<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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 [ ]
41,146,428 shares of the registrant's Common Stock, $0.001 par value,
were outstanding as of July 31, 1999.
1
<PAGE> 2
GENERAL MAGIC, INC.
FORM 10-Q, June 30, 1999
C O N T E N T S
<TABLE>
<CAPTION>
Item Number Page
- ----------- ----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
a. Condensed Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3
b. Condensed Consolidated Statements of Operations - Three-Month Periods Ended June 30, 1999
and 1998 and Six-Month Periods Ended June 30, 1999 and 1998
4
c. Condensed Consolidated Statements of Cash Flows - Six-Month Periods Ended June 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 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
Exhibits
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
--------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted cash of $2,280
in 1998) $ 31,235 $ 21,845
Short-term investments 1,000 12,075
Other current assets 1,008 1,700
--------------------------------
Total current assets 33,243 35,620
--------------------------------
Property and equipment, net 10,489 7,507
Other assets 4,189 4,171
--------------------------------
Total assets $ 47,921 $ 47,298
================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,634 $ 1,348
Accrued expenses 10,949 9,980
Current portion of long-term debt 2,333 2,333
Other current liabilities 20 54
--------------------------------
Total current liabilities 14,936 13,715
Deferred revenue, noncurrent 2,000 2,000
Long-term debt 2,611 3,778
Other long-term liabilities 589 683
--------------------------------
Total liabilities 20,136 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 - 2; 1998 - None 20,252 -
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: 599 shares
Issued and outstanding: 1999 - 599; 1998 - None - -
Preferred stock, $0.001 par value
Authorized: 435 shares
Issued and outstanding: 1999 and 1998 - None - -
Common stock, $0.001 par value
Authorized: 100,000 shares
Issued and outstanding: 1999 - 41,099; 1998 - 33,400 41 33
Additional paid-in capital 244,826 208,557
Deficit accumulated during development stage (237,131) (209,500)
--------------------------------
7,736 (910)
Less treasury stock, at cost: 1999 and 1998 - 46 (203) (203)
--------------------------------
Total stockholders' equity (deficit) 7,533 (1,113)
--------------------------------
$ 47,921 $ 47,298
================================
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
3
<PAGE> 4
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three-Month Periods Ended Six-Month Periods Ended
June 30, June 30,
-------------------------------------------------------------
1999 1998 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Service revenue $ 164 $ - $ 301 $ -
Licensing revenue 16 4 34 1,514
Other revenue - 87 - 272
-------------------------------------------------------------
Total revenue 180 91 335 1,786
Operating expenses:
Cost of other revenue - 51 - 198
Network operations 1,588 - 3,500 -
Research and development 3,183 4,784 6,749 9,494
Selling, general and administrative 6,275 4,373 12,181 7,550
Depreciation and amortization 1,145 736 2,118 1,440
Write-off of in-process research and development - - - 2,050
-------------------------------------------------------------
Total costs and expenses 12,191 9,944 24,548 20,732
-------------------------------------------------------------
Loss from operations (12,011) (9,853) (24,213) (18,946)
Total other income (expense), net (1,017) 2,535 (2,510) 5,205
-------------------------------------------------------------
Loss before income taxes (13,028) (7,318) (26,723) (13,741)
Income taxes - 19 22 19
-------------------------------------------------------------
Net loss (13,028) (7,337) (26,745) (13,760)
Dividends on preferred stock (351) (89) (634) (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 (6,333) - (8,034)
Favorable redemption rights on redeemable, convertible Series
C preferred stock (10,016) - (10,016)
-------------------------------------------------------------
Loss applicable to common stockholders $ (13,379) $ (23,775) $ (27,630) $ (35,591)
Basic and diluted loss per share $ (0.34) $ (0.82) $ (0.75) $ (1.26)
Shares used in computing per share amounts 39,242 29,104 36,807 28,258
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
4
<PAGE> 5
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six-Month Periods Ended
June 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (26,745) $ (13,760)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,066 1,440
Equity in net loss of unconsolidated affiliate 3,016 -
Deferred revenue - (2,186)
Amortization of deferred compensation - 341
Write-off of in-process research and development - 1,850
Changes in items affecting operations:
Other current assets 692 (860)
Accounts payable and accrued expenses 1,237 280
-----------------------------
Net cash used in operating activities (19,734) (12,895)
-----------------------------
Cash flows from investing activities:
Purchases of short-term investments (3,077) (18,260)
Proceeds from sales and maturities of short-term investments 14,152 12,137
Purchases of property and equipment (4,997) (2,233)
Other assets (3,086) (397)
-----------------------------
Net cash provided by investing activities 2,992 (8,753)
-----------------------------
Cash flows from financing activities:
Repayment of capital lease obligations (15) (150)
Proceeds of issuance of debt - 1,905
Repayment of debt (1,167) (222)
Proceeds from sale of common stock 860 1,981
Purchase of treasury stock - (39)
Proceeds from sale of Series E preferred stock, net of offering costs 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 487 (95)
-----------------------------
Net cash provided by financing activities 26,132 44,276
-----------------------------
Net increase in cash and cash equivalents 9,390 22,628
Cash and cash equivalents, beginning of period 21,845 17,414
-----------------------------
Cash and cash equivalents, end of period $ 31,235 $ 40,042
=============================
Supplemental disclosures of cash flow information:
Income taxes paid during the period $ 22 $ 19
Interest paid during the period 244 241
Noncash investing and financing activity:
Conversion of Series C preferred stock into common stock $ 20,924 $ -
Conversion of Series B preferred stock into common stock 7,695 1,842
Preferred stock dividends 634 116
Deferred compensation for restricted stock issuances - 393
Purchase of technology in exchange for shares of common stock - 1,850
Favorable conversion rights on Series A preferred stock issuance - 3,665
Favorable redemption and conversion rights on Series B preferred
stock and warrant issuance - 8,150
Favorable redemption rights on Series C preferred stock issuance - 10,016
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
5
<PAGE> 6
GENERAL MAGIC, INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 six-month period ended June 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 in order 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 they become commercially available.
