<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 September 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 000-25374
GENERAL MAGIC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0250147
(State of incorporation) (IRS Employer Identification Number)
420 NORTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 774-4000
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
26,873,348 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of September 30, 1997.
THIS DOCUMENT CONTAINS 21 PAGES.
THE EXHIBIT INDEX IS ON PAGE 19.
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GENERAL MAGIC, INC.
FORM 10-Q, September 30, 1997
C O N T E N T S
<TABLE>
<CAPTION>
Item Number Page
- ----------- ----
<S> <C> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
a. Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 3
b. Consolidated Statements of Operations - Three-Month Periods Ended
September 30, 1997 and 1996 and Nine-Month Periods Ended September
30, 1997 and 1996 4
c. Consolidated Statements of Cash Flows - Nine-Month Periods Ended
September 30, 1997 and 1996 5
d. Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibits 21
</TABLE>
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>
September 30, December 31,
ASSETS 1997 1996
--------- ---------
<S> <C> <C>
Current assets: (Unaudited)
Cash and cash equivalents $ 17,333 $ 23,706
Short-term investments 22,461 44,157
Receivables 196 1,199
Prepaid expenses and other 534 513
--------- ---------
Total current assets 40,524 69,575
--------- ---------
Property and equipment, net 4,760 5,915
Other assets 1,743 446
--------- ---------
$ 47,027 $ 75,936
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,367 $ 1,984
Accrued expenses 12,079 17,574
Current portion of capital lease obligations 589 1,022
Deferred revenue -- 325
--------- ---------
Total current liabilities 14,035 20,905
--------- ---------
Deferred revenue, noncurrent 4,186 8,200
Other long-term liabilities 2,437 1,128
Capital lease obligations, net of current portion 84 241
--------- ---------
Total liabilities 20,742 30,474
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value
Authorized: 60,000 shares
Issued and outstanding: 1997 - 26,873; 1996 - 26,419 27 26
Additional paid-in capital 165,012 164,534
Other (58) 235
Deficit accumulated during development stage (138,696) (119,333)
--------- ---------
Total stockholders' equity 26,285 45,462
--------- ---------
$ 47,027 $ 75,936
========= =========
</TABLE>
See accompanying notes to consolidated 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 Ended Nine-Month Periods Ended
September 30, September 30,
-----------------------------------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Licensing revenue $ 2,228 $ 197 $ 2,438 $ 2,001
Other revenue 325 557 901 2,675
-------- -------- -------- --------
Total revenue 2,553 754 3,339 4,676
-------- -------- -------- --------
Cost of other revenue and operating
expenses:
Cost of other revenue 291 463 828 2,213
Research and development 5,513 5,520 14,948 18,314
Sales, general and administrative 2,169 6,309 9,178 15,840
Write-off of acquired technology
and in-process research and
development -- 1,542 -- 1,542
-------- -------- -------- --------
Total cost and expenses 7,973 13,834 24,954 37,909
-------- -------- -------- --------
Loss from operations (5,420) (13,080) (21,615) (33,233)
Net interest and other income 582 663 2,269 2,266
-------- -------- -------- --------
Loss before income taxes (4,838) (12,417) (19,346) (30,967)
Income taxes 8 3 17 131
-------- -------- -------- --------
Net loss $ (4,846) $(12,420) $(19,363) $(31,098)
======== ======== ======== ========
Net loss per share $ (0.18) $ (0.48) $ (0.72) $ (1.20)
======== ======== ======== ========
Shares and share equivalents used
in computing per share amounts 26,854 26,144 26,741 26,017
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine-Month Periods Ended
September 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(19,363) $(31,098)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 2,150 2,467
Amortization of deferred gain from sale and leaseback financing (72) (72)
Deferred revenue (2,339) 919
Amortization of deferred compensation 77 --
Write-off of acquired technology -- 1,343
Changes in items affecting operations:
Receivables and prepaid expenses 482 1,951
Accounts payable and accrued expenses (5,472) 946
-------- --------
Net cash used in operating activities (24,537) (23,544)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (51,260) (34,485)
Proceeds from sales and maturities of short-term investments 72,741 60,252
Purchases of property and equipment (1,629) (2,028)
Other assets (1,231) (896)
-------- --------
Net cash provided by investing activities 18,621 22,843
