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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31, 2001.
[ ] 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)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates, based upon the closing sale price of the Common Stock on June
21, 2001 as reported on the Nasdaq National Market, was approximately
$30,089,104. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock, based
on Schedule 13G filings, have been excluded since such persons may be deemed
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of June 21, 2001, there were 23,423,996 shares of the Registrant's Common
Stock outstanding.
Documents Incorporated by Reference
Portions of Registrant's definitive proxy statement (the "Proxy Statement") for
its 2001 Annual Meeting of Stockholders, which the Registrant intends to file
within 120 days of the Registrant's fiscal year-end (the "2001 Proxy
Statement"), are incorporated by reference into Part III of this Report.
GEOWORKS CORPORATION
Table of Contents
Page
----
PART 1
Item 1. Business 3
Risk Factors 12
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 4A. Directors and Executive Officers of the Registrant 19
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 22
Item 6. Selected Consolidated Financial Data 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 36
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 60
PART III
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners and Management 60
Item 13. Certain Relationships and Related Transactions 60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 61
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PART I
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), regarding future events and our management's plans and expectations that
involve risks and uncertainties. When used in this Report, the words "estimate,"
"project," "intend," "expect" and "anticipate" and similar expressions are
intended to identify such forward-looking statements. Such statements are
subject to certain risks and uncertainties, including those discussed below,
that could cause actual results to differ materially from those projected.
Factors that may cause actual results to vary include, but are not limited to:
(i) risks associated with our history of operating losses; (ii) risks associated
with our ability to meet our capital needs in order to execute our business
plan; (iii) risks associated with our dependence on the development of the
market for mobile data software; (iv) risks of competition in mobile data
software and services; and (v) risks associated with rapid technological change.
Other factors that may cause or contribute to such differences include, but are
not limited to, those discussed in the section of this Report titled "Risk
Factors," beginning on page 12, as well as those discussed elsewhere in this
Report. Consequently, the inclusion of forward-looking information herein should
not be regarded as a representation by us or any other person that our
objectives or plans will be achieved. The reader is therefore cautioned not to
place undue reliance on the forward-looking statements contained herein, which
speak only as of the date hereof. We undertake no obligation to publicly release
updates or revisions to these statements.
Item 1. BUSINESS
Geoworks Strategic Summary
Geoworks Corporation is a leading provider of carrier-class mobile Internet
infrastructure software enabling personalized, real-time access to corporate and
Internet data. Our software enables easy migration of existing corporate
Intranet solutions to the wireless Web and the rapid development of new
applications to support the mobile enterprise. We are focused on the wireless
carrier market and enabling wireless carriers to deliver on the promise of
always-on mobile applications over today's 2G and 2.5G networks. We also provide
professional services consulting related to the deployment of these solutions,
the development of new technologies supporting mobile communications and the
technologies we previously developed.
The Market Need: Wireless carriers need enabling software in order to offer
enterprise-class data and Internet services that will increase their revenue,
differentiate their service offerings, reduce turnover and generate a return on
the capital they are investing in next generation wireless networks.
Our Products: Geoworks software, when deployed in a wireless carrier network,
allows the carrier to reformat and extend corporate enterprise data and Internet
applications over the wireless network to mobile devices.
Our Strategy: We sell directly to the wireless carriers and through the wireless
carriers to the enterprise. We also partner with solution providers to extend
our reach. And, we are building a community of developers to facilitate the
adoption of our software.
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Our Business Model: We license our software for mobile solutions to wireless
carriers and enterprises on a per server and per user basis. Our revenues grow
as the carriers roll out, and their users adopt, enhanced data services.
Company Overview
Since our initial public offering ("IPO") in 1994, our business has been focused
on enabling mobile access to information. How we deliver on that focus has
changed over the years with developments in both technology and the market.
Prior to early 1999, we developed and sold a wireless operating system for smart
phones and personal digital assistants (PDAs). In 1998, there were six different
models of Geoworks-enabled handsets and mobile data devices, manufactured by
five major original equipment manufacturers, available for sale in more than 30
countries. However, this market did not develop as rapidly as expected and
product shipments were disappointing. Also, that year, several of the world's
largest handset makers, representing more than half of our target market,
created a joint venture to develop their own mobile operating system. As a
result, we began to explore alternative opportunities where our expertise in
mobile solutions could be applied.
In 1999, we introduced our first mobile data server software, Mobile Server+,
and services based on that software platform. In July 2000, we significantly
strengthened our product and service offering with the acquisition of the
AirBoss Application Platform from Telcordia Technologies (Telcordia). And, in
June 2001, we announced a reorganization intended to strengthen our competitive
position by accelerating the integration of our two software products,
streamlining our organization and exiting the Mobile ASP (Application Service
Provider) market.
Our products and market targets have evolved over the last two years as we have
adapted to dramatic changes in mobile data technology and market demand, but,
our focus has remained clear: enabling mobile access to information. Our
strategy is to provide an integrated, enterprise-oriented product offering,
providing innovative mobile Internet infrastructure capabilities to wireless
carriers worldwide and to partner with solution providers and developers to
facilitate the adoption of our software.
Our company was incorporated in California in 1983, and reincorporated in
Delaware in 1997. Based in Alameda, California, we have regional offices in New
Jersey, Japan and the United Kingdom. Our fiscal year commences on April 1 and
ends on March 31. You can visit our website at http://www.geoworks.com.
Our Market
The market for wireless data technology is growing rapidly, fueled by growth in
both the Internet and wireless telecommunications markets and by the rapid
convergence of the two technologies.
People are becoming increasingly dependent on the Internet to provide
information, e-mail and remote access to corporate applications and
Internet-based services. According to International Data Corporation (IDC) there
were approximately 400 million Internet users worldwide at the end of 2000, and
that number is expected to grow to almost 900 million worldwide by the end of
2004. Businesses are using the Internet/intranet to extend communications to and
conduct transactions with remote locations, telecommuting employees, business
affiliates, suppliers, customers and other companies. Enterprises are also using
the Internet/intranet as a platform for
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traditional enterprise applications such as customer relationship management,
direct marketing, inventory control, human resources, enterprise resource
planning and manufacturing, to increase productivity, widen accessibility, and
build closer relationships along the entire supply and distribution chain.
At the same time, the use of mobile communications is growing rapidly. IDC
estimates that the global number of wireless voice users was 450 million at the
end of 2000, and will grow to 1.1 billion in 2003.
These technologies are rapidly converging as consumers and enterprises demand
the benefits of mobile information access. According to a recent study by the
Gartner Group, a leading market researcher, the North American wireless data
market will grow to 137.5 million subscribers in 2005, from 7.3 million in 2000.
In a separate study, Gartner predicts 800 million world-wide wireless data users
by 2004. This growth is being driven by the global deployment of 2.5G or packet
data networks, improvements in the capabilities of handheld devices, the
increased overall use of wireless devices to receive messages and e-mail, the
availability of inexpensive wireless data devices, and the development of
company-specific, mobility-focused applications that will improve the
productivity of the mobile worker. By many estimates, by 2004 more people
worldwide will access the Internet via wireless devices than via PCs.
The two primary buyers of mobile data software will be wireless carriers,
looking to provide services that will drive traffic through their networks, and
enterprises, looking to increase the productivity of an increasingly mobile
workforce and to reach their customers on the move. Strategy Analytics, a
leading market researcher, estimates that wireless service providers will
generate annual wireless data revenue of $48 billion in 2005, up from $5 billion
in 1999. Epoch Partners, an investment research firm, predicts that software and
content providers will collect approximately $10 billion of this revenue, up
from less than $100 million in 2000. In addition, Goldman Sachs has estimated
that companies worldwide will spend approximately $38 billion on technology to
support mobile workers in 2005, $9 billion on software alone.
Product and Service Offering
Mobile Data Software
We are currently integrating our AirBoss Application Platform and Mobile Server+
technology into a single, enterprise-focused infrastructure solution targeted at
wireless carriers and enterprises worldwide. This integrated product will bring
together the complementary strengths of the two product lines. In short, AirBoss
provides an excellent platform for providing wireless access to enterprise data
via Internet and other standard protocols. It is a reliable, scalable solution
that provides superior authentication, distribution, session maintenance and
management, and administration functions. Mobile Server+ strengths lie in its
data access and transformation capabilities. It is specifically designed to
handle complex data translation, customization and access services. When seeking
to mobilize a current application, enterprises would like to make as few changes
as possible to the underlying infrastructure that supports that application and
to the application itself. Our combined product enables the enterprise's
original application to interact with the AirBoss Platform through simple,
standard Internet application program interfaces (APIs). Then, for applications
or services that require additional translation or customized data delivery, the
enterprise can use the Mobile Server+ components.
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While providing complementary functionality, both software products share key
attributes reflecting Geoworks' software development strategy. Both are highly
reliable, scalable, open, standards-based programs that provide innovative
capabilities enabling carriers and enterprises to provide mobile access to
information easily. We are committed to constantly updating our products to
support the latest devices and wireless networks. In addition, we work with a
number of technology partners to ensure that our software continues to provide
cutting-edge functionality and the flexibility to grow as users' needs change,
new devices proliferate and carrier networks evolve.
More detailed discussion of the two software components of our integrated
product line is provided below.
AirBoss Application Platform: The AirBoss Application Platform is a suite of
patented software products that allow mobile users to access corporate Intranets
and the Internet remotely, via wireless data communication networks. AirBoss
products are based on unique proxy technology and client-server architecture,
operating both on the wireless mobile device and on the AirBoss server connected
to the wireless carrier or corporate computer network. The AirBoss Application
Platform provides wireless data applications with compression, reliability,
end-to-end security, scalability, and application development support. Using
AirBoss software, wireless device users can seamlessly connect with enterprise
applications, extending their corporate networks into mobile networks.
The AirBoss solution operates with leading commercial wireless networks,
including CDPD, GSM, CDMA/TDMA, GPRS, Mobitex, ARDIS or satellite. The AirBoss
products also support a full range of client device operating systems, including
Windows 95, Windows 98, Windows NT, Windows CE, Palm OS, RIM Inter@ctive 850/857
and 950/957 pagers/PDAs, and embedded systems. This flexibility allows AirBoss
users to "mix and match" network components utilizing whichever wireless
transmission technology is most appropriate without changes in wireless data
functionality or performance.
The AirBoss Application Platform also provides comprehensive tools for the rapid
development of wireless applications. Without the AirBoss platform, wireless
application developers need to create custom code for multiple devices and
enterprise applications. AirBoss simplifies this process by using open,
standards-based tools with common interfaces. The AirBoss client/server software
development kits (SDKs) for custom application development include the AirBoss
INET (ABInet) application program interfaces (APIs) that simplify programming
for wireless Web-based applications. ABInet is based on standard Windows APIs
and further simplifies the development of custom Web-based applications.
The AirBoss Application Platform was first developed in the mid 1990s and has
been commercially deployed at a number of companies including GoAmerica,
e-Dispatch and Telkom South Africa. In late 2000, it was selected by Cingular
Interactive to be a key component in Cingular's Wireless Web Access product
offering. In May 2001, Cingular launched a developer program for wireless
applications based on the AirBoss Application Platform to its 1,000+ strong
developer community. Commercial launch of Cingular's wireless Web access program
is expected in the second half of 2001.
Mobile Server+: The Mobile Server+ platform provides a single server solution
for developing and deploying wireless services that can support a variety of
mobile devices and formats. The Java-compliant open architecture interfaces with
back-end systems to retrieve content. Mobile
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Server+ then formats the data and properly displays it on wireless devices,
automatically handling different form factors, screen displays and protocols.
Mobile Server+ supports any markup language, any transport protocol and any
mobile device.
Mobile Server+ can be used to support a wide variety of wireless services
including Web content (Internet and Intranet), e-mail delivery, status, alerts,
news and information services, two-way messaging, m-commerce, location ID and
directions, and animated graphics and video. It enables leading-edge
applications that include interactive voice, location/position and multimedia
features. iValue Creation, Toshiba's wireless application service provider
company, currently hosts wireless data applications for approximately a dozen
Japanese companies serving more than one million consumers on our Mobile Server+
software. In addition, the applications currently hosted by our Mobile ASP
operations for United Airlines and Abbey National are both run on the Mobile
Server+ software.
Mobile Server+ is markup-language independent and supports WML, HDML, MML, Palm
Web Clipping, Compact HTML, HTML, and TTML. It is also transport independent,
supporting HTTP, email (incoming and outgoing), various SMS protocols, and FTP,
at this time. Client devices can access a Mobile Server+ service over various
wireless protocols, including TDMA, CDMA, GSM, GPRS, PDC, PHS, Palm web
clipping, Mobitex and others.
Professional Services
We support our mobile information strategy by providing professional consulting
services to mobile device manufacturers, carriers, and service providers.
Geoworks has more than a decade of experience developing wireless operating
systems, related applications and wireless server technology. We have worked
with industry leaders in mobile phones, mobile data applications, data
transmission equipment, mobile security equipment, and e-commerce services,
including Casio, Ericsson, HP, Mitsubishi, NEC, Nokia, Sharp, Seiko Epson,
Sonera SmartTrust and Toshiba.
Our engineers, quality assurance technicians, and project managers have many
years of experience in the wireless industry and a proven track record of
technical innovation. Their skills are in short supply. We are leveraging their
capabilities to offer complete project management and software engineering for
complex projects in wireless software, applications and networks that require
experienced development teams who can ensure completion in a timely and
efficient manner.
Geoworks' Strategy
Our objective is to be a leading provider of mobile data software and services
that enable personalized, real-time access to corporate and Internet data from
mobile devices, to both wireless carriers and enterprises. Key elements of our
strategy include:
Providing industry-leading, scalable products based on open standards. Our
approach to the market for mobile data software is based on a belief in the
importance of scalability and standards. Our software solutions are based on
open industry standards including HTML, XML, SSL and Java, and are designed to
scale to support millions of users. Scalability is critical to the wireless
carriers integrating our products into their wireless data product offerings and
to wireless application software providers (WASPs) like Toshiba, who need to be
able to serve hundreds of companies and millions of consumers to be successful.
A commitment to supporting current and
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emerging industry standards is also critical to support enterprises facing the
complex task of developing applications across the variety of platforms, data
protocols and mobile devices in use today. In addition, by providing
standards-based platforms, we enable application developers to create products
and services based on our software.
Focusing on the wireless carrier. The core of our business model is selling our
software to wireless carriers who can build their mobile data product offerings
on our platform. Our goal is to develop relationships with carriers, like the
one with Cingular, to use our software as the foundation for enterprise mobile
application development across the carriers' network. Carriers need to be able
to provide their enterprise customers with compelling reasons to increase mobile
usage in order to increase carrier revenue. Voice is quickly becoming a
commodity sold on price. To generate a return on the billions of dollars spent
to date on building 2.5 G networks, mobile carriers must develop additional
revenue streams. Enabling cutting-edge data applications is a key component of
most carriers' growth plans.
With the integration of Mobile Server+ and AirBoss platforms, we are uniquely
qualified to enable wireless carriers to deliver on the promise of always-on
mobile applications over today's 2G and 2.5G networks. Our software enables easy
migration of existing corporate Intranet solutions to the wireless Web and the
rapid development of new applications to support the mobile enterprise. Our
relationship with Cingular Interactive is a model for our business going
forward: working with carriers to reach the enterprise, partnering with solution
providers and building developer communities to facilitate the adoption of our
software.
Building a scalable business model. Carriers have millions of users. We license
our software to carriers for a one-time server license fee, then receive
additional seat license fees for each end-user that is enabled to access
applications based on our platform. Our revenues grow as the carriers roll out,
and their users adopt, enhanced data services. We also receive annual upgrade
and maintenance fees based on the initial and additional server and client
licenses. Our model can scale rapidly with only a few successful carrier
customers.
Building an "ecosystem" of technology partners, resellers and developers. A key
corporate initiative in fiscal year 2001 was the launching of our Mobile
Business Alliance program targeting industry-leading technology companies,
resellers and developers to build a larger "ecosystem' or network of companies
involved with Geoworks at many points in the value chain. The program is divided
into two parts, a Solution Partner program and a Developer program.
Solution Partners: By partnering with companies seeking to expand their existing
data solutions and offer their customers new wireless solutions by reselling our
products and/or participating in co-marketing programs, we can significantly
expand our reach. We intend to actively pursue additional relationships with
wireless carriers, Independent Software Vendors (ISVs), Value Added Resellers
(VARs), Systems Integrators (SIs), consulting organizations, application service
providers (ASPs) and distributors to expand the distribution of our products and
services. We believe that developing and maintaining these relationships will
encourage wider adoption of our software and increase brand awareness. Our
solution partners include SAIC, Telcordia Technologies and Toshiba. In addition,
we have relationships with strategic technology companies including Cingular
Wireless, Hewlett Packard, Maptuit, Nuance, Openwave and US. Wireless.
Developer Program: We are committed to building a community of software
programmers focused on developing additional applications for Geoworks'
integrated software solution. Such
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a community can provide users with both ready-made applications and a base of
developers with the knowledge to support custom application development. The
rollout of the Cingular Wireless Developer Program based on the AirBoss
Application Platform was an important early step in this process. Building a
critical mass of developers focused on our platform will encourage additional
mobile carriers to adopt our platform (just as additional mobile carriers
adopting our platform will encourage new developers). It will also facilitate
enterprise adoption of our software. Key components of our program to encourage
developers to focus on Geoworks products include: providing comprehensive
development tools which include product documentation, debugging tools and
easy-to-use APIs based on industry standards; and providing developers with the
infrastructure to evaluate, develop, deploy and support wireless applications.
Apply the expertise we gain through professional services to ongoing product
development. We provide comprehensive software development and technical
services for wireless projects for leading electronics and mobile phone
manufacturers and cellular carriers such as Nokia and Mitsubishi. The expertise
we gain working with next generation devices, operating systems and carrier
technology, can be applied to the ongoing development of our own software
products. In addition, by working closely with industry leaders, we gain a
clearer understanding of the direction of both technology and market trends.
Operations
Engineering and Product Development
One of our most important resources is our engineering staff of 81, as of June
20, 2001, including wireless systems engineers, software engineers who
specialize in developing applications for handheld devices and engineers who
specialize in systems integration, quality assurance and testing. Our
engineering department provides core product development, customization,
deployment and maintenance services to our current customers, engineering
support for our sales effort and professional services consulting. Innovation
drives our industry and is the source of compelling new products and services.
We intend to continue our research and development in order to increase product
efficiency, to enhance and develop new and existing products and services, and
to support new industry standards as they emerge.
Sales and Marketing
As of June 20, 2001, we had 28 sales, marketing and business development
professionals. Our senior executives also spend a considerable amount of time
developing potential customer relationships and selling and promoting our
products and services.
We focus on selling our software products to and through wireless carriers. Once
a carrier has decided to provide data services based on our software platforms,
we then work together to sell those services out into its base of enterprise
customers. We do this through joint selling activities with their sales teams
including coordinated lead generation and joint sales calls. We also establish
routine training programs insuring that the carrier's sales organization can
properly communicate the capabilities and benefits the application development
platform can provide.
Through networking, trade shows events and business development partner
relationships we also have access to enterprises directly. The sales
organization manages these leads through a well-documented qualification and
sales process. Our goal is to properly evaluate the opportunity and match
channel partners that will ensure a successful sale. Our first priority is to
channel these
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enterprise accounts through our carrier relationships. But, when the enterprise
has the need to host the software behind their firewall, the Geoworks sales team
will introduce other partners like System Integrators, Independent Software
Vendors or Value Added Resellers.
We market our products and services through active public relations, attendance
and exhibition at industry events, and some direct marketing programs. Members
of our executive management speak at major industry events, trade association
meetings and exhibitions, and make presentations to industry analysts. We also
leverage the experience and market presence of our business partners.
Intellectual Property
Our intellectual property assets are important to the success of our business.
We regard our software and development methods as proprietary and rely upon a
combination of patent, copyright, trademark and trade secret laws, employee and
third-party non-disclosure agreements, and license agreements, to establish and
protect proprietary rights in our products and methods. We have patents issued
in the United States, Canada, Japan, Taiwan, Korea, Indonesia, Singapore,
Germany, France, and by the European Patent Office. We have patent applications
pending in the United States, the United Kingdom, other European countries, and
Japan.
In January 2000, we initiated an intellectual property rights (IPR) licensing
program for our patented flexible user interface technology (Flex UI) based on
our belief that WAP-compliant or WAP-enabled products use the technology. In
doing so, we followed industry standards for technology licensing and specific
protocols required by our membership in the WAP Forum. We can license the
technology only for the remaining life of the patent that expires in July 2011.
Our standard IPR licensing agreement lasts for three years.
Through June 2001, we have licensed the Flex UI patent to twenty companies,
including Ericsson, Matsushita, Mitsubishi, NEC, Openwave and Toshiba. We are
actively negotiating with a number of other companies and have provided
information about our licensing initiative to many potential licensee companies
who may wish to license the Flex UI technology.
License revenues from intellectual property are not a significant part of our
business plan, generating revenue of $529,000 in fiscal year 2001. However, we
intend to continue to pursue our IPR licensing program, as it provides us with a
number of benefits. It opens the door to developing relationships with key
technology providers and potential customers worldwide. It gains us access to
technology developed by others through cross-licensing. It provides high-margin
revenue. Finally, it provides the mechanism to license additional intellectual
property we have developed as appropriate.
Competition
The market for our software and services is becoming increasingly competitive.
We believe our software platforms provide the innovative functionality,
compliance with industry standards, and robust and scalable architecture desired
by our target customers at a competitive price. However, the widespread adoption
of industry standards may make it easier for new market entrants to offer some
or all of the products we offer and may make it easier for existing competitors
to introduce products they do not now provide, or improve the quality of their
products. We expect that we will compete primarily on the basis of reliability,
functionality, scalability, ease of integration, quality, price and experience.
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Our current and potential competitors include:
o Wireless Data Software and Service providers such as Aether Systems,
Brience, Broadbeam, Everypath, Openwave, PumaTech, 7/24 Solutions and
Wysdom;
o Wireless content aggregators such as Avantgo, GoAmerica, Infospace, and i3
Mobile. In addition, several Internet portals are beginning to provide
their content and services to mobile device customers; and
o Diversified technology companies seeking to capitalize on the developing
market for wireless applications including IBM, Microsoft, Oracle and Sun
Microsystems.
Competition in these market segments is intense and is expected to increase as
more companies enter alliances and launch products and services. Many of our
competitors have greater financial, technical and marketing resources to address
the market. Nevertheless, we believe we offer distinct features, performance
levels, and superior, reliable mobile software and services that will enable us
to compete in this market. Further, few companies can match the experience we
have gained through the development, implementation and management of mobile
data networks for the most demanding types of applications.
Employees
As of June 20, 2001, we had 158 employees, of whom 81 were employed in
engineering, professional services and research and development, 28 in sales,
marketing and business development, and 49 in legal, finance and administration.
None of our employees is represented by a labor union or subject to a collective
bargaining agreement, and we have not had a work stoppage from any labor
grievance or strike. We strive to attract and retain qualified personnel by
offering competitive compensation, benefits, equity participation and good
working conditions. Our success depends on the continued service of our key
management, technical, sales, and marketing personnel, and on our ability to
continue to attract and retain highly qualified employees.
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Risk Factors Affecting Future Operating Results
History of Operating Losses; Anticipated Future Losses: We have a history of
losses and expect losses in the future.
Since we were formed in 1983, we have incurred significant losses, and suffered
substantial negative operating cash flow. As of March 31, 2001, we had an
accumulated deficit of approximately $111.1 million. We incurred operating
losses of approximately $21.8 million, $5.2 million and $16.3 million in the
fiscal years ended March 31, 2001, 2000, and 1999, respectively. We expect to
continue to incur losses for at least the next fiscal year, and it is unclear
when, if ever, we will be profitable.
Adequacy of Capital Resources to Execute Business Plan: We expect to require
future additional funding to execute our business plan.
Our future liquidity and capital requirements will depend on numerous factors
including revenue from operations, working capital requirements, our investment
in product development, and sales and marketing activities, our capital
expenditures, and potential strategic investments or acquisitions. Historically,
we have relied on the sale of stock to finance our operations. If we need
additional financing to execute our business plan, there can be no assurance
that it will be available or that, if available, on terms acceptable to us. If
we issue additional equity securities, the ownership percentage of existing
stockholders will be reduced. If adequate funds are not available, we may be
required to significantly scale back our operations and forego market or
research opportunities. We expect that the cash we receive from revenues and our
cash and marketable securities on hand will be sufficient to meet our operating
working capital and capital expenditures needs through the end of fiscal year
2002.
Dependence on the Development of the Market for Mobile Data Software: Our
long-term success is dependent on the development of the market for mobile data
software and services.
The market for mobile data software is still emerging and continued growth in
demand for mobile data applications remains uncertain. The successful, practical
and effective distribution of content and services to mobile devices depends on
many factors including the deployment and availability of appropriate network
infrastructure and the development and availability of appropriate mobile
devices for data applications. We cannot assure you that demand for mobile data
applications will continue to grow, or that our technology will be suitable for
the distribution infrastructure as it develops. If the market for our products
and services does not grow, or grows more slowly than we currently anticipate,
our expected financial performance will be adversely affected.
Competition in Mobile Data Software and Services: We are seeing increasing
competition in the mobile data software and services sector that could harm our
ability to increase sales or impact the prices we can charge.
We face growing competition from both start-up companies designing software and
services similar to ours and established companies seeking to capitalize on the
market for mobile data software. These companies include Aether Systems,
Avantgo, Brience, Broadbeam, Everypath, GoAmerica, IBM, Infospace, i3 Mobile,
Microsoft, Openwave, Oracle, PumaTech, 7/24 Solutions, Sun Microsystems and
Wysdom. Many of our current and potential competitors have greater financial,
technical, marketing and distribution resources than we do. In addition, they
may have a larger market presence, more widely deployed wireless server
technology and greater client development resources than Geoworks. Our business
could be seriously impacted if
12
competitors announce new products, features, technologies or services that
contribute to customers deferring purchase of our software or services or
competitors introducing products or services that replace or shorten the life
cycle of our existing offerings. We cannot assure you that we will be able to
compete effectively with current and future competitors or that competitive
pressures will not cause our revenues or income to decline or otherwise harm our
business, operating results and financial condition.
Risks of Rapid Technological Change: If we do not respond effectively and on a
timely basis to rapid technological change, our products and services may become
obsolete.
The wireless, software and data communications industries are characterized by
rapidly changing technologies, evolving industry standards, developing customer
needs and increasing competition. New product and service introductions are
frequent. To remain competitive, we must continuously develop new products and
services and adapt our software to function on new devices and operating systems
designed by other companies. The development of software and services such as
ours can be difficult, time-consuming and costly.
Because of the short product life cycles and intense competition expected in
wireless data applications, the timeliness of new product and service
introductions can be critical. We cannot assure you that we will be able to
develop, introduce and ship new products or services rapidly enough. 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. Our business could be seriously impacted if we fail to
anticipate technological trends or evolving industry standards, or to adapt our
software and services to these trends and standards.
Dependence on Limited Number of Revenue Generating Customers: Because we
currently derive a significant portion of our revenue from a few key customers,
the loss of any one of them would harm our business.
For the fiscal years 2001, 2000 and 1999, three customers in each year accounted
for 78%, 88% and 90% of our total net revenues, respectively. We expect that our
dependence on a small number of customers will continue as we focus on gaining
wireless carriers as customers. If any of our customers discontinue or reduce
their relationship with us, it would have a material adverse impact on our
business, operating results and financial condition. We cannot assure you that
we will be able to sustain these relationships and derive comparable revenues
from them in the future.
Need to Build a Developer Community: Our success is dependent on building a
developer community around our software platforms.
To date, we have developed almost all of the applications running on Mobile
Server+ and the AirBoss Application Platform. We need to build a community of
software programmers focused on developing additional applications for these
platforms to encourage mobile carriers to adopt our platform, to facilitate
enterprise adoption of our platforms and to drive future revenue growth. We have
taken several steps to build a developer community including: providing
comprehensive development tools which include product documentation, debugging
tools and easy-to-use APIs based on industry standards; launching our Mobile
Business Alliance program which provides developers with the infrastructure to
evaluate, develop, deploy and support wireless applications; and rolling out our
developer program to the Cingular developer community in May 2001. However,
there is no guarantee that we will be successful in developing this community
and the development of this community may not result in increased revenues. If
we invest resources in
13
building a developer community and our revenues do not increase correspondingly,
our financial performance and condition would be materially and adversely
affected.
Need to Expand Indirect Distribution: Our success is dependent on creating
indirect channel distribution partnerships.
To date, we have had a small direct sales force and few indirect channel
distribution partners. Future revenue growth will depend on the success of our
direct sales force in developing carrier and large enterprise relationships and
in building relationships with Independent Software Vendors, Value Added
Resellers, Systems Integrators, consulting organizations, Application Service
Providers and distributors to expand our reach. We are focused on expanding our
indirect channel relationships via our Mobile Business Alliance program.
However, there is no guarantee that we will be successful. And, even if we
succeed in these endeavors, it still may not increase our revenue. If we invest
resources in building our indirect sales capabilities and our revenues do not
increase correspondingly, our financial performance and condition would be
materially and adversely affected.
The Importance of Carrier Relationships: Much of our future success will depend
on the acceptance of our products and services by wireless carriers and their
subscribers.
Developing relationships with carriers is a key component of our business model
because a single carrier can represent millions of subscribers with the
potential to generate significant license and maintenance revenue. There are
approximately 600 wireless carriers worldwide, a relatively small number of
potential customers. To date, only one carrier, Cingular Interactive, has
purchased our AirBoss Application Platform. We cannot assure you that Cingular
Interactive or additional carriers will deploy our technology or that large
number of carrier-affiliated subscribers will use the services based on our
platform.
Future Revenue Uncertain Because our Historical Revenue Came from Different
Products and Non-recurring Sources: Because we recently changed our business
model and product and service offerings, it is difficult for us to forecast the
level or source of our revenues and earnings accurately.
Mobile data software, the AirBoss Application Platform and Mobile Server+, and
related services accounted for less than 40% of our total revenue in fiscal year
2001. Legacy product revenues, including licensing and royalty revenue from our
handset operating system and other products, professional services, IPR
licensing, and non-recurring revenue accounted for the remainder. We expect
revenue from legacy royalties and professional services revenue relating to
customer-support of our legacy products to continue to decline over the course
of the next year. Consequently, period-to-period comparisons of our operating
results may not be meaningful, and you should not rely upon them as an
indication of future performance.
Ability to Capitalize on Intellectual Property Rights and Patent Portfolio: Our
intellectual property could be misappropriated, which could force us to become
involved in expensive and time-consuming litigation.
We seek to protect our proprietary software and written materials under trade
secret, patent and copyright laws, which afford only limited protection.
Furthermore, others may develop technologies that are similar or superior to our
technology or design around any patents. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our
software or to obtain and use information that we regard as proprietary. In
addition, the laws
14
of some foreign countries do not ensure that our means of protecting our
proprietary rights in the United States or abroad will be adequate.
For example, on January 19, 2000, we announced to the WAP Forum and its members
that we hold essential Intellectual Property Rights 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.
On April 25, 2000, Openwave, formerly Phone.com, filed a complaint for
declaratory relief in the US District in San Francisco alleging that Geoworks'
Flex UI patent was invalid and unenforceable. We replied to the complaint and
filed a counterclaim for infringement of the patent on June 13, 2000. On
September 8, 2000 we also filed a complaint with the US International Trade
Commission (ITC) against Openwave and two of its customers alleging infringement
of its patent; on September 29, 2000 Geoworks supplemented its initial
complaint. On October 4, 2000 the ITC issued a Notice of Investigation based on
the complaint. On December 28, 2000, Geoworks and OpenWave announced an
agreement to settle the patent dispute by entering into a royalty-free patent
cross-license. The companies requested dismissal of their patent litigation in
federal district court and the ITC investigation.
Through June, 2001, we have licensed the Flex UI patent to twenty companies,
including Toshiba, Ericsson, NEC, Openwave, Mitsubishi Electric Corporation, and
Matsushita Electric Industrial Co. Ltd. While IPR license revenues are not a
significant part of our business plan, we intend to continue to pursue our
licensing program. Due to 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 future 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 and incur significant related expenses, as was
necessary in connection with Openwave Systems, Inc.
