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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER: 0-25374
GENERAL MAGIC, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 77-0250147
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 NORTH MARY AVENUE, SUNNYVALE, CALIFORNIA 94085
(Address of principal executive offices) (Zip Code)
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(408) 774-4000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of registrant's voting stock held by
nonaffiliates of registrant, based upon the closing sale price of the common
stock on March 27, 2002, as reported on the Nasdaq National Market, was
approximately $30,542,151. Shares of common stock held by each officer and
director have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
Outstanding shares of registrant's common stock, $.001 par value, as of
March 27, 2002: 127,324,962
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement for registrant's 2002 Annual
Meeting of Stockholders to be filed with the Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
Form are incorporated by reference into Part III of this Form 10-K Report.
Prospectus supplements on Forms 424(b)(2) filed with the Securities and
Exchange Commission on March 27, 2002, December 3, 2001, May 24, 2001, April 2,
2001, January 30, 2001 and January 19, 2001 are incorporated by reference into
Part II of this Form 10-K Report.
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PART I
This report on Form 10-K includes a number of forward-looking statements
that reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including those discussed in the Risk Factors section
of Item 1 and elsewhere in this Form 10-K, that could cause our actual results
and financial position 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.
ITEM 1. BUSINESS
COMPANY
General Magic, Inc. offers a suite of voice infrastructure software
products to Global 2000 companies to enable the rapid creation of
personality-rich voice access to new and existing Web-based enterprise
applications. This product suite, known as magicTalk(R), is comprised of the
Voice Gateway and the Enterprise Platform.
The magicTalk product suite is designed for use in building and deploying
voice-enabled enterprise applications in the emerging voice self-service market.
The Voice Gateway, first released in May 2001, integrates speech recognition,
text-to-speech, media resources and telephony technologies with a VoiceXML
interpreter to enable user-friendly telephone access to new or existing
enterprise applications and information. The Enterprise Platform, first released
in December 2001, is enterprise-class voice infrastructure software that allows
Web and Java(TM) developers to create their own brand of voice applications that
communicate to the end user through the magicTalk Voice Gateway. The Enterprise
Platform includes prepackaged application design, system testing, debugging,
deployment and management software.
In addition to our magicTalk product suite, we offer supporting services.
These include product training, voice user interface design consulting,
technical support and hosting. In addition, we offer our customers application
development services, delivered directly or through professional services and
consulting companies with whom we partner.
The principal target market for our voice infrastructure software and
supporting services is the Global 2000 enterprise. We offer these enterprises
the ability to leverage investments in both call center and e-business
infrastructure (both intranets and extranets) to expand their business reach by
adding the voice channel to new and existing Web services and information. By
adding voice access to corporate information for customers, suppliers and
employees, enterprises can reduce costs, improve customer retention, improve
workforce productivity and increase revenues.
In 2001, our primary source of revenue was professional services and
hosting revenue from OnStar Corporation, a wholly-owned subsidiary of General
Motors Corporation. Going forward, we expect to reduce our dependency on OnStar
as we seek new customers for our recently released voice infrastructure software
suite of products.
General Magic, Inc. was incorporated in California in May 1990 and
reorganized as a Delaware corporation in February 1995. This report on Form 10-K
contains the trademarks of General Magic and those of other companies.
STRATEGY
The year 2001 was a year of transition for General Magic. Our primary
business as we entered the year was as a professional services company building
a major voice application for a single corporate customer, OnStar, and hosting
this application in our hosting center. The OnStar application is known as the
Virtual Advisor and is the first application in the telematics market to provide
drivers voice access to email and location-based information. Additionally, we
offered our Portico(TM) personal assistant voice application to
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consumers, which was also hosted in our hosting center until October 31, 2001,
when we discontinued that service.
We determined that, given our then current business model, our ability to
achieve high growth in both revenue and customers with a clear path to
profitability in the maturing voice market was very limited. We further believed
that the voice market was ready to embrace the use of speech technologies, but
that there were gaps in the supply chain that needed to be filled, with the most
significant gap being the lack of voice infrastructure software for the
enterprise. As a result of these factors, we decided to leverage our voice
technology experience, product offerings and patents to transform General Magic
into a software company, creating a first-to-market product offering of voice
infrastructure software targeted for Global 2000 enterprises ready to embrace
the voice self-service market.
Today, our top-level strategic objective is to establish General Magic as
the leading voice infrastructure software provider enabling businesses to
rapidly develop and deploy high quality voice access to enterprise data. Our
strategic plan includes the following elements:
Achieve broad market acceptance of our magicTalk voice infrastructure
software. We plan to pursue adoption of our voice infrastructure software in
key vertical markets that include Healthcare, Utilities, Financial Services,
Travel, Retail and Transportation. In furtherance of this objective, we are
currently developing a direct sales channel and establishing key partnerships in
an attempt to maximize the adoption rate of our magicTalk voice infrastructure
software product suite. Late in 2001, we also hired a public relations firm with
experience in marketing for technology companies, UpStart Communications, to
begin to create market awareness of our strategy, product offerings and
achievements.
Create and leverage strategic partnerships to increase market penetration
and to meet key technology integration needs. We intend to work with third
party technology providers, solution providers and software developers already
established in the market, including existing customer relationship management,
enterprise resource management, supply chain management, call center,
independent software vendor, and e-business software companies as well as
software integration and consulting companies, to add voice access to their
products and services. We believe this will provide us with an opportunity to
accelerate our presence in the market while minimizing development and marketing
costs.
Continue to invest in the improvement and extension of the magicTalk voice
infrastructure software product suite. Our ability to offer competitive
products requires the ongoing enhancement of our magicTalk product suite.
Accordingly, we plan to continue to improve and differentiate our voice
platform, integrate additional technologies and make the process for creating
customized personality-rich voice user interfaces increasingly efficient and
scaleable.
Maintain General Magic's position as a recognized leader in voice user
interface design. We intend to leverage our patents on voice user interface
("VUI") with personality by offering to license software embodying our patented
VUI design features and methodologies. In addition we plan to offer licenses for
our patent on VUI design with personality to strategic partners and other
industry players in addition to offering expert speech and language consulting
and training services to customers and partners.
Develop and maintain our relationship with our primary customer, the OnStar
Corporation. In 2001, we derived approximately 95% of our revenues from the
provision of professional services and application hosting services to a single
customer, Onstar Corporation, a subsidiary of General Motors Corporation.
Certain key aspects of this relationship are up for renewal this year, and we
intend to encourage OnStar to maintain and develop its relationship with us.
There can be no assurance that OnStar will renew its relationship with us or
that, if it does so, it will renew its relationship with us on the same or more
favorable terms. See "Risk Factors -- We currently rely on a major customer (a
related party) for substantially all of our revenues."
Continue to contain costs, and seek adequate funding for our
business. While we believe that we made significant progress in 2001 in
reducing and redirecting costs, and in simplifying our complex capital
structure, we plan to continue our efforts to contain costs and to raise
additional capital to fund our ongoing operations.
2
We believe that we achieved significant milestones in the execution of our
voice infrastructure software strategy in 2001. We brought on a new management
team, we implemented significant cost control measures, defined our business
direction and focused all of our resources on the new direction, released our
first software products, signed our first new enterprise customers in two years
and implemented a financial restructuring effort to simplify our capital
structure and to seek adequate funding for our new software business plan.
Although we believe that we have made significant progress during 2001 in
our strategy to develop and market voice infrastructure software products and
services, 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 infrastructure software products and services;
establish and maintain relationships with businesses with high volume customer,
supplier and employee interactions; establish and maintain alliances with
companies that offer technology solutions for businesses with high volume
customer, supplier and employee interactions; respond effectively to competitive
developments; meet the challenges inherent in the timely development and
deployment of complex technologies; generate sufficient revenues from our
products and services to permit us to operate profitably; significantly increase
our customer base and reduce our dependence on OnStar Corporation, 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.
PRODUCTS AND SERVICES
In 2001, we adjusted our business model to focus on the creation of the
following primary revenue sources: product license fees for use of our voice
infrastructure software and voice user interface methodologies; fees for our
speech and language consulting and training services; recurring maintenance fees
for technical support; and recurring fees for our hosting services.
OVERVIEW OF THE MAGICTALK VOICE GATEWAY
The magicTalk Voice Gateway is highly scalable server software, designed to
enable telephone access to enterprise applications. The magicTalk Voice Gateway
integrates speech recognition, text-to-speech, media resources and telephony
technologies with a powerful VoiceXML interpreter to enable voice access to
information and services from any telephone.
OVERVIEW OF THE MAGICTALK ENTERPRISE PLATFORM
The magicTalk Enterprise Platform is a suite of enterprise-class voice
infrastructure software designed for Web and Java developers that simplifies and
speeds all phases of voice application development, integration and deployment
while leveraging existing call center and e-business infrastructure investments.
The Enterprise Platform enables the convergence of the Web and the call center
by providing conversational voice access to new and existing Web applications
and a superior voice alternative to today's call center interactive voice
response ("IVR") systems based on touchtone technology. We have architected our
product to leverage the Web-programming model by basing it on the open standards
found in both the Web (Java 2 Enterprise Edition (J2EE)(TM)) and voice
(VoiceXML) markets. Our product suite runs on industry-standard hardware and
supports a choice of best of breed technologies for speech, telephony and Web
application servers. As a development and deployment platform, our Enterprise
Platform product suite simplifies and standardizes the core functionality used
in developing and deploying voice applications, thus enabling Java developers to
build voice applications quickly and easily.
The magicTalk Enterprise Platform voice infrastructure software includes:
VoiceXML Development Tool: The magicTalk VoiceXML Development Tool is
designed to simplify the task of developing voice applications in VoiceXML
by enabling the user, with point and click technology, to insert VoiceXML
elements and higher-level reusable code fragments. Novice and advanced
developers alike can now begin authoring VoiceXML-compliant voice user
interface scripts in an easy-to-use scripting environment. With a library
of point-and-click VoiceXML compliant elements
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and pre-defined dialog components, developers can create complete VoiceXML
scripts using the magicTalk VoiceXML Development Tool.
VoiceXML Debugger: The magicTalk VoiceXML Debugger provides a utility
for developers to test and debug VoiceXML scripts in a run time mode.
Useful throughout the development phase, the magicTalk VoiceXML Debugger
enables developers to stop and restart VoiceXML scripts, monitor script
variables, analyze events and messages, and test and evaluate voice dialogs
by executing VoiceXML scripts line by line. While "listening" to the
execution of a VoiceXML script, developers can speak directly to the
application to test and tune business application grammar sets to improve
voice recognition results.
Virtual Telephony Client: The magicTalk Virtual Telephony Client
provides a desktop environment that enables developers to test, debug and
tune VoiceXML scripts without the need for a telephony interface or T1/E1
line. Developers can use a headset microphone and desktop speakers to
listen and interact with VoiceXML scripts during execution.
Talklets: The magicTalk Enterprise Platform ships with a collection
of magicTalk Talklets that provide easy-to-use, predefined dialog
components to simplify the development of natural conversational voice user
interfaces. Each Talklet represents a pre-tested unit of conversation for a
commonly used dialog function and is accompanied by a grammar and prompt
library and a parameter set for extending and customizing the dialog
function.
Voice Asset Repository: The magicTalk Voice Asset Repository provides
a central repository for storing and retrieving voice assets during
development and deployment. Voice assets are stored and referenced by asset
type, application, language and meta-data stored with the voice asset. The
magicTalk Voice Asset Repository is designed for storing and organizing
VoiceXML and JSP Scripts, prompt components (scripted, reusable,
customizable prompt components that provide quick and easy assembly of
audio files), prompt pools (collections of prompts that are randomized to
allow the voice user interface to sound more natural), audio files (.WAV
files that contain recorded prompts), grammars (automated speech
recognition grammars that are used as the rule base for recognizing words
and phrases spoken by the user) and parameter sets (pre-defined sets of
parameters that tailor the magicTalk Talklets for a particular dialog
function).
Event Tracker: The magicTalk Event Tracker provides mechanisms for
tracking user activity and progress through a VoiceXML application. The
user data and statistics captured by the magicTalk Event Tracker can be
utilized to optimize voice application performance, monitor Call activity,
monitor Customer Satisfaction and personalize the Voice User Interface
(VUI) via integration with the magicTalk VUI Rules engine.
Voice User Interface Rules Engine: The magicTalk Enterprise Platform
provides voice application personalization support with mechanisms for
tracking user statistics and utilizing them within the magicTalk VUI Rules
Engine to modify voice prompts and options delivered to a user. The
magicTalk VUI Rules Engine integrates with the iLog JRules(TM) engine to
enable developers to implement personalization rules to voice user
interfaces using techniques already in use for web-based services.
J2EE Integration Services: The magicTalk Enterprise Platform allows
easy integration of voice applications with J2EE-based e-business
applications and enterprise software. Enabling a single middleware
approach, the magicTalk J2EE Integration Services enable voice applications
to use messaging to request services and send messages to other
applications and legacy systems using standard Java messaging services.
OVERVIEW OF THE MAGICTALK SUPPORTING SERVICES
Speech and Language Consulting and Training Services: Our speech and
language team provides consulting services to businesses developing voice
applications on our magicTalk Enterprise Platform. In addition to dialog
design, our speech and language services include personality development,
talent
4
selection and direction, prompt recording at our on-site recording studio,
grammar development and voice application optimization.
Technical Support: We provide ongoing maintenance and technical
support for the OnStar Virtual Advisor. Early in 2002, we began to
establish a technical support group for our voice infrastructure product as
well. We expect to offer direct support to end customers procured by our
direct sales group and indirect support to customers procured through our
alliance partners.
Hosting Services: Our network operations center has been in
commercial operation since July 1998. The center features a
high-availability architecture designed to remain in service around the
clock. We have provided service to over 2 million users in our
state-of-the-art network operations center and can rapidly scale to meet
customer demands. Currently we host the OnStar Virtual Advisor in our
network operations center. Customers using our product suite are able to
host their voice applications in our center should they prefer outsourcing
to a premises-based solution.
COMPETITION
Competition in the market for voice applications and services is growing.
See "Risk Factors -- Intense competition in the market for voice application
products and services could prevent us from achieving or sustaining
profitability." We believe that we will face competition from three principal
classes of competitors:
- Software technology vendors, such as providers of speech recognition
software, seeking to provide more comprehensive voice solutions;
- Well-established telecommunications service, platform and equipment
vendors with experience in providing voice-based solutions to their
customers; and
- Emerging companies seeking to enter the voice market.
We believe that the principal competitive factors affecting our market
include the scalability, operability, reliability and extensibility of voice
solutions technology; the ability to reliably and cost-effectively deliver voice
solutions; and the ability to leverage existing enterprise technology to add the
voice access channel. Although we believe that our capabilities currently
compare favorably with respect to these factors our market is relatively new and
evolving rapidly.
RESEARCH AND DEVELOPMENT
We have made substantial investments in research and development throughout
our existence. We believe that our future performance depends on our ability to
continue to develop and enhance our magicTalk Enterprise Platform voice
infrastructure software suite of products as well as associated technologies and
products.
Our total expenses for research and development for the years ended
December 31, 2001, 2000, and 1999 were $6.5 million, $6.0 million and $12.5
million, respectively. Our research and development expenditures increased in
2001 as we focused our efforts on the development of the magicTalk Enterprise
Platform. We expect to continue to invest substantial funds in research and
development activities.
SALES AND MARKETING
We plan to offer our voice infrastructure software products and related
services both directly and through alliances with third parties who will provide
their new and existing customers the option to add voice access to their
products and services. During 2002, we plan to build our sales and business
development organizations to meet these objectives. Marketing support for our
sales efforts in key targeted vertical markets (Healthcare, Utilities, Financial
Services, Travel, Retail and Transportation) is expected to focus on the
creation of targeted sales materials and collateral and an ongoing public
relations program and media outreach to both online and offline outlets, with a
focus on publicizing referenceable customers. In addition, we plan to maintain
and participate in marketing programs aimed at building awareness within the
Java developer community that we offer development software that may be used by
novice and experienced Java developers
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to create stylized voice-access to existing Web applications and information. We
also plan to educate that community on the uses and benefits of our magicTalk
Enterprise Platform suite of products. In this regard, we plan to present
exhibits and presentations at key developer trade shows and conferences and to
contribute articles in key developer publications.
CUSTOMERS
OnStar Corporation remains our primary customer. Our relationship with
OnStar is described in detail for you below. In addition, in December 2001 we
announced that Public Services Company of New Mexico ("PNM") selected our
magicTalk product suite to develop their next generation IVR system with the use
of our speech and language development services. We assisted PNM in the
development of this system earlier this year and delivered it to them in March
2002. We also recently announced that we have arrangements with two Fortune 10
companies to use our magicTalk voice infrastructure product suite to develop
relatively small voice applications to provide voice access, in one case, for
customers, suppliers and employees to existing enterprise information and, in
the other case, to pilot voice access to customers of certain customer account
information. We plan to leverage these business relationships and what we expect
to be the success of these initial voice applications to expand use of our
magicTalk voice infrastructure suite of products by these Fortune 10 companies
and their affiliated and related companies to develop more substantial voice
applications or next generation IVR systems. There can be no assurance that
these efforts will be successful or that either company will develop additional
applications with our magicTalk voice infrastructure software.
STRATEGIC ALLIANCES
Strategic alliances are an important part of our market growth strategy. We
have several relationships with software development firms and technology
partners, including Speechworks International, Inc., Intel Corp., Nuance
Communications Inc., International Business Machines Corporation and Royal
Philips Electronics of the Netherlands. We also have a major alliance with
OnStar Corporation, a wholly-owned subsidiary of General Motors Corporation, the
pioneer in the telematics market, and we recently signed a Memorandum of
Understanding with InterVoice-Brite, Inc., which has the current leading market
share in the call-center IVR market. Each of these strategic alliances is
described in more detail immediately below.
RELATIONSHIP WITH INTERVOICE-BRITE
In January 2002, we announced a Memorandum of Understanding (MOU) with
InterVoice-Brite, Inc., ("IVB"), a leading provider of speech and self-service
solutions serving enterprise customers and institutions worldwide. We intend to
collaborate with IVB in delivering next-generation IVR solutions to customers
seeking to implement voice self-service. The MOU contemplates a strategic
partnership agreement to integrate elements of our respective technologies and
to engage in joint marketing initiatives to provide next-generation IVR
solutions that leverage open standards and advanced Web technologies. We expect
this sales and product alliance to generate significant market opportunities for
both companies.
RELATIONSHIP WITH GENERAL MOTORS
ONSTAR VIRTUAL ADVISOR
Our main source of revenue in 2001 was OnStar Corporation, a wholly-owned
subsidiary of General Motors Corporation, which generated a total of $5.4
million in revenue to General Magic for the year. (See "Risk Factors -- We
currently rely on a major customer (a related party) for substantially all of
our revenues.") The service delivered by OnStar is an in-vehicle safety,
security and information service using Global Positioning System (GPS) satellite
network and wireless technologies to provide, through live advisors, accident
assistance, stolen vehicle tracking, emergency services, roadside assistance
with location, remote door unlock, remote diagnostics, route support, OnStar
Concierge and other convenience and information services to OnStar subscribers.
The OnStar service includes a Personal Calling feature that allows OnStar
subscribers who have purchased wireless minutes to make and receive hands-free,
voice-activated
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phone calls through a nationwide wireless network. OnStar subscribers who have
activated the Personal Calling feature may also access the Virtual Advisor
service. The Virtual Advisor is an automated voice-activated network service
developed by General Magic and hosted in our network operations center that
allows OnStar subscribers to access email, stock quotes, entertainment features,
weather updates, traffic reports and up-to-the-minute news content, including
sports, financial, headline, business and world news.
Relationship with OnStar Corporation
On November 9, 1999, we entered into a Preferred Stock and Warrant Purchase
Agreement and a Development and License Agreement with General Motors
Corporation, through its OnStar subsidiary, for total consideration in the
amount of $20 million. Approximately $13.8 million of that sum was allocated to
General Motor's purchase of General Magic's Series G Preferred Stock and
associated warrants, and the balance, approximately $6.2 million, was allocated
to the development services and license rights provided to OnStar under the
Development and License Agreement.
Development and License Agreement with OnStar
Pursuant to the Development and License Agreement, we agreed to commit a
minimum of 315 person-months to develop the OnStar Virtual Advisor service and
to integrate that service with the existing OnStar service. All development
effort required beyond the minimum commitment (which was satisfied in 2000) was
charged to OnStar at mutually agreed upon rates.
Under the Development and License Agreement, we also granted OnStar a
world-wide, perpetual, non-transferable and irrevocable license to operate the
Virtual Advisor for use primarily through equipment installed onboard vehicles.
The license was exclusive through January 1, 2002. We further agreed to refrain
for five years from January 1, 2001, from transferring or sublicensing its
rights to those elements of the voice user interface developed specifically for
the OnStar Virtual Advisor to any vehicle manufacturer or supplier for use in
services designed primarily for use through equipment installed on board
vehicles.
Services Agreement with OnStar
The Development and License Agreement provides that General Magic initially
would operate the service, which we have done pursuant to a Services Agreement
entered into on May 2, 2001, and effective as of January 1, 2001. Under the
Services Agreement, we are obligated to (i) operate the Virtual Advisor service
24 hours a day, seven days a week, through and including December 31, 2002, (ii)
maintain compliance with designated performance levels, and (iii) provide second
level support to OnStar. As requested by OnStar, we are also to contract with
service providers for the delivery of content, such as news and weather, to the
Virtual Advisor. In consideration, OnStar is to pay a minimum of $95,000 per
month for utilization of the service up to 4 million minutes per month.
Utilization of the services in excess of 4 million minutes per month is subject
to incremental per minute rate increases. As of March 27, 2002, utilization of
the service has not yet exceeded 4 million minutes per month. Should we fail to
attain the performance levels to which we have committed, other than for reasons
beyond our control, we may be obligated to credit OnStar up to approximately
$75,000 of the monthly service fee for any month in which such failure occurs,
depending upon the extent and duration of any such failure, and further
depending upon our average performance for the calendar quarter in which such
failure occurs. As of March 27, 2002, we have consistently maintained the
performance levels to which we committed, and have not been obligated to credit
OnStar in any material amount. The Services Agreement is automatically renewable
for successive ninety-day periods unless either party gives the other notice of
nonrenewal ninety days prior to the expiration of the then-current term.
Amendment to Development and License Agreement and Services Addendum
The Development and License Agreement also provides that, following first
commercial availability of the OnStar Virtual Advisor service, OnStar may
request that we develop additional features and functionality for the service,
which it has done from time to time, generally pursuant to change order
requests. On August 1, 2001, and in order both to ensure OnStar a committed
level of resources to support continued development
7
and enhancement of the Virtual Advisor and to allow General Magic an opportunity
to better predict demands on our resources and related revenues and returns on
revenues, we entered into Amendment Number One to the Development and License
Agreement, which provides that General Magic will undertake such efforts
pursuant only to a Services Addendum that describes the work to be performed,
resources to be made available to OnStar, and the payment terms therefor.
Under a Services Addendum executed contemporaneously with Amendment Number
One, we agreed to dedicate a minimum of eighteen people over a period of one
year to develop and implement enhancements to the Virtual Advisor service, and
to support and maintain the Virtual Advisor software. In consideration, OnStar
will pay General Magic a minimum of approximately $484,000 for each month during
the term of the Services Addendum, which is a 30% discount from our standard
rates, subject to reduction only to the extent that we are unable to supply the
resources committed. The term of the Services Addendum is renewable for
subsequent one-year periods upon agreement of the parties. There can be no
assurance that the Services Addendum will be renewed or renewed at the current
rates or levels.
PROPRIETARY RIGHTS AND LICENSES
Our success will depend in part on our ability to obtain and enforce
intellectual property protection for our technology in both the United States
and other countries. In November 2000, the United States Patent and Trademark
Office ("PTO") issued to us a patent entitled "Voice User Interface with
Personality," and in December 2001 issued a second patent in the "Voice User
Interface with Personality" family of patents with what we believe are
substantially broader claims. In addition, the PTO has issued to us fifteen
patents in the last five years, three concerning our pioneering agent
technology, one regarding telephonic access to and navigation of the Internet,
three regarding graphical user interface design, seven regarding various
features of a communications hardware and software platform for Internet
appliances and hand-held communications devices, and one concerning architecture
independent program implementations. We have a total of fifteen patent
applications pending with the PTO. Thirteen of these applications relate to our
voice technology or to telephonic access to and navigation of the Internet, one
of them relates to our agent technology, and the balance relate to certain
features or components of a communications hardware and software platform for
Internet appliances and hand-held communications devices and other technologies.
In addition, we have been issued a number of counterpart patents in foreign
jurisdictions, and have numerous foreign counterpart patent applications
pending. We cannot guarantee that our pending patent applications in any
jurisdiction will result in the issuance of patents.
Our patents may not provide competitive advantages to us. In addition, our
patents may be challenged, invalidated or circumvented, and we cannot guarantee
that the patent laws will provide effective legal or injunctive remedies to stop
any infringement of our patents. Also, our competitors may independently develop
or patent technologies that are equivalent to or superior to our technologies.
We rely in part on copyright laws to prevent unauthorized duplication of
our software and documentation. However, existing copyright laws afford only
limited protection, especially in certain jurisdictions outside the United
States where we may license our technology, or sell products or services
incorporating our technology. Unauthorized parties may copy our technologies or
reverse engineer or otherwise obtain and use information that we regard as
proprietary. Moreover, the courts and laws of foreign nations against piracy and
infringement may not adequately protect our proprietary technology.
From time to time, we have received communications from third parties
claiming that features or content of certain of our products, services and/or
technologies may infringe their intellectual property rights. It is our practice
to review all such claims and determine if a license is appropriate. To date, no
such claim has resulted in litigation against us. However, a third party may
commence litigation against us in the future. If a third party were to commence
litigation against us, it is likely to claim damages and/or seek to enjoin
commercial activities relating to our technology, services or products. Such
litigation could be costly and a diversion of management's attention, whether or
not the suit is ultimately successful. The costs of such litigation may divert
resources from the continued development, maintenance and support of our
technology, services or products. In addition, if the suit is successful, we
could lose our proprietary rights and may be required to
8
significantly modify or even discontinue sales or licensing of our technology,
services or products. In addition, we may be required to pay significant
damages.
EMPLOYEES
As of December 31, 2001, we had 111 full-time employees, 41 primarily
engaged in engineering, 34 in network operations and customer support, and 36 in
sales, general and administrative. In addition, from time to time, we retain
independent contractors and temporary employees to support our business. None of
our employees are subject to a collective bargaining agreement, and we believe
that our relations with our employees are good.
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-K.
WE HAVE A HISTORY OF LOSSES AND OUR ABILITY TO CONTINUE AS A GOING CONCERN IS AT
RISK. WE MAY CONTINUE TO INCUR LOSSES, AND WE MAY NEVER ACHIEVE AND SUSTAIN
PROFITABILITY OR CASH BREAKEVEN.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which means that they were prepared on the assumption that
we would have a continuity of operations, realization of assets, and liquidation
of liabilities and commitments in the normal course of business. Since our
inception, however, we have incurred significant losses, including a net loss of
$27.2 million for the twelve-month period ended December 31, 2001. As of
December 31, 2001, we had an accumulated deficit of $340.7 million. This,
combined with our current cash position, raises substantial doubt about our
ability to continue as a going concern. As of March 27, 2002, we had cash, cash
equivalents and short-term investment balances of $12.0 million, which includes
proceeds from the equity financing arrangement with institutional investors
concluded March 27, 2002. A cash flow analysis, which was prepared as of March
31, 2002 to determine whether we will be able to fund negative cash flows, based
on our current cash "burn" rate, through December 31, 2002, projects that we
require total estimated additional cash, cash equivalents and short-term
investments amounting to $8.0 million as of March 31, 2002. This analysis did
not take into account any increase in revenues from current customers, revenues
from new customers, or new financings for the period March 31, 2002 through
December 31, 2002. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty,
and there can be no assurance that we will be able to generate sufficient
additional revenues or to raise sufficient additional cash to continue our
operations on an ongoing basis.
We plan to continue to spend significant amounts to develop, enhance and
maintain our voice infrastructure software products and services and to expand
our marketing and sales efforts. As a result, we will need to generate
significant revenues to achieve cash breakeven and profitability. There can be
no assurance that we will be successful in our efforts to reach cash breakeven
or 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 both cash breakeven and profitability, the price of our stock may
decline substantially.
WE REQUIRE, AND MUST RAISE, ADDITIONAL CAPITAL TO SUPPORT THE CONTINUING
OPERATIONS OF OUR BUSINESS, AND THE AVAILABILITY OF ADDITIONAL FINANCING IS
UNCERTAIN. OUR LIMITED FUNDING MAY RESTRICT OR JEOPARDIZE OUR OPERATIONS AND OUR
ABILITY TO EXECUTE OUR BUSINESS STRATEGY.
Since our inception, we have generated only minimal revenues and have
relied principally on third party financing to fund our operations. Our cash,
cash equivalents and short-term investments totaled $10.0 million as of December
31, 2001. Our business model will require us to devote significant amounts of
these financial resources to the development, enhancement and maintenance of our
magicTalk suite of voice infrastructure software products and related services,
to the development of our sales and business development organization and to the
operation and maintenance of our network operations center. For example, during
the twelve-month period ended December 31, 2001, our average monthly cash "burn"
rate to support the implementation of our
9
business model was $1.8 million per month. We currently expect our cash, cash
equivalents and short-term investment balances of $12.0 million as of March 27,
2002, which includes proceeds from an equity financing arrangement with
institutional investors that closed on March 27, 2002, will be sufficient to
fund our operations into September 2002. (Please note that this is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act of 1995.) We will be required to raise additional public
or private financing to support our continuing operations beyond September 2002.
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. No assurance can be given that additional
financing will be available or that, if available, it will be available on terms
favorable to us or to our stockholders. If adequate funds are not available to
support our short term or long term capital requirements, we may be required to
significantly limit our operations, which would have a material adverse effect
on our business, financial condition, and results of operation and jeopardize
our ability to continue as a going concern. In the event we raise additional
equity financing to support our continuing operations, further dilution to our
stockholders will likely result.
We have engaged a number of non-exclusive financial advisors to facilitate
our capital raising efforts. The terms of these engagements are summarized
below.
On June 28, 2001, we renewed our relationship with the investment banking
firm of Ladenburg Thalmann & Co., Inc. by entering into a non-exclusive
placement agent and financial advisory agreement with that firm, pursuant to
which they agreed to assist us in the offering of up to $15,000,000 worth of our
common stock on a "reasonable best efforts" basis. Under this arrangement, which
is scheduled to expire on April 30, 2002 (unless extended by the parties),
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 institutional investors. As
of March 31, 2002, we had not yet raised any capital pursuant to this agreement.
On November 7, 2001, we entered into a non-exclusive financial consulting
agreement with Hyperion Partners Corp. ("Hyperion"), pursuant to which Hyperion
agreed to assist us in the offering of shares of our common stock to
institutional investors who may wish to purchase our common stock from time to
time on specific terms to be negotiated between us and such institutional
investors. This engagement is scheduled to expire on May 6, 2002, unless
extended by the parties. As of March 31, 2002, we had raised approximately $8.1
million pursuant to this arrangement.
On November 21, 2001, we entered into a non-exclusive financial consulting
agreement with Atlas Capital Services, LLC ("Atlas"), pursuant to which Atlas
agreed to assist us in the offering of shares of our common stock in private
placements of up to $5,000,000 on a "reasonable best efforts" basis to
institutional investors who may wish to purchase our common stock from time to
time on specific terms to be negotiated between us and such institutional
investors. This engagement is scheduled to expire on May 21, 2002, unless
extended by the parties. As of March 31, 2002, we had raised approximately $3.6
million pursuant to this arrangement.
On February 18, 2002, we entered into a non-exclusive financial consulting
agreement with Occidental Solutions, Inc. ("Occidental"), pursuant to which
Occidental agreed to assist us in the offering of shares of our common stock in
private placements of at least $500,000 on a "best efforts" basis to
institutional investors who may wish to purchase our common stock from time to
time on specific terms to be negotiated between us and such institutional
investors. As of March 31, 2002, we had not yet raised any capital pursuant to
this arrangement.
Hyperion, Ladenburg Thalmann, Atlas, and Occidental are not committed to
purchase any of our securities, regardless of whether they do or do not
successfully identify others that are interested in purchasing or that do in
fact purchase our securities. We, in turn, are not obligated to sell any of our
securities to any prospective purchaser successfully identified by Hyperion,
Ladenburg Thalmann, Atlas or Occidental.
No assurance can be given that additional financing will be available under
the agreements with Hyperion, Ladenburg Thalmann, Atlas or Occidental or
otherwise, or that, if available, it will be available on
10
terms favorable to us or our 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. In addition, if we attempt to transfer
the listing of our common stock over to The Nasdaq Small Cap Market, we could
fail to meet the listing requirements of The Nasdaq Small Cap Market, and we
could be denied inclusion in, or eventually delisted from, that market as well.
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
for that market, and there can be no guarantee that our common stock will be
accepted for listing on The Nasdaq Small Cap Market."
WE CURRENTLY RELY ON A MAJOR CUSTOMER (A RELATED PARTY) 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 year ended December 31, 2001, we derived approximately 95% of our
total revenues from a single customer, OnStar Corporation, a wholly-owned
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 after the expiration of the Services
Addendum in August 2002, or to extend the network operations contract at the
expiration of its current term in December 2002. In addition, OnStar may
terminate its network operations 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.
THE MARKET FOR OUR VOICE INFRASTRUCTURE SOFTWARE 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
infrastructure software products and services. If the market for voice
infrastructure software 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 would be
adversely affected.
The market for voice infrastructure software 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 infrastructure
software products and services could be hindered by the perceived cost, quality
or 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
provide information to 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 infrastructure software products and services do not achieve commercial
acceptance, our business would be harmed.
The continued development of the market for our voice infrastructure
software 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 vendors,
customers, and employees;
- consumer acceptance of such applications in general, and our offerings,
in particular; and
- continuing improvements in hardware and software technology that may
reduce the cost and improve the performance of voice solutions.
11
WE MUST ESTABLISH AND MAINTAIN RELATIONSHIPS WITH CUSTOMERS AND PARTNERS TO
GENERATE REVENUES.
Our business model for voice infrastructure software products and
supporting services depends on generation of revenue from licensing of our
magicTalk Voice Gateway and of the magicTalk Enterprise Platform suite of voice
infrastructure software products and supporting services. Our success in
generating these revenues depends on our ability to establish and maintain
relationships with our existing customers, such as OnStar Corporation, and with
other organizations that engage in high-volume customer, vendor and employee
interactions, such as companies with customer relationship management, supply
chain management, sales force automation and enterprise resource planning
applications and with partners that currently provide technology solutions to
these businesses. Competition for relationships with companies such as these is
extremely intense.
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE ARE NOT
ABLE TO DEMONSTRATE COMPLIANCE WITH THE CONTINUED LISTING REQUIREMENTS FOR THAT
MARKET, AND THERE CAN BE NO GUARANTEE THAT OUR COMMON STOCK WILL BE ACCEPTED FOR
LISTING ON THE NASDAQ SMALL CAP MARKET.
Our common stock is currently listed on The Nasdaq National Market under
the symbol "GMGC." However, there is a significant risk that we may be delisted
from The Nasdaq National Market. In addition, if we do not raise sufficient
additional capital we may not meet the initial and continuing listing
requirements to transition (or maintain) the listing of our common stock on The
Nasdaq Small Cap Market.
On February 14, 2002, we received notice from Nasdaq that our stock had
traded below the $1.00 minimum per share price required for continued listing on
The Nasdaq National Market for thirty (30) consecutive trading days.
Accordingly, we were provided until May 15, 2002 to regain compliance with that
requirement. In order to do so the closing bid price of our stock must be at or
above $1.00 per share for a minimum of ten (10) consecutive trading days at any
time prior to May 15, 2002, or our stock will be delisted from The Nasdaq
National Market, subject to an elective appeals process. At that time, we may
either appeal a delisting determination, or request to be transferred to The
Nasdaq Small Cap Market. To transition to The Nasdaq Small Cap Market, we must
satisfy the continued inclusion requirements for The Nasdaq Small Cap Market,
with the exception of the requirement that we maintain a minimum $1.00 bid
price. If the transfer is approved, we will be granted an additional grace
period through August 13, 2002 in which to regain compliance with the $1.00
minimum bid price requirement for inclusion in The Nasdaq Small Cap Market. We
may then be eligible for an additional 180 calendar day grace period in which to
regain compliance with the $1.00 minimum bid price requirement for inclusion in
The Nasdaq Small Cap Market, provided we meet the initial listing requirements
for The Nasdaq Smallcap Market at that time. The "initial listing requirements"
for The Small Cap Market include stockholders equity of $5 million, or market
cap of $50 million, or net income of $750,000. We may be eligible to transfer
back to The Nasdaq National Market if we meet the $1.00 minimum bid price
requirement for thirty (30) consecutive trading days and meet all other
maintenance requirements of that market by February 10, 2003.
The delisting of our common stock from The Nasdaq National Market may
result in a reduction in some or all of the following, each of which may have a
material adverse effect on our investors:
- the liquidity of our common stock;
- the market price of our common stock;
- the number of institutional investors that will consider investing in our
common stock;
- the number of investors in general that will consider investing in our
common stock;
- the number of market makers in our common stock;
- the availability of information concerning the trading prices and volume
of our common stock;
- the number of broker-dealers willing to execute trades in shares of our
common stock; and
- our ability to obtain financing for the continuation of our operations.
12
IF OUR SECURITIES WERE DELISTED FROM THE NASDAQ NATIONAL MARKET AND NOT ACCEPTED
FOR LISTING ON, OR DELISTED FROM, THE NASDAQ SMALL CAP MARKET, THEY MAY BE
TREATED AS "PENNY STOCKS," WHICH WOULD FURTHER REDUCE THE LIQUIDITY IN OUR
COMMON STOCK AND MAKE IT MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES.
If our common stock were delisted from The Nasdaq National Market, and not
accepted for listing on, or delisted from, The Nasdaq Small Cap Market, it could
become subject to the SEC's "Penny Stock" rules. "Penny stocks" generally are
equity securities with a price of less than $5.00 per share that are not
registered on certain national securities exchanges or quoted on the Nasdaq
system. Broker-dealers dealing in our common stock would then be subject to the
disclosure rules for transactions involving penny stocks which require the
broker-dealer to determine if purchasing our common stock is suitable for a
particular investor. The broker-dealer must also obtain the written consent of
purchasers to purchase our common stock. The broker-dealer must also disclose
the best bid and offer prices available for our stock and the price at which the
broker-dealer last purchased or sold our common stock. These additional burdens
imposed upon broker-dealers may discourage them from effecting transactions in
our common stock, which could make it difficult for investors to sell their
shares and, hence, limit the liquidity of our common stock.
CONVERSION OF OUR SERIES G PREFERRED STOCK AND THE SALE OF THE RESULTING
CONVERSION SHARES WOULD DILUTE CURRENT STOCKHOLDERS AND COULD RESULT IN A
DECREASE IN OUR STOCK PRICE.
As of March 26, 2002, our outstanding Series G preferred stock (the last
remaining outstanding series of our preferred stock as of that date) was
convertible into approximately 8,907,363 shares of our common stock. The holders
of our Series G preferred stock have the right to convert their preferred shares
into shares of our common stock at any time. The holders of our common stock
would experience substantial dilution to their investment upon conversion of the
Series G preferred shares. In addition, the influx of the shares of common stock
issuable upon conversion of the preferred shares into the market could serve to
substantially drive down our stock price. For example, on March 25, 2002, the
holders of all of our then outstanding shares of Series H preferred stock
converted all of their shares of Series H preferred stock into 1,008,998 shares
of our common stock, which represented approximately 1.1% of our outstanding
common stock. On that day, the closing bid price of our common stock on The
Nasdaq National Market was 3.9% lower than the preceding day's closing price for
our common stock.
A decrease in the price of our common stock could cause our common stock to
be delisted from The Nasdaq National 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 for that market, and there
can be no guarantee that our common stock will be accepted for listing on The
Nasdaq Small Cap Market."
In addition, our board of directors may authorize the issuance of up to
427,101 additional shares of preferred stock that are convertible into common
stock and 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.
CONVERSION OF OUR PREFERRED STOCK AND THE SALE OF THE RESULTING COMMON STOCK
COULD ENCOURAGE OUR PREFERRED STOCKHOLDERS OR OTHERS TO "SHORT" OUR COMMON
STOCK, WHICH COULD RESULT IN A FURTHER DECREASE IN THE PRICE OF OUR COMMON
STOCK.
The significant downward pressure on the price of our common stock as our
preferred stockholders exercise their warrants, convert their preferred shares,
and sell material amounts of common stock could encourage short sales by our
preferred stockholders or others. An increase in the aggregate short position on
our common stock could result in further downward pressure on the price of our
common stock.
13
ANY FUTURE SALES OF OUR COMMON STOCK, INCLUDING THROUGH OUR ARRANGEMENTS WITH
HYPERION, LADENBURG THALMANN, ATLAS, OCCIDENTAL, OR OTHERWISE COULD RESULT IN
DILUTION TO OUR COMMON STOCKHOLDERS AND RESULT IN A DECREASE IN OUR STOCK PRICE.
We may seek to raise additional capital through the sale of our common
stock pursuant to our non-exclusive agreements with Hyperion, Atlas, and
Occidental, through which such financial advisors each agreed to assist us in
offering shares of our common stock to certain investors to be identified by
such financial advisors. In addition, we currently have an arrangement with the
investment banking firm of Ladenburg Thalmann pursuant to which we could seek to
raise an additional $15,000,000 upon the sale of our common stock. We may also
seek to raise additional capital otherwise than through our arrangements with
these financial advisors. The holders of our common stock could experience
substantial dilution when we raise additional capital pursuant to these
arrangements or otherwise. In addition, as we raise additional capital through
the sale of our common stock, the price of our common stock in the market could
decrease, especially if we place these additional shares at a discount to
market, as we have in the past. A decrease in the price of our common stock
could cause our common stock to be delisted from The Nasdaq National 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 for
that market, and there can be no guarantee that our common stock will be
accepted for listing on The Nasdaq Small Cap Market."
LEVERAGE MAY IMPAIR OUR FINANCIAL CONDITION.
In connection with the conversion of our Series D and Series F preferred
stock effective October 15, 2001, we issued 5% Secured Notes Due April 15, 2003
in the aggregate original principal amount of $1,250,000 (the "Notes") to
certain holders of our Series D and Series F preferred stock as an inducement to
convert their preferred stock. Such Series D and Series F holders also exchanged
481,024 shares of common stock and all warrants to purchase shares of our common
stock held by such investors that were issued in connection with the issuance of
our Series B Convertible Preferred Stock, Series D Convertible Preferred Stock
and Series H Convertible Preferred Stock (representing 1,013,776 shares). The
Notes are secured by all of the assets of General Magic.
The amount of our debt and long-term liabilities is significant in
comparison to our total assets. As of December 31, 2001, our total debt
(reflected by the Notes) is $1.25 million. In addition to the debt represented
by the Notes, we are also liable for repayment of prepaid royalties of $2
million, together with interest, on or before December 31, 2003 to OKI Electric
Industry Co., Ltd. under a 1994 license of our Magic Cap technology. Our debt
and long-term liabilities could have important consequences to our equity
holders, including:
- limiting our ability to obtain future financing to fund future working
capital, capital expenditures, acquisitions and other general corporate
requirements; and
- requiring a portion of our cash flow from operations for the payment of
interest and principal on our debt and reducing our ability to use our
cash flow to fund working capital, capital expenditures, acquisitions and
general corporate requirements.
SERVICING OUR DEBT WILL REQUIRE PERIODIC PAYMENTS OF CASH, AND OUR ABILITY TO
GENERATE SUFFICIENT CASH DEPENDS ON MANY FACTORS, SOME OF WHICH ARE BEYOND OUR
CONTROL.
Our ability to make payments on and refinance our debt and to fund planned
capital expenditures depends on our ability to generate cash flow in the future.
To some extent, this is subject to general economic, financial, and competitive
factors and other factors that are beyond our control. We cannot assure you that
our business will generate cash flow from operations or that we will be able to
raise sufficient capital in the future in an amount sufficient to enable us to
pay our debt or to fund other liquidity needs. As a result, we may need to
refinance all or a portion of our debt on or before maturity, and there can be
no assurance that such refinancing will be available to us. The Notes mature in
stages commencing January 15, 2002. We cannot assure you that we will be able to
meet our scheduled debt repayment obligations as they become due or
14
obtain refinancing for our debt on favorable terms, if at all. Any inability to
generate sufficient cash flow or to raise sufficient capital on favorable terms
could have a material adverse effect on our financial condition.
IF WE DEFAULT ON THE NOTES, THEN THE COLLATERAL AGENT FOR THE NOTE HOLDERS IS
AFFORDED CERTAIN RIGHTS AND REMEDIES WITH RESPECT TO OUR ASSETS THAT MAY
MATERIALLY AND ADVERSELY AFFECT OUR ABILITY TO OPERATE OUR BUSINESS.
If we default on the Notes, then the Collateral Agent for the Note holders
has numerous rights and remedies that may materially adversely affect our
ability to conduct our business on an ongoing basis including, without
limitation, the following:
- declaring the entire indebtedness due and payable under the Notes without
notice to us;
- assembling and selling the collateral, as though it were its own;
- foreclosing on the collateral;
- transferring title to the collateral;
- collecting revenues from the collateral (such as our accounts
receivable);
- endorsing negotiable instruments relating to the collateral;
- to the extent permitted by applicable law, having a receiver appointed;
and
- all other rights and remedies that are available to secured creditors
under the provisions of the New York Uniform Commercial Code, as amended
from time to time.
In addition, the holders of the Notes have priority over our equity holders
in the event of a liquidation of General Magic.
OUR VOICE INFRASTRUCTURE SOFTWARE PRODUCTS AND SERVICES CAN HAVE LONG SALES AND
IMPLEMENTATION CYCLES AND EACH SALE COULD BE SIGNIFICANT TO THE QUARTER IN WHICH
IT OCCURS. AS A RESULT, OUR QUARTERLY OPERATING RESULTS AND OUR STOCK PRICE MAY
FLUCTUATE.
Purchase of our voice infrastructure software 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, and many customers may attempt to
adopt our products and services on a "pilot" or test basis to assist in this
evaluation. We may spend many months providing information to prospective
customers regarding the use and benefits of our voice infrastructure software
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. If we are performing significant professional services in connection
with the implementation, we do not recognize software revenue immediately, but
rather on a percentage of completion basis or in some cases not until after
acceptance. 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.
Unfavorable economic conditions may cause businesses to reduce capital
expenditures on adoption of new technologies, including voice-driven
applications. 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.
15
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:
- variation in capital spending budgets of our prospective customers,
particularly in response to the current economic downturn;
- the timing of sales of our products and services, particularly in light
of the long sales cycles associated with the adoption of emerging voice
application technologies;
- delays in recognition of software license revenue in accordance with
applicable accounting principles where we are providing any significant
development assistance;
- the timing of product implementations, particularly the implementation of
large projects, such as the OnStar Virtual Advisor, with respect to which
we may not be able to recognize software revenue until after system
acceptance or deployment;
- the mix of product license and services revenue;
- our ability to develop, introduce, ship and support new and enhanced
products, such as new versions of our magicTalk Enterprise Platform suite
of voice infrastructure software products, that respond to evolving
customer requirements in a timely manner; and
- increased sales and product development expenses associated with our
efforts to increase sales and to bring the magicTalk Enterprise Platform
software suite to market.
Due to these factors, and because the market for our voice infrastructure
software and supporting services is new and rapidly evolving, our ability to
accurately forecast our quarterly sales is limited. Because of the difficulty in
predicting our future performance and the volatility of our quarterly results,
our operating results may fall below the expectations of analysts or investors
and, as a result, the price of our common stock may decline.
INTENSE COMPETITION IN THE MARKET FOR VOICE INFRASTRUCTURE SOFTWARE PRODUCTS AND
SERVICES COULD PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY.
The market for voice infrastructure software products and services is
intensely competitive. A number of companies have developed, or are expected to
develop, voice application technologies, products or services that compete with
ours. Competitors in the voice application and platform technologies markets
include companies that offer hosted or customer premises equipment-based
voice-activated solutions, such as Avaya Inc., Comverse Technology, Inc., Edify
Corporation, International Business Machines Corporation, Nortel Networks Corp.
and Syntellect 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.; companies that offer voice
platform technologies, such as Motorola, Inc., Nuance Communications Inc.,
Telera Inc. and VoiceGenie Technologies, Inc.; and companies in the voice portal
category, such as BeVocal, Inc., HeyAnita Inc., and Tellme Networks Inc.
Software developers such as Microsoft Corporation and Oracle Corp., or
telecommunications companies such as AT&T Corp. and Sprint Communications
Company, L.P. may extend their offerings to provide the capabilities of the
magicTalk Enterprise Platform voice infrastructure software product suite. 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
16
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 infrastructure software 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 infrastructure
software products and services obsolete and unmarketable.
Our success will depend upon our ability to timely develop and introduce
new voice infrastructure software 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 of new or enhanced
versions of the magicTalk voice infrastructure software could adversely affect
our revenues or results of operation. To be successful, we must continue to
develop and enhance our suite of voice infrastructure software products and
supporting 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 successful
introduction or marketing of new or improved products or services or the
delivery of new versions of our products or services.
IF WE ARE UNABLE TO RETAIN KEY TECHNICAL, PROFESSIONAL SERVICE, SALES, MARKETING
AND OPERATIONAL PERSONNEL, OUR BUSINESS COULD BE HARMED.
We rely upon the continued performance and services of our existing
employees, including key managerial, technical, operational and marketing
personnel. Our failure to attract, integrate, motivate and retain additional
employees or to motivate and retain existing employees could harm our business.
THE FAILURE OR UNAVAILABILITY OF THIRD-PARTY TECHNOLOGIES AND RELATED SERVICES
COULD LIMIT OUR ABILITY TO GENERATE REVENUES.
We have incorporated technology developed by third parties in certain of
the products and services offered to our customers, including the following:
- personalization software;
- email servers which process both emails and voice mails;
- voice recognition software;
- text-to-speech software; and
- network operations center servers, routers and other equipment.
17
We plan to continue to incorporate third-party technologies in future voice
infrastructure software 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 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 continues to experience an energy crisis that in the future
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.
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 seventeen patents issued by the United States Patent and Trademark
Office ("PTO") and certain counterpart patents in foreign jurisdictions. We have
fifteen 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.
18
OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, AND
RESULTING CLAIMS AGAINST US COULD BE COSTLY AND REQUIRE US TO ENTER INTO
DISADVANTAGEOUS LICENSE OR ROYALTY ARRANGEMENTS.
The software industry is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement
and the violation of intellectual property rights. Although we attempt to avoid
infringing proprietary rights of others, third parties may assert claims against
us from time to time alleging infringement, misappropriation or other violations
of proprietary rights, whether or not such claims have merit. Such claims can be
time consuming and expensive to defend and could require us to cease the use and
sale of allegedly infringing products and services, incur significant litigation
costs and expenses, and develop or acquire non-infringing technology or obtain
licenses to the alleged infringing technology. We may not be able to develop or
acquire alternative technologies or obtain such licenses on commercially
reasonable terms.
SECURITY PROBLEMS IN OUR VOICE APPLICATIONS OR IN OUR VOICE INFRASTRUCTURE
SOFTWARE PRODUCTS OR SERVICES WOULD LIKELY RESULT IN SIGNIFICANT LIABILITY AND
REDUCED REVENUES.
Security vulnerabilities and weaknesses may be discovered in our voice
applications or in our voice infrastructure software products or services, in
the licensed technology incorporated in our products or services, in our network
operations center hosting environment, or in the media by which end users access
our 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 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 products and services and may
result in lawsuits against us.
We plan to continue to incorporate security technologies in our 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
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.
19
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. 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. 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 December 31, 2001, the closing price of our common stock has
varied significantly from a high of $17.31 to a low of $0.27 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;
20
- 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.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 27, 2002, the executive officers of General Magic, who are
elected by and serve at the discretion of our Board of Directors, were as
follows:
<Table>
<Caption>
NAME AGE POSITION WITH THE COMPANY EMPLOYED SINCE
- ---- --- ------------------------- --------------
Kathleen M. Layton........................ 54 President and CEO January 2001
Jeffrey M. Adamson........................ 41 Vice President, Applications January 2000
Services
Mary E. Doyle............................. 49 Senior Vice President of Business July 1996
Affairs, General Counsel and
Secretary
Pericles Haleftiras, Jr................... 49 Chief Technology Officer April 2001
Mark Phillips............................. 49 Vice President, Product September 2001
Development
David H. Russian.......................... 49 Vice President and Chief Financial May 2001
Officer
Paula E. Skokowski........................ 39 Vice President, Marketing May 2000
Mark D. Strumwasser....................... 35 Vice President, Sales and Market April 2001
Development
</Table>
Kathleen M. Layton joined the Company as Chief Executive Officer and
President in January 2001. Ms. Layton has also served as a Director of the
Company since January 2001. Immediately prior to joining the Company, Ms. Layton
served as Chief Executive Officer of S.A.I.L. Port, a technology company
advancing speech, artificial intelligence and language. Prior to joining
S.A.I.L., Ms. Layton was the Chief Executive Officer and President of OmniVoice
Technologies, Inc., a joint venture integrating proprietary speech compression
technology with wireless and Internet technologies to create voice messaging
solutions for global wireless and Internet markets from February 1998 through
March 2000. From January 1997 to January 1998, