is hereby amended as follows:
###
2.6 Product
Section 2.6 is hereby amended as follows: "(i) a MELCO product as
defined in Exhibit A-1, (ii) products developed by MELCO or its
Affiliates for projects involving
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###
2.10 Territory
Section 2.10 is hereby amended as follows:
###
2.12 Derivative Works
A new section 2.12 is hereby added to the Agreement as follows:
"2.12 Derivative Works
works which are based upon one or more pre-existing works, such as
revisions, modifications, translations, abridgments, condensations,
expansions, collections, compilations or any other form(s) in which such
pre-existing works may be recast, transformed or adapted, and which, in
the absence of this Agreement or other authorization by the owner of the
pre-existing work, would constitute copyright infringement of the
pre-existing work."
2.13 Intellectual Property Rights
A new section 2.13 is hereby added to the Agreement as follows:
"2.13 Intellectual Property Rights
### arising under statutory or common law, including (i) patents; (ii)
design patents; (iii) rights associated with works of authorship
including copyrights, copyright registrations and copyright
applications; (iv) rights relating to the protection of trade secrets
and confidential information; (v) and divisions, continuations,
renewals, reissues and extensions of the foregoing (as and to the extent
applicable) now existing, hereafter filed, issued or acquired."
3. GRANT OF LICENSES
The first paragraph of Section 3 is hereby amended as follows: "Subject
to all the terms and conditions herein, Geoworks hereby grants to MELCO
and its Affiliates, under and to the extent of Geoworks' or Geoworks'
licensors' Intellectual Property Rights, the following:"
3.1 Distribution
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Section 3.1 is hereby amended by adding the words, "use, copy and"
before the word, "distribute" on the second (2nd) line.
3.2 Reproduction
Section 3.2 is hereby deleted in its entirety.
3.3 Internal Use
Section 3.3 is hereby deleted in its entirety.
3.4 Trademarks
Section 3.4 is hereby deleted in its entirety.
3.5 Private Labeling
Section 3.5(a) is hereby amended as follows:
"Manufacturing: all such Private Labeled Product units must be
manufactured by MELCO, its Affiliates or a subcontractor of MELCO or its
Affiliates; and "
3.6 No Implied Licenses
Section 3.6 is hereby amended by replacing the words "Except as
expressly provided above" in the third line with the words, "Except as
expressly provided hereunder" and by replacing the words "in accordance
with" in the last sentence of this Section 3.6 with the words,
"permitted by".
3.7 Modifications
###
3.8 ###
Section 3.8 is hereby added to the Agreement as follows:
### as follows:"
3.8.1 ###
###
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3.8.2 Development Rights:
subject to Exhibit F, a non-exclusive, non-transferable license to use,
copy, prepare Derivative Works, modify or, pursuant to the terms of this
Agreement have a subcontractor use, copy, prepare Derivative Works or
modify, ###
3.8.3 Object Code Distribution:
a non-exclusive, non-transferable license to distribute, make, use,
sell, lend, import, dispose or exhibit including the license to have
distributed, made, used, sold, lent, imported, disposed or exhibited
object code versions of the Embedded Licensed Technology in Products in
the Territory, in accordance with Section 3 of the Agreement. Unless
otherwise expressly provided herein, MELCO and its Affiliates shall have
###.
3.8.4 No Sublicense
MELCO and its Affiliates may not sublicense, assign, or otherwise
transfer ### rights set forth in this Amendment #1 unless otherwise
agreed by the Parties in writing.
4. PROPRIETARY RIGHTS
4.5 Geoworks' Retained Rights
Section 4.5 is hereby amended by capitalizing the phrase Intellectual
Property Rights in the second line.
4.6 MELCO Modifications
Section 4.6 of the Agreement is hereby amended by modifying the first
sentence as follows: "MELCO shall own all rights, title and interests to
modifications ### made by MELCO as Derivative Works", and the rest of
this Section shall remain unchanged.
4.8 Representation
Section 4.8 is hereby added to this Agreement as follows:
"4.8 Representation
"Geoworks represents and warrants ###
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except the Third Party Technology, it represents it has the right to
sublicense the Third Party Technology defined in Exhibit E, that it has
the power and right to enter into this Agreement and that it has the
right to grant the licenses set forth herein."
