<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
AMENDMENT NO. 1
----------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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: 0-25374
GENERAL MAGIC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0250147
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
420 NORTH MARY AVENUE, SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 774-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of registrant's voting stock held by nonaffiliates
of registrant, based upon the closing sale price of the common stock on March
20, 2000, as reported on the Nasdaq National Market, was approximately
$690,496,000. Shares of common stock held by each officer and director have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
Outstanding shares of registrant's common stock, $.001 par value, as of March
20, 2000: 50,338,415
REASON FOR AMENDMENT
After filing its Annual Report on Form 10-K, the registrant discovered a
typographical error in Part IV, Item 14, Note 15: Subsequent Events (unaudited)
to the Financial Statements where a reference to Series A convertible preferred
stock should have been to Series H convertible preferred stock. Accordingly, the
registrant is refiling, in its entirety, Part IV, Item 14. Registrant is also
filing this Amendment No. 1 to include certain information required in Items 10,
11, 12 and 13 of Part III of Form 10-K.
<PAGE> 2
PART III
Part III is replaced in its entirety as follows:
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
The table below sets forth, for persons who are nominees for election to the
Board of Directors at this meeting, certain information with respect to age and
background.
<TABLE>
<CAPTION>
COMMON STOCK DIRECTORS POSITION WITH THE COMPANY AGE DIRECTOR SINCE
- ---------------------- ------------------------- --- --------------
<S> <C> <C> <C>
Steven Markman, Ph.D....... Chairman, Chief Executive Officer, President and 54 1996
Director
Elizabeth A. Fetter........ Director 41 2000
Philip D. Knell............ Director 55 1998
Tom D. Seip................ Director 50 2000
Susan G. Swenson........... Director 52 1997
SERIES G DIRECTOR POSITION WITH THE COMPANY AGE DIRECTOR SINCE
- ----------------- ------------------------- --- --------------
Chester A. Huber, Jr. ..... Director 45 1999
</TABLE>
STEVEN MARKMAN, joined the Company as Chairman, Chief Executive Officer and
President in September 1996. Prior to joining the Company, Dr. Markman served
Novell, Inc. as Executive Vice President and General Manager of the Products
Group from January 1996 to September 1996, and as the Executive Vice President
and General Manager of the Information Access and Management Group from August
1994 until January 1996. Dr. Markman holds a B.S. and a M.S. in Electrical
Engineering and Electrophysics, respectively, from the Polytechnic Institute of
Brooklyn. He also received a Ph.D. in Electrophysics from the Polytechnic
Institute of New York.
ELIZABETH A. FETTER has served as a director of the Company since January of
2000. Ms. Fetter has been President of NorthPoint Communications Group, Inc.
since March 1999, and was named Chief Executive Officer in March 2000. Ms.
Fetter was also Chief Operating Officer of NorthPoint Communications Group, Inc.
from March 1999 to March 2000. From January 1998 until March of 1999, Ms. Fetter
was Vice President and General Manager of the Consumer Services Group of US
WEST. During 1997, Ms. Fetter served as Vice President and General Manager of
Operator and Director Services for SBC Communications, Inc., and from March 1991
to October 1997, Ms. Fetter served in various executive positions at Pacific
Bell, including most recently as President of the Industry Markets Group. Ms.
Fetter is also a director of Andrew Corporation, Datum Inc., and NorthPoint
Communications Group, Inc.
CHESTER A. HUBER, JR. has served as a director of the Company since December
1999. Mr. Huber was named President of OnStar Corporation in December of 1999,
and was General Manager of the OnStar Division of General Motors Corporation
from June of 1995 until December of 1999. Prior to becoming General Manager of
the OnStar Division, Mr. Huber held a variety of engineering, operations and
marketing positions spanning a 27-year career with General Motors.
PHILIP D. KNELL has served as a director of the Company since June 1998. Mr.
Knell has been President and General Manager of MCI WorldCom Conferencing since
September 1998, and was President and General Manager of the networkMCI
Conferencing division of MCI Communications Corporation from July 1995 to
September 1998. From December 1992 through June 1995, Mr. Knell was President
and Chief Executive Officer of Darome Teleconferencing, Inc.
TOM D. SEIP has served as a director of the Company since April 2000. Mr.
Seip has served as General Partner of Seip Investments LP since January 1998.
From January 1983 to June 1998, he was employed by Charles Schwab & Co. in
various capacities. Mr. Seip served as Chief Executive Officer of Charles Schwab
Investment Management, Inc. and as Trustee of the Schwab Family of Funds and
Schwab Investments, and was a member of the Charles Schwab Management Committee
from July 1992 to June 1998.
SUSAN G. SWENSON has served as a director of the Company since August 1997.
Ms. Swenson has been President and Chief Operating Officer of Leap Wireless
International, Inc. since July of 1999. Ms. Swenson was President and Chief
Executive Officer of Cellular One from March 1994 to July 1999. Ms. Swenson is
also a director of Leap Wireless International, Inc., Wells Fargo & Company and
Palm, Inc.
2
<PAGE> 3
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 20, 2000, the executive officers of General Magic, who are
elected by and serve at the discretion of our Board of Directors, were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY EMPLOYED SINCE
- ---- --- ------------------------- --------------
<S> <C> <C> <C>
Steven Markman, Ph.D........... 54 Chairman, Chief Executive Officer And September 1996
President
Mary E. Doyle.................. 47 Senior Vice President of Business July 1996
Affairs, General Counsel and Secretary
Linda A. Hayes................. 58 Senior Vice President of Marketing September 1997
Rose M. Marcario............... 35 Senior Vice President and Chief October 1999
Financial Officer
Elena M. Morera................ 48 Vice President of Human Resources July 1996
</TABLE>
STEVEN MARKMAN joined General Magic in September 1996 as Chairman, Chief
Executive Officer and President. Prior to joining General Magic, Dr. Markman
served Novell, Inc. as executive vice president and general manager of the
Products Group from January 1996 to September 1996, and as the executive vice
president and general manager of the Information Access and Management Group
from August 1994 until January 1996. Dr. Markman holds a B.S. and a M.S. in
Electrical Engineering and Electrophysics, respectively, from the Polytechnic
Institute of Brooklyn. He also received a Ph.D. in Electrophysics from the
Polytechnic Institute of New York.
MARY E. DOYLE joined General Magic in July 1996 as General Counsel and
Secretary and served as our Vice President of Business Affairs from January 1997
until September 1998, when she was named Senior Vice President of Business
Affairs. Before joining General Magic, Ms. Doyle served Teledyne, Inc. from July
1984 to July 1996, where she last served as general counsel of the Aerospace and
Electronics segment. Ms. Doyle received an A.B. in Biology and Economics from
the University of California, Santa Cruz, and a J.D. from the University of
California, Berkeley.
LINDA A. HAYES joined General Magic in September 1997 as Vice President of
Marketing, and was appointed our Senior Vice President of Marketing in September
1998. Ms. Hayes was Vice President of Marketing for Pretty Good Privacy, Inc.
("PGP") from August 1996 to September 1997. Prior to joining PGP, she served as
Vice President of Marketing at Novell, Inc. from September 1995 to August 1996.
Ms. Hayes was Vice President of Marketing Communications Worldwide for Zenith
Data Systems from January 1993 to September 1995. Ms. Hayes holds an A.B. in
English from Kansas State University, and has completed the Corporate
Communications Program at Northwestern University's Kellogg Graduate School.
ROSE M. MARCARIO joined General Magic in October 1999 as our Senior Vice
President and Chief Financial Officer. Before joining us, Ms. Marcario served as
Vice President of Global Financial Services for International Rectifier
Corporation from July 1993 to October 1999. Ms. Marcario holds a B.S. in Finance
from New York University and earned her M.B.A. in International Finance from the
University of California, Los Angeles. Ms. Marcario is a Certified Public
Accountant in the State of New York.
ELENA M. MORERA joined General Magic in July 1996 as our Vice President of
Human Resources. Before joining General Magic, Ms. Morera served as Vice
President of Human Resources for Scantron Corporation from July 1992 to July
1996. Ms. Morera holds a B.S. in Education from Florida International
University, and earned her M.A. in Management from the Claremont Graduate
School.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers, directors and persons who beneficially own
more than 10% of the Company's Common Stock to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers,
directors and more than 10% stockholders were complied with during fiscal 1999.
3
<PAGE> 4
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the total compensation
of the Chief Executive Officer, four other highest compensated current executive
officers of the Company whose salary and bonus for the year ended December 31,
1999, exceeded $100,000, and two former executive officers of the Company whose
salary and bonus for the year ended December 31, 1999, exceeded $100,000 but who
were not executive officers at December 31, 1999 (the "Named Executive
Officers") for the years ended December 31, 1999, 1998 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL ------------------------
COMPENSATION RESTRICTED SECURITIES
--------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARD(s)($) OPTIONS(#) COMPENSATION($)
- --------------------------- ----- ---------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Steven Markman, Ph.D. 1999 350,000 -- -- -- --
Chairman, Chief Executive 1998 319,423 $ 273,000(1) -- 652,793 --
Officer and President 1997 301,154 90,000(2) -- -- --
Mary E. Doyle 1999 200,000 -- -- 225,000 --
Senior Vice President, Business 1998 196,615 100,000(1) -- 150,000 --
Affairs, General Counsel 1997 180,692 53,055(2) -- 70,000 61,762(3)
and Secretary
Linda A. Hayes(4) 1999 215,000 -- -- 150,000 --
Senior Vice President, Marketing 1998 234,150 75,100(1) -- 225,000 --
1997 60,923 32,400(2) -- 130,000 --
Rose M. Marcario(5) 1999 38,462 35,000(6) -- 350,000 6,401(7)
Chief Financial Officer
Elena M. Morera 1999 142,000 -- -- 100,000 --
Vice President, Human Resources 1998 139,647 42,600(1) -- 70,000 --
1997 128,492 26,200(2) -- 50,000 --
Former Officers:
James P. McCormick(8) 1999 187,850 468,075(9) -- -- 243,951(10)
Chief Operating Officer and Chief 1998 201,750 107,500(1) -- 175,000 --
Financial Officer 1997 101,077 31,500(2) -- 200,000 --
Kevin J. Surace(11) 1999 230,000 375,023(12) -- 189,193(10)
Executive Vice President, 1998 219,962 138,000(1) 200,000 --
Business Development and Strategy 1997 192,442 57,221(2) -- 70,000 --
</TABLE>
- ------------
(1) Includes bonuses earned in fiscal 1998 but paid in fiscal 1999.
(2) Includes bonuses earned in fiscal 1997 but paid in fiscal 1998.
(3) Represents payment for costs incurred in connection with Ms. Doyle's
employment transition.
(4) Ms. Hayes joined the Company in September 1997.
(5) Ms. Marcario joined the Company in November 1999.
(6) Includes a sign-on bonus paid in connection with Ms. Marcario's employment.
(7) Represents payment for costs incurred in connection with Ms. Marcario's
employment transition.
(8) Mr. McCormick left the Company in October 1999.
(9) Represents a retention bonus paid pursuant to an agreement with the Company
and a performance bonus earned and paid to Mr. McCormick in 1999. See
"Employment Contracts and Termination of Employment and Change-in-Control
Arrangements" below.
4
<PAGE> 5
(10) Represents gain realized in 1999 on sale of stock received upon exercise of
stock options.
(11) Mr. Surace resigned as an officer of the Company in May 1999, and is
currently a part-time employee of the Company.
(12) Represents a retention bonus paid to Mr. Surace in 1999 pursuant to an
agreement with the Company. See "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements" below.
The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the year ended
December 31, 1999 to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN FISCAL 1999
-----------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED TO OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(4)
OPTIONS IN FISCAL BASE EXPIRATION ---------------------------
NAME GRANTED(1) YEAR(2) PRICE($/SH)(3) DATE 5%($) 10%($)
- ---- ------------ ----------- -------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steven Markman, Ph.D.. -- -- -- -- -- --
Mary E. Doyle(5)...... 150,000 5.7% 3.9375 03/17/09 371,440 941,304
Mary E. Doyle......... 75,000 2.8 3.9688 12/21/09 187,197 474,394
Linda A. Hayes(5)..... 150,000 5.7 3.9375 03/17/09 371,440 941,304
Rose M. Marcario...... 350,000 13.3 1.9380 11/08/09 426,579 1,081,036
Elena M. Morera(5).... 100,000 3.8 3.9375 03/17/09 247,627 627,536
Former Officers:
James P. McCormick.... -- -- -- -- -- --
Kevin J. Surace....... -- -- -- -- -- --
</TABLE>
- ------------
(1) Generally, options granted in 1999 under the Amended and Restated 1990
Stock Option Plan vest at the rate of 1/4th on the first anniversary of
the date of grant and 1/48th per month thereafter for each full month of
the continued employment of the option holder.
(2) The total number of shares subject to options granted to employees in
fiscal 1999 was 2,641,500, which number includes options granted to
employee directors, but excludes options granted to nonemployee directors
and consultants.
(3) All options were granted at an exercise price equal to the fair market
value of the Common Stock on the date of grant.
(4) Potential gains are net of exercise price, but before taxes associated
with the exercise. These amounts represent certain hypothetical gains
based on assumed rates of appreciation, based on the Securities and
Exchange Commission's rules, and do not represent the Company's estimate
or projection of future Common Stock prices. Actual gains, if any, on
stock option exercises are dependent on the future performance of the
Company, overall market conditions and the continued employment of the
option holders through the vesting period. The amounts reflected in this
table may not be achieved.
(5) Options granted to these Named Executive Officers under the Amended and
Restated 1990 Stock Option Plan vest at the rate of 1/24th per month for
each full month of the continued employment of the option holder,
commencing March 12, 1999.
