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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
September 30, 1996
OR
[ ] 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 0-25374
GENERAL MAGIC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0250147
(State of incorporation) (IRS Employer Identification Number)
420 NORTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 774-4000
(Address and telephone number of principal executive offices)
Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past 90 days. YES X NO
----- -----
26,401,807 shares of the registrant's Common stock, $0.001 par value, were
outstanding as of October 31, 1996.
THIS DOCUMENT CONTAINS 21 PAGES.
THE EXHIBIT INDEX IS ON PAGE 19.
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GENERAL MAGIC, INC.
FORM 10-Q, September 30, 1996
C O N T E N T S
<TABLE>
<CAPTION>
Item Number Page
- ----------- ----
PART I: FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
a. Consolidated Balance Sheets - September 30, 1996 and December 31,
1995 3
b. Consolidated Statements of Operations - Three-Month Periods Ended
September 30, 1996 and 1995 and Nine-Month Periods Ended 4
September 30, 1996 and 1995
c. Consolidated Statements of Cash Flows - Nine-Month Periods Ended
September 30, 1996 and 1995 5
d. Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-18
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibits 21
</TABLE>
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PART I.- FINANCIAL INFORMATION
Item 1. Financial Statements
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 41,414 $ 40,563
Short-term investments 38,226 64,162
Receivables 1,306 3,196
Prepaid expenses 749 810
--------- ---------
Total current assets 81,695 108,731
Property and equipment, net 6,505 6,692
Other assets 439 443
--------- ---------
$ 88,639 $ 115,866
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,799 $ 2,771
Accrued expenses 6,737 3,193
Deferred revenue 1,400 1,614
Current portion of capital lease obligations 1,086 734
--------- ---------
Total current liabilities 11,022 8,312
Deferred revenue, noncurrent 14,427 15,760
Other long-term liabilities 3,106 1,455
Capital lease obligations, net of current portion 376 1,247
--------- ---------
Total liabilities 28,931 26,774
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value
500 shares authorized; none issued as of September 30, 1996 and
December 31, 1995 -- --
Common stock, $0.001 par value;
Authorized: 60,000 shares
Issued: 1996 26,209; 1995 - 25,789 26 26
Additional paid-in capital 164,478 162,595
Unrealized gain (loss) on investments 1 170
Deficit accumulated during development stage (104,797) (73,699)
--------- ---------
Total stockholders' equity 59,708 89,092
--------- ---------
$ 88,639 $ 115,866
========= =========
</TABLE>
See accompanying notes to financial statements.
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three-Month Periods Nine-Month Periods
Ended September 30, Ended September 30,
------------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Licensing revenue $ 197 $ 2,669 $ 2,001 $ 7,107
Other revenue 557 558 2,675 2,185
-------- -------- -------- --------
Total revenue 754 3,227 4,676 9,292
-------- -------- -------- --------
Costs and expenses:
Cost of other revenue 463 357 2,213 1,391
Research and development 5,520 4,754 18,314 13,847
Sales, general, and
administrative 6,309 4,675 15,840 13,058
Write-off of acquired
technology and in-process
research and development 1,542 -- 1,542 --
-------- -------- -------- --------
Total costs and expenses 13,834 9,786 37,909 28,296
-------- -------- -------- --------
Loss from operations (13,080) (6,559) (33,233) (19,004)
Net interest, other income and
expense 663 1,591 2,266 4,485
-------- -------- -------- --------
Loss before income taxes (12,417) (4,968) (30,967) (14,519)
Income taxes 3 100 131 656
-------- -------- -------- --------
Net loss $(12,420) $ (5,068) $(31,098) $(15,175)
======== ======== ======== ========
Net loss per share $ (0.48) $ (0.20) $ (1.20) $ (0.63)
======== ======== ======== ========
Shares and share equivalents used
in computing per share amounts 26,144 25,310 26,017 24,044
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine-Month Periods Ended
September 30,
---------------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (31,098) $ (15,175)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 2,467 1,534
Amortization of deferred gain from sale and leaseback financing (72) (72)
Write-off of acquired technology 1,343 --
Changes in items affecting operations:
Receivables and prepaid expenses 1,951 (3,311)
Accounts payable and accrued expenses 946 1,207
--------- ---------
Net cash used in operating activities (24,463) (15,817)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments (34,485) (122,679)
Proceeds from sales and maturities of short-term investments 60,252 47,178
Purchases of property and equipment (2,028) (3,415)
Other assets (896) 462
--------- ---------
Net cash provided by (used in) investing activities 22,843 (78,454)
--------- ---------
Cash flows from financing activities:
Repayment of capital lease obligations (519) (374)
Proceeds from sale of common stock 1,186 83,837
Deferred revenue 919 2,171
Other long-term liabilities 885 471
--------- ---------
Net cash provided by financing activities 2,471 86,105
--------- ---------
Net increase (decrease) in cash and cash equivalents 851 (8,166)
Cash and cash equivalents, beginning of period 40,563 34,021
--------- ---------
Cash and cash equivalents, end of period $ 41,414 $ 25,855
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid during the period $ 136 $ 656
Noncash financing activity:
Conversion of preferred stock into common stock $ -- $ 77,019
Purchase of technology in exchange for common shares $ 697 $ --
Reclassification of prepaid royalties from deferred revenue
to accrued liabilities and other long-term liabilities $ 2,466 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of the
Company's financial condition, results of operations and cash flows for the
periods presented. These financial statements should be read in conjunction with
the Company's audited consolidated financial statements as of December 31, 1995
and 1994, and for each of the three years ended December 31, 1995, including
notes thereto, included in the Company's Form 10-K Statement which was filed
with the SEC on March 27, 1996.
