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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 September 30, 1999
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 [ ]
41,254,159 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of October 31, 1999.
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<PAGE> 2
GENERAL MAGIC, INC.
FORM 10-Q, September 30, 1999
C O N T E N T S
<TABLE>
<CAPTION>
ITEM NUMBER PAGE
- ----------- ----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
a. Condensed Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3
b. Condensed Consolidated Statements of Operations - Three-Month Periods Ended September 30, 1999
and 1998 and Nine-Month Periods Ended September 30, 1999 and 1998 4
c. Condensed Consolidated Statements of Cash Flows - Nine-Month Periods Ended September 30, 1999 and
1998 5
d. Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 28
Exhibits 29
</TABLE>
2
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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)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted cash of $2,280 in 1998) $ 10,676 $ 21,845
Short-term investments 3,467 12,075
Other current assets 1,427 1,700
------------ ------------
Total current assets 15,570 35,620
------------ ------------
Property and equipment, net 11,767 7,507
Other assets 3,588 4,171
------------ ------------
Total assets $ 30,925 $ 47,298
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,710 $ 1,348
Accrued expenses 8,324 9,980
Current portion of long-term debt - 2,333
Other current liabilities 5 54
------------ ------------
Total current liabilities 10,039 13,715
Deferred revenue, noncurrent 2,000 2,000
Long-term debt - 3,778
Other long-term liabilities 518 683
------------ ------------
Total liabilities 12,557 20,176
Commitments
Redeemable, convertible Series D preferred stock, $0.001 par value
Stated at involuntary liquidation preference
Authorized: 2 shares; Issued and outstanding: 1999 - 1; 1998 - None 10,252 -
Redeemable, convertible Series C preferred stock, $0.001 par value
Stated at involuntary liquidation preference
Authorized: 3 shares; Issued and outstanding: 1999 - None; 1998 - 2 - 20,658
Redeemable, convertible Series B preferred stock, $0.001 par value
Stated at involuntary liquidation preference
Authorized: 12 shares; Issued and outstanding: 1999 - None; 1998 - 6 - 7,577
Stockholders' equity (deficit):
Convertible Series A preferred stock, $0.001 par value
Liquidation preference: 1999 - $4,500; 1998 - $4,500
Authorized: 50 shares; Issued and outstanding: 1999 - 50; 1998 - 50 - -
Convertible Series E preferred stock, $0.001 par value
Liquidation preference: 1999 - $5,990; 1998 - None
Authorized: 1 share; Issued and outstanding: 1999 - 1; 1998 - None - -
Convertible Series F preferred stock, $0.001 par value
Liquidation preference: 1999 - $10,252; 1998 - None
Authorized: 1 share; Issued and outstanding: 1999 - 1; 1998 - None - -
Preferred stock, $0.001 par value
Authorized: 432 shares; Issued and outstanding: 1999 and 1998 - None - -
Common stock, $0.001 par value
Authorized: 100,000 shares; Issued and outstanding: 1999 - 41,225; 1998 - 33,400 41 33
Additional paid-in capital 256,020 208,557
Deficit accumulated during development stage (247,742) (209,500)
------------ ------------
8,319 (910)
Less treasury stock, at cost: 1999 and 1998 - 46 (203) (203)
------------ ------------
Total stockholders' equity (deficit) 8,116 (1,113)
------------ ------------
$ 30,925 $ 47,298
============ ============
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
3
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED NINE-MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Service revenue $ 206 $ - $ 507 $ -
Licensing revenue 1,503 63 1,537 1,577
Other revenue 4 311 4 583
---------- ---------- ---------- ----------
Total revenue 1,713 374 2,048 2,160
Operating expenses:
Cost of other revenue - 165 - 363
Network operations 1,905 1,709 5,405 1,709
Research and development 2,863 3,651 9,612 13,145
Selling, general and administrative 5,321 5,610 17,502 13,160
Depreciation and amortization 1,320 783 3,438 2,223
Write-off of in-process research and development - - - 2,050
---------- ---------- ---------- ----------
Total costs and expenses 11,409 11,918 35,957 32,650
---------- ---------- ---------- ----------
Loss from operations (9,696) (11,544) (33,909) (30,490)
Total other income (expense), net (205) 1,498 (2,715) 6,703
---------- ---------- ---------- ----------
Loss before income taxes (9,901) (10,046) (36,624) (23,787)
Income taxes 1 - 23 19
---------- ---------- ---------- ----------
Net loss (9,902) (10,046) (36,647) (23,806)
Dividends on preferred stock (223) - (857) (116)
Warrants issuance on Series D preferred stock - - (251) -
Favorable conversion rights on convertible Series A
preferred stock - - - (3,665)
Favorable conversion and redemption rights on redeemable,
convertible Series B preferred stock and favorable
exercise rights on warrants - - - (8,034)
Favorable redemption rights on redeemable, convertible Series
C preferred stock - - - (10,016)
Favorable conversion rights on convertible Series F
preferred stock (485) - (485) -
---------- ---------- ---------- ----------
Loss applicable to common stockholders $ (10,610) $ (10,046) $ (38,240) $ (45,637)
========== ========== ========== ==========
Basic and diluted loss per share $ (0.25) $ (0.34) $ (1.00) $ (1.58)
Shares used in computing per share amounts 41,170 30,017 38,277 28,849
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (36,647) $ (23,806)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 3,438 2,223
Equity in net loss of unconsolidated affiliate 3,407 -
Deferred revenue - (2,186)
Amortization of deferred compensation - 451
Write-off of in-process research and development - 1,850
Changes in items affecting operations:
Other current assets 274 (3,001)
Accounts payable and accrued expenses (1,313) 2,914
------------ ------------
Net cash used in operating activities (30,841) (21,555)
------------ ------------
Cash flows from investing activities:
Purchases of short-term investments (6,545) (18,260)
Proceeds from sales and maturities of short-term investments 15,152 14,978
Purchases of property and equipment (7,543) (5,127)
Other assets (2,780) 309
------------ ------------
Net cash used in investing activities (1,716) (8,100)
------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligations (30) (207)
Proceeds of issuance of debt - 1,905
Repayment of debt (6,110) (556)
Proceeds from sale of common stock 991 2,501
Purchase of treasury stock - (39)
Proceeds from sale of Series E preferred stock 5,967
Proceeds from sale of Series D preferred stock 20,000 -
Proceeds from sale of Series C preferred stock 29,518
Proceeds from sale of Series B preferred stock - 6,915
Proceeds from sale of Series A preferred stock - 4,463
Other long-term liabilities 570 (145)
------------ ------------
Net cash provided by financing activities 21,388 44,355
------------ ------------
Net increase (decrease) in cash and cash equivalents (11,169) 14,700
Cash and cash equivalents, beginning of period 21,845 17,414
------------ ------------
Cash and cash equivalents, end of period $ 10,676 $ 32,114
============ ============
Supplemental disclosures of cash flow information:
Income taxes paid during the period $ 23 $ 19
Interest paid during the period 327 415
Noncash investing and financing activity:
Conversion of Series C preferred stock into common stock $ 20,924 $ -
Exchange of Series D preferred stock for Series F preferred stock 10,223 -
Conversion of Series B preferred stock into common stock 7,695 1,842
Preferred stock dividends 857 116
Favorable conversion rights on Series F preferred stock issuance 485 -
Stock issued in conjunction with equity line of credit 200 -
Favorable redemption rights on Series C preferred stock issuance - 10,016
Favorable redemption and conversion rights on Series B preferred
stock and warrant issuance - 8,034
Favorable conversion rights on Series A preferred stock issuance - 3,665
Purchase of technology in exchange for shares of common stock - 1,850
Deferred compensation for restricted stock issuances - 393
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
5
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GENERAL MAGIC, INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed 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 condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the financial condition, results of operations and cash
flows of General Magic, Inc. (the "Company") for the periods presented. These
financial statements should be read in conjunction with the Company's audited
consolidated financial statements as of December 31, 1998 and 1997, and for each
of the three years ended December 31, 1998, including notes thereto, included in
the Company's Annual Report on Form 10-K, which was filed with the SEC on March
31, 1999.
The results of operations for the nine-month period ended September 30,
1999, are not necessarily indicative of the results expected for the current
year or any other period.
Effective January 1, 1999, the Company has reclassified the presentation of
its statement of operations to more accurately portray the operating costs of
providing voice-enabled services and to allow for better comparison with other
companies in the service industry. As a result, certain line items have been
added and expenses have been reclassified in prior periods to be consistent with
this new presentation. The following line items have been added:
Service Revenue: Service revenue consists of all revenue from the Company's
Portico(TM) service and will include revenue from other voice-enabled services
as it is recognized.
Network operations: Network operations expense consists of personnel and
related costs associated with running the network operations center and
providing customer support and billing, access costs associated with the
telephony and data network, and royalties paid to software and content
providers.
Depreciation and amortization: Depreciation and amortization expense
consists of all depreciation on property and equipment as well as amortization
of intangible assets from certain acquisitions.
NOTE 2: CONSOLIDATED FINANCIAL STATEMENT DETAILS
PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Network operations center $ 11,185 $ 5,357
Office equipment and computers 9,034 7,818
Furniture and fixtures 2,412 2,373
Leasehold improvements 1,457 996
------------ ------------
$ 24,088 $ 16,544
Less accumulated depreciation and amortization 12,321 9,037
------------ ------------
$ 11,767 $ 7,507
============ ============
</TABLE>
ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Prepaid royalty payment and accrued interest $ 2,822 $ 4,217
Employee compensation 2,799 3,688
Other 2,703 2,075
------------ ------------
$ 8,324 $ 9,980
============ ============
</TABLE>
6
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TOTAL OTHER INCOME (EXPENSE), NET
A summary of other income follows (in thousands):
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED NINE-MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Equity in net loss of DSI $ (540) - $ (3,557) -
Gain on sale of Starfish, Inc. 177 903 339 903
Gain on AltoCom, Inc. transactions - - - 4,696
Interest income 261 695 836 1,430
Interest expense (102) (159) (356) (412)
Other (1) 59 23 86
---------- ---------- ---------- ----------
$ (205) $ 1,498 $ (2,715) $ 6,703
========== ========== ========== ==========
</TABLE>
NOTE 3: COMPREHENSIVE INCOME/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 and nine-month periods ended September 30,
1999 and 1998, there were no material differences between the Company's
comprehensive loss and net loss.
NOTE 4: NET 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.
