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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission file number 000-25374
GENERAL MAGIC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0250147
(State of incorporation) (IRS Employer Identification Number)
420 NORTH MARY AVENUE
SUNNYVALE, CALIFORNIA 94086
(408) 774-4000
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
55,570,575 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of June 30, 2000.
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GENERAL MAGIC, INC.
FORM 10-Q, JUNE 30, 2000
CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER PAGE
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<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
a. Condensed Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3
b. Condensed Consolidated Statements of Operations - Three-Month and Six-Month periods
ended June 30, 2000 and 1999 4
c. Condensed Consolidated Statements of Cash Flows - Six-Month periods ended
June 30, 2000 and 1999 5
d. Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibits 24
</TABLE>
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,482 $ 23,045
Short-term investments 11,133 2,490
Other current assets 991 767
--------- ---------
Total current assets 25,606 26,302
--------- ---------
Property and equipment, net 10,598 11,869
Other assets 3,552 3,534
--------- ---------
Total assets $ 39,756 $ 41,705
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 3,687 $ 2,780
Accrued expenses 4,094 8,018
Deferred revenue and other current liabilities 1,279 5,895
--------- ---------
Total current liabilities 9,060 16,693
Other long-term liabilities 2,298 2,692
--------- ---------
Total liabilities 11,358 19,385
========= =========
Commitments:
Redeemable, convertible Series D preferred stock, $0.001 par value
Stated at involuntary liquidation preference;
Authorized: 2 shares; issued and outstanding: 2000 -- 0; 1999 -- 1 1,976 10,274
Stockholders' equity:
Convertible preferred stock, $0.001 par value
Authorized: 55 shares; issued and outstanding: 2000 -- 53; 1999 -- 54 2 2
Preferred stock, $0.001 par value
Authorized: 427 shares; issued and outstanding: 2000 -- 0; 1999 -- 0 -- --
Common stock, $0.001 par value; authorized: 150,000 shares;
Issued and outstanding: 2000 - 55,571; 1999 -- 43,248 56 43
Additional paid-in capital 325,987 282,861
Accumulated other comprehensive loss (6) (3)
Deficit accumulated during development stage (299,414) (270,654)
--------- ---------
26,625 12,249
Less treasury stock, at cost: 2000 -- 46; 1999 -- 46 (203) (203)
--------- ---------
Total stockholders' equity 26,422 12,046
--------- ---------
$ 39,756 $ 41,705
========= =========
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS ENDED SIX-MONTH PERIODS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Service revenue $ 2,258 $ 164 $ 4,848 $ 301
Licensing revenue 4 16 10 34
-------- -------- -------- --------
Total revenue 2,262 180 4,858 335
-------- -------- -------- --------
Operating expenses:
Cost of service revenue 1,359 -- 2,530 --
Network operations 2,948 1,588 6,028 3,500
Research and development 1,016 3,070 2,992 6,523
Selling, general and administrative 4,771 6,275 11,824 12,181
Depreciation and amortization 1,524 1,145 3,008 2,118
Compensation expense associated with stock 99 113 253 226
-------- -------- -------- --------
Total costs and expenses 11,717 12,191 26,635 24,548
-------- -------- -------- --------
Loss from operations (9,455) (12,011) (21,777) (24,213)
Total other income (expense), net 389 (1,017) 668 (2,510)
-------- -------- -------- --------
Loss before income taxes (9,066) (13,028) (21,109) (26,723)
Income taxes 6 -- 26 22
-------- -------- -------- --------
Net loss (9,072) (13,028) (21,135) (26,745)
Dividends on preferred stock (107) (351) (255) (634)
Warrants issuance on Series D preferred stock -- -- -- (251)
Beneficial conversion feature of Series
H Preferred Stock (7,366) -- (7,366) --
-------- -------- -------- --------
Loss applicable to common stockholders $(16,545) $(13,379) $(28,756) $(27,630)
======== ======== ======== ========
Basic and diluted loss per share $ (0.32) $ (0.34) $ (0.58) $ (0.75)
======== ======== ======== ========
Shares used in computing per share amounts 52,007 39,242 49,966 36,807
======== ======== ======== ========
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTH PERIODS
ENDED JUNE 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(21,135) $(26,745)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 3,008 2,066
Equity in net loss of unconsolidated affiliate -- 3,016
Compensation expense associated with stock options 253 --
Deferred revenue (4,616) --
Changes in items affecting operations:
Other current assets (224) 692
Accounts payable and accrued expenses (2,391) 1,237
-------- --------
Net cash used in operating activities (25,105) (19,734)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (13,643) (3,077)
Proceeds from sales and maturities of short-term investments 5,000 14,152
Purchases of property and equipment (1,654) (4,997)
Disposition of property and equipment 19 --
Other assets (189) (3,086)
-------- --------
Net cash (used in) provided by investing activities (10,467) 2,992
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations -- (15)
Repayment of debt -- (1,167)
Proceeds from sale of common stock and warrants 4,006 860
Proceeds from exercise of Series E warrant 1,000 --
Proceeds from sale of Series D preferred stock -- 20,000
Proceeds from sale of Series E preferred stock -- 5,967
Proceeds from sale of Series H Preferred Stock 20,640 --
Other long-term liabilities 363 487
-------- --------
Net cash provided by financing activities 26,009 26,132
-------- --------
Net increase (decrease) in cash and cash equivalents (9,563) 9,390
-------- --------
Cash and cash equivalents, beginning of period 23,045 21,845
-------- --------
Cash and cash equivalents, end of period $ 13,482 $ 31,235
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid during the period 27 22
Interest paid during the period -- 244
Non-cash investing and financing activity:
Conversion of Series B preferred stock into common stock -- 7,695
Conversion of Series C preferred stock into common stock -- 20,924
Conversion of Series D preferred stock into common stock 8,411 --
Conversion of Series E preferred stock into common stock 2,490 --
Exercise of Series E warrant 1,000 --
Conversion of Series F preferred stock into common stock 3,326 --
Conversion of Series H Preferred Stock into common stock 10,848 --
Beneficial Conversion feature of Series H Preferred Stock 7,366 --
Preferred stock dividends 255 634
</TABLE>
The Notes to Condensed Consolidated Financial Statements are an integral part of
these financial statements.
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GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) considered necessary for the
fair presentation of financial condition, results of operations and cash flows
of General Magic, Inc. (the "Company") for the periods presented. These
financial statements should be read in conjunction with the consolidated balance
sheets 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, including notes thereto, included
in the Company's Annual Report on Form 10-K/A which was filed with the SEC on
April 28, 2000.
The results of operations for the six-month period ended June 30, 2000, are
not necessarily indicative of the results expected for the current year or any
other period.
NOTE 2: CONSOLIDATED FINANCIAL STATEMENT DETAILS
PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Network operations center 14,043 $ 13,020
Office equipment and computers 7,756 8,225
Furniture and fixtures 2,242 2,303
Leasehold improvements 1,425 1,062
-------- --------
25,466 24,610
Less accumulated depreciation and amortization (14,868) (12,741)
-------- --------
$ 10,598 $ 11,869
======== ========
</TABLE>
ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Employee compensation 2,121 3,511
Other 1,973 2,380
Prepaid royalty payment and accrued interest -- 2,127
------ ------
$4,094 $8,018
====== ======
</TABLE>
TOTAL OTHER INCOME (EXPENSE), NET
A summary of other income (expense) follows (in thousands):
<TABLE>
<CAPTION>
THREE-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
----- ------- ----- -------
<S> <C> <C> <C> <C>
Interest income $ 399 $ 300 $ 680 $ 574
Other (10) 2 (12) 24
Equity in net loss of DSI -- (1,220) -- (3,016)
Gain on sale of investment in Starfish, Inc. -- 5 -- 162
Interest expense -- (104) -- (254)
----- ------- ----- -------
Total other income (expense), net $ 389 $(1,017) $ 668 $(2,510)
===== ======= ===== =======
</TABLE>
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NEW PRONOUNCEMENTS
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." In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment to SFAS No. 133." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging 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. SFAS No. 138 addresses a limited
number of issues causing implementation difficulties for companies that are
required to apply SFAS No. 133. The Company has not determined the impact that
the adoption of SFAS No. 133, as amended by SFAS No. 138, will have on its
financial statements and believes that such determination will not be meaningful
until closer to the date of the initial adoption.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation--an Interpretation of APB Opinion No.
25" ("FIN No. 44"). The interpretation clarifies the application of Opinion 25
for certain issues such as the following: (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The Company must adopt FIN No. 44 by July 1, 2000. Management does
not believe that the adoption of the interpretation will have a material effect
on the Company's results of operations, financial position or liquidity.
