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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 March 31, 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 [ ]
51,292,300 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of March 31, 2000.
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GENERAL MAGIC, INC.
FORM 10-Q, MARCH 31, 2000
C O N T E N T S
<TABLE>
<CAPTION>
ITEM NUMBER PAGE
- ----------- -----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
<S> <C> <C>
a. Condensed Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 3
b. Condensed Consolidated Statements of Operations - Three-month Periods Ended
March 31, 2000 and 1999 4
c. Condensed Consolidated Statements of Cash Flows - Three-month Periods Ended
March 31, 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 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibits 23
</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>
MARCH 31, DECEMBER 31,
2000 1999
--------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,379 $ 23,045
Short-term investments 6,207 2,490
Other current assets 853 767
--------- ---------
Total current assets 17,439 26,302
--------- ---------
Property and equipment, net 11,123 11,869
Other assets 3,677 3,534
--------- ---------
Total assets $ 32,239 $ 41,705
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 4,708 $ 2,780
Accrued expenses 5,512 8,018
Deferred revenue and other current liabilities 3,438 5,895
--------- ---------
Total current liabilities 13,658 16,693
Other long-term liabilities 2,364 2,692
--------- ---------
Total liabilities 16,022 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 -- 1; 1999 -- 1 4,191 10,274
Stockholders' equity:
Convertible preferred stock, $0.001 par value
Authorized: 54 shares; issued and outstanding: 2000 -- 53; 1999 -- 54 2 2
Preferred stock, $0.001 par value
Authorized: 432 shares; issued and outstanding: 2000 -- 0; 1999 -- 0 -- --
Common stock, $0.001 par value; authorized: 100,000 shares;
Issued and outstanding: 2000 -- 51,292; 1999 -- 43,248 51 43
Additional paid-in capital 295,047 282,861
Accumulated other comprehensive loss (2) (3)
Deficit accumulated during development stage (282,869) (270,654)
--------- ---------
12,229 12,249
Less treasury stock, at cost: 1999 -- 46; 1998 -- 46 (203) (203)
--------- ---------
Total stockholders' equity 12,026 12,046
--------- ---------
$ 32,239 $ 41,705
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</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
MARCH 31,
-------------------------
2000 1999
---------- ---------
<S> <C> <C>
Revenue:
Service revenue $ 2,590 $ 137
Licensing revenue 6 18
-------- --------
Total revenue 2,596 155
-------- --------
Operating expenses:
Cost of service revenue 1,171 -
Network operations 3,080 1,912
Research and development 1,976 3,452
Selling, general and administrative 7,053 5,906
Depreciation and amortization 1,484 973
Compensation expense associated with stock 154 114
-------- --------
Total costs and expenses 14,918 12,357
-------- --------
Loss from operations (12,322) (12,202)
Total other income (expense), net 279 (1,493)
-------- --------
Loss before income taxes (12,043) (13,695)
Income taxes 20 22
Net loss (12,063) (13,717)
Dividends on preferred stock (148) (283)
Warrants issuance on Series D preferred stock - (251)
-------- --------
Loss applicable to common stockholders $(12,211) $(14,251)
======== ========
Basic and diluted loss per share $ (0.26) $ (0.41)
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Shares used in computing per share amounts 47,872 34,386
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</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>
THREE-MONTH PERIODS ENDED
MARCH 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,063) $ (13,717)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,484 973
Equity in net loss of unconsolidated affiliate - 1,796
Compensation expense associated with stock options 154 --
--
Deferred revenue (2,457) --
Changes in items affecting operations:
Other current assets (87) 528
Accounts payable and accrued expenses 114 1,649
-------- --------
Net cash used in operating activities (12,855) (8,771)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (5,717) (3,077)
Proceeds from sales and maturities of short-term
investments 2,000 11,133
Purchases of property and equipment (696) (1,688)
Disposition of property and equipment 9 --
Other assets (193) (2,886)
-------- --------
Net cash provided by (used in) investing activities (4,597) 3,482
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations -- (584)
Proceeds from sale of common stock 3,418 --
Purchase of treasury stock -- 701
Proceeds from exercise of Series E warrant 1,000 --
Proceeds from sale of Series D preferred stock -- 20,000
Other long-term liabilities 368 309
-------- --------
Net cash provided by financing activities 4,786 20,426
-------- --------
Net increase (decrease) in cash and cash
equivalents (12,666) 15,137
-------- --------
Cash and cash equivalents, beginning of period 23,045 21,845
-------- --------
Cash and cash equivalents, end of period $ 10,379 $ 36,982
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid during the period 20 22
Interest paid during the period -- 137
Non-cash investing and financing activity:
Conversion of Series D preferred stock into common stock 6,155 --
Conversion of Series F preferred stock into common stock 3,326
Conversion of Series E preferred stock into common stock 2,490 --
Exercise of Series E warrant 1,000
Preferred stock dividends 148 283
Conversion of Series C preferred stock into common stock -- 5,309
Conversion of Series B preferred stock into common stock -- 2,877
</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 which was filed with the SEC on
March 30, 2000.
