<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, 1997
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
------ ------
26,826,765 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of July 31, 1997.
<PAGE> 2
GENERAL MAGIC, INC.
FORM 10-Q, June 30, 1997
CONTENTS
<TABLE>
<CAPTION>
Item Number Page
- ----------- ----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 3
b. Consolidated Statements of Operations - Three Month Periods Ended June
30, 1997 and 1996 and Six Month Periods Ended June 30, 1997 and 1996 4
c. Consolidated Statements of Cash Flows - Six Month Periods Ended June
30, 1997 and 1996 5
d. Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results 10
of Operations
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 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibits 22
</TABLE>
2
<PAGE> 3
PART I.- FINANCIAL INFORMATION
Item 1. Financial Statements
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,878 $ 23,706
Short-term investments 35,775 44,157
Receivables 357 1,199
Prepaid expenses 523 513
--------- ---------
Total current assets 49,533 69,575
--------- ---------
Property and equipment, net 4,656 5,915
Other assets 1,441 446
--------- ---------
$ 55,630 $ 75,936
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 864 $ 1,984
Accrued expenses 14,106 17,574
Current portion of capital lease obligations 660 1,022
Deferred revenue 100 325
--------- ---------
Total current liabilities 15,730 20,905
--------- ---------
Deferred revenue, noncurrent 6,200 8,200
Other long-term liabilities 2,497 1,128
Capital lease obligations, net of current portion 128 241
--------- ---------
Total liabilities 24,555 30,474
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value
Authorized: 500 shares
Issued and outstanding: 1997 and 1996 - None -- --
Common stock, $0.001 par value
Authorized: 60,000 shares
Issued and outstanding: 1997 - 26,826; 1996 - 26,419 27 26
Additional paid-in capital 164,951 164,534
Other (53) 235
Deficit accumulated during development stage (133,850) (119,333)
--------- ---------
Total stockholders' equity 31,075 45,462
--------- ---------
$ 55,630 $ 75,936
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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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 Ended Six Month Periods Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Licensing revenue $ 59 $ 375 $ 210 $ 1,804
Other revenue 238 739 576 2,118
-------- -------- -------- --------
Total revenue 297 1,114 786 3,922
-------- -------- -------- --------
Cost of other revenue and operating expenses:
Cost of other revenue 225 682 537 1,750
Research and development 4,455 7,383 9,435 12,794
Sales, general and administrative 2,978 5,379 7,009 9,531
-------- -------- -------- --------
Total cost and expenses 7,658 13,444 16,981 24,075
-------- -------- -------- --------
Loss from operations (7,361) (12,330) (16,195) (20,153)
Net interest and other income 654 690 1,687 1,603
-------- -------- -------- --------
Loss before income taxes (6,707) (11,640) (14,508) (18,550)
Income taxes 7 7 9 128
-------- -------- -------- --------
Net loss $ (6,714) $(11,647) $(14,517) $(18,678)
======== ======== ======== ========
Net loss per share $ (0.25) $ (0.45) $ (0.54) $ (0.72)
======== ======== ======== ========
Shares and share equivalents used in
computing per share amounts 26,782 26,001 26,678 25,953
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Month Periods Ended
June 30,
-------- --------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(14,517) $(18,678)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 1,476 1,563
Amortization of deferred gain from sale and leaseback financing (48) (48)
Deferred revenue (225) 275
Amortization of deferred compensation 58 --
Changes in items affecting operations:
Receivables and prepaid expenses 332 2,830
Accounts payable and accrued expenses (4,540) 387
-------- --------
Net cash used in operating activities (17,464) (13,671)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (47,999) (18,454)
Proceeds from sales and maturities of short-term investments 56,190 44,079
Purchases of property and equipment (283) (1,369)
Other assets (929) (896)
-------- --------
Net cash (used in) provided by investing activities 6,979 23,360
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations (475) (328)
Proceeds from sale of common stock 263 803
Other long-term liabilities (131) 1,039
-------- --------
Net cash provided by (used in) financing activities (343) 1,514
-------- --------
Net (decrease) increase in cash and cash equivalents (10,828) 11,203
Cash and cash equivalents, beginning of period 23,706 40,563
-------- --------
Cash and cash equivalents, end of period $ 12,878 $ 51,766
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid during the period $ 7 $ 130
======== ========
Noncash financing activity:
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
======== ========
Reclassification of prepaid royalties from deferred revenue to
other long-term liabilities $ 1,500 --
======== ========
Contribution of furniture and equipment in exchange for investment
$ 66 $ --
======== ========
Deferred compensation for restricted stock purchase $ 155 $ --
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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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, 1996
and 1995, and for each of the three years ended December 31, 1996, including
notes thereto, included in the Company's Form 10-K which was filed with the SEC
on March 31, 1997.
