GENERAL MAGIC INC
10-Q, 1996-08-14
PREPACKAGED SOFTWARE
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<PAGE>   1
                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 June 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 _33-87164

                               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 / /

26,288,795 shares of the registrant's Common stock, $0.001 par value, were
outstanding as of July 31, 1996.

                        THIS DOCUMENT CONTAINS __ PAGES.
                        THE EXHIBIT INDEX IS ON PAGE __.
<PAGE>   2
                               GENERAL MAGIC, INC.
                            FORM 10-Q, June 30, 1996

                                 C O N T E N T S

<TABLE>
<CAPTION>
Item Number                                                                                                    Page
- -----------                                                                                                    ----
                          PART I: FINANCIAL INFORMATION
<S>               <C>                                                                                           <C>
Item 1.           Consolidated Financial Statements

         a.       Consolidated Balance Sheets - June 30, 1996 and December 31, 1995                              3

         b.       Consolidated  Statements of  Operations - Three-Month  Periods Ended June 30, 1996 and         4
                  1995 and Six-Month Periods Ended June 30, 1996 and 1995

         c.       Consolidated Statements of Cash Flows - Six-Month Periods Ended June 30, 1996 and 1995         5

         d.       Notes to Consolidated Financial Statements                                                    6-7

Item 2.           Management's Discussion and Analysis of Financial Condition and Results of Operations          8


                           PART II: OTHER INFORMATION

Item 1.           Legal Proceedings

Item 2.           Changes in Securities

Item 3.           Defaults Upon Senior Securities

Item 4.           Submission of Matters to a Vote of Security Holders

Item 5.           Other Information

Item 6.           Exhibits and Reports on Form 8-K

Signatures

Exhibits
</TABLE>


                                                                               2
<PAGE>   3
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>
                                                                           June 30,      December 31,
ASSETS                                                                      1996            1995
                                                                          ---------       ---------
                                                                         (Unaudited)
<S>                                                                       <C>             <C>      
Current assets:
         Cash and cash equivalents                                        $  51,766       $  40,563
         Short-term investments                                              38,339          64,162
         Receivables                                                            557           3,196
         Prepaid expenses                                                       619             810
                                                                          ---------       ---------
                  Total current assets                                       91,281         108,731
Property and equipment, net                                                   6,619           6,692
Other assets                                                                  1,915             443
                                                                          ---------       ---------
                                                                          $  99,815       $ 115,866
                                                                          =========       =========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
         Accounts payable                                                 $   2,242       $   2,771
         Accrued expenses                                                     5,753           3,193
         Current portion of capital lease obligations                           801             734
         Deferred revenue                                                     1,256           1,614
                                                                          ---------       ---------
                  Total current liabilities                                  10,052           8,312
Deferred revenue, noncurrent                                                 13,927          15,760
Capital lease obligations, net of current portion                               852           1,247
Other long-term liabilities                                                   3,268           1,455
                                                                          ---------       ---------
                  Total liabilities                                          28,099          26,774
                                                                          ---------       ---------
Commitments and contingencies

Stockholders' equity:
   Preferred stock, $0.001 par value
     500 shares authorized; none issued as of June 30, 1996 and
       December 31, 1995                                                         --              --
   Common stock, $0.001 par value;
     Authorized:  60,000 shares
     Issued:  1996 26,039; 1995 - 25,789                                         26              26
   Additional paid-in capital                                               164,095         162,595
   Unrealized gain (loss) on investments                                        (28)            170
   Deficit accumulated during development stage                             (92,377)        (73,699)
                                                                          ---------       ---------
                  Total stockholders' equity                                 71,716          89,092
                                                                          ---------       ---------
                                                                          $  99,815       $ 115,866
                                                                          =========       =========
</TABLE>

See accompanying notes to financial statements.


