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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 1999
[ ] 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)
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<S> <C>
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)
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510-814-1660
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date:
As of July 21, 1999, the Company had outstanding 17,669,292 shares of Common
Stock, $ 0.001 par value per share.
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GEOWORKS CORPORATION
INDEX
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Page
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets: June 30, 1999 and March 31, 1999 2
Condensed consolidated statements of operations: Three months ended
June 30, 1999 and 1998 3
Condensed consolidated statements of cash flows: Three months ended
June 30, 1999 and 1998 4
Notes to condensed consolidated financial statements: June 30, 1999 5-6
Item 2. Management's discussion and analysis of financial condition and results
of operations 7-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
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<CAPTION>
June 30, March 31,
1999 1999
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ASSETS
Current assets
Cash and cash equivalents $ 2,399 $ 1,760
Marketable securities 11,083 11,955
Accounts receivable 2,542 3,102
Prepaid expenses and other current assets 412 371
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Total current assets 16,436 17,188
Property and equipment, net 857 973
Other assets 22 22
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$ 17,315 $ 18,183
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable $ 672 $ 504
Accrued and other current liabilities 2,342 2,807
Deferred revenue 2,750 1,498
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Total current liabilities 5,764 4,809
Stockholders' equity 11,551 13,374
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$ 17,315 $ 18,183
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See accompanying notes
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GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
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<CAPTION>
Three Months Ended
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June 30, 1999 June 30, 1998
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Net revenues:
Professional services $ 1,149 $ --
Research and development fees -- 1,285
License and other revenue 484 208
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Total net revenues 1,633 1,493
Operating expenses:
Cost of services 795 --
Cost of license revenue 66 18
Sales and marketing 930 1,243
Research and development 949 4,640
General and administrative 702 911
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Total operating expenses 3,442 6,812
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Operating loss (1,809) (5,319)
Other income (expense):
Interest income 139 195
Interest expense (9) (18)
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Loss before income taxes (1,679) (5,142)
Provision for income taxes 165 31
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Net loss $ (1,844) $ (5,173)
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Net loss per share (basic and diluted) $ (0.10) $ (0.32)
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Shares used in per share
computations 17,643 15,931
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See accompanying notes
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GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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<CAPTION>
Three Months Ended
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June 30, 1999 June 30, 1998
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Operating activities:
Net loss $ (1,844) $ (5,173)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization 125 430
Changes in operating assets and liabilities 1,493 1,621
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Net cash used in operating activities (226) (3,122)
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Investing activities:
Purchases of property and equipment (9) (89)
Sales of marketable securities (net of purchases) 872 (2,869)
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Net cash provided by (used in) investing activities 863 (2,958)
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Financing activities:
Payments of capital lease and debt obligations (19) (219)
Net proceeds from issuance of common stock 20 97
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Net cash provided by (used in) financing activities 1 (122)
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Foreign currency translation adjustments 1 6
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Net increase (decrease) in cash and cash equivalents 639 (6,196)
Cash and cash equivalents at beginning of period 1,760 8,738
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Cash and cash equivalents at end of period $ 2,399 $ 2,542
========= =========
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See accompanying notes
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GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements for the three months ended June
30, 1999 and 1998 are unaudited but reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the consolidated financial position and results of
operations for the interim periods. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, included in the Company's
Annual Report to Shareholders on Form 10-K for the fiscal year ended March 31,
1999. The results of operations for the three months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal year.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period's presentation.
In the quarter ended June 30, 1999, as professional services revenues became
significant, the Company began disclosing such revenues and the related service
costs. There were no such revenues in the quarter ended June 30, 1998. Such
consulting services can be offered at relatively higher rates than those for
Original Equipment Manufacturer (OEM) funded research and development fees, but
do not generally have the additional revenue potential provided by a royalty or
license agreement with the OEM. Professional services revenues are usually
billed and recognized based on time and materials expended rather than based on
the attainment of milestones specific to the OEM contracts. The majority of the
current professional service projects involve consulting related to technology
previously developed by Geoworks. Cost of services are those expenses incurred
to provide professional services, including compensation, travel, related direct
costs and facilities overhead. In general, the employees providing these
services had previously been engaged in fulfilling the Company's obligations
under OEM research and development contracts.
2. NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is presented in
accordance with the requirements of Statement of Financial Accounting Standards
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.
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GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMPREHENSIVE LOSS
Comprehensive loss consists of the following:
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Three months ended
June 30,
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1999 1998
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Net loss $ (1,844) $ (5,173)
Foreign currency translation adjustments 1 6
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Comprehensive loss $ (1,843) $ (5,167)
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4. 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 shifted its resources to
support a business plan focused on opportunities in the mobile e-commerce and
information services market. 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 restructuring charges consisted 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.
The following table summarizes the restructuring activity (in thousands):
<TABLE>
<CAPTION>
Write-off
of Accrual
property of
Severance and and lease
related charges equipment commitments Total
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<S> <C> <C> <C> <C>
Total restructuring charges $ 247 $ 501 $ 1,042 $ 1,790
Amount paid 59 - - 59
Amount written off - 501 - 501
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Accrued liabilities at March 31, 1999 188 - 1,042 1,230
Activity in quarter
ended June 30,1999
Amount paid 149 - 156 305
=============================================================
Accrued liabilities at June 30, 1999 $ 39 - $ 886 $ 925
=============================================================
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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.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
Many of the discussions in this Form 10-Q for Geoworks Corporation ("Geoworks"
or the "Company") are forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 ( the "Exchange Act"). Words such as "expects,"
"anticipates," "believes," "intends," "plans," "seeks," "estimates," and
variations of such words and similar expressions are intended to identify these
forward-looking statements. In particular, discussions of the following topics
include forward-looking statements: the anticipated emergence, timing and size
of the market for mobile 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
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 11.
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.
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Results of Operations
Net Revenues
Net revenues increased $140,000, or 9%, during the quarter ended June
30, 1999, in comparison with the corresponding quarter of the previous fiscal
year. The increase was attributable to new professional services revenues and
increased license revenues which more than offset the lack of research and
development fees revenues in the quarter ended June 30, 1999. The shift in
revenues to professional services from research and development fees is
consistent with the Company's shift of focus to becoming a mobile e-commerce and
information services provider.
Professional services revenues for the quarter were $1,149,000 versus
zero in the quarter ended June 30, 1998. In the second quarter of fiscal 1999,
the Company began providing some of its non-recurring engineering services on a
consulting basis rather than as Original Equipment Manufacturer (OEM) funded
research and development. Such consulting services can be offered at relatively
higher rates, but do not generally have the additional revenue potential
provided by a royalty or license agreement with the OEM. Professional services
revenues are usually billed and recognized based on time and materials expended
rather than based on the attainment of milestones specific to the OEM contracts.
The majority of the current professional service projects involve consulting
related to technology previously developed by Geoworks. As of June 30, 1999, the
Company had approximately $3.8 million of potential additional revenue to earn
from professional services under the terms of executed contracts which have
established contract values. There can be no assurance that such revenues will
be recognized because it is possible that the Company will not be able to
assemble or maintain the engineering staff and resources necessary to meet the
customers' currently anticipated scope of these projects, and because there can
be no assurance that these customers will not reduce the scope or delay the
schedules of the projects contemplated in these contracts.