5
<PAGE> 6
The following table provides the specified information concerning exercises
of options to purchase the Company's Common Stock during the year ended December
31, 1999, and unexercised options held as of December 31, 1999, by the Named
Executive Officers:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT 12/31/99(1) OPTIONS AT 12/31/99(2)
ACQUIRED ON VALUE ------------------------------ ------------------------------
NAME EXERCISE REALIZED(3) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven Markman, Ph.D... -- -- 813,374 589,419 $628,388 $145,013
Mary E. Doyle.......... -- -- 235,210 309,790 221,083 83,584
Linda A. Hayes......... -- -- 208,031 296,969 167,231 101,505
Rose M. Marcario....... -- -- -- 350,000 -- 677,950
Elena M. Morera........ -- -- 135,417 134,583 138,956 56,344
Former Officers:
James P. McCormick..... 200,000 243,951 43,750 -- -- --
Kevin J. Surace........ 70,614 189,193 211,886 137,500 177,396 --
</TABLE>
- ----------
(1) Includes options granted at an exercise price greater than the per share
closing price of $3.875, as reported on the Nasdaq National Market, on
December 31, 1999.
(2) Based on the per share closing price of $3.875 on December 31, 1999, as
reported on the Nasdaq National Market, less the exercise price,
multiplied by the number of shares underlying the options.
(3) Based on the sale price of the Company's Common Stock on the exercise
date, less exercise price, multiplied by the number of shares underlying
the options.
COMPENSATION OF DIRECTORS
Each eligible outside director, who is not an employee of the Company or of
any parent or subsidiary corporation of the Company and was a director at time
of disbursement was entitled to receive the following amounts of cash
compensation for his or her services as a director of the Company: (i) $10,000
per year, payable on the last day of the Company's fiscal year, and (ii) $1,000
or $500 for each regular or special meeting attended by the eligible outside
director in person or by telephone, respectively (the "Directors Compensation
Plan"). In addition, each eligible outside director was entitled to
reimbursement of travel expenses reasonably incurred by him or her in connection
with attending any regular or special meeting of the Board of Directors.
Furthermore, the 1994 Outside Directors Stock Option Plan (the "Directors Stock
Option Plan") provides for automatic initial and annual grants of nonqualified
stock options to directors of the Company who are not employees of the Company
or of any affiliated corporation. For purposes of the foregoing, any
non-employee director will be ineligible to participate either in the Directors
Compensation Plan or in the Directors Stock Option Plan if the director's
employer is a stockholder of the Company or an affiliated corporation of a
stockholder of the Company, or if the director's employer holds a technology
license from the Company or is an affiliated corporation of such license holder.
During the fiscal year ended December 31, 1999, each of Messrs. Kalogris, Knell,
Pieper and Strigl and Ms. Swenson received under the Directors Stock Option Plan
an annual option grant for 10,000 shares of Common Stock. Additionally, during
1999 Mr. Knell received an individual stock option grant for 25,000 shares
outside of the Directors Stock Option Plan. Mr. Huber is ineligible to
participate under both the Directors Compensation Plan and the Directors Stock
Option Plan.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In September 1996, the Company entered into an employment agreement with
Steven Markman commencing September 19, 1996. The employment agreement was
amended in December 1997 and in October 1999 (together with the employment
agreement, the "Employment Agreement"). The Employment Agreement provides that
Dr. Markman serve as the Company's Chairman of the Board of Directors, President
and Chief Executive Officer for an annual salary of $300,000, subject to annual
review by the Board of Directors, and during the first twelve months of his
employment, a guaranteed bonus of not less than twenty percent (20%) of his
then-current salary. The Employment Agreement further provides that Dr. Markman
will be eligible to receive an annual bonus and that his target eligibility will
be 80% of his base rate of pay. In accordance with the Employment Agreement, the
Company granted
6
<PAGE> 7
Dr. Markman options for 750,000 shares of the Company's Common Stock. In
addition, as further required by his Employment Agreement, the Company granted
Dr. Markman the right to purchase up to 135,000 restricted shares of the
Company's Common Stock at a price of $0.10 per share. Dr. Markman exercised this
right in March 1997. 67,500 of the restricted shares vested in September 1997
and the remaining 67,500 shares vested in September 1998. As permitted under the
Employment Agreement, Dr. Markman surrendered 22,562 and 23,584 shares of Common
Stock of the Company in September 1997 and September 1998, respectively, in
satisfaction of the income and employment tax withholding obligations arising
upon the vesting of the restricted shares. Either party may terminate the
Employment Agreement at any time, provided that, if prior to September 19, 2000,
the Company terminates Dr. Markman's employment other than for "cause" (and not
as a result of his death or "disability" (as defined in the agreement)) or Dr.
Markman resigns for "good reason" (as defined in the agreement), then (i) Dr.
Markman will be entitled to receive his final salary rate until September 19,
2000, provided such period of salary continuance will not be less than one year
or more than two years, as well as any bonus he would otherwise have earned in
the year of his termination, and (ii) all restricted stock and all stock options
previously granted to Dr. Markman by the Company will continue to vest during
the period of salary continuance, and such stock options will remain exercisable
for a period of 18 months following the later of the date Dr. Markman is
terminated as the Company's Chief Executive Officer or the date of such option
vesting. If Dr. Markman's employment is terminated by the Company without cause
or if Dr. Markman resigns for good reason during the period beginning 30 days
prior to the first public announcement that the Company has entered into an
agreement that results in a change in control (as defined in the agreement) and
ending one year following the change in control, then Dr. Markman is entitled to
the same benefits described in the preceding sentence, except that the period of
salary continuance shall be no less than two years and except that all of his
unvested outstanding stock options and restricted stock will immediately vest.
In August 1997, the Company entered into a letter agreement with Linda A.
Hayes. The employment letter provides that Ms. Hayes serve as the Company's Vice
President, Marketing, for an annual salary of $180,000. The agreement also
provides that Ms. Hayes is eligible to participate in the Company's bonus plan,
with an initial target eligibility of 36% of her base pay. The bonus for the
second half of 1997 and first half of 1998 was guaranteed in the amount of
$64,800. In accordance with her letter agreement, the Company granted Ms. Hayes
options for 130,000 shares of the Company's Common Stock, twenty percent of
which vested 90 days following her date of employment. Upon a "transfer of
control" (as defined in the Company's standard form of stock option agreement),
all of the shares subject to this option will become fully vested and
exercisable as of the date ten days prior to the date of the transfer of
control.
In February 1999, the Company entered into a retention agreement with James
P. McCormick. The agreement provided that Mr. McCormick serve as the Company's
Chief Operating Officer and Chief Financial Officer through August 19, 1999.
Under the agreement, upon the occurrence of a performance milestone, a total of
60,000 unvested shares subject to certain outstanding options vested in full. In
addition, as of August 19, 1999, an additional 60,834 unvested shares subject to
certain outstanding options vested, and Mr. McCormick received a retention bonus
in an amount equal to $200,000, net of any applicable federal and state income
taxes and any applicable employment taxes. In connection with Mr. McCormick's
resignation from the Company in October 1999, the Company agreed to pay him an
additional retention bonus equal to a pro rata share of his 1999 bonus under the
Employee Incentive Bonus Plan at 100% of target.
In February 1999, the Company entered into a retention agreement with Kevin
J. Surace. The agreement provides that Mr. Surace serve as the Company's
Executive Vice President of Business Development and Strategy. The agreement was
amended by a letter agreement dated May 24, 1999, whereby Mr. Surace resigned as
an executive officer of the Company, effective May 17, 1999 and assumed a
part-time position with the Company as Advisor, Business Development and
Strategy, effective August 7, 1999. Under the agreement, as amended, upon the
occurrence of a performance milestone, a total of 60,000 unvested shares subject
to certain outstanding options vested in full. Also pursuant to the agreement,
as amended, on August 7, 1999 an additional 48,125 unvested shares subject to
certain outstanding options vested, and Mr. Surace received a retention bonus in
an amount equal to $200,000, net of any applicable federal and state income
taxes and any applicable employment taxes. The agreement, as amended, provides
that from May 17, 1999 through May 5, 2000, Mr. Surace will be compensated at
his base rate of pay in effect as of May 17, 1999, less applicable taxes, and
will be eligible to participate in the Company's benefit programs, but will not
be eligible to participate in the Employee Incentive Bonus Plan for 1999 or
thereafter, or the Company's life, accident and long-term disability insurance
programs or to accrue paid time off benefits. The agreement, as amended, further
provides for payment of a fee in the amount of 1% of the consideration received
by the Company or its stockholders in the event the Company concludes a private
placement of the Company's equity securities, a sale, merger, consolidation or
other business combination or a joint venture with a partner actively engaged by
Mr. Surace in significant discussions on or before May 5, 2000.
In October 1999, the Company entered into a letter agreement with Rose M.
Marcario. The agreement provides that Ms. Marcario serve as the Company's Vice
President, Finance and Administration, and Chief Financial Officer for an annual
salary of $250,000 and
7
<PAGE> 8
an annual bonus of up to 50% of her base pay. Ms. Marcario also received a
one-time sign-on bonus of $35,000 and relocation expenses in an amount up to
$35,000 under the letter agreement. In accordance with the letter agreement, the
Company granted Ms. Marcario options to purchase 350,000 shares of the Company's
Common Stock. If the Company terminates Ms. Marcario's employment prior to the
end of her first twelve months of service with the Company for any reason (other
than just cause, or upon her death, disability or voluntary resignation), Ms.
Marcario will receive her base salary for the remaining balance of the
twelve-month period, but not for less than six months from the date of her
termination.
In April 1998, the Board of Directors authorized the Company to adopt a
Change of Control Plan (the "Plan") for all of its employees, including the
executive officers other than Dr. Markman, which provides for the payment of
certain severance benefits in the event of a change of control in the beneficial
ownership of the Company (as defined in the Plan). The Plan provides that in the
event of a change of control in which the employees' stock options are not
assumed or substituted for by the acquiring corporation, such options will
become fully vested and exercisable as of a date prior to the change of control.
In addition, the Plan provides that severance benefits will be payable to the
employees upon the occurrence of both of the following: (1) a change of control
of the Company, and (2) within twelve months after the change of control, such
individual's employment is involuntarily terminated by the Company other than
for "cause" or such individual terminates his or her employment for "good
reason" (as those terms are defined in the Plan). Upon the occurrence of the
events described in the preceding sentence, each executive officer other than
Dr. Markman will be entitled to receive the following benefits: (a) a lump sum
cash payment equal to the sum of (i) his or her then-effective annual base
salary, plus (ii) 100% of his or her bonus at the "on-target" level for the year
in which the termination occurs, and (b) full accelerated vesting of any options
to purchase shares of the Company's Common Stock.
In September 1999, the Compensation Committee of the Board of Directors
authorized payment of a retention bonus to each employee of the Company, other
than Messrs. McCormick and Surace and the Chief Executive Officer, equivalent to
one month's base salary, less applicable withholding, payable January 14, 2000,
provided such employee was employed as of December 31, 1999, and an additional
month's base salary, less applicable withholding, payable April 7, 2000,
provided such employee was employed through March 31, 2000.
In September 1999, the Compensation Committee authorized the Company to enter
into severance agreements with executives of the Company at the vice president
level as of that date, other than Mr. McCormick, providing for payment of six
(6) months of base salary in the event of involuntary termination other than for
cause. As of March 31, 2000, only Ms. Doyle, Ms. Hayes and Ms. Morera were
eligible for this benefit.
8
<PAGE> 9
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock and Preferred Stock as of
March 31, 2000 by (i) each person known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock, (ii) each director of the
Company, (iii) the Named Executive Officers and (iv) all current executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF PREFERRED STOCK
BENEFICIALLY OWNED(2)(3) BENEFICIALLY OWNED(2)(3)
---------------------------- -------------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) SHARES OF CLASS SHARES OF CLASS
- ---------------------------------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
5% STOCKHOLDERS
Microsoft Corporation..................... 3,629,000(4) 5.7% 50,000 28.9%(6)
One Microsoft Way, Bldg. #8
North Office 2211
Redmond, WA 98052
General Motors Corporation................ 8,907,363(5) 14.0% 1,500(5) 71.1%(6)
888 West Big Beaver Avenue
Suite 200
Troy, MI 48084
OFFICERS AND DIRECTORS
Steven Markman, Ph.D.(7).................. 1,098,252 1.7 -- --
Mary E. Doyle(8).......................... 307,292 * -- --
Elizabeth A. Fetter....................... -- * -- --
Linda A. Hayes(9)......................... 274,273 * -- --
Chester A. Huber, Jr. .................... -- * -- --
Philip D. Knell(10)....................... 46,167 * -- --
Rose M. Marcario.......................... -- * -- --
James P. McCormick(11).................... -- * -- --
Elena M. Morera(12) ...................... 173,959 * -- --
Tom D. Seip............................... -- * -- --
Dennis F. Strigl(13)...................... 28,700 * -- --
Kevin J. Surace(14)....................... 135,624 * -- --
Susan G. Swenson(15)...................... 27,500 * -- --
-- --
Executive officers and directors as a group
(13 persons)(16) ......................... 1,929,443 2.9 -- --
</TABLE>
- ---------------------
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is in
care of the Company at 420 North Mary Avenue, Sunnyvale, California 94086.
(2) Except as indicated in the footnotes to this table, the Company believes
that the persons named in the table have sole voting and dispositive power
with respect to all shares of Common Stock and/or Preferred Stock shown as
beneficially owned by them, subject to community property laws, where
applicable.
(3) Calculations of percentages of beneficial ownership are based upon
51,292,300 shares of Common Stock and 12,536,363 shares of Series A
Preferred Stock and Series G Preferred Stock outstanding (on an
as-if-converted basis) as of March 31, 2000. Calculations assume the
exercise by only the respective named stockholder of all options to
purchase Common Stock or convertible securities beneficially held by such
stockholder, if any, which are exercisable within 60 days of March 31,
2000, except as indicated in footnote (5) below.
(4) Includes 3,629,000 shares of Common Stock that may be acquired at any time
by Microsoft Corporation upon conversion of the 50,000 shares of Series A
Preferred Stock currently held by it.
