1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 [ ]
67,876,318 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of April 26, 2001.
================================================================================
2
GENERAL MAGIC, INC.
FORM 10-Q, MARCH 31, 2001
CONTENTS
ITEM NUMBER PAGE
- ----------- ----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
a. Condensed Consolidated Balance Sheets - March 31, 2001 and
December 31, 2000 3
b. Condensed Consolidated Statements of Operations -
Three-Month periods ended March 31, 2001 and 2000 4
c. Condensed Consolidated Statements of Cash Flows -
Three-Month periods ended March 31, 2001 and 2000 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 23
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibits 26
2
3
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
GENERAL MAGIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
--------- ------------
2001 2000
--------- ------------
Current assets:
Cash and cash equivalents ...................................................... $ 11,984 $ 12,344
Short-term investments ......................................................... 5,268 6,700
Accounts Receivable ............................................................ 1,116 1,924
Other current assets ........................................................... 556 747
--------- ---------
Total current assets ....................................................... 18,924 21,715
--------- ---------
Property and equipment, net ...................................................... 7,343 8,761
Other assets ..................................................................... 470 497
--------- ---------
Total assets ............................................................... $ 26,737 $ 30,973
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 861 $ 1,888
Accrued expenses ............................................................... 3,095 3,763
Deferred revenue and other current liabilities ................................. 50 280
--------- ---------
Total current liabilities .................................................. 4,006 5,931
Other long-term liabilities ...................................................... 2,089 2,161
--------- ---------
Total liabilities .......................................................... 6,095 8,092
Commitments
Redeemable, convertible Series D preferred stock, $0.001 par value
Stated at involuntary liquidation preference;
Authorized: 2 shares; issued and outstanding: 2001 -- 0; 2000 -- 0 ............ $ 2,046 $ 2,023
Stockholders' equity:
Convertible preferred stock, $0.001 par value
Authorized: 482 shares; issued and outstanding:
2001 -- 55; 2000 -- 55 ....................................................... 2 2
Common stock, $0.001 par value; authorized: 150,000 shares;
Issued and outstanding: 2001 -- 67,481; 2000 -- 64,861 ......................... 67 65
Additional paid-in capital ..................................................... 339,509 334,544
Accumulated other comprehensive loss ........................................... 1 (3)
Accumulated deficit ............................................................ (320,780) (313,547)
--------- ---------
18,799 21,061
Less treasury stock, at cost: 2001 -- 46; 2000 -- 46 ........................... (203) (203)
--------- ---------
Total stockholders' equity ................................................. 18,596 20,858
--------- ---------
$ 26,737 $ 30,973
========= =========
The Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
3
4
GENERAL MAGIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE-MONTH PERIODS ENDED
MARCH 31,
-------------------------
2001 2000
-------- --------
Revenues:
Service revenue ................................................................. $ 1,200 $ 2,590
Licensing revenue ............................................................... 16 6
-------- --------
Total revenue ............................................................... 1,216 2,596
Costs and expenses:
Cost of revenue ............................................................... 524 1,171
Network operations ............................................................ 1,542 3,080
Research and development ...................................................... 1,453 2,130
Selling, general and administrative ........................................... 3,611 7,053
Depreciation and amortization ................................................. 1,450 1,484
-------- --------
Total costs and expenses .................................................... 8,580 14,918
-------- --------
Loss from operations .............................................................. (7,364) (12,322)
Other income, net ................................................................. 264 279
-------- --------
Loss before income taxes .......................................................... (7,100) (12,043)
Income taxes ...................................................................... 1 20
-------- --------
Net loss .................................................................... $ (7,101) $(12,063)
-------- --------
Dividends on preferred stock ...................................................... (76) (148)
Favorable redemption rights on warrants for Series H preferred stock .............. (57) --
Loss applicable to common stockholders ............................................ $ (7,234) $(12,211)
======== ========
Basic and diluted loss per share .................................................. $ (0.11) $ (0.26)
======== ========
Shares used in computing per share amounts ........................................ 66,904 47,872
======== ========
The Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
4
5
GENERAL MAGIC, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE-MONTH PERIODS ENDED
MARCH 31,
-------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $ (7,101) $(12,063)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,450 1,484
Disposition of property and equipment 4 9
Compensation expense associated with stock options (1) 154
Deferred revenue (230) (2,457)
Changes in items affecting operations:
Other current assets 999 (87)
Accounts payable and accrued expenses (1,768) 114
-------- --------
Net cash used in operating activities (6,647) (12,846)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (1,568) (5,717)
Proceeds from sales and maturities of short-term investments 3,000 2,000
Purchases of property and equipment (9) (696)
Other assets -- (193)
-------- --------
Net cash provided by (used in) investing activities 1,423 (4,606)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock and warrants 4,859 3,418
Proceeds from exercise of Series E warrant -- 1,000
Other long-term liabilities 5 368
-------- --------
Net cash provided by financing activities 4,864 4,786
-------- --------
Net decrease in cash and cash equivalents (360) (12,666)
-------- --------
Cash and cash equivalents, beginning of period 12,344 23,045
-------- --------
Cash and cash equivalents, end of period $ 11,984 $ 10,379
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid during the period 1 20
Non-cash investing and financing activity:
Preferred stock dividends 76 148
Favorable redemption rights on warrants for Series H preferred stock 57 --
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
The Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
5
6
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
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, 2000 and 1999, 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,
2000, including notes thereto, included in the Company's Annual Report on Form
10-K which was filed with the SEC on April 2, 2001.
The results of operations for the three-month period ended March 31, 2001,
are not necessarily indicative of the results expected for the current year or
any other period.
