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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, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to .
Commission file number 0-23926
GEOWORKS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 94-2920371
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
960 ATLANTIC AVENUE, ALAMEDA, CALIFORNIA 94501
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(Address of principal executive offices) (Zip code)
510-814-1660
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date:
As of August 07, 2000, the Company had outstanding 21,650,580 shares of Common
Stock, $ 0.001 par value per share.
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GEOWORKS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets: June 30, 2000 and March 31, 2000 2
Condensed consolidated statements of operations: Three months ended
June 30, 2000 and 1999
3
Condensed consolidated statements of cash flows: Three months ended
June 30, 2000 and 1999 4
Notes to condensed consolidated financial statements: June 30, 2000 5-6
Item 2. Management's discussion and analysis of financial condition and results
of operations 7-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GEOWORKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
-------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,301 $ 1,709
Marketable securities 13,761 15,495
Accounts receivable 755 1,492
Prepaid expenses and other current 433 417
assets
------- -------
Total current assets 16,250 19,113
Property and equipment, net 1,855 1,155
Long-term investments 18,331 21,180
Other assets 55 11
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$36,491 $41,459
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable $ 657 $ 1,173
Accrued liabilities 1,786 2,025
Deferred revenue 1,222 1,629
------- -------
Total current liabilities 3,665 4,827
Stockholders' equity 32,826 36,632
------- -------
$36,491 $41,459
======= =======
</TABLE>
See accompanying notes
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GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Net revenues:
Professional services $ 2,055 $ 1,149
License and other revenue 1,975 484
-------- --------
Total net revenues 4,030 1,633
Operating expenses:
Cost of services 1,189 795
Cost of license revenue 18 66
Sales and marketing 1,473 930
Research and development 1,646 949
General and administrative 1,313 702
-------- --------
Total operating expenses 5,639 3,442
-------- --------
Operating loss (1,609) (1,809)
Other income (expense):
Interest income 228 139
Interest expense -- (9)
-------- --------
Loss before income taxes (1,381) (1,679)
Provision for income taxes 173 165
-------- --------
Net loss $ (1,554) $ (1,844)
======== ========
Net loss per share (basic and diluted) $ (0.08) $ (0.10)
======== ========
Shares used in per share
computations 18,551 17,643
======== ========
</TABLE>
See accompanying notes
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GEOWORKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
June 30, June 30,
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss $ (1,554) $ (1,884)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization 202 125
Changes in operating assets and liabilities (486) 1,493
--------- ---------
Net cash used in operating activities (1,838) (226)
--------- ---------
Investing activities:
Purchases of property and equipment (888) (9)
Sales of marketable securities 1,734 872
--------- ---------
Net cash provided by (used in) investing activities 846 863
--------- ---------
Financing activities:
Payments of capital lease and debt obligations -- (19)
Net proceeds from issuance of common stock 542 20
--------- ---------
Net cash provided by (used in) financing activities 542 1
--------- ---------
Foreign currency translation adjustments 42 1
--------- ---------
Net increase (decrease) in cash and cash equivalents (408) 639
Cash and cash equivalents at beginning of period 1,709 1,760
--------- ---------
Cash and cash equivalents at end of period $ 1,301 $ 2,399
========= =========
</TABLE>
See accompanying notes
4
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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, 2000 and 1999 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,
2000. The results of operations for the three months ended June 30, 2000 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.
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.
3. LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
-------- --------
<S> <C> <C>
Wink Communications,Inc. 14,969 16,380
MyTurn.com, Inc. 3,359 4,797
Other 3 3
-------- --------
Total 18,331 21,180
======== ========
</TABLE>
The Company's equity securities are classified as available for sale. The
carrying value of the Company's investments in Wink Communications,Inc.
("Wink") and MyTurn.com, Inc. ("MyTurn") are determined based on the closing
price of these companies common shares at each balance sheet date. The fair
value of these assets will fluctuate with the market price of Wink and MyTurn
common shares. The unrealized gain on these shares, which is equal to the fair
value of the investment, is included in stockholders' equity. Gains recognized
on the sale of these investments are reported as other income. No such sales
were made in the quarters ended June 30, 2000 or June 30, 1999.