The results of operations for the three-month and nine-month periods ended
September 30, 1996 are not necessarily indicative of the results expected for
the current year or any other period.
NOTE 2: BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
Office equipment and computers $ 8,977 $ 7,190
Furniture and fixtures 2,774 2,537
Leasehold improvements 486 483
------- -------
12,237 10,210
Less accumulated depreciation and amortization 5,732 3,518
------- -------
$ 6,505 $ 6,692
======= =======
</TABLE>
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: BALANCE SHEET COMPONENTS, CONTINUED
ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Employee compensation $2,937 $2,286
Prepaid royalty repayment and accrued interest 2,571 --
Accrued research and development expenses 600 --
Accrued legal expense 312 339
Foreign income tax withholding on royalty receipts 176 182
Other 141 386
------ ------
$6,737 $3,193
====== ======
</TABLE>
In conjunction with licensing Magic Cap technology, the Company receives
prepayments of royalties as it achieves certain product milestones. The Company
generally accounts for prepayments of royalties as deferred revenue. In June
1996, the Company negotiated with one of its licensees to accelerate repayment
of unrecouped prepaid royalties in exchange for the licensee waiving certain
rights granted to it by the Company in a separate agreement. Accordingly,
$2,466,000 of prepaid royalties was reclassified during the second quarter 1996
from current or noncurrent deferred revenues to accrued expenses or other
long-term liabilities based upon the repayment schedule. The payments are due on
a quarterly basis beginning in 1996, in equal installments of $411,000 plus
accrued interest. The final payment less any recouped advances, is due in
October 1997.
Also in June 1996, the Company agreed to assist one of its Telescript licensees
with the development and deployment of a pilot service using the Company's new
Telescript-based product, Tabriz AgentWare. The costs associated with this
obligation were included in accrued research and development expenses as of
September 30, 1996.
NOTE 3: WRITE-OFF OF ACQUIRED TECHNOLOGY AND IN-PROCESS RESEARCH AND DEVELOPMENT
In April 1996, the Company purchased rights to two Internet applications from
Active Paper, Inc. At that time, costs associated with this acquisition were
capitalized. During the third quarter of 1996, the Company determined that
future sales of these products would be below expectations and recorded a
$1,343,000 write-off of the asset.
In July, 1996, the Company acquired certain assets from Conterra, Inc. for
approximately $230,000 and recognized a $199,000 charge for in-process research
and development costs as a result.
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NOTE 4: SUBSEQUENT EVENTS
On October 30, 1996, the Company announced a reduction in workforce of
approximately 29%. The associated cost of this action is not included as a third
quarter charge as the reduction plan, employee notification, and board approval
did not exist or take place as of September 30, 1996. The Company expects the
cost of this reduction in workforce and associated restructuring to range from
$2,000,000 to $4,000,000.
Also, subsequent to the end of the period, one of the Magic Cap licensees
demanded delivery by December 31, 1996, of the final milestone due under the
master license agreement ("MLA"). The Company believes that, under the terms of
the MLA, delivery of the final milestone is not required until the end of
January, 1997. If the Company has not delivered the product by that time, the
licensee may terminate the MLA and demand refund of prepaid royalties in the
amount of $2,000,000, which sum is presently recorded as a noncurrent deferred
revenue. The refund would be payable with accrued interest in two equal annual
installments due one and two years, respectively, from the date of termination.
The Company is currently engaged in discussions with the licensee to resolve
this matter. No interest has been accrued to date, as the terms of the MLA
provide that interest accrues upon the date of the termination of the MLA.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in the Risk Factors section of this Item 2 that could
cause actual results to differ materially from historical results or those
anticipated. In this report, the words "anticipates," "believes," "expects,"
"future," "intends," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
OVERVIEW
General Magic, Inc. (the "Company"), incorporated in May 1990, has refocused its
strategy to incorporate open Internet standards. The Company provides engaging,
active Internet software for business professionals, developers, device
manufacturers, service providers and enterprises. The Company's software
platform technologies focus on making emerging Internet communication
technologies and electronic communication devices more powerful and easier to
use so that people can communicate more efficiently and work more productively.
The Company is headquartered in Sunnyvale, California, with a subsidiary in
Paris, France and offices in Columbia, South Carolina, and Tokyo, Japan.