Although the Company continues to have some research and development
fee contracts, no revenue was recognized on these contracts in the quarter ended
June 30, 1999. During the quarter ended June 30, 1998, $1,285,000 in research
and development fees were recognized. As discussed above, the Company's business
model is changing and OEM funded research and development contracts are not
being actively pursued. Research and development fees represent amounts received
pursuant to contracts with OEM licensees under which the Company is reimbursed
for a portion of its development costs related to specific products up to the
amounts specified in the contracts. The Company is typically paid by the OEM
licensee as certain project milestones are achieved. Revenue under these
research and development arrangements is recognized under the
percentage-of-completion method. The amount of such revenue can vary
considerably among periods, depending upon the specific terms of the Company's
contracts with OEM licensees and the relative level of development effort
devoted to projects in which research and development fees are charged. As of
June 30, 1999, the Company had approximately $390,000 of potential additional
revenue to earn in research and development fees under the terms of current
contracts with OEM licensees. There can be no assurance that the Company will
achieve the milestones required to earn such fees.
During the quarter ended June 30, 1999, license and other revenue
increased $276,000, or 133%, in comparison with the corresponding quarter of the
previous fiscal year. License and other revenue in the quarter ended June 30,
1999 increased primarily due to royalties received as a result of increased
shipments of units sold by a single OEM licensee. The Company's realization of
license or royalty revenues from OEM licensees is uncertain due to potential
delays and risks in the commercial release and acceptance of such products.
Although royalty
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revenues increased in the quarter ended June 30, 1999, because the Company has
sold source code outright and terminated a number of license agreements over the
past two fiscal years, and because the Company is now focusing on mobile
e-commerce and information services, the number of OEMs subject to license
agreements which could generate future royalty revenues has decreased.
Historically, license and other revenue has also included non-recurring items
such as one-time source code license fees, or fees received due to changes in
the terms of license agreements resulting from amendment, restructuring, or
termination of these agreements.
Operating Expenses
Cost of Services. Cost of services are those expenses incurred to
provide professional services consulting, including compensation, travel,
related direct costs and facilities overhead. In general, the employees
providing these services had previously been engaged in fulfilling the Company's
obligations under OEM research and development contracts. The Company's gross
margin percentage on professional services revenues was 31% during the quarter
ended June 30, 1999. The gross margin recognized on such services is subject to
several variables, particularly the average rates charged for these consulting
services, the ability of the Company to hire and retain engineering personnel at
competitive rates, and the utilization rates of those personnel. As the Company
has a limited history in providing such services, the gross margin percentage
for the quarter is not necessarily indicative of future operating results.
Cost of License Revenue. The Company's gross margin percentage on
license revenue was 86% during the quarter ended June 30, 1999 and 91% in the
corresponding quarter of the previous fiscal year. Cost of license revenues in
both periods consisted of license payments to third parties for software that is
incorporated into the Company's software.
Sales and Marketing. Sales and marketing expense decreased $313,000,
or 25%, during the quarter ended June 30, 1999 in comparison with the
corresponding quarter of the previous fiscal year. Due to the change in the
Company's business focus, the Company has narrowed the scope of its sales and
marketing activities during the current fiscal year, and as a result has reduced
its sales and marketing staff by approximately 45% compared to the quarter ended
June 30, 1998. The cost savings from headcount reductions have been partially
offset by increased spending on marketing programs, including those to support
the launch of the Company's discopro.com service offering, and a termination fee
paid in connection with the cancellation of a long term agreement with the
Company's primary sales agent in Japan.
Research and Development. Research and development expense decreased
$3,761,000 or 80%, during the quarter ended June 30, 1999 in comparison with the
corresponding period of the previous fiscal year. This decrease is attributable
principally to reductions in staffing and related costs, including those
resulting from the restructuring actions taken in the fourth quarter of fiscal
1999. Such staff and expense reductions were necessary as the Company reacted to
reduced levels of OEM funding. The Company has also narrowed the scope of its
internal research and development to focus on its mobile e-commerce and
information services business plan. Research and development headcount has been
reduced approximately 75% compared to the quarter ended June 30, 1998.
Approximately 10% of the reduction in research and development headcount is due
to the shift of staff into professional services consulting.
General and Administrative. General and administrative expense
decreased $209,000 or 23%, during the quarter ended June 30, 1999 in comparison
with the corresponding period of the previous fiscal year. This decrease is due
to reduced staffing costs and reduced professional fees consistent with the
reductions in staffing and activity in other areas of the Company due to the
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restructuring actions taken in the fourth quarter of fiscal 1999 and the change
in the Company's business focus.