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GEOWORKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMPREHENSIVE LOSS
Comprehensive loss consists of the following:
<TABLE>
<CAPTION>
Three months
ended June 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Net loss $ (1,554) $ (1,844)
Unrealized loss on investments (2,849) --
Foreign currency translation
adjustments 42 1
-------- --------
Comprehensive loss $ (4,361) $ (1,843)
======== ========
</TABLE>
5. SUBSEQUENT EVENTS
On July 24, 2000, the Company acquired through its wholly-owned subsidiary,
AirBoss Acquisition Corp., a New Jersey corporation ("AirBoss Ac") substantially
all of the assets of an established, separate, and unincorporated division of
Telcordia Technologies, Inc. ("Telcordia"), an SAIC company. The acquired
division will consist of Telcordia's "AirBoss Business Unit" and "AirBoss
Wireless Solutions Business Unit," which operated a software and wireless
technology services business. As purchase consideration for the acquired assets,
AirBoss Ac assumed substantially all the liabilities of the AirBoss Business and
Geoworks issued to Telcordia approximately three million shares of Geoworks'
common stock.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27a of the Securities Act of 1933 and Section 21e of the
Securities Exchange Act of 1934. Our actual results could differ materially from
those projected in forward-looking statements as a result of a number of risks
and uncertainties, including the risks discussed in this Form 10-Q. See "Risk
Factors Affecting Future Operating Results" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below. Statements are
made as of the date of the filing of this Form 10-Q with the Securities and
Exchange Commission and you should not rely on them as of any other date. We
expressly disclaim any obligation to update any information except as may be
required by law.
Results of Operations
Net Revenues
<TABLE>
<CAPTION>
Three Months Ended Change
------------------------------ --------------------------
June 30, 2000 June 30, 1999 $ %
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Net Revenues:
Professional Services $ 2,055 $ 1,149 $ 906 79%
License and other
Revenue 1,975 484 1,491 308%
---------- ---------- ---------- ----------
Total net revenues $ 4,030 $ 1,633 $ 2,397 147%
========== ========== ========== ==========
</TABLE>
Net revenues increased $2,397,000, or 147%, during the quarter ended
June 30, 2000, in comparison with the corresponding quarter of the previous
fiscal year. The increase was attributable to increased professional services
and license revenues. During our continued transition from a provider of
operating systems and related research and development to becoming a mobile
e-commerce and information services provider, professional services revenues
have been a primary focus for revenue and cash generation. We had three primary
customers for these services in the quarter ended June 30, 2000 which engaged us
for more hours than the two such customers in the same quarter of the prior
year. In addition, our rates have increased as we have obtained new customers
and renewed an existing contract. Our professional service projects involve
consulting related to technology previously developed by us, as well as
development of new technologies supporting mobile communications. The
professional services revenues ultimately recognized depend upon our ability to
hire and maintain the engineering staff and resources necessary to meet our
customers' desired scope of work as well as our ability to attract additional
customers for these services. Our consulting relationship with one major
customer wound down in the first quarter of fiscal year 2001 as the current
project reached completion.
Our license and other revenues are generated from technology we have
developed that is included in smart phones, various related software and
operating systems, and our wireless internet server. License and other revenues
increased in the quarter ended June 30, 2000 as compared to the same period of
the prior year, primarily due to the receipt of a $1.2 million dollar royalty
due in the quarter because a customer did not meet the minimum unit shipment
volume requirements of an agreement signed in fiscal year 1999. A significant
portion of our license revenues continue to be generated from shipments of
products utilizing operating systems
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we developed in prior years, that we believe, are nearing the end of their life
cycles and subsequent royalty revenues of this nature are expected to decrease
accordingly. Although royalty revenues increased in the quarter ended June 30,
2000, 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
Original Equipment Manufacturers subject to license agreements which could
generate future royalty revenues has decreased.
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. Cost of services increased
$394,000, or 50% in the quarter ended June 30, 2000 as compared to the quarter
ended June 30, 1999. This increase is due to the 79% increase in the volume of
professional services revenue discussed above.
The Company's gross margin percentages on professional services revenues
were 42% and 31% during the quarters ended June 30, 2000 and 1999, respectively.
The gross margin percentage improved in the quarter as compared to the same
quarter of the prior year because of increased rates charged for such services
as well as decreased average costs to provide such services due to an improved
mix of the engineering resources used to provide these services. 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. Since we have a limited history in
providing such services, the gross margin percentages achieved to date are not
necessarily indicative of future operating results.