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>
June 30, December 31,
1999 1998
---------------------------
<S> <C> <C>
Network operations center $ 9,145 $ 5,357
Office equipment and computers 8,634 7,818
Furniture and fixtures 2,430 2,373
Leasehold improvements 1,332 996
---------------------------
$ 21,541 $ 16,544
Less accumulated depreciation and amortization 11,052 9,037
---------------------------
$ 10,489 $ 7,507
===========================
</TABLE>
6
<PAGE> 7
ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------------------
<S> <C> <C>
Prepaid royalty payment and accrued interest $ 4,287 $ 4,217
Employee compensation 3,363 3,688
Other 3,299 2,075
---------------------------
$ 10,949 $ 9,980
===========================
</TABLE>
TOTAL OTHER INCOME (EXPENSE), NET
A summary of other income follows (in thousands):
<TABLE>
<CAPTION>
Three-Month Periods Ended Six-Month Periods Ended
June 30, June 30,
----------------------------------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Equity in net loss of DSI $ (1,220) $ - $ (3,016) -
Gain on sale of Starfish, Inc. 5 - 162 -
Gain on AltoCom, Inc. transactions - 2,250 - 4,696
Interest income 300 384 574 735
Interest expense (104) (125) (254) (253)
Other 2 26 24 27
----------------------------------------------------------
$ (1,017) $ 2,535 $ (2,510) $ 5,205
==========================================================
</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 six-month periods ended June 30, 1999 and
1998, there were no material differences between the Company's comprehensive
loss and net loss.
7
<PAGE> 8
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:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------------------------------
<S> <C> <C>
Stock options 8,222,000 4,330,000
Warrants for the purchase of common stock 780,000 710,000
Shares of common stock issuable upon conversion of Series A preferred
stock 3,629,000 3,629,000
Shares of common stock issuable upon conversion of Series B preferred
stock - 1,891,000
Shares of common stock issuable upon conversion of Series C preferred
stock - 2,788,000
Shares of common stock issuable upon conversion of Series D preferred
stock 5,101,000 -
Shares of common stock issuable upon conversion of Series E preferred
stock 1,839,000 -
</TABLE>
NOTE 5: PREFERRED 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 and Series D 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. As of June 30, 1999, a total of 1,839,474 shares of
the Company's common stock were issuable upon the conversion of the Series E
preferred stock, including shares of Series E preferred stock issuable upon
conversion of the Warrant.
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 share
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 and Series E 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 $3.97 (the "Conversion Price"). The 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
8
<PAGE> 9
immediately after each such date (the "Reset Price") if the Reset Price is less
than the then-effective Conversion Price.
Subject to certain conditions, the Company may redeem all of the Series D
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 value. In addition, subject to certain conditions, in the event
that a Reset Price is less than 50% of the initial Conversion Price, the Company
may redeem all of the Series D preferred stock at liquidation value.
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 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 or (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 The Nasdaq National Market ("Nasdaq"), The American Stock
Exchange, Inc. ("AMEX") or The New York Stock Exchange ("NYSE"); 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: (x) the
Company's failure to maintain the registration statement for resale of the
common stock issuable upon conversion of the Series D preferred stock; (y) the
Company's failure to maintain listing of its common stock on Nasdaq, AMEX or
NYSE; or (z) 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 to acquire 150,000 shares of common
stock at a price of $5.073 per share. The warrants have a three-year term and
are immediately exercisable.
During the six-month period ended June 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 June 30, 1999, no shares of the Series B preferred
stock were outstanding. During the six-month period ended June 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 June 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 majority of DSI's common stock is owned by employee founders of DSI. The
Company did not recognize any gain or loss as a result of the divestiture of the
DataRover Division, and has accounted for its investment in DSI under the
modified equity method,
9
<PAGE> 10
which requires the Company to record 100% of the losses incurred by DSI. As of
June 30, 1999, the Company had recorded a decrease of $3,016,000 since December
31, 1998, reducing the value of its investment to zero and writing off a portion
of the associated receivable described below.
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.