Other Income (Expense)
Interest income declined $56,000, or 29%, during the quarter ended June
30, 1999, in comparison with the corresponding period of the previous fiscal
year. This decrease was attributable primarily to reduced cash balances
available to the Company for short-term investment as a result of the Company's
operating deficits over the preceding 12 months. Interest expense decreased
$9,000, or 50%, during the quarter ended June 30, 1999, in comparison with the
corresponding period of the previous fiscal year, due primarily to reduced
levels of capital lease and debt obligation liabilities.
Provision for Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Income tax expense consists primarily of foreign income tax withholding
on foreign source royalties paid to the Company. The provision for income taxes
increased by $130,000 or 432% in the quarter ended June 30, 1999 in comparison
with the corresponding period of the previous fiscal year due to an increased
level of royalties payments received in the quarter.
Liquidity and Capital Resources
The Company's cash, cash equivalents, and marketable securities
declined to $13.5 million at June 30, 1999 from $13.7 million at March 31, 1999.
Although the net loss in the quarter was $1.8 million, the net change in cash
and marketable securities was only $243,000, due to changes in working capital,
principally collections of accounts receivable and increased deferred revenue
liability. The decrease in net cash and marketable securities in the current
quarter was significantly less than the $3.3 million decrease in the quarter
ended June 30, 1998 and was approximately equal to the cash used by the Company
in the quarter ended March 31, 1999, before including the $5.0 million
investment raised in a private placement during that quarter. This reduced usage
of cash is attributable primarily to actions taken by Company management to
better align its cost structure with revenue projections, including
restructuring moves made in the quarter ended March 31, 1999.
The Company expects to increase its investment in the development of
its mobile e-commerce and information services business, including additional
sales, marketing and research and development spending, and expects to incur
additional substantial operating losses at least through the current fiscal year
ending March 31, 2000. The Company 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 which has filed a
preliminary Form S-1 with the Securities and Exchange Commission, and 540,000
shares of common stock of Global PC, Inc., another privately held company.
The Company's purchases of property and equipment in the quarter ended
June 30, 1999 were insignificant and were reduced compared to the same quarter
of the prior year, consistent with reductions in personnel resulting from
restructuring moves and reduced levels of OEM
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funded research and development activities. Marketable securities transactions
in the quarters ended June 30, 1999 and 1998 were performed when necessary to
meet operating cash requirements.
Payments of capital lease and debt obligations were reduced in the
quarter ended June 30, 1999 compared to the same quarter of the prior year
reflecting the reduced levels of these liabilities in the current quarter
compared to the same quarter of the prior year. Proceeds from issuance of common
stock were generated from the employee stock option plan.
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 June 30, 1999, the
Company had an accumulated deficit of $90.9 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 professional services 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 which 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
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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 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.
In June 1999, the Company introduced Discopro.com, its first information
service. The service features discounts and promotions which are delivered to
digital cell phones and alphanumeric pagers. Although it is one of the first
services to offer free, advertising sponsored services delivered to mobile
devices, there can be no assurances that the service will attract the number of
advertisers or customers necessary to achieve market acceptance or that the
market share captured, if any, will be adequate to provide a reasonable return
on investment. The Company plans to offer additional services, but there can be
no assurances that Company will bring such services to market or that such
services would achieve market acceptance.
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 market
segments. 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 which 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 which 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.
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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 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 and 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 the Company's existing and yet to be released
products and services in new markets is critical to its future success. The
Company has made progress toward this development goal, but acceptance of its
newly developed products and services in the market is uncertain.
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 which 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
13
<PAGE> 15
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 devices 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
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
14
<PAGE> 16
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 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
15
<PAGE> 17
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 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 by 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 fiscal 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 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.
