<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1998
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 [ ]
28,829,140 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of April 30, 1998.
<PAGE> 2
GENERAL MAGIC, INC.
FORM 10-Q, March 31, 1998
C O N T E N T S
<TABLE>
Item Number Page
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
a. Condensed Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 3
b. Condensed Consolidated Statements of Operations - Three-Month Periods Ended
March 31, 1998 and 1997 4
c. Condensed Consolidated Statements of Cash Flows - Three-Month Periods Ended
March 31, 1998 and 1997 5
d. Notes to Condensed 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 20
Signatures
Exhibits
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted cash of $3,300
in 1998 and 1997) $ 20,967 $ 17,414
Short-term investments 8,453 11,387
Other current assets 1,736 1,206
------------------------
Total current assets 31,156 30,007
------------------------
Property and equipment, net 4,819 5,148
Other assets 2,084 1,142
------------------------
$ 38,059 $ 36,297
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 882 $ 952
Accrued expenses 5,969 7,191
Current portion of long-term debt 1,113 801
Other current liabilities 133 224
------------------------
Total current liabilities 8,097 9,168
------------------------
Deferred revenue, noncurrent 2,000 4,186
Long-term debt 2,887 3,199
Other long-term liabilities 2,376 2,446
------------------------
Total liabilities 15,360 18,999
------------------------
Commitments
Redeemable, convertible Series B preferred stock, $0.001 par value
Stated at involuntary liquidation preference
Authorized: 12 shares
Issued and outstanding: 1998 - 5; 1997 - None 6,528 --
Stockholders' equity:
Convertible Series A preferred stock, $0.001 par value
Liquidation preference: 1998 - $4,500; 1997 - None
Authorized: 50 shares
Issued and outstanding: 1998 - 50; 1997 - None -- --
Preferred stock, $0.001 par value
Authorized: 438 shares
Issued and outstanding: 1997 and 1996 - None -- --
Common stock, $0.001 par value
Authorized: 60,000 shares
Issued and outstanding: 1998 - 28,729; 1997 - 26,892 29 27
Additional paid-in capital 175,988 165,039
Deferred compensation (311) (58)
Accumulated other comprehensive loss (2) 7
Deficit accumulated during development stage (159,533) (147,717)
------------------------
Total stockholders' equity 16,171 17,298
------------------------
$ 38,059 $ 36,297
========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three-Month Periods Ended
March 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Revenue:
Licensing revenue $ 1,510 $ 151
Other revenue 185 338
-------------------------
Total revenue 1,695 489
-------------------------
Costs and expenses:
Cost of other revenue 147 312
Research and development 5,049 4,980
Sales, general and administrative 3,542 4,031
Write-off of in-process research and development 2,050 --
-------------------------
Total costs and expenses 10,788 9,323
-------------------------
Loss from operations (9,093) (8,834)
Total other income, net 2,670 1,033
-------------------------
Loss before income taxes (6,423) (7,801)
Income taxes -- 2
-------------------------
Net loss $ (6,423) $ (7,803)
Favorable conversion rights on redeemable,
convertible Series B preferred stock and
warrants issuance and preferred stock dividend (1,728) --
Favorable conversion rights on convertible
Series A preferred stock issuance (3,665) --
-------------------------
Loss applicable to common stockholders $(11,816) $ 7,803
=========================
Basic and diluted loss per share $ (0.43) $ (0.29)
=========================
Shares used in computing basic and diluted loss
per share 27,403 26,572
=========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three-Month Periods Ended
March 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,423) $ (7,803)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 704 747
Amortization of deferred gain from sale and leaseback financing -- (24)
Deferred revenue (2,186) (213)
Amortization of deferred compensation 140 39
Write-off of in-process research and development 1,850 --
Changes in items affecting operations:
Other current assets (530) 234
Accounts payable and accrued expenses (1,292) (2,792)
-------------------------
Net cash used in operating activities (7,737) (9,812)
-------------------------
Cash flows from investing activities:
Purchases of short-term investments (2,034) (28,411)
Proceeds from sales and maturities of short-term investments 4,959 30,153
Purchases of property and equipment (483) (107)
Other assets (834) --
-------------------------
Net cash provided by investing activities 1,608 1,635
-------------------------
Cash flows from financing activities:
Repayment of capital lease obligations (106) (207)
Proceeds from sale of common stock 454 163
Proceeds from sale of Series B preferred stock, net of offering costs 4,926 --
Proceeds from sale of Series A preferred stock, net of offering costs 4,463 --
Other long-term liabilities (55) 10
-------------------------
Net cash provided by (used in) financing activities 9,682 (34)
-------------------------
Net increase (decrease) in cash and cash equivalents 3,553 (8,211)
Cash and cash equivalents, beginning of period 17,414 23,706
-------------------------
Cash and cash equivalents, end of period $ 20,967 $ 15,495
=========================
Supplemental disclosures of cash flow information:
Income taxes paid during the period $ -- $ 2
=========================
Interest paid during the period $ 855 $ --
=========================
Noncash investing and financing activities:
Deferred compensation for restricted stock issuances $ 393 $ 155
=========================
Business acquisition in exchange for shares of common stock $ 1,850 $ --
=========================
Favorable conversion rights on Series B preferred stock and warrants issuance $ 1,728 $ --
=========================
Favorable conversion rights on Series A preferred stock issuance $ 3,665 $ --
=========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying condensed
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 condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
as of December 31, 1997 and 1996, and for each of the three years ended December
31, 1997, including notes thereto, included in the Company's Annual Report on
Form 10-K which was filed with the SEC on March 31, 1998.