The following were excluded from the computation of diluted loss per share:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
Stock options 8,070 7,088
Warrants for the purchase of common stock 780 710
Shares of common stock issuable upon conversion of Series A preferred stock 3,629 3,629
Shares of common stock issuable upon conversion of Series B preferred stock - 1,891
Shares of common stock issuable upon conversion of Series C preferred stock - 2,788
Shares of common stock issuable upon conversion of Series D preferred stock 6,088 -
Shares of common stock issuable upon conversion of Series E preferred stock 1,839 -
Shares of common stock issuable upon conversion of Series F preferred stock 7,440 -
</TABLE>
NOTE 5: PREFERRED STOCK
On September 9, 1999, certain of the Company's investors exchanged an
aggregate of 1,000 shares of Series D convertible preferred stock for 1,000
shares of the Company's Series F convertible preferred stock. Each holder of
Series F preferred stock has special voting rights with respect to matters that
adversely affect the rights of holders of Series F preferred stock and otherwise
has no voting rights except as may be required by law. Each share of Series F
preferred stock accrues dividends quarterly at a rate of 5% per annum of the
stated value ($10,000 per share). The liquidation preference of Series F
preferred stock is $10,000 per share plus any accrued but unpaid dividends and
unpaid default interest on cash dividends, and is payable pari passu with the
Series A, Series D and Series E preferred stock and in preference to the holders
of common stock. Each share of Series F preferred stock is convertible into
shares of the Company's common stock at a conversion rate obtained by dividing
the liquidation preference by $1.378 (the "Series F Conversion Price"). The
Series F Conversion Price is subject to adjustment upon certain events,
including, without limitation, adjustment following the last day of each
December, March, June and September until March 30, 2002, to an amount equal to
90% of the average of the closing bid prices of the Company's common stock
during the ten trading days immediately after each such date (the "Reset Price")
if the Reset Price is less than the then-effective Series F Conversion Price.
Subject to certain conditions, the Company may redeem all of the Series F
preferred stock upon a consolidation, merger or other business combination in
which the Company's stockholders do not retain sufficient voting power in the
surviving entity to elect a majority of such entity's board of directors (a
"Change of Control") at a price equal to, subject to limited exceptions, 115% of
the liquidation preference. In addition, subject to certain conditions, in the
event that a Reset Price is less than $1.966, the Company may redeem
all of the Series F preferred stock at the liquidation preference.
In the event of a Change of Control, the sale of substantially all of the
assets of the Company, or a purchase, tender or exchange offer made to and
accepted by holders of more than 50% of the common stock of the Company which is
approved or recommended by the Company's board of directors (each a "Major
Transaction"), the holders of Series F preferred stock may require the Company
to redeem any or all of their shares at the greater of (i) 125% of the
liquidation preference and (ii) a price based on the market value of the common
stock at the time of the public announcement of such Major Transaction. However,
in the event of a Change of Control, the holders of the Series F preferred stock
may not exercise their right of redemption if the Company has previously
delivered its notice of redemption upon a Change of Control. Unless the Company
elects to redeem the Series F preferred stock at a price per share equal to the
greater of 130% of the liquidation preference and a price based on the closing
bid price of the Company's common stock, then, at the time of any of the
following events, the holders of the Series F preferred stock are entitled to a
substantial reduction in the conversion price and a payment of 1% of the
liquidation preference for each day that any of such events continues for up to
20 days in any 365-day period: (i) the Company's failure to have the
registration statement declared effective by the SEC within 120 days of the
issuance of the Series F preferred stock; (ii) the Company's failure to maintain
registration of the common stock
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issuable upon conversion or exercise of the Series F preferred stock; or (iii)
the Company's failure to maintain the listing of the common stock on The Nasdaq
National Market ("Nasdaq"), The New York Stock Exchange ("NYSE") or the American
Stock Exchange, Inc. ("AMEX"). If the Company fails to make these 1% penalty
payments, the holders of the Series F preferred stock will have the right to
require the Company to redeem some or all of their shares at a price per share
equal to the greater of 130% of the liquidation preference or a price based on
the closing bid price. The holders of the Series F preferred stock also have the
right to require the Company to redeem their shares at such price upon the
occurrence of any of the following events: (i) the Company's failure to use its
reasonable best efforts to have the registration statement declared effective by
the SEC within 120 days of the issuance of the Series F preferred stock; (ii)
the Company's failure to use its best efforts to maintain registration of the
common stock issuable upon conversion or exercise of the Series F preferred
stock; (iii) the Company's failure to use its reasonable best efforts to
maintain the listing of the common stock on Nasdaq, NYSE or AMEX; or (iv) the
Company's failure to timely convert shares of Series F preferred stock to common
stock.
On June 18, 1999, the Company entered into an agreement with Excite, Inc. in
which the Company sold 599 shares of its Series E Convertible Preferred Stock
and a warrant to purchase an additional 100 shares of Series E preferred stock
(the "Warrant") for cash proceeds of $5,967,000, net of issuance costs of
$33,000. Except as may be required by law, the Series E preferred stock has no
voting rights. The holder is entitled to receive non-cumulative dividends at 5%
of $10,000 per annum on each share of the Series E preferred stock, which are
payable in preference to any dividends on the Company's common stock. The
liquidation preference of Series E preferred stock is $10,000 per share, and is
payable pari passu with the Series A, Series D and Series F preferred stock and
in preference to the holders of common stock. Subject to adjustment in certain
circumstances, each share of Series E preferred stock is convertible into that
number of shares of the Company's common stock equal to $10,000 divided by
$3.80. The Warrant is exercisable for 100 shares of Series E preferred stock at
an exercise price of $10,000 per share. The Warrant has a fifteen-month term and
is immediately exercisable.
On March 30, 1999, the Company entered into a financing transaction with a
group of private investors that provided $20,000,000 in cash to the Company from
the sale of 2,000 shares of its Series D Convertible Preferred Stock. Each
holder of Series D preferred stock has special voting rights with respect to
matters that adversely affect the rights of holders of Series D preferred stock
and otherwise has no voting rights except as may be required by law. Each share
of Series D preferred stock accrues dividends quarterly at a rate of 5% per
annum of the stated value ($10,000 per share). The liquidation preference of
Series D preferred stock is $10,000 per share plus any accrued but unpaid
dividends and unpaid default interest on cash dividends, and is payable pari
passu with the Series A, Series E and Series F preferred stock and in preference
to the holders of common stock. Each share of Series D preferred stock is
convertible into shares of the Company's common stock at a conversion rate
obtained by dividing the liquidation preference by $1.684 (the "Series D
Conversion Price"). The Series D Conversion Price is subject to adjustment upon
certain events, including, without limitation, adjustment following the last day
of each September and March until March 30, 2002 and on December 31, 1999 and
June 30, 2000, to an amount equal to 110% of the average of the closing bid
prices of the Company's common stock during the ten trading days immediately
after each such date (the "Series D Reset Price") if the Series D Reset Price is
less than the then-effective Series D Conversion Price.
Subject to certain conditions, the Company may redeem all of the Series D
preferred stock upon a Change of Control at a price equal to, subject to limited
exceptions, 115% of the liquidation preference. In addition, subject to certain
conditions, in the event that a Series D Reset Price is less than $1.966, the
Company may redeem all of the Series D preferred stock at the liquidation
preference.
In the event of a Major Transaction, the holders of Series D preferred stock
may require the Company to redeem any or all of their shares at the greater of
(i) 125% of the liquidation preference or (ii) a price based on the market value
of the common stock at the time of the public announcement of such Major
Transaction. However, in the event of a Change of Control, the holders of the
Series D preferred stock may not exercise their rights of redemption if the
Company has previously delivered its notice of redemption upon a Change of
Control. The holders of the Series D preferred stock are also entitled to
require the Company to redeem some or all of their shares at a per share price
equal to 130% of the liquidation preference, or in certain cases, the greater of
(i) 130% of the liquidation preference and (ii) a price based on the closing bid
price of the Company's common stock at the time of any of the following events,
among others: (x) the Company's failure to use its best efforts to maintain
registration of the common stock issuable upon conversion of the Series D
preferred stock; (y) the Company's failure to use its reasonable best efforts to
maintain the listing of its common stock on Nasdaq, NYSE or AMEX; or (z) the
Company's failure to timely convert the Series D preferred stock. In addition,
the holders of the Series D preferred stock are entitled to require the Company
to redeem some or all of their shares at a
8
<PAGE> 9
per share price equal to the liquidation preference at the time of any of the
following events: (i) the Company's failure to maintain the registration
statement for resale of the common stock issuable upon conversion of the Series
D preferred stock; (ii) the Company's failure to maintain listing of its common
stock on Nasdaq, NYSE or AMEX; or (iii) a purchase, tender or exchange offer
made to and accepted by holders of more than 50% of the Company's common stock
which is not approved or recommended by the Company's board of directors. As
part of the financing transaction, the Company issued warrants that are
exercisable for up to 150,000 shares of common stock at an exercise price of
$5.078 per share. The warrants have a three-year term and are immediately
exercisable.
During the nine-month period ended September 30, 1999, 5,600 shares of the 5
1/2% Cumulative Convertible Series B Preferred Stock were converted into
2,459,746 shares of common stock. As of September 30, 1999, no shares of the
Series B preferred stock were outstanding. During the nine-month period ended
September 30, 1999, 1,549 shares of the 5 % Cumulative Convertible Series C
Preferred Stock were converted into 4,877,219 shares of common stock. As of
September 30, 1999, no shares of the Series C preferred stock were outstanding.
NOTE 6: INVESTMENT IN DATAROVER MOBILE SYSTEMS, INC.
Effective October 1998, the Company divested its DataRover handheld
communications device division ("DataRover Division") in a transaction with
DataRover Mobile Systems, Inc. ("DSI"). Pursuant to the transaction, the Company
contributed cash and certain other assets of the DataRover Division totaling
$3,361,000 in value to DSI. The Company also licensed certain of its
technologies to DSI. In consideration therefor, the Company received non-voting,
non-redeemable preferred stock and 49% of the outstanding common stock of DSI.
The Company did not recognize any gain or loss as a result of the divestiture of
the DataRover Division, and accounted for its investment in DSI under the
modified equity method, which required the Company to record 100% of the losses
incurred by DSI. As of September 30, 1999, the Company had written off its
entire original investment in DSI.
During the three-month period ended March 31, 1999, the Company purchased
handheld communication units from Oki Electric Industry Co., Ltd. ("Oki
Electric") for DSI under an existing letter of credit for a total of $2,179,000.
DSI was obligated to reimburse the Company the actual cost of such units, and
its obligation was secured by all personal property of DSI. Prior to the August
5, 1999, financing described below, the total receivable from DSI, reflecting
this and other obligations, was $2,089,000.
On August 5, 1999, in connection with a third party DSI financing
transaction, the Company exchanged all of its preferred stock and common stock
for Series AA convertible preferred stock. In connection with this transaction,
the Company also agreed to reduce the note receivable due from DSI to $500,000,
and released its security interest in all personal property of DSI other than
its DataRover 840 inventory. As a result of this transaction, the Company now
owns less than 20% of the outstanding common stock of DSI and will account for
this investment under the cost method. The Company's interest in DSI as of
September 30, 1999, is comprised of an investment of $1,589,000 and a note
receivable of $500,000, all classified as other non-current assets.
NOTE 7: COMMITMENTS
PURCHASE COMMITMENTS
In April 1998, the Company entered into an agreement with Qwest
Communications International, Inc. 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. The charges underlying this commitment will be expensed
in the periods in which they occur.
LONG-TERM DEBT
In December 1997, the Company entered into a $4,000,000 term loan with a
financial institution. The loan bore interest at 0.25% above the financial
institution's prime rate (8.25% as of September 30, 1999), and had a term of 40
months with interest only due in the first four months and principal and
interest due monthly thereafter. This loan was secured by all of the assets of
the Company, including its intellectual property. The loan was paid in full on
August 31, 1999.