Cost of License Revenue. Cost of license revenues consists of license
payments to third parties for software that is incorporated into our software.
Cost of license revenues decreased to $18,000 in the quarter ended June 30,
2000, as compared to $66,000 in the quarter ended June 30, 1999. Gross margin
percentages on license and other revenue were 99% and 86% in the quarters ended
June 30, 2000 and June 30, 1999, respectively. Gross margin percentage was
increase in the quarter ended June 30, 2000 because a lesser proportion of the
license and other revenues were subject to third party software license
agreements.
Sales and Marketing. Sales and marketing expense increased $543,000, or
58%, during the quarter ended June 30, 2000 in comparison to the quarter ended
June 30, 1999. This increase is due primarily to increased headcount as we
expanded our efforts to market our new services, particularly the Mobile ASP and
Premion Server+ offerings, to customers. In addition, we have increased business
development activities. These increased personnel costs were partially offset by
reduced consulting expenses because of the increased internal resources
available.
Research and Development. Research and development expense increased
$697,000 or 73%, during the quarter ended June 30, 2000 in comparison with the
corresponding period of the previous fiscal year. This increase is attributable
principally to increased staffing and related costs, including recruiting
expenses, as we expanded our research efforts and continued to develop the
operational capability necessary to support our new business plans.
General and Administrative. General and administrative expense increased
$611,000 or 87%, during the quarter ended June 30, 2000 in comparison with the
corresponding period of the
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previous fiscal year. This increase is due to increased staffing, including
recruiting, and legal costs. We have added headcount to support the increasing
size of the company and to put the administrative infrastructure in place to
support the new business plans. Legal expenses related to enforcing and
defending our patent rights, including the Phone.com related litigation,
increased by approximately $250,000 in the quarter ended June 30, 2000 as
compared to the corresponding period of the previous fiscal year. Legal fees
are expected to continue to increase as a result of the filing of a lawsuit by
Phone.com challenging the validity and enforceability of our Flex UI patent and
our counter-suit against Phone.com for patent infringement. See further
discussion at Risk Factors Affecting Future Operating Results; "Ability to
Capitalize on Intellectual Property Rights and Patent Portfolio."
Other Income (Expense)
Interest income increased $89,000, or 64%, during the quarter ended June
30, 2000, in comparison with the corresponding period of the previous fiscal
year. This increase was attributable primarily to higher cash balances available
for short-term investment. Net cash used in operations was significantly reduced
due to improved operating performance and we generated a total of $4.0 million
from the sales of Wink stock in the third and fourth quarters of the fiscal year
ended March 31, 2000. We have also received approximately $3.8 million from the
issuance of our common stock in the past 12 months, including $0.5 million in
the quarter ended June 30, 2000. These proceeds have been generated from our
stock option and employee stock purchase plans. Interest expense was
insignificant in the quarter and the same quarter of the prior year as we have
had minimal balances of debt outstanding. As we increase our investment in the
assets and infrastructure to support our new business plans, we will consider
financing alternatives which could increase the amount of interest expense
incurred in the future.
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 $8,000 or 5% in the quarter ended June 30, 2000 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 total cash, cash equivalents, and marketable securities
have declined to $15.1 million at June 30, 2000 from $17.2 million at March 31,
2000. The net loss in the quarter of $1.6 million was the primary reason for
this decline. In addition, changes in working capital and purchases of property
and equipment used cash in the quarter. In the quarter ended June 30, 1999, we
had a larger net loss, but used changes in working capital to offset much of
the cash impact.
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, 2001. The Company anticipates that its existing capital resources will
be adequate to satisfy its operating and capital requirements at least through
March 31, 2001.
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The Company's purchases of property and equipment in the quarter ended
June 30, 2000 were significantly higher as compared to the same quarter of the
prior year. This is consistent with the increase in personnel resulting from
increases in staffing and development of the mobile e-commerce and information
services business. Marketable securities transactions in the quarters ended June
30, 2000 and 1999 were performed when necessary to meet operating cash
requirements.
Payments of capital lease and debt obligations ended during fiscal year
end 2000. Proceeds from issuance of common stock were generated from the
employee stock option plan.