The Company expects that its cash, cash equivalents and short-term
investment balances of $17.3 million as of March 31, 2001, along with cash
expected to be available under the Company's equity line arrangement and the
Ladenburg Thalmann agreement will be adequate to fund the Company's operations
through the year 2001. As of April 30, 2001 the Company has cash, cash
equivalents and short-term investment balances of $16.0 million. However, there
are a number of conditions and limitations on the Company's right to draw down
under the equity line and Ladenburg Thalmann is not obligated to purchase any of
the Company's shares. 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
products and 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 products and services.
The holders of the Series D preferred stock, the Series F preferred stock
and the Series H preferred stock have redemption rights if we fail to meet the
requirements of the documents governing each, including, in the case of the
Series D and Series F preferred stock, the requirement that our common stock not
be suspended from listing on or delisted from The Nasdaq National Market for a
period of 15 consecutive days or for an aggregate of 45 days in any 365-day
period. One of the requirements of The Nasdaq National Market for the continued
listing of our common stock is that our common stock meet a minimum bid
requirement of $1.00. If our common stock trades below $1.00 for 30 consecutive
trading days and thereafter does not trade at or above $1.00 for at least 10
consecutive trading days in the 90 business day period following, then we would
be in violation of the continued listing requirements of The Nasdaq National
Market and, pending the outcome of an elective appeals process, subject to
delisting. The closing price for our common stock has been below $1.00 ten times
between April 9, 2001 and April 26, 2001. As of April 26, 2001, 186 shares of
Series D preferred stock, 428 shares of the Series F preferred stock and 580
shares of the Series H preferred stock were outstanding. The redemption value of
these shares could total as much as approximately $21.0 million. If we were
required to redeem these shares, such payments would significantly deplete our
cash balance, which could materially and adversely affect our financial
condition. In addition, such a decrease in our cash balance could cause our
common stock to be delisted from The Nasdaq National Market. We cannot guarantee
that we will be able to meet all of the requirements necessary to avoid a
redemption.
NOTE 2: CONSOLIDATED FINANCIAL STATEMENT DETAILS
PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Network operations center $ 14,554 $ 14,926
Office equipment and computers 6,914 6,659
Furniture and fixtures 2,231 2,230
Leasehold improvements 1,438 1,425
-------- --------
25,137 25,240
Less accumulated depreciation
and amortization (17,794) (16,479)
-------- --------
$ 7,343 $ 8,761
======== ========
ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Employee compensation $1,527 $2,228
Other 1,568 1,535
------ ------
$3,095 $3,763
====== ======
TOTAL OTHER INCOME (EXPENSE), NET
A summary of other income (expense) follows (in thousands):
THREE-MONTH PERIOD ENDED
MARCH 31,
------------------------
2001 2000
---- ----
Interest income $265 $280
Other (1) (1)
---- ----
Total other income (expense), net $264 $279
==== ====
6
7
NEW PRONOUNCEMENTS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standard No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities which establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other derivatives, and
for hedging activities. The adoption of SFAS 133 has not had a material effect
on the Company's consolidated financial position or results of operations.
NOTE 3: COMPREHENSIVE LOSS
There were no material differences between the Company's comprehensive
loss and net loss for the periods presented.
NOTE 4: NET LOSS PER SHARE (in thousands)
Basic and diluted loss per share are computed by dividing loss available
to holders of common stock by the weighted-average number of shares of common
stock outstanding during the period. Since the Company has had net losses for
all periods presented, basic and diluted loss per share are equal. The
computation of diluted loss per share does not include common stock issuable
upon the exercise of outstanding options or warrants or upon the conversion of
outstanding preferred stock as the impact would have been antidilutive for the
periods presented. Stock options and warrants outstanding and preferred stock
convertible to common stock are as follows:
MARCH 31,
------------------
2001 2000
------ ------
Stock options 8,407 6,157
Warrants for the purchase of common stock 5,905 3,882
Shares of common stock issuable upon conversion of Series A preferred stock -- 3,629
Shares of common stock issuable upon conversion of Series D preferred stock 1,844 2,488
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 5,184 4,001
Shares of common stock issuable upon conversion of Series G preferred stock 8,907 8,907
Shares of common stock issuable upon conversion of Series H Preferred stock 990 --
------ ------
31,237 29,985
====== ======
NOTE 5: PREFERRED STOCK
On March 30, 1999, the Company entered into a financing transaction with a
group of private investors that provided $20,000,000 in cash less offering
expenses to the Company from the sale of 2,000 shares of its Series D
Convertible Preferred Stock. Each share of Series D preferred stock accrues
dividends quarterly at a rate of 5% per annum of the stated value ($10,000 per
share). The liquidation preference of Series D preferred stock is $10,000 per
share plus any accrued but unpaid dividends and unpaid default interest on cash
dividends, and is payable pari passu with the Series F, Series G and Series H
preferred stock and in preference to the holders of common stock. Each share of
Series D preferred stock is convertible into shares of the Company's common
stock at a conversion rate obtained by dividing the liquidation preference by
$1.084 (the "Series D Conversion Price"). The Series D Conversion Price is
subject to adjustment upon certain events, including, without limitation,
adjustment following the last day of each September and March until March 30,
2002, to an amount equal to 110% of the average of the closing bid prices of the
Company's common stock during the ten trading days immediately after each such
date (the "Series D Reset Price") if the Series D Reset Price is less than the
then-effective Series D Conversion Price. The Series D Conversion Price reset
effective March 31, 2001.