The results of operations for the three-month period ended March 31, 1998
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,
1998 1997
------------------------
<S> <C> <C>
Office equipment and computers $ 9,361 $ 9,133
Furniture and fixtures 2,316 2,315
Leasehold improvements 607 546
------------------------
12,284 11,994
Less accumulated depreciation and amortization 7,465 6,846
------------------------
$ 4,819 $ 5,148
========================
</TABLE>
ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------------------
<S> <C> <C>
Prepaid royalty payment and accrued interest $2,612 $3,318
Employee compensation 1,738 2,384
Other 1,619 1,489
------------------------
$5,969 $7,191
========================
</TABLE>
5
<PAGE> 7
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3: COMPREHENSIVE LOSS
Effective January 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 requires disclosure of comprehensive loss in interim periods and
additional disclosures of the components of comprehensive loss on an annual
basis. Comprehensive loss includes all changes in equity during a period except
those resulting from investments by and distributions to the Company's
stockholders. For the three-month periods ended March 31, 1998 and 1997, there
were no material differences between the Company's comprehensive loss and net
loss.
NOTE 4: LOSS PER SHARE
The computation of diluted loss per share does not include common stock
issuable upon (i) the exercise of outstanding stock options and stock purchase
warrants and (ii) the conversion of preferred stock, because the inclusion of
these securities would have an anti-dilutive effect. As of March 31, 1998 and
1997, there were approximately 4,903,000 and 3,468,000 stock options
outstanding, respectively. As of March 31, 1998, there were 400,000 stock
purchase warrants outstanding, 3,629,000 shares of common stock issuable upon
the conversion of Series A preferred stock and 1,673,698 shares of common stock
issuable upon the conversion of Series B preferred stock.
NOTE 5: INVESTMENTS IN CONITA TECHNOLOGIES, INC. AND ALTOCOM, INC.
In January 1998, the Company discontinued operations of its South Carolina
office and entered into an agreement with Conita Technologies, Inc. ("Conita"),
a company founded by former employees of the South Carolina office. Under the
agreement, the Company obtained a minority interest in Conita through the
purchase of preferred stock for an aggregate amount of $650,000, $260,000 of
which sum was paid upon execution of the agreement.
In the three-month period ended March 31, 1998, the Company recognized
$2,446,000 in other income for consideration received pursuant to an agreement
concluded with AltoCom, Inc. ("AltoCom"). During 1997, the Company transferred
its software modem technology group to AltoCom. The Company retained a minority
interest in AltoCom and a share of its ongoing revenue stream. In January 1998,
the Company and AltoCom agreed to discontinue the revenue sharing arrangement in
exchange for certain consideration, including the assumption by AltoCom of a
$2,186,000 obligation to one of the Company's Magic Cap licensees. In April
1998, the Company sold its minority interest in AltoCom for a total of
$2,495,000, and recognized a gain of $2,240,000 on the sale.
6
<PAGE> 8
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 6: ACQUISITION OF NETPHONIC COMMUNICATIONS, INC.
On March 6, 1998, the Company acquired all of the outstanding shares of
common and preferred stock of NetPhonic Communications, Inc. ("NetPhonic"), a
development stage enterprise, for a total of $2,050,000, which consideration
consisted of $200,000 cash and 1,342,524 shares of the Company's common stock.
The Company's common stock was issued to NetPhonic shareholders of record as of
the date of the transaction. NetPhonic has developed a patent pending voice
browser that enables users to access documents from the Web using a touch-tone
telephone. The Company plans to incorporate the NetPhonic technology into a
future version of its Portico(TM) service. The acquisition was accounted for
under the purchase method and, accordingly, the results of operations of
NetPhonic have been included in the Company's consolidated financial statements
as of the date of acquisition. During the three-month period ended March 31,
1998, the Company recognized a $2,050,000 charge for the write-off of in-process
research and development in connection with this acquisition.
NOTE 7: PREFERRED STOCK
On February 27, 1998, the Company entered into an agreement with Microsoft
Corp. ("Microsoft") for the sale of 50,000 shares of Series A Convertible
Preferred Stock and the license of certain of the Company's technology. The
aggregate consideration for the sale of Series A preferred stock was $4,500,000.