Risk Factors Affecting Future Operating Results
History of Operating Losses; Anticipated Future Losses. Since Geoworks
was formed in 1983, our revenues have been limited, and we have incurred
significant losses, and suffered substantial negative operating cash flow. As of
June 30, 2000, we had an accumulated deficit of $91.6 million, and had incurred
operating losses of $1.6 million in the quarter ended June 30, 2000 and
approximately $5.2 million, $16.3 million and $16.0 million in the fiscal years
ended March 31, 2000, 1999 and 1998 respectively. Although we limited this in
our most recent fiscal year, we expect substantial annual operating losses in
the fiscal year ending March 31, 2001, and it is unclear when, if ever, we will
be profitable. We plan to achieve profitability by managing operating expenses,
maximizing professional services consulting revenues, and focusing our resources
on the mobile e-commerce and information services markets. We will also increase
our focus on licensing our server technology, selling our Mobile ASP(TM) and
Mobile Site(TM) products, and licensing our patent portfolio. However, we cannot
assure you that our efforts will be successful.
Our objective is to develop, market, sell and license products and
services for the mobile communications market. Our success will depend on the
growth rate and acceptance of new mobile communications products, our ability to
establish business relationships and alliances with leading industry partners,
our ability to introduce and sell successful products and services which
generate net revenues through mobile e-commerce and information services, and
our ability to stake out and maintain a competitive advantage in the midst of
intense competition, as well as other factors.
Ability to Capitalize on Intellectual Property Rights and Patent
Portfolio. On January 19, 2000, we announced to the WAP Forum and its members
that we hold essential Intellectual Property Rights (IPR) for the Wireless
Application Protocol and the Wireless Markup Language (WML) specification
(collectively the "WAP Specification"). We also announced that we believe our
patents for flexible user interface technology (U.S. Patent No. 5,327,529 and
Japanese Patent No. 2,794,339) are potentially implicated by products and
services based on the WAP Specification and placed into the stream of commerce
in the United States and Japan. Simultaneously, we announced our comprehensive
licensing program to make our technology available to WAP Forum members,
non-members, and other industry participants. In February 2000 we clarified our
licensing program. We have an active program for communicating with new WAP
Forum members and non-member companies entering the wireless Internet and data
communications markets.
In connection with our licensing program, we have posted on our web site
(www.geoworks.com) a white paper entitled "The Geoworks Wireless Internet
Patent: Invention and Innovation in Flexible User Interface Technology." The
white paper details many issues of interest to WAP Forum members and
non-members, including licensing details, legal issues and technical
information. The WAP Forum is an industry association devoted to developing a de
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facto world standard for wireless information and telephony services on digital
mobile phones and other wireless terminals. We are a member of the WAP Forum.
Other member companies include Ericsson Mobile Communications AB, Microsoft,
Motorola, Nokia Mobile Phones, Phone.com Inc., and QUALCOMM Inc., among more
than 500 leading companies around the world.
Prior to launching our licensing program, we met certain compliance
protocols outlined in the WAP Forum membership documents. In May of 1999, we
were one of the first WAP Forum members to register and declare that our
patented flexible user interface technology was essential IPR in the WAP
Specification. During the latter part of 1999, we obtained an independent
analysis of our Flex UI patent as well as the WAP Specification. We received
multiple legal opinions indicating that the WAP Specification infringed our
patented technology. The infringement analysis, and our licensing program, were
prepared with the help of experts from distinguished law firms recognized as
leaders in patent law and licensing.
On April 25, 2000, Phone.com filed a declaratory relief complaint
alleging that our Flex UI patent is invalid and unenforceable. We believe
Phone.com's claims are without merit. Our patent was awarded in 1994 after a
four-year interactive prosecution administered by the United States Patent &
Trademark Office. Under U.S. patent law the validity of a patent issued by the
United States Patent & Trademark Office is presumed valid. We do not believe the
Phone.com litigation will overcome this legal presumption.
On June 16, 2000, we announced that we had filed a countersuit in the United
States District Court in San Francisco against Phone.com. The lawsuit, which was
served to Phone.com on the previous day, seeks to demonstrate that the activity
of Phone.com and its licensees utilizing Phone.com's UP Server Suite and UP
Browser infringes on Geoworks Flexible User Interface patent (US Patent
#5,327,529).