(5) Includes 8,907,363 shares of Common Stock that may be acquired by General
Motors Corporation upon conversion of the 1,500 shares of Series G
Preferred Stock currently held by it. However, pursuant to a letter
agreement (the "Letter Agreement") effective December 9, 1999, General
Motors Corporation agreed not to exercise its right to convert shares of
the Series G Preferred Stock into shares of the Company's Common Stock to
the extent that the shares of Common Stock issuable upon conversion would
exceed 19.99% of the outstanding shares of the Company's Common Stock as
of December 9, 1999, pending
9
<PAGE> 10
stockholder approval. Does not include 2,969,121 shares of Common Stock
that may be acquired by General Motors Corporation upon exercise of the
warrant currently held by it to purchase an additional 500 shares of
Series G Preferred Stock, and conversion of that stock to Common Stock.
Pursuant to the Letter Agreement, General Motors Corporation has agreed
not to exercise its warrant, pending stockholder approval.
(6) Microsoft Corporation is entitled to vote 3,629,000 shares on an
as-if-converted basis (or 28.9% of the voting preferred stock), and
General Motors Corporation is entitled to vote 8,907,363 shares on an
as-if-converted basis (or 71.1% of the voting preferred stock), but see
footnote 5 above.
(7) Includes 959,498 shares subject to stock options exercisable within 60
days of March 31, 2000.
(8) Includes 299,792 shares subject to stock options exercisable within 60
days of March 31, 2000.
(9) Includes 274,273 shares subject to stock options exercisable within 60
days of March 31, 2000.
(10) Includes 44,167 shares subject to stock options exercisable within 60 days
of March 31, 2000.
(11) Does not include shares subject to stock options held by Mr. McCormick and
exercised and sold within 60 days after his resignation from the Company,
effective October 22, 1999.
(12) Includes 173,959 shares subject to stock options exercisable within 60
days of March 31, 1999.
(13) Includes 27,500 shares subject to stock options exercisable within 60 days
of March 31, 1999. Mr. Strigl is not standing for reelection to the Board
of Directors.
(14) Includes 135,614 shares subject to stock options exercisable within 60
days of March 31, 2000. Mr. Surace is a former officer and a current
part-time employee of the Company.
(15) Includes 27,500 shares subject to stock options exercisable within 60 days
of March 31, 2000.
(16) Includes 1,779,189 shares subject to stock options exercisable within 60
days of March 31, 2000 held by all current executive officers and
directors as a group. Does not include shares or shares subject to stock
options exercisable within 60 days of March 31, 2000 held by Kevin J.
Surace, a former officer of the Company, or by Dennis F. Strigl, who is
not standing for reelection to the Board of Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1999, for consideration totaling $20.0 million, the Company
entered into a Development and License Agreement with General Motors
Corporation, by and through its OnStar Division ("General Motors"), together
with a Series G Preferred Stock and Warrant Purchase Agreement (the "Stock
Purchase Agreement") pursuant to which General Motors purchased (i) 1,500 shares
of the Company's Series G Preferred Stock and (ii) a warrant (the "Warrant") to
purchase up to an additional 500 shares of Series G Preferred Stock. The Series
G Preferred Stock is convertible into 8,907,363 shares of Common Stock, subject
to adjustment in certain circumstances, or approximately 22% of the outstanding
Common Stock of the Company immediately after the transaction and approximately
18% of the outstanding Common Stock as of March 6, 2000. The Warrant is
exercisable for Series G Preferred Stock, which in turn is convertible into up
to 2,969,121 shares of Common Stock, subject to adjustment in certain
circumstances, or up to an additional approximately 7% of the outstanding Common
Stock of the Company immediately after the transaction and up to an additional
approximately 6% of the outstanding Common Stock as of March 6, 2000. Under a
letter agreement dated as of December 9, 1999, the closing date of the
transaction, General Motors agreed not to exercise or permit a transferee to
exercise the right to convert shares of the Series G Preferred Stock into shares
of the Company's Common Stock to the extent that the shares of Common Stock
issuable upon conversion would exceed 19.99% of the outstanding shares of the
Company's Common Stock as of December 9, 1999 unless the Company first obtains
(i) the approval of its stockholders or (ii) a written opinion of outside
counsel to the Company that stockholder approval of the issuance of the
Company's Common Stock (or securities convertible into Common Stock) in excess
of 19.99% of the outstanding shares of Common Stock or voting power of the
Company as of December 9, 1999 is not required under applicable Nasdaq
regulations and NASD Rule 4460(i). General Motors also agreed not to exercise or
allow a transferee to exercise the Warrant unless the Company obtains (i) such
stockholder approval or (ii) such written opinion. The
10
<PAGE> 11
Company must use its reasonable best efforts to obtain such stockholder approval
or such written opinion. If the Company fails to obtain the approval of its
stockholders or an opinion of counsel reasonably satisfactory to General Motors,
then the Company must, at the absolute discretion of the Company, either (i) pay
to General Motors $7 million in cash, or (ii) pay to General Motors $3.5 million
in cash and credit $3.5 million against amounts then owed or next owing by
General Motors to the Company. In connection with the sale of Series G Preferred
Stock, General Motors was granted certain registration rights. General Motors
was also granted the right to elect one member of the Company's Board of
Directors, and in December 1999 appointed Chester A. Huber, Jr. to the Board of
Directors.
In June 1998, the Company entered into an agreement with Brooks Fiber
Communications ("BFC") pursuant to which BFC provides telecommunications
services to the Company. Under the agreement, the Company paid an $8,000
installation fee and agreed to pay approximately $13,000 per month in usage fees
until June 2003. In March 1999, the Company entered into an agreement with
WorldCom Technologies, Inc. ("WTI") pursuant to which WTI will provide Internet
telecommunications services to the Company. Under the agreement, the Company
paid a $3,000 start-up fee, $6,000 per month for the first twelve months of the
two-year term, and $10,800 per month for the remaining twelve months of the
two-year term. BFC and WTI are wholly-owned subsidiaries of MCI WorldCom, Inc.
Philip D. Knell, a director of the Company, is President and General Manager of
Network MCI Conferencing.
The Company has entered into indemnification agreements with each of its
officers and directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified and to obtain directors' and
officers' insurance if available on reasonable terms. The Company maintains an
insurance policy covering officers and directors of the Company under which the
insurer has agreed to pay the amount of any claim made against the officers or
directors of the Company that such officers or directors may otherwise be
required to pay or for which the Company is required to indemnify such officers
and directors, subject to certain exclusions and conditions. The policy has a
coverage limit of $15,000,000.
PART IV
Part IV is amended to include the following:
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management........................................ 12
Report of Independent Auditors.............................. 13
Consolidated Balance Sheets................................. 14
Consolidated Statements of Operations....................... 15
Consolidated Statements of Stockholders' Equity (Deficit)... 16
Consolidated Statements of Cash Flows....................... 18
Notes to Consolidated Financial Statements.................. 19
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because the required information is not
present or not present in amounts sufficient to require submission of the
schedules or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
3. EXHIBITS
See Index to Exhibits. The Exhibits listed in the accompanying Index to
Exhibits are filed as part of this report.
(b) REPORTS ON FORM 8-K
A Form 8-K was filed on October 22, 1999 to report the resignation of the
Company's Chief Financial Officer and the appointment of a new Chief Financial
Officer.
A Form 8-K was filed on November 12, 1999 to report the signing of a
definitive agreement on November 9, 1999 with General Motors Corporation by and
through its OnStar Division, subject to regulatory approval.
A Form 8-K was filed on December 14, 1999 to report the closing of the
transaction with General Motors Corporation by and through its OnStar Division.
11
<PAGE> 12
REPORT OF MANAGEMENT
Responsibility for the preparation, integrity and objectivity of the
financial information presented in this annual report rests with the management
of General Magic, Inc. (the "Company"). The accompanying consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles, applying certain estimates and judgments as required.
The Company maintains a system of internal accounting control designed to
be cost-effective while providing reasonable assurance that assets are
safeguarded and that transactions are executed in accordance with management's
authorization and are properly recorded in the financial records. Internal
control effectiveness is supported through careful selection and training of
personnel and quarterly financial reviews with the Company's senior management.
Management believes that the Company's internal controls provide reasonable
assurance that errors or irregularities that could be material to the
consolidated financial statements are prevented or would be detected within a
timely period by employees in the normal course of performing their assigned
functions.
KPMG LLP, independent auditors, are retained to express an opinion on the
Company's consolidated financial statements. Their opinion is based on
procedures believed by them to be sufficient to provide reasonable assurance
that the consolidated financial statements are free of material misstatement.
The Audit Committee of the Board of Directors is composed solely of
nonemployee directors, and is responsible for recommending to the Board the
independent auditors firm to be retained for the coming year, subject to
stockholder approval. The Audit Committee meets periodically and privately with
the independent auditors and with the Company's management to review accounting,
auditing, internal control and financial reporting matters.
Steven Markman
Chairman of the Board, Chief Executive
Officer, and President
Rose Marcario
Chief Financial Officer
12
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of General Magic, Inc.:
We have audited the accompanying consolidated balance sheets of General
Magic, Inc. and subsidiary (a development stage enterprise) as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1999, and for the period from May 1, 1990
(inception) to December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of General
Magic, Inc. and subsidiary (a development stage enterprise) as of December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1999, and for the
period from May 1, 1990 (inception) to December 31, 1999, in conformity with
generally accepted accounting principles.
KPMG LLP
Mountain View, California
January 28, 2000
13
<PAGE> 14
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents (including restricted cash of $0
and $2,280 in 1999 and 1998, respectively)............. $ 23,045 $ 21,845
Short-term investments.................................... 2,490 12,075
Other current assets...................................... 767 1,700
--------- ---------
Total current assets.............................. 26,302 35,620
--------- ---------
Property and equipment, net................................. 11,869 7,507
Other assets................................................ 3,534 4,171
--------- ---------
Total assets...................................... $ 41,705 $ 47,298
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,780 $ 1,348
Accrued expenses.......................................... 8,018 9,980
Current portion of long-term debt......................... -- 2,333
Deferred revenue and other current liabilities............ 5,895 54
--------- ---------
Total current liabilities......................... 16,693 13,715
Deferred revenue............................................ -- 2,000
Long-term debt.............................................. -- 3,778
Other long-term liabilities................................. 2,692 683
--------- ---------
Total liabilities................................. $ 19,385 $ 20,176
========= =========
Commitments
Redeemable, convertible Series D preferred stock, $0.001 par
value; stated at involuntary liquidation preference;
authorized: 2 shares; issued and outstanding: 1999 -- 1;
1998 -- None.............................................. $ 10,274 $ --
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' (deficit) equity:
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 Preferred stock, $0.001 par value; authorized:
435 shares; issued and outstanding: 1999 -- 3;
1998 -- None........................................... 2 --
Common stock, $0.001 par value; authorized: 100,000
shares; issued and outstanding: 1999 -- 43,248;
1998 -- 33,400......................................... 43 33
Additional paid-in capital................................ 282,861 208,557
Accumulated other comprehensive loss...................... (3) --
Deficit accumulated during development stage.............. (270,654) (209,500)
--------- ---------
12,249 (910)
Less treasury stock, at cost: 1999 -- 46; 1998 -- 46...... (203) (203)
--------- ---------
Total stockholders' (deficit) equity.............. 12,046 (1,113)
--------- ---------
$ 41,705 $ 47,298
========= =========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
financial statements.
14
<PAGE> 15
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM MAY 1,
YEARS ENDED DECEMBER 31, 1990 (INCEPTION) TO
-------------------------------- DECEMBER 31,
1999 1998 1997 1999
-------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Licensing revenue...................... $ 1,563 $ 1,610 $ 2,454 $ 20,468
Service revenue........................ 914 119 -- 1,033
Other revenue.......................... 7 557 1,002 9,307
-------- -------- -------- ---------
Total revenue.................. 2,484 2,286 3,456 30,808
-------- -------- -------- ---------
Costs and expenses:
Cost of revenue..................... 195 363 928 6,359
Network operations.................. 7,387 3,405 -- 10,688
Research and development............ 12,071 16,022 21,015 132,128
Selling, general and
administrative.................... 22,976 20,642 9,360 102,557
Depreciation and amortization....... 4,902 3,044 2,849 18,695
Write-off of acquired technology and
in-process research and
development....................... -- 2,827 -- 4,369
Compensation expense associated with
DSI divestiture................... 453 1,634 -- 2,087
Restructuring....................... -- -- -- 3,170
-------- -------- -------- ---------
Total costs and expenses....... 47,984 47,937 34,152 280,053
-------- -------- -------- ---------
Loss from operations..................... (45,500) (45,651) (30,696) (249,245)
Other income (expense), net.............. (2,052) 6,762 2,329 17,375
-------- -------- -------- ---------
Loss before income taxes................. (47,552) (38,889) (28,367) (231,870)
Income taxes............................. 23 19 17 2,330
-------- -------- -------- ---------
Net loss....................... (47,575) (38,908) (28,384) (234,200)
-------- -------- -------- ---------
Favorable conversion rights on
convertible Series A preferred stock... -- (3,665) -- (3,665)
Favorable conversion and redemption
rights on redeemable, convertible
Series B preferred stock, favorable
exercise rights on warrants and
preferred stock dividend............... (112) (8,352) -- (8,464)
Favorable redemption rights on
redeemable, convertible Series C
preferred stock and preferred stock
dividend............................... (522) (10,858) -- (11,380)
Favorable redemption rights on
redeemable, convertible Series D
preferred stock and preferred stock
dividend............................... (602) -- -- (602)
Favorable redemption rights on
redeemable, convertible Series F
preferred stock and preferred stock
dividend............................... (609) -- -- (609)
Favorable conversion rights on
convertible Series G preferred stock... (11,734) -- -- (11,734)
-------- -------- -------- ---------
Loss applicable to common stockholders... $(61,153) $(61,783) $(28,384) $(270,654)
======== ======== ======== =========
Basic and diluted loss per share......... $ (1.56) $ (2.09) $ (1.06)
======== ======== ========
Shares used in computing per share
amounts................................ 39,098 29,630 26,778
======== ======== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
financial statements.