On September 9, 1999, certain of the Company's investors exchanged an
aggregate of 1,000 shares of Series D Convertible Preferred Stock for 1,000
shares of the Company's Series F Convertible Preferred Stock. Each share of
7
8
Series F preferred stock accrues dividends quarterly at a rate of 5% per annum
of the stated value ($10,000 per share). The liquidation preference of Series F
preferred stock is $10,000 per share plus any accrued but unpaid dividends and
unpaid default interest on cash dividends, and is payable pari passu with the
Series D, Series G and Series H preferred stock and in preference to the holders
of common stock. Each share of Series F preferred stock is convertible into
shares of the Company's common stock at a conversion rate obtained by dividing
the liquidation preference by $0.887 (the "Series F Conversion Price"). The
Series F Conversion Price is subject to adjustment upon certain events,
including, without limitation, adjustment following the last day of each
December, March, June and September until March 30, 2002, to an amount equal to
90% of the average of the closing bid prices of the Company's common stock
during the ten trading days immediately after each such date (the "Series F
Reset Price") if the Series F Reset Price is less than the then-effective Series
F Conversion Price. The Series F Conversion Price reset effective March 31,
2001.
Preferred stock outstanding is as follows:
March 31,
---------
2001 2000
---- ----
Series A preferred stock - 50,000
Series B preferred stock - -
Series C preferred stock - -
Series D preferred Stock 186 399
Series E preferred Stock - 350
Series F preferred Stock 428 525
Series G preferred Stock 1,500 1,500
Series H preferred Stock 580 -
Adjustments to accumulated deficit of approximately $133 thousand were
recorded in the three-month period ended March 31, 2001 related to dividends on
preferred stock and favorable redemption rights on warrants for the Series H
preferred stock for the period. Adjustments to accumulated deficit of
approximately $148 thousand were recorded in the three-month period ended March
31, 2000 related to dividends on preferred stock.
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 was obligated to
purchase $13 million in telecommunications services during the three-year period
ending April 30, 2001, of which $5.09 million had been purchased as of March 31,
2001. Based on the terms of the contract, Qwest's level of performance under the
contract, and the Company's discontinuation of the myTalk service, the Company
renegotiated the terms of the contract in September 2000. The resulting
amendment to the agreement revises the total purchase commitment to $5.1 million
over the same three-year term.
NOTE 7: SEGMENT REPORTING
The Company's operating segments are defined as components of the
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 assess 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, 2001 and 2000, was related to voice
application services.
For the three-month period ended March 31, 2001, revenue from one major
customer accounted for 94% of total revenue.
8
9
NOTE 8: SUBSEQUENT EVENT
Following the December 31, 2000, resignation of Dr. Markman as Chief
Executive Officer and President of the Company, Dr. Markman served as the
Company's Chairman of the Board. Dr. Markman resigned as an officer and director
of the Company effective April 20, 2001. Dr. Markman received his regular salary
and benefits through May 4, 2001. The Company is finalizing a letter agreement
with Dr. Markman amending his September 12, 1996 Employment Agreement with the
Company (the "Employment Agreement"). Pursuant to the letter agreement, the
Company will pay Dr. Markman a total of $350,000, payable in two installments of
$175,000 each, less applicable payroll taxes, on May 18, 2001 and July 13, 2001,
respectively, in lieu of any and all cash payments otherwise due under the
Employment Agreement. In consideration therefor, the Company granted Dr. Markman
an option to purchase an aggregate of 685,000 shares of the Company's common
stock. Dr. Markman will continue to provide services to the Company as a
founding member of the Company's Industry Advisory Board.
9
10
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. enables businesses to rapidly and efficiently develop
and deploy voice applications delivering mobile access to enterprise, Internet
and telecommunication information and services. We offer an open VoiceXML-based
voice platform for developing and deploying voice applications, supported by
expert speech and language services and voice hosting services.
Our principal target market is businesses that desire to offer automated
voice access to information and services over the telephone. The growth of
Internet users and mobile phone users is fueling the demand for mobile access to
information. Through our magicTalk voice platform, we offer enterprises the
opportunity to leverage investments in Internet infrastructure and extend their
reach to new and existing customers. With years of experience developing voice
applications, most recently completing the development and deployment of the
OnStar Virtual Advisor, we have demonstrated the capabilities of our magicTalk
voice platform to meet the requirements of large-scale applications. Our open
standards-based voice platform and patented personality-rich voice user
interface design features and methodology provide the foundation for our
products and services.
The magicTalk voice platform provides businesses with an open,
standards-based architecture upon which to develop and deploy voice applications
that can be rapidly integrated with existing Web-based services and
infrastructure. Designed to support VoiceXML, the emerging standard for
developing voice applications, and a choice of speech recognition,
text-to-speech technologies and telephony interfaces, the magicTalk voice
platform supports best of breed technology.
We offer expert speech and language services to businesses developing
voice applications on the magicTalk voice platform. The speech and language
services focus on the software tools and techniques for developing socially
engineered voice user interfaces. Based on our patented design features and
methodology for developing voice user interfaces with personality and our
extensive experience in combining language, logic and personality, we enable
businesses to develop voice user interfaces to mirror their company brand and
services and to build customer trust and loyalty.
The magicTalk voice platform is our third generation voice platform. In
February 2001, we announced the delivery of the initial feature set for the
OnStar Virtual Advisor, a hands-free, eyes-free, in car voice service that was
developed and is deployed on the magicTalk voice platform. The OnStar Virtual
Advisor is hosted in our Network Operations Center in Sunnyvale, California. The
Virtual Advisor represents the largest commercial deployment of a VoiceXML voice
application to date. Our Portico service runs on a previous version of the
magicTalk voice platform, as did our myTalk application.
Although we made significant progress in 2000 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.