The results of operations for the three month and six month periods ended June
30, 1997 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,
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Office equipment and computers $ 9,252 $ 9,149
Furniture and fixtures 2,782 2,775
Leasehold improvements 498 489
-------- --------
12,532 12,413
Less accumulated depreciation and amortization (7,876) (6,498)
-------- --------
$ 4,656 $ 5,915
======== ========
</TABLE>
6
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------- -------
(unaudited)
<S> <C> <C>
Royalty and accrued interest $ 9,040 $10,012
Restructuring (See Note 3) 1,069 2,807
Employee compensation 2,266 3,569
Other 1,731 1,186
------- -------
$14,106 $17,574
======= =======
</TABLE>
NOTE 3: RESTRUCTURING
In the fourth quarter of 1996, the Company announced and began to implement a
restructuring plan designed to reduce costs and achieve long-term profitability
in the Company's operations. The Company's restructuring actions consisted
primarily of terminating 64 employees, all but four of whom had been terminated
as of June 30, 1997; canceling or vacating certain facilities and auto leases
related to these employee terminations; disposing of certain office and computer
equipment; and settling a contractual obligation resulting from a change in the
Telescript product strategy.
These actions resulted in an initial charge of $3,170,000. Since the inception
of the restructuring plan through June 30, 1997, the Company incurred cash
expenditures of $1,941,000 and noncash expenditures of $160,000. The Company
expects that the remaining $1,069,000 accrued balance as of June 30, 1997, will
result in $539,000 cash and $530,000 noncash expenditures. The remaining
restructuring actions are expected to be completed in the next six months and
will be financed through current working capital.
7
<PAGE> 8
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table depicts the restructuring activity from December 31, 1996 to
June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
Balance as of Balance as of
COMPONENTS December 31, 1996 Spending June 30, 1997
- ---------- ------ ------ ------
(unaudited) (unaudited)
<S> <C> <C> <C>
Payments to employees
involuntarily terminated (C) $ 823 $ 297 $ 526
Payments on canceled or vacated
facilities and auto leases (C) 394 381 13
Disposal of office and computer
equipment (NC) 690 160 530
Contract settlement costs (C) 900 900 --
------ ------ ------
$2,807 $1,738 $1,069
====== ====== ======
</TABLE>
(C): CASH; (NC): NONCASH
NOTE 4: COMMITMENTS AND CONTINGENCIES
During 1994 and 1995, the Company entered into Magic Cap technology license
agreements with three of its stockholders. These license agreements each
provided for the payment of a $2,500,000 up front, nonrefundable, nonrecoupable
technology fee. The agreements also provided for the payment of up to $2,500,000
in prepaid royalties payable in installments upon the Company's achievement of
certain technology milestones. Failure to deliver the technology milestones
entitles each licensee to terminate its agreement and obtain a refund of
unrecouped prepaid royalties in two equal annual installments of principal, plus
interest from the date of termination, payable commencing one year following
termination of the agreement. During the fourth quarter of 1996, each of the
three licensees demanded delivery of the final milestone due under the license
agreements. The final milsestone was delivered by the Company on or about
January 24, 1997, and is subject to continued evaluation by the licensees. In
addition, as previously disclosed, one licensee asserted that changes in the
Magic Cap product strategy resulted in substantial but unspecified damages, for
which it sought compensation. In June of 1997, the Company reached an agreement
to resolve the claims of, and terminate the license agreement with, this
licensee in consideration of the refund of unrecouped prepaid royalties totaling
$1,500,000 (previously classified as noncurrent deferred revenue), the waiver of
any further payments otherwise due under the agreement (including $500,000 due
but unpaid), and the grant of a royalty-free license to certain software modem
technology. The $1,500,000 refund is secured by a license in certain of the
Company's intellectual property, is non-interest bearing, and is payable in
August of 1999. The Company continues to work with its remaining licensees to
develop product plans and to resolve any issues outstanding under the
agreements. The prepaid royalties paid to date by the remaining licensees total
$4,000,000 and are classified as noncurrent deferred revenues as of June 30,
1997.