The Company has developed two platform technologies called Magic Cap and
Telescript. Magic Cap technology integrates access to the World Wide Web via a
browser, Web and other electronic mail, fax, telephone and paging capabilities,
enables wireless and wireline communications, and provides an intuitive user
interface for personal intelligent communicators and other communicating
devices. Telescript technology is intended to turn passive computer networks
into active networks by enabling intelligent software programs ("agents") to
perform various tasks on network servers on behalf of users, from carrying
messages, to searching for data, to executing transactions. The Company's
technologies are open platforms intended to enable the development of
applications and services by independent software vendors, electronic merchants
and publishers, and other third parties. To date, virtually all of the Company's
resources have been devoted to research and development activities, establishing
and leveraging licensing relationships for the Company's technologies, and
marketing and promoting these technologies.
The Company's initial business strategy was two-pronged. First, the Company
licensed its Telescript technology to large telephone network operators so that
they could build and operate proprietary public networks in key geographies.
Second, the Company licensed its Magic Cap software to multinational consumer
device and computer manufacturers so that they could use Magic Cap technology to
build clients for Telescript-based proprietary networks. The Company's primary
source of revenue to date has been from up-front licensing fees from such Magic
Cap and Telescript licensees. The first products and services that implemented
this strategy appeared in 1994, with the release of Magic Cap communication
devices manufactured by Sony and Motorola, and AT&T's Telescript-based
PersonaLink service. However, the on-going royalty revenues from Magic Cap-based
device shipments and fees from AT&T's PersonaLink Services have been minimal. A
significant reason that these fees have been minimal is the recent emergence of
the Internet and the World Wide Web as the venue of choice for the network
services. The explosive growth of the Internet has made it increasingly
difficult for the
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Company to pursue its original strategy focused on proprietary networks rather
than the Internet. Therefore, the Company has replaced its original
proprietary-oriented strategy with a strategy that is designed to leverage off
of the growth of the Internet.
Consistent with its new strategy, the Company completed Magic Cap for Windows 95
in the third quarter and began shipping its first retail product incorporating
this technology in October, 1996. The Company continues to make available its
Presto!Links and Presto!Mail products, which provide Magic Cap device users with
mobile access to the World Wide Web, Internet email and corporate intranets. In
addition, the Company continues to develop the next generation of Magic Cap
software and released the first milestone to its partners in August, 1996. The
Company expects to ship a final release of the next generation of Magic Cap
software in the first quarter of 1997.
The Telescript component of the strategy shift was to modify Telescript to make
it work in conjunction with standard Web servers and browsers rather than
proprietary on-line services and clients. As part of this strategy, the Company
began shipping in July 15, 1996 two new products derived from the Company's
Telescript technology, Tabriz AgentWare and Tabriz Agent Tools. Both products
are currently available for UNIX-based servers. As is common practice in the
Internet market, the Company's Tabriz Agent Tools product is available free of
charge and the Tabriz AgentWare product, which is sold for $4,995, was also made
available free of charge until October 15, 1996. To extend the Tabriz products
to the Microsoft NT environment, in July 1996, the Company purchased
substantially all of the assets of Conterra Software, Inc., which had been
contracted by the Company to port Tabriz from UNIX to Microsoft NT. Upon this
acquisition, all of Conterra's senior engineers became General Magic employees.
The Company expects to release a Tabriz AgentWare NT beta version product later
this year.
While management believes the Company's shift in business strategy to the
Internet market provides the best long-term growth opportunities, the change is
anticipated to have an adverse impact on the Company's revenue and net loss in
the near-term. The Company expects revenue from its Internet-based products to
be modest for the remainder of 1996. As a result of the change in strategy and
the effect on revenue and current operating levels, in October, 1996, the
Company announced a reduction in work force of approximately 29%. The associated
costs of this action will be recorded in the fourth quarter as a restructuring
charge, which the Company currently estimates to be between $2 million to $4
million. The Company does not expect to realize a cost savings in 1996 related
to this action.
The Company expects that its operating results will continue to fluctuate for
some time as a result of a number of factors, including: timing of new product
and service introductions by its licensees and competitors; changes in the
Company's level of operating expenses, including the Company's expenditures on
research and development and promotional programs; payments to independent
contractors; the size and timing of customer orders for its licensees' products
or services; development, production or quality problems on the part of the
Company or any of its licensees; amount and timing of royalty payments and
one-time license fees by licensees if any, as well as, support and maintenance
fees; and competition in the personal intelligent communications and Internet
markets. In the early years of commercialization of its technologies, the
Company expects to derive a significant portion of its revenue from one-time
license fees, distribution of "shrink-wrap" products, customer engineering
projects and support and maintenance contracts. As the Company expands its
product offerings and distribution channels, quarterly results could be
significantly influenced by new product introductions or the cyclical nature of
consumer purchases. Further, the Company expects that it will continue to charge
up-front payments to its licensees upon establishing new license arrangements.