10
11
RESULTS OF OPERATIONS
For the three-month period ended March 31, 2001, the Company incurred a
net loss of $7.1 million, or $0.11 per share, compared to a net loss of $12.1
million, or $0.26 per share, for the three-month period ended March 31, 2000.
The net loss per share applicable to stockholders for the three-month period
ended March 31, 2001, included the net loss for the period and $133 thousand in
adjustments to accumulated deficit related to dividends on preferred stock and
favorable redemption rights on warrants for the Series H preferred stock during
the period. The net loss per share applicable to stockholders 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.
TOTAL REVENUE
Total revenue for the three-month period ended March 31, 2001, was $1.2
million compared to $2.6 million for the three-month period ended March 31,
2000. Total revenue consists primarily of development fees for the Virtual
Advisor for OnStar and subscription fees for the Portico service. The Company
expects to recognize revenue related to the OnStar development and hosting
agreements and other customers through fiscal year 2001. These revenues include
development fees, licensing fees, hosting fees, professional services fees, and
support fees. If the market for voice application services does not develop or
if the Company is unable to capture a significant portion of that market, the
Company's revenues and results of operations will be materially adversely
affected.
COST OF SERVICE REVENUE
Cost of service revenue for the three-month period ended March 31, 2001,
was $524 thousand compared to $1.2 million for the three-month period ended
March 31, 2000. Cost of service revenue consists of costs related to the
development and support of the Virtual Advisor for OnStar.
NETWORK OPERATIONS
Network operations expense for the three-month period ended March 31, 2001, was
$1.5 million compared to $3.1 million for the three-month period ended March 31,
2000. Network operations expense consists of personnel and related costs
associated with running the network operations center and providing customer
support, access costs associated with the telephony and data network, and
royalties paid to software and content providers. The decrease for the
three-month period ended March 31, 2001 compared to the same period ended March
31, 2000, was due primarily to the discontinuation of the myTalk service and
subsequently, the reduction of the associated telecommunications charges. The
Company expects network operations expense to increase slightly through 2001 as
it maintains network infrastructure to support its hosting capacity.
RESEARCH AND DEVELOPMENT
Research and development expense for the three-month period ended March
31, 2001, was $1.5 million, compared to $2.1 million for the three-month period
ended March 31, 2000. The decrease for the three-month period ended March 31,
2001, compared to the three-month period ended March 31, 2000, was due to
reduced spending on outside consultants and a decrease in headcount. The Company
expects research and development expenses to increase slightly through the
remainder of 2001.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the three-month period
ended March 31, 2001, was $3.6 million, compared to $7.1 million for the
three-month period ended March 31, 2000. The selling, general and administrative
expense for the three-month period ended March 31, 2001 compared to the same
period ended March 31, 2000 has decreased due to a decrease in headcount and
reduced marketing and advertising expenses associated with the discontinuation
of the myTalk service.
11
12
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three-month period ended
March 31, 2001 was $1.5 million, compared to $1.5 million for the three-month
period ended March 31, 2000. The Company expects depreciation and amortization
expense to increase slightly through the remainder of 2001 as the network
operations center continues to support hosting capacity.
TOTAL OTHER INCOME (EXPENSE), NET
The Company had other income of $264 thousand in the three-month period
ended March 31, 2001, and other income of $279 thousand in the three-month
period ending March 31, 2000. Other income consisted primarily of interest
income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash
equivalents and short-term investment balances that totaled $17.3 million as of
March 31, 2001, down $1.7 million from $19.0 million as of December 31, 2000.
The Company expects that its cash, cash equivalents and short-term
investment balances of $17.3 million as of March 31, 2001, along with cash
expected to be available under the Company's equity line arrangement and the
Ladenburg Thalmann agreement will be adequate to fund the Company's operations
through the year 2001. As of April 30, 2001 the Company has cash, cash
equivalents and short-term investment balances of $16.0 million. However, there
are a number of conditions and limitations on the Company's right to draw down
under the equity line and Ladenburg Thalmann is not obligated to purchase any of
the Company's shares. 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
products and 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 products and services.
The Company may be required to raise additional public or private
financing to support its operations beyond the year 2001. 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.
On September 7, 2000, the Company engaged the investment banking firm of
Ladenburg Thalmann & Co. Inc. to act as its exclusive placement agent for the
offering of up to $45,000,000 worth of its common stock, par value $0.001 per
share, on a "reasonable best efforts" basis. Ladenburg Thalmann has agreed to
seek to identify institutional investors who may wish to purchase the Company's
common stock from time to time on specific terms to be negotiated between each
such institutional investor and the Company. Ladenburg Thalmann is not committed
to purchase any of the Company's securities, regardless of whether Ladenburg
Thalmann does or does not successfully identify others to purchase its
securities. The Company, in turn, is not obligated to sell any of its securities
to any prospective purchaser successfully identified by Ladenburg Thalmann.
During the first quarter of 2001, the Company sold 2,581,699 shares of
common stock under the agreement with Ladenburg Thalmann at a weighted average
sales price of $1.937 yielding $4.8 million net cash after expenses and fees of
$205,556. As of April 26, 2001, the Company has sold an aggregate of 6,606,177
shares of common stock under the agreement with Ladenburg Thalmann. In
consideration of the financing arrangement, the Company has paid to Ladenburg
Thalmann a $35,000 non-accountable expense allowance, issued Ladenburg Thalmann
a warrant to purchase 100,000 shares of the Company's common stock at a strike
price of $8.6767 and agreed to indemnify Ladenburg Thalmann against certain
underwriter's liabilities under the Securities Act of 1933, as amended. The
Company also issued a warrant to Paul Revere for 200,000 shares with an exercise
price of $1.75 per share. See Part II Item 2.