5. DELIVERY OF THE LICENSED TECHNOLOGY AND ACCEPTANCE
The following section is hereby added to the Agreement as follows:
5.11 ###
###
6. ###
###
7. PAYMENTS
7.1 Royalty Prepayments and Payments
Section 7.1 is hereby amended as follows:
"7.1 One-Time Payment
MELCO agrees to pay to Geoworks the sum ### for the rights granted in
Sections 3.1-3.7 of the Agreement, including the distribution of the
Embedded Licensed Technology in object code form with Products except
Other Products pursuant to the terms of the Agreement as amended herein
in lieu of paying Geoworks royalties based upon Product Shipment.
Geoworks shall credit MELCO with all fees previously paid to Geoworks by
MELCO as prepaid royalties under the original Section 2.1 of Exhibit A-1
toward such paid-up license fee and MELCO shall continue paying Geoworks
the remaining quarterly installments ### pursuant to Section 2.1 of
Exhibit A-1 until such ### is paid in full. As a result of such ### fee,
MELCO shall have no obligation to pay any royalty including royalty per
Product Shipment in the future, except for royalties due pursuant to
Section 7.12 herein. ### fee shall not constitute an advance and, except
as otherwise stated, shall not be credited towards royalties,
development fees or other payments owed by MELCO to Geoworks under the
Agreement."
7.6 Records
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Section 7.6 is hereby amended by inserting the words, "for Other
Products" after the word, "royalties" on the second (2nd) line.
7.7 Reports
Section 7.7(a) regarding royalty reports is hereby amended by changing
the word "Product" on the third (3rd) line to "Other Products".
Section 7.7(b) is hereby amended by capitalizing the phrase
Intellectual Property Rights on the fourth (4th) line.
7.8 Audit
Section 7.8 is hereby amended by inserting the word "Other" before the
word "Product" on the third (3rd) line.
7.9 Third Party Manufacturers
Section 7.9 is hereby deleted in its entirety.
7.10 ###
Section 7.10 is hereby added to the Agreement as follows:
"Within forty-five (45) days after the date of MELCO's receipt of the
invoice referenced in Section 5.11 and the components set forth in ###
and the installation and compilation of the V243 ###, MELCO shall pay to
Geoworks ### in consideration for ### .
Upon completion of Phase 2 of the General Training Session set forth in
Exhibit G, ### shall become nonrefundable, and upon completion of Phase
2 of the High Level Training Series ### shall become nonrefundable.
If within five (5) years after the execution of this Amendment #1,
Geoworks ###. MELCO shall have the right to have an independent
third-party representative of MELCO, reasonably acceptable to Geoworks,
upon reasonable notice and during Geoworks' normal business hours,
conduct an audit to verify Geoworks' compliance with this provision of
the Agreement."
7.11 Fees for Training
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Section 7.11 is hereby added to the Agreement as follows:
"MELCO shall pay ### for the training set forth in Exhibit G, in which
Geoworks will invoice MELCO on a monthly basis. MELCO will thereafter
pay Geoworks the amount due on the invoice within forty-five (45) days
after the date of the invoice."
7.12 Royalty Payment for Other Products
Section 7.12 is hereby added to the Agreement as follows:
"Before MELCO distributes object code versions of the Embedded Licensed
Technology in Other Products in the Territory in accordance with Section
3.8.3, MELCO and Geoworks will negotiate a royalty to be paid to
Geoworks by MELCO for Product Shipments of Other Products."
8. MANUFACTURING RESPONSIBILITIES
Section 8 is hereby deleted in its entirety.
9. GEOWORKS' INDEMNITIES
Section 9 is hereby amended by replacing all references to the words
"Licensed Technology" with the words," Licensed Technology except the
Third Party Technology."
9.1 Indemnity
Section 9.1 is hereby amended by replacing the words, beginning on line
13 of this Section 9.1, "(b) Geoworks is given control over the defense
thereof and MELCO cooperates in the defense, at Geoworks' expense" with
the following: "(b) Geoworks is given control over the defense thereof
and MELCO cooperates in the defense, at Geoworks' expense, provided
that, Geoworks shall (i) notify and consult with MELCO about the
settlement of any such claim, demand, action or suit prior to a final
judgement without the breach of any confidentiality obligations; (ii)
make commercially reasonable efforts to minimize payments to third
parties for such infringement,; and (iii) defend MELCO, it Affiliates,
and substantially through MELCO or its Affiliates defend customers of
MELCO and its Affiliates in accordance with the decision of such
consultation."
10. MELCO'S INDEMNITIES
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Section 10 is hereby amended by replacing all references to the words
"Licensed Technology" with the words, "Licensed Technology except the
Third Party Technology."
11. COMBINATION CLAIMS
Section 11 is hereby amended by replacing all references to the words
"Licensed Technology" with the words,"Licensed Technology except the
Third Party Technology."