On July 5, 2000, we announced that we had implemented new licensing terms
beginning July 1, 2000 for companies that use our Flexible User Interface patent
(US Patent #5,327,529). We recognized by the number of requests we have received
for additional information that the licensing program is a complex matter. As a
result, we are offering an extension of the previous licensing terms through
September 1, 2000 to any company that contacts Geoworks by July 31, 2000.
Companies negotiating license terms will continue to receive the current
introductory annual rate of $20,000 and will not be held responsible for any
past infringement of the patent if the license is completed by September 1,
2000. Companies that do not become licensees by September 1 will be offered a
licensing fee of $100,000 for a 3-year contract and may remain liable for any
past infringement of the Geoworks Flex UI patent. Certain server license rates
will not be changed. Applicable fees may also be waived for smaller companies.
Through July 2000, we have licensed the Flex UI patent to eight
companies, including Toshiba. However, because of the short time period since we
announced the licensing program, the Phone.com lawsuit, the relative immaturity
of the WAP market, and the complex legal and technical issues potential
licensees must analyze in preparing to enter a licensing agreement with us, we
cannot predict the revenue impact. In addition, we do not know whether potential
licensees will agree to sign license agreements or whether it will be necessary
for us to pursue appropriate legal remedies. The expenses required to pursue
legal remedies could be significant. Although we believe we have adequate
resources to support our IPR licensing program, we can not be certain of the
outcome of related litigation. Litigation, regardless of its outcome, could
result in significant expenses and be a diversion of our resources and could
have a material adverse effect on our operating results and financial condition.
Adequacy of Capital Resources to Execute Business Plan. We believe our
existing capital resources will be adequate to satisfy our operating and capital
requirements for at least the next twelve months. We expect to incur additional
losses for the fiscal year ending March 31, 2001, and may require substantial
additional capital beyond that time to successfully execute our business plan.
The amount of capital that we will need in the long-term depends upon many
factors, such as the amount of revenue we receive from operations, working
capital requirements, investment in product development and sales and marketing
activities, our legal expenses, our capital expenditures, and potential
strategic investments or acquisitions. Historically, we have sold equity
securities, obtained advance payments of license revenue and professional fees,
and obtained short-term loans as sources of funding. If we need additional
financing to execute our business plan, there can be no assurance that it will
be available or that if available at all, the terms will be favorable to us or
our stockholders without substantial dilution of ownership and rights. If
adequate funds are not available to satisfy either short-term or long-term
requirements, we may be required to significantly curtail the scale of our
operations, forego market or research opportunities, obtain funds through
arrangements with strategic partners or others on unfavorable terms, or reduce
our ability to enforce our proprietary technology rights.
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Competition in Mobile E-Commerce and Information Services. We have and
expect more competition in the mobile e-commerce and information services
markets. Our competitors include service providers, wireless ASP's and Internet
content and transaction providers. These companies have more cash available and
greater technical and marketing resources and name recognition and have or soon
may have mobile e-commerce and information services that may compete directly
with our products and services. These companies include Phone.com, Infospace,
Aether Systems, Puma Technologies, i3 Mobile, 724 Solutions, Oracle, Microsoft,
Yahoo and other Internet portals.
In February 2000, we introduced Mobile ASP(TM) (Application Service
Provider), as our first information service to businesses looking to reach their
end user customers through mobile devices. Mobile ASP(TM) is designed to provide
companies with a modular and scalable mobile communications platform they can
use to extend their operations, communications and customer service initiatives.
Mobile ASP(TM) clients select from modules that meet their customer requirements
for mobile data and service solutions. In Mobile ASP(TM), we offer six modules
including the Premion(TM) Server+ software, Secure Application Hosting, Wireless
Network Integration, Systems Integration, Application Development, and 7x24
Customer Care.
In May 2000, we introduced Mobile Site(TM) to companies looking for a
mobile data solution with fewer features and quick implementation. The Mobile
Site(TM) service dynamically pulls data from any company's Web site and programs
it in a format suitable for transmission to WAP, HDML, SMS, Palm and HTML mobile
devices. Mobile Site(TM) allows any business to mobilize its existing Web
content for any mobile device affordably and quickly. With Mobile Site(TM), our
clients can rapidly deploy a mobile service to their customers in less than two
weeks.