                                                                               3
<PAGE>   4
                               GENERAL MAGIC, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                Three-Month Periods               Six-Month Periods
                                                   Ended June 30                    Ended June 30
                                              ------------------------        ------------------------
                                                1996            1995            1996            1995
                                              --------        --------        --------        --------
<S>                                           <C>             <C>             <C>             <C>     
Revenue:
     Licensing revenue                        $    375        $  1,075        $  1,804        $  4,438
     Other revenue                                 739             807           2,118           1,627
                                              --------        --------        --------        --------
Total revenue                                    1,114           1,882           3,922           6,065
                                              --------        --------        --------        --------
Costs and expenses:
     Cost of other revenue                         682             496           1,750           1,034
     Research and development                    7,383           4,862          12,794           9,093
     Sales, general, and administrative          5,379           4,597           9,531           8,383
                                              --------        --------        --------        --------
Total costs and expenses                        13,444           9,955          24,075          18,510
                                              --------        --------        --------        --------
Loss from operations                           (12,330)         (8,073)        (20,153)        (12,445)
                                              --------        --------        --------        --------
Net interest, other income and expense             690           1,819           1,603           2,894
                                              --------        --------        --------        --------
Loss before income taxes                       (11,640)         (6,254)        (18,550)         (9,551)
Income taxes                                         7             206             128             556
                                              --------        --------        --------        --------
Net loss                                      $(11,647)       $ (6,460)       $(18,678)       $(10,107)
                                              ========        ========        ========        ========
Net loss per share                            $  (0.45)       $  (0.26)       $  (0.72)       $  (0.43)
                                              ========        ========        ========        ========
Shares and share equivalents used in
   computing per share amounts                  26,001          25,034          25,953          23,409
                                              ========        ========        ========        ========
</TABLE>

See accompanying notes to financial statements.


                                                                               4
<PAGE>   5
                               GENERAL MAGIC, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                    Six-Month Periods Ended
                                                                                           June 30,
                                                                                  --------------------------
                                                                                     1996             1995
                                                                                  ---------        ---------
<S>                                                                               <C>              <C>       
Cash flows from operating activities:
Net loss                                                                          $ (18,678)       $ (10,107)
Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation                                                                     1,563              969
     Amortization of deferred gain from sale and leaseback financing                    (48)             (48)
Changes in items affecting operations:
     Receivables and prepaid expenses                                                 2,830             (761)
     Accounts payable and accrued expenses                                              387            2,222
                                                                                  ---------        ---------
       Net cash used in operating activities                                        (13,946)          (7,725)
                                                                                  ---------        ---------
Cash flows from investing activities:
     Purchases of short-term investments                                            (18,454)        (110,960)
     Proceeds from sales and maturities of short-term investments                    44,079           23,520
     Purchases of property and equipment                                             (1,369)          (2,722)
     Other assets                                                                      (896)             695
                                                                                  ---------        ---------
       Net cash provided by (used in) investing activities                           23,360          (89,467)
                                                                                  ---------        ---------
Cash flows from financing activities:
     Repayment of capital lease obligations                                            (328)            (244)
     Proceeds from sale of common stock                                                 803           81,521
     Deferred revenue                                                                   275              710
     Other long-term liabilities                                                      1,039              325
                                                                                  ---------        ---------
       Net cash provided by financing activities                                      1,789           82,312
                                                                                  ---------        ---------
Net increase (decrease) in cash and cash equivalents                                 11,203          (14,880)
Cash and cash equivalents, beginning of period                                       40,563           34,021
                                                                                  ---------        ---------
Cash and cash equivalents, end of period                                          $  51,766        $  19,141
                                                                                  =========        =========
Supplemental disclosures of cash flow information:
     Income taxes paid during the period                                          $     130        $     556

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.


                                                                               5
<PAGE>   6
                               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 six-month periods ended June
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>
                                                     June 30,    December 31,
                                                       1996          1995
                                                     -------       -------
                                                   (Unaudited)
<S>                                                  <C>           <C>    
Office equipment and computers                       $ 8,444       $ 7,190
Furniture and fixtures                                 2,652         2,537
Leasehold improvements                                   483           483
                                                     -------       -------
                                                      11,579        10,210
Less accumulated depreciation and amortization         4,960         3,518
                                                     -------       -------
                                                     $ 6,619       $ 6,692
                                                     =======       =======
</TABLE>

OTHER ASSETS

In April 1996, the Company acquired certain software technology it obtained
from a software development company. As of June 30, 1996, the Company had net
capitalized purchased software costs of $1,476,000 classified as "other 
assets." Accumulated amortization was $120,000 as of June 30, 1996.