The results of operations for the three-month period ended March 31, 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>
MARCH 31, DECEMBER 31,
2000 1999
--------- --- --------
<S> <C> <C>
Network operations center $ 13,312 $13,020
Office equipment and computers 8,145 8,225
Furniture and fixtures 2,306 2,303
Leasehold improvements 1,425 1,062
--------- -------
25,188 24,610
Less accumulated depreciation and amortization 14,065 12,741
--------- -------
$ 11,123 $11,869
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</TABLE>
ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Other 2,763 2,380
Employee compensation 2,749 3,511
Prepaid royalty payment and accrued interest - 2,127
------- --------
$5,512 $8,018
======= ========
</TABLE>
TOTAL OTHER INCOME (EXPENSE), NET
A summary of other income (expense) follows (in thousands):
<TABLE>
<CAPTION>
THREE-MONTH PERIODS
ENDED
MARCH 31,
-------------------------
2000 1999
------- -------
<S> <C> <C>
Interest income $ 280 $ 274
Other (1) 22
Equity in net loss of DSI -- (1,796)
Gain on sale of investment in
Starfish, Inc. -- 157
Interest expense -- (150)
------- -------
$ 279 $(1,493
======= =======
</TABLE>
New Pronouncements
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP No.
97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP
No. 98-9 requires recognition of revenue using the "residual method" in a
multiple element software arrangement when fair value does not exist for one or
more of the delivered elements in the arrangement. Under the "residual method,"
the total fair value of the undelivered elements is deferred and recognized in
accordance with SOP No. 97-2. The Company is required to implement SOP No. 98-9
for the year ending December 31, 2000. SOP No. 98-9 also extended the deferral
of the application of SOP No. 97-2 to certain other multiple-element software
arrangements through the Company's year ending December 31, 1999. The adoption
of SOP No. 98-9 will not have a material impact on its financial position,
results of operations or cash flows.
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities, Deferral
of the Effective Date of SFAS No. 133", which amends the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities and requires the Company to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
them at fair value. Gains and losses resulting from changes in fair value would
be accounted for based on the intended use of the derivative and whether it is
designated and qualifies for hedge accounting. The Company has not determined
the impact that SFAS No. 133 will have on its financial statements and believes
that such determination will not be meaningful until closer to the date of the
initial adoption.
The FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB Opinion No. 25" ("FIN No.
44") in March 2000. The interpretation clarifies the application of Opinion 25
for only 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 interpretation will have a material effect
on the Company's results of operations, financial position or liquidity.
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NOTE 3: COMPREHENSIVE INCOME/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 three-month periods ended March 31, 2000 and 1999, there
were no material differences between the Company's comprehensive loss and net
loss.
NOTE 4: NET LOSS PER SHARE
The computation of diluted loss per share does not include common stock
issuable upon (i) the exercise of outstanding stock options and stock purchase
warrants and (ii) the conversion of preferred stock, because the inclusion of
these securities would have an anti-dilutive effect (in thousands).
<TABLE>
<CAPTION>
March 31,
-----------------
2000 1999
------ ------
<S> <C> <C>
Stock options 6,157 7,766
Warrants for the purchase of common stock 3,882 780
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 B
preferred stock -- 1,232
Shares of common stock issuable upon conversion of Series C
preferred stock -- 3,294
Shares of common stock issuable upon conversion of Series D
preferred stock 2,488 6,007
Shares of common stock issuable upon conversion of Series E
preferred stock 921 --
Shares of common stock issuable upon conversion of Series F
preferred stock 4,001 --
Shares of common stock issuable upon conversion of Series G
preferred stock 8,907 --
------ ------
29,985 22,708
====== ======
</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.
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
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 will record 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 the later of (i) April 20, 2000 and (ii)
the date on which the Company's registration statement on Form S-3 under the
Securities Act of 1933, as amended, covering the Series H Preferred Stock (the
"Registration Statement"), is declared effective.
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 may, subject to certain conditions, redeem the Series H Preferred
Stock upon certain consolidations, mergers or other business combinations 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.
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Adjustments to accumulated deficit of approximately $148 thousand were
recorded in the three-month period ended March 31, 2000 to record dividends on
preferred stock for the period. Adjustments to accumulated deficit of
approximately $534 thousand were recorded in the three-month period ended March
31, 1999 related to issuances of preferred stock with favorable conversion and
redemption rights and dividends on preferred stock for the period.
During the three-month period ended March 31, 2000, 591 shares of the Series
D preferred stock were converted into 3.7 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,
and 319 shares of the Series F preferred stock were converted into 2.4 million
shares of common stock.
As of March 31, 2000, 50,000 shares of Series A preferred stock were
outstanding. As of March 31, 2000, no shares of the Series B or Series C
preferred stock were outstanding. As of March 31, 2000, 399 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, and 1,500
shares of Series G preferred stock were outstanding.
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 $3.4 million has been purchased as of March 31,
2000. The remaining charges underlying this commitment will be expensed in the
periods in which they occur.
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 three-month periods ended
March 31, 2000 and 1999, was related to voice application services.
For the three-month period ended March 31, 2000, revenue from one major
customer accounted for 95% of total revenue. For the three-month period ended
March 31, 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, Inc. is a voice application services provider that enables
businesses to give their customers voice access to information and services,
whether provided through customer interaction centers, over telecommunications
networks or through the Internet. We develop and deploy our voice applications
on our magicTalk(TM) communications platform and offer hosting services for
those applications in our state-of-the-art network operations center.