Our Products may Infringe the Intellectual Property Rights of Others: If third
parties claim we have infringed their intellectual property rights, we may be
forced to pay for expensive licenses, reengineer our product, engage in
expensive and time-consuming litigation, or stop marketing our products.
We attempt to avoid infringing known proprietary rights of third parties in our
product development efforts. However, we do not regularly conduct comprehensive
patent searches. There are a large number of patents in many areas that may
apply to our software and we believe there are a large number of pending patent
applications, which are not disclosed until a patent is issued, which may apply
to our software. Therefore, it is possible we may be subject to a claim of
infringement in the future. Any such claim, regardless of merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, and/or cause product delays. In addition, if any such claim was
successful, we could be required to discontinue using or selling the infringing
software, develop alternative technology or obtain licenses to the alleged
infringing technology. We may be unable to develop alternative technologies and
a licensing agreement may not be available on acceptable terms, if at all.
Moreover, we incorporate software licenses from third parties into our products,
and if we lose these licenses, our sales could be disrupted
15
Acquisitions may Disrupt our Business: Acquisitions could result in dilution,
operating difficulties and other harmful consequences.
We may merge with or acquire technologies or companies in the future that we
believe complement or expand our business, augment our market coverage, enhance
our technical capabilities or that may otherwise offer growth opportunities.
Entering into any business combination entails a number of risks, any of which
could be harmful to our business. These include: the possibility that we pay
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; the difficulty of integrating each company's accounting,
management information, human resource and other administrative systems to
permit effective management, and the lack of control if such integration is
delayed or not implemented; and the impairment of relationships with employees
and customers.
We have limited experience acquiring businesses, and we cannot assure you that
we will identify appropriate targets, will be able to 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.
In July 2000, we acquired the AirBoss business unit of Telcordia Technologies,
Inc., a software and wireless technology services business. We have completed
much of the integration of the AirBoss products, services, technologies and
personnel. However, if we are unable to complete the integration process and to
create new or enhanced services based on the integrated product offering and
operations, we may not achieve the anticipated benefits from our acquisition of
AirBoss.
Fluctuations in Operating Results: Our quarterly and annual operating results
are subject to significant fluctuations, and our stock price may decline if we
do not meet the expectations of investors and analysts.
Our quarterly and annual revenues and operating results are difficult to predict
and may fluctuate significantly due to a number of factors, some of which are
outside of our control. Risks include, but are not limited to:
o the success of the our efforts to integrate the Mobile Server + and the
AirBoss Application products;
o our ability to sign new carrier and enterprise customers;
o our ability to continue to develop new and compelling services;
o our concentrated target market;
o the long sales cycle for our products;
o the timing of revenue recognition based on financial accounting principles;
o the substantial effect on total revenues from the gain or loss of business
from each incremental customer;
16
o the extent to which we can negotiate and subsequently earn fees for
professional services;
o the timing and extent of our expenses for research and development, and
sales and marketing;
o our ability to manage our costs effectively;
o the development of attractive wireless applications by third parties; and
o actions by our competitors.
Because our staffing and operating expenses are based on anticipated revenue
levels, and because a high percentage of our costs are fixed, small variations
in revenue levels can cause significant variations in operating results quarter
to quarter. If we are unable to adjust spending in a timely manner to compensate
for an unexpected revenue shortfall, we would expect our operating performance
to be negatively affected. If our operating results will be below public
expectations, we would expect to experience an immediate and significant decline
in the market price of our common stock.
In 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. Because of the recent economic downturn, many of our
current and prospective customers may elect to delay or postpone investment in
wireless data applications, which could materially impact our revenue, operating
performance and financial condition. Due to the foregoing factors, we believe
period-to-period comparisons of our revenue levels and operating results are not
meaningful. You should not rely on our quarterly revenues and operating results
to predict our future performance.
International Operations: We have derived most of our revenue from international
operations in each of the last three fiscal years and there are many risks
associated with these operations.
International operations accounted for 78%, 94% and 94% of total revenues in
fiscal years 2001, 2000 and 1999, respectively. We anticipate that international
revenue will continue to represent a significant portion of our future revenue.
International revenue is subject to 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. We earn a substantial portion of our revenue from customers in
Europe and Japan and view these regions as strategic to our business objectives.
Economic difficulties within these regions could have a material adverse effect
on our ability to generate revenue from our international customers.
Furthermore, 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.
Risk of Software Defects: Our software may contain defects or errors that could
delay shipments, harm our reputation, or increase costs.
Our software is complex and must operate across a broad variety of operating
systems, devices and connectivity options. And, it must meet the stringent
requirements of our customers. We must develop our software and service products
quickly to keep pace with the rapidly evolving mobile data market. Despite
rigorous testing, software this complex is likely to contain undetected errors
or defects, particularly when first introduced or when new versions are
released. Such errors or defects may result in the rejection of our product,
damage to our reputation, lost revenue, diverted development resources and
increased service and support costs, any of which could harm our business.
17
Dependence on Key Personnel: Our 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. 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.
Volatility of Stock Price: Our stock price may be volatile, like that of many
companies in the Internet and telecommunications software industries, exposing
us to expensive and time-consuming securities class action litigation.
Our stock price has experienced significant volatility to date. We expect that
the market price of our common stock will fluctuate in the future as a result of
variations in our quarterly operating performance. In addition, our common stock
price is volatile because it is associated with Internet, telecommunications and
technology stocks, in general, and because volume is usually limited. As a
result, there are many factors that may affect our stock price unrelated to our
specific performance, including substantial sales by one of our larger
shareholders. Also 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 significantly.
Item 2. PROPERTIES
Our corporate headquarters are located in Alameda, California, in approximately
40,000 square feet of office space under a lease that expires in January 2005.
We have a facility in Macclesfield, England, in 7,000 square feet of office
space under a lease that expires in 2006. We have also leased a small office in
Tokyo, Japan.
In connection with the AirBoss acquisition we assumed a lease of approximately
6,240 square feet of office space in the Telcordia facilities in Red Bank,
Piscataway, and Morristown, New Jersey. In July 2001, the existing New Jersey
leases will terminate and we will move into a new approximately 20,000 square
foot facility in Morganville, New Jersey. This lease will expire in 2011. We
believe that our existing facilities will be adequate to meet our needs in
fiscal year 2002 and that additional space will be available if needed.
Item 3. LEGAL PROCEEDINGS
We are not involved in any material litigation. On April 25, 2000, Openwave
Systems Inc., formally Phone.com filed a declaratory relief complaint alleging
that our Flex UI patent is invalid and unenforceable. On June 15, 2000, we filed
a countersuit in the United States District Court in San Francisco against
Phone.com. The lawsuit sought to demonstrate that the activity of Phone.com and
its licensees utilizing Phone.com's UP Server Suite and UP Browser infringes on
our Flexible User Interface patent. On September 8, 2000 we filed a complaint
with the U.S. International Trade Commission (the "ITC") against Phone.com,
Sanyo Electric Co., Ltd. of Japan and Sanyo North America seeking an order to
block importation into the U.S. of WAP cellular telephones containing
Phone.com's microbrowsers. One month later, the ITC announced it had accepted
our complaint and initiated an investigation into this matter.
18
On December 28, 2000, we announced an agreement between Openwave Systems Inc.,
to settle our patent dispute by entering into a royalty-free patent
cross-license, and the companies have dismissed their patent litigation in
federal district court and in the ITC.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended March 31, 2001.
Item 4A. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The members of the Board of Directors and executive officers of the Company are
as follows:
Name Age Position
---- --- --------
David Neylon 53 Chairman of the Board of Directors
John B. Balousek 56 Director
Kevin P. Fitzgerald 44 Director
Andrew Cole 34 Director
Stephen T. Baker 43 Director
David L. Grannan 37 President and Chief Executive Officer, Director
Dave M. Pepe 44 Senior Vice President, Mobile Products and
Services
Timothy J. Toppin 41 Vice President and Chief Financial Officer
Christopher A. Waldo 43 Vice President, Sales
Mr. Neylon joined the Board of Directors in January 2000. He was appointed
Chairman of the Board of Directors in April 2000. Mr. Neylon was previously with
LookSmart, Ltd., a leading Internet search and directory company, where he
served as Chief Operating Officer from November 1998 to September 1999. Mr.
Neylon was Senior Vice President of WorldPlay Entertainment from 1995 to 1998.
Mr. Neylon was with AT&T from 1987 to 1995 in a variety of management
assignments. He was Vice President of ImagiNation Network, a subsidiary of AT&T
and the predecessor of WorldPlay Entertainment from 1993 to 1995. Mr. Neylon's
other positions with AT&T included product management assignments at AT&T's
Computer Systems Division, strategic planning for AT&T's Consumer Products
Division, and in emerging technology ventures for AT&T's Easylink Systems. Mr.
Neylon holds a BA degree from Drew University and an MBA from Rutgers
University.
Mr. Balousek joined the Board of Directors in December 1998. Mr. Balousek was
Executive Vice President and a Founder of PhotoAlley.com, a San Francisco-based
start-up company providing electronic commerce services from 1998 through 1999.
In 1996 Mr. Balousek was named Chairman and Chief Executive Officer of True
North Technologies, the digital and interactive services company of Foote, Cone
& Belding Communications (FCB), an agency network of parent company True North
Communications. Mr. Balousek joined the San Francisco office of FCB, one of the
nation's leading advertising agencies, in 1979 and was named general manager of
the office in 1986. Mr. Balousek was named President of FCB West and a director
of the firm in 1989, and was named President and Chief Operating Officer of the
$5 billion agency in 1991. Prior to joining FCB, Mr. Balousek was in brand
management at Procter & Gamble. In addition to Geoworks, he currently serves as
a Director of Aptimus.com, and Micron Electronics Corp., both publicly-held
companies, and Encirq Corp., Emmperative Inc , and EDB Holdings, all privately
held companies. Mr. Balousek holds a BA degree from Creighton University and a
Master's degree from Northwestern University.
19
Mr. Fitzgerald joined the Board of Directors in December 1999. From Oct. 2000 to
May 2001, Mr. Fitzgerald was the President, CEO & Director of Globaltron
Communications. From May 1995 to June 2000, Mr. Fitzgerald served as President,
Chief Executive Officer, and director of Neff Corporation, one of the largest
equipment rental companies in the United States. Prior to May 1995, Mr.
Fitzgerald was a senior vice president of Houlihan Lokey, Howard & Zukin, an
investment-banking firm. Mr. Fitzgerald currently serves as a director of
TeleServices Group, a privately held company and is a partner with Apogee
Capital, an investment firm. Mr. Fitzgerald holds a BS in Electrical Engineering
from Carnegie Mellon University, and an MBA from Fordham University.
Mr. Cole joined the Board of Directors in April 2000. Mr. Cole is a Vice
President and head of the Global Wireless Practice of ADVENTIS Corp, a leading
international consulting firm specializing in wireless and telecommunications
markets. Mr. Cole has been with ADVENTIS since 1995. Mr. Cole was the Director
of Wireless Consulting Services at EMI Strategic, a Boston based strategic
marketing firm from 1993 to 1995. From 1991 to 1993, Mr. Cole held
cross-continental positions at the LEK Partnership, a strategy consulting firm
based in the United Kingdom. Mr. Cole holds a Masters Degree in Business from
Oxford University and an Undergraduate Degree in Geography, Economics and
Statistics from Bristol University in England.
Mr. Baker joined the Company in October 1998 as Vice President and Chief
Financial Officer and was promoted to President and Chief Operating Officer in
September 2000. In June 2001 he stepped down from a management role with the
Company while continuing to serve on the Board of Directors. He was appointed to
the Board of Directors in October 1999. From 1996 to 1998, he was Vice
President, Finance and Controller, for the Service Provider Messaging Group at
Lucent Technologies having started with Octel Communications prior to its
acquisition by Lucent. From 1995 to 1996, Mr. Baker was the CFO for the Software
Systems Group of Bell Communications Research. From 1993 to 1995 he was
Controller at Novell after the acquisition of Unix System Laboratories (USL). At
Unix System Laboratories, a worldwide software company, Mr. Baker was CFO from
1989 to 1993. Mr. Baker has also held a number of financial management and
operational positions with AT&T Corporation from 1981 through 1989. He holds a
BA from the University of Pennsylvania and an MBA from the Columbia University
Graduate School of Business.
Mr. Grannan joined the Company in March 1998 as Vice President, Marketing and
Business Development. The Board of Directors appointed Mr. Grannan as President,
Chief Executive Officer, and a Director in January 1999. Prior to joining the
Company, Mr. Grannan was an Area Vice President at Sprint PCS from June 1997 to
March 1998. Prior to his position at Sprint PCS, Mr. Grannan worked at Andersen
Consulting in the Communications Industry Group from May 1994 to June 1997,
where he provided strategic services for many organizations. Mr. Grannan began
his career as a Data Communications Officer in the United States Marine Corps.
He holds a BA from Indiana University and received his MBA from the University
of California, Berkeley.
Mr. Pepe joined the Company in July 2000 after the acquisition of AirBoss from
Telcordia Technologies Inc. as Vice President, Mobile Products. He was promoted
to Senior Vice President, Mobile Products and Services in June 2001. Mr. Pepe
has more than 20 years of telecommunications industry experience within both
business and technical disciplines at RCA, Panasonic, and Ericsson, prior to
joining
20
Telcordia Technologies in 1987. Mr. Pepe has spent 15 years in the area of
wireless communications, beginning with the industry's pioneer in wireless data
communications efforts in alphanumeric paging. While working for Ericsson Radio
Systems, Mr. Pepe was responsible for establishing Ericsson as the premier
supplier of cellular systems in the United States. In 1987, Mr. Pepe joined
Telcordia Technologies providing market and business planning for wireless local
loop technologies for voice and data communications to the Regional Bell
Operating Companies. He established a Wireless Business Unit responsible for
software solution development of wireless voice and data products within the
evolving Wireless Intelligent Network (WIN) infrastructure and has been awarded
three patents in the area of wireless data and messaging. Mr. Pepe holds a
B.S.E.E. from Fairleigh Dickinson University (microprocessor and system design)
and pursued graduate studies at Wharton and Fairleigh Dickinson University
(finance and marketing).
Mr.Toppin joined the Company in March 1999 as Controller and was promoted to
Vice President and Chief Financial Officer in September 2000. He has served as
the Company's Secretary since June 2000. Prior to Geoworks, Mr. Toppin was with
Digital Generation Systems, Inc. as Controller from April 1996 to December 1998
and as Planning and Accounting Manager from February 1995 through March 1996.
From 1987 to 1995, Mr. Toppin held a number of financial management positions at
BEI Electronics, Inc., and it's subsidiary, Zinnanti Surgical Instruments. Mr.
Toppin was with the public accounting firm of Deloitte Haskins & Sells from 1983
to 1987. He holds a B.S. degree in business administration from the University
of California at Berkeley, and is a Certified Public Accountant in the state of
California.
Mr. Waldo joined the Company in May 2000 as Vice President, Sales. Before
joining Geoworks, Mr. Waldo was the Area Director of National Sales for Sprint
PCS from January 1997 to May 2000. Mr. Waldo previously was Director of Sales
for Cellular One in the San Francisco Bay Area from September 1994 to December
1996. From May 1992 to September 1994, Waldo was Corporate Sales Manager for
Cellular One. Mr. Waldo began his sales career with IBM in 1987 prior to joining
Responsive Software Solutions, an IBM Business Partner in 1989, and Cellular One
as a Key Account Executive in November 1990. Mr. Waldo has a BS and BA in
Economics from the University of Missouri.
21
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Changes in Common Stock Market Value
Our Common Stock trades on the Nasdaq National Market under the symbol "GWRX."