We plan to offer additional mobile e-commerce and information services
to business and consumer end users, but we do not know whether we can market
these services fast enough or whether they will be accepted by the market. The
mobile e-commerce and information services marketplace is expected to evolve
rapidly. Our competitors may develop and market services that are superior to
ours and their offerings may achieve greater market acceptance.
Dependence on Development of Mobile Device Content and Services. We
believe our long-term financial success depends on our ability to profit from
the delivery of content and services for mobile communication devices. We plan
to generate revenue from sales of internally developed client and server
software, mobile information hosting and delivery services using the ASP revenue
model (monthly subscription fees), transaction revenue from mobile e-commerce
services, and professional services for technology consulting, systems
integration and content applications development. However, we cannot assure you
that we will be able to derive significant revenue from any of these sources.
Many of our competitors have more widely deployed wireless server technology,
greater client development resources, and a larger market presence. We cannot
assure you that we will be able to successfully develop better technology,
market additional products and services, or obtain greater distribution rights
to third-party products or content than our competitors, or that our services
will achieve greater acceptance in the market. Further, we have historically
marketed operating systems and applications, and we have limited experience
marketing server and mobile e-commerce and information services. Finally,
practical and effective distribution of content and services to mobile
communication devices 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 network infrastructure. We cannot assure you that
mobile information services will prove to be feasible or that our technology
will be suitable for the distribution infrastructure as it develops. If we
cannot derive significant revenue from one or more of the foregoing sources,
there will be material adverse impact to our long-term business, results of
operations and financial condition.
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Risks of Software Product Development and Risk of Delays. Our future
success will depend on our ability to develop and release, on a timely basis,
new application software products and new mobile e-commerce and information
services. It is critical that our current and future products and services be
widely accepted in new markets. We have made progress toward these goals, but
cannot guarantee that our products and services will be widely accepted in the
market.
Because of the short product life cycles and intense competition
expected in the mobile communicating device market, and the mobile e-commerce
and information services markets, the timeliness of new product and service
introductions and shipments can be critical. We cannot assure you that we will
be able to develop, introduce and ship new products or services fast enough.
Furthermore, from time to time, our competitors may announce new products,
features, technologies or services that have the potential to replace or shorten
the life cycle of our existing offerings. These announcements may cause our
customers to defer purchasing our products and services. Delays or difficulties
associated with developing or introducing new products or services could have a
material adverse effect on our business, operating results and financial
condition.
Dependence on Limited Number of Revenue Generating Customers. We have a
history of dependence on a few key customers. In the quarter ended June 30,
2000, three customers accounted for 84% of our total net revenues. Therefore, a
termination or decline in our business relationship with any of our existing
customers could have a material adverse impact on our business, financial
condition, and results of operations, and we cannot assure you that we will be
able to sustain these relationships and derive comparable revenues from them in
the future. Our relationship with one of these customers will wind down in the
first quarter in fiscal year 2001 as the current project reaches completion.
Our mobile information services revenue depends on signing up new
customers with a large installed base of users. Our 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 on
our software. Our professional services revenue depends on a limited number of
customer contracts; these revenues are also constrained by the number of
chargeable current employees and the rate at which new highly skilled technical
employees can be hired. We earn a substantial portion of our revenue from
customers in Europe and Japan, and we view these regions as strategic to our
business objectives. Economic difficulties within Europe and/or Japan could have
a material adverse effect on our ability to generate revenue from our customers
in these regions and from customers who market their products within Europe and
Japan.
Current and Future Acquisitions May Adversely Affect our Business. As
part of our business strategy, we have made and expect to continue to make
acquisitions of businesses that offer complementary products, services and
technologies. On July 24, 2000, we acquired the AirBoss Business Unit and the
AirBoss Wireless Solutions Business Unit, a developer of a software and
wireless technology services business. Our acquisitions are and will be
accompanied by the risks commonly encountered in acquisitions of businesses.