Our principal target market is businesses with high volume customer
interactions, such as telecommunication service, customer relationship
management and e-commerce providers. We have also developed General Magic
branded services that demonstrate the attributes of our communications platform
and voice user interface technologies, and that have permitted us to evolve the
capabilities of the platform to meet the requirements of large scale
applications. Our patent-pending communications platform and personality-rich
voice user interface technologies provide the foundation for all of our voice
solutions and services.
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. In
November 1999, in connection with the sale of Series G Convertible Preferred
Stock, we entered into a licensing and technology agreement with General Motors
Corporation through its OnStar Corporation subsidiary ("OnStar"). OnStar has
selected the magicTalk communications platform and custom voice user interface
for its OnStar Virtual Advisor that will provide hands-free voice-activated
access to Web-based information services in vehicles.
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 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 March 31, 2000, the Company incurred a net
loss of $12.1 million, or $0.26 per share, compared to a net loss of $13.7
million, or $0.41 per share, for the three-month period ended March 31, 1999.
The net loss per share for the three-month period ended March 31, 2000, included
the net loss for the period and $148 thousand in adjustments to accumulated
deficit related to dividends on preferred stock. The net loss per share for the
three-month period ended March 31, 1999, included the net loss for the period
and $534 thousand in adjustments to accumulated deficit related to preferred
stock and warrants issued during the period and dividends on preferred stock.
TOTAL REVENUE
Total revenue for the three-month period ended March 31, 2000, was $2.6
million compared to $155 thousand for the three-month period ended March 31,
1999. Total revenue consists of subscription fees for the Portico service and
revenue for the development of the Virtual Advisor for OnStar. The Company
expects to recognize revenue related to the OnStar development agreement and
other strategic partnerships 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.
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COST OF SERVICE REVENUE
Cost of service revenue for the three-month period ended March 31, 2000, was
$1.2 million compared to none for the three-month period ended March 31, 1999.
Cost of service revenue consists of costs related to the development of the
Virtual Advisor for OnStar.
NETWORK OPERATIONS
Network operations expense consists of personnel and related costs associated
with running the network operations center and providing customer support and
billing, access costs associated with the telephony and data network, and
royalties paid to software and content providers. Network operations expense for
the three-month period ended March 31, 2000, was $3.1 million compared to $1.9
million for the three-month period ended March 31, 1999. The Company expects
network operations expense to increase modestly through 2000 as it adds network
infrastructure to support hosting services.
RESEARCH AND DEVELOPMENT
Research and development expense for the three-month period ended March 31,
2000, was $2.0 million, compared to $3.5 million for the three-month period
ended March 31, 1999. The decrease for the three-month period ended March 31,
2000 compared to the three-month period ended March 31, 1999 was due to reduced
spending on outside consultants and a decrease in engineering headcount. The
Company expects research and development expenses to increase through the
remainder of 2000.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the three-month period ended
March 31, 2000, was $7.1 million, compared to $5.9 million for the three-month
period ended March 31, 1999. The increase in the three-month period ended March
31, 2000 compared to the three-month period ended March 31, 1999 was due to
staffing increases and additional marketing and advertising expenses associated
with efforts to develop market demand and distribution channels for the
Company's voice application services.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three-month period ended March
31, 2000, was $1.5 million, compared to $973 thousand for the three-month period
ended March 31, 1999. The increase 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 support hosting capacity.
TOTAL OTHER INCOME (EXPENSE), NET
The Company had other income of $279 thousand in the three-month period ended
March 31, 2000, and other expense of $1.5 million in the three-month period
ending March 31, 1999. During the three-month period ended March 31, 1999, the
Company recorded a loss of $1.8 million to account for net losses of its equity
investment in DataRover Mobile Systems, Inc. ("DSI"). 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 $16.6 million as of March 31,
2000, down $8.9 million from $25.5 million as of December 31, 1999.
During the three-month period ended March 31, 2000, 591 shares of the Series
D preferred stock were converted into 3.7 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 Series E preferred
stock, which were converted into 263 thousand shares of common stock, and 319
shares of the Series F preferred stock were converted into 2.4 million shares of
common stock.
As of March 31, 2000, 50,000 shares of Series A preferred stock were
outstanding. As of March 31, 2000, no shares of the Series B or Series C
preferred stock were outstanding. As of March 31, 2000, 399 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, and 1,500
shares of Series G 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
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 will record 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 the later of (i) April 20, 2000 and (ii)
the date on which the Company's registration statement on Form S-3 under the
Securities Act of 1933, as amended, covering the Series H Preferred Stock (the
"Registration Statement"), is declared effective.
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 may, subject to certain conditions, redeem the Series H Preferred
Stock upon certain consolidations, mergers or other business combinations 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.
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<PAGE> 11
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 $3.4 million has been
purchased as of March 31, 2000. The charges underlying this commitment are
expensed in the periods in which they occur.