The following table sets forth the high and low last reported sales prices for
our Common Stock as reported by the Nasdaq National Market for the quarters
indicated:
High Low
For the quarter ended:
----------------------
March 31, 2001 $ 5.09 $ 1.17
December 31, 2000 7.06 1.22
September 30, 2000 16.19 7.38
June 30, 2000 25.75 9.00
Fiscal 2000
-----------
March 31, 2000 $ 51.75 $ 14.06
December 31, 1999 16.75 2.38
September 30, 1999 3.56 2.06
June 30, 1999 3.69 2.25
Registered Holders
As of June 4, 2001, there were 240 registered holders of record of our Common
Stock and approximately 19,830 beneficial holders of our Common Stock. We have
never declared or paid any cash dividends on our common stock. Since we
currently intend to retain all future earnings to finance future growth, we do
not anticipate paying any cash dividends in the foreseeable future.
22
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below is qualified in its entirety by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the "Consolidated Financial
Statements" and notes thereto included elsewhere in this Report on Form 10-K.
Condensed Consolidated Statements of Operations Data:
(in thousands, except per share data)
Year ended March 31
2001 2000 1999 1998 1997
Total net revenues $ 16,565 $ 12,139 $ 8,782 $ 12,917 $ 11,096
Operating expenses:
Cost of services 6,735 4,919 867 155 624
Sales and marketing 8,607 5,577 4,951 6,613 7,108
Research and development 9,202 4,100 13,810 18,543 13,698
General and administrative 7,079 3,338 3,634 3,596 3,708
Amortization of goodwill and other intangible assets 5,410 -- -- -- --
Purchased in-process research and development 1,378 -- -- -- --
Restructuring charges (reversal) -- (589) 1,790 -- --
Cost of merger -- -- -- -- 1,450
--------
Total operating expenses 38,411 17,345 25,052 28,907 26,588
--------
Operating loss (21,846) (5,206) (16,270) (15,990) (15,492)
Other income (expense):
Other income 265 4,049 -- -- --
Interest income 840 646 612 1,427 2,324
Interest expense (4) (10) (31) (158) (244)
------------------------------------------------------------
Total other income, net 1,101 4,685 581 1,269 2,080
------------------------------------------------------------
Loss before income taxes (20,745) (521) (15,689) (14,721) (13,412)
Provision for income taxes 313 452 149 148 64
------------------------------------------------------------
Net loss $(21,058) $ (973) $(15,838) $(14,869) $(13,476)
============================================================
Net loss per share- basic and diluted $ (0.99) $ (0.05) $ (0.97) $ (0.95) $ (0.88)
============================================================
Shares used per share computation 21,190 17,866 16,260 15,687 15,234
============================================================
23
Consolidated Balance Sheet Data:
(in thousands)
March 31
2001 2000 1999 1998 1997
Cash and cash equivalents $ 13,713 $ 17,204 $ 13,715 $ 19,981 $ 36,820
Working capital 10,616 14,286 12,379 20,095 33,626
Total assets 56,263 41,459 18,183 27,463 41,868
Deferred revenue 1,128 1,629 1,498 778 1,919
Long-term obligations, net of
current portion 128 -- -- 231 739
Accumulated deficit (111,110) (90,052) (89,079) (73,241) (58,372)
Stockholders' equity 49,731 36,632 13,374 23,392 36,553
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Our company is a leading provider of carrier-class mobile Internet
infrastructure sofware, enabling personalized, real-time access to corporate and
Internet data. Our business model is built around the licensing of our software
platforms for mobile solutions, the Geoworks AirBoss Application Platform and
MobileServer+, to wireless carriers and enterprises around the world. We also
provide professional services consulting related to technologies we previously
developed, as well as the development of new technologies supporting mobile
communications.
Our financial performance and financial condition over the last few years have
been significantly affected by a number of strategic business decisions.
From our IPO in 1994 through early 1999, we were focused on developing and
selling wireless operating systems for smart phones and PDAs. Our customers were
large mobile phone manufacturers who paid us research and development fees to
develop software and agreed to pay us royalties based on the number of phones
they shipped with our operating system. This market did not develop as rapidly
as expected and we did not generate significant royalty revenue.
In mid-1998, several of the world's largest handset makers including Nokia,
Motorola, Ericsson and Matsushita, representing over half of our target market,
created a joint venture to develop their own mobile operating system. Therefore,
in response to the slow growth in the market, the increased competition and the
loss of key Original Equipment Manufacturers, ("OEM") targets, we shifted our
focus to the development of mobile server software for m-commerce and
information services.
This refocusing of our business strategy affected our reported performance and
business model in both fiscal years 1999 and 2000. In the second quarter of
fiscal year 1999, we began changing the nature of our contractual arrangements
with customers for engineering services from OEM funded research to a
professional services consulting basis. This is reflected in the growth in
professional services revenue over the period, and reduced both the risk and
reward of being dependent on the collection of product royalty revenues based on
potential shipments of our OEM customers.
In the fourth quarter of fiscal year 1999, we discontinued development of our
smart phone operating system and sold the source code, on a non-exclusive basis,
to one of our major OEM customers who we continue to support through a
professional service consulting agreement. In connection with that effort, we
significantly reduced headcount and recorded a restructuring charge to bring our
ongoing expense levels down sharply to be in line with our business plan to
provide mobile software for e-commerce and information services.
The shift in revenue from research and development fees to professional services
continued in fiscal year 2000, as we grew the volume of engineering consulting
services provided to our customers during the year. Consistent with our business
plan, most of our research and development and sales and marketing efforts were
targeted at our mobile software and services offerings.
In July 2000, we strengthened our product and service offering by acquiring the
AirBoss Application Platform and the Airboss Business Unit from Telcordia , as
discussed below. This acquisition was important to fiscal year 2001 revenues, as
new mobile software revenues more than offset the expected decline in royalty
and source code revenues from legacy products.
25
In June 2001, we announced a reorganization intended to strengthen our
competitive position by accelerating the integration of our two software
products, the AirBoss Application Platform and Mobile Server+, streamlining our
organization and exiting the Mobile ASP market. Given current market conditions
and our available resources, we believe this is the best way to focus our
resources on the areas of greatest potential while reducing operating expenses.
As a result of the reorganization, we reduced our workforce by approximately
22%, or 43 employees, and will implement other cost cutting measures that
management anticipates will save approximately $2.0 million in expenses per
quarter going forward. We expect to incur approximately $3.0 million in
restructuring and exit charges in our quarter ending June 30, 2001.
Acquisition of AirBoss
On July 24, 2000, we acquired substantially all of the assets of an established,
separate, and unincorporated division of Telcordia, considting of of Telcordia's
AirBoss Business Unit, which operated a software and wireless technology
services business ("AirBoss").
Effective as of the closing of the acquisition, we established an office in New
Jersey to continue the research, development, and deployment of the AirBoss line
of patented mobile communications software products, as well as to service the
various third parties whose contractual rights with Telcordia were assigned to,
and assumed by us as part of the acquisition. In connection with the
acquisition, Telcordia terminated the employment of twenty-five individuals, who
were then immediately hired by us.
Results of Operations
Net Revenues
Year Ended Change Year Ended Change
----------------- ------------------ ----------------- ------------------
March 31, March 31, March 31, March 31,
2001 2000 $ % 2000 1999 $ %
------- ------- ------- ------- ------- ------- ------- -------
Net revenues (in thousands):
Professional services $ 8,343 $ 7,004 $ 1,339 19% $ 7,004 $ 1,228 $ 5,776 470%
Software and related services 8,222 4,815 3,407 71 4,815 4,239 576 14
Research and development fees -- 320 (320) (100) 320 3,315 (2,995) (90)
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues $16,565 $12,139 $ 4,426 36% $12,139 $ 8,782 $ 3,357 38%
======= ======= ======= ======= ======= ======= ======= =======
Fiscal year 2001 vs. 2000
Net revenues. Net revenues in fiscal year 2001 increased by $4,426,000, or 36%,
in comparison with fiscal year 2000. During our continued transition from being
a provider of operating systems and related research and development to becoming
a provider of wireless data communication services and technologies,
professional services revenues have been a primary source for revenue and cash
generation. Software and related services primarily include revenues generated
from AirBoss products and services as well as revenues from legacy operating
system products.
Professional services revenue. Professional services revenue in fiscal year 2001
increased by $1,339,000, or 19%, in comparison with fiscal year 2000.
Professional services revenue increased based on both an increased number of
hours worked and an increase in our rates as compared to the same periods of the
prior year. We had two primary customers for these services for fiscal year
2001, as compared to three such customers for fiscal year 2000. Our professional
service projects involve consulting related to technology previously developed
by us, as well as development of new technologies supporting mobile
communications.
26
Software and related services revenue. Software and related services revenue in
fiscal year 2001 increased $3,407,000, or 71%, in comparison with fiscal year
2000, and now accounts for almost 50% of our total revenue. This increase is due
primarily to the addition of Airboss product revenues. In fiscal year 2000,
software and related services revenues included $1,541,000 in one-time payments
for source code licenses for operating systems. Excluding these one-time
payments from source code license revenues, software and related services in
fiscal year 2001 increased $4,948,000, or 151%, in comparison with fiscal year
2000.
The largest element of software and related services revenue are revenues
derived from the sale of our software and the related software customization.
Customization contracts also include the potential for additional license fees
and maintenance services. For fiscal year 2001, such software and customization
services revenues were approximately $3,100,000. Software and customization
services revenues included services provided to Telcordia, a related party, to
support an installation of AirBoss software for Telkom South Africa. In
addition, AirBoss software was customized for Cingular Interactive, formerly
BellSouth Wireless Data. No such revenues were recorded for fiscal year 2000.
Since our acquisition of the AirBoss business unit, AirBoss products and
customers accounted for approximately $3,500,000 of fiscal year 2001 revenues.
Included in the AirBoss revenues are $2,555,000 from Telcordia, a related party,
for fiscal year 2001. On March 16, 2001, we announced that we will no longer be
providing subcontracted mobile data services to Telcordia for Telkom South
Africa ("TSA") as a result of the termination of the contract between Telcordia
and TSA. The TSA contract accounted for 15% of fiscal year 2001 revenue.
Telcordia continues to be an active VAR for us and our largest stockholder. We
expect AirBoss product revenues to continue to be a significant portion of our
revenues in the future.
The remaining fluctuations in software and related services revenues are due
primarily to decreased license fees, and royalty revenues for fiscal year 2001,
as compared to fiscal year 2000. Historically, our license and other revenues
have been generated primarily by operating system and various application
software we developed that are included in smart phones. As the last of these
products containing the Geoworks operating systems reach the conclusion of their
life cycles, the license revenue from these legacy products has continued to
diminish. In addition, because we have sold operating system source code and
terminated a number of license agreements over the past three fiscal years, the
number of OEM license agreements which could generate future royalty revenues
has decreased. Although our legacy license revenues are decreasing, we expect
new license and other related revenues will be generated from our mobile
software offerings based on the growth of revenues and subscribers of our
existing customers such as Toshiba and Cingular Interactive, as well as
additional AirBoss and Mobile Server+ software customers.
Software and related services revenue also includes license fees generated from
our Flex UI licensing program. For fiscal year 2001, the Company recorded
approximately $529,000 in Flex UI licensing revenues.
Research and development fee revenue. Research and development fee revenue for
fiscal year 2000 was related to an OEM contract with a single customer. As
discussed above, we have adopted a new business model and OEM funded research
and development contracts are not being actively pursued. No such revenue was
recorded for fiscal year 2001.
Fiscal year 2000 vs. 1999
Net revenues. Net revenues in fiscal year 2000 increased $3,357,000, or 38%,
versus net revenues in fiscal year 1999. The increase was due to increased
professional services revenues and license revenues which more than offset
reductions in research and development fees. The shift in revenue to
professional
27
services from research and development fees was consistent with our transition
from being a provider of operating systems and related research and development
to becoming a provider of wireless data communication services and technologies.
Professional services revenue. Professional services revenue increased
$5,776,000, or 470%, in fiscal year 2000, as compared to fiscal year 1999. This
increase was primarily due to a change in our contractual agreements we provided
for engineering services. In the second quarter of fiscal year 1999, we began
providing a portion of our non-recurring engineering services on a professional
services consulting basis rather than as OEM funded research and development.
Software and related services revenue. Software and related services revenue in
fiscal year 2000 increased $576,000, or 14%, in comparison with fiscal year
1999. Such revenues included royalty and license fees resulting from the use of
our technology in units sold by OEM customers as well as sales of our source
code and various service revenues. Royalty and license fees increased $837,000,
or 22% due to royalties received based on increased shipments of units sold by a
single OEM licensee. Source code revenues, which are included in the royalty and
license fees, increased approximately $200,000 due to one-time non-recurring
events. Service revenues decreased $261,000, or 72% due to a reduction in
support fees earned in connection with software licensed to OEM customers. The
service fee decrease was consistent with the change in our business model.
Research and development fees revenue. Research and development fees revenue
decreased $2,995,000, or 90%, in fiscal year 2000 as compared to fiscal year
1999. The revenues recognized in fiscal year 2000 resulted from contracts that
had been in progress since fiscal year 1999.
Operating Expenses
Cost of Professional Services. Cost of professional services are those expenses
incurred to provide professional services consulting, including compensation,
travel, other direct costs, and facilities overhead. Cost of professional
services increased $184,000, or 4%, to $4,768,000 for fiscal year 2001 in
comparison with fiscal year 2000. The increase for fiscal year 2000 was
$3,757,000, or 454% to $4,584,000 as compared to fiscal year 1999. These
increases can be attributed to the increased volumes of professional service
activity and revenue as compared with the same periods of the prior fiscal
years.
Gross margin percentages on professional services revenues were 43%, 35%, and
33% during fiscal years 2001, 2000 and 1999, respectively. The gross margin
percentages have improved in each year as compared to the prior years because we
have charged increased rates for such services and have decreased our average
costs 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.
Cost of Software and Related Services. Cost of software and related services
increased $1,632,000, or 487%, to $1,967,000 for fiscal year 2001 in comparison
with fiscal year 2000. The increase in fiscal year 2001 is primarily because we
began providing software and related customization services after our
acquisition of AirBoss in July 2000. Costs of these customization services and
other related services are recorded based on labor and direct costs and related
overhead of these projects. For fiscal year 2001, cost of customization services
was approximately $1,900,000. No such cost was recorded in fiscal year 2000.
Also included in these costs of software and related services are license
payments to third parties for software that is incorporated into our software.
Such costs decreased $288,000, or 86%, to $47,000 in
28
fiscal year 2001, in comparison with fiscal year 2000. The decrease is due to a
reduced proportion of the related revenues being subject to such fees in fiscal
year 2001, as compared with fiscal year 2000.
Cost of software and related services increased $295,000, or 738%, to $335,000
for fiscal year 2000, as compared to fiscal year 1999. This was primarily due to
the increased license payments to third parties for software that was
incorporated into our software, as compared to fiscal year 1999.
To calculate the gross margin on software and related services we have included
direct costs of software and related services as well as the amortization of
other intangible assets acquired in the AirBoss acquisition of $1,369,000 for
fiscal year 2001. Such technology-related expenses are included in amortization
of goodwill and other intangible assets. See Note 4 "Acquistion of Airboss" in
the consolidated financial statements. Including this additional amortization
expense, the Company's gross margin percentages on software and related services
was 59%, 93% and 99% for fiscal years 2001, 2000 and 1999, respectively.
Excluding these non-cash amortization expenses, the gross margin percentages on
software and related services was 76%, 93% and 99% for fiscal years 2001, 2000
and 1999, respectively. The gross margins on these revenues are lower in the
current fiscal year because of the addition of the revenues and associated costs
of providing customization services. The gross margin recognized on such
services is subject to several variables, particularly the mix of products and
services provided and the average rates charged for such services. 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.
Sales and Marketing. Sales and marketing expenses include salaries, benefits,
sales commissions, travel and related facilities overhead expense for our sales
and marketing personnel. Sales and marketing expense increased $3,030,000, or
54%, to $8,607,000, during fiscal year 2001, in comparison with fiscal year
2000. This increase is due primarily to an increase in personnel and business
activity, including business development, as we expanded our efforts to market
our new services, particularly the AirBoss Application Platform, Mobile Server+,
and Mobile ASP offerings and launched our Mobile Business Alliance Program.
Sales and Marketing headcount grew by 115%, to 43 during fiscal year 2001. The
increased personnel costs were partially offset by reduced consulting expenses
because of the increased internal resources available.