                                                                               6
<PAGE>   7
                               GENERAL MAGIC, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2:  BALANCE SHEET COMPONENTS, CONTINUED

Amortization is provided for using the straight-line method over the estimated
useful life of three years. The Company periodically reviews the net realizable
value of this asset and adjusts the carrying amount accordingly.

ACCRUED EXPENSES

A summary of accrued expenses follows (in thousands):

<TABLE>
<CAPTION>
                                                        June 30,    December 31,
                                                          1996         1995
                                                         ------       ------
                                                      (Unaudited)
<S>                                                      <C>          <C>   
Employee compensation                                    $2,298       $2,286
Prepaid royalty repayment and accrued interest            1,890           --
Accrued research and development expenses                   600           --
Accrued legal expense                                       371          339
Foreign income tax withholding on royalty receipts          179          182
Other                                                       415          386
                                                         ------       ------
                                                         $5,753       $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 July 1996, in equal installments of $411,000 plus
accrued interest. The final payment less any recouped advances, is due in
November 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 June
30 ,1996.


                                                                               7
<PAGE>   8
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
business strategy on the Internet, World Wide Web and corporate intranets. 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 and an office in Tokyo.

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-
<PAGE>   9
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 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.

The Company announced in June 1996, the details of its plans to move away from
its strategy based on proprietary networks to a strategy that takes advantage of
the momentum of the Internet. As with the Company's original strategy, the
Company's new strategy consists of two separate components; the first component
addresses Magic Cap and the second component addresses Telescript. The Magic Cap
component includes replacing the functionality in Magic Cap that relies on the
existence of Telescript-based proprietary networks with standard Internet and
Web functionality. This replacement was accomplished with the development of
General Magic's Presto!Links and Presto!Mail products. These products, which are
available today, provide Magic Cap device users with mobile access to the World
Wide Web, Internet email and corporate intranets. The Company believes
Presto!Links and Presto!Mail will position Magic Cap communication devices
towards mobile professionals who are increasingly relying on the Internet.
Similarly, the Company is incorporating Internet connectivity into the
development of its Magic Cap for Windows product ("MCW"), due to ship later this
year. In June, the Company signed agreements with Microsoft to bundle Microsoft
Internet Explorer and with America Online to integrate access to its on-line
service into MCW. The Company also expects to include Internet email
functionality in MCW.

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 on July 15, 1996 two new products derived from the Company's
Telescript technology. These products, Tabriz AgentWare and Tabriz Agent Tools,
are designed to turn the passive World Wide Web into an active, more effective
network. Whereas the Company's original proprietary network strategy relied on
only a small number of potential licensees around the world for the Company's
Telescript technology, selling products to Web service providers and developers
is a volume based business. Therefore, the Company is beginning to develop
relationships with original equipment manufacturers ("OEMs"), value added
resellers ("VARs") and system integrators ("SIs").

Tabriz AgentWare and Tabriz Agent Tools are currently available for UNIX-based
servers. 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.

The Company's plan to move away from a strategy based on proprietary on-line
networks to a strategy that leverages the emergence of the Web was validated in
July 1996, when AT&T announced it will discontinue the operation of its
PersonaLink Services on August 30, 1996, in favor of networks based on Internet
standards. As part of AT&T's
<PAGE>   10
announcement, AT&T offered to its subscribers a coupon valued at up to $150 that
can be applied to the purchase of Magic Cap messaging applications, including
the Company's Presto!Mail product. General Magic has announced that it will give
its Presto!Links Web browser application to PersonaLink subscribers who purchase
Presto!Mail through AT&T's offer.

In addition to the Company's Magic Cap and Telescript-based products, the
Company announced in June 1996, another General Magic-branded software product.
This product is named SoftModem. SoftModem is capable of performing a full suite
of data and fax modem functions on general-purpose microprocessors independent
of the operating system used. SoftModem can share a single CPU with client
applications, thus eliminating the need for a dedicated digital signal
processor, or DSP, and providing consumer electronics and computer manufacturers
the ability to reduce the cost and complexity of their products. To date,
SoftModem has been licensed to Philips and General Magic is in negotiations with
other companies interested in the technology.