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations (590) (519)
Proceeds from sale of common stock 324 1,186
Other long-term liabilities (191) 885
-------- --------
Net cash provided by (used in) financing activities (457) 1,552
-------- --------
Net (decrease) increase in cash and cash equivalents (6,373) 851
Cash and cash equivalents, beginning of period 23,706 40,563
-------- --------
Cash and cash equivalents, end of period $ 17,333 $ 41,414
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid during the period $ 15 $ 136
======== ========
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
<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, 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 nine-month periods ended
September 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>
September 30, December 31,
1997 1996
------------------------------
<S> <C> <C>
(unaudited)
Office equipment and computers $ 6,898 $ 9,149
Furniture and fixtures 2,795 2,775
Leasehold improvements 519 489
Construction in process 1,152 --
------------------------------
11,364 12,413
Less accumulated depreciation and amortization (6,604) (6,498)
==============================
$ 4,760 $ 5,915
==============================
</TABLE>
6
<PAGE> 7
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>
September 30, December 31,
1997 1996
---------------------------------------
<S> <C> <C>
(unaudited)
Royalty and accrued interest $ 8,645 $ 10,012
Restructuring (See Note 3) 347 2,807
Employee compensation 1,982 3,569
Other 1,105 1,186
---------------------------------------
=======================================
$ 12,079 $ 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 September 30, 1997; vacating certain facilities and canceling 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 September 30, 1997, the Company incurred cash
expenditures of $2,034,000 and noncash expenditures of $789,000. The Company
expects that the remaining $347,000 accrued balance as of September 30, 1997,
will result in cash expenditures. The remaining restructuring actions are
expected to be completed in the next three months and will be financed through
existing cash and cash equivalents.
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
September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
Balance as of Balance as of
December 31, September 30,
COMPONENTS 1996 Spending Adjustments 1997
---------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Payments to employees involuntarily $ 823 $ 377 ($99) $347
terminated (C)
Payments on vacated facilities and
canceled auto leases (C) 394 394 - -
Disposal of office and computer equipment
(NC) 690 789 99 -
Contract settlement costs (C) 900 900 - -
===============================================================
$2,807 $2,460 $ 0 $347
===============================================================
</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
license 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
entitled 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 milestone was delivered by the Company on or about January
24, 1997. As previously disclosed, the Company reached an agreement to resolve
the claims of one of these licensees in June of 1997. In September of 1997, the
Company reached agreement with a second of these licensees providing for
acceptance of the final milestone, subject to certain conditions which were
satisfied by the Company on September 29, 1997. Pursuant to this agreement, the
Company waived payment of the final $500,000 installment of the prepaid
royalties and recognized $2,000,000 in revenue previously classified as
noncurrent deferred revenue. In October of 1997, the Company reached agreement
with the third of these licensees, also providing for acceptance of the final
milestone. Pursuant to this agreement, the Company waived payment of the final
$500,000 installment of the prepaid royalties and agreed to refund prepaid
royalties not recouped by January 1, 2003, plus any accrued interest, on or
before December 31, 2003.
8
<PAGE> 9
During the three-month period ended September 30, 1997, the Company entered into
an original equipment manufacturer ("OEM") agreement with Oki Electric Industry
Co., Ltd. ("Oki Electric") for the manufacture of handheld communicators. In
connection therewith, the Company obtained an irrevocable letter of credit with
a term of one year to collateralize the Company's obligation to Oki Electric for
purchase of these communicators. The amount outstanding as of September 30,
1997, under this letter of credit was $3,300,000. The Company has placed on
deposit an equivalent amount as security with the financial institution issuing
the letter of credit.