In June 1998, the Company secured a $3,000,000 term loan with the same
financial institution. The loan bore interest at the financial institution's
prime rate (8.25% as of September 30, 1999), and had a term of 42 months with
interest only due in the first six months and principal and interest due monthly
thereafter. This loan was secured by all of the assets of the Company, including
its intellectual property. The loan was paid in full on August 31, 1999.
NOTE 8: SEGMENT REPORTING
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The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements.
Operating segments are defined as components of an enterprise about which
separate financial information is available and is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision maker is its Chief
Executive Officer ("CEO"). Financial information for separate components of the
Company's business is not available to the CEO for review and analysis.
Allocation of resources and assessment of performance is based on the Company's
condensed consolidated financial information, which is available to the CEO in
substantially the form presented in the accompanying condensed consolidated
statements of operations. The Company therefore operates in a single operating
segment, voice-enabled services. Total revenue for the nine-month periods ended
September 30, 1999 and 1998, was reported under the voice-enabled services
product offering.
NOTE 9: OTHER EVENTS
In June 1997, the Company reached a settlement agreement to resolve the
claims of, and terminate a license agreement with Mitsubishi Electric
Corporation (MELCO). In consideration therefor, the Company agreed to refund
unrecouped prepaid royalties of $1,500,000, waive further payments otherwise due
under the original agreement, and grant a royalty-free license to certain
software modem technology. The $1,500,000 refund was secured by a license in
certain of the Company's intellectual property, was non-interest bearing, and
was payable on or before August 17, 1999. The Company elected not to refund the
$1,500,000 unrecouped prepaid royalty to MELCO and, on August 18, 1999, MELCO's
license to certain of the Company's intellectual property became effective.
NOTE 10: SUBSEQUENT EVENT
On November 9, 1999, the Company entered into a definitive agreement with
General Motors Corporation through its OnStar division ("OnStar"). The agreement
provides that OnStar is to take a $15 million equity stake in the Company in the
form of the Company's Series G convertible preferred stock and a warrant to
purchase additional Series G preferred stock for $5 million, and will be
entitled to a seat on the Company's board of directors. In addition, OnStar is
to pay an up-front, nonrefundable $5 million fee pursuant to a development and
licensing agreement for custom engineering and a license to the Company's
magicTalk voice user interface platform technology. The development and
licensing agreement also contemplates recurring technical support and hosting
fees for use of the Company's network operations facilities. The closing of
these transactions is subject to certain conditions, including regulatory
approval.
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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 that 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.
General Magic, Inc. ("General Magic") offers voice-enabled services and
technologies that enable voice access over the telephone to information that is
stored on computer networks, including Web sites. Our services are designed to
make it easy and convenient for people to access and act on their personal and
business information and to engage in personal and business transactions. We
offer both General Magic branded services as well as professional and custom
engineering services to other companies that wish to license our technologies
for use in their own voice-enabled services.
The General Magic branded offerings are the myTalk(TM) service, which
provides consumers with free phone and Web access to personal content, and the
Portico(TM) virtual assistant service, a pay-for service for mobile
professionals.
In June 1999, we introduced myTalk, a service allowing members to access
their email and voicemail from any telephone, reply to email messages using
their own spoken words and make free two-minute phone calls anywhere in the U.S.
The myTalk service is also accessible by personal computer through a standard
Web browser. Members accessing myTalk will see banner ads during a myTalk Web
site session and will hear short audio ads periodically during a telephone
session. This approach to advertising, called rich media, seeks to interactively
involve consumers and enhance their interest in the products and services of
advertisers.
In July 1998, we released the Portico service, which provides many of the
services of a human assistant on an around-the-clock basis. Subscribers can
access voicemail, email, faxes, calendar, address book, company news and stock
quotes from any telephone or, using a standard Web browser, from any personal
computer. This subscription-based service has served as a model for
voice-enabled services, and has allowed us to fine-tune our technologies for
broader deployment while providing a demonstration platform for our
capabilities.
One of our core technology assets is the magicTalk(TM) voice user interface,
integral to all our offerings. magicTalk is a personality-rich natural language
voice user interface. With magicTalk, users don't need to remember special voice
commands or navigate lengthy push-button menus to access information and perform
tasks. We host voice-enabled services in our network operations center, located
in Sunnyvale, California, and plan to assist our partners and customers in
designing and building network operations centers to host their own magicTalk
voice-enabled services.
General Magic's magicTalk voice user interface is a flexible technology
platform that can be used to voice enable network-based content, communications
and electronic commerce applications. Our services include planning, design,
development, deployment, training, maintenance and hosting of customized
voice-enabled services for third parties.
In May 1999, BellSouth Mobility, Inc. announced its intention to begin an
initial deployment of a magicTalk-based service in the Atlanta area. The service
is a private-labeled version of our Portico service and is hosted in our network
operations center in Sunnyvale, California. High-reliability telephone lines and
cross-connect technologies were designed and installed to connect BellSouth
cellular switches in Atlanta to our network operations center. This arrangement
allows BellSouth's customers to use the Portico virtual assistant to answer
their cellular telephones. Initial deployment of the service commenced in
November 1999.
In June 1999, Excite@Home launched the Excite Voicemail service, a free,
advertising-supported service that allows Excite users to receive voicemail and
faxes in their Excite email accounts. Excite Voicemail uses our magicTalk voice
user interface to guide callers in leaving voicemail messages and faxes for
registered Excite members. We host the service in our Sunnyvale, California
network operations center. Special telephone lines have been installed to
connect the Excite@Home operations center with our network operations center,
allowing voicemail and faxes to appear in the Excite member's mailbox.
In 1998, we announced an agreement with intuit(R) Inc. to voice enable
certain features of Intuit's Quicken.com(TM) personal finance Web site. The
private-labeled service employs our magicTalk voice user interface and would be
hosted in our network operations center. Intuit is currently reevaluating its
plans to launch voice-enabled Quicken.com services, and there can be no
assurance that Intuit will proceed under its agreement with us.
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On November 9, 1999, the Company entered into a licensing and technology
agreement with General Motors Corporation through its OnStar division ("OnStar")
pursuant to which OnStar is to pay a $5 million fee for custom engineering
services and a license to the Company's magicTalk voice user interface platform
technology. OnStar has selected magicTalk as the voice user interface for its
OnStar Virtual Advisor, which will provide hands-free, voice-activated access to
Web-based information services in vehicles. The closing of this transaction is
subject to certain conditions, including regulatory approval.
The Company is at an early stage of development in its strategy to develop
and market voice-enabled services and technology, and is subject to all of the
risks inherent in the establishment of a new business enterprise. In order to
succeed, the Company must, among other things, secure adequate financial and
human resources to meet its requirements; identify and secure key business
relationships; generate sufficient subscription, advertising, custom
engineering, licensing and other revenues from its services and technologies to
permit the Company to operate profitably; meet the challenges inherent in the
timely development and deployment of complex technologies; achieve market
acceptance for its voice-enabled services and technology; expand its network
operations center to timely accommodate any demand for its services; ensure that
third-party developers timely develop, license, deliver and support technologies
upon which the Company's services depend; respond effectively to competitive
developments; and protect its intellectual property. Any failure to achieve
these objectives could have a material adverse effect on the Company's business,
operating results and financial condition.
RESULTS OF OPERATIONS
The Company has made certain changes in the format of its financial
statements in order to more accurately portray the operating costs of providing
voice-enabled services. These changes include the addition of certain line items
to the consolidated statements of operations. Certain line items in the prior
year periods have been reclassified to be consistent with these changes.
For the three-month period ended September 30, 1999, the Company incurred a
net loss of $10.6 million, or $0.25 per share, compared to a net loss of $10.0
million, or $0.34 per share, for the three-month period ended September 30,
1998. For the nine-month period ended September 30, 1999, the Company incurred a
net loss of $38.2 million, or $1.00 per share, compared to a net loss of $45.6
million, or $1.58 per share, for the nine-month period ended September 30, 1998.
The net loss per share for the nine-month period ended September 30, 1998,
included the net loss for the period and $21.8 million in adjustments to
accumulated deficit related to preferred stock and warrants issued during the
period with favorable conversion and redemption rights, respectively. Excluding
the effect of these adjustments, the loss per share for the nine-month period
ended September 30, 1998, would have been $0.83 per share.
TOTAL REVENUE
Total revenue for the three-month period ended September 30, 1999, was $1.7
million compared to $374 thousand for the three-month period ended September 30,
1998. For the nine-month period ended September 30, 1999, total revenue was $2.0
million compared to $2.3 million for the nine-month period ended September 30,
1998. Licensing revenue in the three-month and nine-month periods ended
September 30, 1999, included $1.5 million associated with a license to
Mitsubishi Electric Corporation which became effective in August 1999 pursuant
to the terms of a June 1997 settlement agreement. Licensing revenue for the
nine-month period ended September 30, 1998, included a $1.5 million
nonrefundable fee from Microsoft Corp. for the license of certain of the
Company's technologies. Total revenue for both the three-month period and the
nine-month period ended September 30, 1999, consists of service revenue from
subscription fees for the Portico service and licensing revenue from certain of
the Company's technologies. The Company expects that its revenue will increase
significantly in the fourth quarter upon receipt and recognition of the $5
million up-front, nonrefundable fee to be paid under a development and licensing
agreement reached with OnStar in November 1999. The closing of this transaction
is subject to certain conditions, including regulatory approval, and though the
Company believes satisfaction of these conditions is likely, there can be no
guarantee that the transaction will close in the fourth quarter of 1999, or at
all.
NETWORK OPERATIONS
Network operations expense consists of personnel and related costs
associated with running the network operations center and providing customer
support and billing, access costs associated with the telephony and data
network, and royalties paid to software and content providers. Network
operations expense for the three-month period ended September 30, 1999, was $1.9
million compared to $1.7 million for the three-month period ended September 30,
1998. For the nine-month period ended September 30, 1999, network operations
expense was $5.4 million compared to $1.7 million for the nine-month period
ended September 30, 1998. The Company recorded network operations expense for
the first time in the three-month period ended September 30, 1998. Prior to
that, this expense was classified as research and development since the
Company's Portico service had not yet achieved commercial feasibility. The
Company expects network operations expense to increase modestly through 1999 as
it implements its plan to add network infrastructure.