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 reaction of General Magic's current licensees and other
strategic partners to this shift in business strategy has been supportive and
they have expressed a commitment to continue their research and development of
the Company's new Tabriz products. However, the Company expects revenue from its
Internet-based products to be modest for the remainder of 1996. Also, 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 will have a
list price of $4,995, is currently available free of charge until October 15,
1996. Substantial resources will continue to be required to develop, market and
promote new products, develop appropriate distribution channels, and garner
further acceptance for the Company's technologies and products among the
software developer community.

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, 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 Magic Cap licensees upon establishing new license arrangements. The
timing of entering into, or the absence of, such 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 
<PAGE>   11
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 June 30, 1996, the Company incurred a net loss
of $11.6 million, or $0.45 per share, compared to a net loss of $6.5 million, or
$0.26 per share, for the three-month period ended June 30, 1995, and $7.0
million, or $0.27 per share for the three-month period ended March 31, 1996. The
Company's net loss increased 85% to $18.7 million or $0.72 per share for the
six months ended June 30, 1996, compared to a net loss of $10.1 million, or
$0.43 per share in the prior year six-month period. As discussed above and in
the Risk Factors section that follows, the Company has recently directed its
product offerings toward the Internet. 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 June 30, 1996 totaled $1.1 million
compared to $1.9 million for the same three-month period last year and to $2.8
million last quarter. Revenues for the quarter ended June 30, 1996 were
primarily related to customer specific engineering programs and maintenance and
support services. For the six months ended June 30, 1996, revenues were $3.9
million compared to $6.1 million for the six months ended June 30, 1995. The
Company anticipates generating minimal revenue this year from its Internet-based
product offerings which is not expected to compensate for the anticipated
shortfall in licensing fees originally planned in 1996.

Cost of other revenue, which is related to revenue attributable to customer
specific engineering projects and maintenance and support services, was $0.7
million and $1.8 million for the three and six month periods ended June 30,
1996, compared to $0.5 million and $1.0 million for the same three and six-month
periods last year and to $1.1 million last quarter. It consists primarily of
personnel and equipment costs. The level of future cost of other revenue is not
predictable since it relates to variable customer-specific services.

Research and development expenses were $7.4 million and $12.8 for the three and
six-month periods ended June 30, 1996, compared to $4.9 and $9.1 million for the
same three and six-month periods last year and to $5.4 million last quarter.
While headcount decreased slightly from the first quarter of 1996, research and
development expenses increased approximately $2.0 million in the second quarter
due primarily to outside services required to complete the development of the
Internet-focused products described in the preceding "Overview" section, and an
agreement to assist one of the Company's Telescript licensees with its
deployment of a pilot service using General Magic's new Telescript-based
product, Tabriz AgentWare. These development activities are also primarily
responsible for the 52% increase in second quarter 1996 expense from the prior
year's second quarter. The Company anticipates that the rate of growth in
research and development expenses will stabilize in future periods as it
leverages its existing resources to enhance its technologies and support its
OEM, VAR and SI customers.
<PAGE>   12
Sales, general and administrative expenses were $5.4 million and $9.5 million
for the three and six-month periods ended June 30, 1996, compared to $4.6
million and $8.4 million for the same three and six-month periods last year and
to $4.2 million last quarter. The 29% increase in spending compared to last
quarter is due primarily to the costs associated with the Company's new product
launches in June. The net 17% increase over the prior year quarter reflects the
Company's expanded sales and marketing presence in Japan and Europe. To support
its current and anticipated licensee base, marketing programs, new distribution
strategies and growing operations, the Company anticipates that selling, general
and administrative expenses will continue to increase.

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
$1.6 million for the three and six-month periods ended June 30, 1996, compared
to $1.8 million and $2.9 million in the comparable three and six-month periods
last year and $0.9 million last quarter. The decreases in net interest, other
income and expense are due primarily to (a) lower interest income earned as
excess cash and cash equivalents from the Company's IPO are consumed by
operations and (b) increased interest expense related to interest accrued on
prepaid royalties associated with various licenses of the Company's Magic Cap
technology. Such prepaid royalty agreements are discussed further in the
following Liquidity and Capital Resources section. 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 $90.1 million as of June 30, 1996,
down approximately 14% from $104.7 million as of December 31, 1995. For the
six-month period ended June 30, 1996, the Company invested approximately $1.4
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. The Company's
three subsequent Magic Cap licensees are not entitled to a refund of prepaid
royalties unless the Company fails to meet specified technology milestones.
Product sales for those licensees currently manufacturing Magic Cap devices
have been below expectations and other of the Company's licensees have not
released any Magic Cap products to date. Therefore, it is uncertain when
prepaid royalties will be recognized as revenue or if they will be fully
recouped. As of June 30, 1996, the Company has recorded $14.6 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 related accrued interest 
<PAGE>   13
expense of $1.5 million as of June 30, 1996 recorded in accrued expenses and
other long-term liabilities.