In connection with its prior strategy, the Company entered into Magic Cap
master license agreements with eight of its stockholders. The Company has
satisfied its obligations under six of these agreements, and is subject to the
following obligations under the remaining two agreements. 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 March 31, 2000, $1.0 million 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 three-month period ending March 31,
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 March 31, 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
March 31, 2000, the Company had an accumulated deficit of $282.9 million, with a
net loss of $12.1 million for the three-month period ended March 31, 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 $16.6 million as of March 31, 2000, along with the cash received
from the Series H preferred stock financing transaction, 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. In addition, as of March 31, 2000, our capital
stock consisted of 100,000,000 authorized shares of common stock, 51,292,300 of
which were issued and outstanding and 30,515,981 which were issuable and
reserved for issuance pursuant to securities convertible into or exercisable for
shares of our common stock. An additional 6,945,582 shares were reserved
pursuant to provisions of agreements governing issuance of our Series D and
Series F preferred stock and those governing warrants issued in connection with
the Series B, Series C and Series D preferred stock transactions that require us
to reserve a multiple of the shares of common stock issuable upon conversion of
the preferred stock or exercise of the warrants. If, at the time we elect to
draw down under our equity line, we do not have a sufficient number of
authorized but unissued and unreserved shares of common stock available for
issuance under the equity line, we may be unable to draw down under the equity
line. The Company is seeking stockholder approval of an increase in the
Company's authorized capital stock at its 2000 Annual Meeting of Stockholders.
There can be no assurance that we will obtain stockholder approval of an
increase in our authorized capital stock, or that such approval will be timely.
Accordingly, the Company cannot guarantee that sufficient funds will be
available to meet its needs.
The Company's capital requirements will depend on many factors, including,
but not limited to, the market acceptance and competitive position of its voice
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.
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<PAGE> 12
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
$12.1 million for the three-month period ended March 31, 2000. As of March 31,
2000, we had an accumulated deficit of $282.9 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, perhaps
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. 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.
As of March 31, 2000, our capital stock consisted of 100,000,000 shares of
common stock, 51,292,300 of which were issued and outstanding and 30,515,981
which were issuable and reserved for issuance pursuant to securities convertible
into or exercisable for shares of our common stock. An additional 6,945,582
shares were reserved pursuant to provisions of agreements governing issuance of
our Series D and Series F preferred stock and those governing warrants issued in
connection with the Series B, Series C, and Series D preferred stock
transactions that require us to reserve a multiple of the shares of common stock
issuable upon conversion of the preferred stock or exercise of the warrants. If,
at the time we elect to draw down under our equity line, we do not have a
sufficient number of authorized but unissued and unreserved shares of common
stock available for issuance under the equity line, we may be unable to draw
down under the equity line. The Company is seeking stockholder approval of an
increase in the Company's authorized capital stock at its 2000 Annual Meeting of
Stockholders. There can be no assurance that we will obtain stockholder approval
of an increase in our authorized capital stock, or that such approval will be
timely.
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."
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<PAGE> 13
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:
- widespread adoption of voice-driven applications by businesses for use in
conducting transactions and managing relationships with their customers;
- consumer acceptance of such applications; and
- 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 telecommunications providers and customer interaction
centers, and with partners that currently provide customer relationship
management 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 and the OnStar Corporation, a
subsidiary of General Motors Corporation. Qwest and Intuit have placed their
projects on hold. We plan to advance our relationships with Excite and OnStar,
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.
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.
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<PAGE> 14
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.
Competition in the voice application and platform technologies markets include
personal assistant developers such as CallSciences and Lucent, voice browser
developers such as Nuance, Motorola, Speechworks and Vocalis, and providers of
value-added services such as AccessLine, BriteVoice, Comverse, IntelliVoice,
Webley and Wildfire. Wireless communications infrastructure companies, such as
Ericsson or Phone.com, may extend their offerings to provide the capabilities of
the myTalk communications platform, as may software developers such as Microsoft
and Oracle, or telecommunications companies such as AT&T and Sprint. In
addition, TellMe, in the voice portal category, and CollegeClub.com, EchoBuzz,
eVoice, ShoutMail, ThinkLink and Ureach, in the personal messaging category, are
among the potential competitors of General Magic. 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.
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<PAGE> 15
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.
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:
- email servers which process both emails and voicemails;
- calendar and contact software;
- voice recognition software;
- text-to-speech software;
- the billing system; and
- 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 March 31, 2000, we have 50,000 shares of Series A preferred stock, 399
shares of Series D preferred stock, 350 shares of Series E preferred stock, 525
shares of Series F preferred stock and 1,500 shares of Series G 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 March 31, 2000, of 912,522
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. 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
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<PAGE> 16
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 429,301 additional shares of preferred stock that
are convertible into common stock without any action by our stockholders. In
addition, our board of directors may authorize the sale of additional shares of
common stock or other equity securities that are convertible into common stock
without any action by our stockholders. The issuance and conversion of any such
preferred stock or equity securities would further dilute the percentage
ownership of our stockholders.
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 and the Series F preferred have
redemption rights if we fail to meet the requirements of the documents governing
each. As of March 31, 2000, 399 shares of Series D preferred stock and 525
shares of the Series F preferred stock were outstanding. The redemption value of
these shares could total as much as approximately $11.2 million. If we were
required to redeem these shares, such payments would deplete our cash reserves,
which could materially and adversely affect our financial condition. In
addition, such a decrease in our cash reserves 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.
IF WE FAIL TO OBTAIN STOCKHOLDER APPROVAL OF THE SERIES G PREFERRED STOCK
TRANSACTION AS REQUIRED BY THE NASDAQ MARKETPLACE RULES AND OUR AGREEMENT WITH
GENERAL MOTORS, WE WOULD BE REQUIRED TO PAY GENERAL MOTORS A SIGNIFICANT PENALTY
THAT WOULD LIKELY HAVE AN ADVERSE AFFECT ON OUR FINANCIAL CONDITION.