8
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NOTE 5: RECENT ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128
requires the presentation of basic earnings per share ("EPS") and, for companies
with complex capital structures, diluted EPS. SFAS No. 128 is effective for
annual and interim periods ending after December 31, 1997. The Company expects
that basic and diluted loss per share will not differ materially from the loss
per share as presented in the accompanying consolidated financial statements.
9
<PAGE> 10
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") was incorporated in California in May 1990
and was reorganized as a Delaware corporation in February 1995. The Company
originally developed two platform technologies, Magic Cap and Telescript. The
consumer market for devices incorporating Magic Cap has been slow to develop and
the Company has not generated significant royalty revenues in connection with
its Magic Cap licensing efforts to date. In addition, the Internet emerged as
the public data communications network of choice, thereby reducing the market
opportunity for the proprietary Telescript platform. To respond to these
developments, General Magic redirected its business strategy. It is developing
and marketing an advanced network service based on telecommunications, computing
and Internet standards. The network service is designed to provide an integrated
communications and information management solution to mobile business
professionals and other consumers. The Company continues to work with its
licensees to incorporate the Magic Cap technology into their products and to
develop its agent technology for use in its network service as well as for
Internet applications. As a result of the redirection of its strategy, General
Magic expects to derive future revenues principally from the sale of its
products and network service.
The Company is at an early stage of development in its new business strategy and
is subject to all of the risks inherent in the establishment of a new business
enterprise. To address these risks, the Company must, among other things,
establish technical feasibility and complete development of its software
technology, enter into key partnering arrangements, respond to competitive
developments, and attract, retain and motivate qualified personnel. The
Company's decision to become a provider of an advanced network service is
predicated on the assumption that in the future, the number of users of the
Company's network service will be large enough to permit the Company to operate
profitably. There can be no assurance that the Company's assumption will be
correct or that the Company will be able to successfully compete as a network
service provider. Any failure to achieve these goals could have a material
adverse effect upon the Company's business, operating results and financial
condition.
RESULTS OF OPERATIONS
For the three month period ended June 30, 1997, the Company incurred a net loss
of $6.7 million, or $0.25 per share, compared to a net loss of $11.6 million, or
$0.45 per share, for the three month period ended June 30, 1996. The net loss
decreased 22% to $14.5 million or $0.54 per share, for the six months ended June
30, 1997, compared to a net loss of $18.7 million or $0.72 per share, for the
same six month period in the prior year. The decrease in net loss is the result
of savings achieved from the expense management and restructuring actions taken
by the Company in the fourth quarter of 1996 and the first quarter of 1997.
10
<PAGE> 11
Revenues for the three month period ended June 30, 1997, totaled $0.3 million
compared to $1.1 million for the same three month period last year. For the six
months ended June 30, 1997, revenues were $0.8 million compared to $3.9 million
for the six months ended June 30, 1996. Revenues primarily are related to
customer maintenance and support services. The decrease in revenues as compared
to previous periods was primarily related to the Company's shift in product
strategies initiated in the latter part of 1996. The Company expects that this
change will continue to have an adverse impact on 1997 revenues.
Cost of other revenue, which is related to customer maintenance and support
service revenue, was $0.2 million for the three month period ended June 30,
1997, compared to $0.7 million for the same three month period last year. For
the six months ended June 30, 1997, cost of other revenue was $0.5 million
compared to $1.8 million for the six months ended June 30, 1996. Cost for each
of these periods consisted primarily of personnel and equipment costs and
fluctuates based on customer-specific service revenue.
Research and development expenses were $4.5 million for the three month period
ended June 30, 1997, compared to $7.4 million for the same three month period in
1996. For the six months ended June 30, 1997, research and development expenses
were $9.4 million compared to $12.8 million for the six months ended June 30,
1996. Savings in the periods have been achieved by restructuring actions taken
to date and the reduction of product development offerings. To date, the Company
has expensed all software development costs as incurred.
Sales, general and administrative expenses were $3.0 million for the three month
period ended June 30, 1997, compared to $5.4 million for the same three month
period last year. For the six months ended June 30, 1997, sales, general and
administrative expenses were $7.0 million compared to $9.5 million in the same
six month period in 1996. The decreases in the periods were primarily related to
a decrease in headcount and reduced sales and marketing programs as a result of
the Company's shift in product strategies.