The holders of the Series D preferred stock, the Series F preferred stock
and the Series H preferred stock have redemption rights if we fail to meet the
requirements of the documents governing each, including, in the case of the
Series D and Series F preferred stock, the requirement that our common stock not
be suspended from listing on or delisted from The Nasdaq National Market for a
period of 15 consecutive days or for an aggregate of 45 days in any 365-day
period. One of the requirements of The Nasdaq National Market for the continued
listing of our common stock is that our common stock meet a minimum bid
requirement of $1.00. If our common stock trades below $1.00 for 30 consecutive
trading days and thereafter does not trade at or above $1.00 for at least 10
consecutive trading days in the 90 business day period following, then we would
be in violation of the continued listing requirements of The Nasdaq National
Market and, pending the outcome of an elective appeals process, subject to
delisting. The closing price for our common stock has been below $1.00 ten times
between April 9, 2001 and April 26, 2001. As of April 26, 2001, 186 shares of
Series D preferred stock, 428 shares of the Series F preferred stock and 580
shares of the Series H preferred stock were outstanding. The redemption value of
these shares could total as much as approximately $21.0 million. If we were
required to redeem these shares, such payments would significantly deplete our
cash balance, which could materially and adversely affect our financial
condition. In addition, such a decrease in our cash balance could cause our
common stock to be delisted from The Nasdaq National Market. We cannot guarantee
that we will be able to meet all of the requirements necessary to avoid a
redemption.
12
13
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 seven of these agreements, and is subject to the
following obligations under the remaining agreement. The Company has agreed to
refund a 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, 2001, 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, 2001, the Company had an accumulated deficit of $313.7 million,
with a net loss of $7.1 million for the quarter ended March 31, 2001. The
Company expects to incur significant losses for approximately the next fifteen
months.
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.
13
14
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 $7.1 million for the quarter ended March 31, 2001. As of March 31, 2001, we
had an accumulated deficit of $320.8 million. We expect to have net losses and
negative cash flow for at least the next fifteen months. We plan to continue to
spend significant amounts to develop, enhance and maintain our voice application
products, services and technologies 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 sustain or
increase profitability on a quarterly or annual basis. If we fail to achieve and
sustain profitability, the price of our stock may decline substantially.
OUR LIMITED FUNDING MAY RESTRICT OUR OPERATIONS AND OUR ABILITY TO EXECUTE OUR
BUSINESS STRATEGY, AND THE AVAILABILITY OF ADDITIONAL FINANCING IS UNCERTAIN.
Our business model requires us to devote significant financial resources
to the productization, enhancement and maintenance of our magicTalk voice
platform and to the development of related products and services, to the
development of the sales and business development organization and to the
operation and maintenance of our network operations center. Our ability to raise
additional capital will depend on a variety of factors, some of which will not
be within our control, including investor perception of us, our business and the
industry in which we operate, and general economic and market conditions. 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.
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 of which, as of April 26, 2001, we have
drawn down $250,000. 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 our common
stock on the business day immediately preceding a draw down notice must be at
least $2.00 per share and that our common stock is listed on the American Stock
Exchange, Inc. ("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 and has been less than $2.062 again in December
of 2000 and January, February, March and April of 2001. 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 and the investor's percentage ownership of General Magic.
On September 7, 2000, the investment banking firm of Ladenburg Thalmann &
Co. Inc. ("Ladenburg Thalmann") executed a letter agreement with us whereby
Ladenburg Thalmann agreed to act as our exclusive placement agent for the
offering of up to $45,000,000 worth of our common stock on a "reasonable best
efforts" basis (the "Agreement"). Ladenburg Thalmann has agreed that it will
seek to identify institutional investors who may wish to purchase our common
stock from time to time on specific terms to be negotiated between us and such
14
15
institutional investors.
Ladenburg Thalmann is not committed to purchase any of our securities,
regardless of whether Ladenburg Thalmann does or does not successfully identify
others to purchase our securities. We, in turn, are not obligated to sell any of
our securities to any prospective purchaser successfully identified by Ladenburg
Thalmann. From November 29, 2000 through April 26, 2001, we consummated sales of
6,606,177 shares of our common stock to institutional investors identified by
Ladenburg Thalmann for an aggregate purchase price of $13,640,924. This includes
an agreement entered into on March 30, 2001 with an institutional investor,
pursuant to which the investor agreed to purchase, on a firm commitment basis,
$2,000,000 of our common stock.
No assurance can be given that additional financing will be available
under the equity line or the Agreement with Ladenburg Thalmann or otherwise, or
that, if available, it will be available on terms favorable to General Magic or
its stockholders. The unavailability or timing of revenues and financing may
require us to curtail our operations. In addition, if we are not able to
generate revenues or obtain funding, we may be unable to meet The Nasdaq
National Market's continued listing requirements, and our common stock could be
delisted from that market. See "-- Our common stock may be delisted from The
Nasdaq National Market if we are not able to demonstrate compliance with the
continued listing requirements."
THE MARKET FOR OUR VOICE APPLICATION PRODUCTS AND SERVICES MAY NOT DEVELOP,
WHICH WOULD SUBSTANTIALLY IMPEDE OUR ABILITY TO GENERATE REVENUES.
Our future financial performance depends on growth in demand for voice
application products and services. If the market for voice application products
and services does not develop or if we are unable to capture a significant
portion of that market, either directly or through our partners, our revenues
and our results of operation will be adversely affected.