The Series A preferred stock is convertible at a rate of 72.58 shares of common
stock for each share of Series A preferred stock, subject to adjustment in
certain circumstances. The liquidation preference of each share of Series A
preferred stock is $90 plus any declared but unpaid dividends. Each share of
Series A preferred stock is entitled to receive, if and when the Company's Board
of Directors declares a dividend payable on common stock, a dividend equal to
the dividend per share of common stock on an "as if converted" basis. Series A
preferred stock dividends are payable in preference to any dividends on the
Company's common stock and are non-cumulative. Series A preferred stock is
eligible to vote with common stock on an "as if converted" basis. An adjustment
to the accumulated deficit of approximately $3,665,000 was recorded during the
three-month period ended March 31, 1998, to recognize the value of favorable
conversion rights of Series A preferred stock, representing the difference
between the fair market value of the Company's common stock on the date of the
agreement of $2.25 and the sale price of $1.24 per common share equivalent.
On March 3, 1998, the Company entered into a financing transaction with a
private investment group that provided $5,000,000 in cash to the Company from
the sale of 5,000 shares of its 5 1/2% Cumulative Convertible Series B Preferred
Stock. The private investment group was comprised of the following entities: the
Halifax Fund, L.P., Heracles Fund, RGC International Investors, LDC, and Themis
Partners, L.P. Each share of Series B preferred stock is entitled to one vote
and has special voting rights with respect to matters that adversely affect the
rights of holders of Series B preferred stock. Each share of Series B preferred
stock is entitled to receive cumulative dividends at 5 1/2% of the Series B
preferred stock liquidation preference per annum, which are payable in
preference to any dividends on the Company's common stock. The liquidation
preference of Series B preferred stock is $1,000 plus any accrued but unpaid
dividends and is payable pari-passu with the Company's Series A preferred stock.
Subject to adjustment in certain circumstances, each share of Series B preferred
stock is convertible into shares of common stock by dividing the liquidation
preference by the lesser of $3.00 or 85% of the lowest sales price per share of
common stock during the five trading days prior to conversion. The Company has
the right to redeem all Series B preferred stock at 120% of the liquidation
preference upon a change of control transaction (as defined in the agreement).
The holders of Series B preferred stock have the right to require the Company to
redeem any or all Series B preferred stock at 130% of the liquidation preference
upon the occurrence of certain events including a change of control transaction,
bankruptcy or insolvency of the Company. As part of the financing transaction,
the Company issued 400,000 warrants to purchase common stock at a price of $3.38
per share. The warrants have a five-year term and are immediately exercisable.
The Company has an option to secure an additional $5,000,000 of financing
on similar terms, and the holders of Series B preferred stock have the right to
invest an additional $2,000,000 on similar terms. Both of these options are
subject to certain conditions, including share price, average trading volume and
total equity.
An adjustment to the accumulated deficit of approximately $1,728,000 was
recorded in the three-month period ended March 31, 1998, to recognize the value
of favorable conversion and exercise rights of Series B preferred stock and
warrants, respectively, issued during the period. The adjustment represents the
difference between the fair market value of the Company's common stock on the
date of the financing transaction of $3.69 and the per share conversion price of
$3.00, as well as the value attributable to the warrants.
7
<PAGE> 9
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 8: COMMITMENTS
PURCHASE COMMITMENT
During 1997, the Company entered into an OEM agreement with Oki Electric
Industry Co., Ltd. ("Oki Electric") for the manufacture of handheld
communication devices. In connection therewith, the Company obtained an
irrevocable letter of credit with a term of one year to collateralize the
Company's obligations under the OEM agreement. The Company has placed $3,300,000
on deposit as security with the financial institution issuing the letter of
credit. This commitment is denominated in Japanese yen and, as a result, is at
risk of foreign currency fluctuations. Due to favorable changes in the exchange
rate, the Company's purchase commitment was valued at $2,631,000 as of March 31,
1998. Management continually assesses the currency risk associated with this
commitment and may enter into one or more agreements in the future to mitigate
this risk.
LONG-TERM DEBT
In December 1997, the Company entered into a $4,000,000 term loan with a
financial institution. The loan bears interest at 0.25% above the financial
institution's prime rate (8.75% as of March 31, 1998), and has a term of 40
months with interest only due in the first four months and principal and
interest due monthly thereafter. This loan is subject to certain financial
covenants measured on a monthly basis and is secured by all of the assets of the
Company, including its intellectual property. As of March 31, 1998, the current
and noncurrent portions of debt due under this loan were $1,113,000 and
$2,887,000, respectively.
NOTE 9: SUBSEQUENT EVENT
In April 1998, the Company entered into an agreement to purchase
telecommunications services at fixed prices for an initial term of three years.
The Company is obligated to purchase $13,000,000 in telecommunications services
during the three-year period ending April 30, 2001.
8
<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") develops and markets integrated voice
and data applications. The Company is currently developing an advanced network
service to meet the communication and information management requirements of
today's mobile professionals. The first version of the advanced network service
is named Portico (TM) (formerly code-named "Serengeti") and is planned for
commercial release on July 30, 1998. Portico will allow subscribers to access
and respond to information important to their success, either through a leading
Web browser or magicTalk (TM), a voice user interface platform. Among other
things, Portico is expected to (i) manage the subscriber's inbound and outbound
calls; (ii) collect and consolidate the subscriber's email, and notify the
subscriber upon receipt of priority messages; (iii) maintain the subscriber's
calendar, address book and task list; (iv) collect and forward stock quotes,
news and selected public information based on subscriber preferences; and
(v) retrieve press releases and other news and information concerning thousands
of publicly traded companies. The Company is also developing and marketing
handheld communication devices based on its Magic Cap platform technology. The
first of these devices, the DataRover (TM) 840, was commercially released in
February 1998, and is intended to meet the data access and communication needs
of mobile workers in the health care, utilities and transportation industries.