The timing of entering into, or the absence of, such
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new licenses in a given period could result in significant periodic fluctuations
in the Company's operating results, liquidity and capital resources. Therefore,
the Company expects that fluctuations in revenue will result in inconsistent
gross profit trends affected by changes in the revenue mix and the associated
product and operating costs.
RESULTS OF OPERATIONS
For the three month period ended September 30, 1996, the Company incurred a net
loss of $12.4 million, or $0.48 per share, compared to a net loss of $5.1
million, or $0.20 per share, for the three month period ended September 30,
1995. The Company's net loss increased to $31.1 million or $1.20 per share for
the nine month period ended September 30, 1996 compared to $15.2 million or
$0.63 per share in the same period in 1995. The net loss in 1996 includes
write-offs of in-process research and development and acquired technology
previously capitalized totaling $1.5 million. In addition, as discussed above
and in the Risk Factors section that follows, the Company has recently
incorporated Internet standards in its product offerings. This shift had an
adverse impact on year-to-date operations and is anticipated to adversely impact
revenues and net losses for the remainder of 1996.
Revenues for the three month period ended September 30, 1996 totaled $0.8
million compared to $3.2 million for the same three month period in the previous
year. Revenues for the quarter ended September 30, 1996 were primarily related
to customer specific engineering programs and maintenance and support services.
For the nine months ended September 30, 1996, revenues were $4.7 million
compared to $9.3 million for the nine month period in the previous year. The
decline in 1996 revenues is attributable to a reduction in license fees.
Cost of other revenue, which is related to revenue attributable to customer
specific engineering projects and maintenance and support services, was $0.5
million and $2.2 million for the three and nine month periods ended September
30, 1996, compared to $0.4 million and $1.4 million for the same three and nine
month periods in the previous year. It consists primarily of personnel and
equipment costs.
Research and development expenses were $5.5 million and $18.3 for the three and
nine month periods ended September 30, 1996, compared to $4.8 and $13.8 million
for the same three and nine month periods in the previous year. The increase in
expense for the three month period ended September 30, 1996 compared to the same
period in the previous year is due to increased headcount and related costs. The
increase in research and development expenses for the nine month period ended
September 30, 1996 compared to the same period in the previous year is due to
increased headcount and outside support costs, primarily attributable to the
shift in product strategy for both the Magic Cap and Telescript technologies.
Sales, general and administrative expenses were $6.3 million and $15.8 million
for the three and nine month periods ended September 30, 1996, compared to $4.7
million and $13.1 million for the same three and nine month periods last year.
The increase in expense for both the three and nine month periods is the result
of increased headcount and related costs, increased sales and marketing costs to
support a worldwide presence, and increased marketing costs as a result of the
Company's shift in product strategy.
During the third quarter, the Company recognized a one-time charge of $1.5
million. Included in this charge was $1.3 million which reflects the write-off
of software technology previously capitalized as a part of software acquired in
April, 1996 from Active Paper, Inc. In addition, the
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Company recorded a $199,000 charge for in-process research and development costs
related to the acquisition of Conterra, Inc. in July, 1996.
Net interest, other income and expense, largely earned from remaining cash
proceeds from the Company's IPO in February 1995, amounted to $0.7 million and
$2.3 million for the three and nine month periods ended September 30, 1996,
compared to $1.6 million and $4.5 million in the comparable three and nine month
periods last year. The decreases in net interest, other income and expense are
due primarily to lower interest income earned as excess cash and cash
equivalents from the Company's IPO are consumed by operations and increased
interest expense related to interest accrued on prepaid royalties associated
with various licenses of the Company's Magic Cap technology. Interest income is
likely to continue to decrease as cash and cash equivalents and short-term
investments are consumed by the Company's normal operating requirements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash equivalents and
short-term investment balances which totaled $79.6 million as of September 30,
1996, down approximately 24% from $104.7 million as of December 31, 1995. For
the nine month period ended September 30, 1996, the Company invested
approximately $2.0 million in fixed assets consisting primarily of the purchase
of computer equipment.
In conjunction with licensing Magic Cap technology, the Company receives
prepayments of royalties as it achieves certain product milestones. The Company
generally accounts for prepayments of royalties as deferred revenue. As such,
future revenues recognized by the Company will not generate cash to the extent
of the recoupment of these deferred royalties. Such deferred royalties are
generally recouped at the rate of $0.50 of each dollar of royalties earned.