The Company expects that its cash and short-term investment balances of $90.1
million as of June 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 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 licensees and third party software developers; 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 frequently assesses opportunities
to enter into joint ventures, acquisitions of businesses, products or
technologies and 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. As previously discussed, the Company began shipping
these products in June 1996. 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 From 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 June 30, 1996, the Company had an
accumulated deficit of $92.4 million, with net losses of $18.7 million, $20.6
million and $21.5 million for the six months ended June 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. The Company expects to continue to incur substantial
losses at least through the year ending December 31, 1997. There can be no
<PAGE>   14
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 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) has offered a commercial on-line service based on the
Company's first generation of Telescript technology. AT&T announced in July 1996
that it will terminate the PersonaLink services at the end of 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. The Company delivered an enhanced version of its first generation of
Magic Cap software in the fall of 1995. Only Sony (with its Magic Link product),
Motorola (with its Envoy product) and Matsushita (with its NeoNet product), have
developed commercial products based on the first generation of Magic Cap.
Matsushita is marketing the NeoNet only to customers of NTT's Paseo service.
While other companies are developing, or 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.

             RAPID TECHNOLOGICAL CHANGES; 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." The
Company is distributing Magic Cap applications that add standard Internet email
and Web browsing capabilities to Magic Cap-based communicators. The Company has
also released its first Telescript-based products for the Web called Tabriz
AgentWare and Tabriz Agent Tools, and plans to develop and release future
versions of the Tabriz products, as well as new Telescript-based products that
are better suited to execute in the Web server environment. 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 
<PAGE>   15
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 the Company's Tabriz products. The Company also
believes that the establishment of such channels is essential to the success of
the version of the Magic Cap platform that executes as an application on
Windows-based PCs ("MCW") as well as the success of other "shrink-wrap" products
distributed by the Company. 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.

As part of the Tabriz and MCW sales strategies, the Company intends to expand
its sales and marketing efforts significantly. 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. The
Company's Magic Cap technology is currently only commercially available as
incorporated into personal intelligent communicators, and therefore, the
Company's success is dependent on 
<PAGE>   16
increased sales of personal intelligent communicators. Sales of Sony Magic Link,
Motorola Envoy and Matsushita NeoNet communicators remain modest to date, and it
is not clear if, or when, such sales will become substantial. There can be no
assurance that the market for personal intelligent communicators 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 Magic Cap and Telescript is a
complex process that currently requires direct engineering support from the
Company. Therefore, the Company must expand 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 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. Until the Company is able to achieve the
above, 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.
<PAGE>   17
                                    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, which has adversely affected 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.

                    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
<PAGE>   18
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. Microsoft has
announced that it expects products based on its Pegasus hand-held operating
system to be available by the end of 1996. Pegasus is based on Microsoft's
Windows operating system, and purportedly will include wireless communication
features. Casio, Compaq, Toshiba, NEC, Epson America and Philips are all
reportedly developing products based on Pegasus.

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 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.
<PAGE>   19
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.
<PAGE>   20
                               GENERAL MAGIC, INC.
                            FORM 10-Q, JUNE 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:

The Annual Meeting of the Stockholders of General Magic, Inc. was held on May
23, 1996.

A proposal to elect six (6) directors to hold office until the 1997 Annual
Meeting and until their successors are elected and qualified was approved by the
stockholders. This proposal received the following votes:

<TABLE>
<CAPTION>
                                        For                   Against
                                     ----------               -------
<S>                                  <C>                      <C>
         Jerry Baker                 23,075,322               425,729
         Gregory M. Gallo            23,075,902               425,149
         Robert Kelsch               23,076,372               424,679
         Carl Pascarella             23,072,102               428,949
         Roel Pieper                 23,043,315               457,736
         Marc Porat                  23,029,500               471,551
</TABLE>