Such risks include, among other things, the possibility that we pay much more
than the acquired business is worth, the difficulty of integrating the
operations and personnel of the acquired business into ours, the potential
product liability associated with the sale of the acquired business' products,
the potential disruption of our ongoing business, the distraction of management
from our business, the inability of management to maximize our financial and
strategic position, and the impairment of relationships with employees and
customers. We have limited experience acquiring businesses,
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and we cannot assure you that we will identify appropriate targets, will acquire
such businesses on favorable terms, or will be able to integrate such
organizations into our business successfully. Further, the financial
consequences of our acquisitions and investments may include potentially
dilutive issuances of equity securities, one-time write-offs, amortization
expenses related to goodwill and other intangible assets and the incurrence of
contingent liabilities. These risks could have a material adverse effect on our
business, financial condition and results of operations.
History of Disappointing Revenue from Previous Generation Products.
Historically, we emphasized the licensing of our 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. Products that use our
technology, such as the Nokia 9110, Nokia 9000, Toshiba Dialo, Toshiba Genio,
Toshiba Camesse Petit, Seiko-Epson Locatio and Mitsubishi Moem-D, have had only
modest unit sales. With the exception of the Palm Pilot series from 3COM (which
does not incorporate our software), products in the non-communicating device
categories have also experienced low adoption rates. We have failed to generate
significant royalty revenues in connection with our licensing efforts to date,
and our operating results have been adversely affected as a result. Several of
our 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 lower-than-expected recurring license revenues in previous fiscal
years. In part we depend on the marketing efforts of our customers for their
products to be accepted by the market.
Fluctuations in Operating Results. Our past operating results have been
subject to significant fluctuations on both a quarterly and annual basis. We
expect that our future operating results will also fluctuate as a result of all
of the following: the timing and success of the our efforts to introduce and
sell the Mobile ASP(TM) and Mobile Site(TM) products and services; the
introduction and acceptance of our mobile e-commerce and information services;
the extent to which we can negotiate and subsequently earn fees for professional
services, research and development and maintenance fees from our customers; our
ability to effectively manage our costs; legal costs associated with technology
licensing and defense of our patent portfolio; and actions by our competitors.
To obtain license and service revenue from Mobile ASP(TM) and Mobile
Site(TM) customers we will need to market and sell these new services and our
customers will need to successfully market these services to their end users. We
must also continue to develop new and compelling services. Revenue from mobile
e-commerce and information services will vary based on the market success of the
per-subscriber fee model and our ability to derive transaction fees from mobile
e-commerce services. Revenue from research and development fees can vary
considerably among periods, depending upon the specific terms of our contracts
with clients and the relative level of development effort devoted to projects
which generate research and development fees. Our results are also affected by
the timing and extent of our expenses for research and development, and sales
and marketing. We have traditionally devoted substantial resources to research
and development, which has constrained our investment and performance in other
activities and, in turn, affected reported operating results. While we have
taken recent measures to reduce research and development expenditures, our
investment in research and development remains significant relative to our
investment in other aspects of our operations. License revenue related to OEM
customer products which contain our 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. In
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addition, our results may be affected by seasonal and other fluctuations in
demand for mobile communications devices and for related software products and
services, as well as by the general state of the domestic, Japanese, European
and global economies. We believe 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 calendar year.
International Operations. We have derived most of our revenue from
international operations in each of the last three fiscal years. We anticipate
that international revenue will continue to represent a significant portion of
our future revenue. Whether or not we receive revenue from international sources
depends on 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, we derive a substantial portion of our revenue from
customers in Europe and Japan, and we view these regions as strategic to our
business objectives. Although our revenue is generally denominated in U.S.
dollars, fluctuations in currency exchange rates and changes in local economic
conditions could have adverse consequences on our ability to execute agreements
with international customers, and as a result could adversely affect our ability
to generate revenue from technology licensing, professional services, research
and development fees, and mobile e-commerce and information services. In
addition, we are obligated to withhold income tax from royalty income from
licensees in certain countries, such as Japan and Finland. The amount and mix of
our revenue derived from such licensees will impact our accruals for income
taxes. Our income tax rate may vary depending on the amount and mix of our
revenue actually derived from licensees subject to foreign withholding taxes as
compared to amounts forecast by us.
Non-Recurring Revenues. We may receive one-time technology license or
engineering fees or recognize revenue of paid but unamortized advance royalties
under OEM agreements (currently recorded as deferred revenue) if agreements are
terminated, amended or restructured or a product is discontinued. These charges
could impact our operating results. These amounts could be a material portion of
our revenue, as they have been in the past, and provide no corresponding cash
flow benefit in the period in which the revenue is recognized.