Sales and marketing expense increased $626,000, or 13%, to $5,577,000, during
fiscal year 2000, in comparison to fiscal year 1999. This increase was due
primarily to increased spending on marketing and advertising programs as well as
increased business development activities. These increased program costs were
partially offset by reduced personnel costs.
Research and Development. Research and development expenses consist primarily of
salaries and benefits for software engineers, contract development fees, cost of
computer equipment used in software development and related facilities overhead
expense. Research and development expense increased by $5,102,000, or 124% to
$9,202,000, during fiscal year 2001, in comparison with fiscal year 2000. This
increase is attributable principally to increased staffing and related costs,
including recruiting expenses, as we expanded our research and development
efforts. In particular, the Company has focused on software development for the
AirBoss Application Platform and Mobile Server+. The research and development
staff grew by 146% to 86 over fiscal year 2001. In addition, we have utilized
consultants and other outside services at a greater level in fiscal year 2001,
as compared to the prior year.
Research and development expense decreased $9,710,000, or 70%, to $4,100,000,
during fiscal year 2000, in comparison to fiscal year 1999. This decrease was
principally due to reductions in staffing and related costs, including those
resulting from the restructuring actions taken in the fourth quarter of fiscal
year 1999. Such staff and expense reductions were necessary as we stopped doing
operating system
29
development and reacted to reduced levels of OEM funding. We also narrowed the
scope of our internal research and development to focus on mobile data software
and services.
General and Administrative. General and administrative expenses include costs
for our human resources, finance, legal, general management functions, and the
related facilities overhead. General and administrative expense increased by
$3,741,000 or 112%, to $7,079,000, during fiscal year 2001, in comparison to
fiscal year 2000. This increase was due to increased legal expense as well as
the increased personnel costs required to build the administrative
infrastructure to support the new business plan and the AirBoss acquisition. The
general and administrative staff grew 39% to 25 over fiscal year 2001. Legal
fees were $2,340,000, or 33%, of total general and administrative expense, in
the fiscal year 2001, primarily due to the Openwave (formerly Phone.com)
litigation. In December 2000, we announced an agreement with Openwave Systems
Inc. to settle the patent dispute by entering into a royalty-free patent
cross-license and strategic business relationship. The companies dismissed the
patent litigation before the federal district court and the International Trade
Commission. See further discussion at Part 1. Item 1 Business, and Item 3 Legal
Proceedings. Excluding the nonrecurring litigation expenses the general and
administrative expenses increase would have been approximately $1,909,000 or
57%, during fiscal year 2001, in comparison with fiscal year 1999.
General and administrative expense decreased $296,000, or 8%, to $3,338,000
during fiscal year 2000 in comparison to fiscal year 1999. The decrease was due
primarily to reduced staffing costs and reduced professional fees due to the
restructuring actions taken in the fourth quarter of fiscal year 1999 and the
change in our business focus.
Amortization of goodwill and other intangible assets. Amortization of goodwill
and other intangible assets was $5,410,000 for fiscal year 2001. This was
attributable to the amortization of goodwill and other purchased intangible
assets resulting from our July 2000 acquisition of AirBoss. We expect the
quarterly amortization expense related to the AirBoss acquisition to be
approximately $2,000,000 per quarter through fiscal year 2004 and approximately
$1,500,000 per quarter through fiscal year 2005 and then the remaining balance
will be amortized in the first and second quarters of fiscal year 2006. See Note
4 "Acquisition of AirBoss" in the consolidated financial statements.
We review long-lived and intangible assets for impairment whenever events or
circumstances indicate the carrying value of an asset may not be recoverable.
For fiscal year 2001, possible impairment indicators included, but were not
limited to, cancellation of the Company's largest software and customization
contract, declines in the Company's stock price, and continued operating losses.
Possible impairment of the Company's intangible assets were determined based on
estimated future undiscounted cash flows to be generated. The estimates
resulting from the Company's analysis indicated that no impairment was present.
Purchased in-process research and development. In connection with the
acquisition of AirBoss, we recorded a non-cash expense for purchased in-process
research and development of $1,378,000 in the second quarter of fiscal year
2001. The efforts required to complete the acquired in-process technology
included the completion of all planning, designing and testing activities that
are necessary to establish that the products can be produced to meet their
design requirements, including functions, features and technical performance
requirements. The value of the acquired in-process technology was computed using
a discounted cash flow analysis rate of 25% on the anticipated income streams of
the related product revenues. The discounted cash flow analysis was based on
managements' forecast of future revenues, cost of revenues, and operating
expenses related to the products and technologies purchased from Telcordia. The
calculation of value was then adjusted to reflect only the value creation
efforts of AirBoss prior to the close of the acquisition. The acquired
in-process technology was expensed in the period the transaction was
consummated. See Note 4 "Acquisition of AirBoss" in the consolidated financial
statements.
Other Income (Expense)
Other Income. The proceeds from the sale of 10,800 shares, a portion of the
Company's investment in Wink Communications, Inc. ("Wink") resulted in other
income of $265,000 in fiscal year 2001. During fiscal year 2000, 75,000 shares
of Wink were sold which resulted in other income of $4,049,000. Wink completed
its initial public offering in August 1999. As discussed below in "liquidity and
capital resources," our strategy for liquidating all or some portion of our
long-term investments will
30
depend on a number of factors. Such factors include, but are not limited to, the
levels of cash we use in operations, the desire to diversify our investment
risk, and the performance of these investments versus the stock market as a
whole.
Interest Income. Interest income increased by $194,000, or 30%, to $840,000,
during fiscal year 2001, in comparison to fiscal year 2000. This increase is
attributable primarily to higher cash balances available for short-term
investment. In particular, we generated a total of $4,049,000 from the sales of
our investment in Wink in the third and fourth quarters of fiscal year 2000. In
addition, we have received approximately $11,100,000 from the issuance of our
common stock in the past twelve months. This includes equity proceeds which
resulted from a September 2000 private placement of $5,000,000 with Integral
Capital Partners, a January 2001 private placement of $5,000,000 with iValue
Creation Company, a subsidiary of Toshiba Corporation, exercises under our
employee stock option plans, and purchases under our employee stock purchase
plan.
Interest income increased $34,000, or 6%, in fiscal year 2000, as compared to
fiscal year 1999. This increase was attributable to the increased balances of
cash available for short-term investment. Net cash used in operations was
significantly reduced due to improved operating performance and we generated
$4,100,000 from the sales of Wink stock. In addition, we received $3,300,000
from the issuance of common stock in fiscal year 2000 in addition to the
$5,000,000 raised in a private placement from Amazon.com in the fourth quarter
of fiscal year 1999.
Interest Expense. Interest expense was not significant in fiscal years 2000, and
1999, as we have had minimal balances of capital lease and debt outstanding. As
we increase our investment in the assets and infrastructure to support our new
business plans, we will consider financing alternatives, which would increase
the amount of interest expense incurred in the future.
Provision for Income Taxes
We account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Income tax expense consists of
foreign income tax withholding on foreign source royalties paid us. As of March
31, 2001, we had net operating loss carryforwards for U.S. federal income tax
purposes of approximately $116,601,000, and for U.K. income tax purposes of
approximately $5,127,000, and for state income tax purposes of approximately
$30,926,000. We also had research and development credit carryforwards for
federal income tax purposes of approximately $2,653,000 and for state income tax
purposes of approximately $1,039,000. Utilization of our U.S. net operating loss
and research credit carryforwards will be subject to annual limitations based on
the "change of ownership" provisions of the Tax Reform Act of 1986. These
limitations may result in the expiration of net operating loss and research
credit carryforwards before utilization.
Liquidity and Capital Resources
The Company's total cash and cash equivalents were $13,713,000 at March 31,
2001, compared with $17,204,000 at March 31, 2000. Net cash used by operations
in the fiscal year 2001 was $11,997,000. Net cash provided by financing
activities for the same period was $11,189,000 as a result of the issuance of
common stock and other financing activities. The balance of our cash usage in
fiscal year 2001 has been due principally for purchases of equipment. This level
of cash usage is significantly larger than in fiscal year 2000 because we have
been increasing our investment in research and development and sales and
marketing activities in order to execute our business plan. In addition, legal
expenses have been significantly higher in fiscal year 2001. Although legal
expenses are expected to decrease significantly, we expect to incur additional
substantial operating losses at least
31
through the current fiscal year 2002, as we increase our investment in the
development of wireless data software and services and technologies, including
additional sales, marketing and research and development spending.
Purchases of property and equipment were $3,025,000, $937,000 and $216,000 in
fiscal years 2001, 2000, and 1999, respectively. The increase in capital
spending is consistent with the increase in personnel in connection with the
execution of our new business plan and the AirBoss acquisition. Sales of
property and equipment were $6,000, $16,000 and $483,000 in fiscal years 2001,
2000 and 1999, respectively. Sales of property and equipment for fiscal year
2001 were done in the normal course of business. Sales of property and equipment
for fiscal years 2000 and 1999 were done to generate cash from excess property
due to the restructure.
Payments of capital lease and debt obligations were $5,000, $30,000 and $557,000
in fiscal years 2001, 2000 and 1999, respectively. During fiscal year 2001, we
entered into a capital lease obligation to finance our new phone system. Capital
lease and debt payments for the fiscal years ended March 31, 2000 and 1999 were
primarily due to regularly scheduled payments of the related liabilities
incurred prior to fiscal year 1998. In fiscal year 1999, these payments included
$194,000 to retire the debt outstanding on the property we sold.
During fiscal year 2001, we entered into a series of derivative contracts to
hedge against a decline in the value of our investment in Wink. These derivative
instruments will mature or expire in November and December of 2001. These
derivative instruments ensure that the minimum value of the Wink investment will
be at least $4,036,000 at maturity of the instrument. The maximum value is
limited to $7,397,000, depending on the common share price of Wink at maturity
or expiration.
Proceeds from the issuance of our common stock were approximately $11,100,000,
$3,254,000 and $5,858,000, in fiscal years 2001, 2000 and 1999, respectively.
Proceeds from the issuance of our common stock in fiscal year 2001 were
generated from a private placement with Integral Capital Partners; a private
placement with iValue Creation Company, a subsidiary of Toshiba Corporation;
exercises under our employee stock option plans, and purchases under our
employee stock purchase plan.
We expect to increase our investment in the development of our wireless data
software and services, including additional sales, marketing and research and
development spending, and we expect to incur additional operating losses at
least through the next fiscal year 2002. Although we anticipate that our
existing cash and capital resources will be adequate to satisfy our operating
requirements for fiscal year 2002, we intend to seek additional funding this
year to improve operating working capital. We cannot assure you that such
additional funding will be available on acceptable terms.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivatives
Instruments and Hedging Activities -- Deferral of Effective Date of FASB
Statement No. 133" ("FAS No. 137"). FAS No. 133, as amended by FAS No. 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, with earlier application encouraged. The Company entered into an agreement
in November 2000 to hedge against a decline in value of its investment and has
accounted for its investments under FAS No. 133.
32
See further discussion of the related assets in Item 8. Financial Statements and
Supplementary Data, Note 3 "Long-Term Investments."
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25". FIN 44 clarifies the application of APB 25 for certain issues,
including the definition of an employee, the treatment of the acceleration of
stock options and the accounting treatment for options assumed in business
combinations. FIN 44 became effective on July 1, 2000, but is applicable for
certain transactions dating back to December 1998. The adoption of FIN 44 has
not had any material effect on our financial condition or results of operations.
33
Selected Consolidated Financial Data
Quarterly Financial Information (unaudited)
(in thousands, except per share data)
Quarter Ended
31-Mar-01 31-Dec-00 30-Sep-00 30-Jun-00
Net revenues:
Professional services $ 2,342 $ 2,157 $ 2,352 $ 2,055
Software and related services 2,427 2,131 1,126 1,975
-------------------------------------------------------------
Total net revenues 4,769 4,288 3,478 4,030
Operating expenses:
Cost of professional services 1,308 1,207 1,355 1,189
Cost of software and related services 725 913 20 18
Sales and marketing 2,585 2,541 2,008 1,473
Research and development 2,702 2,537 2,317 1,646
General and administrative 1,704 2,393 1,669 1,313
Amortization of goodwill and
other intangible assets 2,029 2,028 1,353
Purchased in-process research and
development -- -- 1,378 --
-------------------------------------------------------------
Total operating expenses 11,053 11,619 10,100 5,639
-------------------------------------------------------------
Operating loss (6,284) (7,331) (6,622) (1,609)
Other income (expense):
Other income -- -- 265 --
Interest income 164 221 227 228
Interest expense (4) -- -- --
-------------------------------------------------------------
Loss before income taxes (6,124) (7,110) (6,130) (1,381)
Provision for income taxes 50 61 29 173
-------------------------------------------------------------
Net loss $ (6,174) $ (7,171) $ (6,159) $ (1,554)
=============================================================
Net loss per share - basic and diluted $ (0.27) $ (0.32) $ (0.29) $ (0.08)
=============================================================
34
Quarterly Financial Information (unaudited)
(in thousands, except per share data)
Quarter Ended
31-Mar-00 31-Dec-99 30-Sep-99 30-Jun-99
Net revenues:
Professional services $ 2,496 $ 1,975 $ 1,384 $ 1,149
Research and development fees 72 248 -- --
Software and related services 1,869 906 1,556 484
---------------------------------------------------------
Total net revenues 4,437 3,129 2,940 1,633
Operating expenses:
Cost of professional services 1,564 1,291 934 795
Cost of software and related services 81 73 115 66
Sales and marketing 1,961 1,577 1,109 930
Research and development 1,335 839 977 949
General and administrative 993 829 814 702
Restructuring charges (reversal) (589) -- --
---------------------------------------------------------
Total operating expenses 5,345 4,609 3,949 3,442
---------------------------------------------------------
Operating loss (908) (1,480) (1,009) (1,809)
Other income (expense):
Other income 1,740 2,309 -- --
Interest income 199 162 146 139
Interest expense -- (1) -- (9)
---------------------------------------------------------
Income (loss) before income taxes 1,031 990 (863) (1,679)
Provision for income taxes 97 59 131 165
---------------------------------------------------------
Net income (loss) $ 934 $ 931 $ (994) $ (1,844)
=========================================================
Net income (loss) per share-
Basis and diluted $ 0.05 $ 0.05 $ (0.06) $ (0.10)
=========================================================
35
Item 7A. QUANTITAVE 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. 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 to acquire common shares of MyTurn.com, Inc. (" MyTurn").
The Company entered into a series of derivative instruments in November 2000 to
hedge against a decline in value of its investment in Wink. These derivative
instruments will mature or expire in November and December of 2001. These
derivative instruments ensure that the minimum value of the Wink investment
should be at least $4,036,000 at maturity or expiration of the instrument.
However, the maximum value of the Wink investments is limited to $7,397,000,
depending on the common share price of Wink at maturity or expiration. As of
March 31, 2001, the fair value of the investments in Wink is recorded at
$4,036,000, which includes the fair value of the common shares of Wink
($2,400,000) and the current fair value of the derivative instruments
($1,636,000). On March 2, 2001, MyTurn filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code. Its stock is no longer trading on the
Nasdaq National Market. As of March 31, 2001 the estimated fair value of the
Company's investment in MyTurn has been reduced to zero because the market price
of MyTurn common stock is substantially below the exercise price of the related
warrants. The fair value of these long-term investments 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, we are 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.
36
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
The Board of Directors and Stockholders
Geoworks Corporation
We have audited the accompanying consolidated balance sheets of Geoworks
Corporation as of March 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 2001. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Geoworks
Corporation at March 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 2001, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
San Francisco, California
April 18, 2001,
except for Note 13, as to which the date is
June 12, 2001
37
Geoworks Corporation
Consolidated Balance Sheets
(In thousands)
March 31
2001 2000
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 13,713 $ 17,204
Accounts receivable 2,769 1,492
Prepaid expenses and other current assets 538 417
----------------------------
Total current assets 17,020 19,113
Property and equipment, net 3,576 1,155
Long-term investments and derivative instruments 4,038 21,180
Goodwill and other intangible assets, net 31,556 --
Other assets 73 11
----------------------------
Total assets $ 56,263 $ 41,459
============================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 2,374 $ 1,173
Accrued liabilities 2,874 2,025
Deferred revenue 1,128 1,629
Current portion of capital lease obligations 28 --
----------------------------
Total current liabilities 6,404 4,827
Capital lease obligations, net of current portion 128 --
Stockholders' equity:
Preferred stock, no par value; 2,000 shares authorized;
0 in 2001 and 0 in 2000 shares issued and outstanding -- --
Common stock, no par value; 80,000 shares authorized;
23,423 in 2001 and 18,485 in 2000 shares issued and outstanding 157,082 105,630
Accumulated deficit (111,110) (90,052)
Notes receivable from stockholders (88) (182)
Deferred compensation, net (318) --
Accumulated other comprehensive income 4,165 21,236
----------------------------
Total stockholders' equity 49,731 36,632
----------------------------
Total liabilities and stockholders' equity $ 56,263 $ 41,459
============================
See accompanying notes.