As of June 30, 1999, there was no remaining commitment to purchase units for
DSI. DSI is obligated to reimburse the Company the actual cost of such units
upon the earlier of: five (5) days following the sale of the units by DSI or 120
days following shipment by Oki Electric. DSI's obligation to reimburse the
Company is secured by all personal property of DSI. The Company has also agreed
to provide office space to DSI at a discount to market value for a period of one
year. As of June 30, 1999, the receivable from DSI was $2,639,000, comprised of
purchases made from Oki Electric by the Company on behalf of DSI. A portion of
the receivable has been written off in order to continue to record the Company's
equity in losses incurred by DSI after reducing the investment balance to zero.
The Company has reclassified this receivable to other assets in the accompanying
condensed consolidated financial statements in anticipation of the closing of a
DSI financing transaction described in Note 9.
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 bears interest at 0.25% above the financial
institution's prime rate (7.75% as of June 30, 1999), and has a term of 40
months with interest only due in the first four months and principal and
interest due monthly thereafter. This loan is secured by all of the assets of
the Company, including its intellectual property. As of June 30, 1999,
$2,444,000 was outstanding under this term loan.
In June 1998, the Company secured a $3,000,000 term loan with the same
financial institution. The loan bears interest at the financial institution's
prime rate (7.75% as of June 30, 1999), and has a term of 42 months with
interest only due in the first six months and principal and interest due monthly
thereafter. This loan is secured by all of the assets of the Company, including
its intellectual property. As of June 30, 1999, $2,500,000 was outstanding under
this term loan.
As of June 30, 1999, the current and non-current portions due under these
loans were $2,333,000 and $2,611,000, respectively. Both of these term loans
contain customary covenants and events of default. As of June 30, 1999, the
Company was in full compliance with all loan covenants.
NOTE 8: SEGMENT REPORTING
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
10
<PAGE> 11
Chief Operating Officer ("COO"). Financial information for separate components
of the Company's business is not available to the COO 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 COO 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 both the six-month periods
ended June 30, 1999 and 1998, was reported under the voice-enabled services
product offering.
NOTE 9: SUBSEQUENT EVENTS
EQUITY FINANCING
Effective July 30, 1999, the Company completed a common stock investment
agreement with an institutional investor pursuant to which the Company may, from
time to time, issue up to an aggregate of $26,000,000 of the Company's common
stock at a discount to market.
INVESTMENT IN DSI
On August 5, 1999, in connection with a 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 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. The Company will therefore begin to
account for this investment under the cost method and will no longer be required
to record losses incurred by DSI except to the extent of an other than
temporary impairment of our cost basis of investment.
11
<PAGE> 12
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. (the "Company") develops and markets voice-enabled
services that provide voice access over the telephone to information that is
stored on computer networks, including Web sites. The Company's services are
designed to make it easy and convenient for subscribers to access and act on
their personal and business information. The Company's primary offerings are the
Portico(TM) virtual assistant service, private-label versions of the Portico
service provided by telecommunication carriers to their customers, the
myTalk(TM) free email service, and services that provide voice access to Web
content over the phone. One of the Company's core technology assets is the
magicTalk(TM) voice user interface, used in all of these offerings. The Company
hosts voice-enabled services in its network operations center, located in
Sunnyvale, California.
The Portico service provides many of the services of a human assistant on an
around-the-clock basis. Subscribers -- who today are principally mobile
professionals -- may access voice mail, email, calendar, address book, company
news and stock quotes from any telephone or, using a standard Web browser, from
any personal computer. When accessing the Portico service over the telephone,
subscribers interact with magicTalk, a personality-rich natural language voice
user interface. With magicTalk, the user doesn't need to remember special voice
commands or navigate lengthy push-button menus. The virtual assistant recognizes
a full range of conversational commands, from "Call John Smith" to "Would you
please call John Smith at home."
The Company distributes the Portico virtual assistant service through a
nationwide network of resellers, as well as direct to consumers through signup
on the Web. The Company is also working with telecommunication carriers to
provide the service to their customers. In May 1999, BellSouth Mobility, Inc.
announced its intention to begin a 3-4 month initial deployment of the Portico
service in the Atlanta area. Initial deployment of the service is currently
scheduled for the third quarter of 1999. Other telecommunications carriers are
conducting trials of the Portico service, and we expect to host customized,
private-label versions of the service for any additional carriers that elect to
make the service commercially available to their customers.
Voice enabling Web content continues to represent a growth opportunity for
the Company. The Web offers a broad base of potential subscribers, including
consumers who may find voice to be an easy way to keep in touch with their
favorite Web content when away from home. In June 1999, the Company introduced
myTalk, a free Internet email service. myTalk is the first Internet service to
feature a natural language voice interface and allows users to access their
email from any telephone and to navigate and reply to messages using their own
spoken words. The myTalk service is also accessible through a standard Web
browser. Users accessing myTalk will see banner ads during a myTalk Web site
session and will hear short audio ads periodically during a telephone session.
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. It incorporates the Company's magicTalk
voice user interface and operates in its network operations center.