Dependence on Key Personnel. Our future success depends in large part on
the continued service of our key technical, marketing, sales, administrative and
management personnel, and on our ability to attract and retain qualified
employees. The competition in the telecommunications, Internet, and high
technology industries for talented personnel is intense. We cannot assure you
that we will succeed in attracting and retaining such personnel. With the
exception of certain executive positions, we do not have employment contracts
with our key employees. We have had a significant number of changes in the
senior leadership team over the last two years. The loss of key employees,
turnover, and our ability to attract and retain members of our executive team,
could have a material adverse effect on our business, operating results, and
financial condition.
Competition in Mobile Communication Device Operating Systems. We expect
the market among mobile communicating device operating systems to be highly
competitive. Although we believe there will be 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
us, such as Symbian (a joint venture involving Psion, Ericsson, Motorola, and
Nokia), Microsoft, Sun Microsystems, and 3COM (through its Palm Computing
subsidiary), have each developed or are reported to be developing operating
systems which may compete directly with our current operating system software.
Further, developers of real-time operating
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systems and low-end operating system software may attempt to adapt their
products for the smart phone market, to provide operating systems which compete
with ours. Although we believe our GEOS and GEOS-SC system software has features
that give us an advantage over competing operating systems, companies may
develop similar or better features. Moreover, a number of our 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 mobile devices and compete
directly with us. Our competitors may develop or market mobile communication
device operating system or application software products that are superior to
ours, that are offered at lower prices, or that are more rapidly accepted by the
market.
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 (Panasonic) also joined the
joint venture. Through Symbian, these companies are seeking to introduce an
operating system platform in the smart phone market that would directly compete
with our GEOS-SC system software, and together these companies have contributed
over $150 million to capitalize the venture. Collectively, Ericsson, Motorola,
Nokia and Matsushita hold a dominant position as suppliers in the worldwide
market for mobile phones, of which smart phones represent a market segment.
While Symbian is in its early stages and its ultimate impact on us is difficult
to assess, its impact on the market could have a material adverse effect on our
business, operating results or financial condition.
Because of our transition away from the development of operating system
technology, we expect license fees and royalty revenues related to our operating
system technologies to decrease significantly in the future.
Volatility Of Stock Price. If our revenues or results of operations do
not meet the levels expected by securities analysts the trading price of our
common stock could decrease. In addition, our common stock price is volatile
because it is associated with internet, telecommunications and technology
stocks, in general. As a result, there are other factors that may affect our
stock price unrelated to our specific performance.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT RISK
Our cash and cash equivalents consist of demand deposits and highly liquid
securities with original maturities of three months or less and our marketable
securities consist of equity securities, principally mutual funds. We believe
these investments are subject to minimal interest or market risks.
Our long-term investments consist of common shares in Wink Communications, Inc.
("Wink") and warrants in MyTurn. The fair value of these assets ($14,969,000 for
Wink and $3,359,000 for MyTurn at June 30, 2000) is included in long-term
investments and will fluctuate with their respective market prices. As such
these investments are subject to fluctuations of the stock market as a whole and
the specific business risks of these companies.
FOREIGN EXCHANGE RISK
We have derived most of our revenue from international operations in each of the
last three fiscal years. Although our invoices to customers are generally
denominated in U.S. dollars, our international subsidiaries use the local
currency as their functional currency. Our cash accounts in foreign countries
are kept at the minimal levels necessary for operations. As the result of the
above, the Company is exposed to foreign exchange rate fluctuations and as these
exchange rates vary, the subsidiaries results, when translated, may vary from
expectations and adversely impact our results of operations.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
No Report on Form 8-K was filed during the quarter ended June 30,
1999.
Subsequent to June 30, 2000,the Company filed a report on Form 8-K
dated July 24, 2000 announcing that the Company, through its
wholly-owned subsidiary, AirBoss Acquisition Corp., a New Jersey
corporation acquired substantially all of the assets of an
established, separate, and unincorporated division of Telcordia
Technologies, Inc., a SAIC company.
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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 14, 2000
GEOWORKS CORPORATION
by: /s/ Stephen T. Baker
------------------------------------------------
Stephen T. Baker
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
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