Under the Company's five original Magic Cap license agreements, if the royalty
prepayments are not fully recouped by the fifth anniversary of the agreements
(November 30, 1997), the licensees are entitled to repayment of the unrecouped
amount plus accrued interest. In September, 1996, the Company entered into an
agreement with one of the five original Magic Cap licensees which, among other
things, permits the licensee to recoup 100% of any royalties owed to the Company
under a SoftModem license agreement against the Magic Cap royalty prepayment,
amends the Magic Cap license agreement to provide for 100% recoupment of any
royalties due thereunder, extends the date for refund of unrecouped prepaid
royalties to November 2, 1999, and provides that no interest shall be due upon
any refund. The Company's three subsequent Magic Cap licensees are not entitled
to a refund of prepaid royalties unless the Company fails to meet specified
product milestones. Product sales for those licensees currently manufacturing
Magic Cap devices have been below expectations and the Company believes that
this first generation of Magic Cap software is nearing the end of its life
cycle. Further, there is no assurance that any of the Company's licensees will
continue to manufacture or continue to develop Magic Cap products. Therefore, it
is uncertain when prepaid royalties will be recognized as revenue or if they
will be fully recouped. As of September 30, 1996, the Company had recorded $15.1
million in deferred revenue, and $2.5 million in accrued expenses and other
long-term liabilities related to prepaid royalties received under its Magic Cap
licensing agreements. Also, the Company has recorded related accrued interest
expense of $2.0 million as of September 30, 1996 as accrued expenses and other
long-term liabilities.
The Company expects that its cash and short-term investment balances of $79.6
million as of September 30, 1996 will be adequate to fund the Company's
operations through the end of 1997. The Company's capital requirements will
depend on many factors, including, but not limited to, the rate at which the
Company's Magic Cap and Telescript licensees develop and introduce their
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products and services; the market acceptance and competitive position of new
products and services; the levels of promotion and advertising required to
launch and market such products and services and attain a competitive position
in the marketplace; the extent to which the Company invests in new technology
and management and staff infrastructure to support its business; and the
response of competitors to the products and services based on the Company's
technologies. To the extent that the Company needs additional public and private
financing, no assurance can be given that additional financing will be available
or that, if available, it will be available on terms favorable to the Company or
its stockholders. If adequate funds are not available to satisfy either short-
or long-term capital requirements, the Company may be required to significantly
limit its operations.
As part of its business strategy, the Company assesses opportunities to enter
into joint ventures, to acquire businesses, products or technologies and to
engage in other like transactions. In April 1996, the Company purchased rights
to two Internet applications called Presto!Mail 1.5 and Presto!Links 1.0 from
Active Paper, Inc. The Company also purchased substantially all the assets of
Conterra in July 1996 and retained all of Conterra's senior engineers to further
the Company's development of a NT version of its Tabriz products which currently
operate on the UNIX platform. The Company has made no commitment or agreement
with respect to any other such transactions at this time.
RISK FACTORS
In addition to the other information in this Form 10-Q, the following factors
should be considered carefully in evaluating the Company and its business before
purchasing shares of the Company's stock.
MINIMAL REVENUES; HISTORY OF AND ANTICIPATION OF LOSSES
The Company has generated minimal revenues, has incurred significant losses and
has substantial negative cash flow. As of September 30, 1996, the Company had an
accumulated deficit of $104.8 million, with net losses of $31.1 million, $20.6
million and $21.5 million for the nine months ended September 30, 1996 and the
years ended December 31, 1995, and 1994, respectively. The Company expects its
operating loss for the year ending December 31, 1996, to be larger than for the
year-earlier periods.
A large percentage of the revenue earned by the Company to date is attributable
to up-front license fees and customer support fees, as opposed to recurring
royalty revenue. The Company expects this trend to continue at least through
1996. Under the terms of the Company's five original Magic Cap license
agreements, and except where otherwise agreed, the licensees are entitled to
repayment of prepaid royalties that are not recouped by the licensees prior to
November 30, 1997. In addition, under subsequent Magic Cap license agreements,
the Company would be required to refund certain prepaid license fees if it fails
to meet specified milestones. The Company expects to continue to incur
substantial losses at least through the year ending December 31, 1997. There can
be no assurance that the Company will achieve or sustain significant revenues or
become cash flow positive or profitable at any time in the future.
DEPENDENCE ON ONGOING DEVELOPMENT OF NEW PRODUCTS BY THIRD PARTIES
The Company's two platform technologies, Telescript and Magic Cap, are designed
to be incorporated into products and services of the Company's licensees. The
Company provided
13
<PAGE> 14
certain of its licensees with the first generation of its Magic Cap and
Telescript software in the third quarter of 1994. Only AT&T (with the AT&T
PersonaLink Services) offered a commercial on-line service based on the
Company's first generation of Telescript technology, which was terminated in
August 1996. NTT is offering an English language pilot service (known as the
Paseo pilot service) in Japan, which is based on the Company's first generation
Telescript technology. Fujitsu is also offering an electronic direct marketing
service in Japan (known as the iMi service) employing the Company's Telescript
technology. The Company delivered an enhanced version of its first generation of
Magic Cap software in the fall of 1995. The Company believes that this first
generation Magic Cap software is nearing the end of its life cycle. The Company
is focusing on the next generation Magic Cap software, which is expected to be
delivered in the first quarter of 1997. While companies have indicated a desire
to develop goods and services based on the Company's second generation of
technologies, there can be no assurance that such development will actually lead
to the availability of commercial products.