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 15, 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 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 is
also developing its patented agent technology for application in connection with
the network service. In addition, the Company continues to develop its Magic Cap
technology for handheld communicators and other communication devices. The
Company plans to market and distribute handheld communicators and customized
software applications in selected vertical markets. The Company expects to
derive future revenues principally from the sale of its services and products.
RESULTS OF OPERATIONS
For the three-month period ended September 30, 1997, the Company incurred a net
loss of $4.8 million, or $0.18 per share, compared to a net loss of $12.4
million, or $0.48 per share, for the three-month period ended September 30,
1996. The net loss decreased 38% to $19.4 million or $0.72 per share, for the
nine months ended September 30, 1997, compared to a net loss of $31.1 million or
$1.20 per share, for the same nine-month period in the prior year. The decrease
in net loss is the result of savings achieved from improved expense management
and the restructuring actions taken by the Company in the fourth quarter of 1996
and the first quarter of 1997.
Revenues for the three-month period ended September 30, 1997, totaled $2.6
million compared to $0.8 million for the same three-month period last year. For
the nine months ended September 30, 1997, revenues were $3.3 million compared to
$4.7 million for the nine months ended September 30, 1996. The increase in
revenue during the third quarter of 1997 is the result of $2 million in royalty
revenue recognized under an existing master license agreement. The decrease in
revenues for the nine-month period ended September 30,
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<PAGE> 11
1997, compared to the nine-month period ended September 30, 1996, 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 $0.3 million for the three-month period ended September 30,
1997, compared to $0.5 million for the same three-month period last year. For
the nine months ended September 30, 1997, cost of other revenue was $0.8 million
compared to $2.2 million for the nine months ended September 30, 1996. Cost of
other revenue 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 $5.5 million for the three-month period
ended September 30, 1997, and $5.5 million for the three-month period ended
September 30, 1996. For the nine months ended September 30, 1997, research and
development expenses were $14.9 million compared to $18.3 million for the nine
months ended September 30, 1996. Included in both the three-month and nine-month
periods ended September 30, 1997, is a $0.6 million one-time charge for a
technology license fee related to the development of the Company's advance
network service. This charge was offset by savings related to headcount
reductions and reduced product offerings. To date, the Company has expensed all
software development costs as incurred.
Sales, general and administrative expenses were $2.2 million for the three-month
period ended September 30, 1997, compared to $6.3 million for the same
three-month period last year. For the nine months ended September 30, 1997,
sales, general and administrative expenses were $9.2 million compared to $15.8
million in the same nine-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 strategic product changes.
During the three-month and nine-month periods ended September 30, 1996, the
Company recognized a one-time charge of $1.5 million. Included in this charge
was a $1.3 million write-off of software technology previously capitalized and
$0.2 million of in-process research and development.
Net interest, other income and expense amounted to $0.6 million for the
three-month period ended September 30, 1997, compared to $0.7 million in the
same three-month period last year. Net interest, other income and expense was
$2.3 million in both nine-month periods ended September 30, 1997 and 1996. Net
interest, other income and expense consisted primarily of interest income and
interest expense. Interest income decreased in both the three-month and
nine-month periods ended September 30, 1997, due to the decrease in cash, cash
equivalents and short-term investments. This decrease was offset by the
reduction in interest expense from obligations under certain master license
agreements and capital leases.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash equivalents and
short-term investment balances which totaled $39.8 million as of September 30,
1997, down from approximately $67.9 million as of December 31, 1996. The effect
on cash, cash equivalents and short term investments of savings in operating
expenses in the nine months ended September 30, 1997, was partially offset by
capital investment in the Company's initial network operations center, one-time
research and development charges, and 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 commitments to licensees and restructuring.