15
<PAGE> 16
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
----------------- --------------- PAID-IN DEVELOPMENT TREASURY EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL OTHER STAGE STOCK (DEFICIT)
-------- ------ ------ ------ ---------- ----- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock...... -- $ -- 6,480 $ 6 $ 417 $ -- $ $ -- $ 423
Issuance of stock warrants.... -- -- -- -- 250 -- -- -- 250
Transfer of equipment from a
related party, at fair
market value................ -- -- -- -- 35 -- -- -- 35
Net loss...................... -- -- -- -- -- -- (474) -- (474)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1990........................ -- -- 6,480 6 702 -- (474) -- 234
-------- ---- ------ --- -------- ----- --------- ----- --------
Issuance of common stock...... -- -- 1,350 1 134 -- -- -- 135
Issuance of common stock under
employee stock option
plan........................ -- -- 26 -- 2 -- -- -- 2
Termination of stock
warrants.................... -- -- -- -- (250) -- -- -- (250)
Contribution of capital....... -- -- -- -- 125 -- -- -- 125
Net loss...................... -- -- -- -- -- -- (3,579) -- (3,579)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1991........................ -- -- 7,856 7 713 -- (4,053) -- (3,333)
-------- ---- ------ --- -------- ----- --------- ----- --------
Issuance of common stock under
employee stock option
plan........................ -- -- 557 1 55 -- -- -- 56
Net loss...................... -- -- -- -- -- -- (10,055) -- (10,055)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1992........................ -- -- 8,413 8 768 -- (14,108) -- (13,332)
-------- ---- ------ --- -------- ----- --------- ----- --------
Issuance of common stock under
employee stock option
plan........................ -- -- 102 1 27 -- -- -- 28
Employee compensation for
founder stock gift to
employees, at fair market
value....................... -- -- -- -- 127 -- -- -- 127
Net loss...................... -- -- -- -- -- -- (17,441) -- (17,441)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1993........................ -- -- 8,515 9 922 -- (31,549) -- (30,618)
-------- ---- ------ --- -------- ----- --------- ----- --------
Issuance of common stock under
employee stock option
plan........................ -- -- 273 -- 111 -- -- -- 111
Termination of preferred stock
redemption feature.......... 6,843 7 -- -- 30,447 -- -- -- 30,454
Repurchase of common stock.... -- -- (800) (1) (51) -- -- -- (52)
Issuance of Series I through N
preferred stock............. 3,609 3 -- -- 46,562 -- -- -- 46,565
Net loss...................... -- -- -- -- -- -- (21,531) -- (21,531)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1994........................ 10,452 10 7,988 8 77,991 -- (53,080) -- 24,929
-------- ---- ------ --- -------- ----- --------- ----- --------
Proceeds from issuance of
common stock in initial
public offering, net of
expenses.................... -- -- 6,325 7 81,248 -- -- -- 81,255
Conversion of preferred stock
into common stock........... (10,452) (10) 10,452 10 -- -- -- -- --
Issuance of common stock under
stock option and purchase
plans....................... -- -- 1,024 1 3,356 -- -- -- 3,357
Unrealized gain on
investments................. -- -- -- -- -- 170 -- -- 170
Net loss...................... -- -- -- -- -- -- (20,619) -- (20,619)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1995........................ -- -- 25,789 26 162,595 170 (73,699) -- 89,092
-------- ---- ------ --- -------- ----- --------- ----- --------
Purchase of technology in
exchange for shares of
common stock................ -- -- 141 -- 697 -- -- -- 697
Issuance of common stock under
stock option and purchase
plans....................... -- -- 489 -- 1,242 -- -- -- 1,242
Unrealized gain on
investments................. -- -- -- -- -- 65 -- -- 65
Net loss...................... -- -- -- -- -- -- (45,634) -- (45,634)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1996........................ -- -- 26,419 26 164,534 235 (119,333) -- 45,462
-------- ---- ------ --- -------- ----- --------- ----- --------
Issuance of common stock under
stock option and purchase
plans....................... -- -- 293 1 261 -- -- -- 262
Issuance of restricted common
stock....................... -- -- 135 -- 169 (155) -- -- 14
Amortization of deferred
compensation................ -- -- -- -- -- 97 -- -- 97
</TABLE>
16
<PAGE> 17
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING STOCKHOLDERS'
----------------- --------------- PAID-IN DEVELOPMENT TREASURY EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL OTHER STAGE STOCK (DEFICIT)
-------- ------ ------ ------ ---------- ----- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchase of technology in
exchange for shares of
common stock................ -- $ -- 45 $-- $ 75 $ -- $ -- $ -- $ 75
Unrealized loss on
investments................. -- -- -- -- -- (228) -- -- (228)
Net loss...................... -- -- -- -- -- -- (28,384) -- (28,384)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1997........................ -- -- 26,892 27 165,039 (51) (147,717) -- 17,298
-------- ---- ------ --- -------- ----- --------- ----- --------
Issuance of common stock under
stock option and purchase
plans....................... -- -- 1,241 1 2,683 -- -- -- 2,684
Issuance of Series A preferred
stock....................... 50 -- -- -- 8,128 -- (3,665) -- 4,463
Issuance of Series B preferred
stock....................... -- -- -- -- 5,849 -- (8,033) -- (2,184)
Issuance of Series C preferred
stock....................... -- -- -- -- 496 -- (9,984) -- (9,488)
Issuance of restricted common
stock....................... -- -- 280 -- 394 (401) -- -- (7)
Conversion of preferred
stock....................... -- -- 3,330 3 21,055 -- -- -- 21,058
Dividends on preferred
stock....................... -- -- -- -- -- -- (1,193) -- (1,193)
Purchase of treasury stock.... -- -- -- -- -- -- -- (203) (203)
Amortization of deferred
compensation................ -- -- -- -- -- 452 -- -- 452
Purchase of NetPhonic and
NETalk...................... -- -- 1,577 2 3,253 -- -- -- 3,255
Compensation associated with
DSI divestiture............. -- -- -- -- 1,390 -- -- -- 1,390
Exercise of warrants.......... -- -- 80 -- 270 -- -- -- 270
Net loss...................... -- -- -- -- -- -- (38,908) -- (38,908)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1998........................ 50 -- 33,400 33 208,557 -- (209,500) (203) (1,113)
-------- ---- ------ --- -------- ----- --------- ----- --------
Issuance of common stock under
stock option and purchase
plans....................... -- -- 1,087 1 1,993 -- -- -- 1,994
Issuance of Series D preferred
stock....................... -- -- -- -- 251 -- (251) -- --
Issuance of Series E preferred
stock....................... 1 1 -- -- 5,967 -- -- -- 5,968
Issuance of Series F preferred
stock....................... 1 -- -- -- 10,708 -- (485) -- 10,223
Issuance of Series G preferred
stock....................... -- 1 -- -- 25,528 -- (11,734) -- 13,795
Issuance of common stock under
equity line................. -- -- 187 -- 246 -- -- -- 246
Conversion of preferred
stock....................... -- -- 8,574 9 28,713 -- -- -- 28,722
Dividends on preferred
stock....................... -- -- -- -- 126 -- (1,110) -- (984)
Compensation associated with
stock options............... -- -- -- -- 772 -- -- -- 772
Accumulated other
comprehensive loss.......... -- -- -- -- -- (3) -- -- (3)
Net loss...................... -- -- -- -- -- -- (47,575) -- (47,575)
-------- ---- ------ --- -------- ----- --------- ----- --------
Balances, December 31,
1999........................ 52 $ 2 43,248 $43 $282,861 $ (3) $(270,654) $(203) $ 12,046
======== ==== ====== === ======== ===== ========= ===== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
financial statements.
17
<PAGE> 18
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1990
YEARS ENDED DECEMBER 31, (INCEPTION) TO
------------------------------ DECEMBER 31,
1999 1998 1997 1999
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(47,575) $(38,908) $(28,384) $(234,200)
Adjustments to reconcile net loss to net cash used in
operating activities:
Employee compensation for founder stock gift to
employees, at fair market value........................ -- -- -- 127
Depreciation and amortization........................... 4,902 3,044 2,849 18,695
Equity in net loss of unconsolidated affiliate.......... 3,557 725 -- 4,282
Amortization of deferred gain from sale and leaseback
financing.............................................. -- -- (72) (285)
Compensation expense associated with stock options...... 772 1,390 -- 2,162
Deferred revenue........................................ 5,895 (2,186) (2,339) 18,944
Amortization of deferred compensation................... -- 452 97 549
Write-off of acquired technology and in-process
research and development............................. -- 2,827 -- 4,170
Changes in items affecting operations:
Other current assets................................ 933 (1,540) 6 (2,313)
Accounts payable and accrued expenses............... (530) 1,620 (10,775) 755
-------- -------- -------- ---------
Net cash used in operating activities....................... (32,046) (32,576) (38,618) (187,114)
-------- -------- -------- ---------
Cash flows from investing activities:
Purchases of short-term investments....................... (7,057) (22,430) (53,352) (283,232)
Proceeds from sales and maturities of short-term
investments............................................. 16,642 21,733 85,894 280,740
Investments in unconsolidated affiliates.................. -- (2,834) -- (2,834)
Acquisitions of NetPhonic and NETalk...................... -- (300) -- (300)
Purchases of property and equipment....................... (9,059) (5,711) (2,716) (30,029)
Other assets.............................................. (3,125) 1,163 (630) (3,937)
-------- -------- -------- ---------
Net cash provided by (used in) investing activities......... (2,599) (8,379) 29,196 (39,592)
-------- -------- -------- ---------
Cash flows from financing activities:
Proceeds from sale and leaseback financing................ -- -- -- 1,885
Repayment of capital lease obligations.................... (54) (209) (985) (2,607)
Proceeds from issuance of debt............................ -- 3,000 4,000 7,000
Repayment of debt......................................... (6,111) (903) -- (7,014)
Proceeds from sale of common stock and warrants, net of
offering cost........................................... 2,240 2,953 351 92,313
Proceeds from sale of redeemable, preferred stock......... 25,968 36,433 -- 106,401
Proceeds from sale of preferred stock..................... 13,796 4,463 -- 51,278
Repurchase of common stock................................ -- (203) -- (255)
Other long-term liabilities............................... 6 (148) (236) 750
-------- -------- -------- ---------
Net cash provided by financing activities................... 35,845 45,386 3,130 249,751
-------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 1,200 4,431 (6,292) 23,045
Cash and cash equivalents, beginning of year/period......... 21,845 17,414 23,706 --
-------- -------- -------- ---------
Cash and cash equivalents, end of year/period............... $ 23,045 $ 21,845 $ 17,414 $ 23,045
======== ======== ======== =========
Supplemental disclosures of cash flow information:
Income taxes paid during the year/period.................. $ 23 $ 19 $ 22 $ 2,089
Interest paid during the year/period...................... 328 410 118 1,117
Noncash investing and financing activities:
Deferred compensation for restricted stock issuances.... -- 394 155 548
Reclassification of advance royalties from deferred
revenue to other long-term liabilities................. 2,000 1,500 3,500
Purchase of technology and other intangibles in exchange
for shares of common stock............................. -- 3,255 75 4,027
Reclassification of advance royalties from deferred
revenue to accrued liabilities......................... -- -- -- 9,049
Reclassification of long-term liability to accrued
expenses............................................... -- 1,563 -- 1,563
Capital equipment acquired under capital lease
obligations............................................ -- -- -- 2,622
Preferred stock redemption and conversion rights and
dividends.............................................. 13,578 22,875 -- 36,452
Transfer of assets to unconsolidated affiliate.......... -- 1,469 -- 1,469
Conversion of redeemable preferred stock into preferred
stock.................................................. 28,722 -- -- 72,723
Conversion of preferred stock into common stock......... 1,618 21,058 -- 22,945
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
financial statements.
18
<PAGE> 19
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The Company
General Magic, Inc. is a voice applications service provider that enables
businesses to give their customers voice access to information and services,
whether provided through customer interaction centers, over telecommunications
networks or through the Internet. The Company develops and deploys its voice
applications on its magicTalk(TM) communications platform and offers hosting
services for those applications in its state-of-the-art network operations
center.
General Magic, Inc. was incorporated in California in May 1990 and
reorganized as a Delaware corporation in February 1995. The Company continues to
be a development stage enterprise. These financial statements contain the
trademarks of General Magic and those of other companies. The Company has
generated minimal revenues to date and expects to incur significant losses
through 2000. There can be no assurance that the Company will achieve or sustain
significant revenues or become cash flow positive or profitable at any time in
the future. The Company expects that its cash, cash equivalents, and short-term
investment balances as of December 31, 1999, along with cash expected to be
available under the Company's equity line of credit arrangement and other
financing arrangements, will be adequate to fund the Company's operations
through 2000.
The Company is subject to all of the risks inherent in the establishment of
a new business enterprise. The Company must, among other things, secure adequate
financial and human resources to meet its requirements; achieve market
acceptance for its voice application services and products; establish and
maintain relationships with businesses with high volume customer interactions;
establish and maintain alliances with companies that offer technology solutions
for businesses with high volume customer interactions; respond effectively to
competitive developments; meet the challenges inherent in the timely development
and deployment of complex technologies; generate sufficient revenues from its
services to permit the Company to operate profitably; 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.
Basis of Presentation
Effective January 1, 1999, the Company has reclassified the presentation of
its statement of operations to more accurately portray the operating costs of
providing voice-enabled services and to allow for better comparison with other
companies in the service industry. As a result, certain line items have been
added and expenses have been reclassified in prior periods to be consistent with
this new presentation. The following line items have been added:
Service Revenue: Service revenue consists of all revenue from the Company's
Portico(TM) service and will include revenue from other voice-enabled services
as it is recognized.
Network operations: Network operations expense consists of personnel and
related costs associated with running the network operations center and
providing customer support and billing, access costs associated with the
telephony and data network, and royalties paid to software and content
providers. Costs incurred prior to the commercial release of the Company's
Portico service are included principally in research and development.
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.
19
<PAGE> 20
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Fees from customer-specific engineering and development projects are
recognized under the percentage-of-completion method based on either the
achievement and acceptance of milestones or the performance of services. Support
and maintenance fees are recognized ratably over the period the service or
maintenance is provided.