RESPONSIVENESS TO INTERNET
The computer industry is characterized by rapid technological advances. For the
Company to remain competitive, it must respond quickly to changing market
demands. The Company believes that its technologies, which were originally
designed to execute in conjunction with large proprietary on-line services, must
be enhanced to work in conjunction with the Internet, especially the World Wide
Web (the "Web") component of the Internet, and enterprise-wide "intranets."
There can be no assurance that the Company will be successful in developing
these new products and enhancements on a timely basis, if at all, or that such
new products and enhancements will achieve market acceptance. The failure to
develop these products and enhancements on a timely basis, or of the products to
achieve market acceptance would likely have a material adverse effect on the
Company's business, financial condition and results of operations. As the Web is
in a very early stage of development, there can be no assurance that future
technological advances will not obsolete the Company's current Internet and
intranet focus, thus requiring the Company to again shift its focus.
Because of the speed at which the Internet is developing, software companies
that make technologies for the Internet typically create new versions of their
technologies on a very fast schedule. Because of the complexity of the Company's
platform technologies and the significant resources needed to modify the
technologies and create development tools for the technologies, there can be no
assurance that the Company will be able to release technologies as rapidly as
other Internet-focused companies. The failure of the Company to release its
technology on schedules equivalent to other Internet-focused companies could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DISTRIBUTION RISKS
To date, the Company has distributed its Magic Cap and Telescript platforms
directly to its licensees. Because of this distribution model, the Company has
not previously established distribution channels with independent distributors,
OEMs, VARs and SIs. The Company believes that the establishment of such channels
is necessary to the success of certain of the Company's new products, including
its Tabriz and Magic Cap for Windows ("MCW") products. There can be no assurance
that the Company will be able to establish and maintain distribution channels
with independent distributors, OEMs, VARs and SIs. Failure to timely establish
these channels would likely have a material adverse effect on the Company's
business, financial condition and results of operations.
14
<PAGE> 15
The Company intends to expand its sales and marketing efforts. There can be no
assurance that the cost of this expansion will not exceed the revenues
generated, or that the Company's sales and marketing organization will be able
to successfully compete against larger and better funded sales and marketing
organizations of the Company's competitors. See "Limited Development Resources",
"Personnel", and "Competition."
POTENTIAL TECHNOLOGICAL ERRORS AND LIMITATIONS
The Magic Cap and Telescript software platforms are complex first generation
technologies that have been exposed to only limited commercial use. There can be
no assurance that a substantial technical difficulty with, or an undetected
error in, the Company's software or the products and services of its licensees
will not arise, resulting in unanticipated costs, production delays or product
recalls. Extended delays in product development could result in licensees and
developers abandoning their plans to develop goods and services based on the
Company's technologies, which would likely result in a material adverse effect
on the Company's business and results of operations. See "Dependence on Magic
Cap Licensees." Additionally, each Tabriz application will require different
resources from the Telescript interpreter. There can be no assurance that the
Telescript interpreter will achieve a commercially reasonable performance for
any particular Tabriz application.
DEPENDENCE ON DEVELOPMENT OF PERSONAL INTELLIGENT COMMUNICATOR MARKET
The market for personal intelligent communicators is not yet established. There
can be no assurance that this market will grow to commercially significant
volumes or that products incorporating General Magic's Magic Cap technology will
offer sufficient price/performance advantages to be commercially successful in
the personal intelligent communicator market. In addition, the Company expects
that the royalty amounts it charges for the distribution of Magic Cap-based
communicators may erode over time due to increased competition.
POTENTIAL SECURITY ISSUES
The Company's Telescript technology enables the creation of software "agents"
that move from network server to network server, performing tasks on behalf of
the agent's creator. Because the agent's creator might not have any direct
relationship with the operator of the network server, Telescript must establish
a safe and secure environment in which the network server executes an agent's
commands. To date, and to the best of the Company's knowledge, Telescript has
not been subject to independent third party attacks on the safety and security
of the environment in which network servers execute agents. Given the Company's
high profile in the mobile agent field, the Company will likely be the target of
computer "hackers" who attempt to breach the security regime implemented by
Telescript. There can be no assurance that such attempts will not be successful
or that Telescript provides a fully safe and secure environment in which network
servers may execute third party created agents.
LIMITED DEVELOPMENT RESOURCES
Building commercial goods and services based on the Magic Cap and Telescript
technologies is a complex process that currently requires direct engineering
support from the Company. Therefore, the Company must manage its customer
engineering capabilities so that communicator manufacturers, independent
distributors, OEMs, VARs, SIs and Web service operators can develop, integrate
and test their products and services without requiring direct support from the
Company's core product development groups. The Company must also create tools
and
15
<PAGE> 16
documentation to enable such development, integration and testing. Finally, the
Company must make its technology releases sufficiently generic to avoid the need
for creating licensee-specific product releases. In light of the foregoing
challenge and given the recent reduction in workforce, the Company's ability to
enhance its existing products and develop new ones will be limited by the
support requirements of the Company's licensees. The Company does not expect to
ship versions of its Magic Cap platform that can be used by its licensees to
develop commercial products without significant development support from the
Company for at least six months. The creation of third party applications for
the Company's recently introduced Tabriz products may, depending on the
complexity of the applications, require significant development support from the
Company. The strains on the Company's core product development groups that
result from the Magic Cap and Telescript third party support requirements
mentioned above could significantly impact shipment of new releases of these
platforms. There can be no assurance that these processes can be successfully
managed given the Company's limited engineering, management and financial
resources. Failure to do so would likely have a material adverse effect on the
Company's business, financial condition and results of operations.