Introduced was a proposal to increase by 2,500,000 shares the aggregate number
of shares issuable under the Company's Amended and Restated 1990 Stock Option
Plan. This proposal received the following votes:

<TABLE>
<S>                               <C>
         For:                     18,089,407
         Against:                    791,380
         Abstained:                1,262,641
</TABLE>
<PAGE>   21
                               GENERAL MAGIC, INC.
                            FORM 10-Q, JUNE 30, 1996

                           Part II--Other Information


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS, CONTINUED:

Also, there was a proposal to approve amendments to the Company's 1994 Outside
Directors Stock Option Plan to increase by 150,000 shares the aggregate number
of shares issuable thereunder, to increase the number of shares subject to
initial and annual options automatically granted to nonemployee directors
thereunder, and to authorize certain additional automatic stock option grants.
This proposal received the following votes:

<TABLE>
<S>                               <C>
         For:                     18,675,280
         Against:                    281,954
         Abstained:                1,202,895
</TABLE>

In addition, the stockholders ratified the appointment of KPMG Peat Marwick LLP
as the independent accountants of the Company for the fiscal year ending
December 31, 1996. This proposal received the following votes:

<TABLE>
<S>                               <C>
         For:                     23,081,242
         Against:                     35,225
         Abstained:                  384,584
</TABLE>

Broker non-votes are included in the determination of the number of shares
present and voting for purposes of determining the presence of a quorum at the
Company's annual meeting of stockholders. They are not, however, counted for
purposes of determining the number of votes cast for a proposal.


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.


<PAGE>   22
                               GENERAL MAGIC, INC.
                            FORM 10-Q, June 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.

DATE:   August 14, 1996                /s/ John Zimmerman
     ------------------------      -----------------------------------

                                   Name:  John Zimmerman
                                   Title: Chief Financial Officer and Vice
                                          President, Finance and Administration
                                          (Principal Financial and Accounting
                                          Officer)


DATE:   August 14, 1996                /s/ Marc Porat
     ------------------------      -----------------------------------

                                   Name:  Marc Porat
                                   Title: Chief Executive Officer and
                                          Chairman of the Board of 
                                          Directors 


                                                                              21
<PAGE>   23
                                 Exhibit Index

11.1      Computation of Net Loss Per Share

27.1      Financial Data Schedule

<PAGE>   1
                               GENERAL MAGIC, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)

                                  EXHIBIT 11.1

                        COMPUTATION OF NET LOSS PER SHARE
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                            Six-Month Periods Ended        Six-Month Periods Ended
                                                   June 30                         June 30 
                                             1996            1995            1996            1995
                                           --------        --------        --------        --------
<S>                                        <C>             <C>             <C>             <C>      
Weighted average common shares
outstanding for the period
         
         Common stock                        26,001          25,034          25,953          20,796
         Preferred stock                         --              --              --           2,613
                                           --------        --------        --------        --------
Shares used in per share calculation         26,001          25,034          25,953          23,409
                                           ========        ========        ========        ========
Net loss                                   $(11,647)       $ (6,460)       $(18,678)       $(10,107)
                                           ========        ========        ========        ========
Net loss per share                         $  (0.45)       $  (0.26)       $  (0.72)       $  (0.43)
                                           ========        ========        ========        ========
</TABLE>



                                                                              22

<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               JUN-30-1996
<CASH>                                          51,766
<SECURITIES>                                    38,339
<RECEIVABLES>                                      557
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                91,281
<PP&E>                                          11,579
<DEPRECIATION>                                   4,960
<TOTAL-ASSETS>                                  99,815
<CURRENT-LIABILITIES>                           10,052
<BONDS>                                            852
                                0
                                          0
<COMMON>                                            26
<OTHER-SE>                                      71,690
<TOTAL-LIABILITY-AND-EQUITY>                    99,815
<SALES>                                              0
<TOTAL-REVENUES>                                 3,922
<CGS>                                                0
<TOTAL-COSTS>                                    1,750
<OTHER-EXPENSES>                                22,325
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                               1,222
<INCOME-PRETAX>                               (18,550)
<INCOME-TAX>                                       128
<INCOME-CONTINUING>                           (18,678)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (18,678)
<EPS-PRIMARY>                                    (.72)
<EPS-DILUTED>                                    (.72)
        

</TABLE>


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