Licensing revenue primarily represents revenue from license fees for the
Company's technologies and royalty revenue from original equipment manufacturer
("OEM") shipments of devices incorporating the Company's technologies. Other
revenue in 1998 consists of proceeds from sales of the DataRover handheld
communication device ("DataRover 840"), fees earned under customer-specific
support service contracts, and subscription fees for the Portico service. Other
revenue in 1997 consists of fees earned under customer-specific engineering,
maintenance and support services contracts.
The Company recognizes nonrefundable, nonrecoupable license fees upon
delivery of its technology to its licensees when no continuing obligation for
the Company exists. Royalties associated with OEM licensees are recognized upon
shipment of the product incorporating the Company's technology to the OEM's
customers provided that the collection of the related receivable is deemed
probable. Royalties associated with potential OEM product returns are estimated
and provided for in the period of sale. Licensing revenue from network operators
is recognized as earned based upon usage and, in certain cases, based on
subscriber registration. Advance payments of licensing revenue and fees received
prior to revenue recognition are recorded as deferred revenue.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid debt instruments with original
remaining maturities of three months or less at the date of acquisition to be
cash equivalents. Cash equivalents consist primarily of commercial paper and
money market mutual funds.
In connection with a previously resolved commitment, the Company had
$2,280,000 in restricted cash as of December 31, 1998.
The Company has classified its investments as "available-for-sale."
Investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a component of comprehensive income. Interest income
is recorded using the effective interest rate, with amortization of associated
premium or discount included in "investment income." The cost of securities sold
is determined based upon the specific identification method.
Property and Equipment
Property and equipment are recorded at original cost less accumulated
depreciation. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the respective assets, generally three
to five years. Assets recorded under capital leases are amortized on a
straight-line basis over the shorter of the lease terms or the estimated useful
lives of the respective assets.
20
<PAGE> 21
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recoverability of Long-Lived Assets
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
The loss would be measured by the amount by which the carrying amount of the
assets exceeds the fair market value of the assets.
Software Development Costs
Development costs incurred in the research and development of new software
products are expensed as incurred until technological feasibility has been
established. Software development expenses incurred for product enhancements
after the product has reached technological feasibility have not been material
and, accordingly, also have been charged to operations as incurred. From
inception through December 31, 1999, no software development costs have been
capitalized.
Income Taxes
The Company provides for income taxes using the asset and liability method
under which provision for deferred income taxes is based on enacted tax laws and
rates applicable to the periods in which the taxes become payable.
Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which requires dual
presentation of basic earnings per share and diluted earnings per share. As the
Company has had net losses for all periods presented, basic and diluted loss per
share are equal. Outstanding convertible preferred stock, warrants, and options
could potentially dilute basic earnings per share in the future but have not
been included in the computation of diluted net loss per share as the impact
would have been antidilutive for the periods presented. The computation of
diluted loss per share does not include common stock issuable upon the exercise
of outstanding options or warrants or upon the conversion of outstanding
preferred stock. As of December 31, 1999, 1998 and 1997, there were 7,079,042,
7,315,000, and 4,991,000 options outstanding, respectively. As of December 31,
1999, there were warrants for the purchase of 4,084,748 shares of common stock
outstanding, 3,629,000 shares of common stock issuable upon the conversion of
Series A preferred stock, 6,099,765 shares of common stock issuable upon the
conversion of Series D preferred stock, 1,576,316 shares of common stock
issuable upon the conversion of Series E preferred stock, 6,356,382 shares of
common stock issuable upon the conversion of Series F preferred stock, and
8,907,363 shares of common stock issuable upon the conversion of Series G
preferred stock.
Basic and diluted loss per share are computed by dividing loss available to
holders of common stock by the weighted-average number of shares of common stock
outstanding during the period.
Comprehensive Income/Loss
Effective January 1998, the Company adopted 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.
21
<PAGE> 22
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There were no material differences between the Company's comprehensive loss and
net loss for the periods presented.
Accounting Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates of the Company relate to the computation and
classification of deferred revenue, including the accrual, if applicable, of
interest payable thereon.
Advertising Costs
Costs incurred for producing and publishing advertisements are expensed
when incurred. Advertising expense was $2,885,251, $1,946,000, and $118,000 for
1999, 1998, and 1997, respectively.
Amortization of Intangibles
Goodwill and other intangibles are amortized on a straight-line basis over
periods ranging from two to five years.
Stock-Based Compensation
The Company has elected to continue to use the intrinsic value-based method
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" as allowed under SFAS No. 123, "Accounting for Stock-Based
Compensation," to account for all of its employee stock-based compensation
plans. The adoption of SFAS No. 123 did not have a material effect on the
Company's consolidated financial position or results of operations.
New Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on
accounting for the costs of computer software intended for internal use. SOP
98-1 was adopted by the Company effective for fiscal 1999 and did not have a
material impact on the Company's consolidated results of operations.
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP No.
97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP
No. 98-9 requires recognition of revenue using the "residual method" in a
multiple element software arrangement when fair value does not exist for one or
more of the delivered elements in the arrangement. Under the "residual method,"
the total fair value of the undelivered elements is deferred and recognized in
accordance with SOP No. 97-2. The Company will be required to implement SOP No.
98-9 for the year ending December 31, 2000. SOP No. 98-9 also extends the
deferral of the application of SOP No. 97-2 to certain other multiple-element
software arrangements through the Company's year ending December 31, 1999. The
Company does not expect the adoption of SOP No. 98-9 to have a material impact
on its financial position, results of operations or cash flows.
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities, Deferral
of the Effective Date of SFAS No. 133", which amends the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging
22
<PAGE> 23
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
activities and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and measure them at fair value. Gains
and losses resulting from changes in fair value would be accounted for based on
the intended use of the derivative and whether it is designated and qualifies
for hedge accounting. The Company has not determined the impact that SFAS No.
133 will have on its financial statements and believes that such determination
will not be meaningful until closer to the date of the initial adoption.
NOTE 2: AGREEMENTS WITH STOCKHOLDERS
In connection with the Company's initial strategy to promote its Magic Cap
and Telescript technologies, the Company entered into various contractual
arrangements with certain stockholders. Substantially all of the Company's
revenue from its May 1, 1990, inception was generated from such stockholders, or
their affiliates.
Five companies, which became stockholders of the Company prior to 1993,
entered into license agreements to pay royalties for the Company's Magic Cap
technology. The agreements provided for the payment of up to $2,500,000 in
prepaid royalties by each licensee in the event the Company met certain
technology development milestones. These prepayments were to be offset at a rate
of $0.50 for every dollar of royalties payable by the licensees upon shipments
of products incorporating the Company's technology. If the prepayments were not
fully recouped by the fifth anniversary of the license agreements (November 30,
1997), the licensees were each entitled to demand repayment of the unrecouped
amount plus interest.
As of December 31, 1998, three of the companies had demanded and received
payment of the unrecouped prepaid royalty. A fourth of these five Magic Cap
licensees, among other things, permitted the licensee to recoup 100% of any
royalties owed to the Company under a software modem license agreement against
the Magic Cap royalty prepayment, amended the Magic Cap license agreement to
provide for 100% recoupment of any royalties due thereunder, extended the date
for refund of unrecouped prepaid royalties to November 2, 1999, and provided
that no interest will be due upon any refund. During 1998, the Company
transferred this obligation to Altocom, Inc. in exchange for discontinuing a
certain revenue sharing agreement (see Note 5).
In December 1999, the Company compromised the claim of the fifth licensee
for refund of a prepaid royalty, together with interest, totaling $2.3 million
in consideration of the issuance to the licensee of 267,559 shares of the
Company's common stock, and an agreement to pay a total of $1,250,000 in five
quarterly installments, commencing January 2000. As of December 31, 1999, $2.0
million of this was classified in accrued expenses and $250 thousand in other
long term liabilities.
Additionally, in 1994 and 1995, the Company entered into Magic Cap
technology license agreements with three other stockholders. These license
agreements each provided for the payment of a $2,500,000 nonrefundable,
nonrecoupable license fee. The agreements also provided for the payment of up to
$2,500,000 in prepaid royalties, payable in installments upon the Company's
achievement of certain technology milestones. Failure to deliver the technology
milestones entitled each licensee to terminate its agreement and obtain a refund
of unrecouped prepaid royalties in two equal annual installments of principal,
plus interest from the date of termination, payable commencing one year
following termination of the agreement. During the fourth quarter of 1996, each
of the three licensees demanded delivery of the final milestone due under the
license agreements. The Company delivered the final milestone in January 1997.
In June 1997, the Company reached a settlement agreement to resolve the
claims of, and terminate a license agreement with Mitsubishi Electric
Corporation (MELCO). In consideration therefor, the Company agreed to refund
unrecouped prepaid royalties of $1,500,000, waive further payments otherwise due
under the original agreement, and grant a royalty-free license to certain
software modem technology. The $1,500,000 refund was secured by a license in
certain of the Company's intellectual property, was non-interest bearing,
23
<PAGE> 24
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and was payable on or before August 17, 1999. The Company elected not to refund
the $1,500,000 unrecouped prepaid royalty to MELCO and, on August 18, 1999,
MELCO's license to certain of the Company's intellectual property became
effective and accordingly, the Company earned the revenue associated with the
license grant.
In September 1997, the Company reached agreement with a second of the three
licensees providing for acceptance of the final milestone, subject to certain
conditions which were satisfied by the Company later that month. Pursuant to
this agreement, the Company waived payment of the final $500,000 installment of
the prepaid royalties and recognized $2,000,000 in licensing revenue. In October
1997, the Company reached agreement with the third licensee, which also provided
for acceptance of the final milestone. Pursuant to this agreement, the Company
waived payment of the final $500,000 installment of the prepaid royalties and
agreed to refund prepaid royalties not recouped by January 1, 2003, plus any
accrued interest, on or before December 31, 2003. As of December 31, 1999 the
remaining obligation of $2,000,000 was classified in other long term
liabilities. The Company does not expect the third licensee to develop or
manufacture additional products that incorporate the Company's Magic Cap
technology.
NOTE 3: CONSOLIDATED FINANCIAL STATEMENT DETAILS
Cash Equivalents, and Short-Term Investments
Cash equivalents and short-term investments consisted of the following (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999
Money market funds............................... $ 7,403 $ $ $ 7,403
Certificates of deposit.......................... -- -- -- --
Government securities............................ 500 -- -- 500
Commercial paper................................. 17,861 -- -- 17,861
------- -- -- -------
$25,764 $-- $-- $25,764
======= == == =======
AS OF DECEMBER 31, 1998
Money market funds............................... $ 9,868 $ $ $ 9,868
Certificates of deposit.......................... 2,280 -- -- 2,280
Government securities............................ 2,839 -- -- 2,839
Commercial paper................................. 18,022 -- -- 18,022
------- -- -- -------
$33,009 $-- $-- $33,009
======= == == =======
</TABLE>
The Company's investments were classified as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Cash equivalents............................................ $23,274 $20,934
Short-term investments...................................... 2,490 12,075
------- -------
$25,764 $33,009
======= =======
</TABLE>
All short-term investments have weighted-average original maturities of
less than one year. As of December 31, 1999, the Company had a cash overdraft of
$229,000.
24
<PAGE> 25
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
The components of property and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Office equipment and computers.............................. $18,653 $13,175
Furniture and fixtures...................................... 2,334 2,373
Leasehold improvements...................................... 3,623 996
------- -------
24,610 16,544
Less accumulated depreciation and amortization.............. 12,741 9,037
------- -------
$11,869 $ 7,507
======= =======
Capital lease equipment included in property and equipment
consisted of:
Cost...................................................... $ 483 $ 483
Less accumulated amortization............................. 483 479
------- -------
$ 0 $ 4
======= =======
</TABLE>
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Prepaid royalty payment and accrued interest................ $2,127 $4,217
Employee compensation....................................... 3,511 3,688
Other....................................................... 2,380 2,075
------ ------
$8,018 $9,980
====== ======
</TABLE>
Other Income (Expense), net
Other income, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Gain on AltoCom transactions............................ $ -- $4,686 $ --
Gain on sale of Starfish, Inc........................... 321 1,318 --
Equity in net loss of DSI............................... (3,557) (725) --
Interest income......................................... 1,068 1,925 2,917
Interest expense........................................ (52) (574) (142)
Other................................................... 168 132 (446)
------- ------ ------
$(2,052) $6,762 $2,329
======= ====== ======
</TABLE>
NOTE 4: FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
short-term investments. The Company invests its excess cash in U.S. government
securities and commercial paper. These investments typically bear minimal risk.
This diversification of risk is consistent with the Company's policy to ensure
safety of principal.
25
<PAGE> 26
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company maintains cash and cash equivalents and certain other financial
instruments with various financial institutions. These financial institutions
are located in the United States, and the Company's policy is designed to limit
exposure to any one institution. The Company's periodic evaluations of the
relative credit standing of these financial institutions are considered in the
Company's investment strategy.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, other accrued liabilities,
and long-term debt, the carrying amounts approximate fair value.
NOTE 5: INVESTMENTS IN CONITA TECHNOLOGIES, INC. AND ALTOCOM, INC.
In January 1998, the Company discontinued operations of its South Carolina
office and entered into an agreement with Conita Technologies, Inc. ("Conita"),
a company founded by former employees of the South Carolina office. Under the
agreement, the Company obtained a 10% minority interest in Conita through the
purchase of preferred stock for a total of $758,000. The Company accounts for
its investment in Conita under the cost method.
In 1997, the Company transferred certain technology and other assets of its
software modem technology group to AltoCom, Inc. ("AltoCom"). The Company
retained a minority interest in AltoCom and a share of its ongoing revenue
stream. In January 1998, the Company and AltoCom agreed to discontinue the
revenue sharing agreement in exchange for certain consideration, including the
assumption by AltoCom of a $2,186,000 obligation to one of the Company's legacy
partners. The Company recognized $2,446,000 in other income during the first
quarter of 1998 in connection with this transaction. In April 1998, the Company
sold its minority interest in AltoCom for a total of $2,495,000, and recognized
in other income a gain of $2,240,000 on the sale.
NOTE 6: DIVESTITURE OF THE DATAROVER DIVISION AND INVESTMENT IN DSI
Effective October 1998, the Company divested its DataRover handheld
communications device division ("DataRover Division") in a transaction with
DataRover Mobile Systems, Inc., which has since changed its name to Icras, Inc.
