<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 March 31, 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 [ ]
26,775,906 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of April 30, 1997.
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GENERAL MAGIC, INC.
FORM 10-Q, March 31, 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 - March 31, 1997 and December 31, 1996 3
b. Consolidated Statements of Operations - Three Month Periods Ended March 31, 1997 and
1996 4
c. Consolidated Statements of Cash Flows - Three Month Periods Ended March 31, 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 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibits 20
</TABLE>
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PART I.- FINANCIAL INFORMATION
Item 1. Financial Statements
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,495 $ 23,706
Short-term investments 42,080 44,157
Receivables 850 1,199
Prepaid expenses 628 513
------------------------------------------
Total current assets 59,053 69,575
------------------------------------------
Property and equipment, net 5,209 5,915
Other assets 512 446
------------------------------------------
$ 64,774 $ 75,936
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,074 $ 1,984
Accrued expenses 15,668 17,574
Current portion of capital lease obligations 871 1,022
Deferred revenue 112 325
------------------------------------------
Total current liabilities 17,725 20,905
------------------------------------------
Deferred revenue, noncurrent 8,200 8,200
Other long-term liabilities 1,138 1,128
Capital lease obligations, net of current portion 185 241
------------------------------------------
Total liabilities 27,248 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 - 26,775; 1996 - 26,419 27 26
Additional paid-in capital 164,851 164,534
Other (216) 235
Deficit accumulated during development stage (127,136) (119,333)
------------------------------------------
Total stockholders' equity 37,526 45,462
------------------------------------------
$ 64,774 $ 75,936
==========================================
</TABLE>
See accompanying notes to consolidated financial statements.
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Month Periods Ended
March 31,
-----------------------------------------------------
1997 1996
-----------------------------------------------------
<S> <C> <C>
Revenue:
Licensing revenue $ 151 $ 1,429
Other revenue 338 1,379
-----------------------------------------------------
Total revenue 489 2,808
-----------------------------------------------------
Costs and expenses:
Cost of other revenue 312 1,068
Research and development 4,980 5,411
Sales, general, and administrative 4,031 4,152
-----------------------------------------------------
Total costs and expenses 9,323 10,631
-----------------------------------------------------
Loss from operations (8,834) (7,823)
-----------------------------------------------------
Net interest, other income and expense 1,033 913
-----------------------------------------------------
Loss before income taxes (7,801) (6,910)
Income taxes 2 121
-----------------------------------------------------
Net loss $ (7,803) $ (7,031)
=====================================================
Net loss per share $ (0.29) $ (0.27)
=====================================================
Shares and share equivalents used in computing per share
amounts 26,572 25,905
=====================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Month Periods Ended
March 31,
----------------------------------------
1997 1996
----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,803) $ (7,031)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 747 752
Amortization of deferred gain from sale and leaseback financing (24) (24)
Deferred revenue (213) 88
Amortization of deferred compensation 39 -
Changes in items affecting operations:
Receivables and prepaid expenses 234 2,062
Accounts payable and accrued expenses (2,792) (1,649)
----------------------------------------
Net cash used in operating activities (9,812) (5,802)
----------------------------------------
Cash flows from investing activities:
Purchases of short-term investments (28,411) -
Proceeds from sales and maturities of short-term investments 30,153 33,735
Purchases of property and equipment (107) (650)
----------------------------------------
Net cash (used in) provided by investing activities 1,635 33,085
----------------------------------------
Cash flows from financing activities:
Repayment of capital lease obligations (207) (171)
Proceeds from sale of common stock 163 781
Other long-term liabilities 10 643
----------------------------------------
Net cash provided by (used in) financing activities (34) 1,253
----------------------------------------
Net (decrease) increase in cash and cash equivalents (8,211) 28,536
Cash and cash equivalents, beginning of period 23,706 40,563
----------------------------------------
Cash and cash equivalents, end of period $ 15,495 $ 69,099
========================================
Supplemental disclosures of cash flow information:
Income taxes paid during the period $ 2 $ 121
========================================
Noncash financing activity:
Contribution of furniture and equipment in exchange for investment $ 66 $ -
========================================
Deferred compensation for restricted stock purchase $ 155 $ -
========================================
</TABLE>
5
See accompanying notes to consolidated financial statements.
<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 Statement which was filed
with the SEC on March 31, 1997.
The results of operations for the three month period ended March 31, 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>
March 31, December 31,
1997 1996
------------------------------------------------
(unaudited)
<S> <C> <C>
Office equipment and computers $9,092 $9,149
Furniture and fixtures 2,775 2,775
Leasehold improvements 489 489
------------------------------------------------
12,356 12,413
Less accumulated depreciation and amortization (7,147) (6,498)
------------------------------------------------
$5,209 $5,915
================================================
</TABLE>
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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>
March 31, December 31,
1997 1996
------------------------------------------------
(unaudited)
<S> <C> <C>
Royalty and accrued interest $ 9,525 $10,012
Restructuring (See Note 4) 2,256 2,807
Employee compensation 1,749 3,569
Other 2,138 1,186
------------------------------------------------
$15,668 $17,574
================================================
</TABLE>
NOTE 3: INVESTMENT IN ALTOCOM, INC.