12
<PAGE> 13
In 1998, the Company announced an agreement with Intuit(R) Inc. to voice
enable certain features of Intuit's Quicken.com(TM) personal finance Web site.
The growth of the Company's Portico business and market deployment of
private-label versions of the service by telecommunications carriers has
developed more slowly then the Company had anticipated. The Company does not
expect a full commercial deployment by a telecommunications carrier in 1999.
However, the Company does expect growth in its Internet business and therefore
is evaluating the opportunities presented by its respective businesses.
The Company is at an early stage of development in its strategy to develop
and market voice-enabled services, 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; generate sufficient subscription, advertisers and
other revenues from its services to permit the Company to operate profitably;
meet the challenges inherent in the timely development and deployment of complex
technologies;establish and maintain relationships with telecommunications
carriers, device manufacturers, Internet companies and other partners for
resale, remarketing and distribution of its services; achieve market acceptance
for its Portico service, myTalk service, and other voice-enabled services;
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 June 30, 1999, the Company incurred a net
loss of $13.0 million, or $0.34 per share, compared to a net loss of $7.3
million, or $0.82 per share, for the three-month period ended June 30, 1998. The
net loss per share for the three-month period ended June 30, 1998, included the
net loss for the period and $16.4 million in adjustments to accumulated deficit
related to preferred stock with favorable conversion and redemption rights
issued during the period. Excluding the effect of these adjustments, the loss
per share for the three-month period ended June 30, 1998, would have been $0.25
per share. For the six-month period ended June 30, 1999, the Company incurred a
net loss of $26.7 million, or $0.75 per share, compared to a net loss of $13.8
million, or $1.26 per share, for the six-month period ended June 30, 1998. The
net loss per share for the six-month period ended June 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 six-month period ended June 30, 1998,
would have been $0.49 per share.
TOTAL REVENUE
Total revenue for the three-month period ended June 30, 1999, was $180
thousand compared $91 thousand for the three-month period ended June 30, 1998.
For the six-month period ended June 30, 1999, total revenue was $335 thousand
compared to $1.8 million for the six-month period ended June 30, 1998. Licensing
revenue for the six-month period ended June 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
six-month period ended June 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 revenue from
telecommunications carriers will not develop as expected in the second half of
1999, but that this shortfall may be offset by growth in revenue associated with
the Company's Internet initiatives. If the market for voice-enabled services
does not develop or if the Company is unable to capture a significant portion of
that market, the Company's revenues and results of operations will be materially
adversely affected.
13
<PAGE> 14
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. For both the
three-month and six-month periods ended June 30, 1998, 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.
RESEARCH AND DEVELOPMENT
Research and development expense for the three-month period ended June 30,
1999, was $3.2 million, compared to $4.8 million for the three-month period
ended June 30, 1998. For the six-month period ended June 30, 1999, research and
development expense was $6.7 million, compared to $9.5 million for the six-month
period ended June 30, 1998. The decreases in both periods were due to the
reclassification of costs into network operations expense, commencing with
commercial feasibility of the Portico service and a reduction of spending due to
the divestiture of the DataRover handheld communications device division during
the fourth quarter of 1998. The Company expects to continue to devote
significant resources to research and development through the remainder of 1999,
but expects the amount of its commitment to fluctuate.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the three-month period
ended June 30, 1999, was $6.3 million, compared to $4.4 million for the
three-month period ended June 30, 1998. For the six-month period ended June 30,
1999, selling, general and administrative expense was $12.2 million, compared to
$7.6 million for the six-month period ended June 30, 1998. The increases in both
periods were 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 that
selling, general and administrative expense may fluctuate in amount through the
remainder of 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three-month period ended June
30, 1999, was $1.1 million, compared to $736 thousand for the three-month period
ended June 30, 1998. For the six-month period ended June 30, 1999, depreciation
and amortization expense was $2.1 million, compared to $1.4 million for the
six-month period ended June 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 six-month period ended June 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 $1.0 million in the three-month period
ended June 30, 1999, and other income of $2.5 million in the three-month period
ending June 30, 1998. During the three-month period ended June 30, 1999, the
Company recorded a loss of $1.2 million to account for 100% of the net losses of
DataRover Mobile Systems, Inc. ("DSI"). During the three-month period ended June
30, 1998, the Company recognized $2.2 million in other income for consideration
received pursuant to an
14
<PAGE> 15
agreement concluded during the period with AltoCom, Inc. ("AltoCom"). In the
six-month period ended June 30, 1999, the Company had other expense of $2.5
million, and in the six-month period ending June 30, 1998, other income of $5.2
million. During the six-month period ended June 30, 1999, the Company recorded a
loss of $3.0 million to account for 100% of the net losses of DSI. During the
six-month period ended June 30, 1998, the Company recognized $4.7 million in
other income for consideration received pursuant to agreements concluded
during the period with AltoCom. Excluding the transactions associated with DSI
and AltoCom, other income (expense), net consisted primarily of interest income
and expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash equivalents
and short-term investment balances that totaled $32.2 million as of June 30,
1999, down $1.7 million from $33.9 million as of December 31, 1998.
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 and Series D 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. As of June 30, 1999, a total of 1,839,474 shares of
the Company's common stock were issuable upon the conversion of the Series E
preferred stock, including shares of Series E preferred stock issuable upon
conversion of the Warrant.
On March 30, 1999, the Company entered into a financing transaction with a
group of private investors that provided $20.0 million in cash to the Company
from the sale of 2,000 shares of its Series D Convertible Preferred Stock. Each
share 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 and Series E 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 $3.97 (the "Conversion Price"). The
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
"Reset Price") if the Reset Price is less than the then-effective Conversion
Price.
Subject to certain conditions, the Company may redeem all of the Series D
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 value. In addition, subject to certain conditions, in the event
that a Reset Price is less than 50% of the initial Conversion Price, the Company
may redeem all of the Series D preferred stock at liquidation value.
15
<PAGE> 16
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 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 or (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 The Nasdaq National Market ("Nasdaq"), The American Stock
Exchange, Inc. ("AMEX") or The New York Stock Exchange ("NYSE"); 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: (x) the
Company's failure to maintain the registration statement for resale of the
common stock issuable upon conversion of the Series D preferred stock; (y) the
Company's failure to maintain listing of its common stock on Nasdaq, AMEX or
NYSE; or (z) 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 to acquire 150,000 shares of common
stock at a price of $5.073 per share. The warrants have a three-year term and
are immediately exercisable.
During the six-month period ended June 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 June 30, 1999, no shares of the Series B preferred
stock were outstanding. During the six-month period ended June 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 June 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 December 1997, the Company entered into a $4.0 million term loan with a
financial institution. The loan bears interest at 0.25% above the financial
institution's prime rate (7.75% as of June 30, 1999), and has a term of 40
months with interest only due in the first four months and principal and
interest due monthly thereafter. This loan is secured by all of the assets of
the Company, including its intellectual property. As of June 30, 1999, $2.4
million was outstanding under this term loan.
In June 1998, the Company secured a $3.0 million term loan with the same
financial institution. The loan bears interest at the financial institution's
prime rate (7.75% as of June 30, 1999), and has a term of 42 months with
interest only due in the first six months and principal and interest due monthly
thereafter. This loan is secured by all of the assets of the Company, including
its intellectual property. As of June 30, 1999, $2.5 million was outstanding
under this term loan.
16
<PAGE> 17
As of June 30, 1999, the current and non-current portions due under these
loans were $2.3 million and $2.6 million, respectively. Both of these term loans
contain customary covenants and events of default. As of June 30, 1999, the
Company was in full compliance with all loan covenants.
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.
As of June 30, 1999, there was no remaining commitment to purchase units for
DSI. DSI is obligated to reimburse the Company the actual cost of such units
upon the earlier of: five (5) days following the sale of the units by DSI or 120
days following shipment by Oki Electric. DSI's obligation to reimburse the
Company is secured by all personal property of DSI. The Company has also agreed
to provide office space to DSI at a discount to market value for a period of one
year. As of June 30, 1999, the receivable from DSI was $2,639,000, comprised of
purchases made from Oki Electric by the Company on behalf of DSI. The receivable
balance reflects a write-off to record the Company's equity in losses incurred
by DSI after reducing the investment balance to zero. The Company has
reclassified this receivable to other assets in the accompanying condensed
consolidated financial statements in anticipation of the closing of a DSI
financing transaction described in Note 9 to the Condensed Consolidated
Financial Statements.
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 five of these agreements, and is subject to the
following obligations under the remaining three agreements. The Company must
refund to one licensee a prepaid royalty, together with interest, which totaled
$2.8 million as of June 30, 1999. This amount was classified in accrued expenses
as of June 30, 1999. The Company has agreed to refund a second licensee the
amount of a $1.5 million unrecouped prepaid royalty. The refund is secured by a
license in certain of the Company's intellectual property, is non-interest
bearing and is payable in August 1999. The amount of this refund was also
classified in accrued expenses as of June 30, 1999. Finally, the Company has
agreed to refund the third licensee any amount of a $2.0 million prepaid royalty
not recouped by January 1, 2003, plus accrued interest. The amount of any such
refund is payable on or before December 31, 2003. As of June 30, 1999, this
obligation was classified in noncurrent deferred revenue. There can be no
assurance that the third such licensee will develop products that incorporate
the Company's Magic Cap technology. It is uncertain when prepaid royalties
currently classified as non-current deferred revenue will be recognized as
licensing revenue or if they will ever be fully recouped, if at all.
The Company expects that its cash, cash equivalents and short-term
investment balances of $32.2 million as of June 30, 1999, along with cash
available under the Company's equity line of credit agreement, will be adequate
to fund the Company's operations through the second half of 1999. However, there
are a number of conditions and limitations on the Company's right to draw down
under the agreement, and the Company cannot guarantee that sufficient amounts
will be available under the equity line of credit agreement to meet its needs.