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RESEARCH AND DEVELOPMENT
Research and development expense for the three-month period ended September
30, 1999, was $2.9 million, compared to $3.7 million for the three-month period
ended September 30, 1998. For the nine-month period ended September 30, 1999,
research and development expense was $9.6 million, compared to $13.1 million for
the nine-month period ended September 30, 1998. The decrease for the three-month
period ended September 30, 1999, compared to the three-month period ended
September 30, 1998, was due to reduced spending on outside consultants. The
decrease in the nine-month period ended September 30, 1999, compared to the
nine-month period ended September 30, 1998, was primarily due to the
reclassification of costs into network operations expense, commencing with
commercial feasibility of the Portico service in July 1998. The Company expects
to continue to devote resources to research and development through the
remainder of 1999 at approximately the same level as in the three-months ended
September 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the three-month period ended
September 30, 1999, was $5.3 million, compared to $5.6 million for the
three-month period ended September 30, 1998. For the nine-month period ended
September 30, 1999, selling, general and administrative expense was $17.5
million, compared to $13.1 million for the nine-month period ended September 30,
1998. The increase in the nine-month period ended September 30, 1999, compared
to the nine-month period ended September 30, 1998, was due to staffing increases
and additional marketing and advertising expenses associated with efforts to
develop market demand and distribution channels for the Company's voice-enabled
services. The Company expects selling, general and administrative expenses to
increase through the remainder of 1999, specifically for marketing programs
related to the Company's myTalk service.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three-month period ended
September 30, 1999, was $1.3 million, compared to $783 thousand for the
three-month period ended September 30, 1998. For the nine-month period ended
September 30, 1999, depreciation and amortization expense was $3.4 million,
compared to $2.2 million for the nine-month period ended September 30, 1998. The
increases in both periods were due to equipment purchases and facility
improvements related to the expansion of the Company's network operations center
and amortization of intangible assets associated with a prior acquisition. The
Company expects depreciation and amortization expense to continue to increase in
1999 compared to 1998 as the network operations center is expanded.
WRITE-OFF OF ACQUIRED TECHNOLOGY AND IN-PROCESS RESEARCH AND DEVELOPMENT
During the nine-month period ended September 30, 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.
TOTAL OTHER INCOME (EXPENSE), NET
The Company had other expense of $205 thousand in the three-month period
ended September 30, 1999, and other income of $1.5 million in the three-month
period ending September 30, 1998. During the three-month period ended September
30, 1999, the Company recorded a loss of $540 thousand related to the net losses
of DataRover Mobile Systems, Inc. ("DSI") through July 31, 1999, and a gain of
$177 thousand for the sale of Motorola stock received in connection with
Motorola's acquisition of Starfish, offset by interest income during the period.
In the nine-month period ended September 30, 1999, the Company had other expense
of $2.7 million compared to other income of $6.7 million for the nine-month
period ending September 30, 1998.
During the nine-month period ended September 30, 1999, the Company recorded
a loss of $3.6 million to account for 100% of the net losses of DSI through July
31, 1999. During the nine-month period ended September 30, 1998, the Company
recognized $4.7 million in other income for consideration received pursuant to
agreements concluded during the period with AltoCom and a gain of $903 thousand
for the sale of Motorola stock received in connection with Motorola's
acquisition of Starfish. Excluding the transactions associated with DSI,
AltoCom, and Motorola, other income (expense), net consisted primarily of
interest income and expense.
LIQUIDITY AND CAPITAL RESOURCES
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The Company's principal sources of liquidity are its cash, cash equivalents
and short-term investment balances that totaled $14.1 million as of September
30, 1999, down $19.7 million from $33.9 million as of December 31, 1998.
On November 9, 1999, the Company entered into a definitive agreement
pursuant to which General Motors Corporation through its OnStar division is to
take a $15 million equity stake in the Company in the form of the Company's
Series G convertible preferred stock and a warrant to purchase additional shares
of Series G preferred stock for $5 million. In addition, OnStar is to pay a $5
million up-front, nonrefundable fee for custom engineering services and a
license to the Company's magicTalk voice user interface technology. The closing
of these transactions is subject to certain conditions, including regulatory
approval.
On September 9, 1999, certain of the Company's investors exchanged an
aggregate of 1,000 shares of Series D convertible preferred stock for 1,000
shares of the Company's Series F convertible preferred stock. Each holder of
Series F preferred stock has special voting rights with respect to matters that
adversely affect the rights of holders of Series F preferred stock and otherwise
has no voting rights except as may be required by law. Each share of Series F
preferred stock accrues dividends quarterly at a rate of 5% per annum of the
stated value ($10,000 per share). The liquidation preference of Series F
preferred stock is $10,000 per share plus any accrued but unpaid dividends and
unpaid default interest on cash dividends, and is payable pari passu with the
Series A, Series D and Series E preferred stock and in preference to the holders
of common stock. Each share of Series F preferred stock is convertible into
shares of the Company's common stock at a conversion rate obtained by dividing
the liquidation preference by $1.378 (the "Series F Conversion Price"). The
Series F Conversion Price is subject to adjustment upon certain events,
including, without limitation, adjustment following the last day of each
December, March, June and September until March 30, 2002, to an amount equal to
90% of the average of the closing bid prices of the Company's common stock
during the ten trading days immediately after each such date (the "Reset Price")
if the Reset Price is less than the then-effective Series F Conversion Price.
Subject to certain conditions, the Company may redeem all of the Series F
preferred stock upon a consolidation, merger or other business combination in
which the Company's stockholders do not retain sufficient voting power in the
surviving entity to elect a majority of such entity's board of directors (a
"Change of Control") at a price equal to, subject to limited exceptions, 115% of
the liquidation preference. In addition, subject to certain conditions, in the
event that a Reset Price is less than $1.966, the Company may redeem
all of the Series F preferred stock at the liquidation preference.
In the event of a Change of Control, the sale of substantially all of the
assets of the Company, or a purchase, tender or exchange offer made to and
accepted by holders of more than 50% of the common stock of the Company which is
approved or recommended by the Company's board of directors (each a "Major
Transaction"), the holders of Series F preferred stock may require the Company
to redeem any or all of their shares at the greater of (i) 125% of the
liquidation preference and (ii) a price based on the market value of the common
stock at the time of the public announcement of such Major Transaction. However,
in the event of a Change of Control, the holders of the Series F preferred stock
may not exercise their right of redemption if the Company has previously
delivered its notice of redemption upon a Change of Control. Unless the Company
elects to redeem the Series F preferred stock at a price per share equal to the
greater of 130% of the liquidation preference and a price based on the closing
bid price of the Company's common stock, then, at the time of any of the
following events, the holders of the Series F preferred stock are entitled to a
substantial reduction in the conversion price and a payment of 1% of the
liquidation preference for each day that any of such events continues for up to
20 days in any 365-day period: (i) the Company's failure to have the
registration statement declared effective by the Securities Exchange Commission
("SEC") within 120 days of the issuance of the Series F preferred stock; (ii)
the Company's failure to maintain registration of the common stock issuable upon
conversion or exercise of the Series F preferred stock; or (iii) the Company's
failure to maintain the listing of the common stock on The Nasdaq National
Market ("Nasdaq"), The New York Stock Exchange ("NYSE") or the American Stock
Exchange, Inc. ("AMEX"). If the Company fails to make these 1% penalty payments,
the holders of the Series F preferred stock will have the right to require the
Company to redeem some or all of their shares at a price per share equal to the
greater of 130% of the liquidation preference or a price based on the closing
bid price. The holders of the Series F preferred stock also have the right to
require the Company to redeem their shares at such price upon the occurrence of
any of the following events: (i) the Company's failure to use its reasonable
best efforts to have the registration statement declared effective by the SEC
within 120 days of the issuance of the Series F preferred stock; (ii) the
Company's failure to use its best efforts to maintain registration of the common
stock issuable upon conversion or exercise of the Series F preferred stock;
(iii) the Company's failure to use its reasonable best efforts to maintain the
listing of the common stock on Nasdaq, NYSE or AMEX; or (iv) the Company's
failure to timely convert shares of Series F preferred stock to common stock.
Effective July 30, 1999, the Company entered into a common stock investment
agreement with an existing institutional investor, providing the Company an
equity line of credit. The common stock investment agreement permits the Company
to require the investor to purchase from time to time an aggregate of up to
$20,000,000 of the Company's common stock in increments of up to $5,000,000. In
addition, the investor has the right to purchase in its sole discretion up to
30% of each increment requested by the Company, up to an aggregate of an
additional $6,000,000 of common stock during the term of the common stock
investment agreement. However, there are numerous conditions on the Company's
right to draw down under the equity line, and there can be no assurance that the
Company will be able to draw down on the line in an amount totaling as much as
$20,000,000.
On June 18, 1999, the Company entered into an agreement with Excite, Inc. in
which the Company sold 599 shares of its Series E Convertible Preferred Stock
and a warrant to purchase an additional 100 shares of Series E preferred stock
(the "Warrant") for cash proceeds of $6.0 million, net of issuance costs of
$33,000. Except as may be required by law, the Series E preferred stock has no
voting rights. The holder is entitled to receive non-cumulative dividends at 5%
of $10,000 per annum on each share of the Series E preferred stock, which are
payable in preference to any dividends on the Company's common stock. The
liquidation preference of Series E preferred stock is $10,000 per share, and is
payable pari passu with the Series A, Series D and Series F preferred stock and
in preference to the holders of common stock. Subject to adjustment in certain
circumstances, each share of Series E preferred stock is convertible into that
number of shares of the Company's common stock equal to $10,000 divided by
$3.80. The Warrant is exercisable for 100 shares of Series E preferred stock at
an exercise price of $10,000 per share. The Warrant has a fifteen-month term and
is immediately exercisable.
On March 30, 1999, the Company entered into a financing transaction with a
group of private investors that provided $20,000,000 in cash to the Company from
the sale of 2,000 shares of its Series D Convertible Preferred Stock. Each
holder of Series D preferred stock has special voting rights with respect to
matters that adversely affect the rights of holders of Series D preferred stock
and otherwise has no voting rights except as may be required by law. Each share
of Series D preferred stock accrues dividends quarterly at
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a rate of 5% per annum of the stated value ($10,000 per share). The liquidation
preference of Series D preferred stock is $10,000 per share plus any accrued but
unpaid dividends and unpaid default interest on cash dividends, and is payable
pari passu with the Series A, Series E and Series F preferred stock and in
preference to the holders of common stock. Each share of Series D preferred
stock is convertible into shares of the Company's common stock at a conversion
rate obtained by dividing the liquidation preference by $1.684 (the "Series D
Conversion Price"). The Series D Conversion Price is subject to adjustment upon
certain events, including, without limitation, adjustment following the last day
of each September and March until March 30, 2002 and on December 31, 1999 and
June 30, 2000, to an amount equal to 110% of the average of the closing bid
prices of the Company's common stock during the ten trading days immediately
after each such date (the "Series D Reset Price") if the Series D Reset Price is
less than the then-effective Series D Conversion Price.
Subject to certain conditions, the Company may redeem all of the Series D
preferred stock upon a Change of Control at a price equal to, subject to limited
exceptions, 115% of the liquidation preference. In addition, subject to certain
conditions, in the event that a Series D Reset Price is less than $1.966, the
Company may redeem all of the Series D preferred stock at the liquidation
preference.