38
Geoworks Corporation
Consolidated Statements of Operations
(In thousands, except per share data)
Year ended March 31
2001 2000 1999
------------------------------------------
Net revenues:
Professional services $ 8,343 $ 7,004 $ 1,228
Software and related services (1) 8,222 4,815 4,239
Research and development fees -- 320 3,315
------------------------------------------
Total net revenues 16,565 12,139 8,782
Operating expenses:
Cost of professional services 4,768 4,584 827
Cost of software and related services 1,967 335 40
Sales and marketing 8,607 5,577 4,951
Research and development 9,202 4,100 13,810
General and administrative 7,079 3,338 3,634
Amortization of goodwill and other intangible assets 5,410 -- --
Purchased in-process research and development 1,378 -- --
Restructuring charges (reversal) -- (589) 1,790
------------------------------------------
Total operating expenses 38,411 17,345 25,052
------------------------------------------
Operating loss (21,846) (5,206) (16,270)
Other income (expense):
Other income 265 4,049 --
Interest income 840 646 612
Interest expense (4) (10) (31)
------------------------------------------
Total other income, net 1,101 4,685 581
------------------------------------------
Loss before income taxes (20,745) (521) (15,689)
Provision for income taxes 313 452 149
------------------------------------------
Net loss $ (21,058) $ (973) $ (15,838)
==========================================
Net loss per share - basic and diluted $ (0.99) $ (0.05) $ (0.97)
==========================================
Shares used in per share computation 21,190 17,866 16,260
==========================================
(1) Revenues from related party (Note 4) $ 2,555 -- --
==========================================
See accompanying notes.
39
Geoworks Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
Notes Accumulated
Common Stock Receivable Other Total
------------------- Accumulated From Deferred Comprehensive Stockholders'
Shares Amount Deficit Stockholders Compensation Income Equity
------------------- ---------------------------------------------------------------------
Balances at March 31, 1998 15,856 $ 96,518 $ (73,241) $ (67) $ -- $ 182 $ 23,392
Common stock issued under
stock option and stock
purchase plans 553 905 -- -- -- -- 905
Common stock issued in private
placement 1,220 4,953 -- -- -- -- 4,953
Comprehensive income (loss):
Foreign currency
translation adjustment -- -- -- -- -- (38) (38)
Net loss -- -- (15,838) -- -- -- (15,838)
---------
Comprehensive loss -- -- -- -- -- -- (15,876)
------------------- ------------------------------------------------------------------
Balances at March 31, 1999 17,629 102,376 (89,079) (67) -- 144 13,374
Common stock issued under stock
option and stock purchase plans 856 3,254 -- (182) -- -- 3,072
Payments received from stockholders -- -- -- 67 -- -- 67
Comprehensive income (loss):
Unrealized gains on investments -- -- -- -- -- 21,177 21,177
Foreign currency
translation adjustment -- -- -- -- -- (85) (85)
Net loss -- -- (973) -- -- -- (973)
---------
Comprehensive income -- -- -- -- -- -- 20,119
------------------- ------------------------------------------------------------------
Balances at March 31, 2000 18,485 105,630 (90,052) (182) -- 21,236 36,632
Common stock issued under stock
option and stock purchase plans 315 1,114 -- -- -- -- 1,114
Common stock issued in
private placements 1,606 9,986 -- -- -- -- 9,986
Common stock issued for acquisition
of AirBoss 3,017 39,949 -- -- -- -- 39,949
Payments received from stockholders -- -- -- 94 -- -- 94
Deferred compensation -- 403 -- -- (403) -- --
Amortization of deferred compensation -- -- -- -- 85 -- 85
Comprehensive income (loss):
Unrealized loss on investments -- -- -- -- -- (18,778) (18,778)
Unrealized gain on derivative
instruments -- -- -- -- -- 1,636 1,636
Foreign currency translation
adjustment -- -- -- -- -- 71 71
Net loss -- -- (21,058) -- -- -- (21,058)
---------
Comprehensive loss -- -- -- -- -- -- (38,129)
------------------- ------------------------------------------------------------------
Balances at March 31, 2001 23,423 $157,082 $(111,110) $ (88) $(318) $ 4,165 $ 49,731
=================== ==================================================================
See accompanying notes.
40
Geoworks Corporation
Consolidated Statements of Cash Flows
(In thousands)
Year ended March 31
2001 2000 1999
--------------------------------------
Operating activities
Net loss $ (21,058) $ (973) $ (15,838)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,059 721 1,559
Amortization of goodwill and other intangible assets 5,410 -- --
Purchased in-process research and development 1,378 -- --
Non-cash restructuring charges (reversal) -- (589) 1,543
Amortization of deferred compensation 85 -- --
Gain on sale of long-term investments (265) (4,049) --
Gain on sale of property and equipment (6) -- --
Changes in operating assets and liabilities, net of business
combination:
Accounts receivable (1,067) 1,610 310
Other current assets (122) (20) 376
Other long-term assets (62) -- --
Deferred revenues (501) 131 720
Accounts payable 1,201 669 --
Other current liabilities 599 (163) (466)
--------------------------------------
Net cash used in operating activities (13,349) (2,663) (11,796)
Investing activities
Purchases of property and equipment (3,025) (937) (216)
Proceeds from sales and disposals of property and equipment 6 16 483
Sales of long-term investments 265 4,049 --
Purchase price adjustment on AirBoss acquisition 1,352 -- --
--------------------------------------
Net cash (used in) provided by investing activities (1,402) 3,128 267
Financing activities
Payment of capital lease and debt obligations (5) (30) (557)
Proceeds from issuance of common stock 11,100 3,254 5,858
Payments received on notes receivable from stockholder 94 67 --
Issuance of stockholder notes -- (182) --
--------------------------------------
Net cash provided by financing activities 11,189 3,109 5,301
Foreign currency translation adjustments 71 (85) (38)
--------------------------------------
Net increase (decrease) in cash and cash equivalents (3,491) 3,489 (6,266)
Cash and cash equivalents, beginning of year 17,204 13,715 19,981
--------------------------------------
Cash and cash equivalents, end of year $ 13,713 $ 17,204 $ 13,715
======================================
Supplemental disclosure of cash flow information
Cash paid for interest $ 4 $ 10 $ 31
======================================
Cash paid for income taxes $ 313 $ 452 $ 149
======================================
Supplemental disclosure of non-cash investing and financing activity
Acquisition of AirBoss $ 40,150 $ -- $ --
======================================
Property and equipment acquired under capital lease $ 161 $ -- $ --
======================================
See accompanying notes.
41
Geoworks Corporation
Notes to Consolidated Financial Statements
March 31, 2001
1. Summary of Significant Accounting Policies
Company
Geoworks Corporation ("the Company") is a provider of carrier-class mobile
Internet infrastructure software enabling personalized real-time access to
corporate and Internet data. Its business model is built around the licensing of
proprietary software platforms for mobile solutions, the Geoworks AirBoss
Application Platform and MobileServer+, to wireless carriers and enterprises
around the world. The Company also provides professional services consulting
related to technologies previously developed, as well as the development of new
technologies supporting mobile communications.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries located in Japan, New Jersey, and the United
Kingdom. All significant intercompany balances and transactions have been
eliminated.
Reclassifications
Certain fiscal year 2000 and 1999 balances have been reclassified to conform to
the fiscal year 2001 presentation.
Foreign Currency Translation
The Company's international subsidiaries use the local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and revenue and expense accounts are
translated at average exchange rates during each period. Resulting translation
adjustments are recorded directly to a separate component of stockholders'
equity. Foreign currency transaction gains and losses have not been material.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
Professional services projects involve consulting related to technology
previously developed by the Company, as well as development of new technologies
supporting mobile communications. Professional services revenues are generally
billed and recognized based on time and materials expended by the Company at
contracted rates.
42
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
Software and related services revenue consists of software license, royalty and
related service revenues, including software customization and maintenance. Such
revenues include software license fees, which are accounted for in accordance
with SOP 97-2 "Software Revenue Recognition," from customers who purchase the
Company's server products or royalties from hardware manufacturers that
incorporate the Company's software products into their systems. In addition, the
Company has licensed certain technology and intellectual property and sold
source code to third parties to be used in the development of their own service
offerings and products. Revenues from the license of products, technology,
intellectual property, and the sale of source code are recognized when evidence
of an arrangement exists, the Company has performed under the terms of the
related contract, and such revenues are fixed and determinable and
collectibility is probable.
Software customization, maintenance and related services revenues are billed and
recognized based on contracted rates, the percentage of completion method or
ratably over the contract period based on the terms of the contract. Advance
payments of license or service fees are recorded as deferred revenue and
recognized as the products or services are delivered.
If a customer transaction includes both software licenses and service elements,
the total arrangement fee is allocated to each of the elements using the
residual method, under which revenue is allocated to undelivered elements based
on vendor-specific objective evidence of fair values of such undelivered
elements and the residual amounts of revenue are allocated to the delivered
elements.
Research and development fees are primarily amounts received pursuant to
contracts with original equipment manufacturers ("OEMs") under which the Company
is reimbursed for a portion of its development costs related to specific
products up to the amounts specified in the contracts. The Company is typically
paid by the OEM as it achieves certain project milestones. Revenue under these
research and development arrangements is recognized under the
percentage-of-completion method based on the relationship of costs incurred to
date to total anticipated project costs.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits with original maturities of
three months or less and are stated at cost, which approximates fair value.
43
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
1. Summary of Significant Accounting Policies (continued)
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash, cash equivalents and trade accounts receivable.
Cash and cash equivalents are held in federally insured or well-established
financial institutions. The Company sells its products primarily to, and has
trade accounts receivable with, original equipment manufacturers and
telecommunications companies in the United States and abroad. As a general
policy, collateral is not required for accounts receivable; however, the Company
periodically monitors the need for an allowance for doubtful accounts based upon
expected collections of accounts receivable and specific identification of
uncollectible accounts. The Company has not recorded an allowance for doubtful
accounts in any period presented. Additionally, customers' financial condition
and credit worthiness are regularly evaluated and historical losses have not
been material.
Derivative Financial Instruments
Derivative financial instruments are designated to hedge the fair value of the
Company's investment in Wink Communications common stock. Derivative instruments
are recorded at fair value as determined by the difference between the market
value of the underlying hedged securities and their stated selling prices per
the derivative contracts. Any unrealized gain or loss on the derivative
instruments are recorded in accumulated other comprehensive income. The amount
of the ineffectiveness of the hedge is not material; thus, no amounts have been
recorded in the consolidated statement of operations. These instruments may
involve elements of credit and market risk in excess of the amounts recognized
in the financial statements. The Company monitors its positions and the credit
quality of counter parties, consisting primarily of major financial
institutions, and does not anticipate nonperformance by any counter-party.
Capitalized Software
The Company has not capitalized any software development expenses for its
products as such expenses have been incurred prior to the Company's products
attaining technological feasibility or such costs have been reimbursed by third
parties in connection with OEM license agreements. Software development expenses
incurred for product enhancements after the product has reached technological
feasibility have not been material and, accordingly, have been charged to
operations as incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of three to
four years. Assets acquired under capital lease obligations and leasehold
improvements are amortized using the straight-line method over the shorter of
the useful lives of the assets or the terms of the leases.
44
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
1. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121 ("SFAS
No. 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," long-lived assets (primarily property,
plant and equipment, goodwill, and other intangible assets) held and used by the
Company or to be disposed of are reviewed for impairment whenever events or
changes in circumstances indicate that the net book value of the asset may not
be recoverable. When such an event occurs, management determines whether there
has been an impairment by comparing the anticipated undiscounted future net cash
flows to the related asset's carrying value. If an asset is considered impaired,
the asset is written down to fair value, which is determined based either on
discounted cash flows or appraised value, depending on the nature of the asset.
For fiscal year 2001 the Company identified such possible impairment indicators
to include, but were not limited to, cancellation of the Company's largest
software and customization contract, declines in the Company's stock price, and
continued operating losses. Possible impairment of the Company's intangible
assets were determined based on estimated future undiscounted cash flows to be
generated. The estimates resulting from the Company's analysis indicated that no
impairment was present.
Research and Development Expense
Research and development expense includes both internally funded development and
projects funded in part by customers. Total research and development expenses on
projects for which OEM funding was received were $182,000 and $4,317,000, for
fiscal years 2000 and 1999, respectively, of which $320,000 and $3,315,000 was
funded and recognized as revenue in fiscal years 2000 and 1999, respectively. No
such expenses were funded or recognized in fiscal year 2001.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include cash
equivalents, long-term investments, and derivative instruments, approximate
their fair values based on quoted market values of the instruments.
Major Customers
Revenues from three major customers accounted for 32%, 31% and 15%, respectively
of net revenues for fiscal year 2001. Revenues from two of these and one
additional major customers accounted for 39%, 31% and 18%, respectively of net
revenues for fiscal year 2000. Revenues from two of these and one additional
major customers accounted for 57%, 17% and 16%, respectively of net revenues for
fiscal year 1999.
45
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
1. Summary of Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation
In accordance with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), the Company has
elected to apply the intrinsic-value method under Accounting Principles Board
Opinion No. 25 ("APB Opinion 25") and related Interpretations in accounting for
its stock option and stock purchase plans. A summary of the pro forma effects on
reported net loss and net loss per share for fiscal years 2001, 2000 and 1999 as
if the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by FAS 123 is presented
in Note 8.
Net Loss Per Share
Basic and diluted net income (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 is computed using the weighted average number of shares of common
stock outstanding during the period and excludes any dilutive effects of
outstanding common stock equivalents. The effect of potentially dilutive stock
options has been excluded from the computation of diluted net loss per share
because the effect of their inclusion would be antidilutive.
If the Company had reported net income for fiscal years 2001, 2000 and 1999, the
calculation of diluted earnings per share for those periods would have included
the effect of dilutive common stock options, computed using the treasury stock
method. For fiscal years ended 2001, 2000 and 1999, the calculation would have
included the common stock equivalent effect of 1,569,000, 1,994,000 and 299,000
shares, respectively.
Segment Information
In accordance with FAS 131, "Disclosures about Segments of an Enterprise and
Related Information," public business enterprises are required to report
financial and other information about operating segments of the entity for which
such information is available and is utilized by the chief operating decision
maker. FAS 131 also establishes standards for related disclosures about products
and services, geographic area, and major customers (see Note 10). The Company
operates as one business segment.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), under
which the liability method is used to account for income taxes. Deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
46
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
1. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivatives
Instruments and Hedging Activities -- Deferral of Effective Date of FASB
Statement No. 133" ("FAS No. 137"). FAS No. 133, as amended by FAS No. 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000, with earlier application encouraged. The Company entered into an agreement
in November 2000 to hedge against a decline in value of its investment and has
accounted for its investments under FAS No. 133.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25". FIN 44 clarifies the application of APB 25 for certain issues,
including the definition of an employee, the treatment of the acceleration of
stock options and the accounting treatment for options assumed in business
combinations. FIN 44 became effective on July 1, 2000, but is applicable for
certain transactions dating back to December 1998. The adoption of FIN 44 has
not had any material effect on our financial condition or results of operations.
2. Property and Equipment
Property and equipment consist of the following (in thousands):
March 31
2001 2000
------------------------
Equipment $ 6,043 $ 2,853
Furniture and fixtures 1,002 986
Leasehold improvements 850 733
------------------------
7,895 4,572
Less accumulated depreciation and amortization 4,319 3,417
------------------------
Property and equipment, net $ 3,576 $ 1,155
========================
Property and equipment includes $161,000 for equipment under capital lease at
March 31, 2001.