PERSONNEL
The Company must continue to attract, retain and motivate qualified personnel.
Silicon Valley remains a highly competitive job market, and there can be no
assurance that key Company management and engineering personnel will remain
employed by the Company, or that the Company will be able to attract sufficient
additional personnel to execute its business plan. The Company has experienced
significant attrition of engineering, marketing, administrative and sales
personnel in the past twelve months. Additionally, the Company had an
approximate 29% reduction in its workforce in October 1996. These reductions
have adversely affected, and may in the future adversely affect development
schedules and sales activities. Failure to attract or retain qualified personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON MAGIC CAP LICENSEES
Although the Company views its relationship with Magic Cap licensees as a
strategic factor in the development and commercialization of its Magic Cap
technology, the level of commitment to the development and commercialization of
the Company's Magic Cap technology varies among these licensees. There are no
financial or other contractual obligations imposed on the Company's licensees to
develop or commercialize the Company's technologies. In addition to developing
and manufacturing Magic Cap devices, some of the Company's licensees make
competitive products or have strategic relationships with competitors of the
Company. See "Competition." Failure of a significant number of Magic Cap
licensees to successfully commercialize products utilizing the Company's
technologies and the failure of licensees to commit sufficient resources to the
marketing of the Company's technologies would likely have a material adverse
effect on the Company's business, financial condition and results of operations.
RELIANCE ON WEB APPLICATIONS DEVELOPERS
The widespread adoption of Telescript is dependent upon third party developers
developing, marketing and offering Web-based applications and services that rely
on Tabriz AgentWare. There can be no assurance that third party Web developers
and electronic merchants and publishers will be willing or able to develop
applications and services utilizing the Tabriz products. Failure of third
parties to develop such applications and services to a sufficient extent would
likely have a material adverse effect on the Company's business, financial
condition and results of operations.
16
<PAGE> 17
RELIANCE ON THIRD PARTY TOOLS DEVELOPERS
The Company is also relying on third parties to create software that increases
the functionality of Magic Cap-based devices. The Company has contracted with a
third party development tools provider for the creation and distribution of
software tools that execute on Macintosh computers and that can be used by
developers to develop programs for Magic Cap-based personal intelligent
communicators. There can be no assurance that the third party development tools
providers will continue to distribute the Company's Magic Cap software
development tools. The Company is also distributing a pre-release of third party
developer tools that can be used to develop applications that execute on MCW.
Developers must use these tools to port their applications written to execute on
Magic Cap-based personal intelligent communicators to MCW. There can be no
assurance that the Company will be able to deliver a final version of such
tools. The requirement that third party software developers port their
applications from Magic Cap-based personal intelligent communicators to MCW, and
the lack of a final version of the tools necessary to perform such a port may
limit the number of third party developers willing to develop applications for
both products, which in turn would limit the potential market for third party
developer applications.
The Company must also create new developer tools for the second generation Magic
Cap platform, including new compilers and debuggers which will work with the
second generation technology. Any delay in the availability or adoption of such
tools will delay the development of applications for Magic Cap-based
communicators based on the second generation of the Magic Cap software, which
could in turn severely limit or eliminate their chances for commercial success.
In addition, there can be no assurance that communicating applications developed
by third parties will achieve market acceptance. Further, the limited success of
initial products and services incorporating the Company's technologies to
achieve market acceptance could result in third party software developers and
electronic merchants and publishers discontinuing development and support of
products and services based on the Company's technologies.
COMPETITION
The Company faces competition from companies which offer or are expected to
offer operating system software for personal intelligent communicators,
including Microsoft and Geoworks. Geoworks has announced relationships with
Novell, NEC, Nokia, Hewlett Packard, Ericsson and Toshiba. Hewlett Packard
("HP") has released two models of its OmniGo PDA using Geoworks technology and
Nokia has introduced a smart cellular telephone based on the HP/Geoworks
technology. Microsoft has announced that it expects products based on its
Windows CE handheld operating system to be available by the end of 1996. Casio,
Compaq, Toshiba, NEC, Epson America and Philips are all reportedly developing
products based on Windows CE. While technologies offered by Geoworks and
Microsoft overlap with and could compete with General Magic's technologies,
head-to-head competition is not expected during the next six months since
Geoworks and Microsoft have discussed target markets different than those
targeted by General Magic.