("DSI"). Pursuant to the transaction, the Company contributed cash and certain
other assets of its DataRover Division totaling $3,361,000 in value to DSI. The
Company also licensed certain of its technologies to DSI. In consideration
therefor, the Company received non-voting, non-redeemable preferred stock and
49% of the outstanding common stock of DSI. The Company did not recognize any
gain or loss as a result of the divestiture of the DataRover Division, and
accounted for its investment in DSI under the modified equity method, which
required the Company to record 100% of the losses incurred by Icras. As of
September 30, 1999, the Company had written off its entire original investment
in DSI.
In connection with the divestiture of the DataRover Division, approximately
30 employees of the Company became employees of DSI. The Company provided for
accelerated vesting of options to acquire 256,000 shares of the Company's common
stock held by such employees, and granted an additional 320,000 options to
acquire the Company's common stock to such employees. The newly granted options
will vest ratably at 1/24 per month over a two-year period. The Company recorded
compensation expense of $1,634,000 associated with the fair value of the
accelerated and newly granted options and severance paid pursuant to an
agreement with a Company executive. The compensation expense relating to the
options was determined using the Black-Scholes fair market valuation method. The
fair value attributable to the accelerated options was expensed in the fourth
quarter of 1998 while the fair value associated with the new grant will be
expensed over the two-year vesting period of the grant.
26
<PAGE> 27
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 1999, the Company purchased handheld communication units from Oki
Electric Industry Co., Ltd. ("Oki Electric") for DSI under an existing letter of
credit for a total of $2,179,000. DSI was obligated to reimburse the Company the
actual cost of such units, and its obligation was secured by all personal
property of DSI. Prior to the August 5, 1999, financing described below, the
total receivable from DSI, reflecting this and other obligations, was
$2,089,000.
On August 5, 1999, in connection with a third party DSI financing
transaction, the Company exchanged all of its preferred stock and common stock
for Series AA convertible preferred stock. In connection with this transaction,
the Company also agreed to reduce the note receivable due from DSI to $500,000,
and released its security interest in all personal property of DSI other than
its DataRover 840 inventory. As a result of this transaction, the Company now
owns less than 20% of the outstanding common stock of DSI and will account for
this investment under the cost method. The Company's interest in DSI as of
December 31, 1999 is comprised of an investment of $1,589,000 and a note
receivable of $498,000, all classified as other non-current assets.
NOTE 7: ACQUISITION OF NETPHONIC COMMUNICATIONS, INC.
In March 1998, the Company acquired all of the outstanding shares of common
and preferred stock of NetPhonic Communications, Inc. ("NetPhonic"), a
development stage enterprise, for a total consideration of $2,050,000,
consisting of $200,000 cash and 1,342,524 shares of the Company's common stock.
The Company's common stock was issued to NetPhonic shareholders of record as of
the date of the transaction. NetPhonic had developed voice browser software that
enabled touch-tone telephone access to Web content, upon which the Company has
recently received a patent. The acquisition was accounted for under the purchase
method and, accordingly, the results of operations of NetPhonic have been
included in the Company's consolidated financial statements as of the date of
acquisition. The operations of NetPhonic were not material relative to the
Company's consolidated results of operations. The Company allocated the total
purchase price to acquired in-process research and development that had not yet
reached technological feasibility and had no alternative future use to the
Company. As a result, the Company recognized a charge of $2,050,000 for the
write-off of in-process research and development as of the date of the
acquisition. The value assigned to purchased in-process research and development
was determined by identifying the cost to develop the purchased technology into
a commercially viable feature of the Company's Portico service, estimating the
resulting net cash flows for this project, and discounting the net cash flows
back to their present value. The efforts to develop the purchased in-process
technology centered around the integration of the purchased touch-tone Web
access technology into the magicTalk platform utilized in the Portico service.
The estimated cost to be incurred to develop the purchased technology into a
commercially viable feature of the Portico service at the time of the
acquisition was estimated at approximately $2,330,000 in the aggregate through
the year 1999 ($845,000 in 1998 and $1,485,000 in 1999). The Company had
expected this effort to be completed by the end of 1999 and to benefit from the
effort beginning in the year 2000. In the fourth quarter of 1998, the Company
decided not to implement the technology purchased from NetPhonic into the
Portico service and suspended any additional development efforts with respect to
that technology.
NOTE 8: ACQUISITION OF NETALK, INCORPORATED
In October 1998, the Company acquired substantially all of the assets of
NETalk, Incorporated ("NETalk"), a development stage enterprise, for a total
consideration of $1,505,000, consisting of $100,000 in cash and 234,104 shares
of the Company's common stock. NETalk was engaged in the development of
applications providing users with advanced speech recognition tools to access
Web content over the telephone. The acquisition was accounted for under the
purchase method and, accordingly, the results of operations of NETalk have been
included in the Company's consolidated financial statements as of the date of
acquisition. The operations of NETalk were not material relative to the
Company's consolidated results of operations. Of
27
<PAGE> 28
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the total purchase price, $777,000 has been allocated to in-process research and
development while the remainder was allocated to certain intangible assets. The
purchased in-process technology represents the present value of the estimated
after-tax benefit after application of an attribution factor. The technology, as
of the acquisition date, had not reached technological feasibility. The cash
flow projections for revenues were based on estimates of relevant market sizes
and growth factors, expected industry trends, the anticipated nature and timing
of new product introductions by the Company and its competitors, individual
product sales cycles, and the estimated life of each product's underlying
technology. Estimated operating expenses and income taxes were deducted from
estimated revenue projections to arrive at estimated after-tax cash flows.
Projected operating expenses include cost of goods sold, marketing and selling
expenses, general and administrative expenses, and research and development,
including estimated costs to complete the technology and maintain the products
once they have been introduced into the market and are generating revenue. The
rates utilized to discount projected cash flows ranged from 30% to 40% for
in-process technologies and were based primarily on venture capital rates of
return and the weighted-average cost of capital for the Company at the time of
the acquisition. The in-process technology was expensed immediately, while the
intangible assets are being amortized over periods ranging from two to five
years. The intangible assets are included under "Other assets" on the balance
sheet.
NOTE 9: PREFERRED STOCK
In February 1998, the Company entered into an agreement with Microsoft
Corp. ("Microsoft") for the sale of 50,000 shares of Series A Convertible
Preferred Stock and the license of certain of the Company's technology. The
aggregate consideration for the sale of Series A preferred stock was $4,500,000.
Series A preferred stock is eligible to vote with common stock on an "as if
converted" basis. Each share of Series A preferred stock is entitled to receive,
if and when the Company's Board of Directors declares a dividend payable on
common stock, a dividend equal to the dividend per share of common stock on an
"as if converted" basis. Series A preferred stock dividends are payable in
preference to any dividends on the Company's common stock and are
non-cumulative. The liquidation preference of each share of Series A preferred
stock is $90 plus any declared but unpaid dividends. Subject to adjustment in
certain circumstances, each share of Series A preferred stock is convertible
into shares of the Company's common stock at a conversion rate obtained by
dividing $90 by the applicable conversion value which, as of December 31, 1999,
was $1.24. As of December 31, 1999, 3,629,000 shares of the Company's common
stock were issuable upon conversion of the Series A preferred stock.
In March 1998, the Company entered into a financing transaction with a
group of private investors that provided $5,000,000 in cash to the Company from
the sale of 5,000 shares of its 5 1/2% Cumulative Convertible Series B Preferred
Stock. As part of the financing transaction, the Company issued warrants to
acquire 320,000 shares of common stock at an exercise price of $3.38 per share.
The warrants have a five-year term and are immediately exercisable. In June
1998, for an aggregate purchase price of $2,000,000, certain holders of the
Company's Series B preferred stock exercised their right to purchase 2,000
additional shares of Series B preferred stock and warrants to acquire an
additional 160,000 shares of the Company's common stock at an exercise price of
$18.75 per share. As of December 31, 1999, no shares of Series B preferred stock
were outstanding, and a total of 528,188 shares of common stock were issuable
upon the exercise of the associated warrants.
In June 1998, the Company entered into a financing transaction with a group
of private investors that provided $30,000,000 in cash to the Company from the
sale of 3,000 shares of its Series C Convertible Preferred Stock. As part of the
financing transaction, the Company issued warrants to acquire 150,000 shares of
common stock at a price of $17.22 per share. The warrants have a three-year term
and are immediately exercisable. As of December 31, 1999, no shares of Series C
preferred stock were outstanding, and a total of 194,503 shares of the Company's
common stock were issuable upon exercise of the associated warrants.
28
<PAGE> 29
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 30, 1999, the Company entered into a financing transaction with a
group of private investors that provided $20,000,000 in cash to the Company from
the sale of 2,000 shares of its Series D Convertible Preferred Stock. Each
holder of Series D preferred stock has special voting rights with respect to
matters that adversely affect the rights of holders of Series D preferred stock
and otherwise has no voting rights except as may be required by law. Each share
of Series D preferred stock accrues dividends quarterly at a rate of 5% per
annum of the stated value ($10,000 per share). The liquidation preference of
Series D preferred stock is $10,000 per share plus any accrued but unpaid
dividends and unpaid default interest on cash dividends, and is payable pari
passu with the Series A, Series E, Series F and Series G preferred stock and in
preference to the holders of common stock. Each share of Series D preferred
stock is convertible into shares of the Company's common stock at a conversion
rate obtained by dividing the liquidation preference by $1.684 (the "Series D
Conversion Price"). The Series D Conversion Price is subject to adjustment upon
certain events, including, without limitation, adjustment following the last day
of each September and March until March 30, 2002 and on December 31, 1999 and
June 30, 2000, to an amount equal to 110% of the average of the closing bid
prices of the Company's common stock during the ten trading days immediately
after each such date (the "Series D Reset Price") if the Series D Reset Price is
less than the then-effective Series D Conversion Price.
Subject to certain conditions, the Company may redeem all of the Series D
preferred stock upon a Change of Control at a price equal to, subject to limited
exceptions, 115% of the liquidation preference. In addition, subject to certain
conditions, in the event that a Series D Reset Price is less than $1.966, the
Company may redeem all of the Series D preferred stock at the liquidation
preference.
In the event of a Major Transaction, the holders of Series D preferred
stock may require the Company to redeem any or all of their shares at the
greater of (i) 125% of the liquidation preference and (ii) a price based on the
market value of the common stock at the time of the public announcement of such
Major Transaction. However, in the event of a Change of Control, the holders of
the Series D preferred stock may not exercise their rights of redemption if the
Company has previously delivered its notice of redemption upon a Change of
Control. The holders of the Series D preferred stock are also entitled to
require the Company to redeem some or all of their shares at a per share price
equal to 130% of the liquidation preference, or in certain cases, the greater of
(i) 130% of the liquidation preference and (ii) a price based on the closing bid
price of the Company's common stock at the time of any of the following events,
among others: (x) the Company's failure to use its best efforts to maintain
registration of the common stock issuable upon conversion of the Series D
preferred stock; (y) the Company's failure to use its reasonable best efforts to
maintain the listing of its common stock on The Nasdaq National Market
("Nasdaq"), The New York Stock Exchange ("NYSE"), or the American Stock
Exchange, Inc. ("AMEX"); or (z) the Company's failure to timely convert the
Series D preferred stock. In addition, the holders of the Series D preferred
stock are entitled to require the Company to redeem some or all of their shares
at a per share price equal to the liquidation preference at the time of any of
the following events: (i) the Company's failure to maintain the registration
statement for resale of the common stock issuable upon conversion of the Series
D preferred stock; (ii) the Company's failure to maintain listing of its common
stock on Nasdaq, NYSE or AMEX; or (iii) a purchase, tender or exchange offer
made to and accepted by holders of more than 50% of the Company's common stock
which is not approved or recommended by the Company's board of directors. As
part of the financing transaction, the Company issued warrants to acquire an
additional 150,000 shares of common stock at an exercise price of $5.078 per
share. The warrants have a three-year term and are immediately exercisable. As
of December 31, 1999, a total of 6,277,732 shares of common stock were issuable
upon the conversion of all Series D preferred stock and associated warrants.
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
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-
29
<PAGE> 30
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cumulative dividends at 5% of $10,000 per annum on each share of the Series E
preferred stock, which are payable in preference to any dividends on the
Company's common stock. The liquidation preference of Series E preferred stock
is $10,000 per share, and is payable pari passu with the Series A, Series D,
Series F and Series G 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 associated warrant is
exercisable for 100 shares of Series E preferred stock at an exercise price of
$10,000 per share, has a fifteen-month term, and is immediately exercisable. As
of December 31, 1999, a total of 1,839,473 shares of common stock were issuable
upon the conversion of all Series E preferred stock and associated warrants.
Effective July 30, 1999, the Company entered into a common stock investment
agreement with an existing institutional investor, providing the Company an
equity line of credit. The common stock investment agreement permits the Company
to require the investor to purchase from time to time an aggregate of up to
$20,000,000 of the Company's common stock in increments of up to $5,000,000. In
addition, pursuant to a March 10, 2000 amendment (see Note 15), the investor has
the right to purchase in its sole discretion up to 100% of each increment
requested by the Company, up to an aggregate of an additional $6,000,000 of
common stock during the term of the common stock investment agreement. However,
there are numerous conditions on the Company's right to draw down under the
equity line, and there can be no assurance that the Company will be able to draw
down on the line in an amount totaling as much as $20,000,000. On November 23,
1999, the Company sold 125,000 shares of its common stock at $2.00 per share for
an aggregate purchase price of $250,000 under the equity line of credit pursuant
to a draw down notice delivered by the Company on September 10, 1999.