The market for voice application products and services is relatively new
and still evolving. Currently, there are a limited number of products and
services in this industry. The adoption of voice application products and
services could be hindered by the perceived cost, quality and reliability of
this new technology, as well as the reluctance of customers 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 must educate prospective customers and
partners, 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 products and services do not achieve
commercial acceptance, our business would be harmed.
The continued development of the market for our voice application products
and services 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
15
16
- 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 products and services depends on
generation of revenue from licensing of our magicTalk voice platform and from
fees for speech and language consulting services and for voice application
hosting services. Our success in generating these revenues depends on our
ability to establish and maintain relationships with our existing customers,
such as OnStar and with other organizations that engage in high-volume customer
interactions, such as companies with customer relationship management
applications, established eCommerce businesses, and value-added
telecommunications providers, and with partners that currently provide
technology solutions to these businesses. Competition for relationships with
companies such as these is extremely intense.
WE CURRENTLY RELY ON A MAJOR CUSTOMER FOR SUBSTANTIALLY ALL OF OUR REVENUES. AS
A RESULT, OUR INABILITY TO SECURE ADDITIONAL SIGNIFICANT CUSTOMERS DURING A
GIVEN PERIOD OR THE LOSS OF OUR MAJOR CUSTOMER COULD CAUSE OUR QUARTERLY RESULTS
OF OPERATION TO SUFFER SIGNIFICANTLY.
In the first quarter of 2001, we derived approximately 94% of our total
revenues from a single customer, the OnStar subsidiary of General Motors
Corporation. Any delay in the continuing deployment of the OnStar Virtual
Advisor service, developed and deployed by General Magic in our network
operations center, or in the expected rate of customer adoption of the service,
could result in revenues and operating results for any quarter that are lower
than projected. OnStar is not contractually obligated to purchase further
development services from us, or to extend the services contract at the
expiration of its current term in December 2002. In addition, OnStar may
terminate its services agreement with us on sixty (60) days written notice and
payment of a termination fee in an amount equal to the then current monthly rate
for each month remaining in the term. Our dependence on OnStar makes it
difficult to forecast quarterly operating results, which could cause our stock
price to be volatile or to decline.
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.
WE MAY BE REQUIRED TO REDEEM THE OUTSTANDING SERIES D PREFERRED STOCK, SERIES F
PREFERRED STOCK AND SERIES H PREFERRED STOCK, WHICH COULD SIGNIFICANTLY DEPLETE
OUR CASH RESERVES AND MATERIALLY AND ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The holders of the Series D preferred stock, the Series F preferred stock
and the Series H preferred stock have redemption rights if we fail to meet the
requirements of the documents governing each, including, in the case of the
Series D and Series F preferred stock, the requirement that our common stock not
be suspended from listing on or delisted from The Nasdaq National Market for a
period of 15 consecutive days or for an aggregate of 45 days in any 365-day
period. One of the requirements of The Nasdaq National Market for the continued
listing of our common stock is that our common stock meet a minimum bid
requirement of $1.00. If our common stock trades below $1.00 for 30 consecutive
trading days and thereafter does not trade at or above $1.00 for at least 10
consecutive trading days in the 90 business day period following, then we would
be in violation of the continued listing requirements of The Nasdaq National
Market and, pending the outcome of an elective appeals process, subject to
delisting. The closing price for our common stock has been below $1.00 ten times
between April 9, 2001 and April 26, 2001. As of April 26, 2001, 186 shares of
Series D preferred stock, 428 shares of the Series F preferred stock and 580
shares of the Series H preferred stock were outstanding. The redemption value of
these shares could total as much as approximately $21.0 million. If we were
required to redeem these shares, such payments would significantly deplete
16
17
our cash balance, which may materially and adversely affect our financial
condition. In addition, such a decrease in our cash balance could cause our
common stock to be delisted from The Nasdaq National Market. We cannot guarantee
that we will be able to meet all of the requirements necessary to avoid a
redemption.
OUR VOICE APPLICATION PRODUCTS AND SERVICES 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 products and services requires the
customer to adopt emerging voice applications technology. Accordingly, the
decision to purchase our products and services 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 products and services. 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.
GENERAL ECONOMIC CONDITIONS MAY DELAY CUSTOMER ADOPTION OF VOICE APPLICATIONS
AND SERVICES.
Our products may assist customers in leveraging existing investments in
web-based infrastructure and hosted services, and in reducing the total cost of
call center and other labor intensive applications. However, unfavorable
economic conditions may cause businesses to reduce capital expenditures on
adoption of new technologies, including voice-driven applications and services.
If the economic conditions in the United States worsen or if a wider or global
economic slowdown occurs, our results of operations and financial condition may
be adversely affected.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE. IF OUR
QUARTERLY OPERATING RESULTS FAIL TO MEET THE EXPECTATIONS OF FINANCIAL ANALYSTS
AND INVESTORS, THE TRADING PRICE OF OUR COMMON STOCK MAY DECLINE.
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
- the timing of sales of our products and services;
- the timing of product implementations;
- unexpected delays in introducing new products and services;
- increased expenses, whether related to sales and marketing, product
development or administration;
- deferral of recognition of our revenue in accordance with applicable
accounting principles where we are providing any significant
development assistance;
- the mix of product license and services revenue; and
- costs related to possible acquisitions of technology or businesses.
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.
17
18
We intend to hire additional personnel, including sales and business
development 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, operational, sales and marketing
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 PRODUCTS AND SERVICES
COULD PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY.
The market for voice application products and services is intensely
competitive. A number of companies have developed, or are expected to develop,
voice application technologies, products and services that compete with ours.