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 Portico
service, enter into strategic development and distribution 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 subscribers 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, 1998, the Company incurred a net
loss of $6.4 million, or $0.43 per share, compared to a net loss of $7.8
million, or $0.29 per share, for the three-month period ended March 31, 1997.
The net loss per share for the three-month period ended March 31, 1998, included
the net loss for the period and $5.4 million in adjustments to the accumulated
deficit related to preferred stock and warrants issued during the period with
favorable conversion and exercise rights, respectively. Excluding the effect of
these adjustments, the loss per share for the period would have been $0.23 per
share.
Revenue for the three-month period ended March 31, 1998, was $1.7 million
compared to $489 thousand for the three-month period ended March 31, 1997. The
increase in revenue primarily related to a $1.5 million nonrefundable fee from
Microsoft Corp. for the license of certain of the Company's technologies. The
Company anticipates an increase in total revenue in 1998 compared to 1997 due to
the anticipated release of the Portico service and the release of the DataRover
840 device. There can be no assurance that the Portico service will be released
on time or at all, or that either the Portico service or the DataRover 840
device will achieve market acceptance. To the extent that either the Portico
service or the DataRover 840 device does not achieve market acceptance, the
Company's business, financial condition and results of operations will be
materially adversely affected.
Cost of other revenue, which consisted primarily of personnel and equipment
costs, was $147 thousand for the three-month period ended March 31, 1998,
compared to $312 thousand for the three-month period ended March 31, 1997. This
decrease was due to a decline in support services in the period. Cost of revenue
is expected to increase in 1998 compared to 1997 as a result of the anticipated
release of the Company's Portico service and the release of the DataRover 840
device.
Research and development expenses for the three-month period ended March
31, 1998, were $5.0 million compared to $5.0 million for the three-month period
ended March 31, 1997. The Company expects research and
9
<PAGE> 11
development expenses to increase in 1998 as compared to 1997 in connection with
the anticipated release of the Portico service and the release of the DataRover
840 device, as well as the continued development of its products and services.
Selling, general and administrative expenses for the three-month period
ended March 31, 1998, were $3.5 million compared to $4.0 million for the
three-month period ended March 31, 1997. The decrease in expenses was primarily
due to a decrease in outside professional fees. The Company expects that
selling, general and administrative expenses will increase in 1998 compared to
1997 as a result of the anticipated release of the Portico service and the
release of the DataRover 840 device, as well as the continued development of
market demand and distribution channels for its products and services.
During the three-month period ended March 31, 1998, the Company recognized
a $2.1 million charge for the write-off of acquired in-process research and
development in connection with the acquisition of all of the outstanding stock
of NetPhonic Communications, Inc., a development stage enterprise. The Company
plans to incorporate the NetPhonic technology in a future version of its
Portico service.
Total other income, net, for the three-month period ended March 31, 1998,
was $2.7 million compared to $1.0 million for the three-month period ended March
31, 1997. During the three-month period ended March 31, 1998, the Company
recognized $2.4 million in other income for consideration received pursuant to
an agreement concluded during the period with AltoCom, Inc. ("AltoCom"). During
1997, the Company transferred its software modem technology group to AltoCom.
The Company retained a minority interest in AltoCom and a share of its ongoing
revenue stream. In January 1998, the Company and AltoCom agreed to discontinue
the revenue sharing arrangement in exchange for certain consideration, including
the assumption by AltoCom of a $2.2 million obligation to one of the Company's
Magic Cap licensees. Excluding the AltoCom consideration, total other income,
net, consisted primarily of interest income and expense. The decrease in
interest income was primarily due to the Company's declining cash, cash
equivalent and short-term investment balances. Future interest income is likely
to decrease as cash equivalents and short-term investments are used to fund the
Company's working capital requirements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash equivalents
and short-term investment balances that totaled $29.4 million as of March 31,
1998, compared to $28.8 million as of December 31, 1997. The cash used for
working capital during the period was offset by additional financing received
in the period.
During the three-month period ended March 31, 1998, the Company raised $9.5
million from two financing transactions. The Company received $4.5 million from
Microsoft Corp. for the sale of its Series A preferred stock. This investment
was convertible into approximately 12% of the outstanding equity of the Company
as of the date of the transaction. In addition, the Company received $5.0
million from a private investment group for the sale of its Series B preferred
stock. In connection with this transaction, the Company also issued five-year
warrants to purchase additional shares of common stock at a premium to the
common stock price as of the date of the transaction. The Company has the option
to secure an additional $5.0 million of financing on similar terms and the
private investment group has the right to invest an additional $2.0 million,
also on similar terms. Both of these options are subject to certain conditions,
including share price, average trading volume and total equity.