11
<PAGE> 12
Under the Company's five original Magic Cap license agreements, royalty
prepayments not fully recouped by the fifth anniversary of the agreements
(November 30, 1997) are subject 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 were 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, was made 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 September 30, 1997,
including interest, totaled $8.6 million. The Company expects to pay this amount
in December of 1997. 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 September 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 entitled 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 milestone was
delivered by the Company on or about January 24, 1997. As previously disclosed,
the Company reached an agreement to resolve the claims of one of these licensees
in June of 1997. In September of 1997, the Company reached agreement with a
second of these licensees providing for acceptance of the final milestone,
subject to certain conditions which were satisfied by the Company on September
29, 1997. Pursuant to this agreement, the Company waived payment of the final
$0.5 million installment of the prepaid royalties and recognized $2.0 million in
revenue previously classified as noncurrent deferred revenue. In October of
1997, the Company reached agreement with the third of these licensees, also
providing for acceptance of the final milestone. Pursuant to this agreement, the
Company waived payment of the final $0.5 million installment of the prepaid
royalties and agreed to refund prepaid royalties not recouped by January 1,
2003, plus any accrued interest, on or before December 31, 2003.
During the three-month period ended September 30, 1997, the Company entered into
an OEM agreement with Oki Electric for the manufacture of handheld
communicators. In connection therewith, the Company obtained an irrevocable
letter of credit with a term of one year to collateralize the Company's
obligation to Oki Electric for purchase of these communicators. The amount
outstanding as of September 30, 1997, under this letter of credit was $3.3
million. The Company has placed on deposit an equivalent amount as security with
the financial institution issuing the letter of credit.
The Company expects that its cash, cash equivalents and short-term investment
balances of $39.8 million as of September 30, 1997, will be adequate to fund the
Company's operations through 1998. However, the
12
<PAGE> 13
Company is evaluating other sources of capital. 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 capital equipment to construct
network operations centers; 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 material commitment
or agreement with respect to any such transaction 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 technology,
enter into key partnering, development and distribution 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 September 30, 1997, the Company had an
accumulated deficit of $138.7 million, with net losses of $19.4 million, $45.6
million and $20.6 million for the nine-month period ended September 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. In 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.
13
<PAGE> 14
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 introduction or 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.
14
<PAGE> 15
To date, the Company has distributed its Magic Cap platform directly to its
licensees. Because of the limited success of this strategy, the Company plans to
market and distribute handheld communicators and customized software
applications in selected vertical markets. In conjunction with this plan, the
Company entered into an OEM agreement for the manufacture of handheld
communicators which incorporate the Magic Cap technology. The Company plans to
distribute such products through a variety of distribution channels, including a
direct sales force, value-added resellers ("VARs") and outside sales
representatives. There can be no assurance that the change in the Company's
Magic Cap distribution strategy will be successful. Failure to establish and
maintain a direct sales force or relationships with VARs and outside sales
representatives would have a material adverse effect on the Company's business,
operating results and financial condition.
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. Because the
market for the Company's advanced network service is evolving, it is difficult
to assess or predict with any assurance the size or growth rate, if any, of this
market. There can be no assurance that the market for the Company's service will
develop, or that it will not develop more slowly than expected or attract new
competitors. If the Company's service does not achieve market acceptance, the
Company's business, operating results and financial condition would be
materially adversely affected.
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, sales and marketing staffs, and better developed
distribution channels than the Company. There can be no assurance that products
or services 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, products or services introduced
by existing competitors and by new companies entering the market.
15
<PAGE> 16
INTELLECTUAL PROPERTY
The Company seeks to protect its proprietary information and technology through
contractual confidentiality provisions and the application for United States and
foreign patents, trademarks and copyrights. There can be no assurance of
patents, trademarks or copyrights or that third parties will not seek to
challenge, invalidate or circumvent such applications or resulting patents,
trademarks or copyrights. Additionally, competitors may independently develop
equivalent or superior, non-infringing technologies. The Company's revenue could
be adversely affected to the extent that such technologies avoid infringement of
the Company's patents. Furthermore, there can be no assurance that third parties
will not assert claims of infringement of intellectual property rights against
the Company and that such claims will not lead to litigation and/or require the
Company to significantly modify or even discontinue sales of certain of its
products. Any such event may have a material adverse effect on the Company's
business, operating results and financial conditions.