We are required under The Nasdaq Marketplace Rules and our agreement with
General Motors, by and through its OnStar subsidiary, to obtain stockholder
approval of the sale or issuance of those shares of our 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
preferred stock upon (i) the conversion of our Series G preferred stock and (ii)
the exercise of the warrant for the purchase of shares of our Series G preferred
stock. If we do not obtain stockholder approval, we will be required, at our
election, either to pay to General Motors $7 million in cash or pay to General
Motors $3.5 million in cash and credit $3.5 million against amounts then owed or
next owing by General Motors to General Magic. Failure to obtain stockholder
approval will likely adversely affect our financial condition, and/or result in
increased dilution to the holders of our common stock.
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
16
<PAGE> 17
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.
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.
17
<PAGE> 18
OUR NETWORK OPERATIONS CENTER MAY NOT BE ABLE TO ACCOMMODATE SIGNIFICANT
INCREASES IN DEMAND, WHICH MAY RESULT IN A DECREASE IN REVENUES AND A DECLINE IN
OUR STOCK PRICE.
Since the launch of our myTalk service and the Excite Voicemail service, we
have also experienced interruptions or slow-downs in service due to increases in
the number of users served by our network operations center. In the event that
we experience sudden unplanned increases in the number of users of the services
hosted in our network operations center, our network operations center may not
be capable of meeting the resulting increase in demand.
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 March 31, 2000, the closing price of our common stock has
varied significantly from a high of $17.313 to a low of $4.031 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
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:
- 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;
- prohibition on stockholder action by written consent;
- requirement that a two-thirds vote of the stockholders is required to
amend the bylaws; and
- advance notice requirements for submitting nominations for election 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.
18
<PAGE> 19
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.
19
<PAGE> 20
Part II: Other Information
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)The following exhibits have been filed with this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------
<S> <C>
10.1 Form of Indemnity Agreement for officers and directors of
the Company
27.1 Financial Data Schedule
</TABLE>
(b) (i) A report on Form 8-K was filed on February 2, 2000, to report under
Item 5, Other Events, a further description of the transaction entered into with
OnStar and to provide an update regarding the accounting treatment of the
revenue generated by the transaction.
(ii) A report on Form 8-K was filed on March 9, 2000, to report under
Item 5, Other Events, the Company's operating results for the fourth quarter
and the year ended December 31, 1999.
(iii) A report on Form 8-K was filed on March 14, 2000, to report under
Item 5, Other Events, that the Company had amended the Common Stock Investment
Agreement dated July 30, 1999, with Cripple Creek Securities, LLC.
(iv) A report on Form 8-K was filed on March 31, 2000, to report under
Item 5, Other Events, that the Company had entered into a private placement
agreement with investors to sell and issue 2,200 shares of its Series H
Convertible Preferred Stock and warrants to purchase additional shares of its
Common Stock.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 15, 2000 /s/ STEVEN MARKMAN
----------------------------------------
Name: Steven Markman
Title: President, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
DATE: May 15, 2000 /s/ ROSE MARCARIO
---------------------------------------
Name: Rose M. Marcario
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------
<S> <C>
10.1 Form of Indemnity Agreement for officers and directors of the
Company
27.1 Financial Data Schedule
</TABLE>
(b) (i) A report on Form 8-K was filed on February 2, 2000, to report under
Item 5, Other Events, a further description of the transaction entered into with
OnStar and to provide an update regarding the accounting treatment of the
revenue generated by the transaction.
(ii) A report on Form 8-K was filed on March 9, 2000, to report under
Item 5, Other Events, the Company's operating results for the fourth quarter
and the year ended December 31, 1999.
(iii) A report on Form 8-K was filed on March 14, 2000, to report under
Item 5, Other Events, that the Company had amended the Common Stock Investment
Agreement dated July 30, 1999, with Cripple Creek Securities, LLC.
(iv) A report on Form 8-K was filed on March 31, 2000, to report under
Item 5, Other Events, that the Company had entered into a private placement
agreement with investors to sell and issue 2,200 shares of its Series H
Convertible Preferred Stock and warrants to purchase additional shares of its
Common Stock.
<PAGE> 1
EXHIBIT 10.1
INDEMNITY AGREEMENT
This Indemnity Agreement, dated as of ____________, ______ is made by and
between GENERAL MAGIC, INC., a Delaware corporation (the "Company"), and
______________ (the "Indemnitee").
RECITALS
A. The Company is aware that competent and experienced persons are
increasingly reluctant to serve as directors, officers or agents of corporations
unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of such
directors, officers and other agents.
B. The statutes and judicial decisions regarding the duties of directors
and officers are often difficult to apply, ambiguous, or conflicting, and
therefore fail to provide such directors, officers and agents with adequate,
reliable knowledge of legal risks to which they are exposed or information
regarding the proper course of action to take.
C. Plaintiffs often seek damages in such large amounts and the costs of
litigation may be so enormous (whether or not the case is meritorious), that the
defense and/or settlement of such litigation is often beyond the personal
resources of directors, officers and other agents.
D. The Company believes that it is unfair for its directors, officers and
agents and the directors, officers and agents of its subsidiaries to assume the
risk of huge judgments and other expenses which may occur in cases in which the
director, officer or agent received no personal profit and in cases where the
director, officer or agent was not culpable.