Net interest, other income and expense amounted to $0.7 million for the three
month period ended June 30, 1997, compared to $0.7 million in the same three
month period last year. For the six months ended June 30, 1997, net interest,
other income and expense was $1.7 million compared to $1.6 million. Net
interest, other income and expense consisted primarily of interest income and
expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash equivalents and
short-term investment balances which totaled $48.7 million as of June 30, 1997,
down from approximately $67.9 million as of December 31, 1996. The affect on
cash, cash equivalents and short term investments of savings in operating
expenses in the six months ended June 30, 1997, was offset by payment of
obligations accrued in 1996. The balance of cash, cash equivalents and short
term investments will continue to decrease in 1997 due to continued payment of
obligations accrued in 1996, such as costs associated with the restructuring and
commitments to licensees.
11
<PAGE> 12
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 a
result, 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 June 1996, the Company negotiated with one of
these licensees to accelerate repayment of unrecouped prepaid royalties in
exchange for the waiver of certain rights granted to the licensee by the Company
in a separate agreement. The payments are due on a quarterly basis beginning
July 1996, in equal installments of $0.4 million plus accrued interest. The
final payment, less any recouped advances, is due in October 1997. In addition,
further recoupment of prepaid royalties is not anticipated for three of the five
original Magic Cap licensees. As a result, in 1996 the Company reclassified, in
the aggregate, approximately $9.0 million from current and noncurrent deferred
revenue to accrued expenses for the repayment of prepaid royalties to each of
these four licensees. The accrual as of June 30, 1997, including interest,
totaled $9.0 million. In September 1996, the Company entered into an agreement
with the fifth original Magic Cap licensee which, among other things, permits
the licensee to recoup 100% of any royalties owed to the Company under a
software modem license agreement against the Magic Cap royalty prepayment and
amends the Magic Cap license agreement to provide for 100% recoupment of any
royalties due thereunder. In addition, the agreement extends the date for refund
of unrecouped prepaid royalties to November 2, 1999, and provides that no
interest shall be due upon any refund. As a result of this agreement, the
unrecouped prepaid royalty of $2.2 million remains in noncurrent deferred
revenue as of June 30, 1997.
Additionally, during 1994 and 1995, the Company entered into Magic Cap
technology license agreements with three of its stockholders. These license
agreements each provided for the payment of a $2.5 million up front,
nonrefundable, nonrecoupable technology fee. The agreements also provided for
the payment of up to $2.5 million in prepaid royalties payable in installments
upon the Company's achievement of certain technology milestones. Failure to
deliver the technology milestones entitles each licensee to terminate its
agreement and obtain a refund of unrecouped prepaid royalties in two equal
annual installments of principal, plus interest from the date of termination,
payable commencing one year following termination of the agreement. During the
fourth quarter of 1996, each of the three licensees demanded delivery of the
final milestone due under the license agreements. The final milsestone was
delivered by the Company on or about January 24, 1997, and is subject to
continued evaluation by the licensees. In addition, as previously disclosed, one
licensee asserted that changes in the Magic Cap product strategy resulted in
substantial but unspecified damages, for which it sought compensation. In June
of 1997, the Company reached an agreement to resolve the claims of, and
terminate the license agreement with, this licensee in consideration of the
refund of unrecouped prepaid royalties totaling $1.5 million (previously
classified as noncurrent deferred revenue), the waiver of any further payments
otherwise due under the agreement (including $0.5 million due but unpaid), and
the grant of a royalty-free license to certain software modem technology. The
$1.5 million refund is secured by a license in certain of the Company's
intellectual property, is non-interest bearing, and is payable in August of
1999. The Company continues to work with its remaining licensees to develop
product plans and to resolve any issues outstanding under the agreements. The
prepaid royalties paid to date by the remaining licensees total $4.0 million and
are classified as noncurrent deferred revenues as of June 30, 1997.
12
<PAGE> 13
There is no assurance that any of the Company's licensees will 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.
The Company expects that its cash, cash equivalents and short-term investment
balances of $48.7 million as of June 30, 1997, will be adequate to fund the
Company's operations through 1998. The Company's capital requirements will
depend on many factors, including, but not limited to, the rate at which the
Company and its 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 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. The Company has made no significant
commitment or agreement with respect to 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.