In connection with its initial strategy, the Company entered into Magic Cap
master license agreements with eight of its stockholders. The Company has
satisfied its obligations under five of these agreements, and is subject to the
following obligations under the remaining three agreements. The Company must
refund to one licensee a prepaid royalty, together with interest, which totaled
$2.6 million as of March 31, 1998. This amount will be paid upon demand, and was
classified in accrued expenses as of March 31, 1998. The Company has agreed to
refund a second licensee the amount of a $1.5 million unrecouped prepaid
royalty. The refund is secured by a license in certain of the Company's
intellectual property, is non-interest bearing and is payable in August 1999.
The amount of this refund was classified in other long-term liabilities as of
March 31, 1998. Finally, the Company has agreed to refund the third licensee any
amount of a $2.0 million prepaid royalty not recouped by January 1, 2003, plus
accrued interest. The amount of any such refund is payable on or before December
31, 2003. As of March 31, 1998, this obligation was classified in deferred
revenue, noncurrent. There can be no assurance that the third such licensee will
develop products that incorporate the Company's Magic Cap technology. Therefore,
it is uncertain when prepaid royalties currently classified as noncurrent
deferred revenue will be recognized as licensing revenue or if they will be
fully recouped.
During 1997, the Company entered into an OEM agreement with Oki Electric
Industry Co., Ltd. ("Oki Electric") for the manufacture of DataRover 840
devices. In connection therewith, the Company obtained an irrevocable letter of
credit with a term of one year to collateralize the Company's obligations under
the OEM agreement. The Company has placed $3.3 million on deposit as security
with the financial institution issuing the letter of credit. This commitment is
denominated in Japanese yen and, as a result, is at risk of foreign currency
fluctuations. Due to favorable changes in the exchange rate, the Company's
commitment was valued at $2.6 million as of March 31, 1998. Management
continually assesses the currency risk associated with this commitment and may
enter into one or more agreements in the future to mitigate this risk.
10
<PAGE> 12
In December 1997, the Company entered into a $4.0 million term loan with a
financial institution. The loan bears interest at 0.25% above the financial
institution's prime rate (8.75% as of March 31, 1998), and has a term of 40
months with interest only due in the first four months and principal and
interest due monthly thereafter. This loan is subject to certain financial
covenants measured on a monthly basis, and is secured by all of the assets of
the Company, including its intellectual property. As of March 31, 1998, the
current and noncurrent portions of debt due under this loan were $1.1 million
and $2.9 million, respectively.
In January 1998, the Company discontinued operations of its South Carolina
office and entered into an agreement with Conita, a company founded by former
employees of the South Carolinan office. Under the agreement, the Company
obtained a minority interest in Conita through the purchase of preferred stock
for an aggregate amount of $650 thousand, $260 thousand of which sum was paid
upon execution of the agreement.
During 1997, the Company transferred its software modem technology group to
AltoCom. The Company retained a minority interest in AltoCom and a share of its
ongoing revenue stream. In January 1998, the Company and AltoCom agreed to
discontinue the revenue sharing arrangement in exchange for certain
consideration, including the assumption by AltoCom of a $2.2 million obligation
to one of the Company's Magic Cap licensees. In April 1998, the Company sold its
minority interest in AltoCom for a total of $2.5 million, and recognized a gain
of $2.2 million on the sale.
In April 1998, the Company entered into an agreement to purchase
telecommunications services at fixed prices for an initial term of three years.
The Company is obligated to purchase $13.0 million in telecommunications
services during the three-year period ending April 30, 2001.
Based on a preliminary study, the Company does not expect that its costs
for the conversion of computer information systems to enable proper processing
of transactions relating to the year 2000 and beyond will be material. The
Company continues to evaluate appropriate courses of corrective action. The
Company does not expect any amounts that it may be required to expense over the
next two years will have a material adverse effect on its business, financial
position or results of operations. However, there can be no assurance that the
systems of other companies on which the Company's systems rely will be timely
converted or that any such failure to convert by another company would not have
a material adverse effect on the Company's systems. See Risk Factors -- "Year
2000 Compliance."
The Company expects that its cash, cash equivalents and short-term
investment balances of $29.4 million as of March 31, 1998, will be adequate to
fund the Company's operations for at least the next twelve months. However, the
Company will continue to evaluate additional sources of capital. The Company's
capital requirements will depend on many factors, including, but not limited to,
the market acceptance and competitive position of its new Portico service and
DataRover 840 device; the levels of promotion and advertising required to launch
and market its products and services and attain a competitive position in the
marketplace; the extent to which the Company invests in new technology and
management and staff infrastructure to support its business; and the response of
competitors to the Company's products and services. To the extent that the
Company needs additional public or 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, or if the objectives of the Company relative to the release and
market acceptance of its Portico service are not achieved, the Company may be
required to significantly limit its operations which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event that the Company raises additional equity financing,
further dilution to investors in the Company will result.