In addition, Magic Cap-based personal intelligent communicators compete with
certain existing hand-held personal organizers, personal digital assistants
("PDAs") and certain notebook and sub-notebook computing devices such as Apple's
Newton products, Motorola's Marco products, the Sharp Zaurus product family,
Casio's BOSS product family and Psion's Series 3 palmtop computers. The Company
also faces competition in the market for easy-to-use, inexpensive Internet
connectivity solutions. Oracle, Diba, Apple, WebTV, Microsoft, Philips, Zenith
and
17
<PAGE> 18
others have announced or demonstrated easy-to-use Internet access devices.
In the Internet market, the Company faces competition from many companies such
as Edify, Forte, Parc Place, Blue Stone and FTP Software, which are developing
products that enable functions on the Web that are similar to the functions that
the Company enables with its Telescript-based Tabriz products. Some of these
products are built on agent-based technology, while others rely upon the more
traditional platform and client/server technologies. Some of the above
technologies execute or support applications written in computer languages such
as Sun Microsystems' Java language that are better known than Telescript.
Many of the companies with which the Company or its licensees compete, or which
are expected to offer products or services based on alternatives to the Magic
Cap or Telescript technologies, have substantially greater financial resources,
research and development capabilities, and sales and marketing staffs and
distribution channels than the Company. There can be no assurance that products
incorporating the Company's technologies will achieve sufficient quality,
functionality or cost-effectiveness to compete with existing or future
alternatives. Furthermore, there can be no assurance that the Company's
competitors will not succeed in developing products or services which are more
effective and lower-cost than those based on the Company's technologies, or
which render the Company's technologies obsolete. The Company believes that its
ability to compete depends on factors both within and outside its control. The
principal competitive factors affecting the market for the Company's
technologies are the availability of the Company's technologies and the products
and services of its licensees and their competitors; the functionality and
architecture of the Company's technologies; the quality, ease of use,
performance and functionality of the products and services developed and
marketed by the Company's licensees; the effectiveness of these licensees in
marketing and distributing their products and services; the emergence of a
Telescript-based electronic marketplace; and price. There can be no assurance
that the Company will be successful in the face of increasing competition from
new technologies or products introduced by existing competitors and by new
companies entering the market.
POSSIBLE VOLATILITY OF STOCK
The stock market has from time to time experienced significant price and volume
fluctuations which have particularly affected the market prices of the stocks of
high technology companies, and which may be unrelated to the operating
performance of particular companies. There has been particular volatility in the
market prices of securities of companies which, like General Magic, are still
primarily engaged in product development. Factors such as technology and product
announcements by the Company and its licensees or by competitors, disputes
relating to patents and proprietary rights, failures or delays in the Company's
development program or the commercialization activities of its licensees and
public concerns as to the safety of wireless voice and data transmission may
have a significant effect on the market price of the Company's common stock.
Since the Company's initial public offering in February 1995, the price of the
Company's common stock has experienced extreme volatility.
18
<PAGE> 19
GENERAL MAGIC, INC.
FORM 10-Q, September 30, 1996
Part II--Other Information
ITEM 1. LEGAL PROCEEDINGS:
None
ITEM 2. CHANGES IN SECURITIES:
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit has been filed with this report:
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
19
<PAGE> 20
GENERAL MAGIC, INC.
FORM 10-Q, September 30, 1996
SIGNATURES
Pursuant to the requirements 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.
<TABLE>
<CAPTION>
<S> <C>
DATE: November 14, 1996 /s/ John Zimmerman
----------------------------- ------------------------------------------------
Name: John Zimmerman
Title: Chief Financial Officer and Vice
President, Finance and Administration
(Principal Financial and Accounting
Officer)
DATE: November 14, 1996 /s/ Steve Markman
----------------------------- -------------------------------------------
Name: Steve Markman
Title: Chief Executive Officer and
Chairman of the Board of Directors
</TABLE>
20
<PAGE> 1
EXHIBIT 11.1
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three-Month Periods Ended Nine-Month Periods Ended
September 30, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for the period
Common stock 26,144 25,310 26,017 22,302
Preferred stock -- -- -- 1,742
-------- -------- -------- --------
Shares used in per share calculation 26,144 25,310 26,017 24,044
======== ======== ======== ========
Net loss $(12,420) $ (5,068) $(31,098) $(15,175)
======== ======== ======== ========
Net loss per share $ (0.48) $ (0.20) $ (1.20) $ (0.63)
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 41,414
<SECURITIES> 38,226
<RECEIVABLES> 1,306
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 81,695
<PP&E> 12,237
<DEPRECIATION> 5,732
<TOTAL-ASSETS> 88,639
<CURRENT-LIABILITIES> 11,022
<BONDS> 376
0
0
<COMMON> 26
<OTHER-SE> 59,682
<TOTAL-LIABILITY-AND-EQUITY> 88,639
<SALES> 0
<TOTAL-REVENUES> 4,676
<CGS> 0
<TOTAL-COSTS> 2,213
<OTHER-EXPENSES> 35,696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,763
<INCOME-PRETAX> (30,967)
<INCOME-TAX> 131
<INCOME-CONTINUING> (31,098)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,098)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