CHANGE IN STRATEGY
The Company is at an early stage of development in its new business strategy and
is subject to all of the risks inherent in the establishment of a new business
enterprise. To address these risks, the Company must, among other things,
establish technical feasibility and complete development of its software
technology, enter into key partnering arrangements, respond to competitive
developments, and attract, retain and motivate qualified personnel. The
Company's decision to become a provider of an advanced network service is
predicated on the assumption that in the future, the number of users of the
Company's network service will be large enough to permit the Company to operate
profitably. There can be no assurance that the Company's assumption will be
correct or that the Company will be able to successfully compete as a network
service provider. Any failure to achieve these goals could have a material
adverse effect upon the Company's business, operating results and financial
condition.
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, 1997, the Company had an
accumulated deficit of $133.9 million, with net losses of $14.5 million, $45.6
million and $20.6 million for the six month period ended June 30, 1997, and the
years ended December 31, 1996, and 1995, respectively.
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. As a consequence of the Company's change in strategy, the
Company does not currently anticipate significant revenues in 1997. See "Change
in Strategy." In
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<PAGE> 14
addition, under the terms of four of the Company's original five Magic Cap
license agreements, the licensees are entitled to repayment of unrecouped
prepaid royalties by the end of 1997. The Company expects to continue to incur
substantial losses until product introduction and it is unable to estimate when
it will achieve profitability. 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.
RAPID TECHNOLOGICAL CHANGE
The communications technology market is characterized by rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
the emergence of new industry standards could render the Company's products and
services obsolete and unmarketable. The Company's future success will depend
upon its ability to timely develop and introduce new products and services
(including its advanced network service) that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of the user. There can be no assurance that the Company will
be successful in developing and marketing new products and services that respond
to technological changes or evolving industry standards, that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products and services, or that
its new products and services will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce new products in a
timely manner in response to changing market conditions or consumer
requirements, the Company's business, operating results and financial condition
would be materially adversely affected.
TECHNOLOGY DEVELOPMENT
The Company's future success is based substantially upon its ability to develop
new technology to enable it to provide an advanced network service, and to
enhance its existing products and technologies. Software product development
schedules are difficult to predict because they involve creative processes, use
of new development tools and the learning processes associated with development
of new technologies, as well as other factors. Moreover, because of its
complexity, software frequently contains undetected errors or failures,
especially when first introduced or when new versions or enhancements are
released. There can be no assurance that despite testing by the Company, errors
will not be found in new software developed by the Company. To provide an
advanced network service, the Company also will require technology developed by
third parties. The Company has limited control over whether or when such
technologies will be developed or enhanced. The failure to timely develop or
license the software technology, or the occurrence of errors in such technology,
could prevent or delay market acceptance of the Company's advanced network
service, which could have a material adverse effect on the Company's business,
operating results and financial condition.
DISTRIBUTION RISKS
In connection with the Company's change in business strategy, it must establish
and maintain relationships with new distribution channels which will deliver
access to the Company's network service. There is intense competition in
establishing such relationships. There can be no assurance that the Company will
succeed in establishing such relationships, or that if established, the Company
will be able to maintain these relationships. The failure of the Company to
successfully establish and then maintain these relationships would have a
material adverse effect on the Company's business, operating results and
financial condition.
To date, the Company has distributed its Magic Cap and Telescript platforms
directly to its licensees. Only Sony (with its Magic Link product), Motorola
(with its Envoy product) and Matsushita (with its
14
<PAGE> 15
NeoNet product) developed commercial products based on the first generation of
Magic Cap. Matsushita marketed the NeoNet only to customers of NTT's Paseo
service. 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; AT&T terminated the PersonaLink service in August 1996. In Japan,
NTT offered a Telescript-based English language pilot service (known as Paseo)
and Fujitsu offered a Telescript-enabled pilot service (called the iMi service)
based on the Company's first generation Telescript technology. The Paseo service
was terminated in January 1997. The Company continues to work with its licensees
to incorporate the Magic Cap technology into their products and to develop its
agent technology for use in its network service as well as Internet
applications. However, there can be no assurance that these licensees will
develop commercial products or services based on the Company's technologies.