Competitors in the voice application and platform technologies markets include
companies that offer hosted or customer premise equipment-based voice-activated
solutions to the telecommunications market, such as AccessLine Communications
Corporation, Call Sciences Inc., Comverse Technology, Inc., InterVoice-Brite
Inc. and Webley Systems, Inc.; speech recognition vendors, such as Nuance
Communications Inc. and SpeechWorks International, to the extent that they
engage in or support the development of voice applications; value-added
resellers of speech recognition technology, such as NetbyTel.com, Inc. and
VocalPoint, Inc.; companies that offer voice platform technologies, such as
VoiceGenie Technologies, Inc., Nuance Communications Inc. and Motorola, Inc.;
and companies in the voice portal category, such as BeVocal, Inc., HeyAnita
Inc., and Tellme Networks Inc. Wireless communications infrastructure companies,
such as Telefonaktiebolaget LM Ericsson or OPENWAVE Systems, Inc., may extend
their offerings to provide the capabilities of the magicTalk communications
platform, as may software developers such as Microsoft Corporation and Oracle
Corp., or telecommunications companies such as AT&T Corp. and Sprint
Communications Company, L.P. Many of these companies have longer operating
histories, significantly greater financial, technical, product development,
marketing and sales resources, greater name recognition, larger established
customer bases, and better-developed distribution channels than we do. Our
present or future competitors may be able to develop products that are
comparable or superior to those we offer, adapt more quickly than we do to new
technologies, evolving industry trends and standards or customer requirements,
or devote greater resources to the development, promotion and sale of their
products than we do. Accordingly, we may not be able to compete effectively in
our markets, competition may intensify and future competition may harm our
business.
TECHNOLOGY CHANGES RAPIDLY IN OUR MARKET, AND OUR FUTURE SUCCESS WILL DEPEND ON
OUR ABILITY TO MEET THE NEEDS OF OUR CUSTOMERS.
The market for voice application products and services 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 products and services
obsolete and unmarketable.
Our success will depend upon our ability to timely develop and introduce
new voice application products and services, as well as enhancements to our
existing products and services, to keep pace with technological developments and
emerging industry standards and address the changing needs of customers and
partners. We may not be successful in developing and marketing new products or
services that respond to technological changes or evolving industry standards.
We may experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products or services. In
addition, our new products and services 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 OPERATION.
Any delays in product development or market launch could adversely affect
our revenues or results of operation. To be successful, we must continue to
develop and enhance our magicTalk voice platform, and related products and
services. 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
18
19
successful introduction or marketing of new or improved products or services or
the delivery of new versions of our products or services.
THE FAILURE OR UNAVAILABILITY OF THIRD-PARTY TECHNOLOGIES AND SERVICES COULD
LIMIT OUR ABILITY TO GENERATE REVENUES.
We have incorporated technology developed by third parties in certain of
the voice application products and services offered to our customers, including
the following:
- email servers which process both emails and voice mails;
- 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 products and services. We have limited control over whether or when
these third-party technologies will be enhanced. In addition, our competitors
may acquire interests in these third parties or their technologies, which may
render the technology unavailable to us. If a third party fails or refuses to
timely develop, license or support technology necessary to our products or
services, market acceptance of our products or services 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.
WE RELY ON THIRD PARTY SERVICES TO CONDUCT OUR NETWORK OPERATIONS CENTER, AND
CALIFORNIA'S CURRENT ENERGY CRISIS COULD DISRUPT OUR BUSINESS OPERATIONS AND
INCREASE OUR EXPENSES.
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.
California is in the midst of an energy crisis that could disrupt our
business operations, in particular the services provided by our network
operations center, and increase our expenses. In the event of an acute power
shortage, that is, when power reserves for the State of California fall below
1.5%, California has, on some occasions implemented, and is likely in the future
to implement rolling blackouts throughout California. We currently have a backup
generator to maintain power to our network operations center, and maintain
sufficient fuel on-site to run the generator for a number of hours, with
arrangements from a supplier to provide additional fuel as needed. We have no
other alternate source of power, and our current insurance may not provide
adequate coverage for any damages we or our customers may suffer as a result of
any interruption in our power supply. If blackouts interrupt power supply to our
network operations center, and our backup generator fails to operate properly,
or we are unable to contract for needed fuel, it could lead to interruptions in
the services hosted in our network operations center and could substantially
impair our ability to operate our business. Any such interruption in our ability
to continue operations at our facilities could damage our reputation, harm our
ability to retain existing customers and to obtain new customers, and could
result in lost revenue, any of which could substantially harm our business and
results of operations.
CONVERSION OF PREFERRED STOCK OR ISSUANCE OF OTHER SECURITIES WOULD DILUTE
CURRENT STOCKHOLDERS.
As of April 26, 2001, we have 186 shares of Series D preferred stock, 428
shares of Series F preferred stock, 1,500 shares of Series G preferred stock and
580 shares of Series H preferred stock outstanding, all of which are convertible
into common stock. In addition, we have outstanding a warrant to purchase up to
an additional 500
19
20
shares of Series G preferred stock and warrants to purchase an aggregate, as of
April 26, 2001, of 2,956,832 shares of common stock outstanding. We also have an
equity line arrangement under which we could issue up to $25,750,000 in common
stock and an agreement with Ladenburg Thalmann pursuant to which we may raise up
to an additional $31,359,076 upon the sale of our common stock. The holders of
common stock could experience substantial dilution to their investment upon
conversion of the preferred shares, exercise of the warrants, drawdowns under
the equity line arrangement, or in the event we elect to raise additional
capital pursuant to the Ladenburg Thalmann agreement. The number of shares of
common stock issuable upon the conversion of the Series D preferred stock and
the Series F preferred stock, upon exercise of the warrants issued in connection
with the Series B, Series C and Series D preferred stock transactions, and
pursuant to the equity line arrangement, and the Ladenburg Thalmann 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
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, Series D, and Series H preferred stock, drawdowns under the equity
line, and sales of common stock pursuant to the Ladenburg Thalmann agreement
will increase and the holders of common stock would experience additional
dilution of their investment. Such dilution could cause the price of our common
stock to decrease further. A decrease in the price of our common stock could
cause our common stock to be delisted from The Nasdaq National Market. Our board
of directors may authorize issuance of up to 427,101 additional shares of
preferred stock that are convertible into common stock without any action by our
stockholders. In addition, our board of directors may authorize the sale of
additional shares of common stock or other equity securities that are
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.
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 sixteen patents issued by the United States Patent and Trademark
Office ("PTO"). We have ten 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 expensive, and there is no guarantee that we would detect any infringement
or misappropriation of our proprietary rights. Even if we do detect infringement
or misappropriation of our proprietary rights, litigation to enforce these
rights could cause us to divert financial and other resources away from our
business operations. Further, we expect to license our products internationally,
and the laws of some foreign countries would not protect our proprietary rights
to the same extent as do the laws of the United States.
OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY ARRANGEMENTS.
The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of intellectual property rights. Although we attempt to avoid
infringing proprietary rights of others, third parties may assert claims against
us from time to time alleging infringement, misappropriation or other violations
of proprietary rights, whether or not such claims have merit. Such claims can be
time consuming and expensive to defend and could require us to cease the use and
sale of allegedly infringing products and services, incur significant litigation
costs and expenses, and develop or acquire non-
20
21
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 PRODUCTS OR SERVICES WOULD LIKELY
RESULT IN SIGNIFICANT LIABILITY AND REDUCED REVENUES.
Security vulnerabilities and weaknesses may be discovered in our voice
application products or services, in the licensed technology incorporated in our
voice application products or services, in our network operations center hosting
environment, or in the media by which end users access our voice application
products or services. 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 products or services. 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 products and services and may result in lawsuits against us.
We will continue to incorporate security technologies in our voice
application products and services. However, such technologies may not be
adequate to prevent break-ins. In addition, weaknesses in the media by which
users access our voice application products and services, 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 products and services, 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 OPERATION.
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
21
22
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. Such errors may be expensive or difficult to
correct in a timely manner, and we may have little or no control over whether
any inadequacies in software or services supplied to us by third parties are
timely corrected, if at all.
OUR STOCK PRICE HAS BEEN EXTREMELY VOLATILE, AND EXTREME PRICE FLUCTUATIONS
COULD ADVERSELY AFFECT YOUR INVESTMENT.
The market price of our common stock has been extremely volatile. From
January 1, 2000 to April 25, 2001, the closing price of our common stock has
varied significantly from a high of $17.313 to a low of $0.86 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
products or services, 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,
Series F preferred stock and Series H preferred stock prohibit changes of
control unless the surviving entity assumes all of our obligations under the
Series D preferred stock, Series F preferred stock, or Series H 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
22
23
from other types of disasters, including fire, floods, power loss,
communications failures and similar events. Any damage to our facility could
lead to interruptions in the services hosted in our network operations center
and loss of subscriber information, and could substantially if not totally
impair our ability to operate our business. The insurance we maintain may not be
adequate to cover our losses resulting from disasters or other business
interruptions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have limited exposure to financial market risks, including changes in
interest rates. The fair value of our investment portfolio or related income
would not be significantly impacted by a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio.
23
24
Part II: Other Information
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 29, 2001, the Company issued to Paul Revere Capital Partners,
Ltd. ("Paul Revere") an unregistered warrant to purchase 200,000 shares of the
Company's common stock at a strike price of $1.75 per share as a commitment fee
for Paul Revere's agreement to purchase $2,000,000 of the Company's common
stock. The warrant was issued in reliance on the exemption from registration
granted by Rule 506 of Regulation D. In connection with the issuance of the
warrant, Paul Revere warranted to the Company that Paul Revere (a) is an
"accredited investor," (b) acquired the warrant for its own account for
investment and not with a view to, or for sale in connection with, any
distribution thereof, nor with any present intention of distributing or selling
the same, except as otherwise may be permitted under applicable securities laws,
and (c) was not organized specifically for the purpose of investing in the
Company.
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:
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------
None
(b)(i) A report on Form 8-K was filed on January 4, 2001, to report under
Item 5, Other Events, the filing of a press release announcing that
Kathleen M. Layton replaced Steven Markman as its Chief Executive
Officer and President.
(ii) A report on Form 8-K/A was filed on February 21, 2001, to report
under Item 5, Other Events, the filing of a press release announcing a
reduction in the Company's workforce of approximately twenty percent.
(iii) A report on Form 8-K was filed on February 23, 2001, to report
under Item 5, Other Events, the filing of a press release announcing
that the Company completed delivery of the initial feature set of the
OnStar Virtual Advisor.
(iv) A report on Form 8-K was filed on March 8, 2001, to report under
Item 5, Other Events, the filing of a press release announcing the
Company's operating results for the fourth quarter and fiscal year
ended December 31, 2000.
(v) A report on Form 8-K was filed on March 29, 2001, to report under
Item 5, Other Events, the filing of a press release announcing the
availability of the Company's VoiceXML-based magicTalk(TM) Voice
Gateway.
24
25
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/ KATHLEEN M. LAYTON
-------------------------------------
Name: Kathleen M. Layton
Title: President and Chief Executive
Officer
(Principal Executive Officer)
DATE: May 15, 2000 /s/ ROSE M. MARCARIO
-------------------------------------
Name: Rose M. Marcario
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25