E. The Company recognizes that the issues in controversy in litigation
against a director, officer or agent of a corporation such as the Company or its
subsidiaries are often related to the knowledge, motives and intent of such
director, officer or agent, that such person is usually the only witness with
knowledge of the essential facts and exculpating circumstances regarding such
matters, and that the long period of time which usually elapses before the trial
or other disposition of such litigation often extends beyond the time that the
director, officer or agent can reasonably recall such matters; and may extend
beyond the normal time for retirement for such director, officer or agent with
the result that such person, after retirement or in the event of such person's
death, such person's spouse, heirs, executors or administrators, may be faced
with limited liability and undue hardship in maintaining an adequate defense,
which may discourage such a director, officer or agent from serving in that
position.
F. Based upon their experience as business managers, the Board of
Directors of the Company (the "Board") has concluded that, to retain and attract
talented and experienced individuals to serve as directors, officers and agents
of the Company and its subsidiaries and to encourage such individuals to take
the business risks necessary for the success of the Company and its
subsidiaries, it is necessary for the Company to contractually indemnify its
directors, officers and agents and the directors, officers and agents of its
subsidiaries, and to assume for
<PAGE> 2
itself maximum liability for expenses and damages in connection with
claims against such directors, officers and agents in connection with their
service to the Company and its subsidiaries, and has further concluded that the
failure to provide such contractual indemnification could result in great harm
to the Company and its subsidiaries and the Company's stockholders.
G. Section 145 of the General Corporation Law of Delaware, under which
the Company is organized ("Section 145"), empowers the Company to indemnify its
directors, officers, employees and agents by agreement and to indemnify persons
who serve, at the request of the Company, as the directors, officers, employees
or agents of other corporations or enterprises, and expressly provides that the
indemnification provided by Section 145 is not exclusive.
H. The Company desires and has requested the Indemnitee to serve or
continue to serve as a director, officer or agent of the Company and/or one or
more subsidiaries of the Company free from undue concern for claims for damages
arising out of or related to such services to the Company and/or one or more
subsidiaries of the Company.
I. Indemnitee is willing to serve, or to continue to serve, the Company
and/or one or more subsidiaries of the Company, provided that Indemnitee is
furnished the indemnity provided for herein.
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions.
(a) Agent. For the purposes of this Agreement, "agent" of the Company
means any person who is or was a director, officer, employee or other agent of
the Company or a subsidiary of the Company; or is or was serving at the request
of, for the convenience of, or to represent the interests of the Company or a
subsidiary of the Company as a director, officer, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise; or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Company or a
subsidiary of the Company; or was a director, officer, employee or agent of
another enterprise at the request of, for the convenience of, or to represent
the interests of such predecessor corporation.
(b) Expenses. For purposes of this Agreement, "expenses" include all
direct and indirect costs of any type or nature whatsoever (including, without
limitation, all attorneys' fees and related disbursements, other out-of-pocket
costs actually and reasonably incurred by the Indemnitee in connection with
either the investigation, defense or appeal of a proceeding or establishing or
enforcing a right to indemnification under this Agreement or Section 145 or
otherwise; provided, however, that "expenses" shall not include any judgments,
fines ERISA excise taxes or penalties, or amounts paid in settlement of a
proceeding.
2
<PAGE> 3
(c) Proceeding. For the purposes of this Agreement, "proceeding"
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary" means
any corporation of which more than 50% of the outstanding voting securities is
owned directly or indirectly by the Company, by the Company and one or more
other subsidiaries, or by one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to
serve as agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as Indemnitee is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as Indemnitee tenders Indemnitee's
resignation in writing; provided, however, that nothing contained in this
Agreement is intended to create any right to continued employment by Indemnitee.
3. Liability Insurance.
(a) Maintenance of D&O Insurance. The Company hereby covenants and
agrees that, so long as the Indemnitee shall continue to serve as an agent of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible proceeding by reason of the fact that the Indemnitee was an agent of
the Company, the Company, subject to Section 3(c), shall promptly obtain and
maintain in full force and effect directors' and officers' liability insurance
("D&O Insurance") in reasonable amounts from established and reputable insurers.
(b) Rights and Benefits. In all policies of D&O Insurance, the
Indemnitee shall be named as an insured in such a manner as to provide the
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if the Indemnitee is a director; or of the
Company's officers, if the Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, if the Indemnitee is not a director
or officer but is a key employee.
(c) Limitation on Required Maintenance of D&O Insurance.
Notwithstanding the foregoing, the Company shall have no obligation to obtain or
maintain D&O Insurance if the Company determines in good faith that such
insurance is not reasonably available, the premium costs for such insurance are
disproportionate to the amount of coverage provided, the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or the Indemnitee is covered by similar insurance maintained by a
subsidiary of the Company.
4. Mandatory Indemnification. Subject to Section 8 below, the Company
shall indemnify the Indemnitee as follows:
(a) Indemnification for Expenses of a Party Who is Wholly or Partly
Successful. Notwithstanding any other provisions of this Agreement but subject
to Section 8 below, to the extent that Indemnitee is a party to and is
successful or is a participant in any proceeding in which the defendant is
successful, on the merits or otherwise, in any proceeding or in defense of any
claim, issue or matter therein, in whole or in part, by reason of the fact that
3
<PAGE> 4
Indemnitee is or was an agent of the Company at any time the Company shall
indemnify Indemnitee against all expenses actually and reasonably incurred by
Indemnitee in connection therewith. If Indemnitee, or such other defendant is
not wholly successful in such proceeding but is successful, on the merits or
otherwise, as to one or more but less than all claims, issues or matters in such
proceeding, the Company shall indemnify Indemnitee against all expenses actually
and reasonably incurred by Indemnitee or on Indemnitee's behalf in connection
with each successfully resolved claim, issue or matter. If the Indemnitee or
such other defendant is not wholly successful in such proceeding, the Company
also shall indemnify Indemnitee against all expenses reasonably incurred in
connection with a claim, issue or matter related to any claim, issue, or matter
on which the Indemnitee or such other defendant was successful. For purposes of
this Section 4(a) and without limitation, the termination of any claim, issue or
matter in such a proceeding by dismissal, with or without prejudice, shall be
deemed to be a successful result as to such claim, issue or matter.
(b) Third Party Actions. If the Indemnitee is a person who was or is,
or is threatened to be made, a party to or a participant in, any proceeding
(other than an action by or in the right of the Company) by reason of the fact
that Indemnitee is or was an agent of the Company, or by reason of anything done
or not done by Indemnitee in any such capacity, the Company shall indemnify the
Indemnitee against any and all expenses and liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes and
penalties, and amounts paid in settlement) actually and reasonably incurred by
Indemnitee in connection with the investigation, defense, settlement or appeal
of such proceeding, provided the Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company and its stockholders, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe Indemnitee's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
(c) Derivative Actions. If the Indemnitee is a person who was or is,
or is threatened to be made, a party to or a participant in, any proceeding by
or in the right of the Company to procure a judgment in its favor by reason of
the fact that Indemnitee is or was an agent of the Company, or by reason of
anything done or not done by Indemnitee in any such capacity, the Company shall
indemnify the Indemnitee against any amounts paid in settlement of any such
proceeding and all expenses actually and reasonably incurred by Indemnitee in
connection with the investigation, defense, settlement, or appeal of such
proceeding, provided the Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company and its stockholders. The Company shall indemnify the Indemnitee
against judgments, fines, and ERISA excise taxes and penalties to the same
extent and subject to the same conditions as described in the immediately
proceeding sentence. Notwithstanding the foregoing, no indemnification under
this subsection 4(c) shall be made in respect to any claim, issue or matter as
to which Indemnitee shall have been adjudged to be liable for negligence or
misconduct in the performance of Indemnitee's duty to the Company unless and
only to the extent that the Delaware Court of Chancery or the court in which
such
4
<PAGE> 5
action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Delaware Court of Chancery or such other court shall deem proper.
(d) Actions where Indemnitee is Deceased. If the Indemnitee is a
person who was or is, or is threatened to be made, a party to or a participant
in, any proceeding by reason of the fact that Indemnitee is or was an agent of
the Company, or by reason of anything done or not done by Indemnitee in any such
capacity, and if prior to, during the pendency or after completion of such
proceeding Indemnitee becomes deceased, the Company shall indemnify the
Indemnitee's heirs, executors and administrators against any and all expenses
and liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred to the extent Indemnitee would have
been entitled to indemnification pursuant to Sections 4(a), 4(b), 4(c), or 6(b)
hereof were Indemnitee still alive.
5. Partial Indemnification. If the Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of any expenses or liabilities of any type whatsoever (including, but
not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts
paid in settlement) incurred by Indemnitee in the investigation, defense,
settlement or appeal of a proceeding, but not entitled, however, to
indemnification for all of the total amount hereof, the Company shall
nevertheless indemnify the Indemnitee for such total amount except as to the
portion hereof to which the Indemnitee is not entitled.
6. Advances and Indemnification of Witness Expenses.
(a) Mandatory Advancement of Expenses. Subject to Section 8(a) below,
the Company shall advance all expenses incurred by the Indemnitee in connection
with the investigation, defense, settlement or appeal of any proceeding to which
the Indemnitee is, or is threatened to be made, a party or participant by reason
of the fact that the Indemnitee is or was an agent of the Company. Indemnitee
hereby undertakes to repay such amounts advanced only if, and to the extent
that, it shall be determined ultimately that the Indemnitee is not entitled to
be indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to the Indemnitee within twenty (20) days
following delivery of a written request therefor by the Indemnitee to the
Company, whether prior to or after the final disposition of any proceeding.
Advances shall be made without regard to Indemnitee's ability to repay the
expenses and without regard to Indemnitee's ultimate entitlement to
indemnification under the other provisions of this Agreement. Advances shall
include any and all reasonable expenses incurred pursuing an action to enforce
this right of advancement, including expenses incurred preparing and forwarding
written requests to the Company to support the advances claimed.
(b) Indemnification For Expenses of a Witness. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee is, by reason
of the fact that Indemnitee is or was an agent of the Company, a witness in any
proceeding to which Indemnitee is not a party, Indemnitee shall be indemnified
against all expenses actually and reasonably incurred by Indemnitee or on
Indemnitee's behalf in connection therewith.
5
<PAGE> 6
7. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto may
be sought from the Company under this Agreement, notify the Company of the
commencement or threat of commencement thereof.
(b) If, at the time of the receipt of a notice of the commencement of
a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance or
other applicable insurance coverage in effect, the Company shall give prompt
notice of the commencement of such proceeding to the insurers in accordance with
the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such proceeding
in accordance with the terms of such policies.
(c) In the event the Company shall be obligated to pay the expenses
of any proceeding against the Indemnitee, the Company, if appropriate, shall be
entitled to assume the defense of such proceeding, with counsel approved by the
Indemnitee, upon the delivery to the Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel subsequently incurred by the Indemnitee with respect to the same
proceeding, provided that (i) the Indemnitee shall have the right to employ
Indemnitee's counsel in any such proceeding at the Indemnitee's expense; and
(ii) if (A) the employment of counsel by the Indemnitee has been previously
authorized by the Company, (B) the Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and the Indemnitee
in the conduct of any such defense, or (C) the Company shall not, in fact, have
employed counsel to assume the defense of such proceeding, then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Company.
8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
to the Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by the Indemnitee and not by way of defense, unless (i) such
indemnification is expressly required to be made by law, (ii) the proceeding was
authorized by the Board, (iii) such indemnification is provided by the Company,
in its sole discretion, pursuant to the powers vested in the Company under the
General Corporation Law of Delaware or (iv) the proceeding is brought to
establish or enforce a right to indemnification under this Agreement or any
other statute or law or otherwise as required under Section 145.
(b) Lack of Good Faith. To indemnify the Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by the
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that the proceeding was not brought by the Indemnitee in
good faith or was frivolous; or
6
<PAGE> 7
(c) Unauthorized Settlements. To indemnify the Indemnitee under this
Agreement for any amounts paid in settlement of a proceeding unless the Company
consents to such settlement, which consent shall not be unreasonably withheld.
(d) Insurance and other Payments. To indemnify the Indemnitee for
expenses or liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) for which payment is actually made to Indemnitee under a valid and
collectible D&O Insurance or other applicable insurance policy, or under a valid
and enforceable indemnity clause, by-law or agreement.
9. Non-exclusivity. The provisions for indemnification and advancement of
expenses set forth in this Agreement shall not be deemed exclusive of any other
rights which the Indemnitee may have under any provision of law, the Company's
Certificate of Incorporation or Bylaws, the vote of the Company's stockholders
or disinterested directors, other agreements, or otherwise, both as to action in
Indemnitee's official capacity and to action in another capacity while occupying
Indemnitee's position as an agent of the Company, and the Indemnitee's rights
hereunder shall continue after the Indemnitee has ceased acting as an agent of
the Company and shall inure to the benefit of the heirs, executors and
administrators of the Indemnitee.
10. Enforcement. Any right to indemnification or advances granted by this
Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in
any court of competent jurisdiction if (i) the claim for indemnification or
advances is denied, in whole or in part, or (ii) no disposition of such claim is
made within ninety (90) days of request therefor. Indemnitee, in such
enforcement action, if successful in whole or in part, shall be entitled to be
paid also the expense of prosecuting Indemnitee's claim. It shall be a defense
to any action for which a claim for indemnification is made under this Agreement
(other than an action brought to enforce a claim for expenses pursuant to
Section 6(a) hereof, provided that the required undertaking has been tendered to
the Company) that Indemnitee is not entitled to indemnification because of the
limitations set forth in Sections 4 and 8 hereof. Neither the failure of the
Company (including its Board of Directors or its stockholders) to have made a
determination prior to the commencement of such enforcement action that
indemnification of Indemnitee is proper in the circumstances, nor an actual
determination by the Company (including its Board of Directors or its
stockholders) that such indemnification is improper, shall be a defense to the
action or create a presumption that Indemnitee is not entitled to
indemnification under this Agreement or otherwise.
11. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
12. Survival of Rights.
(a) All agreements and obligations of the Company contained herein
shall continue during the period Indemnitee is an agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible claim
or threatened, pending or completed
7
<PAGE> 8
action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Indemnitee was
serving in the capacity referred to herein.
(b) The Company shall require any successor to the Company (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. Interpretation of Agreement. It is understood that the parties hereto
intend this Agreement to be interpreted and enforced so as to provide
indemnification to the Indemnitee to the fullest extent permitted by law
including those circumstances in which indemnification would otherwise be
discretionary.
14. Severability. If any provision or provisions of this Agreement shall
be held to be invalid, illegal or unenforceable for any reason whatsoever, (i)
the validity, legality and enforceability of the remaining provisions of the
Agreement (including, without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (ii) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable and to give
effect to Section 13 hereof.
15. Modification and Waiver. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
16. Notice. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee or (ii) if mailed by
certified or registered mail with postage prepaid, on the third business day
after the mailing date. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written notice.
17. Governing Law. This Agreement shall be governed exclusively by and
construed according to the laws of the State of Delaware as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
18. Consent to Jurisdiction. The Company and the Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
8
<PAGE> 9
The parties hereto have entered into this Indemnity Agreement effective
as of the date first above written.
THE COMPANY:
GENERAL MAGIC, INC.
By
----------------------------------
Title
-------------------------------
Address: 420 N. Mary Avenue
Sunnyvale, California 94086
INDEMNITEE:
-------------------------------------
(Name here)
Address:
-----------------------------
-----------------------------
9
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