12. WARRANTIES
Section 12 is hereby amended by replacing all references to the words
"Licensed Technology" (except the words used as the heading of Section
12.4) with the words, "Licensed Technology except the Third Party
Technology."
12.1 Disclaimer of Express Warranties
The first sentence of Section 12.1 is hereby amended by replacing the
words "Except as expressly provided below in Section 12.4 (Licensed
Technology Performance Warranty)" with the words, "Except as expressly
provided under this Agreement."
13.1 Term
Section 13.1 is hereby amended by deleting the words "for as long as
any Project Exhibit is in effect" in the third line.
13.2 Termination for Breach
The last sentence of this Section 13.2 is hereby amended by adding the
following words to the end of this sentence, "unless otherwise provided
herein."
13.4(b) Other Termination or Expiration
The last part of the first sentence of Section 13.4(b) is hereby amended
as follows: "subject to the continued obligation to pay royalties for
Product Shipments of Other Products as set forth in the applicable
Project Exhibit(s)".
14. CONFIDENTIAL INFORMATION
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The fourth (4th) sentence of this Section 14, beginning on line 17 of
the Agreement, is hereby amended as follows: "Both parties agree that
all Confidential Information of the other Party shall be held in strict
confidence, will not be disseminated or disclosed to any third party and
will not be used by the Receiving Party for any purpose other than
performing its rights under this Agreement without the express written
consent of the Disclosing Party for ten (10) years from the date of
disclosure, ### provided, however, that each Party may disclose
necessary portions of the Confidential Information to independent
contractors who agree in writing to be bound by confidentiality
restrictions equivalent to those set forth in this Agreement and who
agree in writing not to claim any ownership rights in the Confidential
Information or in the Confidential Information included in a work
product which may be derived from their access to such Confidential
Information."
15. LIMITATION OF LIABILITY
Paragraph (3) of Section 15 is hereby amended as follows: "In no event
shall Geoworks' aggregate liability to defend and indemnify under
Section 9 (Geoworks' Indemnities), exceed an amount equal to ###. In no
event shall MELCO's aggregate liability to defend and indemnify under
Section 10 (MELCO's Indemnities) exceed an amount equal to ###. In the
case of a claim under Section 9 (Geoworks' Indemnities), Geoworks shall
pay such aggregate liability as follows: One third shall be paid by
Geoworks on or before the sixtieth (60th) business day following the
date of final settlement or final decision. The balance shall be a
credit in favor of MELCO, which MELCO may apply against non-recurring
engineering expenses. The foregoing limitation of each Party's aggregate
liability under Section 9 (Geoworks' Indemnities) or Section 10 (MELCO's
Indemnities) shall not apply in the case of damages or liabilities
attributable to a wilful infringement." The remaining paragraphs within
this Section 15 shall remain unchanged.
16. GENERAL
16.1 Assignment
Section 16.1 of the Agreement is hereby amended by adding the following
language after the word "assets" on the 6th line: "or in the event a
third party acquires all the rights and obligations to Geoworks' GEOS-SC
operating system business and agrees in
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writing, which writing shall be directed and provided to MELCO, to
continue to meet the obligations under this Agreement. Geoworks shall
remain liable for completion of the training set forth in Exhibit G in
the event such assignment is effective prior to the completion of the
training and such third party does not agree to complete such training.
The assigning Party shall give notice to the other Party as soon as the
assignment may be disclosed without breach of confidentiality
obligations". The rest of this Section 16.1 shall remain unchanged.
16.9 Survival
Section 16.9 of the Agreement is hereby amended by limiting the survival
of Section 9 (GEOWORKS' INDEMNITIES) and Section 10 (MELCO'S
INDEMNITIES) to the earlier of six (6) years from the first commercial
Product Shipment of the V291/321 Product or eight (8) years from the
Effective Date of this Amendment #1.
Exhibit A-1 THE MELCO V243 PRODUCT
Section 2.1 of Exhibit A-1 (Non-Refundable Prepaid Royalties) is hereby
amended by deleting the last sentence of this Section 2.1 in its
entirety.
Section 2.3 of Exhibit A-1 (Royalties) is hereby deleted in its
entirety.
Section 4 of Exhibit A-1 ("TERM OF AGREEMENT AS TO THE V243 PROJECT") is
hereby amended by deleting the second sentence beginning with the words,
"The Parties agree to meet . . ."
Exhibit B ADDRESSES FOR NOTICES
Geoworks' Electronic Mail is hereby amended by substituting
"[email protected]" for "[email protected]" and "[email protected]" for
"[email protected]".