Effective January 31, 1997, the Company transferred certain technology as well
as furniture and equipment to AltoCom, Inc. ("AltoCom") in exchange for a
minority interest in the company, a share of the revenue from existing products
as well as certain non-exclusive rights to new technology to be developed by
AltoCom. The costs of developing the technology transfered were previously
charged to operations. Accordingly, the only cost attributable to the minority
investment is $66,000 for the furniture and equipment contributed. The Company
also agreed to subsidize operating expenses of AltoCom up to $550,000 in the
first twelve months following the effective date of the transaction.
NOTE 4: 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. As a result of the lack of demand for the Company's
products, primarily attributed to the emergence of the Internet and the failure
of the personal intelligent communicator ("PIC") market to develop, the Company
adopted a new strategic direction and executed its restructuring plan. The
Company's restructuring actions consist primarily of terminating approximately
60 employees, all but four of whom had been terminated as of March 31, 1997;
canceling or vacating certain facility and auto leases as a result of these
employee terminations; disposing of certain office and computer equipment; and
settling of 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
restructuring plan inception through March 31, 1997, the Company incurred cash
expenditures of $847,000 and noncash expenditures of $67,000. The Company
expects that the remaining $2,256,000 accrued balance as of March 31, 1997 will
result in $1,633,000 cash and $623,000 noncash expenditures. The remaining
restructuring actions are expected to be completed in the next nine months and
will be financed through current working capital.
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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
March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Balance as of Balance as of
COMPONENTS December 31, 1996 Spending March 31, 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) 394 187 207
Disposal of office and computer equipment (NC) 690 67 623
Contract settlement costs (C) 900 - 900
----------------------------------------------------------------------
$2,807 $ 551 $2,256
======================================================================
</TABLE>
(C): CASH; (NC): NONCASH
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.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in the Risk Factors section of this Item 2 that could
cause actual results to differ materially from historical results or those
anticipated. In this report, the words "anticipates," "believes," "expects,"
"future," "intends," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
OVERVIEW
General Magic, Inc. (the "Company") was incorporated in California in May 1990
and was reorganized as a Delaware corporation in February 1995. The Company has
developed two platform technologies, Magic Cap and Telescript. The 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 has 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 has redirected its business strategy. It is developing and
marketing an advanced network service based on Internet, computing and
telecommunications 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 deliver products that incorporate Magic Cap technology, and to
develop its agent technology for Internet applications. As a result of the
redirection of its strategy, General Magic believes it will 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 focus its efforts as 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 March 31, 1997, the Company incurred a net loss
of $7.8 million, or $0.29 per share, compared to a net loss of $7.0 million, or
$0.27 per share, for the three month period ended March
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31, 1996. Revenues for the three month period ended March 31, 1997, totaled $0.5
million compared to $2.8 million for the same three month period last year.
Revenues primarily related to customer maintenance and support services. The
Company has recently redirected its business and product strategies. The Company
expects that this change will continue to have an adverse impact on 1997
revenues.
Cost of other revenue, which is related to revenue attributable to customer
maintenance and support services, was $0.3 million for the three month period
ended March 31, 1997, compared to $1.1 million for the same three month period
last year.
Research and development expenses were $5.0 million for the three month period
ended March 31, 1997, compared to $5.4 million for the same three month period
in 1996. While this represents a slight decrease from the prior year's first
quarter, the Company has begun shifting the investment in this area to
development of its advanced network service. To date, the Company has expensed
all software development costs as incurred.
Sales, general and administrative expenses were $4.0 million for the three
month period ended March 31, 1997, compared to $4.2 million for the same three
month period last year. The decrease is primarily related to a decrease in
headcount over the comparable period.
Net interest, other income and expense amounted to $1.0 million for the
three-month period ended March 31, 1997, compared to $0.9 million in the
comparable period last year.
Income taxes were $2 thousand for the three month period ended March 31, 1997,
compared to $121 thousand for the same three month period in 1996. The decrease
related to a reduction in the foreign withholding tax obligation on revenues
from the Company's Japan-based customers.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash equivalents and
short-term investment balances which totaled $57.6 million as of March 31, 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 quarter ended March 31, 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.
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
its licensees to accelerate repayment of unrecouped prepaid royalties in
exchange for the licensee waiving certain rights granted to it by the Company in
a separate agreement. 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
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advances, is due October 1997. In addition, further recoupment of royalties
against prepayments 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 associated with these
four licensees. The accrual as of March 31, 1997, including interest, totaled
$9.5 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, amends the
Magic Cap license agreement to provide for 100% recoupment of any royalties due
thereunder, extends the date for refund of unrecouped prepaid royalties to
November 2, 1999, and provides that no interest shall be due upon any refund. As
a result of this new agreement, the unrecouped prepaid royalty of $2.2 million
remains in noncurrent deferred revenue as of March 31, 1997.