On September 9, 1999, certain of the Company's investors exchanged an
aggregate of 1,000 shares of Series D Convertible Preferred Stock for 1,000
shares of the Company's Series F Convertible Preferred Stock. Each holder of
Series F preferred stock has special voting rights with respect to matters that
adversely affect the rights of holders of Series F preferred stock and otherwise
has no voting rights except as may be required by law. Each share of Series F
preferred stock accrues dividends quarterly at a rate of 5% per annum of the
stated value ($10,000 per share). The liquidation preference of Series F
preferred stock is $10,000 per share plus any accrued but unpaid dividends and
unpaid default interest on cash dividends, and is payable pari passu with the
Series A, Series D, Series E and Series G preferred stock and in preference to
the holders of common stock. Each share of Series F preferred stock is
convertible into shares of the Company's common stock at a conversion rate
obtained by dividing the liquidation preference by $1.378 (the "Series F
Conversion Price"). The Series F Conversion Price is subject to adjustment upon
certain events, including, without limitation, adjustment following the last day
of each December, March, June and September until March 30, 2002, to an amount
equal to 90% of the average of the closing bid prices of the Company's common
stock during the ten trading days immediately after each such date (the "Series
F Reset Price") if the Series F Reset Price is less than the then-effective
Series F Conversion Price.
Subject to certain conditions, the Company may redeem all of the Series F
preferred stock upon a consolidation, merger or other business combination in
which the Company's stockholders do not retain sufficient voting power in the
surviving entity to elect a majority of such entity's board of directors (a
"Change of Control") at a price equal to, subject to limited exceptions, 115% of
the liquidation preference. In addition, subject to certain conditions, in the
event that a Series F Reset Price is less than $1.966, the Company may redeem
all of the Series F preferred stock at the liquidation preference.
In the event of a Change of Control, the sale of substantially all of the
assets of the Company, or a purchase, tender or exchange offer made to and
accepted by holders of more than 50% of the common stock of the Company which is
approved or recommended by the Company's board of directors (each a "Major
Transaction"), the holders of Series F preferred stock may require the Company
to redeem any or all of their
30
<PAGE> 31
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
shares at the greater of (i) 125% of the liquidation preference and (ii) a price
based on the market value of the common stock at the time of the public
announcement of such Major Transaction. However, in the event of a Change of
Control, the holders of the Series F preferred stock may not exercise their
right of redemption if the Company has previously delivered its notice of
redemption upon a Change of Control. Unless the Company elects to redeem the
Series F preferred stock at a price per share equal to the greater of 130% of
the liquidation preference and a price based on the closing bid price of the
Company's common stock, then, at the time of any of the following events, the
holders of the Series F preferred stock are entitled to a substantial reduction
in the conversion price and a payment of 1% of the liquidation preference for
each day that any of such events continues for up to 20 days in any 365-day
period: (i) the Company's failure to maintain registration of the common stock
issuable upon conversion or exercise of the Series F preferred stock; or (ii)
the Company's failure to maintain the listing of the common stock on Nasdaq,
NYSE or AMEX. If the Company fails to make these 1% penalty payments, the
holders of the Series F preferred stock will have the right to require the
Company to redeem some or all of their shares at a price per share equal to the
greater of 130% of the liquidation preference or a price based on the closing
bid price. The holders of the Series F preferred stock also have the right to
require the Company to redeem their shares at such price upon the occurrence of
any of the following events: (i) the Company's failure to use its best efforts
to maintain registration of the common stock issuable upon conversion or
exercise of the Series F preferred stock; (ii) the Company's failure to use its
reasonable best efforts to maintain the listing of the common stock on Nasdaq,
NYSE or AMEX; or (iii) the Company's failure to timely convert shares of Series
F preferred stock to common stock. As of December 31, 1999, a total of 6,356,382
shares of common stock were issuable upon the conversion of all Series F
preferred stock.
In November 1999, the Company announced a strategic partnership with
OnStar, a division of General Motors Corporation. The agreement entails the
licensing of the Company's magicTalk communications platform to be used in the
OnStar Advisory System for mid-sized cars and trucks in the GM family. OnStar
paid the Company $20.0 million related to a preferred stock investment,
technology agreement and license fee. The Company expects to recognize $6.2
million in revenue through mid-2000 associated with this transaction.
Under a letter agreement dated as of the December 9, 1999 closing date,
General Motors agreed that it would not exercise or permit a transferee to
exercise the right to convert shares of the Series G preferred stock into shares
of the Company's common stock to the extent that the shares of common stock
issuable upon conversion would exceed 19.99% of the outstanding shares of the
Company's common stock as of December 9, 1999 (the "Exchange Cap") unless the
Company (i) obtains the approval of its stockholders as required by Rule 4460(i)
and applicable regulations of Nasdaq for issuance of common stock (or securities
convertible into or exercisable for common stock) in excess of the Exchange Cap
or (ii) obtains a written opinion reasonably satisfactory to General Motors from
outside counsel to the Company that such approval is not required. Furthermore,
General Motors agreed not to exercise, nor to allow a transferee to exercise,
the warrant unless the Company (i) obtains such stockholder approval or (ii)
obtains such written opinion.
The letter agreement requires the Company to seek and use reasonable best
efforts to obtain either (a) the stockholder approval required by the applicable
rules and regulations of Nasdaq for the issuance by the Company of (i) that
portion of the Series G preferred stock that may not be converted without
exceeding the Exchange Cap, (ii) the associated warrant, and (iii) shares of the
Company's common stock (or securities convertible into or exercisable for common
stock) issuable upon conversion of such portion of the Series G preferred stock
or upon exercise of the warrant or (b) an opinion of counsel reasonably
satisfactory to General Motors that such approval is not required.
Should the Company fail to obtain the approval of its stockholders or an
opinion of counsel reasonably satisfactory to General Motors, then the Company
must, at the absolute discretion of the Company, either
31
<PAGE> 32
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(i) pay to General Motors $7 million in cash, or (ii) pay to General Motors $3.5
million in cash and credit $3.5 million against amounts then owed or next owing
by General Motors to the Company.
Subject to the provisions of the letter agreement, the shares of Series G
preferred stock are convertible, at the option of the holder, into common stock
of the Company at a conversion rate equal to $10,000 divided by $1.684 (as
adjusted for any stock dividends, combinations, splits, reclassifications,
exchanges, recapitalizations, capital reorganizations, and the like with respect
to such shares). In addition, upon the consent of the holders of at least fifty
percent of the Series G preferred stock then outstanding, all outstanding shares
of the Series G preferred stock will be converted into shares of common stock
automatically and without any further action by the holders of such shares,
subject to the provisions of the letter agreement.
The holders of Series G preferred stock are entitled to receive, when, if
and as declared by the Company's Board of Directors, noncumulative cash
dividends at the rate of 7% of $10,000 per annum on each outstanding share of
Series G preferred stock (as adjusted for any stock dividends, combinations,
splits, recapitalizations and the like with respect to such shares).
The holders of Series G preferred stock are entitled to vote together with
the common stock as though part of that class and are entitled to vote on all
matters the number of votes equal to the largest number of whole shares of
common stock into which the holder's shares of Series G preferred stock may be
converted. The holders of Series G preferred stock are entitled to vote as a
separate class (i) on any matter as to which such class would be entitled to
vote under applicable law, (ii) on any matter proposing to change any provision
of the Certificate of Designations, Preferences and Rights of Series G
Convertible Preferred Stock (the "Certificate of Designations") or the Company's
Certificate of Incorporation if such action would adversely alter or change the
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of, the holders of the Series G preferred stock, unless all series
of preferred stock are so altered or changed and (iii) on any matter to increase
or decrease the number of authorized shares of Series G preferred stock.
Furthermore, the holders of the Series G preferred stock, voting as a
separate class, have the right to elect one member of the Company's Board of
Directors until the earlier of (i) the date upon which less than 600 shares (as
adjusted for stock splits, recombinations, reclassifications and the like) of
Series G preferred stock are outstanding, (ii) the date upon which General
Motors Corporation and its affiliates own less than a majority of the
outstanding shares of Series G preferred stock (as adjusted for stock splits,
recombinations, reclassifications and the like), and (iii) the date of
consummation of an acquisition or asset transfer, as those terms are defined in
Section 3(b) of the Certificate of Designations. As of December 31, 1999, a
total of 11,876,484 shares of common stock were issuable upon the conversion of
all Series G preferred stock.
During 1999, adjustments to accumulated deficit of approximately $251
thousand were recorded to recognize the value of favorable conversion rights
associated with the warrants for Series D preferred stock issued during the
period. Adjustments to accumulated deficit of approximately $485 thousand were
recorded in the year ended December 31, 1999, to recognize the value of
favorable conversion, redemption and exercise rights associated with the Series
F preferred stock issued during the period. Adjustments to accumulated deficit
of approximately $11.7 million were recorded in the year ended December 31,
1999, to recognize the value of favorable conversion, redemption and exercise
rights associated with the Series G preferred stock and related warrants issued
during the period. The adjustments principally represent the calculation of the
Black-Scholes warrant costs. Adjustments to accumulated deficit of approximately
$1.1 million were recorded in the year ended December 31, 1999, to record
dividends accrued for the period.
During the year ended December 31, 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 December 31, 1999, no shares of the Series B
preferred stock were outstanding. During the year ended December 31, 1999, 1,549
shares of the Series C Convertible Preferred Stock were converted into 4.9
million shares of common stock. As of
32
<PAGE> 33
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, no shares of the Series C preferred stock were outstanding.
During the year ended December 31, 1999, 10 shares of the Series D Convertible
Preferred Stock were converted into 104 thousand shares of common stock. As of
December 31, 1999, 990 shares of the Series D preferred stock were outstanding.
During the year ended December 31, 1999, 156 shares of the Series F Convertible
Preferred Stock were converted into 1.2 million shares of common stock. As of
December 31, 1999, 844 shares of the Series F preferred stock were outstanding.
As of December 31, 1999, 1,500 shares of Series G preferred stock were
outstanding.
NOTE 10: STOCKHOLDERS' EQUITY
Accounting for Stock-Based Compensation
As of December 31, 1999, the Company had three stock-based compensation
plans, which consist of two stock option plans and an employee stock purchase
plan. The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans for stock options issued to employees. The Company has
adopted the pro forma disclosure provisions of SFAS No. 123. Compensation
expense recognized under these three plans for 1999, 1998, and 1997 was
$772,000, $1,390,000, and none, respectively and relate principally to the
divestiture of DSI (see Note 6). Excluding the compensation expense recorded in
1999 and 1998, had compensation cost for the Company's three stock-based
compensation plans been determined based on the fair value approach described in
SFAS No. 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net loss
As reported...................................... $(47,575) $(38,908) $(28,384)
Pro forma........................................ (52,594) (42,928) (30,641)
Net loss per share
As reported...................................... $ (1.56) $ (2.09) $ (1.06)
Pro forma........................................ (1.69) (2.22) (1.14)
</TABLE>
Stock Option Plans
The Company has two stock option plans, the Amended and Restated 1990 Stock
Option Plan ("1990 Stock Option Plan") and the 1994 Outside Directors Stock
Option Plan, as amended ("Directors Option Plan"). Under the 1990 Stock Option
Plan, the Company has reserved an aggregate of 12,870,000 shares of common stock
for issuance. The 1990 Stock Option Plan provides that stock options may be
granted to employees (including officers), consultants, advisers and other
independent contractors, at an exercise price not less than 100% of the fair
market value, as determined by the Board of Directors, for incentive stock
options, and 50% of the fair market value for nonqualified stock options, at the
grant date. All options granted under the 1990 Stock Option Plan must have a
term not greater than 10 years from the date of grant. The Board of Directors
determines the number of shares for which an option may be granted. Options
issued generally vest 25% after one year and then ratably at 1/48 per month
thereafter. However, in April 1997, 1,182,500 options were granted to Company
employees (excluding officers), subject to acceleration of vesting upon
achievement of specified milestones. As of December 31, 1999, up to 100 % of the
grant was accelerated based on the achievement of certain of those milestones.
Also, in May and September 1999, 154,000, 244,000 options respectively, were
granted to Company employees (excluding officers), subject to acceleration of
vesting upon achievement of specified milestones. As of December 31, 1999, 50%
of the May 1999 grant was
33
<PAGE> 34
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accelerated and 0% of the September 1999 grant was accelerated based on the
achievement of certain of those milestones.
Under the Directors Option Plan, the Company has reserved an aggregate of
550,000 shares of common stock for issuance. The Directors Option Plan provides
for the automatic grant of nonqualified stock options to directors of the
Company who are not employees of (i) the Company, (ii) a stockholder of the
Company, (iii) a holder of a technology license from the Company, or (iv) any
parent or subsidiary of the same ("Eligible Outside Directors"). Each person who
is newly elected or appointed as an Eligible Outside Director is automatically
granted an option to purchase 40,000 shares of common stock. Each Eligible
Outside Director is automatically granted an option to purchase 10,000 shares of
common stock on the day following each anniversary date of election or
appointment, subject to the director's option to decline the grant. The exercise
price of the options in all cases is equal to the fair market value of common
stock on the grant date. The initial grant options generally vest and become
exercisable 25% after the first year and then ratably at 1/48 per month
thereafter. The anniversary grant options generally vest and become exercisable
at the rate of 1/12 per month beginning three years after the grant date.
Generally, options must be exercised within 10 years.
Under SFAS No. 123, the fair value of each option grant under the two stock
option plans is estimated on the respective date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for 1999, 1998, and 1997: zero dividend yield; expected
volatility of 70%; risk free interest rates of 5.52%, 4.59%, and 6.42%,
respectively; and expected lives of 3.30, 3.50, and 3.24 years, respectively.
The expected volatility assumption was estimated based on historical industry
stock price volatility as well as the Company's historical stock price
volatility, and assumes increases and decreases in stock prices. The expected
volatility assumption used in the Black-Scholes option pricing model may not be
indicative of the historic or future performance of the Company's common stock.