As part of its business strategy, the Company assesses opportunities to
enter into joint ventures, to acquire or sell businesses, products or
technologies and to engage in other like transactions. The Company has made no
significant commitment or agreement with respect to any 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 or selling 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 Portico
service, enter into strategic 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
subscribers to the 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. If the Company's assumption is not accurate, or if the Company
is unable to compete as a network service provider, the Company's business,
operating results and financial condition will be materially adversely affected.
MINIMAL REVENUES; HISTORY OF AND ANTICIPATION OF LOSSES
11
<PAGE> 13
The Company has generated minimal revenues, has incurred significant losses
and has substantial negative cash flow. As of March 31, 1998, the Company had an
accumulated deficit of $159.5 million, with net losses of $6.4 million, $28.4
million, and $45.6 million for the three-month period ended March 31, 1998, and
the years ended December 31, 1997 and 1996, respectively.
Historically, a large percentage of the total revenue earned by the Company
to date has been attributable to up-front license fees and customer support
fees, as opposed to recurring royalty revenue. As a consequence of the Company's
recent change in business strategy, the Company expects that a significant
portion of future revenues will be derived from direct sales of its products and
services and not from license fees or royalties. The Company's DataRover 840
device was commercially released in February 1998, and its Portico service is
expected to be released by July 30, 1998. However, the Company expects to incur
significant losses through 1998. 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.
LIMITED RESOURCES
Building the Portico service is a complex process that requires significant
engineering and financial resources. Among other things, to implement its
Portico service, the Company must develop certain technologies and license other
technologies from third parties, establish strategic distribution and
development arrangements and undertake a substantial marketing campaign. The
Company has limited technical, sales and marketing staffs and there can be no
assurance that such personnel will be able to manage and successfully complete
all of the tasks necessary to develop and launch the Company's Portico service.
In addition, because the Company has generated minimal revenues to date and does
not expect to generate substantial revenues in 1998, the Company must conserve
cash. As a result, the Company may not be able to fund the marketing efforts
required to successfully introduce the service to customers. Alternatively,
market acceptance for its Portico service may overwhelm the Company's limited
staffs such that the Company is unable to adequately respond to and satisfy
customers' demand for the Portico service. The Company's failure to develop and
launch its Portico service, or to respond to market demand for its Portico
service, will likely have a material adverse effect on the Company's business,
operating results and financial condition.
FUTURE CAPITAL REQUIREMENTS AND AVAILABILITY OF ADDITIONAL FINANCING
In February of 1998, the Company completed a private placement of $4.5
million of Series A Convertible Preferred Stock to Microsoft Corp. In March of
1998, the Company completed a separate private placement of $5.0 million of 5
1/2% Cumulative Convertible Series B Preferred Stock and warrants to
institutional investors. The Company has an option to secure an additional $5.0
million of financing from the holders of Series B preferred stock, and the
holders of Series B preferred stock have the right to invest an additional $2.0
million. The proceeds of these transactions will be used for working capital
purposes. If expenditures required to achieve the Company's plans are greater
than projected or if the Company is unable to generate adequate cash flow from
sales of its products and services, the Company may need to seek additional
sources of capital. The Company has no other commitments or arrangements to
obtain any additional funding and there can be no assurance that the Company
will be able to obtain such additional funding, if necessary, on acceptable
terms or at all. The unavailability or timing of any financing could prevent or
delay the continued development and marketing of the products and services of
the Company and may require curtailment of operations of the Company. The
failure to raise needed funds on sufficiently favorable terms or at all could
have a material adverse effect on the Company's business, operating results and
financial condition.
POTENTIAL DILUTIVE EFFECTS
The number of shares of common stock which may be issued upon conversion of
the Series B preferred stock is dependent upon the trading price of the
Company's common stock at the time of conversion. If the lowest sales price of
the common stock in the five trading days prior to conversion is less than
$3.45, the number of shares of common stock issuable upon conversion of the
Series B preferred stock will increase.
TECHNOLOGY DEVELOPMENT
The Company's future success is based substantially upon its ability to
develop new technology to enable it to provide as well as bill for the Portico
service, and to enhance and extend its existing products and technologies.
Software product development schedules are difficult to predict because they
involve creative processes, use of new development tools and learning processes
associated with development of new technologies, as well as other factors. The
Company has in the past experienced delays in its software development efforts
and there can be no assurance that the Company will not experience future delays
in connection with its current development or future development activities.
Delays or difficulties associated with the development of new, and the
enhancement of existing, technologies could have a material adverse effect on
the Company's business, operating results and financial condition. Moreover,
software products as complex as those being developed for the Company's Portico
service frequently contain undetected errors or shortcomings, and may fail to
perform or to scale as expected. Although the Company has tested and will
continue to test its Portico service prior to releasing it, such tests may not
accurately simulate actual use of the service by subscribers. As a result,
errors may be found in the Portico service after it is commercially released
which may result in loss of or a delay in market acceptance of the Company's
Portico service.