In addition, the Company believes that revenue from telecommunications carriers
will not develop as expected in the second half of 1999. While this shortfall
may be offset by growth in revenue associated with the Company's Internet
initiatives, it will further increase the Company's need to develop additional
sources of capital. The Company's capital requirements will depend on many
factors, including, but not limited to, the market acceptance and competitive
position of its voice-enabled services; its ability to generate subscription,
advertising 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. If the
Company's sources of capital through the second half of 1999 do not prove
adequate, and in any case to support operations in the year 2000, the Company
may 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,
17
<PAGE> 18
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:
o creation of an inventory of all potentially date-sensitive systems,
including third-party systems;
o evaluation and/or testing of all systems;
o remediation or replacement of systems which are not year 2000 ready;
o verification of corrected systems, if necessary;
o 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
o 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 which it has determined are not year 2000 ready. It will
continue to remediate or replace systems which are not year 2000 ready. The
Company expects to commence testing of all systems directly related to the
Excite Voicemail services during the third quarter. In addition, it plans to
re-test all systems in both the third and fourth quarters. The Company has and
will continue to verify corrected systems.
The Company has completed the inventory for all other systems and has
completed initial 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 and is in the process of remediating or replacing the
remaining systems which are not year 2000 ready. The Company will also continue
to evaluate the systems not directly related to the
18
<PAGE> 19
Company's services and will verify that the corrected systems are compliant, if
it determines that such verification is necessary.
The Company expects to complete all phases of the year 2000 plan for systems
directly related to the Company's services and for all other systems by the end
of the third quarter of 1999, except retesting and verification and its
contingency plan. The Company has initiated its contingency planning process,
including 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 third and fourth quarters 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. Based on its inquiries to
date, the Company believes that certain third-party systems will require
remediation or replacement. If remediation or replacement is not practicable,
the Company will seek alternative suppliers whose products and services are year
2000 ready.
Costs. The Company believes that the costs related to its year 2000 effort
will not exceed $600,000, approximately 14% of its actual and anticipated
information technology operating budget for fiscal years 1998 and 1999. 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 June 30,
1999, the Company has incurred approximately $465,000 of the estimated total of
$600,000. The Company does not expect to incur any costs related to the delay of
its non-year 2000 information technology efforts or to the acceleration of
system upgrades or replacements.
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 fail to identify
all critical year 2000 problems, may not properly assess, remediate or test its
systems, and may encounter unexpected delays or costs associated with its year
2000 effort. In addition, the Company has not completed its assessment of the
year 2000 readiness of significant suppliers. The Company believes that products
and services supplied by third parties present the greatest year 2000 risks to
the Company. The Company relies on third-party suppliers for a significant
number of systems related to its services, such as:
o email servers which process both emails and voicemails;
o the calendar and contact software;
o the voice recognition software;
o the text-to-speech software;
o the billing system; and
o the network operations center equipment.
In addition, the Company relies on third parties for key services, such as
telecommunications, Internet access and power. Although the Company has
requested written assurances from all of its significant suppliers, to date, a
number of suppliers have not responded to such requests.
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.
19
<PAGE> 20
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.
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 June 30, 1999, we had an accumulated
deficit of $237.1 million, with a net loss of $27.6 million for the six-month
period ended June 30, 1999.
Historically, we have derived a large percentage of our total revenue from
license fees and customer support fees. As a consequence of our 1997 change in
business strategy, we expect to derive a significant portion of any future
revenues from sales of services and advertising by us and by our partners and
not from license fees. We expect to incur significant losses through the year
1999, and we may never achieve or sustain significant revenues or become
profitable.
OUR LIMITED RESOURCES MAY RESTRICT OUR OPERATIONS AND OUR ABILITY TO IMPLEMENT
OUR NEW STRATEGY, AND THE AVAILABILITY OF ADDITIONAL RESOURCES IS UNCERTAIN.
In early 1997, we changed our business strategy to focus on the marketing
and sale of voice-enabled services. Our new business model requires us to devote
significant financial resources to a number of complex services, including our
Portico and myTalk services and private-label services offered by 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 introduce,
maintain and enhance these services and to generate sufficient revenues will be
restricted.
We must conserve cash because we have generated minimal revenues to date.
Effective July 30, 1999, we obtained from an institutional investor an equity
line of credit for up to an aggregate of $20,000,000 of common stock. We may
request draw downs on this equity line beginning on August 25, 1999 and
approximately every 31 business days thereafter in increments of $5,000,000.
However, there are numerous conditions to our right to draw down, 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, The New York Stock
Exchange, The Nasdaq National Market or The Nasdaq SmallCap Market. On August
12, 1999, the closing bid price of our common stock was $2.19 per share. It is
uncertain that we will be able to meet the closing bid price condition, the
listing condition or any other condition. In addition, although we may request
draw downs in increments of $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. We cannot guarantee that we will
be able to draw down on the equity line of credit in amounts sufficient to meet
our needs, if at all. In such an event, it is uncertain whether we will be able
to obtain alternative financing. Even if we were able to draw down on the equity
line of credit in sufficient amounts, we may require additional funding in the
future and we cannot guarantee that we will be able to obtain such funding. The
unavailability or timing of significant revenues and financing could prevent or
delay the continued development and marketing 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."