In the event of a Major Transaction, the holders of Series D preferred stock
may require the Company to redeem any or all of their shares at the greater of
(i) 125% of the liquidation preference and (ii) a price based on the market
value of the common stock at the time of the public announcement of such Major
Transaction. However, in the event of a Change of Control, the holders of the
Series D preferred stock may not exercise their rights of redemption if the
Company has previously delivered its notice of redemption upon a Change of
Control. The holders of the Series D preferred stock are also entitled to
require the Company to redeem some or all of their shares at a per share price
equal to 130% of the liquidation preference, or in certain cases, the greater of
(i) 130% of the liquidation preference and (ii) a price based on the closing bid
price of the Company's common stock at the time of any of the following events,
among others: (x) the Company's failure to use its best efforts to maintain
registration of the common stock issuable upon conversion of the Series D
preferred stock; (y) the Company's failure to use its reasonable best efforts to
maintain the listing of its common stock on Nasdaq, NYSE or AMEX; or (z) the
Company's failure to timely convert the Series D preferred stock. In addition,
the holders of the Series D preferred stock are entitled to require the Company
to redeem some or all of their shares at a per share price equal to the
liquidation preference at the time of any of the following events: (i) the
Company's failure to maintain the registration statement for resale of the
common stock issuable upon conversion of the Series D preferred stock; (ii) the
Company's failure to maintain listing of its common stock on Nasdaq, NYSE or
AMEX; or (iii) a purchase, tender or exchange offer made to and accepted by
holders of more than 50% of the Company's common stock which is not approved or
recommended by the Company's board of directors. As part of the financing
transaction, the Company issued warrants that are exercisable for up to 150,000
shares of common stock at an exercise price of $5.078 per share. The warrants
have a three-year term and are immediately exercisable.
During the nine-month period ended September 30, 1999, 5,600 shares of the 5
1/2% Cumulative Convertible Series B Preferred Stock were converted into 2.5
million shares of common stock. As of September 30, 1999, no shares of the
Series B preferred stock were outstanding. During the nine-month period ended
September 30, 1999, 1,549 shares of the 5 % Cumulative Convertible Series C
Preferred Stock were converted into 4.9 million shares of common stock. As of
September 30, 1999, no shares of the Series C preferred stock were outstanding.
In April 1998, the Company entered into an agreement with Qwest
Communications International, Inc. 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. The charges underlying this commitment will be
expensed in the periods in which they occur.
In connection with its prior strategy, the Company entered into Magic Cap
master license agreements with eight of its stockholders. The Company has
satisfied its obligations under six of these agreements, and is subject to the
following obligations under the remaining two agreements. The Company must
refund to one licensee a prepaid royalty, together with interest, which totaled
$2.8 million as of September 30, 1999. This amount was classified in accrued
expenses as of September 30, 1999. The Company has agreed to refund the second
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 September 30, 1999, this obligation was
classified in noncurrent deferred revenue. The Company does not expect the
second licensee to develop or manufacture additional products that incorporate
the Company's Magic Cap technology. The Company is currently in discussions with
the second licensee to determine, among other things,
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to what extent the prepaid royalties currently classified as non-current
deferred revenue may be recognized as revenue, if at all.
Since the Company's inception, it has generated only minimal revenues and
has relied principally on third party financing to fund its operations. The
Company has incurred significant losses and has substantial negative cash flow.
As of September 30, 1999, the Company had an accumulated deficit of $247.7
million, with a net loss of $38.2 million for the nine-month period ended
September 30, 1999. The Company expects to incur significant losses at least
through the year 1999.
The Company expects that its cash, cash equivalents and short-term
investment balances of $14.1 million as of September 30, 1999, along with cash
expected to be available pursuant to the Company's strategic agreement with
the OnStar division of General Motors Corporation and under the Company's equity
line of credit arrangement, will be adequate to fund the Company's operations
through the second half of 2000. However, the closing of the OnStar transaction
is subject to certain conditions, including regulatory approval, and there are a
number of conditions and limitations on the Company's right to draw down under
the equity line of credit. Accordingly, the Company cannot guarantee that
sufficient funds will be available to meet its needs. The Company's capital
requirements will depend on many factors, including, but not limited to, the
market acceptance and competitive position of its voice-enabled services and
technology; the Company's ability to attract and secure key business
relationships; the Company's ability to generate subscription, advertising,
custom engineering, licensing and other revenue from its services; the equipment
required to support the network operations for these services; the levels of
promotion and advertising required to market the Company's 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 services
and technology.
To support its operations through the balance of the year 2000, the Company
will be required to raise 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 the Company's short-term or
long-term capital requirements, 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 operation. In the event
the Company raises additional equity financing, further dilution to the
Company's stockholders will result.
As part of its business strategy, the Company assesses opportunities to
enter 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 transaction at this time.
YEAR 2000
Status. Like many companies and organizations, the Company faces risks
related to the inability of computer systems to accurately identify and process
dates beyond the year 1999. The Company is currently taking steps to ensure its
year 2000 readiness by addressing these risks for all of its computer systems,
including its internal systems and systems supplied to it by third parties.
These systems include those that are commonly thought of as information
technology systems, such as billing, accounting and network systems. In
addition, these systems include those that are non-information technology
systems, such as building control systems, building safety systems and
communications systems.
The Company has assembled a year 2000 project team and engaged outside
consultants to advise it on year 2000 issues. The year 2000 project team has
developed a plan to evaluate and to mitigate the risks related to year 2000
issues for (i) systems directly related to the Company's Portico virtual
assistant, myTalk free email and other services and (ii) all other systems. The
plan includes each of the following phases for both the systems directly related
to the Company's services and other systems:
- creation of an inventory of all potentially date-sensitive systems,
including third-party systems;
- evaluation and/or testing of all systems;
- remediation or replacement of systems which are not year 2000 ready;
- verification of corrected systems, if necessary;
- development and implementation of configuration control procedures to
assure that systems remain year 2000 ready once they have been
determined to be year 2000 ready; and
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- development and implementation of a contingency plan in the event that
the Company or its suppliers fail for any reason to attain year 2000
readiness.
The Company's year 2000 plan has executive sponsorship, is regularly
reviewed by senior management, and includes progress reports to the board of
directors on a regular basis.
For all systems directly related to the Company's services, the Company has
completed the inventory. For systems directly related to the Company's Portico
and myTalk services, the Company has completed evaluation and/or initial testing
of all of the systems identified. The Company believes that substantially all of
these systems are year 2000 ready, and has remediated or replaced substantially
all of the systems it has determined are not year 2000 ready. It will continue
to remediate or replace systems that are not year 2000 ready. The Company
completed testing of all systems directly related to the Excite Voicemail
services during the third quarter and all General Magic systems are year 2000
ready. Further testing will be required in the fourth quarter to insure that
Excite@Home systems supporting the Excite Voicemail service are also year 2000
ready. The Company has and will continue to verify corrected systems.
The Company has completed the inventory for all other systems and has
completed evaluation and/or testing of such systems. The Company believes that
substantially all of these systems are year 2000 ready. It has remediated or
replaced substantially all of the systems which it has identified as not
year 2000 ready.
The Company expects to complete the final test sequence for the year 2000
plan for systems directly related to the Company's services by the end of 1999.
The Company has initiated its contingency planning process,
including completion of the installation of a generator for back-up
power to its network operations center, and expects to further develop and
implement its contingency plan during the fourth quarter of 1999.
In the process of evaluating its systems, the Company has contacted certain
of its key suppliers to determine whether their operations and the products and
services they provide are year 2000 ready. The Company has requested written
assurances of year 2000 readiness from all significant suppliers who have not
otherwise provided sufficient written assurances. To date, a number of
suppliers have not responded to our request.
Costs. The Company believes that the costs related to its year 2000 effort
will not exceed $600,000. The Company estimates that the total costs will
include approximately $160,000 for external consultants and advisers,
approximately $100,000 for replacement of systems which are not year 2000 ready
and approximately $330,000 for the direct costs of internal employees working on
the year 2000 project. As of September 30, 1999, the Company has incurred
approximately $465,000 of the estimated total of $600,000.
Risks. Based on currently available information, the Company does not
believe that year 2000 issues will have a material adverse impact on its results
of operations or financial condition. However, the Company may have failed to
identify all critical year 2000 problems, may not have properly assessed,
remediated or tested its systems, and may encounter unexpected costs associated
with its year 2000 effort. In addition, the Company relies on third-party
suppliers for a significant number of systems related to its services, such as:
- email servers which process both emails and voicemails;
- the calendar and contact software;
- the voice recognition software;
- the text-to-speech software;
- the billing system; and
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- the network operations center equipment.
In addition, the Company relies on third parties for key services, such as
telecommunications, Internet access and power. While the Company has requested
written assurance of year 2000 readiness from all significant third party
suppliers, a number of its suppliers, including its telecommunications and
power providers, have not responded to the Company. The Company believes that
products and services supplied by third parties present the greatest year 2000
risk to the Company.
In the most reasonably likely worst case scenario, one of the Company's
critical systems and/or one of the critical systems supplied by a third party
could prove to be noncompliant and fail. Such a failure could lead to
interruptions in the Company's operations and service offerings. Such
interruptions could lead to lost sales, loss of relationships with partners,
sponsors, and advertisers, and damage to the Company's business reputation. Due
to the large number of variables involved, the Company cannot provide an
estimate of the damages it may suffer if it or its suppliers are not year 2000
ready.
Note: The foregoing discussion of year 2000 issues shall be considered "Year
2000 Readiness Disclosure" for purposes of the Year 2000 Information and
Readiness Disclosure Act.
RISK FACTORS
In this section we summarize certain risks regarding our business and
industry. Readers should carefully consider the following risk factors in
conjunction with the other information included in this report on Form 10-Q.
WE MAY NEVER ACHIEVE AND SUSTAIN PROFITABILITY.
Since our inception, we have generated only minimal revenues. We have
incurred significant losses, and we have substantial negative cash flow. As of
September 30, 1999, we had an accumulated deficit of $247.7 million, with a net
loss of $38.2 million for the nine-month period ended September 30, 1999. We
expect to incur significant losses through the year 1999, and we may never
achieve or sustain significant revenues or become profitable.
OUR LIMITED FUNDING MAY RESTRICT OUR OPERATIONS AND OUR ABILITY TO IMPLEMENT OUR
NEW STRATEGY, AND THE AVAILABILITY OF ADDITIONAL RESOURCES IS UNCERTAIN.
Our business model requires us to devote significant financial resources to
the development, enhancement and maintenance of our General Magic branded
services, and to professional and custom engineering services for third parties.
If we are not able to successfully manage our existing resources or to secure
additional resources in a timely manner, our ability to successfully provide
these services and to generate sufficient revenues will be restricted.
We must conserve cash because we have generated minimal revenues to date.
On November 9, 1999, we entered into a definitive agreement pursuant to which
General Motors Corporation through its OnStar division is to take a $15 million
equity stake in General Magic in the form of Series G convertible preferred
stock and a warrant to purchase additional shares of Series G preferred stock
for $5 million. In addition, OnStar is to pay a $5 million up-front,
nonrefundable fee for custom engineering services and a license to our magicTalk
voice user interface technology. The closing of these transactions is subject to
certain conditions, including regulatory approval. Effective July 30, 1999, we
entered into a common stock investment agreement with an existing institutional
investor, providing for an equity line of credit. The common stock investment
agreement permits us to require the investor to purchase from time to time an
aggregate of up to $20,000,000 of the common stock in increments of up to
$5,000,000. In addition, the investor has the right to purchase in its sole
discretion up to 30% of each increment requested by us, up to an aggregate of
an additional $6,000,000 of common stock during the term of the common stock
investment agreement. However, there are numerous conditions on our right to
draw down under the equity line, including that the closing bid price of the
common stock on the business day immediately preceding a draw down notice
must be at least $2.00 per share and that the common stock is listed on The
American Stock Exchange ("AMEX"), The New York Stock Exchange ("NYSE"),
The Nasdaq National Market or The Nasdaq SmallCap Market. In addition, the
dollar amount specified in any draw down notice will be decreased by one
twentieth (1/20) for each business day during the twenty (20) business days
immediately following delivery of the draw down notice on which the weighted
average price of the common stock is less than $2.062.