Option activity under the Company's two stock option plans was as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Outstanding, beginning of year....................... 7,315 4,991 3,926
Granted.............................................. 2,692 3,811 3,494
Exercised............................................ (995) (1,117) (208)
Canceled............................................. (1,933) (370) (2,221)
-------- ------- -------
Outstanding, end of year............................. 7,079 7,315 4,991
-------- ------- -------
Shares available for future grant.................... 1,701 2,361 802
Options authorized to be issued...................... 13,420 13,420 8,320
Options exercisable, end of year..................... 3,210 1,932 1,387
Weighted-average exercise prices:
Outstanding at beginning of year................... $ 4.44 $ 2.28 $ 3.17
Granted............................................ 3.50 6.40 1.78
Exercised.......................................... 1.67 2.27 0.63
Canceled........................................... 5.40 2.19 3.22
Outstanding, end of year........................... 4.21 4.44 2.28
Options exercisable, end of year..................... 3.87 2.52 2.99
Weighted-average fair value of options granted
during the year.................................... $ 1.84 $ 3.44 $ 0.95
</TABLE>
34
<PAGE> 35
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding under
the Company's two stock option plans as of December 31, 1999 (shares in
thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING PRICE
------------------------ ----------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.40 to $2.72.................... 1,964 8.43 $ 1.84 840 $ 1.74
$2.84 to $5.88.................... 2,494 7.99 3.45 1,421 3.16
$5.97 to $7.28.................... 2,566 8.72 6.60 916 6.64
$8.94 to $13.06................... 57 7.64 11.93 32 11.50
----- ---- ------ ----- ------
$0.40 to $13.06................... 7,079 8.37 $ 4.21 3,210 $ 3.87
</TABLE>
1995 Employee Stock Purchase Plan
As of December 31, 1999, the Company had reserved an aggregate of 551,869
shares of common stock for issuance under the 1995 Employee Stock Purchase Plan,
as amended ("Purchase Plan"). The Purchase Plan permits eligible employees to
purchase common stock at a discount through payroll deductions during 12-month
and 6-month offering periods. The price for the initial offering period was
equal to 85% of the fair market value of common stock at the close of business
on the day prior to the first day of the initial offering period or the fair
market value of common stock on the last day of the purchase period, whichever
was lower. The price at which stock is purchased under the Purchase Plan for all
subsequent periods is equal to 85% of the fair market value of common stock on
the first day of the offering period, or the last day of the purchase period,
whichever is lower. Under the Purchase Plan, the Company sold 92,411, 124,813,
and 84,890 shares to its employees in 1999, 1998, and 1997 respectively.
Under SFAS No. 123, the fair value of employees' purchase rights was
estimated using the Black-Scholes model with the following assumptions for 1999,
1998 and 1997: zero dividend yield and expected life of 12 months for each year;
expected volatility of 70%; and risk free interest rates of 5.01%, 5.37%, and
5.53%, respectively. The expected volatility assumption was estimated based on
historical industry stock price volatility as well as the Company's historical
stock price volatility, and assumes increases and decreases in stock prices. The
expected volatility assumption used in the Black-Scholes option pricing model
may not be indicative of the historic or future performance of the Company's
common stock. The weighted-average fair value of purchase rights (including the
15% discount off of the quoted market price of common stock) granted in 1999,
1998 and 1997 was $1.09, $0.73, and $0.70, respectively.
Restricted Stock Grant
During 1997, the Company sold to its Chairman, Chief Executive Officer and
President 135,000 shares of restricted common stock for $0.10 per share. The
Company recorded approximately $155,000 of deferred compensation in connection
with the sale of these shares, which had been fully expensed by December 31,
1998. During 1998, the Company sold to its Chief Technology Officer 280,000
shares of restricted common stock for $0.10 per share. The Company recorded
approximately $393,000 of deferred compensation in connection with the sale of
these shares, which had been fully expensed as of December 31, 1998.
NOTE 11: RETIREMENT PLAN
The Company has a deferred compensation plan for all employees who are at
least 21 years of age. Under the plan, which qualifies under Section 401(k) of
the Internal Revenue Code of 1986, as amended, eligible
35
<PAGE> 36
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employees may contribute from 2% to 20% of their pretax compensation, up to the
annual limits imposed by the Internal Revenue Service.
The Company may, at its discretion, contribute to the plan. No employer
contributions have been made in any of the periods presented.
NOTE 12: 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 currently
obligated to purchase $13,000,000 in telecommunications services during the
three-year period ending April 30, 2001, of which $1,500,000 has been purchased
as of December 31, 1999. The charges underlying this commitment will be expensed
in the periods in which they occur.
Long-Term Debt
In December 1997, the Company entered into a $4,000,000 term loan with a
financial institution. The loan bore interest at 0.25% above the financial
institution's prime rate, and had a term of 40 months with interest only due in
the first four months and principal and interest due monthly thereafter. This
loan was secured by all of the assets of the Company, including its intellectual
property. The loan was paid in full on August 31, 1999.
In June 1998, the Company secured a $3,000,000 term loan with the same
financial institution. The loan bore interest at the financial institution's
prime rate, and had a term of 42 months with interest only due in the first six
months and principal and interest due monthly thereafter. This loan was secured
by all of the assets of the Company, including its intellectual property. The
loan was paid in full on August 31, 1999.
Lease Commitments
The Company leases two facilities under operating leases extending through
2002 and 2003, respectively. The leases require the Company to pay all executory
costs, such as maintenance and insurance, and provide for escalating rent
payments. The Company is amortizing the total rent payments over the lease term
on a straight-line basis for the leases. The Company has subleased the second of
its facilities in Sunnyvale consisting of 20,000 square feet, under subleases
expiring in 2001 and 2003.
Rent expense was approximately $688,000, $175,000, and $790,000 for the
fiscal years ended December 31, 1999, 1998 and 1997, respectively. Future
minimum lease payments under noncancelable operating leases as of December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
YEARS ENDING DECEMBER 31, LEASES
------------------------- ---------
<S> <C>
2000....................................................... $ 579
2001....................................................... 597
2002....................................................... 538
2003....................................................... 160
2004 and thereafter........................................ 0
Total minimum lease payments............................... $1,874
======
</TABLE>
36
<PAGE> 37
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: INCOME TAXES
Income tax expense for the years ended December 31, 1999, 1998, and 1997 is
comprised primarily of foreign withholding and state taxes.
Total income tax expense differs from expected tax expense (computed by
multiplying the U.S. income statutory rate of 34% to loss before income tax) as
a result of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Years ended December 31, (in thousands):
Expected tax benefit...................................... $(16,167) $(13,222) $(9,645)
Losses and temporary difference for which no tax benefit
was realized........................................... 15,912 11,599 9,248
Nondeductible expenses.................................... 255 1,623 397
Foreign withholding and state taxes....................... 23 19 17
-------- -------- -------
Total tax expense................................. $ 23 $ 19 $ 17
======== ======== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
December 31, (in thousands):
Deferred tax assets:
Accruals and other reserves............................... $ 5,041 $ 1,634
Deferred revenue.......................................... 2,525 857
Loss carryovers and deferred start-up expenditures........ 84,099 69,386
Foreign tax credit carryforward........................... 1,215 1,740
Research and development credit carryforward.............. 9,663 8,661
Fixed assets.............................................. 1,201 916
--------- --------
Total gross deferred tax assets................... $ 103,744 $ 83,194
--------- --------
Less valuation allowance.................................... (103,744) (83,194)
--------- --------
Net deferred tax assets........................... $ -- $ --
========= ========
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1999 was a net increase of $21,075,000.
Deferred tax assets as of December 31, 1999 include approximately
$6,150,000 relating to the exercise of stock options, which will be credited to
equity if and when realized.
As of December 31, 1999, the Company has cumulative federal net operating
losses of approximately $215,844,000, which can be used to offset future income
subject to federal income taxes. The federal tax loss carryforwards will expire
from 2006 through 2019. The Company has cumulative state net operating losses of
approximately $115,402,000, which can be used to offset future income subject to
state income taxes. The state tax loss carryforwards will expire from 1999
through 2004.
As of December 31, 1999, foreign tax credits of approximately $1,215,000
are available to reduce future federal income taxes. Foreign tax credit
carryforwards expire from 1999 through 2001.
As of December 31, 1999, unused research and development tax credits of
approximately $6,272,000 and $3,391,000 are available to reduce future federal
and California income taxes, respectively. Federal credit carryforwards expire
from 2007 through 2019; California credits will carry forward indefinitely.
37
<PAGE> 38
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Federal and state tax laws limit the use of net operating loss
carryforwards in certain situations where changes occur in the stock ownership
of a company. The Company believes such an ownership change, as defined, may
have occurred and, accordingly, certain of the Company's federal and state net
operating loss carryforwards may be limited in their annual usage.
NOTE 14: SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
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 financial statements.
It also establishes standards for related disclosures about products and
services, major customers, and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is available and is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision maker is its Chief
Executive Officer ("CEO"). Financial information for separate components of the
Company's business is not evaluated by the CEO for review and analysis.
Allocation of resources and assessment of performance is based on the Company's
consolidated financial information, which is available to the CEO in
substantially the form presented in the accompanying consolidated statement of
operations. The Company therefore operates in a single operating segment: voice
application services.
From its inception through the year ended December 31, 1999, the Company
has derived revenue from two product lines. Initially, the Company derived
revenues from the development, licensing, manufacturing and sale of handheld
communications device technologies and products, including object-oriented
software platform technologies ("Handheld Technologies"). In 1997, the Company
began developing and marketing platforms for the delivery of voice application
services and products, and in 1998, launched Portico, a General Magic branded
service, and the first voice application developed, deployed, and hosted by the
Company. Effective October 1998, the Company divested itself of its DataRover
handheld communications device division in order to focus on the development,
marketing and sale of voice application services.
Revenue by product offering was as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Voice Application Services............................... $2,484 $1,654 $ --
Handheld Technologies.................................... -- 632 3,456
------ ------ ------
$2,484 $2,286 $3,456
====== ====== ======
</TABLE>
For the year ended December 31, 1999, revenue from one major customer
accounted for 61% of total revenue. For the year ended December 31, 1998,
revenue from one major customer, a stockholder in the Company, accounted for 66%
of total revenue. For the year ended December 31, 1997, revenue from two major
customers, both then stockholders in the Company, accounted for 69% and 13% of
total revenue, respectively.
The Company's revenue was generated principally from its headquarters in
North America. Revenue from customers in Japan amounted to none, $387,000, and
$2,875,000 for the years ended December 31, 1999, 1998, and 1997 respectively.
The Company did not receive revenue from customers in Europe for the years ended
December 31, 1999, 1998, and 1997. Substantially all of the Company's tangible
assets are located at its North American headquarters.
38
<PAGE> 39
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SUBSEQUENT EVENTS (UNAUDITED)
Conversion of Preferred Stock
On January 3, 2000, 3 shares of Series F Preferred Stock were converted
into 22,601 shares of common stock. On January 4, 2000, 132 shares of Series D
Preferred Stock were converted into 813,708 shares of common stock. On January
4, 2000, 183 shares of Series F Preferred Stock were converted into 1,378,824
shares of common stock. On January 6, 2000, 268 shares of Series D Preferred
Stock were converted into 1,652,559 shares of common stock. On January 6, 2000,
8 shares of Series F Preferred Stock were converted into 60,292 shares of common
stock. On March 3, 2000, 81 shares of Series D preferred stock were converted
into 503,200 shares of common stock. On March 14, 2000, 110 shares of Series D
preferred stock were converted into 684,282 shares of common stock. On March 16,
2000, 249 shares of Series E preferred stock were converted into 655,263 shares
of common stock, and a warrant to purchase 100 shares of Series E preferred
stock was exercised for 263,157 shares of common stock. On March 23, 2000, 125
shares of Series F preferred stock were converted into 951,635 shares of common
stock.
Financing Transaction
On March 29, 2000, the Company entered into a private financing transaction
that will provide $22,000,000 in cash to the Company from the sale of 2,200
shares of Series H convertible preferred stock. As part of the transaction, the
Company will issue three year warrants to purchase additional shares of common
stock in the approximate amount of half the number of shares of common stock
into which the preferred stock is convertible.
On March 10, 2000 the Company agreed to amend the common stock investment
agreement relating to the equity line of credit discussed in Note 9, to provide
the institutional investor with the option to purchase additional shares of the
Company's common stock equal to 100% of the amount specified in its put notice
to the investor. The aggregate amount available under the equity line, however,
was not increased by this amendment.
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GENERAL MAGIC, INC.
By: /s/ STEVEN MARKMAN
--------------------------------------
Steven Markman
Chairman of the Board, Chief Executive
Officer and President
Dated: April 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE: DATE:
--------- ------ -----
<S> <C> <C>
By: /s/ STEVEN MARKMAN Chairman and Chief Executive April 28, 2000
---------------------------------------- Officer (Principal Executive)
Steven Markman
By: * ROSE M. MARCARIO Chief Financial Officer April 28, 2000
---------------------------------------- (Principal Financial and
Rose M. Marcario Accounting Officer)
By: * CHESTER A. HUBER, JR. Director April 28, 2000
----------------------------------------
Chester A. Huber, Jr.
By: * PHILIP D. KNELL Director April 28, 2000
----------------------------------------
Philip D. Knell
By: * ELIZABETH A. FETTER Director April 28, 2000
----------------------------------------
Elizabeth A. Fetter
By: * SUSAN G. SWENSON Director April 28, 2000
----------------------------------------
Susan G. Swenson
By: Director
-----------------------------------------
Tom D. Seip
By: * DENNIS F. STRIGL Director April 28, 2000
----------------------------------------
Dennis F. Strigl
*By: /s/ STEVEN MARKMAN April 28, 2000
---------------------------------------
Steven Markman
Attorney-in-Fact
</TABLE>
40
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
23.1 Consent of Independent Auditors
24.1 Power of Attorney (previously filed)
</TABLE>
41
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
General Magic, Inc.:
We consent to incorporation by reference in the registration statements
Nos. 33-93648, 333-12667, 333-33329, 333-45751, 333-71781, 333-93479 on Form S-8
and Nos. 333-67683, 333-59723, 333-51685, 333-77369, 333-79857, 33-83075, and
333-90023 on Form S-3 of General Magic, Inc. of our report dated January 28,
2000, relating to the consolidated balance sheets of General Magic, Inc. and
subsidiary (a development stage enterprise) as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1999, and for the period from May 1, 1990 (inception) to December
31, 1999, which report appears in the December 31, 1999 annual report on Form
10-K/A of General Magic, Inc.
/s/ KPMG LLP
Mountain View, California
April 28, 2000