In addition, our limited financial resources may further constrain the size
of our technical, business development, sales, marketing and customer support
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 customer support personnel may not remain with us, and we may
be unable to attract and retain sufficient personnel to execute our business
plan.
OUR BUSINESS MODEL IS NEW AND UNPROVEN, AND WE MAY BE UNABLE TO IMPLEMENT IT
SUCCESSFULLY.
Our new model for conducting business and generating revenue is 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 multiple sources, including:
o the Portico service;
o private-label versions of our virtual assistant services offered by
telecommunications carriers, device manufacturers and other companies;
o the myTalk service; and
o services based on our magicTalk(TM) voice user interface technology
offered by Internet companies.
If we fail to generate revenues from one or more of these sources,
development and sales of our products and services would be adversely affected.
It is uncertain whether we or our partners will be able to develop and
maintain at reasonable cost a significant subscriber base for virtual assistant
services. Although the Portico service was released on July 30, 1998, 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 Internet services depend on advertising and
sponsorship sales and upgrades to fee-based services, and such revenues may
never be sufficient to offset the costs of providing free services. See "--
Revenues from our Internet services depend on banner and audio advertising sales
and upgrades to fee-based services, and our inability to generate sufficient
revenues from advertising sales and upgrades would harm our business."
20
<PAGE> 21
REVENUES FROM OUR INTERNET SERVICES DEPEND ON BANNER AND AUDIO ADVERTISING SALES
AND ON UPGRADES TO FEE-BASED SERVICES, AND OUR INABILITY TO GENERATE SUFFICIENT
REVENUES FROM ADVERTISING SALES AND UPGRADES WOULD HARM OUR BUSINESS.
Our business model depends on our ability to generate sufficient revenues
from banner and audio advertising sales and upgrades to 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, a
sufficient number of users must upgrade to 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 we or our partners cannot
attract a sufficient number of users, we will not be able to attract a
sufficient number of advertisers and sponsors to generate revenues.
21
<PAGE> 22
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 these requirements. The letter required
us to demonstrate compliance with the continued listing requirements 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, including the completion, by July 30, 1999, of a
financing transaction. On July 1, 1999, The Nasdaq National Market accepted our
proposal, contingent on our ability to successfully execute it. As of July 30,
1999, we completed an equity line of credit arrangement. In the event that we
are not able to maintain continued compliance with The Nasdaq National Market
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 MAY BE REQUIRED TO REDEEM THE SERIES D PREFERRED STOCK AND SUCH REDEMPTION
COULD SIGNIFICANTLY DEPLETE OUR CASH RESERVES, WHICH WOULD MATERIALLY ADVERSELY
AFFECT OUR FINANCIAL CONDITION.
The holders of the Series D preferred stock have redemption rights if we
fail to meet the requirements of the documents governing the Series D preferred
stock, including continued listing on The Nasdaq National Market, The American
Stock Exchange, Inc. or The New York Stock Exchange. Assuming that all 2,000
shares of Series D preferred stock are outstanding, the total redemption value
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.
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 products. 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 products will grow or that consumers will accept any
of the services or products built on our magicTalk voice user interface
platform.
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 Portico and myTalk 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 may lead to substantial interruptions in our service.
Shortly after the launch of our myTalk service and the Excite Voicemail
service, we experienced interruptions in service due to a sudden increase in the
number of users. In the event that we experience other sudden increases in the
number of users to our services 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 our
services. 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
22
<PAGE> 23
retain subscribers, partners, sponsors, and advertisers, and we may experience
negative publicity that could adversely affect our stock price.
WE MUST ESTABLISH AND MAINTAIN DISTRIBUTION RELATIONSHIPS 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 relationships with
telecommunication carriers, device manufacturers and Internet and other
companies. Although we have entered into arrangements with Qwest Communications
Corporation, Intuit(R) Inc., Wireless Knowledge, BellSouth Mobility, Inc. and
Excite, Inc., we cannot guarantee that we will be able to maintain these
relationships or establish additional relationships. Competition for
relationships with telecommunications carriers, device manufacturers and
Internet companies is extremely intense. In addition, decisions by these third
parties, particularly telecommunications carriers, to enter into distribution
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 attain profitability.
Our control over the marketing efforts of Qwest, Intuit, Wireless Knowledge,
BellSouth and Excite is limited under our arrangements. We cannot guarantee that
Qwest, Intuit, Wireless Knowledge, BellSouth, Excite or any future partner will
actively market the services incorporating our technology.
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 develop
technology to enable us to provide, bill for and enhance our Portico service,
myTalk service, fee-based services for the myTalk and other voice-enabled
services, including those we agree to supply for 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.
23
<PAGE> 24
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 Portico
and myTalk services and the services to be provided to our partners, including
the following:
o email servers which process both emails and voicemails;
o the calendar and contact software;
o the voice recognition software;
o the text-to-speech software;
o the billing system; and
o 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.
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.
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 technology obsolete. If we are unable to compete
effectively, our business would 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, 2,000 shares of Series D
preferred stock and 599 shares of Series E 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 pursuant to the equity line of credit
arrangement depends on the prices of the common stock as quoted on Nasdaq
shortly before the date of conversion or 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
24
<PAGE> 25
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.