The weighted average price of our common stock was less than $2.062 on each
business day through much of September and October.
It is uncertain that we will be able consistently to meet the closing
bid price condition, the listing condition or any other condition. In addition,
although we may request drawdowns in increments of up to $5,000,000, the actual
dollar amount is subject to limitations based on the daily trading volumes, the
market price of the common stock and the investor's ownership percentage, which
have also significantly limited our ability to draw down to date. Accordingly,
we cannot guarantee that sufficient funds will be available to meet our needs
through the second half of 2000. In any event, to support our operations through
the balance of the year 2000, we will be required to raise 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
General Magic or its stockholders. The unavailability or timing of significant
revenues and financing could prevent or delay the continued provision of our
services and may require us to curtail our operations. In addition, if we are
not able to generate revenues or obtain funding, we may be unable to meet The
Nasdaq National Market's continued listing requirements, and our common stock
could be delisted from that market. See "-- Our common stock may be delisted
from The Nasdaq National Market if we are not able to demonstrate compliance
with the continued listing requirements."
WE MAY NOT BE ABLE TO RETAIN OR ATTRACT KEY EMPLOYEES.
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In September 1999, we reduced our workforce by 20%. This reduction may
adversely affect our ability to attract, retain and motivate qualified
personnel. Our limited financial resources may further constrain the size of our
technical, business development, sales, marketing and professional service
staffs. Our existing personnel may not be able to manage and successfully
complete all of the tasks necessary to support the various aspects of our
business. Furthermore, Silicon Valley remains a highly competitive job market.
Our key management, technical, business development, sales, marketing,
administrative and professional service personnel may not remain with us, and we
may be unable to attract and retain sufficient personnel to execute our business
plan.
THE MARKET FOR OUR SERVICES MAY NOT DEVELOP, WHICH WOULD SUBSTANTIALLY IMPEDE
OUR ABILITY TO GENERATE REVENUES.
Our future financial performance depends in large part on growth in demand
for our voice-enabled services and technologies. If the market for voice-enabled
services does not develop or if we are unable to capture a significant portion
of that market either directly or through our partners, our revenues and our
results of operations will be adversely affected.
The market for voice-enabled services is still evolving. Currently, there
are only a limited number of products and applications in this industry.
Negative consumer perceptions regarding reliability, cost, ease-of-use and
quality of speech-based products affects consumer demand and may impact the
growth of the market. As a result, we cannot guarantee that the market for
voice-enabled services and technologies will grow or that consumers will accept
any of the services or products built on our magicTalk voice user interface
platform.
OUR BUSINESS MODEL IS NEW AND UNPROVEN, AND WE MAY BE UNABLE TO IMPLEMENT IT
SUCCESSFULLY.
Our model for conducting business and generating revenue is new and
unproven, and we face many of the risks faced by new businesses, especially
companies in new and rapidly evolving markets. Our business depends on our
ability to generate revenue from our General Magic branded services and from
third parties that license our technologies and retain our professional and
engineering services. If we fail to generate sufficient revenues from these
sources, our revenues and results of operation will be adversely affected.
Revenues from our Portico service and from any service commercially launched
by such partners as BellSouth depend on the generation of significant numbers of
subscribers. It is uncertain whether our partners or we will be able to develop
and maintain at reasonable cost a significant subscriber base for virtual
assistant services. Revenues from Portico subscriptions to date have not been
significant. Moreover, market deployment of private-labeled versions of the
Portico service by telecommunications carriers has proceeded more slowly than
anticipated, and the Company does not expect a full commercial deployment by a
carrier, or associated revenues, in 1999.
In addition, revenues from our myTalk service as well as from certain
voice-enabled services licensed to partners such as Excite@Home depend on
advertising and sponsorship sales. Such revenues may not be sufficient to offset
the costs to General Magic of providing these services. See "-- Revenues from
our Internet service depend on banner and audio advertising sales, and our
inability to generate sufficient revenues from advertising sales would harm our
business."
WE MUST ESTABLISH AND MAINTAIN RELATIONSHIPS WITH PARTNERS AND CUSTOMERS TO
GENERATE REVENUES.
Our success in generating revenues from private-label versions of our
virtual assistant services and other services based on our magicTalk voice user
interface is dependent on our ability to establish and maintain relationships
with telecommunication carriers, device manufacturers, service providers,
Internet and other companies. Although we have entered into arrangements with
Qwest Communications Corporation, Intuit(R) Inc., Wireless Knowledge, BellSouth
Mobility, Inc. and Excite@Home and have executed a definitive agreement to
provide custom engineering services and license our magicTalk voice user
interface technology to the OnStar division of General Motors Corporation, we
cannot guarantee that we will be able to maintain these relationships or
establish additional relationships. Competition for relationships with these
companies is extremely intense. In addition, decisions by these companies,
particularly telecommunications carriers, to enter into partner or customer
relationships can be a lengthy, expensive process, with no assurance of success.
It is uncertain whether any of the services contemplated by our current and
future partners will be commercially launched. Even if these services were
commercially launched, our current and future partners may not be able to
attract and retain a sufficient number of subscribers to result in significant
revenue to General Magic.
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REVENUES FROM OUR MYTALK SERVICE AND THE INTERNET SERVICES OF CERTAIN OF OUR
PARTNERS AND CUSTOMERS DEPEND ON BANNER AND AUDIO ADVERTISING SALES AND UPON
INCORPORATION OF FEE-BASED SERVICES, AND OUR INABILITY TO GENERATE SUFFICIENT
REVENUES FROM ADVERTISING SALES AND FEE-BASED SERVICES WOULD HARM OUR BUSINESS.
The business model for our myTalk service, as well as for certain
voice-enabled services licensed to partners such as Excite@Home, depends on
generation of revenues from banner and audio advertising sales and incorporation
of fee-based services to offset the costs of providing a free service. In order
to generate revenues, we and our partners will need to attract a large number of
banner and audio advertisers and advertising sponsors on an ongoing basis. In
addition, over time, a sufficient number of users must utilize fee-based
services. If we are not able to attract or retain a sufficient number of
advertisers and sponsors or a sufficient number of users of the fee-based
services, we may not be able to generate the revenues necessary to operate.
To attract advertisers and sponsors, we and our partners will need to
attract a large number of users to our services. To do so, we must increase
awareness of the myTalk and General Magic brands and continually enhance and
improve the features and quality of our services. If our partners or we cannot
attract a sufficient number of users, we will not be able to attract a
sufficient number of advertisers and sponsors to generate revenues.
In addition, the market for Internet audio and banner advertising may not
develop. It is uncertain whether companies that have historically relied on
traditional media channels to advertise or sell their products and services will
adopt audio and banner advertising. Potential advertisers may have negative
perceptions of the Internet as an effective means of advertising or selling
their products or services. If the market for audio and banner advertising does
not develop, our business would be harmed.
INTENSE COMPETITION IN THE MARKET FOR VOICE-ENABLED SERVICES COULD PREVENT US
FROM ACHIEVING OR SUSTAINING PROFITABILITY.
The market for voice-enabled services is intensely competitive. We may be
unable to compete with existing companies or new companies entering the market.
Many of these companies have greater financial resources, name recognition,
research and development capabilities, sales and marketing staffs and better
developed distribution channels than we do. The services that we offer may not
achieve sufficient quality, functionality or cost-effectiveness to compete with
existing or future alternatives. Furthermore, our competitors may succeed in
developing competing products or services which are more effective and cheaper
or which render our services or technologies obsolete. If we are unable to
compete effectively, our business would be adversely affected.
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE ARE NOT
ABLE TO DEMONSTRATE COMPLIANCE WITH THE CONTINUED LISTING REQUIREMENTS.
We are subject to the continued listing requirements of The Nasdaq National
Market. On April 15, 1999, we received a letter from The Nasdaq National Market
advising us that we had failed to meet the "net tangible assets" requirement for
continued listing on that market. The letter required us to demonstrate
compliance with this requirement by July 13, 1999. In response to the April 15th
letter, we submitted a letter demonstrating our compliance as of May 7, 1999,
and providing our plan for continued compliance through December 31, 1999. Our
plan was accepted by The Nasdaq National Market on July 1, 1999, contingent on
our ability to complete a financing transaction by July 30, 1999, and to
demonstrate compliance with the "net tangible assets" requirement through the
remainder of the year. As of July 30, 1999, we entered into an agreement
providing for an equity line of credit arrangement. Also, on September 9, 1999,
we entered into an exchange agreement with holders of the Series D convertible
preferred stock. Pursuant to the agreement, holders of the Series D preferred
stock exchanged an aggregate of $10,000,000 of Series D preferred stock for
$10,000,000 of a newly created Series F convertible preferred stock. The
redemption provisions of the Series F preferred stock allow us to treat it as
"equity" for accounting purposes. This reclassification of $10,000,000 of the
Series D preferred stock will further our ability to meet the "net tangible
assets" requirement for continued listing on The Nasdaq National Market.
Finally, on November 9, 1999, we entered into a definitive agreement pursuant to
which General Motors Corporation through its OnStar division is to take a $15
million equity stake in General Magic in the form of Series G convertible
preferred stock and a warrant to purchase additional shares of Series G
preferred stock for $5 million. In addition, OnStar is to pay a $5 million
up-front, nonrefundable fee for custom engineering services and a license to
our magicTalk voice user interface technology. However, the closing of these
transactions is subject to certain conditions, including regulatory
approval. In the event that we are not able to maintain continued compliance
with The Nasdaq National Market's "net tangible assets" requirement or any
other of its listing requirements through December 31, 1999, and
thereafter, we would be subject to a delisting process. In the event that we
are delisted, we will seek to list our common stock on other markets,
including The Nasdaq Small Cap Market and The American Stock
Exchange, Inc. We cannot guarantee that we will be able to meet the listing
requirements of these or any other markets. In the event that we are delisted
from The Nasdaq National Market or are not able to list on any other market, the
ability to sell shares of our common stock will be adversely affected.
WE MAY BE REQUIRED TO REDEEM THE SERIES D PREFERRED STOCK AND THE SERIES F
PREFERRED STOCK AND SUCH REDEMPTION COULD SIGNIFICANTLY DEPLETE OUR CASH
RESERVES, WHICH WOULD MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The holders of the Series D preferred stock and the Series F preferred stock
have certain redemption rights if we fail to meet the requirements of the
documents governing the Series D preferred stock and the Series F preferred
stock. Assuming that all 1,000 shares of Series D preferred stock and all 1,000
shares of the Series F preferred stock are outstanding, the total redemption
value
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would be approximately $20 million to $26 million. Such payments would
significantly deplete our cash reserves, which would materially adversely affect
our financial condition. In addition, such a decrease in our cash reserves may
cause our common stock to be delisted from The Nasdaq National Market. We cannot
guarantee that we will be able to meet all of the requirements necessary to
avoid a redemption. See "Selling Stockholders--Relationships between Selling
Stockholders and Us."