17
<PAGE> 19
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
PART II -- OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.28 Exhibit A-2 to the Geoworks Corporation - Mitsubishi Electric
Corporation Technology Agreement, effective June 30, 1999 ###p
27.1 Financial Data Schedule
###p Confidential treatment has been requested and is pending
as to portions thereof
b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended June 30,
1999.
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
executive officer.
Date: August 13, 1999
GEOWORKS CORPORATION
by: /s/ Stephen T. Baker
----------------------------------
Stephen T. Baker
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
19
<PAGE> 21
GEOWORKS CORPORATION
EXHIBITS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.28 Exhibit A-2 to the Geoworks Corporation - Mitsubishi Electric
Corporation Technology Agreement, effective June 30, 1999 ###p
27.1 Financial Data Schedule
</TABLE>
20
<PAGE> 1
Exhibit 10.28
EXHIBIT A-2
THE MELCO V291 PRODUCT
1.1 IDENTIFICATION OF THE LICENSED TECHNOLOGY:
###
2. MELCO PAYMENTS
2.1 ###
###
2.2 Payment Information
MELCO shall make wire transfer payments in US dollars to Geoworks as
follows:
###
21
<PAGE> 2
3. TERM OF AGREEMENT AS TO THE V291 PROJECT
The term of this Project Exhibit shall be one calendar year from April
1, 1999 through March 31, 2000.
4. PRODUCT DEFINITION
###
5. PROJECT DOCUMENTS
5.1 SPECIFICATIONS
###
5.2 PROJECT ASSESSMENT MEETINGS: The designated project managers of
MELCO and GEOWORKS will meet to determine and assess the status of the
project and set goals for the fiscal quarter to follow on the following
period:
September 1-2, 1999
December 1-2, 1999
5.3 FINAL PROJECT REVIEW AND ASSESSMENT MEETING:
March 1-2, 2000
The purpose of this meeting is for MELCO to raise any issues relating
to GEOWORKS' performance together with MELCO'S proposal for resolution,
including any time deadlines. MELCO must deliver at the meeting on
March 1-2, 2000 a definitive list of issues and proposed resolutions.
GEOWORKS' response will be due by March 10, 2000. In the event all
issues are not resolved by March 17, 2000, the parties will meet in
person on March 22-23, 2000 for the purpose of resolving all issues to
completion. In the event the parties do not resolve all issues at that
time, any portion of retained NRE fees relating to resolved issues will
be paid to Geoworks, and any portion of the retained NRE fees still
relating to disputed issues will be placed in escrow for final
determination by arbitration under Section 16.2 of the Technology
License Agreement dated as of November 12, 1997.
5.4 Project Plan
To be attached
5.5 QA Plans
To be attached
22
<PAGE> 3
6. Project Managers:
6.1 Identification of the Geoworks Project Manager:
###
6.2 Identification of the MELCO Project Manager:
###
6.3 PROCEDURE FOR CHANGING PROJECT MANAGER:
A Party may change its designated Project Manager by giving notice of
the change to the other Party, in the manner set forth in Section 16.8
(Notices).
23
<PAGE> 4
LIST OF DOCUMENTS TO BE ATTACHED TO EXHIBIT A-2
Acceptance Criteria
Specifications: To be determined
Project Plan
QA Plan
24
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> MAR-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,399
<SECURITIES> 11,083
<RECEIVABLES> 2,542
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,436
<PP&E> 3,708
<DEPRECIATION> (2,851)
<TOTAL-ASSETS> 17,315
<CURRENT-LIABILITIES> 5,764
<BONDS> 0
0
0
<COMMON> 102,397
<OTHER-SE> (90,846)
<TOTAL-LIABILITY-AND-EQUITY> 17,315
<SALES> 0
<TOTAL-REVENUES> 1,633
<CGS> 0
<TOTAL-COSTS> 861
<OTHER-EXPENSES> 2,581
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (1,679)
<INCOME-TAX> 165
<INCOME-CONTINUING> (1,844)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,844)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
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