DEPENDENCE ON EMERGING MARKETS
The Company's future financial performance will depend on the growth in demand
for an advanced network service by mobile business professionals and other
consumers. This market is new and emerging, is rapidly evolving, is
characterized by an increasing number of market entrants and will be subject to
frequent and continuing changes in customer preferences and technology. As is
typical in new and evolving markets, demand and market acceptance for the
Company's technologies are subject to a high level of uncertainty.
Furthermore, the markets for PICs and agent technology are not yet established.
Sales of Sony Magic Link, Motorola Envoy and Matsushita NeoNet communicators
were modest, and manufacture of each of these products has been discontinued. It
is not clear if or when the market for the PICs will become substantial. The
Company has concluded that its Telescript-derived Tabriz products will not
achieve market acceptance. There can be no assurance that the markets for PICs
or for agent technology will grow to commercially significant volumes or that
products or services incorporating the Company's technologies will offer
sufficient price and performance advantages to be commercially successful.
Because the markets for the Company's technologies are new and evolving, it is
difficult to assess or predict with any assurance the size or growth rate, if
any, of these markets. There can be no assurance that the markets for the
Company's technologies will develop, or that they will not develop more slowly
than expected or attract new competitors. If the Company's technologies do not
achieve market acceptance, the Company's business, operating results and
financial condition would be materially adversely affected.
LIMITED RESOURCES
Building an advanced network service based on software technology is a complex
process that requires significant engineering and financial resources. Among
other things, to implement its network service, the Company must develop certain
technology and license other technologies from third parties, and establish
distribution channels and strategic partnering relationships. In part as a
result of reductions in personnel in October 1996 and January 1997, the Company
currently has limited technical and sales staff. Furthermore, because the
Company has generated minimal revenues to date and does not expect to generate
revenues from its network service in 1997, if at all, the Company must conserve
its remaining cash reserves. There can be no assurance that given the limited
resources of the Company it will be able to develop or implement its advanced
network service. Failure to do so would have a material adverse effect on the
Company's business, operating results and financial condition.
15
<PAGE> 16
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 eighteen months, including an approximate one-half
reduction in its workforce between October 1996 and January 1997. These
reductions have adversely affected, and may in the future adversely affect,
development schedules and sales activities. There can be no assurance that the
Company's current employees will continue to work for the Company or that the
Company will be able to obtain the services of additional personnel necessary
for the Company's growth. Failure to attract or retain qualified personnel would
likely have a material adverse effect on the Company's business, operating
results and financial condition.
DEPENDENCE ON MAGIC CAP LICENSEES
Although the Company views its relationship with its 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. The Company
provided these licensees with the next generation of its Magic Cap technology in
January 1997. There can be no assurance that the Company's licensees will be
deemed to have accepted the new release, or that they will incorporate it into
any of their products. 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. Failure of the Magic
Cap licensees to successfully commercialize products utilizing the Company's
technologies and failure of the 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, operating results and financial condition.
RELIANCE ON TOOLS DEVELOPMENT AND THIRD PARTY APPLICATIONS DEVELOPERS
The Company must 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 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.
16
<PAGE> 17
DEPENDENCE ON AND RESPONSIVENESS TO THE INTERNET
The Company believes that its future success is in part dependent upon continued
growth in the use of the Internet. Rapid growth in the use of and interest in
the Internet is a recent phenomenon. The Internet may prove not to be a viable
means of conducting commerce or communications for a number of reasons,
including, but not limited to, potentially unreliable network infrastructure, or
untimely development of performance improvements including high speed modems. In
addition, to the extent that the Internet continues to experience significant
growth in the number of users and level of use, there can be no assurance that
the Internet infrastructure will continue to be able to support the demands
placed on it by any such growth. Failure of the Internet as a mode of conducting
commerce and communications could have a material adverse effect on the
Company's business, operating results and financial condition.
POTENTIAL SECURITY ISSUES
The implementation of a network service poses several security issues, including
the possibility of break-ins and other similar disruptions. The Company intends
to incorporate authentication technology in its advanced network service.