WE MAY EXPERIENCE INTERRUPTIONS IN SERVICE DUE TO ERRORS OR INADEQUACIES IN OUR
SOFTWARE AND SYSTEM ARCHITECTURE, WHICH MAY RESULT IN SIGNIFICANT COSTS, A
DECREASE IN REVENUES AND A DECLINE IN OUR STOCK PRICE.
The ability to provide the myTalk and Portico services and the services of
our partners depends on the integrity of our software, computer hardware systems
and network infrastructure. We have encountered, and may encounter in the
future, errors in our software and our system design. These errors may be
expensive to correct, and could result in substantial interruptions in our
service.
Since the launch of our myTalk service and the Excite@Home Voicemail
service, we have experienced interruptions in service due to increases in the
number of users served by our network operations center. In the event that we
experience sudden increases in the number of users of the services hosted in our
network operations center or we are successful in establishing other
relationships with partners with large existing customer bases, our network
operations center may not be capable of meeting the resulting increase in
demand. A sudden increase in demand could lead to slow-downs or failures in
services hosted by General Magic. Furthermore, we presently do not have
redundant, multiple site capacity in the event of a technical failure of our
services or a natural disaster.
Any damage to or failure of our systems could lead to interruptions in
service and/or the loss of customer information. Such interruptions or loss
could damage our reputation and ability to attract and retain subscribers,
partners, sponsors, and advertisers, and we may experience negative publicity
that could adversely affect our stock price.
WE MAY EXPERIENCE DELAYS IN PRODUCT DEVELOPMENT, WHICH COULD ADVERSELY AFFECT
OUR REVENUES OR RESULTS OF OPERATIONS.
Any delays in product development or market launch could adversely affect
our revenues or results of operations. To be successful, we must continue to
develop and enhance technologies to enable us to offer our General Magic branded
services and to supply other voice-enabled services to third parties. Software
product development schedules are difficult to predict because they involve
creativity and the use of new development tools and learning processes. Our
software development efforts have been delayed in the past. In addition to
software development delays, we may also experience delays in other aspects of
product development. Any product development delays could delay or prevent
successful introduction or marketing of new or improved products or services or
the delivery of new versions of our products or services.
THE FAILURE OR UNAVAILABILITY OF THIRD-PARTY TECHNOLOGIES AND SERVICES COULD
LIMIT OUR ABILITY TO GENERATE REVENUES.
We have incorporated technology developed by third parties in the myTalk and
Portico services and the services to be provided to our partners, including the
following:
- email servers which process both emails and voicemails;
- the calendar and contact software;
- the voice recognition software;
- the text-to-speech software;
- the billing system; and
- the network operations center equipment.
We will continue to incorporate third-party technology in future products
and services. We have limited control over whether or when these third-party
technologies will be enhanced. In addition, our competitors may acquire
interests in these third parties or their technologies, which may render the
technology unavailable to us. If a third party fails or refuses to timely
develop, license or support technology necessary to our services, market
acceptance of our services could be adversely affected.
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In addition, we rely and will continue to rely on services supplied by third
parties in connection with providing our services such as telecommunications,
Internet access and power. If these services fail to meet industry standards for
quality and reliability, market acceptance of our services could be adversely
affected.
CONVERSION OF PREFERRED STOCK OR ISSUANCE OF OTHER SECURITIES WOULD DILUTE
CURRENT STOCKHOLDERS.
We have 50,000 shares of Series A preferred stock, 1,000 shares of Series D
preferred stock, 599 shares of Series E preferred stock and 1,000 shares of
Series F preferred stock outstanding, all of which are convertible into common
stock. In addition, we have a warrant to purchase an additional 100 shares of
Series E preferred stock and warrants to purchase an aggregate of 780,000 shares
of common stock outstanding. We also have an equity line of credit arrangement
under which we could issue up to $26,000,000 in common stock. The holders of
common stock could experience substantial dilution to their investment upon
conversion of the preferred shares, exercise of the warrants, or draw downs
under the equity line of credit arrangement. The number of shares of common
stock issuable upon the conversion of the Series D preferred stock and the
Series F preferred stock and pursuant to the equity line of credit arrangement
depends in part on future prices of our common stock on The Nasdaq National
Market. The number of shares of common stock issued pursuant to the equity line
of credit arrangement depends on the prices of common stock on The Nasdaq
National Market shortly before the date of issuance and sale. We cannot predict
the price of the common stock in the future. If the price of our common stock
decreases over time, the number of shares of common stock issuable upon
conversion of the preferred stock and draw downs under the equity line of credit
will increase and the holders of common stock would experience additional
dilution of their investment. Such dilution could cause the stock price of our
common stock to decrease further. A decrease in the stock price of our common
stock could cause our common stock to be delisted from The Nasdaq National
Market. See "Selling Stockholders--Relationships between Selling Stockholders
and Us."
Our board of directors may authorize issuance of up to 432,301 additional
shares of preferred stock that are convertible into common stock without any
action by our stockholders. In addition, our board of directors may authorize
the sale of additional shares of common stock or other equity securities that
are convertible into common stock without any action by our stockholders. The
issuance and conversion of any such preferred stock or equity securities would
further dilute the percentage ownership of our stockholders.
TECHNOLOGY CHANGES RAPIDLY IN OUR MARKET, AND OUR FUTURE SUCCESS WILL DEPEND ON
OUR ABILITY TO MEET THE NEEDS OF OUR CUSTOMERS.
The telecommunications services 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 our voice-enabled services obsolete and unmarketable.
Our success will depend upon our ability to timely develop and introduce new
products and services, as well as enhancements to our existing products and
services, to keep pace with technological developments and emerging industry
standards and address the changing needs of partners, users, sponsors, and
advertisers. We may not be successful in developing and marketing new products
and services that respond to technological changes, or evolving industry
standards. We may experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products and services.
In addition, our new products and services may not adequately meet the
requirements of the marketplace or achieve market acceptance.
WE ARE DEPENDENT ON THE INTERNET, AND THE INTERNET MAY PROVE NOT TO BE VIABLE.
Our future success is in part dependent upon continued growth in the use of
the Internet. Internet use by consumers is in an early stage of development, and
market acceptance of the Internet as a medium for content, advertising and
electronic commerce is highly uncertain. If the Internet fails to be a viable
means of conducting commerce or communications, we may not be able to generate
revenues. A number of factors may inhibit the growth of Internet usage including
security concerns, inconsistent quality of service, limited availability of
cost-effective, high-speed access and inadequate network infrastructure. If the
Internet continues to experience significant growth in the number of users and
level of use, the Internet infrastructure may not be able to support the demands
placed on it by such growth.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD IMPAIR OUR COMPETITIVE
POSITION.
We believe that our success depends, in part, on our ability to protect our
intellectual property. In order to do that, we must take the following measures:
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- obtain patent, copyright and trademark protection where appropriate;
- preserve our trade secrets;
- defend our patents, copyrights, trademarks and trade secrets against
infringement; and
- prevent unauthorized disclosure of confidential information through the
use of confidentiality agreements with employees, consultants and
partners.
We may be unable to accomplish these measures. In addition, we cannot be
certain that they will be adequate to protect our intellectual property. In
spite of our efforts, third parties may successfully copy our products or use
our confidential information.
VARIOUS PARTIES MAY ACCUSE US OF INFRINGING THEIR INTELLECTUAL PROPERTY RIGHTS,
AND ANY RELATED LITIGATION COULD HARM OUR BUSINESS REGARDLESS OF ITS MERIT.
Third parties may assert claims against us from time to time alleging
infringement, misappropriation or other violations of proprietary rights,
whether or not such claims have merit. Such claims can be time consuming and
expensive to defend and could require us to cease the use and sale of allegedly
infringing products and services, incur significant litigation costs and
expenses, and develop or acquire non-infringing technology or obtain licenses to
the alleged infringing technology. We may not be able to develop or acquire
alternative technologies or obtain such licenses on commercially reasonable
terms.
SECURITY PROBLEMS IN OUR SERVICES WOULD LIKELY RESULT IN SIGNIFICANT LIABILITY
AND REDUCED REVENUES.
Security vulnerabilities and weaknesses may be discovered in our services or
licensed technology incorporated into our services or in the media by which
subscribers access our services. Any security problems in our services or the
licensed technology incorporated in our services may require us to expend
significant capital and other resources to alleviate the problems. In addition,
these problems could result in the loss or misuse of personal information,
including credit card numbers, and limit the number of subscribers to our
Portico and myTalk services and to services of our partners. A decrease in the
number of subscribers could lead to decreased revenues and termination of our
relationships with advertisers, sponsors and partners. These problems may also
cause interruptions or delays in the development of enhancements to our services
and may result in lawsuits against us.
We will continue to incorporate authentication, encryption and other
security technologies in our services. However, such technologies may not be
adequate to prevent break-ins. In addition, weaknesses in the media by which
users access these services, including the Internet, land-line telephones,
cellular phones and other wireless devices, may compromise the security of the
electronic information accessed from the service. We intend to continue to limit
our liability to end users and to our partners, including liability arising from
failure of the authentication, encryption and other security technologies
incorporated into our services, through contractual provisions. However, we may
not successfully negotiate such limitations with all our partners, nor may such
limitations eliminate liability. We do not currently have liability insurance to
protect against risks associated with forced break-ins or disruptions.
A PRODUCT LIABILITY CLAIM ASSERTED AGAINST US COULD MATERIALLY AND ADVERSELY
AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We may be subject to claims for damages related to system errors and other
defects in our services. Agreements with end users of our services typically
contain provisions designed to limit exposure to potential product liability
claims. However, these provisions may not be sufficient to protect us from
liability. We currently have liability insurance to protect against certain
risks associated with system errors and other defects in our services. However,
we cannot guarantee that such insurance will be sufficient.
OUR STOCK PRICE HAS BEEN EXTREMELY VOLATILE, AND EXTREME PRICE FLUCTUATIONS
COULD ADVERSELY AFFECT YOUR INVESTMENT.
The market price of our common stock has been extremely volatile. Since
October 1, 1998, the closing price of our common stock has varied significantly
from a high of $7.438 to a low of $1.375 per share.
Publicized events and announcements may have a significant impact on the
market price of our common stock. For example, shortfalls in our revenue or net
income, conversions of preferred stock into common stock, delays in product
development, disruptions in our service, or announcements of partnerships,
technological innovations or new products or services by our competitors could
have the effect of temporarily or permanently driving down the price of our
common stock. In addition, the stock market from time to time experiences
extreme price and volume fluctuations which particularly affect the market
prices for emerging and technology
23
<PAGE> 24
companies such as ours, and which are often unrelated to the operating
performance of the affected companies. These broad market fluctuations may
adversely affect your ability to sell your shares at a price equal to or above
the price you purchased them. In addition, a decrease in the stock price of our
common stock could cause our common stock to be delisted from The Nasdaq
National Market.
YEAR 2000 COMPLICATIONS MAY DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS.