Additionally, in 1994 and 1995, three stockholders entered into license
agreements for certain Magic Cap technology. These license agreements provide
for the payment of a $2.5 million up front, nonrefundable, nonrecoupable
technology fee. These license agreements also provide for the payment of up to
$2.5 million in prepaid royalties in the event the Company meets certain
technology milestones. These prepayments are to be offset at a rate of $0.50 for
every dollar of royalties payable by the licensees upon shipments of products
incorporating the Company's technology. If the Company fails to deliver on the
final technology milestone, the licensees may terminate the agreement and obtain
a refund of any unrecouped royalties in two equal annual installments of
principal, plus interest from the termination date. During the fourth quarter of
1996, each of the licensees demanded delivery of the final milestone due under
the terms of the agreements. In subsequent correspondence, one of the licensees
further asserted that changes in the Magic Cap product strategy made by the
Company to address the Internet resulted in substantial but unspecified damages,
for which it seeks compensation. On or about January 24, 1997, the Company
delivered the final product milestone. The Company believes that the delivery of
the final product milestone was timely and that the deliverable complies with
the requirements of the agreements, but it continues to work with its licensees
to develop product plans and to resolve any issues outstanding under the
agreements. If any of the licensees ultimately rejects the final deliverable,
however, the sole and exclusive remedy available under each agreement is
termination of the agreement and refund of any advance royalties paid
thereunder. Such a refund would be payable in two equal annual installments of
principal and interest at the prime rate, with the first payment due one year
following termination of the agreement. The advance royalties paid to date by
the licensees total $6.0 million and are classified in noncurrent deferred
revenues in the accompanying consolidated balance sheet.
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 $57.6 million as of March 31, 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's Magic Cap 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
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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 Form 10-Q, the following factors
should be considered carefully in evaluating the Company and its business before
purchasing shares of the Company's stock.
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 focus its efforts as 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 March 31, 1997, the Company had an
accumulated deficit of $127.1 million, with net losses of $7.8 million, $45.6
million and $20.6 million for the three month period ended March 31, 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 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 at least through the year ending December 31, 1997.
There can be no assurance that the Company will achieve or sustain significant
revenues or become cash flow positive or profitable at any time in the future.
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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
will 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
for 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 could 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 NeoNet product) developed
commercial products based on the first
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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 is currently working with certain of
its licensees to deliver Magic Cap devices, and to develop its agent technology
for 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 could 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 likely have a material adverse effect on
the Company's business, operating results and financial condition.
14
<PAGE> 15
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 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 in January
1997. There can be no assurance that the Company's licensees will accept the new
release, or that, if they accept it, 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 a significant number
of Magic Cap licensees to successfully commercialize products utilizing the
Company's technologies and the failure of licensees to commit sufficient
resources to the marketing of the Company's technologies would likely have a
material adverse effect on the Company's business, 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 communicating applications developed by third
parties will achieve market acceptance. Further, the limited success of initial
products and services incorporating the Company's technologies to achieve market
acceptance could result in third party software developers and electronic
merchants and publishers discontinuing development and support of products and
services based on the Company's technologies.
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
15
<PAGE> 16
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."
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 and distribution
channels than the Company. There can be no assurance that products incorporating
the Company's technologies will achieve sufficient quality, functionality
16
<PAGE> 17
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.
17
<PAGE> 18
GENERAL MAGIC, INC.
FORM 10-Q, March 31, 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.
18
<PAGE> 19
GENERAL MAGIC, INC.
FORM 10-Q, March 31, 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: 5/13/97 /s/ Robyn Cerutti
--------------------- -------------------------------
Name: Robyn Cerutti
Title: Controller
(Principal Accounting Officer)
DATE: 5/13/97 /s/ Steven Markman
--------------------- -------------------------------
Name: Steven Markman
Title: Chairman, Chief Executive Officer,
President and Acting Chief Financial Officer
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
EXHIBIT 11.1
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Month Periods Ended
March 31
---------------------------------------
1997 1996
---------------------------------------
<S> <C> <C>
Weighted average common shares outstanding for the period:
Common stock 26,572 25,905
Preferred stock - -
---------------------------------------
Shares used in per share calculation 26,572 25,905
=======================================
Net loss $ (7,803) $ (7,031)
=======================================
Net loss per share $ (0.29) $ (0.27)
=======================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 15,495
<SECURITIES> 42,080
<RECEIVABLES> 850
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 59,053
<PP&E> 12,356
<DEPRECIATION> 7,147
<TOTAL-ASSETS> 64,774
<CURRENT-LIABILITIES> 17,725
<BONDS> 185
0
0
<COMMON> 27
<OTHER-SE> 37,499
<TOTAL-LIABILITY-AND-EQUITY> 64,774
<SALES> 0
<TOTAL-REVENUES> 489
<CGS> 0
<TOTAL-COSTS> 312
<OTHER-EXPENSES> 9,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> (7,801)
<INCOME-TAX> 2
<INCOME-CONTINUING> (7,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,803)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