Geoworks' Notice Recipient is hereby amended by substituting "Lars
Stenstedt" for "Leland J. Llevano" and "Wendy D. Nemeroff, Geoworks
General Counsel, 960 Atlantic Avenue, Alameda, California 94501" for
"Jordan J. Breslow".
Geoworks' Officer For Approvals is hereby amended by substituting "Lars
Stenstedt" for "Leland J. Llevano".
Exhibit D COOPERATIVE MARKETING is hereby deleted in its entirety.
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IN WITNESS WHEREOF, the Parties have executed this Amendment # 1 to the
Technology License Agreement in Alameda, California as of the Effective Date.
MITSUBISHI ELECTRIC GEOWORKS CORPORATION
CORPORATION
/s/Katsumi Nakai /s/ Lars Stenstedt
- ---------------------------- ----------------------------------
Katsumi Nakai Lars Stenstedt
Section Manager Vice President, Sales and Business
Section B Development
EXHIBITS TO BE ADDED TO THE AGREEMENT:
Exhibit E IDENTIFICATION OF ###
Exhibit F GEOWORKS' GUIDELINES FOR PRESERVING THE CONFIDENTIALITY OF ###
EXHIBIT G TRAINING
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EXHIBIT E
IDENTIFICATION OF ###
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EXHIBIT F
GEOWORKS' GUIDELINES FOR PRESERVING
THE CONFIDENTIALITY OF ###
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EXHIBIT G
TRAINING
TECHNOLOGY TRANSITION COST ESTIMATE
- --------------------------------------------------------------------------------
Overview
This document details the cost estimate of the ###
Technology Transition Training Program
The training program consists of the following elements:
o General Training Session to be held in Japan.
o High Level Training Series to be held in Japan and the US.
o Installation of ###.
GENERAL TRAINING SESSION
Phase 1
o 1 week preparation (x2 engineers = 2w)
o 1 week training session in Japan (x2 engineers = 2w)
o 2 flights
o 2 weeks co-location expense
Phase 2
o 2 weeks preparation (x2 engineers = 4w)
o 3 week training session in Japan (x2 engineers = 6w)
o 2 flights
o 6 weeks co-location expense
HIGH LEVEL TRAINING SERIES
Phase 1
o 3 weeks preparation (x2 engineers = 6w)
o 12 weeks intensive training in the US(x4 engineers = 48w)
Phase 2
o A series of alternating co-locations which include:
o 4 weeks preparation (x2 engineers = 8w)
o 13 weeks of training in the US (x2 engineers = 26w)
o 12 weeks training in Japan (x2 engineers = 24w)
o 8 flights
o 24 weeks co-location expense
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EXHIBIT G (CONT.)
SOURCE CODE INSTALLATION AND CONFIGURATION
This is the estimate to ###
1 week installation (x1 engineer = 1w)
o 3 weeks configuration support (x1 engineer = 3w)
o 4 weeks co-location expense
Total Estimated Costs
The total estimated costs from Geoworks are as follows:
Total Engineering time: ###
Total Flights: ###
Total co-location expense: ###
Grand Total (Geoworks only) = ###
Additional Costs to Melco
###
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Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the 1994 Stock Plan (Form S-8 No. 333-39863), the Supplemental
Option Plan (Form S-8 No. 333-09569), the 1997 Supplemental Plan (Form S-8 No.
333-23901), and the Registration Statement, including Amendment No. 1 thereto
(Form S-3 No. 333-24097) and in the related prospectus of Geoworks Corporation
of our report dated April 21, 1999, with respect to the consolidated financial
statements of Geoworks included in the Annual Report on Form 10-K for the year
ended March 31, 1999.
/s/ Ernst & Young LLP
---------------------------------------
Ernst & Young LLP
San Francisco, California
June 28, 1999
62
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,760
<SECURITIES> 11,955
<RECEIVABLES> 3,102
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,188
<PP&E> 3,699
<DEPRECIATION> (2,726)
<TOTAL-ASSETS> 18,183
<CURRENT-LIABILITIES> 4,809
<BONDS> 0
0
0
<COMMON> 102,376
<OTHER-SE> (89,002)
<TOTAL-LIABILITY-AND-EQUITY> 27,463
<SALES> 0
<TOTAL-REVENUES> 8,782
<CGS> 0
<TOTAL-COSTS> 40
<OTHER-EXPENSES> 25,012
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,000
<INCOME-PRETAX> (15,689)
<INCOME-TAX> 149
<INCOME-CONTINUING> (15,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,838)
<EPS-BASIC> (.97)<F1>
<EPS-DILUTED> (.97)
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