Our board of directors has the authority to issue 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 sell 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.
In addition, the market for Internet advertising may not develop. The
adoption of Internet advertising, particularly by companies that have
historically relied on traditional channels to advertise or sell their products
and services, requires the acceptance of a new way of conducting business.
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 Internet advertising does not develop, our business would be harmed.
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:
o obtain patent, copyright and trademark protection where appropriate;
o preserve our trade secrets;
o defend our patents, copyrights, trademarks and trade secrets against
infringement; and
o 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.
25
<PAGE> 26
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, 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, such
limitations may not 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 our
initial public offering in February 1995, the closing price of our common stock
has ranged from a high of $26.625 to a low of $0.938 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
26
<PAGE> 27
market prices for emerging and technology 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. In addition, we have not
completed our assessment of the year 2000 readiness of significant suppliers. 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:
o email servers which process both emails and voicemails;
o the calendar and contact software;
o the voice recognition software;
o the text-to-speech software;
o the billing system; and
o 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:
o 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;
o prohibition on stockholder action by written consent;
27
<PAGE> 28
o requirement that a two-thirds vote of the stockholders is required to
amend the bylaws; and
o 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 provides holders rights to redemption
of their Series D preferred stock upon a change in control, which could make an
acquisition more difficult.
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. An increase or decrease in interest rates would not
significantly increase or decrease interest expense on debt obligations.
28
<PAGE> 29
GENERAL MAGIC, INC.
FORM 10-Q, June 30, 1999
Part II: Other Information
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES
On June 18, 1999, the Company issued to Excite, Inc. 599 shares of the
Series E Convertible Preferred Stock and a warrant to purchase 100
shares of preferred stock for an aggregate cash consideration of $6.0
million. The terms of the conversion and exercise 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
exception 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
The Annual Meeting of the Stockholders of General Magic, Inc. was held
on June 24, 1999.
A proposal to elect the following (6) directors to hold office until the
1999 Annual Meeting and until their successors are elected and qualified
was approved by the stockholders. The proposal received the following
votes:
<TABLE>
<CAPTION>
NUMBER OF SHARES/VOTES
------------------------------------
FOR AGAINST
------------------------------------
<S> <C> <C>
Steven Markman, Ph.D. 33,986,882 374,691
Michael E. Kalogris 34,012,515 349,058
Philip D. Knell 33,988,790 372,783
Roel Pieper, Ph.D. 33,845,059 516,514
Dennis F. Strigl 34,018,815 342,758
Susan G. Swenson 34,017,765 343,808
</TABLE>
A proposal to approve an amendment to the Company's Amended and Restated
1995 Employee Stock Purchase Plan to increase by 500,000 shares the
maximum number of shares reserved for issuance thereunder was approved
by the stockholders. The proposal received the following votes:
<TABLE>
<S> <C>
For: 32,635,337
Against: 676,978
Abstain: 142,539
Broker Non-Vote: 906,719
</TABLE>
29
<PAGE> 30
A proposal to approve the issuance of those shares of the Company's
common stock equal to 20% or more of the outstanding common stock or
voting power before the issuance of the Series D Convertible Preferred
Stock upon (i) the conversion of the Company's Series D Convertible
Preferred Stock and (ii) the exercise of warrants for the purchase of
shares of the Company's common stock if the issuance of such shares upon
such conversion or exercise is for less than the greater of book or
market value of the common stock, was approved by the stockholders.
The proposal received the following votes:
<TABLE>
<S> <C>
For: 11,867,721
Against: 713,106
Abstain: 287,310
</TABLE>
A proposal to ratify the appointment of KPMG LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1999,
was approved by the stockholders. The proposal received the following
votes:
<TABLE>
<S> <C>
For: 34,071,040
Against: 172,375
Abstain: 118,158
</TABLE>
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>
27.1 Financial Data Schedule
</TABLE>
(b) A report on Form 8-K was filed on April 2, 1999, to report under
Item 5, Other Events, a private placement of the Company's securities.
30
<PAGE> 31
GENERAL MAGIC, INC.
FORM 10-Q, June 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.
DATE: August 16, 1999 /s/ STEVEN MARKMAN
------------------------------------
Name: Steven Markman
Title: Chairman and Chief Executive
Officer (Principal Executive Officer)
DATE August 16, 1999 /s/ JAMES P. McCORMICK
------------------------------------
Name: James P. McCormick
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 31,235
<SECURITIES> 1,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,243
<PP&E> 21,541
<DEPRECIATION> 11,052
<TOTAL-ASSETS> 47,921
<CURRENT-LIABILITIES> 14,936
<BONDS> 3,200
20,252
0
<COMMON> 41
<OTHER-SE> 7,492
<TOTAL-LIABILITY-AND-EQUITY> 47,921
<SALES> 0
<TOTAL-REVENUES> 335
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> (26,723)
<INCOME-TAX> 22
<INCOME-CONTINUING> (26,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,745)
<EPS-BASIC> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