However, there can be no assurance that such technology will be adequate to
prevent break-ins in the service. In addition, as is generally known, weaknesses
in the medium by which users may access the Company's network service, including
the Internet, telephones, cellular phones and other wireless devices, may
compromise the security of the confidential electronic information accessed from
the Company's network service. There can be no assurance that the Company will
be able to provide a safe and secure network service. The Company's failure to
provide a secure network service may result in significant liability to the
Company and may deter potential users of the service. The Company intends to
limit its liability to users, including liability arising from failure of the
authentication technology that will be incorporated into the network service,
through contractual provisions. However, there can be no assurance that such
limitations will be effective. The Company currently does not have liability
insurance to protect against risks associated with forced break-ins or
disruptions. There can be no assurance that security vulnerabilities and
weaknesses will not be discovered in the Company's network service or licensed
technology incorporated into such service or in the mediums by which subscribers
access the network service. Any security problems in the network service or the
licensed technology incorporated in such service may require significant
expenditures of capital and resources by the Company to alleviate such problems,
may result in lawsuits against the Company, may limit the number of users of the
network service and may cause interruptions or delays in the development and
completion of, or the cessation of, the Company's network service. Any such
expenditures, lawsuits, reduction of users, interruptions or delays in the
development and completion of the network service, or the cessation of such
service by the Company, would likely have a material adverse effect on the
Company's business, operating results and financial condition.
Critical issues concerning the security of the Internet remain unresolved at
this time. If the Internet proves to be unreliable with respect to the
information distributed on or the transactions conducted over it, the rapid
growth in the use of and interest in the Internet may cease, which could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Dependence on and Responsiveness to the Internet."
17
<PAGE> 18
COMPETITION
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
Company's technologies, have substantially greater financial resources, research
and development capabilities, and sales and marketing staffs, 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 services and 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 and its
licensees; the effectiveness of the Company and its licensees in marketing and
distributing their products and services; 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.
18
<PAGE> 19
GENERAL MAGIC, INC.
FORM 10-Q, June 30, 1997
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 June 12, 1997.
A proposal to elect the following three (3) directors to hold office
until the 1998 Annual Meeting and until their successors are elected
and qualified was approved by the stockholders. This proposal received
the following votes:
For Against
--- -------
Steven Markman 19,767,584 131,650
Carl F. Pascarella 19,752,124 147,110
Roel Pieper 19,771,216 128,018
A proposal to increase by 275,000 shares the aggregate number of shares
issuable under the Company's 1994 Employee Stock Purchase Plan was also
approved by the stockholders. This proposal received the following
votes:
For: 18,990,926
Against: 860,385
Abstained: 47,893
In addition, the stockholders ratified the appointment of KPMG Peat
Marwick LLP as the independent auditors of the Company for the fiscal
year ending December 31, 1997. This proposal received the following
votes:
For: 19,830,077
Against: 48,388
Abstained: 20,769
19
<PAGE> 20
GENERAL MAGIC, INC.
FORM 10-Q, June 30, 1997
Part II--Other Information
Abstentions and 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.
20
<PAGE> 21
GENERAL MAGIC, INC.
FORM 10-Q, June 30, 1997
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 12, 1997 /s/ James P. McCormick
--------------- ----------------------
Name: James P. McCormick
Title: Vice President of Finance and Administration
and Chief Financial Officer
DATE: August 12, 1997 /s/ Steven Markman
--------------- ----------------------
Name: Steven Markman
Title: Chairman, Chief Executive Officer,
and President
21
<PAGE> 22
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Month Periods Ended Six Month Periods Ended
June 30, June 30,
-------- -------- -------- --------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for the period:
Common stock 26,782 26,001 26,678 25,953
Preferred stock -- -- -- --
-------- -------- -------- --------
Shares used in per share calculation 26,782 26,001 26,678 25,953
======== ======== ======== ========
Net loss $ (6,714) $(11,647) $(14,517) $(18,678)
======== ======== ======== ========
Net loss per share $ (0.25) $ (0.45) $ (0.54) $ (0.72)
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 12,878
<SECURITIES> 35,775
<RECEIVABLES> 357
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 49,533
<PP&E> 12,532
<DEPRECIATION> 7,876
<TOTAL-ASSETS> 55,630
<CURRENT-LIABILITIES> 15,730
<BONDS> 128
0
0
<COMMON> 27
<OTHER-SE> 31,048
<TOTAL-LIABILITY-AND-EQUITY> 55,630
<SALES> 0
<TOTAL-REVENUES> 786
<CGS> 0
<TOTAL-COSTS> 537
<OTHER-EXPENSES> 16,444
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> 14,508
<INCOME-TAX> 9
<INCOME-CONTINUING> 14,517
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,517
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