NOTE 3: COMPREHENSIVE LOSS
Comprehensive loss includes all changes in equity during a period except
those resulting from investments by and distributions to the Company's
stockholders. For the six-month periods ended June 30, 2000 and 1999, there were
no significant differences between the Company's comprehensive loss and reported
net loss.
NOTE 4: NET LOSS PER SHARE (in thousands)
The computation of diluted loss per share does not include common stock
issuable upon (i) the exercise of outstanding stock options and stock purchase
warrants and (ii) the conversion of preferred stock, because the inclusion of
these securities would have an anti-dilutive effect.
<TABLE>
<CAPTION>
JUNE 30,
------------------
2000 1999
------ ------
<S> <C> <C>
Stock options 6,083 8,222
Warrants for the purchase of common stock 5,766 780
Shares of common stock issuable upon conversion of Series A preferred stock 3,629 3,629
Shares of common stock issuable upon conversion of Series D preferred stock 1,174 5,101
Shares of common stock issuable upon conversion of Series E preferred stock 921 1,839
Shares of common stock issuable upon conversion of Series F preferred stock 4,049 --
Shares of common stock issuable upon conversion of Series G preferred stock 8,907 --
Shares of common stock issuable upon conversion of Series H Preferred stock 3,685 --
------ ------
34,214 19,571
====== ======
</TABLE>
NOTE 5: PREFERRED STOCK
On March 29, 2000, the Company entered into a private financing transaction
with a group of existing investors to provide $22,000,000 in cash to the Company
from the sale of 2,200 shares of its Series H Convertible Preferred Stock (the
"Series H Preferred Stock") and warrants to acquire 1,883,200 shares of the
Company's common stock (the "Warrants"). The Warrants have a three-year term and
are immediately exercisable. The financing transaction closed on April 20, 2000.
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Holders of Series H Preferred Stock generally have no voting rights, except
as may be required by Delaware law. However, the vote of two-thirds (2/3) of the
then outstanding shares of Series H Preferred Stock is required to change the
powers, designations, preferences and rights of the Series H Preferred Stock or
to issue any shares of Series H Preferred Stock not provided for initially in
the Series H financing transaction.
The Series H Preferred Stock will not bear any dividends.
The liquidation preference of the Series H Preferred Stock, which is payable
pari passu with the Series A, Series D, Series E, Series F and Series G
preferred stock and in preference to the holders of common stock, is $10,000 per
share plus, on a per share basis, the result of the following formula:
(.02)(N/365)($10,000). Each share of Series H Preferred Stock is convertible at
any time at the option of the holder, subject to certain limitations relating to
the number of shares of common stock that a holder of Series H Preferred Stock
or its affiliates are deemed to beneficially own, into common stock of the
Company at a conversion rate (the "Conversion Rate") obtained by dividing the
liquidation preference by $5.97 (the "Conversion Price"). The Conversion Price
is subject to adjustment from time to time upon the occurrence of certain
events, including, without limitation, the subdivision or combination of the
Company's common stock, the reorganization, reclassification, consolidation, or
merger of the Company, or the sale of all or substantially all of the Company's
assets. The Conversion Price was set at an 8% discount to the average closing
bid prices of the Company's common stock for the ten trading days immediately
following March 31, 2000. The Company recorded a beneficial conversion amount in
the second quarter of 2000 to account for this beneficial conversion feature.
The Company may, subject to certain conditions, require that all of the
outstanding shares of Series H Preferred Stock be converted at the Conversion
Price then in effect at any time after June 19, 2000. Should any of the shares
of Series H Preferred Stock remain outstanding on April 20, 2002 (subject to
extension under certain circumstances) the Company may either redeem each of the
outstanding shares of Series H Preferred Stock at the liquidation preference or
require their conversion at the then applicable Conversion Price, subject to
certain conditions. The Company also may, subject to certain conditions, redeem
the Series H Preferred Stock upon a consolidation, merger or other business
combination of the Company at a price equal to 115% of the liquidation
preference.
The holders of Series H Preferred Stock may require the Company to redeem any
or all of their shares at a price per share equal to the greater of (i) 130% of
the liquidation preference and (ii) a price based upon a multiple of the then
applicable Conversion Rate and the closing bid prices of the Company's common
stock on certain dates, upon the occurrence of any of the following events: (a)
the notification by the Company to any holder of the Series H Preferred Stock of
its intention not to comply with proper requests for conversion of the Series H
Preferred Stock into shares of the Company's common stock or (b) the failure of
the Company to timely convert any shares of the Series H Preferred Stock.
Adjustments to accumulated deficit of approximately $7.6 million were
recorded in the six-month period ended June 30, 2000 related to issuances of
preferred stock with beneficial conversion and redemption rights and dividends
on preferred stock for the period. Adjustments to accumulated deficit of
approximately $885 thousand were recorded in the six-month period ended June 30,
1999 related to issuances of preferred stock with beneficial conversion and
redemption rights and dividends on preferred stock for the period.
During the six-month period ended June 30, 2000, 804 shares of the Series D
preferred stock were converted into 5.0 million shares of common stock, 249
shares of the Series E preferred stock were converted into 655 thousand shares
of common stock, the Series E warrant was exercised for 100 shares of Series E
preferred stock, which was converted into 263 thousand shares of common stock,
319 shares of the Series F preferred stock were converted into 2.4 million
shares of common stock, and 1,620 shares of the Series H Preferred Stock were
converted into 2.7 million shares of common stock.
As of June 30, 2000, 50,000 shares of Series A preferred stock were
outstanding. As of June 30, 2000, no shares of the Series B or Series C
preferred stock were outstanding. As of June 30, 2000, 186 shares of Series D
preferred stock were outstanding, 350 shares of Series E preferred stock were
outstanding, 525 shares of Series F preferred stock were outstanding, 1,500
shares of Series G preferred stock were outstanding, and 580 shares of Series H
Preferred Stock were outstanding. On June 27, 2000, the holder of Series A
preferred stock initiated, and on July 5, 2000, completed, the conversion of all
of its shares of Series A.
NOTE 6: COMMITMENTS
PURCHASE COMMITMENTS
In April 1998, the Company entered into an agreement with Qwest
Communications International, Inc. to purchase telecommunications services at
fixed prices for an initial term of three years. The Company is obligated to
purchase $13 million in telecommunications services during the three-year period
ending April 30, 2001, of which $4.8 million has been purchased as of June 30,
2000. Based on the terms of the contract, Qwest's level of performance under
the contract, and the Company's discontinuation of the myTalk service, the
Company has commenced negotiations with Qwest to terminate the contract or
renegotiate its terms including the purchase commitment. The negotiations are
ongoing.
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NOTE 7: SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements.
Operating segments are defined as components of an enterprise about which
separate financial information is available and is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision maker is its Chief
Executive Officer ("CEO"). Financial information for separate components of the
Company's business is not available to the CEO for review and analysis.
Allocation of resources and assessment of performance is based on the Company's
condensed consolidated financial information, which is available to the CEO in
substantially the form presented in the accompanying condensed consolidated
statements of operations. The Company operates in a single operating segment,
voice application services. Total revenue for the six-month periods ended June
30, 2000 and 1999, was related to voice application services.
For the six-month period ended June 30, 2000, revenue from one major customer
accounted for 95% of total revenue. For the six-month period ended June 30,
1999, no customer accounted for more than 10% of the Company's revenue.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes a number of forward-looking statements that reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those discussed in the Risk Factors section below and elsewhere in
this report on Form 10-Q, that could cause actual results to differ materially
from historical results or those anticipated. In this report, words such as
"anticipates," "believes," "expects," "future," "intends," "plans," "potential,"
"may," "could," and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
General Magic is a voice application services provider. The Company offers
its customers premier voice-enabled applications based on its VoiceXML-based
magicTalk(TM) platform. Primary applications for General Magic's patent-pending
magicTalk platform include customer relationship management interactions, value
added telecommunication services, Internet voice portal services, and eCommerce
transactions. General Magic develops and deploys magicTalk voice applications
through the efforts of its professional services organization and offers its
customers around-the-clock hosting services in its network operations center
("NOC"). Each General Magic voice application features a personality-rich,
socially-engineered voice user interface ("VUI") that responds to ordinary
speech, all but eliminating the need to punch buttons or enter codes when using
technology such as email, voice mail, telephone, fax and the Internet.
General Magic's target markets are businesses with high volume customer
interactions, including telecommunication providers, enterprises, and Internet
companies. To support its customers General Magic provides a full range of
professional services to assist in the planning, design, development, deployment
and support of voice solutions developed with magicTalk. For customers who
require rapid time-to-market and elect to deploy end-to-end voice solutions
without investing in a separate hosting facility, General Magic provides
customers cost-effective hosting services through its NOC. General Magic's NOC
allows the Company to optimize the return on investment for each of its
customers by optimizing service performance, managing growth and taking
advantage of efficiencies of scale.
In July 2000, General Magic signed an agreement with IBM to jointly develop
and deliver voice applications for companies in General Magic's target markets.
The agreement provides that General Magic will integrate its magicTalk platform
with IBM's DirectTalk platform and ViaVoice speech recognition engine to deliver
and host end-to-end voice solutions. IBM and General Magic also plan to jointly
market integrated magicTalk applications on DirectTalk through the existing IBM
sales channel. IBM's DirectTalk is a voice-processing platform that connects
self-service customer relationship management applications for effective call
routing and response for 24 hours a day, 7 days a week, customer service.
In June 2000, General Magic signed an agreement with Global Services Network,
Inc. ("GSN"), a provider of unified communications and messaging services
targeting the enterprise and mobile professional markets. General Magic will
develop and host customized unified communications applications for GSN using
General Magic's VoiceXML-based magicTalk platform.
In November 1999, General Magic entered into a licensing and technology
agreement with General Motors Corporation through what is now its OnStar
Corporation subsidiary ("OnStar"). The agreement licenses General Magic's
magicTalk platform and custom VUI for OnStar's Virtual Advisor, which provides
hands-free voice-activated access to Internet-based information services in
vehicles manufactured by General Motors, as well as other international auto
makers. General Magic is designing, developing and hosting the OnStar Virtual
Advisor service. General Magic delivered Phase I of the OnStar Virtual Advisor
for testing in June 2000.
In June 1999, General Magic launched myTalk, which was an advertising
sponsored service that let people access email over the phone, reply to email
messages using their own spoken words and make short calls anywhere in the
United States. myTalk attracted more than one million subscribers which
management believes provided a successful proof point and demonstrated the
appeal of magicTalk-based services and the widespread adoption of voice-enabled
services. In June 2000, General Magic discontinued the myTalk consumer service
in order to more effectively focus on the development of custom voice solutions
on the magicTalk platform. General Magic now offers customized components
similar to those offered by the myTalk service as part of its intended business.
In June 1999, Excite@Home launched the Excite Voicemail service, a free
advertising-supported service that allows Excite users to receive voicemail and
faxes in their Excite email accounts. Excite Voicemail employs our
communications platform and voice user interface technologies to guide callers
in leaving voicemail messages and faxes for registered Excite members.
Although we have made significant progress in our strategy to develop and
market voice application services and products, we are subject to all of the
risks inherent in the establishment of a new business enterprise. To succeed, we
must, among other things, secure adequate financial and human resources to meet
our requirements; achieve market acceptance for our voice application services
and products; establish and maintain relationships with businesses with high
volume customer interactions; establish and maintain
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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 our
services and products to permit us to operate profitably; and protect our
intellectual property. Any failure to achieve these objectives could have a
material adverse effect on our business, operating results and financial
condition.
RESULTS OF OPERATIONS
For the three-month period ended June 30, 2000, the Company incurred a net
loss of $16.5 million, or $0.32 per share, compared to a net loss of $13.4
million, or $0.34 per share, for the three-month period ended June 30, 1999. The
net loss per share applicable to stockholders for the three-month period ended
June 30, 2000, included the net loss for the period and $7.5 million in
adjustments to accumulated deficit related to preferred stock and warrants
issued during the period with beneficial conversion rights and dividends on
preferred stock. The net loss per share applicable to stockholders for the
three-month period ended June 30, 1999, included the net loss for the period and
$351 thousand in adjustments to accumulated deficit related to dividends on
preferred stock.
For the six-month period ended June 30, 2000, the Company incurred a net loss
of $28.8 million, or $0.58 per share, compared to a net loss of $27.6 million,
or $0.75 per share, for the six-month period ended June 30, 1999. The net loss
per share for the six-month period ended June 30, 2000, included the net loss
for the period and $7.6 million in adjustments to accumulated deficit related to
preferred stock and warrants issued during the period with beneficial conversion
rights and dividends on preferred stock. The net loss per share for the
six-month period ended June 30, 1999, included the net loss for the period and
$885 thousand in adjustments to accumulated deficit related to warrants issued
during the period with beneficial exercise rights and dividends on preferred
stock.
TOTAL REVENUE
Total revenue for the three-month period ended June 30, 2000, was $2.3
million compared to $180 thousand for the three-month period ended June 30,
1999. Total revenue for the six-month period ended June 30, 2000, was $4.9
million compared to $335 thousand for the six-month period ended June 30, 1999.
Total revenue consists of revenue for the development of the Virtual Advisor for
OnStar and subscription fees for the Portico service. The Company expects to
recognize revenue related to the OnStar development agreement and other
customers through fiscal year 2000. These revenues include development fees,
licensing fees, hosting fees, professional services fees, and support fees. If
the market for voice application services does not develop or if the Company is
unable to capture a significant portion of that market, the Company's revenues
and results of operations will be materially adversely affected.
COST OF SERVICE REVENUE
Cost of service revenue for the three-month period ended June 30, 2000, was
$1.4 million compared to none for the three-month period ended June 30, 1999.
Cost of service revenue for the six-month period ended June 30, 2000, was $2.5
million compared to none for the six-month period ended June 30, 1999. Cost of
service revenue consists of costs related to the development of the Virtual
Advisor for OnStar.
NETWORK OPERATIONS
Network operations expense for the three-month period ended June 30, 2000,
was $2.9 million compared to $1.6 million for the three-month period ended June
30, 1999. Network operations expense for the six-month period ended June 30,
2000, was $6.0 million compared to $3.5 million for the six-month period ended
June 30, 1999. 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. The increase
for both the three-month and the six-month periods ended June 30, 2000
compared to the same periods ended June 30, 1999, was due primarily to increased
telecommunication billings associated with the myTalk service. The Company
expects network operations expense to increase modestly through 2000 as it adds
network infrastructure to increase its hosting capacity.
RESEARCH AND DEVELOPMENT
Research and development expense for the three-month period ended June 30,
2000, was $1.0 million, compared to $3.1 million for the three-month period
ended June 30, 1999. Research and development expense for the six-month period
ended June 30, 2000, was $2.9 million, compared to $6.5 million for the
six-month period ended June 30, 1999. The decrease for the six-month period
ended June 30, 2000, compared to the six-month period ended June 30, 1999, was
due to reduced spending on outside consultants and a decrease in headcount. The
Company expects research and development expenses to increase slightly from the
level in the three-month period ended June 30, 2000 through the remainder of
2000.
SELLING, GENERAL AND ADMINISTRATIVE
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Selling, general and administrative expense for the three-month period ended
June 30, 2000, was $4.8 million, compared to $6.3 million for the three-month
period ended June 30, 1999. Selling, general and administrative expense for the
six-month period ended June 30, 2000, was $11.8 million, compared to $12.2
million for the six-month period ended June 30, 1999. The selling, general and
administrative expense for the three-month and six-month periods ended June 30,
2000 compared to the same periods ended June 30, 1999 has decreased due to a
decrease in headcount and reduced marketing and advertising expenses associated
with the discontinuation of the myTalk service.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three-month period ended June
30, 2000, was $1.5 million, compared to $1.1 million for the three-month period
ended June 30, 1999. Depreciation and amortization expense for the six-month
period ended June 30, 2000, was $3.0 million, compared to $2.1 million for the
six-month period ended June 30, 1999. The increase in both periods was due to
equipment purchases and facility improvements related to the expansion of the
Company's network operations center and amortization of intangible assets
associated with a prior acquisition. The Company expects depreciation and
amortization expense to increase modestly through the remainder of 2000 as the
network operations center continues to expand to increase hosting capacity.
TOTAL OTHER INCOME (EXPENSE), NET
The Company had other income of $389 thousand in the three-month period ended
June 30, 2000, and other expense of $1.0 million in the three-month period
ending June 30, 1999. The Company had other income of $668 thousand in the
six-month period ended June 30, 2000, and other expense of $2.5 million in the
six-month period ending June 30, 1999. During the three-month period ended June
30, 1999, the Company recorded a loss of $1.2 million to account for net losses
of its equity investment in DataRover Mobile Systems, Inc. ("DSI") and $3.0
million to account for net losses of its equity investment in DSI for the
six-month period ended June 30, 1999. Excluding the losses associated with DSI,
other income (expense), net consisted primarily of interest income and expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash equivalents
and short-term investment balances that totaled $24.6 million as of June 30,
2000, down $920 thousand from $25.5 million as of December 31, 1999.
During the six-month period ended June 30, 2000, 804 shares of the Series D
preferred stock were converted into 5.0 million shares of common stock, 249
shares of the Series E preferred stock were converted into 655 thousand shares
of common stock, the Series E warrant was exercised for 100 shares of Series E
preferred stock, which was converted into 263 thousand shares of common stock,
319 shares of the Series F preferred stock were converted into 2.4 million
shares of common stock, and 1,620 shares of the Series H Preferred Stock were
converted into 2.7 million shares of common stock. On June 27, 2000, the holder
of Series A preferred stock initiated, and on July 5, 2000, completed, the
conversion of all of its shares of Series A.
As of June 30, 2000, 50,000 shares of Series A preferred stock were
outstanding. As of June 30, 2000, no shares of the Series B or Series C
preferred stock were outstanding. As of June 30, 2000, 186 shares of Series D
preferred stock were outstanding, 350 shares of Series E preferred stock were
outstanding, 525 shares of Series F preferred stock were outstanding, 1,500
shares of Series G preferred stock were outstanding, and 580 shares of Series H
Preferred Stock were outstanding.
On March 29, 2000, the Company entered into a private financing transaction
with a group of existing investors to provide $22,000,000 in cash to the Company
from the sale of 2,200 shares of its Series H Convertible Preferred Stock (the
"Series H Preferred Stock") and warrants to acquire 1,883,200 shares of the
Company's common stock (the "Warrants"). The Warrants have a three-year term and
are immediately exercisable. The financing transaction closed on April 20, 2000.
Holders of Series H Preferred Stock generally have no voting rights, except
as may be required by Delaware law. However, the vote of two-thirds (2/3) of the
then outstanding shares of Series H Preferred Stock is required to change the
powers, designations, preferences and rights of the Series H Preferred Stock or
to issue any shares of Series H Preferred Stock not provided for initially in
the Series H financing transaction.
The Series H Preferred Stock will not bear any dividends.
The liquidation preference of the Series H Preferred Stock, which is payable
pari passu with the Series A, Series D, Series E, Series F and Series G
preferred stock and in preference to the holders of common stock, is $10,000 per
share plus, on a per share basis, the result of the following formula:
(.02)(N/365)($10,000). Each share of Series H Preferred Stock is convertible at
any time at the option of the holder, subject to certain limitations relating to
the number of shares of common stock that a holder of Series H Preferred Stock
or its affiliates are deemed to beneficially own, into common stock of the
Company at a conversion rate (the "Conversion Rate") obtained
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by dividing the liquidation preference by $5.97 (the "Conversion Price"). The
Conversion Price is subject to adjustment from time to time upon the occurrence
of certain events, including, without limitation, the subdivision or combination
of the Company's common stock, the reorganization, reclassification,
consolidation, or merger of the Company, or the sale of all or substantially all
of the Company's assets. The Conversion Price was set at an 8% discount to the
average closing bid prices of the Company's common stock for the ten trading
days immediately following March 31, 2000. The Company recorded a beneficial
conversion amount in the second quarter of 2000 to account for this beneficial
conversion feature.
The Company may, subject to certain conditions, require that all of the
outstanding shares of Series H Preferred Stock be converted at the Conversion
Price then in effect at any time after June 19, 2000. Should any of the shares
of Series H Preferred Stock remain outstanding on April 20, 2002 (subject to
extension under certain circumstances) the Company may either redeem each of the
outstanding shares of Series H Preferred Stock at the liquidation preference or
require their conversion at the then applicable Conversion Price, subject to
certain conditions.
The Company also may, subject to certain conditions, redeem the Series H
Preferred Stock upon a consolidation, merger or other business combination of
the Company at a price equal to 115% of the liquidation preference.
The holders of Series H Preferred Stock may require the Company to redeem any
or all of their shares at a price per share equal to the greater of (i) 130% of
the liquidation preference and (ii) a price based upon a multiple of the then
applicable Conversion Rate and the closing bid prices of the Company's common
stock on certain dates, upon the occurrence of any of the following events: (a)
the notification by the Company to any holder of the Series H Preferred Stock of
its intention not to comply with proper requests for conversion of the Series H
Preferred Stock into shares of the Company's common stock or (b) the failure of
the Company to timely convert any shares of the Series H Preferred Stock.
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 $13.0 million in telecommunications services during the
three-year period ending April 30, 2001, of which $4.8 million has been
purchased as of June 30, 2000. The charges underlying this commitment are
expensed in the periods in which they occur. Based on the terms of the contract,
Qwest's level of performance under the contract, and the Company's
discontinuation of the myTalk service, the Company has commenced negotiations
with Qwest to terminate the contract or renegotiate its terms, including the
purchase commitment. There is no assurance the Company will be successful in
these discussions.
In connection with its prior strategy, the Company entered into Magic Cap
master license agreements with eight of its stockholders. The Company has
satisfied its obligations under six of these agreements, and is subject to the
following obligations under the remaining two agreements. In December 1999, the
Company compromised its obligation to refund one licensee 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 June 30, 2000, $750 thousand remains to be paid under this
arrangement and is classified in accounts payable. 267,559 shares of common
stock were issued to the licensee during the six-month period ending June 30,
2000. The Company has agreed to refund the second remaining licensee any amount
of a $2.0 million prepaid royalty not recouped by January 1, 2003, plus accrued
interest. The amount of any such refund is payable on or before December 31,
2003. As of June 30, 2000, this obligation was classified in other long-term
liabilities. The Company does not expect the second licensee to develop or
manufacture additional products that incorporate the Company's Magic Cap
technology.
Since the Company's inception, it has generated only minimal revenues and has
relied principally on third party financing to fund its operations. The Company
has incurred significant losses and has substantial negative cash flow. As of
June 30, 2000, the Company had an accumulated deficit of $299.4 million, which
includes a net loss of $21.1 million for the six-month period ended June 30,
2000. The Company expects to incur significant losses at least for the next
eighteen months.
The Company expects that its cash, cash equivalents and short-term investment
balances of $24.6 million as of June 30, 2000, and the cash expected to be
available under the Company's equity line of credit arrangement, will be
adequate to fund the Company's operations through the year 2000. However, there
are a number of conditions and limitations on the Company's right to draw down
under the equity line of credit, including that the closing bid price of the
common stock on the business day immediately preceding a draw down notice must
be at least $2.00 per share and that the common stock is listed on The American
Stock Exchange ("AMEX"), The New York Stock Exchange ("NYSE"), The Nasdaq
National Market or The Nasdaq SmallCap Market. In addition, the dollar amount
specified in any draw down notice will be decreased by one twentieth (1/20) for
each business day during the twenty business days immediately following delivery
of the draw down notice on which the weighted average price of the common stock
is less than $2.062. The weighted average price of our common stock was less
than $2.062 on each business day through much of September, October and the
first half of November of 1999. It is uncertain that the Company will be able
consistently to meet the closing bid price condition, the listing condition or
any other condition. In addition, although the Company may request drawdowns in
increments of up to $5,000,000, the actual dollar amount is subject to
limitations based on the daily trading volumes, the market price of the common
stock as well as the investor's percentage ownership of General Magic.
Accordingly, the Company cannot guarantee that sufficient funds will be
available to meet its needs.
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The Company's capital requirements will depend on many factors, including,
but not limited to, the market acceptance and competitive position of its voice
application services and products; the Company's ability to attract and secure
key business relationships; the Company's ability to generate licensing fees and
royalties, professional services fees, hosting services fees, and other revenue
from its services; the equipment required to support the network operations for
these services; the levels of promotion and advertising required to market the
Company's products and services and attain a competitive position in the
marketplace; the extent to which the Company invests in new technology and
management and staff infrastructure to support its business; and the response of
competitors to the Company's services and technology.
The Company will be required to raise additional public or private financing
to support its operations beyond the year 2000. No assurance can be given that
additional financing will be available or that, if available, it will be
available on terms favorable to the Company or its stockholders. If adequate
funds are not available to satisfy the Company's short-term or long-term capital
requirements, the Company may be required to significantly limit its operations,
which would have a material adverse effect on the Company's business, financial
condition and results of operation. In the event the Company raises additional
equity financing, further dilution to the Company's stockholders will result.
As part of its business strategy, the Company assesses opportunities to enter
joint ventures, to acquire or sell businesses, products or technologies and to
engage in other like transactions. The Company has made no significant
commitment or agreement with respect to any such transaction at this time.
RISK FACTORS
In this section we summarize certain risks regarding our business and
industry. Readers should carefully consider the following risk factors in
conjunction with the other information included in this report on Form 10-Q.
WE HAVE A HISTORY OF LOSSES. WE EXPECT TO CONTINUE TO INCUR LOSSES, AND WE MAY
NEVER ACHIEVE AND SUSTAIN PROFITABILITY.
Since our inception, we have incurred significant losses, including a loss of
$21.1 million for the six-month period ended June 30, 2000. As of June 30, 2000,
we had an accumulated deficit of $299.4 million. We expect to have net losses
and negative cash flow for at least the next eighteen months. We plan to
continue to spend significant amounts to develop, enhance and maintain our voice
application services and products and to expand our marketing and sales efforts.
As a result, we will need to generate significant revenues to achieve
profitability. Even if we achieve profitability, we may be unable to maintain or
increase profitability on a quarterly or annual basis. If we fail to achieve and
maintain profitability, the price of our stock may decline substantially.
OUR LIMITED FUNDING MAY RESTRICT OUR OPERATIONS AND OUR ABILITY TO EXECUTE OUR
BUSINESS STRATEGY, AND THE AVAILABILITY OF ADDITIONAL FINANCING IS UNCERTAIN.
Our business model requires us to devote significant financial resources to
the development, enhancement and maintenance of magicTalk, our platform for
delivery of voice application services and products, to the expansion of our
sales and professional services organizations and to the buildout of our network
operations center. If we are not able to successfully manage our existing
resources or to secure additional financing in a timely manner, our ability to
generate sufficient revenues may be restricted and our business curtailed.
Effective July 30, 1999, we entered into a common stock investment agreement
with an institutional investor providing for an equity line of credit. The
common stock investment agreement permits us to require the investor to purchase
from time to time an aggregate of up to $20,000,000 of our common stock in
increments of up to $5,000,000. In addition, the investor has the right to
purchase in its sole discretion up to an aggregate of an additional $6,000,000
of common stock during the term of the common stock investment agreement. On
March 10, 2000, we agreed to amend the common stock investment agreement to
provide the institutional investor with the option to purchase additional shares
of our common stock equal to up to 100% of the amount specified in our put
notice to the investor. The aggregate amount of the equity line, however, was
not increased by this amendment. There are numerous conditions on our right to
draw down under the equity line, including that the closing bid price of the
common stock on the business day immediately preceding a draw down notice must
be at least $2.00 per share and that the common stock is listed on The American
Stock Exchange ("AMEX"), The New York Stock Exchange ("NYSE"), The Nasdaq
National Market or The Nasdaq SmallCap Market. In addition, the dollar amount
specified in any draw down notice will be decreased by one twentieth (1/20) for
each business day during the twenty business days immediately following delivery
of the draw down notice on which the weighted average price of the common stock
is less than $2.062. The weighted average price of our common stock was less
than $2.062 on each business day through much of September, October and the
first half of November of 1999. It is uncertain that we will be able
consistently to meet the closing bid price condition, the listing condition or
any other condition. In addition, although we may request drawdowns in
increments of up to $5,000,000, the actual dollar amount is subject to
limitations based on the daily trading volumes, the market price of our common
stock as well as the investor's percentage ownership of General Magic.
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To support our operations beyond the year 2000, we will be required to raise
additional public or private financing. No assurance can be given that
additional financing will be available or that, if available, it will be
available on terms favorable to General Magic or its stockholders. The
unavailability or timing of revenues and financing may require us to curtail our
operations. In addition, if we are not able to generate revenues or obtain
funding, we may be unable to meet The Nasdaq National Market's continued listing
requirements, and our common stock could be delisted from that market. See "--
Our common stock may be delisted from The Nasdaq National Market if we are not
able to demonstrate compliance with the continued listing requirements."
THE MARKET FOR OUR VOICE APPLICATION SERVICES AND PRODUCTS MAY NOT DEVELOP,
WHICH WOULD SUBSTANTIALLY IMPEDE OUR ABILITY TO GENERATE REVENUES.
Our future financial performance depends on growth in demand for voice
application services and products. If the market for voice application services
and products does not develop or if we are unable to capture a significant
portion of that market, either directly or through our partners, our revenues
and our results of operations will be adversely affected.
The market for voice application services and products is relatively new and
still evolving. Currently, there are a limited number of products and services
in this industry. The adoption of voice application services and products could
be hindered by the perceived cost, quality and reliability of this new
technology, as well as the reluctance of businesses that have invested
substantial resources in existing systems, such as touch-tone-based systems, to
replace their current systems with this new technology. Accordingly, in order to
achieve commercial acceptance, we will have to educate prospective customers,
including large, established companies, about the uses and benefits of
voice-driven applications in general and our products in particular. If these
efforts fail, or if our voice application services and products do not achieve
commercial acceptance, our business would be harmed.
The continued development of the market for our voice application services
and products will depend upon the:
o widespread adoption of voice-driven applications by businesses for use
in conducting transactions and managing relationships with their
customers;
o consumer acceptance of such applications; and
o continuing improvements in hardware and software technology that may
reduce the cost and improve the performance of voice solutions.
WE MUST ESTABLISH AND MAINTAIN RELATIONSHIPS WITH CUSTOMERS AND PARTNERS TO
GENERATE REVENUES.
Our business model for voice application services and products depends on
generation of revenue from licensing of our magicTalk communications platform
and from voice application development, support and hosting services. Our
success in generating these revenues depends on our ability to establish and
maintain relationships with organizations that engage in high-volume customer
interactions, such as companies with customer relationship management
applications, established eCommerce businesses, and value-added
telecommunications providers, and with partners that currently provide
technology solutions to these businesses. Competition for relationships with
companies such as these is extremely intense.
WE ARE DEPENDENT ON A FEW CUSTOMERS AND EXPECT TO DERIVE A SIGNIFICANT AMOUNT OF
REVENUE FROM A SINGLE CUSTOMER.
We have entered into commercial arrangements with Qwest Communications
Corporation, Intuit(R) Inc., Excite@Home, the OnStar Corporation, a subsidiary
of General Motors Corporation and Global Services Network, Inc. ("GSN"). Qwest
and Intuit have placed their projects on hold. We plan to advance our
relationships with OnStar and GSN and, in 2000, we expect to derive a
significant portion of our revenue from OnStar. However, we cannot guarantee
that we will be able to maintain these relationships or establish others. It is
also uncertain whether the voice applications contemplated by our current or
future partners will be commercially launched, or if launched, that they will
result in significant revenue to General Magic.
OUR VOICE APPLICATION SERVICES AND PRODUCTS CAN HAVE LONG SALES AND
IMPLEMENTATION CYCLES AND, AS A RESULT, OUR QUARTERLY OPERATING RESULTS AND OUR
STOCK PRICE MAY FLUCTUATE.
Purchase of our voice application services and products requires a
significant expenditure by a customer. Accordingly, the decision to purchase our
services and products typically requires significant pre-purchase evaluation. We
may spend many months educating and providing information to prospective
customers regarding the use and benefits of our voice application services and
products. During this evaluation period, we may expend substantial sales,
marketing and management resources.
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After purchase, it may take substantial time and resources to implement our
solution and to integrate it with our customer's existing systems. If we are
performing significant professional services in connection with the
implementation, we do not recognize software revenue until after system
acceptance or deployment. In cases where the contract specifies milestones or
acceptance criteria, we may not be able to recognize services revenue until
these conditions are met. We have in the past and may in the future experience
unexpected delays in recognizing revenue. Consequently, the length of our sales
and implementation cycles may make it difficult to predict the quarter in which
revenue recognition may occur and may cause revenue and operating results to
vary significantly from period to period. These factors could cause our stock
price to be volatile or to decline.
LOSS OF OR DELAYS IN ACQUIRING A KEY CUSTOMER COULD SUBSTANTIALLY REDUCE OUR
REVENUE IN ANY GIVEN PERIOD AND HARM OUR BUSINESS.
We expect that for at least the next twelve months, a limited number of
customers will account for a substantial portion of our revenue during any given
period. As a result, if we do not acquire a major customer, if a contract is
delayed, cancelled or deferred, or if an anticipated sale is not made, our
revenue would be adversely affected.
IF WE ARE UNABLE TO HIRE ADDITIONAL PERSONNEL, OR TO RETAIN KEY TECHNICAL,
PROFESSIONAL SERVICE, SALES, MARKETING AND OPERATIONAL PERSONNEL, OUR BUSINESS
COULD BE HARMED.
We intend to hire additional personnel, including engineers, professional
service, sales, marketing and operational personnel to support our business.
Competition for these individuals is keen, especially in the San Francisco Bay
Area. We may not be able to attract, assimilate or retain additional highly
qualified personnel. In addition, we rely upon the continued performance and
services of our existing employees, including key managerial, technical and
operational personnel. Our failure to attract, integrate, motivate and retain
additional employees or to motivate and retain existing employees could harm our
business.
INTENSE COMPETITION IN THE MARKET FOR VOICE APPLICATION SERVICES AND PRODUCTS
COULD PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY.
The market for voice application services and products is intensely
competitive. A number of companies have developed, or are expected to develop,
voice applications and/or platform technologies that compete with ours.
Competitors in the voice application and platform technologies markets include
companies that offer hosted or customer premise equipment-based voice-activated
solutions to the telecommunications market, such as AccessLine Communications
Corporation, Call Sciences Inc., Comverse Technology, Inc., InterVoice-Brite
Inc. and Webley Systems, Inc.; speech recognition vendors, such as Nuance
Communications Inc., SpeechWorks International and Vocalis Group plc, to the
extent that they engage in or support the development of voice applications;
value-added resellers of speech recognition technology, such as NetbyTel.com
Inc. and VocalPoint, Inc.; and companies in the voice portal category, such as
BeVocal, Inc., Lucent Technologies, Inc., Motorola Inc., Quack.com Inc. and
Tellme Networks Inc. Wireless communications infrastructure companies, such as
Telefonaktiebolaget LM Ericsson or Phone.com Inc., may extend their offerings
to provide the capabilities of the magicTalk communications platform, as may
software developers such as Microsoft Corporation and Oracle Corp., or
telecommunications companies such as AT&T Corp. and Sprint Communications
Company, L.P. Many of these companies have longer operating histories,
significantly greater financial, technical, product development, marketing and
sales resources, greater name recognition, larger established customer bases,
and better-developed distribution channels than we do. Our present or future
competitors may be able to develop products that are comparable or superior to
those we offer, adapt more quickly than we do to new technologies, evolving
industry trends and standards or customer requirements, or devote greater
resources to the development, promotion and sale of their products than we do.
Accordingly, we may not be able to compete effectively in our markets,
competition may intensify and future competition may harm our business.
TECHNOLOGY CHANGES RAPIDLY IN OUR MARKET, AND OUR FUTURE SUCCESS WILL DEPEND ON
OUR ABILITY TO MEET THE NEEDS OF OUR CUSTOMERS.
The market for voice application services and products is characterized by
rapid technological change, changing customer needs, increasingly frequent new
product introductions and evolving industry standards. The introduction of
products or services embodying new technologies and the emergence of new
industry standards could render our voice application services and products
obsolete and unmarketable.
Our success will depend upon our ability to timely develop and introduce new
voice application services and products, as well as enhancements to our existing
services and products, to keep pace with technological developments and emerging
industry standards and address the changing needs of customers, partners, users,
sponsors, and advertisers. We may not be successful in developing and marketing
new services or products that respond to technological changes or evolving
industry standards. We may experience difficulties that could delay or prevent
the successful development, introduction and marketing of new services or
products. In addition, our new services and products may not adequately meet the
requirements of the marketplace or achieve market acceptance.
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WE MAY EXPERIENCE DELAYS IN PRODUCT DEVELOPMENT, WHICH COULD ADVERSELY AFFECT
OUR REVENUES OR RESULTS OF OPERATIONS.
Any delays in product development or market launch could adversely affect our
revenues or results of operations. To be successful, we must continue to develop
and enhance technologies to enable us to offer voice application services and
other products deployed on our magicTalk communications platform. Software
product development schedules are difficult to predict because they involve
creativity and may require implementation of original, untried solutions or the
use of new development tools. Our software development efforts have been delayed
in the past. In addition to software development delays, we may also experience
delays in other aspects of product development. Any product development delays
could delay or prevent successful introduction or marketing of new or improved
services or products or the delivery of new versions of our services or
products.
THE FAILURE OR UNAVAILABILITY OF THIRD-PARTY TECHNOLOGIES AND SERVICES COULD
LIMIT OUR ABILITY TO GENERATE REVENUES.
We have incorporated technology developed by third parties in certain of the
voice application services and products offered to our customers, including the
following:
o email servers which process both emails and voice mails;
o calendar and contact software;
o voice recognition software;
o text-to-speech software;
o the billing system; and
o network operations center servers, routers and other equipment.
We will continue to incorporate third-party technologies in future voice
application services and products. We have limited control over whether or when
these third-party technologies will be enhanced. In addition, our competitors
may acquire interests in these third parties or their technologies, which may
render the technology unavailable to us. If a third party fails or refuses to
timely develop, license or support technology necessary to our services or
products, market acceptance of our services or products could be adversely
affected. Moreover, if these third-party technologies fail or otherwise prove to
be not viable, it may have a significant impact on our ability to provide our
services and/or to generate revenues. In addition, we rely and will continue to
rely on services supplied by third parties such as telecommunications, Internet
access and power for services hosted in our network operations center. If these
third-party services fail to meet industry standards for quality and
reliability, market acceptance of our services could be adversely affected.
CONVERSION OF PREFERRED STOCK OR ISSUANCE OF OTHER SECURITIES WOULD DILUTE
CURRENT STOCKHOLDERS.
As of June 30, 2000, we have 50,000 shares of Series A preferred stock, 186
shares of Series D preferred stock, 350 shares of Series E preferred stock, 525
shares of Series F preferred stock, 1,500 shares of Series G preferred stock and
580 shares of Series H Preferred Stock outstanding, all of which are convertible
into common stock. In addition, we have a warrant to purchase up to an
additional 500 shares of Series G preferred stock and warrants to purchase an
aggregate, as of June 30, 2000, of 2,796,991 shares of common stock outstanding.
We also have an equity line of credit arrangement under which we could issue up
to $25,750,000 in common stock. On June 27, 2000, the holder of Series A
preferred stock initiated, and on July 5, 2000, completed, the conversion of all
of its shares of Series A. The holders of common stock could experience
substantial dilution to their investment upon conversion of the preferred
shares, exercise of the warrants, or drawdowns under the equity line of credit
arrangement. The number of shares of common stock issuable upon the conversion
of the Series D preferred stock and the Series F preferred stock, upon exercise
of the warrants issued in connection with the Series B, Series C and Series D
preferred stock transactions, and pursuant to the equity line of credit
arrangement depends in part on future prices of our common stock on The Nasdaq
National Market. The number of shares of common stock issued pursuant to the
equity line of credit arrangement depends on the prices of common stock on The
Nasdaq National Market shortly before the date of issuance and sale. We cannot
predict the price of the common stock in the future. If the price of our common
stock decreases over time, the number of shares of common stock issuable upon
conversion of the preferred stock, exercise of the warrants issued in connection
with the Series B, Series C, and Series D preferred stock, and drawdowns under
the equity line of credit will increase and the holders of common stock would
experience additional dilution of their investment. Such dilution could cause
the stock price of our common stock to decrease further. A decrease in the stock
price of our common stock could cause our common stock to be delisted from The
Nasdaq National Market. Our board of directors may authorize issuance of up to
427,101 additional shares of preferred stock that are convertible into common
stock without any action by our stockholders. In addition, our board of
directors may authorize the sale of additional shares of common stock or other
equity securities that are
17
<PAGE> 18
convertible into common stock without any action by our stockholders. The
issuance and conversion of any such preferred stock or equity securities would
further dilute the percentage ownership of our stockholders.
WE MAY BE REQUIRED TO REDEEM THE OUTSTANDING SERIES D PREFERRED STOCK AND SERIES
F PREFERRED STOCK, WHICH COULD SIGNIFICANTLY DEPLETE OUR CASH RESERVES AND
MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The holders of the Series D preferred stock, the Series F preferred stock
and the Series H Preferred Stock have redemption rights if we fail to meet the
requirements of the documents governing each. As of June 30, 2000, 186 shares of
Series D preferred stock, 525 shares of the Series F preferred stock 580 shares
of the Series H preferred stock were outstanding. The redemption value of these
shares could total as much as approximately $17.4 million. If we were required
to redeem these shares, such payments would significantly deplete our cash
balance, which could materially and adversely affect our financial condition. In
addition, such a decrease in our cash balance could cause our common stock to be
delisted from The Nasdaq National Market. We cannot guarantee that we will be
able to meet all of the requirements necessary to avoid a redemption.
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE ARE NOT
ABLE TO DEMONSTRATE COMPLIANCE WITH THE CONTINUED LISTING REQUIREMENTS.
We are subject to the continued listing requirements of The Nasdaq National
Market. In the event that we are not able to maintain continued compliance with
The Nasdaq National Market's "net tangible assets" requirement or any other of
its listing requirements, we would be subject to a delisting process. In the
event that we are delisted, we will seek to list our common stock on other
markets such as The Nasdaq Small Cap Market and The American Stock Exchange,
Inc. We cannot guarantee that we will be able to meet the listing requirements
of these or any other markets. In the event that we are delisted from The Nasdaq
National Market or are not able to list on any other market, the ability to sell
shares of our common stock will be adversely affected.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD IMPAIR OUR COMPETITIVE
POSITION.