DISTRIBUTION RISKS
In connection with the change in its business strategy, the Company must
establish and maintain relationships with new distribution channels for its
Portico service and DataRover 840 device. The Company believes that in order to
successfully market its Portico service, it must, among other things, enter into
distribution arrangements with telephony providers such as wireless and wireline
carriers, as well as resellers, device manufacturers and Internet service
providers. Competition in establishing such relationships is extremely intense.
In addition, decisions by such parties, particularly cellular carriers, to enter
into a distribution relationship with the Company can entail a lengthy process
during which the Company may be required to incur significant expenditures
without any assurance of success. There can be no assurance that the Company
will succeed in establishing distribution relationships, or that if established,
the Company will be able to maintain such relationships or that such
relationships will result in sales of the Company's Portico service. The failure
of the Company to establish and then successfully maintain distribution
relationships for its Portico service will have a material adverse effect on the
Company's business, operating results and financial condition.
The Company plans to distribute the DataRover 840 device through a variety
of distribution channels, including a direct sales force, value-added resellers
("VARs") and outside sales representatives. To date, the
12
<PAGE> 14
Company has established distribution arrangements with one VAR, the Fuld
Institute for Technology in Nursing Education. There can be no assurance that
the Company will be able to establish distribution relationships with additional
VARs and outside sales representatives for its DataRover 840 device. The
Company's failure to establish, or if established, successfully maintain such
relationships could have a material adverse effect on the Company's business,
operating results and financial condition.
LENGTHY SALES CYCLES
Sales of the Company's DataRover 840 device depend, in significant part,
upon the decision of a prospective customer to choose handheld devices as a
means of communication for its employees. As a result, the amount of time from
the initial contact with a customer to the customer's placement of an order may
range from a few weeks to many months, depending on such factors as the amount
of time required to test and customize the DataRover 840 device for the
particular customer. If a customer decides not to purchase the DataRover 840
device, the Company may not have another opportunity to sell its handheld
devices to that customer for a number of years, if at all. For these and other
reasons, the Company expects its DataRover 840 device will have a lengthy sales
cycle during which the Company may expend substantial funds and significant
sales and technical effort. There can be no assurance that the Company's
expenditures or efforts during the lengthy sales process with any potential
customer will result in sales.
DEPENDENCE ON EMERGING MARKETS; ACCEPTANCE OF THE COMPANY'S SERVICES AND
PRODUCTS
The Company's future financial performance will depend in large part on the
growth in demand for the Portico 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 is subject to a high level of uncertainty. Because the
market for the Company's Portico 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 Portico service will
develop, or that it will not develop more slowly than expected or attract new
competitors. In addition, even if a market develops for an advanced network
service, there can be no assurance that the markets for the Company's Portico
service will develop, or that the Company's Portico service will be adopted. If
the market fails to develop, develops more slowly than expected or attracts new
competitors, or if the Company's Portico service does not achieve market
acceptance, the Company's business, operating results and financial condition
will be materially adversely affected.
DEPENDENCE ON THIRD PARTY TECHNOLOGY AND PRODUCTS
To develop its Portico service, the Company has incorporated and will
continue to incorporate technology developed by third parties. In addition to
all the risks associated with the development of complex technologies, the
Company has limited control over whether or when such third party technologies
will be developed or enhanced. A third party's failure or refusal 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 Portico service, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company has entered into an OEM agreement with Oki Electric for the
manufacture of DataRover 840 devices. To the extent Oki Electric fails to timely
manufacture the DataRover devices or meet the Company's volume and quality
requirements and delivery schedules, which has occurred in the past, the
Company's business, operating results and financial condition could be
materially adversely affected. In addition, because the Company currently
depends solely on Oki Electric for the manufacture of its DataRover devices, in
the event Oki Electric were to become unwilling or unable to manufacture the
DataRover devices, the Company would be required to identify and qualify an
acceptable replacement. The process of qualifying another manufacturer could be
lengthy, and no assurance can be given that another manufacturer would be
available to the Company on a timely basis. Because Oki Electric is located in
Japan, the Company is also directly affected by the political and economic
conditions of this region and subject to the risks normally attendant to the
conduct of foreign trade, including fluctuations in currency exchange rates and
longer delivery times.
COMPETITION
Many of the companies with which the Company competes, 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 the
services and products that the Company offers 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 offered by the Company, or which render the
Company's Portico service or DataRover 840 device obsolete. The Company believes
that its ability to compete
13
<PAGE> 15
depends on factors both within and outside its control. The principal
competitive factors affecting the market for the Company's products and services
are the availability of the Company's products and services; the quality,
performance and functionality of the Portico service and DataRover 840 device
developed and marketed by the Company; the effectiveness of the Company in
marketing and distributing its 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.
EXTREME VOLATILITY OF STOCK PRICE
Like the stock of other high technology companies, the market price of the
Company's common stock has been and may continue to be extremely volatile. Since
its initial public offering in February 1995, the market price of the Company's
common stock has ranged from a high of $26.625 to a low of $0.938 per share.
Factors such as quarterly fluctuations in the Company's results of operations or
the announcements of technological innovations or strategic alliances or the
introduction of new products or services by the Company or its competitors may
have a significant impact on the market price of the Company's common stock.
