10-Q 1 e10-q.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 6/30/2000 1 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 -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 94-2920371 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 960 ATLANTIC AVENUE, ALAMEDA, CALIFORNIA 94501 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) 510-814-1660 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE -------------------------------------------------------------------------------- (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. 2 GEOWORKS CORPORATION INDEX
Page ---- 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
1 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS GEOWORKS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands)
June 30, March 31, 2000 2000 -------- --------- 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 ------- ------- $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 ======= =======
See accompanying notes 2 4 GEOWORKS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share data)
Three Months Ended ----------------------- June 30, June 30, 2000 1999 -------- -------- 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 ======== ========
See accompanying notes 3 5 GEOWORKS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Three Months Ended ------------------------- June 30, June 30, 2000 1999 --------- --------- 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 ========= =========
See accompanying notes 4 6 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
June 30, March 31, 2000 2000 -------- -------- Wink Communications,Inc. 14,969 16,380 MyTurn.com, Inc. 3,359 4,797 Other 3 3 -------- -------- Total 18,331 21,180 ======== ========
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. 5 7 GEOWORKS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. COMPREHENSIVE LOSS Comprehensive loss consists of the following:
Three months ended June 30, ----------------------- 2000 1999 -------- -------- Net loss $ (1,554) $ (1,844) Unrealized loss on investments (2,849) -- Foreign currency translation adjustments 42 1 -------- -------- Comprehensive loss $ (4,361) $ (1,843) ======== ========
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. 6 8 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
Three Months Ended Change ------------------------------ -------------------------- June 30, 2000 June 30, 1999 $ % ------------- ------------- ---------- ---------- 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% ========== ========== ========== ==========
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 7 9 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 8 10 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. 9 11 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 10 12 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. 11 13 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. 12 14 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, 13 15 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 14 16 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 15 17 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. 16 18 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. 17 19 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) 18