Our future success and ability to compete depends in part upon our
proprietary technology and our trademarks, which we attempt to protect under a
combination of patent, copyright, trademark and trade secret laws, as well as
with confidentiality procedures and contractual provisions. These legal
protections afford only limited protection and may be time-consuming and
expensive to obtain and/or maintain. Further, despite our efforts, we may be
unable to prevent third parties from infringing upon or misappropriating our
intellectual property.
We hold fourteen patents issued by the United States Patent and Trademark
Office ("PTO"). We have eight patent applications pending before the PTO, as
well as selected counterpart patent applications pending in foreign
jurisdictions. There is no guarantee that patents will be issued with respect to
our current or future patent applications. Any patents that are issued to us
could be invalidated, circumvented or challenged. If challenged, our patents
might not be upheld or their claims could be narrowed. Our intellectual property
may not be adequate to provide us with a competitive advantage or to prevent
competitors from entering the markets for our products or services.
Additionally, our competitors could independently develop non-infringing
technologies that are competitive with, equivalent to, and/or superior to our
technology. Monitoring infringement and/or misappropriation of intellectual
property can be difficult, and there is no guarantee that we would detect any
infringement or misappropriation of our proprietary rights. Even if we do detect
infringement or misappropriation of our proprietary rights, litigation to
enforce these rights could cause us to divert financial and other resources away
from our business operations. Further, we expect to license our products
internationally, and the laws of some foreign countries would not protect our
proprietary rights to the same extent as do the laws of the United States.
OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY ARRANGEMENTS.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of intellectual property rights. Although we attempt to avoid
infringing proprietary rights of others, third parties may assert claims against
us from time to time alleging infringement, misappropriation or other violations
of proprietary rights, whether or not such claims have merit. Such claims can be
time consuming and expensive to defend and could require us to cease the use and
sale of allegedly infringing products and services, incur significant litigation
costs and expenses, and develop or acquire non-infringing technology or obtain
licenses to the alleged infringing technology. We may not be able to develop or
acquire alternative technologies or obtain such licenses on commercially
reasonable terms.
SECURITY PROBLEMS IN OUR VOICE APPLICATION SERVICES OR PRODUCTS WOULD LIKELY
RESULT IN SIGNIFICANT LIABILITY AND REDUCED REVENUES.
18
<PAGE> 19
Security vulnerabilities and weaknesses may be discovered in our voice
application services or products, in the licensed technology incorporated in our
voice application services or products, in our network operations center hosting
environment, or in the media by which end users access our voice application
services or products. Any such security problems may require us to expend
significant capital and other resources to alleviate the problems. In addition,
these problems could result in the loss or misuse of personal information,
including credit card numbers, and may limit the number of customers or
subscribers for our voice application services or products. A decrease in the
number of customers could lead to decreased revenues. These problems may also
cause interruptions or delays in the development of enhancements to our voice
application services and products and may result in lawsuits against us.
We will continue to incorporate security technologies in our voice
application services and products. However, such technologies may not be
adequate to prevent break-ins. In addition, weaknesses in the media by which
users access our voice application services and products, including the
Internet, land-line telephones, cellular phones and other wireless devices, may
compromise the security of the electronic information accessed. We intend to
continue to limit our liability to end users and to our customers and partners,
including liability arising from failure of the security technologies
incorporated into our services and products, through contractual provisions.
However, we may not successfully negotiate such limitations with all our
customers and partners, nor may such limitations eliminate liability. We do not
currently have liability insurance to protect against risks associated with
forced break-ins or disruptions.
ANY SOFTWARE DEFECTS IN OUR PRODUCTS COULD HARM OUR BUSINESS AND RESULT IN
LITIGATION.
Complex software products such as ours may contain errors, defects and bugs.
With the planned release of any product, we may discover these errors, defects
and bugs, and, as a result, our products may take longer than expected to
develop. In addition, we may discover that remedies for errors or bugs may be
technologically unfeasible. Delivery of products with undetected production
defects or reliability, quality or compatibility problems could damage our
reputation. Errors, defects or bugs could also cause interruptions, delays or a
cessation of sales to our customers. We could be required to expend significant
capital and other resources to remedy these problems. In addition, customers
whose businesses are disrupted by these errors, defects and bugs could bring
claims against us. Although our contracts typically contain provisions designed
to limit our exposure to liability claims, a claim brought against us, even if
unsuccessful, could be time-consuming, divert management's attention, result in
costly litigation and harm our reputation. Moreover, existing or future laws or
unfavorable judicial decisions could limit the enforceability of the limitation
of liability, disclaimer of warranty or other protective provisions contained in
our contracts.
A CLAIM FOR DAMAGES COULD MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We may be subject to claims for damages related to system errors and other
defects in the services we host for our customers or in our General Magic
branded services. Agreements with end users of these services typically contain
provisions designed to limit exposure to potential product liability claims.
However, these provisions may not be sufficient to protect us from liability.
Moreover, a claim brought against us, even if unsuccessful, could be
time-consuming, divert management's attention, result in costly litigation and
harm our reputation. We currently have liability insurance to protect against
certain risks associated with system errors and other defects in our services.
However, we cannot guarantee that such insurance will be sufficient.
WE DEPEND ON THE INTEGRITY AND RELIABILITY OF OUR SOFTWARE, COMPUTER HARDWARE
SYSTEMS AND NETWORK INFRASTRUCTURE, AND ANY INADEQUACIES MAY RESULT IN
SUBSTANTIAL INTERRUPTIONS TO OUR SERVICE.
Our ability to host services for our customers depends on the integrity of
our software, computer hardware systems and network infrastructure, and the
reliability of software and services supplied by our vendors, including
providers of telecommunications and electric power. We have encountered, and may
encounter in the future, errors in our software or our system design, or
inadequacies in the software and services supplied by our vendors. Any such
errors or inadequacies may result in substantial interruptions to our services
or those we host for our customers. Our errors may be expensive or difficult to
correct in a timely manner, and we may have little or no control over whether
any inadequacies in software or services supplied to us by third parties are
timely corrected, if at all.
OUR STOCK PRICE HAS BEEN EXTREMELY VOLATILE, AND EXTREME PRICE FLUCTUATIONS
COULD ADVERSELY AFFECT YOUR INVESTMENT.
The market price of our common stock has been extremely volatile. From
January 1, 2000 to June 30, 2000, the closing price of our common stock has
varied significantly from a high of $17.313 to a low of $2.5938 per share.
Publicized events and announcements may have a significant impact on the
market price of our common stock. For example, shortfalls in our revenue or net
income, conversions of preferred stock into common stock, delays in development
of our services or products, disruptions in our services, or announcements of
partnerships, technological innovations or new products or services by our
19
<PAGE> 20
competitors could have the effect of temporarily or permanently driving down the
price of our common stock. In addition, the stock market from time to time
experiences extreme price and volume fluctuations that particularly affect the
market prices for emerging and technology companies, such as ours. Such price
and volume fluctuations are often unrelated or disproportionate to the operating
performance of the affected companies. These broad market fluctuations may
adversely affect your ability to sell your shares at a price equal to or above
the price you purchased them. In addition, a decrease in the stock price of our
common stock could cause our common stock to be delisted from The Nasdaq
National Market.
DELAWARE LAW AND CERTAIN PROVISIONS OF OUR CHARTER DOCUMENTS MAY INHIBIT A
CHANGE OF CONTROL OF GENERAL MAGIC.
Delaware law and provisions of our charter documents may make it more
difficult for a third party to acquire, or may discourage a third party from
attempting to acquire, General Magic. We are subject to the anti-takeover
provisions of the Delaware General Corporation Law, which could delay a merger,
tender offer or proxy contest or make such a transaction more difficult. In
addition, provisions of our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change in control or in management, or may
limit the price that certain investors may be willing to pay in the future for
shares of our common stock. These provisions include:
o authority to issue "blank check" preferred stock, which is preferred stock
that can be issued by the board of directors without prior stockholder
approval, with rights senior to those of common stock;
o prohibition on stockholder action by written consent;
o requirement that a two-thirds vote of the stockholders is required to
amend the bylaws; and
o advance notice requirements for submitting nominations for election to the
board of directors and for proposing matters that can be acted upon by
stockholders at a meeting.
Furthermore, the Series D preferred stock and the Series F preferred stock
provide holders rights to redemption of their Series D preferred stock or Series
F preferred stock, as the case may be, or penalty payments upon a change in
control. In addition, the documents governing the Series D preferred stock and
Series F preferred stock prohibit changes of control unless the surviving entity
assumes all of our obligations under the Series D preferred stock or Series F
preferred stock, as the case may be, and is a publicly traded corporation traded
on The Nasdaq National Market, NYSE or AMEX. All of these rights could make an
acquisition even more difficult.