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 or services. Any such event may have a material adverse effect on the
Company's business, operating results and financial condition.
POTENTIAL SECURITY ISSUES
The implementation of the Portico service poses several security issues,
including the possibility of break-ins and other similar disruptions. The
Company intends to incorporate authentication, encryption and other security
technologies in its Portico service. However, there can be no assurance that
such technologies 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 Portico service, including the Internet, telephones, cellular phones
and other wireless devices, may compromise the security of the confidential
electronic information accessed from the Portico service. There can be
no assurance that the Company will be able to provide a safe and secure
service. The Company's failure to provide a secure 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, encryption and other
security technologies that will be incorporated into its Portico 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 Portico service or licensed
technology incorporated into such service or in the mediums by which subscribers
access the Portico service. Any security problems in the Portico 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 subscribers
of the Portico service and may cause interruptions or delays in the development
and completion of, or the cessation of, the Company's service. Any such
expenditures, lawsuits, reduction of subscribers, interruptions or delays in the
development and commercial release of the Portico service, or the cessation of
such service by the Company, could have a material adverse effect on the
Company's business, operating results and financial condition.
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, engineering, marketing, sales,
administrative, and customer support 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 could have a material adverse effect on the Company's
business, operating results and financial condition.
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 or
services embodying new technologies and the emergence of new industry standards
could render the Company's products or services obsolete and unmarketable. The
Company's future success will depend upon its ability to timely
14
<PAGE> 16
develop and introduce new products and services, including the Portico service,
as well as enhancements to such products and services, to 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 timely develop and introduce new products and
services in response to changing market conditions or consumer requirements, the
Company's business, operating results and financial condition will be materially
adversely affected.
15
<PAGE> 17
DEPENDENCE ON AND RESPONSIVENESS TO THE INTERNET
The Company believes that its future success is in part dependent upon
continued growth in the use of the Internet. 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.
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
financial business systems and various administrative functions. To the extent
that these software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000," some level of
modification or even replacement of such source code or applications will be
necessary. The Company is in the process of identifying the software
applications that are not "Year 2000" compliant. Given the information known at
this time about the Company's systems, coupled with the Company's ongoing
efforts to upgrade or replace business critical systems as necessary, it is
currently not anticipated that these "Year 2000" costs will have a material
adverse impact on the Company's business, operating results and financial
condition. However, the Company is still analyzing its software applications
and, to the extent they are not fully "Year 2000" compliant, there can be no
assurance that the costs necessary to update software or potential systems
interruptions would not have a material adverse effect on the Company's
business, operating results and financial condition.
SINGLE CALIFORNIA LOCATION
Currently, the Company's only network operations center is located at its
headquarters in Sunnyvale, California. Operation of the Portico service is
dependent in part upon the Company's ability to protect the network operations
center against physical damage from power outages, telecommunications failures,
physical break-ins and other similar events. In addition Northern California
historically has been vulnerable to certain natural disasters and other risks,
such as earthquakes, fires and floods, which at times have disrupted the local
economy and pose physical risks to the Company's property. The Company presently
does not have redundant, multiple site capacity in the event of a technical
failure of its Portico service or a natural disaster. In the event of such a
failure or disaster, the Company's business, operating results and financial
condition could be materially adversely affected.
16
<PAGE> 18
GENERAL MAGIC, INC.
FORM 10-Q, March 31, 1998
Part II--Other Information
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES
Information with respect to this item is incorporated by reference to
Part I - Item 1 - Notes 6 and 7 to the Condensed Consolidated Financial
Statements of this Quarterly Report on Form 10-Q. The securities issued by the
Company in each of the transactions described therein were not registered under
the Securities Act of 1933, as amended (the "1933 Act"), in reliance upon the
exemptions provided by Section 4(2) of the 1933 Act and/or Regulation D
promulgated thereunder for transactions by an issuer not involving a public
offering.
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 is filed with this report:
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
17
<PAGE> 19
GENERAL MAGIC, INC.
FORM 10-Q, March 31, 1998
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 May 15, 1998 /s/ STEVEN MARKMAN
--------------------- ----------------------------------------
Name: Steven Markman
Title: Chairman and Chief Executive
Officer (Principal Executive Officer)
DATE: May 15, 1998 /s/ JAMES P. MCCORMICK
--------------------- ----------------------------------------
Name: James P. McCormick
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
19
<PAGE> 20
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,967
<SECURITIES> 8,453
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,156
<PP&E> 12,284
<DEPRECIATION> 7,465
<TOTAL-ASSETS> 38,059
<CURRENT-LIABILITIES> 8,097
<BONDS> 5,263
29
6,528
<COMMON> 0
<OTHER-SE> 16,142
<TOTAL-LIABILITY-AND-EQUITY> 38,059
<SALES> 0
<TOTAL-REVENUES> 1,695
<CGS> 0
<TOTAL-COSTS> 147
<OTHER-EXPENSES> 10,641
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> (6,423)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,423)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