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 experienced
significant attrition of engineering, marketing, administrative and sales
personnel during the latter part of 1996 and the first half of 1997, including
an approximate one-half reduction in its workforce between October 1996 and
January 1997. These reductions adversely affected, and may in the future
adversely affect, the Company's ability to attract, retain and motivate
qualified personnel. 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.
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 addition, with
respect to its handheld communicator business, the Company must customize third
party applications for its selected vertical markets, establish distribution
channels, and develop a sales force. 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 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 or develop and distribute
handheld communicators and associated software. Failure to do so would have a
material adverse effect on the Company's business, operating results and
financial condition.
16
<PAGE> 17
MAGIC CAP LICENSEES
The Company continues to work with its licensees to develop products based on
its Magic Cap technology. The Company provided its Magic Cap licensees with the
next generation of its technology in January 1997. There can be no assurance
that the Company's licensees will incorporate the new release into any of their
products. Moreover, some of the Company's licensees make competitive products or
have strategic relationships with competitors of the Company. Accordingly, the
Company entered into an OEM agreement for the manufacture of handheld
communicators which incorporate the Magic Cap technology, and plans to
distribute such products to selected vertical markets. See "Third Party
Products." Failure of the Magic Cap licensees to successfully commercialize
products utilizing the Company's technologies or failure of the licensees to
commit sufficient resources to the marketing of the Company's technologies could
adversely affect the Company's business, operating results and
financial condition.
THIRD PARTY PRODUCTS
The Company has entered into an OEM agreement for the manufacture of handheld
communicators which incorporate the Magic Cap technology. Failure of the OEM to
manufacture such products or to meet the Company's volume and quality
requirements and delivery schedules could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, the
OEM manufactures product outside of the United States and supply of such
products could be adversely affected by factors normally attendant to the
conduct of foreign trade, including imposition of duties, taxes, fees or other
trade restrictions, fluctuations in currency exchange rates and longer delivery
times.
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. 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 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
17
<PAGE> 18
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 have a material adverse effect on the Company's
business, operating results and financial condition.
18
<PAGE> 19
GENERAL MAGIC, INC.
FORM 10-Q, September 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit has been filed with this report:
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
19
<PAGE> 20
\ GENERAL MAGIC, INC.
FORM 10-Q, September 30, 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: November 6, 1997 /s/ James P. McCormick
----------------- ------------------------------------------------
Name: James P. McCormick
Title: Vice President of Finance and Administration
and Chief Financial Officer
DATE: November 6, 1997 /s/ Steven Markman
----------------- ------------------------------------------------
Name: Steven Markman
Title: Chairman, Chief Executive Officer
and President
20
<PAGE> 21
Exhibit Number Description
- -------------- -----------
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
21
<PAGE> 1
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
EXHIBIT 11.1
COMPUTATION OF NET LOSS PER SHARE (Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three-Month Periods Ended Nine-Month Periods Ended
September 30, September 30,
-----------------------------------------------------------------
1997 1996 1997 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for the period:
Common stock 26,854 26,144 26,741 26,017
=================================================================
Shares used in per share calculation 26,854 26,144 26,741 26,017
=================================================================
Net loss $ (4,846) $ (12,420) $ (19,363) $ (31,098)
=================================================================
Net loss per share $ (0.18) $ (0.48) $ (0.72) $ (1.20)
=================================================================
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 17,333
<SECURITIES> 22,461
<RECEIVABLES> 196
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,524
<PP&E> 11,364
<DEPRECIATION> 6,604
<TOTAL-ASSETS> 47,027
<CURRENT-LIABILITIES> 14,035
<BONDS> 84
0
0
<COMMON> 27
<OTHER-SE> 26,258
<TOTAL-LIABILITY-AND-EQUITY> 47,027
<SALES> 0
<TOTAL-REVENUES> 3,339
<CGS> 0
<TOTAL-COSTS> 828
<OTHER-EXPENSES> 24,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197
<INCOME-PRETAX> (19,346)
<INCOME-TAX> 17
<INCOME-CONTINUING> (19,363)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,363)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