OUR FACILITY IS LOCATED NEAR KNOWN EARTHQUAKE FAULTS, AND THE OCCURRENCE OF AN
EARTHQUAKE OR OTHER NATURAL DISASTER COULD CAUSE SIGNIFICANT DAMAGE TO OUR
FACILITY THAT MAY REQUIRE US TO CEASE OR CURTAIL OPERATIONS.
Our facility is located in the San Francisco Bay Area near known earthquake
faults and is vulnerable to damage from earthquakes. In October 1989, a major
earthquake that caused significant property damage and a number of fatalities
struck this area. We do not have redundant, multiple site capacity, and so are
also vulnerable to damage from other types of disasters, including fire, floods,
power loss, communications failures and similar events. Any damage to our
facility could lead to interruptions in the services hosted in our network
operations center and loss of subscriber information, and could substantially if
not totally impair our ability to operate our business. The insurance we
maintain may not be adequate to cover our losses resulting from disasters or
other business interruptions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. The fair value of our investment portfolio or related income
would not be significantly impacted by a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio.
20
<PAGE> 21
Part II: Other Information
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 20, 2000, the Company issued to accredited investors 2,200 shares of
the Series H Preferred Stock and warrants to purchase 1,883,200 shares of common
stock for an aggregate cash consideration of $22.0 million. The terms of the
conversion and exercise of these securities are incorporated by reference to
Part I-Item 1-Note 5 of the Notes to Condensed Consolidated Financial
Statements of this Quarterly Report on Form 10-Q. These securities were
registered under the Securities Act of 1933, as amended (the "Securities Act")
in reliance upon the exemption provided by section 4(2) of the Securities Act
and/or Regulation D promulgated thereunder for transactions by an issuer not
involving a public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of General Magic, Inc. was held on June
23, 2000.
A proposal to elect the following directors to hold office until the 2001
Annual Meeting and until their successors are elected and qualified was
approved by the stockholders. The proposal received the following votes:
<TABLE>
<CAPTION>
Number of Votes For Authority Withheld
------------------- ------------------
<S> <C> <C>
Nominees: Common Stock Directors
Steven Markman, Ph.D. 54,929,743 1,303,609
Elizabeth A. Fetter 55,622,695 610,657
Philip D. Knell 55,612,370 620,982
Tom D. Seip 55,642,585 590,767
Susan G. Swenson 55,620,980 612,372
Nominees: Series G. Director:
Chester A. Huber, Jr. 8,907,363 0
</TABLE>
A proposal to approve an amendment of the Company's Amended Certificate of
Incorporation to increase the number of authorized shares of Common Stock
thereunder from 100,000,000 shares to 150,000,000 shares was adopted with the
following votes:
<TABLE>
<S> <C>
For: 54,020,390
Against: 1,986,032
Abstain: 226,930
</TABLE>
A proposal to approve the adoption of the General Magic Inc. 2000 Stock
Option Plan (the "Plan") and to authorize the reservation of 2,550,000 shares
of Common Stock for issuance under the Plan was adopted with the following
votes:
<TABLE>
<S> <C>
For: 52,000,873
Against: 3,949,921
Abstain: 282,558
</TABLE>
A proposal to approve the issuance of those shares of the Company's Common
Stock (or securities convertible into Common Stock) equal to 20% or more of
the outstanding Common Stock or voting power before the issuance of the
Series G Convertible Preferred Stock upon (i) the conversion of the Company's
Series G Convertible Preferred Stock and (ii) the exercise of a warrant for
the purchase of shares of the Company's Series G Convertible Preferred Stock
was adopted with the following votes:
<TABLE>
<S> <C>
For: 23,121,859
Against: 1,868,854
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C>
Abstain: 376,196
</TABLE>
A proposal to ratify the appointment of KPMG LLP as the independent auditors
of the Company for the fiscal year ending December 31, 2000 was adopted with
the following votes:
<TABLE>
<S> <C>
For: 55,670,968
Against: 298,670
Abstain: 263,714
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits have been filed with this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1 Securities Purchase Agreement dated as of March 29, 2000 by and
among the Company and the investors listed on the Schedule of Buyers
attached thereto is incorporated by reference to Exhibit 4.1 to the
Company's report on Form 8-K filed with the Securities and Exchange
Commission on March 31, 2000 (File No. 000-25374)
4.2 Conversion Agreement dated March 29, 2000 by and among the Company
and the signatories thereto is incorporated by reference to Exhibit
4.2 to the Company's report on Form 8-K filed with the Securities
and Exchange Commission on March 31, 2000 (File No. 000-25374)
4.3 Certificate of Designations dated as of March 29, 2000 is incorporated
by reference to Exhibit 4.3 to the Company's report on Form 8-K filed
with the Securities and Exchange Commission on March 31, 2000 (File
No. 000-25374)
4.4 Registration Rights Agreement dated March 29, 2000 by and among the
Company and the signatories thereto is incorporated by reference to
Exhibit 4.4 to the Company's report on Form 8-K filed with the Securities
and Exchange Commission on March 31, 2000 (File No. 000-25374)
4.5 Form of Warrant for the purchase of shares of the Company's Common
Stock is incorporated by reference to Exhibit 4.5 to the Company's
report on Form 8-K filed with the Securities and Exchange Commission
on March 31, 2000 (File No. 000-25374)
4.6 Certificate of Amendment to Certificate of Incorporation dated June
23, 2000 is incorporated by reference to Appendix A to the Company's
Definitive (14A) Proxy Statement filed with the Securities and
Exchange Commission on May 12, 2000 (File No. 000-25374)
10.1(1) Professional Services, Licensing and Acquisition Agreement dated
June 21, 2000 between the Company and Global Services Network, Inc.
10.2 Letter Agreement with Paula Skokowski dated April 20, 2000
10.3 Letter Agreement with Dennis Kilian dated June 20, 2000
10.4 Letter Agreement with Linda A. Hayes dated May 25, 2000
27.1 Financial Data Schedule
</TABLE>
--------------
(1) Certain portions of this document are subject to an Application for
Confidential Treatment filed with the Commission on August 14, 2000.
(b) (i) A report on Form 8-K was filed on May 22, 2000, to report under
Item 5, Other Events, that the Company intends to focus on servicing
the business-to-business market and would discontinue its branded
myTalk service within 45 days of that date.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 14, 2000 /s/ STEVEN MARKMAN
---------------------------------------
Name: Steven Markman
Title: President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
DATE: August 14, 2000 /s/ ROSE MARCARIO
--------------------------------------
Name: Rose M. Marcario
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
4.1 Securities Purchase Agreement dated as of March 29, 2000 by and
among the Company and the investors listed on the Schedule of Buyers
attached thereto is incorporated by reference to Exhibit 4.1 to the
Company's report on Form 8-K filed with the Securities and Exchange
Commission on March 31, 2000 (File No. 000-25374)
4.2 Conversion Agreement dated March 29, 2000 by and among the Company
and the signatories thereto is incorporated by reference to Exhibit
4.2 to the Company's report on Form 8-K filed with the Securities
and Exchange Commission on March 31, 2000 (File No. 000-25374)
4.3 Certificate of Designations dated as of March 29, 2000 is incorporated
by reference to Exhibit 4.3 to the Company's report on Form 8-K filed
with the Securities and Exchange Commission on March 31, 2000 (File
No. 000-25374)
4.4 Registration Rights Agreement dated March 29, 2000 by and among the
Company and the signatories thereto is incorporated by reference to
Exhibit 4.4 to the Company's report on Form 8-K with the Securities
and Exchange Commission on March 31, 2000 (File No. 000-25374)
4.5 Form of Warrant for the purchase of shares of the Company's Common
Stock is incorporated by reference to Exhibit 4.5 to the Company's
report on Form 8-K filed with the Securities and Exchange Commission
on March 31, 2000 (File No. 000-25374)
4.6 Certificate of Amendment to Certificate of Incorporation dated June
23, 2000 is incorporated by reference to Appendix A to the Company's
Definitive (14A) Proxy Statement filed with the Securities and
Exchange Commission on May 12, 2000 (File No. 000-25374)
10.1(1) Professional Services, Licensing and Acquisition Agreement dated
June 21, 2000 between the Company and Global Services Network, Inc.
10.2 Letter Agreement with Paula Skokowski dated April 20, 2000
10.3 Letter Agreement with Dennis Kilian dated June 20, 2000
10.4 Letter Agreement with Linda A. Hayes dated May 25, 2000
27.1 Financial Data Schedule
</TABLE>
--------------
(1) Certain portions of this document are subject to an Application for
Confidential Treatment filed with the Commission on August 14, 2000.
(b) (i) A report on Form 8-K was filed on May 22, 2000, to report under
Item 5, Other Events, that the Company intends to focus on servicing
the business-to-business market and would discontinue its branded
myTalk service within 45 days of that date.
24