We face risks related to the inability of computer systems to accurately
identify and process dates beyond the year 1999. We are currently taking steps
to address these risks for all of our computer systems, including internal
systems and systems supplied to us by third parties. These systems include those
that are commonly thought of as information technology systems, such as our
billing, accounting and network systems. In addition, these systems include
those that are non-information technology systems, such as our building control
systems, building safety systems and communications systems. Based on currently
available information, we do not believe that year 2000 issues will have a
material adverse impact on our results of operations or financial condition.
However, we may fail to identify all critical year 2000 problems, may not
properly assess, remediate or test our systems, and may encounter unexpected
delays or costs associated with our year 2000 effort. We believe that
noncompliance of products and services supplied to us by third parties presents
the most significant year 2000 risk. We rely on third-party suppliers for a
significant number of systems related to our Portico service, such as:
- email servers which process both emails and voicemails;
- the calendar and contact software;
- the voice recognition software;
- the text-to-speech software;
- the billing system; and
- the network operations center equipment.
In addition, we rely on third parties for key services, such as
telecommunications, Internet access and power. Although we have requested
written assurances from all of our significant suppliers, to date a number of
suppliers have not responded to such requests. In the event that we, or any of
our third-party suppliers, are not year 2000 ready, we could experience
significant disruptions in our operations and service offerings. Such
interruptions could lead to lost sales, loss of relationships with partners,
advertisers and sponsors, and damage to our business reputation.
DELAWARE LAW AND CERTAIN PROVISIONS OF OUR CHARTER DOCUMENTS MAY INHIBIT
POTENTIAL ACQUISITION BIDS.
Delaware law and our charter may inhibit potential acquisition bids for
General Magic. We are subject to the anti-takeover provisions of the Delaware
General Corporation Law, which could delay a merger, tender offer or proxy
contest or make such a transaction more difficult. In addition, provisions of
our certificate of incorporation and bylaws may have the effect of delaying or
preventing a change in control or in management, or may limit the price that
certain investors may be willing to pay in the future for shares of common
stock. These provisions include:
- issuance of "blank check" preferred stock, which is preferred stock that
can be issued by the board of directors without prior stockholder
approval, with rights senior to those of common stock;
- prohibition on stockholder action by written consent;
- requirement that a two-thirds vote of the stockholders is required to
amend the bylaws; and
- advance notice requirements for submitting nominations for election of
the board of directors and for proposing matters that can be acted upon
by stockholders at a meeting.
Furthermore, the Series D preferred stock and the Series F preferred stock
provide holders rights to redemption of their Series D preferred stock or Series
F preferred stock, as the case may be, or penalty payments upon a change of
control. In addition, the
24
<PAGE> 25
documents governing the Series D preferred stock and Series F preferred stock
prohibit changes of control unless the surviving entity assumes all our
obligations under the Series D preferred stock or Series F preferred stock, as
the case may be, and is a publicly traded corporation traded on The Nasdaq
National Market, NYSE or AMEX. All of these rights could make an acquisition
more difficult. See "Selling Stockholders--Relationships between Selling
Stockholders and Us."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. The fair value of our investment portfolio or related income
would not be significantly impacted by a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio.
25
<PAGE> 26
GENERAL MAGIC, INC.
FORM 10-Q, September 30, 1999
Part II: Other Information
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES
On September 9, 1999, certain of the Company's investors exchanged 1,000
shares of the Company's Series D preferred stock for 1,000 shares of the
Company's Series F convertible preferred stock. The terms of the exchange and
the rights, preferences and privileges of these securities are incorporated by
reference to Part I- Item 1- Note 5 of the Notes to Condensed Consolidated
Financial Statements of this Quarterly Report on Form 10-Q. These securities
were not registered under the Securities Act of 1933, as amended (the
"Securities Act") in reliance upon the exemption provided by section 4(2) of the
Securities 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 exhibits have been filed with this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock filed with the Delaware Secretary of
State on September 9, 1999 is incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 1999
4.1 Exchange Agreement, dated as of September 9, 1999, by and among
the Company and the investors listed on the Schedule of
Investors thereto is incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 1999
4.2 Registration Rights Agreement, dated as of September 9, 1999, by
and among the Company and the holders listed on the Schedule of
Holders thereto is incorporated by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 1999
4.3 Waiver Agreement, dated as of September 9, 1999, by and among
the Company and the stockholders listed on the Schedule of
Stockholders thereto is incorporated by reference to Exhibit 4.9
to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 1999
4.4 Amendment #2 to Registration Rights Agreement, dated as of July
9, 1999, by and among the Company and holders of the Series D
Convertible Preferred Stock is incorporated by reference to
Exhibit 4.6 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 10,
1999
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C>
4.5 Amendment #3 to Registration Rights Agreement, dated as of July
23, 1999, by and among the Company and holders of the Series D
Convertible Preferred Stock is incorporated by reference to
Exhibit 4.7 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 10,
1999
4.6 Amendment #4 to Registration Rights Agreement, dated as of
August 6, 1999, by and among the Company and holders of the
Series D Convertible Preferred Stock is incorporated by
reference to Exhibit 4.8 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on
September 10, 1999
4.7 Amendment #1 to the Common Stock Investment Agreement, dated as
of July 30, 1999, between the Company and Cripple Creek
Securities, LLC
27.1 Financial Data Schedule
</TABLE>
(b) (i) A report on Form 8-K was filed on August 3, 1999, to report
under Item 5, Other Events, an arrangement with a private investor to provide
the Company with an equity line of credit.
(ii) A report on Form 8-K was filed on August 3, 1999, to report
under Item 5, Other Events, the Company's operating results for the second
quarter ended June 30, 1999.
(iii) A report on Form 8-K was filed on September 8, 1999, to report
under Item 5, Other Events, payment of all amounts outstanding under two term
loans.
(iv) A report on Form 8-K was filed on September 8, 1999, to report
under Item 5, Other Events, the Company's new organizational structure and a
reduction of approximately 20% of its work force.
(v) A report on Form 8-K was filed on September 10, 1999, to report
under Item 5, Other Events, the exchange of 1,000 shares of the Company's Series
D Convertible Preferred Stock for 1,000 shares of the Company's Series F
Convertible Preferred Stock.
27
<PAGE> 28
GENERAL MAGIC, INC.
FORM 10-Q, September 30, 1999
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.
<TABLE>
<S> <C>
DATE: November 15, 1999 /s/ STEVEN MARKMAN
-------------------------------------------------------------
Name: Steven Markman
Title: President, Chief Executive Officer and
Chairman of the Board (Principal Executive Officer)
DATE: November 15, 1999 /s/ ROSE MARCARIO
-------------------------------------------------------------
Name: Rose Marcario
Title: Senior Vice President and Chief Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
28
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Designations, Preferences and Rights of Series F
Convertible Preferred Stock filed with the Delaware Secretary of
State on September 9, 1999 is incorporated by reference to
Exhibit 3.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 1999
4.1 Exchange Agreement, dated as of September 9, 1999, by and among
the Company and the investors listed on the Schedule of
Investors thereto is incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 1999
4.2 Registration Rights Agreement, dated as of September 9, 1999, by
and among the Company and the holders listed on the Schedule of
Holders thereto is incorporated by reference to Exhibit 4.3 to
the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 1999
4.3 Waiver Agreement, dated as of September 9, 1999, by and among
the Company and the stockholders listed on the Schedule of
Stockholders thereto is incorporated by reference to Exhibit 4.9
to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 10, 1999
4.4 Amendment #2 to Registration Rights Agreement, dated as of July
9, 1999, by and among the Company and holders of the Series D
Convertible Preferred Stock is incorporated by reference to
Exhibit 4.6 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 10,
1999
4.5 Amendment #3 to Registration Rights Agreement, dated as of July
23, 1999, by and among the Company and holders of the Series D
Convertible Preferred Stock is incorporated by reference to
Exhibit 4.7 to the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 10,
1999
4.6 Amendment #4 to Registration Rights Agreement, dated as of
August 6, 1999, by and among the Company and holders of the
Series D Convertible Preferred Stock is incorporated by
reference to Exhibit 4.8 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on
September 10, 1999
4.7 Amendment #1 to the Common Stock Investment Agreement, dated as
of July 30, 1999, between the Company and Cripple Creek
Securities, LLC
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 4.7
AMENDMENT #1 TO THE
COMMON STOCK INVESTMENT AGREEMENT
This Amendment #1 (the "Amendment") to the Common Stock Investment
Agreement, dated as of July 30, 1999 (the "Investment Agreement"), by and
between General Magic, Inc. (the "Company") and Cripple Creek Securities, LLC
(the "Investor") is made as of August 4, 1999 by and between the Company and
Investor.
RECITALS
WHEREAS, Section 4(i) of the Investment Agreement requires the Company
inter alia to file a Prospectus Supplement within two Business Days after the
date of the Investment Agreement;
NOW, THEREFORE, in consideration of the foregoing:
1. Waiver. The Investor hereby waives the requirement under Section 4(i)
of the Investment Agreement that the Company file the Prospectus Supplement
within two Business Days after the date of the Investment Agreement, and any
related rights.
2. Amendment to the Agreement. The parties hereby agree that the
Investment Agreement shall be amended as follows:
2.1 Amendment to Section 1(b). After the number "25" in the third
line of Section 1(b), the phrase ", 1999" shall be inserted.
2.2 Amendment to Section 1(e). After the parenthetical "(as set forth
in the second sentence of Section 1(d))," and before the number "(ii)" in the
fifth line of Section 1(e), the word "and" shall be inserted.
2.3 Amendment to Section 4(i). Section 4(i) shall be deleted in its
entirety and the following substituted in lieu thereof:
"i. Filing of Form 8-K. On or before the date which is two Business Days
after the date hereof, the Company shall file with the SEC a Current Report
on Form 8-K describing the terms of the transaction contemplated by the
Transaction Documents and including this Agreement as an exhibit thereto in
the form required by the 1934 Act."
2.4 Addition of Section 4(k). After Section 4(j), a new Section 4(k)
shall be inserted and shall read as follows:
"k. Filing of Prospectus Supplements. The Company shall file with the SEC
(i) a prospectus supplement to the Registration Statement providing for the
transactions contemplated by the Investment Agreement in the "Plan of
Distribution" section, which
<PAGE> 2
form of prospectus supplement shall be acceptable to the Investor, on or
before the date which is three Business Days after the date hereof, and
(ii) a prospectus supplement to the Registration Statement covering the
Commitment Shares, which form of prospectus supplement shall be acceptable
to the Investor, on or before the date which is seven Business Days after
the date hereof."
3. Miscellaneous.
3.1 Capitalized Terms. All capitalized terms not otherwise defined
herein will have the meanings set forth in the Investment Agreement.
3.2 Other Provisions. All other provisions of the Agreement shall
remain in full force and effect.
3.3 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
2
<PAGE> 3
IN WITNESS WHEREOF, the undersigned has caused this amendment to be duly
executed and delivered by its proper and duly authorized officers.
COMPANY: INVESTOR:
GENERAL MAGIC, INC. CRIPPLE CREEK SECURITIES LLC
By: /s/ Steven Markman By: /s/ Robert Chender
------------------------- -------------------------
Name: Steven Markman Name: Robert Chender
Its: Chief Executive Officer and Its: Principal
President
[Amendment #1 to Common Stock Investment Agreement]
3
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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10,252
0
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