47
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
3. Long-Term Investments and Derivative Instruments
Long-term investments and derivative instruments were as follows (in thousands):
March 31, March 31,
2001 2000
------- -------
Wink Communications, Inc. $ 2,400 $16,380
MyTurn.com, Inc. -- 4,797
Other 2 3
------- -------
Total long-term investments 2,402 21,180
Derivative instruments related to investments 1,636 --
------- -------
Total long-term investments and derivative instruments $ 4,038 $21,180
======= =======
In connection with the transfer of certain technology and rights to two
privately held companies, Wink Communications Inc. ("Wink") and Global PC, Inc.
("Global PC"), the Company received a minority interest and a warrant,
respectively in each of these companies in previous fiscal years. In August
1999, Wink completed an initial public offering of its common stock. In December
1999, the assets of Global PC were acquired by MyTurn.com, Inc. ("MyTurn") a
publicly traded company in exchange for a warrant for 250,000 common shares.
The Company's marketable equity securities and its long-term investments are
classified as available for sale. The carrying value of the Company's
investments in Wink and 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 as well as the value of a series of derivative instruments the Company
entered into in November 2000 to hedge against a decline in value of its
investment in Wink. These derivative instruments will mature or expire in
November and December of 2001. These derivative instruments ensure that the
minimum value of the Wink investment should be at least $4,036,000 at maturity
or expiration of the instrument. However, the maximum value of the Wink
investments is limited to $7,397,000, depending on the common share price of
Wink at maturity or expiration. As of March 31, 2001, the fair value of the
investments in Wink is recorded at $4,036,000, which includes the fair value of
the common shares of Wink ($2,400,000) and the current fair value of the
derivative instruments ($1,636,000). As of March 31, 2001 the Company owns
480,000 common shares of Wink. These derivative instruments do not prevent the
Company from selling Wink shares, but such a sale would have to be preceded by a
settlement of the associated derivative instruments at the stated contract
price. The unrealized gain on these investments is equal to the fair value of
each investment (including the fair value of the related derivative instruments)
and is included in stockholders' equity.
On March 2, 2001, MyTurn filed a voluntary petition for relief under Chapter 11
of the Bankruptcy Code. Its stock is no longer trading on Nasdaq National
Market. As of March 31, 2001 the estimated fair value of the Company's
investment in MyTurn has been reduced to zero because the market price of MyTurn
common stock is substantially below the exercise price of the related warrants.
Gains recognized on the sale of these investments are reported as other income.
For the year ended March 31, 2001, 10,800 shares of Wink were sold at a gain of
$265,000 and for the year ended March 31, 2000, 75,000 shares of Wink were sold
at a gain of $4,049,000.
48
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
4. Acquisition of AirBoss
On July 24, 2000, the Company acquired substantially all of the assets of an
established, separate, and unincorporated division of Telcordia Technologies,
Inc. ("Telcordia"), a subsidiary of Science Applications International
Corporation. The acquired division consisted of Telcordia's AirBoss Business
Unit, which operated a software and wireless technology services business
("AirBoss").
Effective as of the closing of the acquisition, Geoworks established an office
in New Jersey to continue the research, development, and deployment of the
AirBoss line of patented mobile communications software products, as well as to
service the various third parties whose contractual rights with Telcordia were
assigned to, and assumed by, the Company as part of the acquisition. In
connection with the acquisition, Telcordia terminated the employment of
twenty-five individuals, who were then immediately hired by Geoworks.
The acquisition was accounted for as a purchase business combination.
Accordingly, the purchase consideration was allocated to the tangible and
identifiable intangible assets acquired based on fair values as of the closing
date. No liabilities were assumed in the transaction. The valuation of
intangible assets acquired was determined in conjunction with an independent
valuation report.
The total purchase price of approximately $39.9 million consisted of
approximately 3,018,000 shares of Geoworks' common stock. The fair value per
share of common stock issued is based on an average of the closing prices
adjacent the May 16, 2000 announcement of the acquisition. The acquisition
expenses of $250,000 consisted mainly of legal, accounting, and financial
advisory fees.
The fair value of assets acquired was as follows (in thousands):
Current assets $ 504
Goodwill and other intangible assets:
Developed technology 4,732
Core technology 1,605
Acquired workforce 616
Patents 1,048
Goodwill 30,316
--------
38,317
Acquired in-process research and development 1,378
--------
39,695
--------
Total purchase price 40,199
Less: Purchase price adjustment on AirBoss acquisition (1,352)
========
$ 38,847
========
The goodwill and other intangible assets are being amortized over the following
periods: developed technology, core technology, and patents over four years,
acquired workforce over three years, and goodwill over five years. Accumulated
amortization of the acquired intangible assets was $5,410,000 at March 31, 2001.
49
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
4. Acquisition of AirBoss (continued)
Acquired in-process research and development of $1,378,000 was charged to
operations during the quarter ended September 30, 2000.
Pro forma results of operations for fiscal years 2001 and 2000, as if the
business combination occurred on the first day of each fiscal year, are as
follows (in thousands, except per share amounts):
Year Ended
----------------------------
March 31 March 31
2001 2000
---------- ----------
Net revenues $ 16,904 $ 16,665
Net loss $ (24,206) $ (10,661)
Net loss per share $ (1.10) $ (0.51)
The Company has entered into various contracts with Telcordia to provide AirBoss
software to various customers of Telcordia. Revenues from Telcordia for fiscal
year 2001 were approximately $ 2,555,000. At March 31, 2001, accounts receivable
from Telcordia was approximately $1,078,000, of which approximately $218,000 was
unbilled. Accounts payable to Telcordia at March 31, 2001 were approximately
$398,000.
5. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
March 31
2001 2000
-------------------------
Accrued compensation $ 1,268 $ 1,344
Other accrued liabilities 1,606 681
-------------------------
Total $ 2,874 $ 2,025
=========================
6. Income Taxes
The income tax provisions of $313,000, $452,000 and $149,000 for fiscal years
2001, 2000 and 1999, respectively, consist primarily of foreign withholding tax
payments made with respect to royalties received from original equipment
manufacturers.
50
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
6. Income Taxes (continued)
Significant components of the Company's net deferred income tax assets are as
follows (in thousands):
March 31,
2001 2000
------------------------
Operating loss carryforwards $ 44,460 $ 34,625
Tax credit carryforwards 3,692 3,080
Purchased intangible assets 8,824 9,633
Capitalized research expenditures 2,844 2,808
Deferred revenue 463 668
Other, net 295 157
------------------------
Total deferred tax assets 60,578 50,971
Unrealized gain on marketable securities (1,654) (8,683)
Valuation allowance on deferred tax assets (58,924) (42,288)
------------------------
Net deferred tax assets $ -- $ --
========================
The valuation allowance increased $16,636,000 for fiscal year 2001 and decreased
$8,191,000 for fiscal year 2000, respectively.
Deferred tax assets relating to net operating loss carryforwards as of March 31,
2001 include approximately $4,900,000 associated with stock option activity for
which any subsequently recognized tax benefits will be credited directly to
stockholders' equity.
As of March 31, 2001, the Company has net operating loss carryforwards for U.S.
federal income tax purposes of approximately $116,601,000, U.K. income tax
purposes of approximately $5,127,000, and state income tax purposes of
approximately $30,926,000. The Company also has federal and state research and
development credit carryforwards of approximately $2,653,000 and $1,039,000
respectively. The net operating loss and the research and development tax credit
carryforwards expire in various years from 2001 through 2020.
Utilization of the Company's U.S. net operating loss and tax credit
carryforwards will be subject to an annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of net operating loss and tax credit
carryforwards before utilization.
51
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
7. Commitments
The Company leases its office facilities and certain computer equipment under
noncancelable lease agreements that require the Company to pay operating costs,
including property taxes, insurance and maintenance. Rent expense was
$1,093,000, $518,000, and $1,247,000 for fiscal years 2001, 2000 and 1999,
respectively.
In November 2000, the Company executed a new, ten-year operating lease for a
20,000 square foot facility in Morganville, New Jersey. The lease commencement
is expected to occur in June 2001, and will extend for a term of ten years from
the commencement date. As part of this agreement the Company is required to
maintain on deposit with a major financial institution an irrevocable standby
letter of credit as a form of security totaling $500,000. The letter of credit
expires on December 10, 2001 but will automatically extend to each succeeding
calendar year, up to June 1, 2011, unless otherwise terminated in writing.
Future minimum payments under non-cancelable operating leases having terms in
excess of one year and capital leases are due as follows (in thousands):
Capital Operating
Fiscal Year Leases Leases
- ----------- --------------------
2002 $ 40 $ 1,192
2003 41 585
2004 40 567
2005 41 576
2006 30 580
Thereafter -- 2,583
--------------------
Total minimum lease payments $ 192 $ 6,083
========
Less: Amounts representing interest 36
--------
Present value of future minimum lease payments $ 156
Less: Current portion 28
--------
Capital lease obligation, less current portion $ 128
========
8. Stockholders' Equity
Preferred Stock
The Company's Articles of Incorporation authorize two million shares of
preferred stock, none of which is issued or outstanding. The Board of Directors
has the authority to issue the preferred stock with rights, preferences,
privileges and restrictions, including vesting rights, without any further vote
or action by the shareholders. A total of 500,000 shares of Preferred Stock have
been reserved for issuance under the Company's Shareholder Rights Plan.
52
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
8. Stockholders' Equity (continued)
Shareholder Rights Plan
On March 1, 2001, the Board of Directors adopted a Shareholder Rights Plan
("Rights Plan") pursuant to which preferred stock purchase rights were
distributed as a dividend at the rate of one right for each share of Geoworks
common stock held as of March 9, 2001. Each right will entitle the holders of
the company's common stock to purchase one one-thousandth of a share of Series A
Junior Participating Preferred Stock at an exercise price of $20, subject to
adjustment in certain cases to prevent dilution. The rights are evidenced by the
common stock certificates and are not exercisable or transferable apart from the
common stock until the earlier of ten days after the date on which a person or
group of affiliated persons has acquired beneficial ownership of 15% or more of
the common stock (an "Acquiring Entity"), such date as determined by the Board
of Directors after the public announcement of the commencement of a bona fide
tender or exchange offer (as determined by the Board of Directors) that would
result in the Acquiring Entity owning 15% or more of the common stock on March
9, 2011 (the "Expiration Date"). Further, in the event a person or group of
affiliates persons becomes an Acquiring Entity, the rights generally entitle
each right holder (except the Acquiring Entity) to purchase that number of
shares of the company's common stock which equals the exercise price of the
right divided by one-half of the current market price of the common stock if any
person becomes the beneficial owner of 15% or more of the common stock. If an
Acquiring Entity purchases at least 15% of the Company's common stock, but has
not acquired 50%, the Board of Directors may exchange the rights (except those
of the Acquiring Entity) for one share of common stock per right. In addition,
under certain circumstances, if the Company is involved in a merger or other
business combination in which the company is not the surviving corporation, the
rights entitle the holder to buy common stock of the Acquiring Entity with a
market value of twice the exercise price of each right.
The Company is generally entitled to redeem the rights for $.005 per right at
any time on or prior to the earlier of the close of business on the tenth day
following a public announcement that a person or group of affiliated persons has
become an Acquiring Entity or the Expiration Date. The rights, which do not have
voting rights, will expire on the Expiration Date, unless redeemed or exchanged
earlier by the Company pursuant to the Rights Plan.
53
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
8. Stockholders' Equity (continued)
Stock Option Plans
Under the Company's stock option plans, incentive and nonqualified stock options
may be granted to employees, consultants and outside directors, to purchase a
maximum of 8,380,000 common shares. The exercise price of the stock options is
determined by the Company's Board of Directors on the date of grant and is at
least equal to the fair market value of the stock on the grant date. Options for
new employees generally vest 25% on the first anniversary of the recipient's
hire date and 1/48 per month thereafter. Options for continuing employees
generally vest 1/48 per month from the date of grant. Options expire ten years
from the date of grant.
The following table summarizes activity under the Company's stock option plans:
Options Outstanding
Weighted-Average
Number Exercise Price
of Shares
----------------------------------
Balance at March 31, 1998 3,033,000 $ 8.95
Granted 4,174,000 3.38
Exercised (443,000) 1.59
Forfeited (3,450,000) 7.04
----------------------------------
Balance at March 31, 1999 3,314,000 4.88
Granted 1,235,000 7.30
Exercised (737,000) 4.08
Forfeited (1,221,000) 6.05
----------------------------------
Balance at March 31, 2000 2,591,000 5.83
Granted 4,157,000 9.68
Exercised (241,000) 3.02
Forfeited (666,000) 9.24
----------------------------------
Balance at March 31, 2001 5,841,000 $ 8.30
==================================
Options available for grant at March 31, 2001 2,539,000
=============
The weighted average fair value at grant date of options granted during fiscal
years 2001, 2000 and 1999 was $8.87, $5.88 and $2.82, per share, respectively.
54
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
8. Stockholders' Equity (continued)
Stock Option Plans (continued)
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercisable Contractual Exercise Exercise
Prices Shares Life (years) Price Shares Price
- ---------------------------------------------------------------------------------------------
$ 0.67 - 3.63 1,677,000 7.63 $ 2.89 767,000 $ 3.02
3.69 - 9.00 1,814,000 8.81 5.00 280,000 5.38
9.97 - 13.63 772,000 9.04 12.13 122,000 12.07
13.75 - 15.19 1,224,000 8.88 14.38 119,000 14.86
15.50 - 42.44 354,000 8.59 21.43 76,000 23.46
---------------------------------------------------------
5,841,000 8.50 $ 8.30 1,364,000 $ 6.48
=====================================================================
Employee Stock Purchase Plan
Under the Company's employee stock purchase plan, employees meeting certain
eligibility criteria may purchase shares of the Company's common stock, subject
to certain limitations, at not less than 85% of fair market value as defined in
the plan. A total of 950,000 shares have been reserved for issuance under the
plan. In fiscal years 2001, 2000 and 1999, 71,000 shares, 69,000 shares and
110,000 shares, respectively, were issued under the plan at average prices of
$4.56, $2.07, and $1.81 per share, respectively. At March 31, 2001, a total of
533,000 shares were available for issuance under the plan.
55
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
8. Stockholders' Equity (continued)
Stock Compensation
The Company has adopted the disclosure-only provisions of FAS 123 and applies
APB Opinion 25 and related interpretations in accounting for its stock option
and employee stock purchase plans. Had compensation cost for the Company's stock
plans been determined based on the fair value at the grant date for awards
during fiscal years 2001, 2000 and 1999 the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below (in
thousands, except per share amounts):
Year ended March 31
2001 2000 1999
------------------------------------
Net loss, as reported $ (21,058) $ (973) $ (15,838)
Net loss, pro forma (31,473) (4,561) (19,911)
Net loss per share - basic and diluted, as reported $ (0.99) $ (0.05) $ (0.97)
Net loss per share - basic and diluted, pro forma (1.49) (0.26) (1.22)
The fair value of each option as of date of grant has been estimated using the
Black-Scholes option-pricing model with the following assumptions used for
fiscal years 2001, 2000, and 1999: expected volatility calculations based on
historical data (1.481, 1.086 and 1.164, respectively) and risk free interest
rates based on U.S. government strip bonds on the date of grant (6.41%, 5.94%
and 5.21%, respectively) with maturities equal to the expected option lives of
five years. No dividends are assumed.
Common Stock Reserved for Future Issuance
Common stock reserved for future issuance as of March 31, 2001 is as follows:
Employee stock option granted shares outstanding 5,841,000
Employee stock options available for grant 2,539,000
Employee stock purchase plan shares available for grant 533,000
-----------
Total 8,913,000
===========
56
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
8. Stockholders' Equity (continued)
Private Placements
On September 1, 2000, the Company, issued and sold, in a private placement, an
aggregate of 355,556 shares of its common stock to two entities affiliated with
Integral Capital Partners. The aggregate purchase price of the shares was
$5,000,000.
On January 16, 2001 the Company issued and sold, in a private placement, an
aggregate of 1,250,000 shares of its common stock to iValue Creation Company, a
subsidary of Toshiba Corporation. The aggregate purchase price of the shares was
$5,000,000.
The net proceeds for the two private placements, net of issuance cost was
$9,986,000 for fiscal year 2001.
9. Retirement Plan
The Company has a deferred compensation plan for substantially all employees.
Under this plan, which qualifies under Section 401(k) of the Internal Revenue
Code, eligible employees may contribute up to 15% of their pretax salary,
subject to certain limitations.
During fiscal year 2001, the Company started to match 70% of the basic
contribution of 1% to 6% of total employee compensation and such matching
amounts vest 20% per year over a five-year period. The Company contributed
$149,000 during fiscal year 2001. No employer contributions were made during
fiscal years 2000 or 1999.
10. Information by Geographic Area
Information regarding operating information and identifiable assets by
geographic area is as follows (in thousands):
Year ended March 31
2001 2000 1999
-------------------------------------
Revenues:
U.S. operations:
Domestic revenues $ 3,703 $ 716 $ 517
Export revenues:
Japan 7,788 5,542 6,771
United Kingdom 5,074 5,881 1,472
Foreign operations (principally Europe) -- -- 22
-------------------------------------
$ 16,565 $ 12,139 $ 8,782
=====================================
57
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
10. Information by Geographic Area (continued)
Year ended March 31
2001 2000 1999
--------------------------------------------
Operating loss:
U.S. operations $ (17,192) $ (2,078) $ (12,756)
Foreign operations (4,654) (3,128) (3,514)
--------------------------------------------
$ (21,846) $ (5,206) $ (16,270)
============================================
As of March 31
2001 2000 1999
--------------------------------------------
Identifiable assets:
U.S. operations $ 55,390 $ 40,673 $ 17,315
Foreign operations 873 786 868
--------------------------------------------
$ 56,263 $ 41,459 $ 18,183
============================================
11. Legal Actions-Litigation
The Compnay is not involved in any material litigation. On April 25, 2000,
Openwave Systems Inc., formally Phone.com filed a declaratory relief complaint
alleging that the Flex UI patent is invalid and unenforceable. On June 15, 2000,
the Company filed a countersuit in the United States District Court in San
Francisco against Phone.com. The lawsuit sought 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. On September 8,
2000 the Compnay filed a complaint with the U.S. International Trade Commission
(the "ITC") against Phone.com, Sanyo Electric Co., Ltd. of Japan and Sanyo North
America seeking an order to block importation into the U.S. of WAP cellular
telephones containing Phone.com's microbrowsers. One month later, the ITC
announced it had accepted the complaint and initiated an investigation into this
matter. On December 28, 2000, the Company announced an agreement between
Openwave Systems Inc., formally Phone.com, to settle the patent dispute by
entering into a royalty-free patent cross-license, and the companies have
dismissed their patent litigation in federal district court and in the ITC.
58
Geoworks Corporation
Notes to Consolidated Financial Statements (continued)
March 31, 2001
12. Restructuring Charges
During the fourth quarter of fiscal 1999, the Company recorded restructuring
charges of approximately $1.8 million as a result of actions taken to better
align its cost structure with revenue projections as the Company shifted its
resources to support a business plan focused on opportunities in the mobile
e-commerce and information services market. During the quarter, the Company
terminated approximately 27% of its workforce, vacated one facility and
consolidated those operations in a remaining facility, which is also partially
vacant. The restructure charges consist of severance costs for the termination
of 33 employees, 32 of which were terminated prior to March 31, 1999, as well as
related charges for the write-off of property and equipment and the accrual of
lease commitment liabilities (net of expected sublease income) as a result of
these actions.
During the fourth quarter of fiscal 2000, the Company negotiated a release from
the remainder of the lease of the facility previously vacated in the fourth
quarter of fiscal 1999. Also, based on improved operating results and improved
business opportunities, the Company will now fully occupy the space in its
primary facility that it had previously intended to vacate. The Company did not
utilize this space in fiscal 2000. As a result of these actions, the remaining
lease commitment accrual, $589,000, was reversed.
The following table summarizes the restructuring activity (in thousands):
Severance Write-off of Accrual of
and related property lease
charges and equipment commitments Total
-------------------------------------------------------------
Total restructuring charges $ 247 $ 501 $ 1,042 $ 1,790
Amount paid (59) -- -- (59)
Write-off of property and equipment -- (501) -- (501)
-------------------------------------------------------------
Accrued liabilities at March 31, 1999 188 -- 1,042 1,230
Amounts paid (188) -- (453) (641)
Reversal of accrued lease commitments -- -- (589) (589)
-------------------------------------------------------------
Accrued liabilities at March 31, 2000 $ -- $ -- $ -- $ --
=============================================================
13. Subsequent Events
On June 12, 2001 the Company announced that it was reorganizing its operations,
exiting the Mobile Application Service Provider market and accelerating the
integration of its two software platforms. These actions were taken to focus the
Company's efforts on the area of greatest current potential while reducing
operating expenses and conserving resources. In connection with these actions
the Company announced that it will reduce its workforce by approximately 22
percent.
59
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to executive officers and
directors is incorporated herein by reference from Item 4A of Part I of this
Form 10-K. The information required by this Item with respect to compliance with
the reporting requirements of Section 16(a) of the Securities Exchange Act of
1934 is incorporated herein by reference to our 2001 Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to our
2001 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to our
2001 Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to our
2001 Proxy Statement.
60
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Financial Statements.
The following Consolidated Financial Statements of Geoworks and Report
of Independent Auditors are included in Item 8 of this report on Form
10-K.
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
All schedules are omitted, because they are not required, are not
applicable, or the information is included in the consolidated
financial statements and notes thereto.
3. Exhibits.
The following exhibits are filed as part of, or incorporated by
reference into, this report on Form 10-K:
Exhibit Number/Description of Document
--------------------------------------
3.1a Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.01 to Registrant's report on Form 8-K
filed October 27, 1997.)
3.1b Certificate of Amendment of Certificate of Incorporation of
the Registrant, filed November 3, 2000, with the Secretary of
State of the State of Delaware. (Incorporated by reference to
Exhibit 3.1.a to Registrant's report on Form 10-Q filed for
the quarter ending September 30, 2000 on November 14, 2000.)
3.1c Certificate of Designations of Series A Junior Participating
Preferred Stock of the Registrant, filed March 12, 2001, with
the Secretary of State of the State of Delaware (incorporated
by reference to Exhibit 1 to the Registrant's registration
statement on Form 8-A, filed March 12, 2001.)
61
3.2a Bylaws of the Registrant (incorporated by reference to Exhibit
to Registrant's report on Form 8-K filed October 27, 1997.)
3.2b Amendment to Bylaws of the Registrant to separate the executive
positions of Chief Executive Officer and President incorporated
by reference to Exhibit 4.1 on Form 10-Q filed on February 14,
2001.
4.1a Shareholder Rights Plan, dated as of March 9, 2001, between the
Registrant and Mellon Investor Services, L.L.C. (incorporated
by reference to Exhibit 1 to the Registrant's registration
statement on Form 8-A, filed March 12, 2001.)
4.1b Specimen Stock Certificate (incorporated by reference to
Exhibit 4.1 to Registrant's Registration Statement on Form
S-1 (File No. 33-78104), effective June 22, 1994.)
10.1 Form of Indemnification Agreement between the Registrant and
each of its officers and directors (incorporated by reference
to Exhibit 10.1 to Registrant's report on Form 10-Q for the
quarter ended September 30, 1997.)
10.2 1987 Stock Option Plan (incorporated by reference to Exhibit
10.2 to Registrant's Registration Statement on Form S-1 (File
No. 33-78104), effective June 22, 1994.)
10.3 1994 Stock Plan, as amended through May 27, 1997 (incorporated
by reference to Exhibit 4.03 to Registrant's Registration
Statement on Form S-8 (File No. 333-39863) filed November 10,
1997.)*
10.4 Form of Stock Option Agreement under the 1994 Stock Plan.
10.5 Employee Stock Purchase Plan and Form of Subscription Agreement
(incorporated by reference to Exhibit 10.4 to Registrant's
Registration Statement on Form S-1 (File No. 33-78104),
effective June 22, 1994.)*
10.6 Lease dated December 30, 1993 for facilities located at 960
Atlantic Avenue, Alameda, California (incorporated by reference
to Exhibit 10.16 to Registrant's Registration Statement on Form
S-1 (File No. 33-78104), effective June 22, 1994.)
10.7 Amendment Number Five to lease for facilities located at 960
Atlantic Avenue, Alameda, CA, dated March 15, 1996
(incorporated by reference to Exhibit 10.29 to Registrant's
report on Form 10-K for the year ended March 31, 1996.)
62
10.8 Corporate Technology Agreement between Toshiba Corporation and
Geoworks dated March 17, 1993 (incorporated by reference to
Exhibit 10.12 to Registrant's Registration Statement on Form
S-1 (File No. 33-78104), effective June 22, 1994.) ###
10.9 Amendment Number One to Corporate Technology Agreement between
the Company and Toshiba Corporation dated June 30, 1994
(incorporated by reference to Exhibit 10.17 to Registrant's
report on Form 10-Q for the quarter ended June 30, 1994.) ###
10.10 Amendment Number Three to Corporate Technology Agreement
between the Company and Toshiba Corporation dated September 29,
1995 (incorporated by reference to Exhibit 10.27 to
Registrant's report on Form 10-Q for the quarter ended December
31, 1995.) ###
10.11 Addendum to Corporate Technology Agreement between Geoworks
and Toshiba, dated December 16, 1996 (incorporated by reference
to Exhibit 10.39 to Registrant's report on Form 10-Q for the
quarter ended December 31, 1996.) ###
10.12 Software Development and Licensing Agreement between Nokia
Mobile Phones Ltd. and Geoworks dated December 2, 1994
(incorporated by reference to Exhibit 10.23 to Registrant's
original Annual Report on Form 10-K or amendments thereto on
Form 10-KA for the year ended March 31, 1995.) ###
10.13 Technology License Agreement dated January 12, 1996 between
Geoworks and Ericsson Mobile Communications (incorporated by
reference to Exhibit 10.28 to Registrant's report on Form 10-K
for the year ended March 31, 1996.) ###
10.14 Supplemental Stock Option Plan effective August 5, 1996
(incorporated by reference to Exhibit 4.1 filed with the
Registrant's Registration Statement on Form S-8 filed August 5,
1996.) *
10.15 Form of Stock Option Agreement under the Supplemental Stock
Option Plan (incorporated by reference to Exhibit 4.2 filed
with Registrant's Registration Statement on Form S-8 filed
August 5, 1996.) *
10.16 Technology License Agreement between Geoworks and NEC
Corporation, dated April 26, 1996 (incorporated by reference to
Exhibit 10.36 to Registrant's report on Form 10-Q for the
quarter ended September 30, 1996.) ###
63
10.17 1997 Supplemental Stock Plan (incorporated by reference to
Exhibit 4.1 to Registrant's Registration Statement on Form S-8
filed March 25, 1997.)
10.18 Form of Stock Option Agreement under the 1997 Supplemental
Stock Plan (incorporated by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-8 filed March 25,
1997.) *
10.19 Executive Employment Agreement between Geoworks and David L.
Grannan, dated January 10, 1999 (incorporated by reference to
Exhibit 10.25 to Registrant's report on Form 10-Q for the
quarter ended December 31, 1998.)*
10.20 Amendment to Executive Employment Agreement between Geoworks
and David Grannan dated November 21, 2000.*
10.21 Purchase Agreement between Geoworks Corporation and
Amazon.com, Inc. dated February 12, 1999 (incorporated by
reference to Exhibit 10.26 to Registrant's report on Form 10-K
for the year ended March 31, 1999 filed June 29, 1999.)
10.22 Amendment Number One to Geoworks Corporation - Mitsubishi
Electric Corporation Technology Agreement, effective March 25,
1999 (incorporated by reference to Exhibit 10.27 to
Registrant's report on Form 10-K for the year ended March 31,
1999 filed June 29, 1999.) ###
10.23 Exhibit A-2 to the Geoworks Corporation-Mitsubishi Electric
Corporation Technology Agreement, effective June 30, 1999
(incorporated by reference to exhibit 10.28 to Registrant's
report on Form10-Q for the quarter ended June 30, 1999.) ####p
10.24 Agreement for Software Development Subcontracting, dated
November 4, 1999, between Nokia Mobile Phones Ltd. and Geoworks
Corporation (incorporated by reference to exhibit 10.29 to
Registrant's report on Form 10-Q for the quarter ended December
31, 1999.) ###p
10.25 Exhibit A-3 to Amendment Number One to Geoworks Corporation -
Mitsubishi Electric Corporation Technology Licensing Agreement,
MELCO V29170 Development FY 2001 Project effective 1 April 2000
(incorporated by reference to exhibit 10.34 to Registrant's
report on Form 10K for the fiscal year ended March 31, 2000
filed June 29, 2000.) ###p
10.26 Amendment Number Five to Geoworks - Toshiba Corporate
Technology Agreement effective 31 January 2000 (incorporated by
reference to exhibit 10.32 to
64
Registrant's report on Form 10-K for the year ended March 31,
2000 filed June 29, 2000.) ###p
10.27 Geoworks-MyTurn Stock Transfer and Technology License
Agreement, effective December 22, 1999 (Incorporated by
reference to exhibit 10.30 to Registrant's report on Form10-Q
for the quarter ended December 31, 1999.) ###p
10.28 Lease dated November 21, 2000 between Toubin Realty II, LLC
and Geoworks.
10.29 First Amendment to Lease Agreement dated January 21, 2001
between Toubin Realty II, LLC and Geoworks.
10.30 Employment agreement with Stephen T. Baker, dated as of July
1, 2000 and incorporated by reference to Exhibit 10.35 to
Registrant's Report on Form 10-Q for the quarter ended
September 30, 2000 filed on November 14, 2000.*
10.31 Exhibit 1,2 & 3 to the Joint motions to terminate proceedings
in the US District Court and the ITC. The exhibits constitute
the publicly filed versions of the settlement between Geoworks
Corporation and Openwave Systems Inc., formerly Phone.com
entered into December 28, 2000. (Incorporated by reference to
Exhibit 10.35 to Registrant's Report Form 10-Q for the quarter
ended December 31, 2000 filed on February 14, 2001.) ###p
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors (see sequentially numbered Page
69)
24.1 Power of Attorney (see Page 68)
### Confidential treatment has been granted as to portions thereof
###p Confidential treatment has been requested and is pending as to
portions thereof
* Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter ended March
31, 2001:
(1) On January 26, 2001, the company reported under Item 5. "Other Events"
that on January 16, 2001, it issued and sold an aggregate of one million, two
hundred fifty thousand (1,250,000) shares of its common stock to iValue Creation
Company of Toshiba Corporation.
65
The aggregate purchase price of the transaction was five million dollars
($5,000,000), or $4.00 per share.
(2) On March 12, 2001, the company reported under Item 5. "Other Events"
that it had entered into a Rights Agreement dated March 9, 2001 between the
Registrant and Mellon Investor Services, LLC, as Rights Agent.
(c) Exhibits.
See Item 14 (a) 3 above.
(d) Financial Statement Schedules.
See Item 14 (a) 2 above
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: June 29, 2001
GEOWORKS CORPORATION
By: /s/David L. Grannan
--------------------------------
David L. Grannan
President and Chief Executive Officer
67
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David Neylon and David L. Grannan and each of
them acting individually, as such person's true and lawful attorneys-in-fact and
agents, each with full power of substitution, for such person, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his or her substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ David L. Grannan President, Chief Executive June 29, 2001
- ------------------------ Officer, and Director
David L. Grannan (Principal Executive Officer)
/s/ David Neylon Chairman of the Board June 29, 2001
- ------------------------
David Neylon
/s/ John B. Balousek Director June 29, 2001
- ------------------------
John B. Balousek
/s/ Kevin P. Fitzgerald Director June 29, 2001
- ------------------------
Kevin P. Fitzgerald
/s/ Andrew Cole Director June 29, 2001
- ------------------------
Andrew Cole
/s/ Stephen T. Baker Director June 29, 2001
- ------------------------
Stephen T. Baker
/s/ Timothy J. Toppin Vice President, Chief June 29, 2001
- ------------------------ Financial Officer (Principal
Timothy J. Toppin Financial Officer)
68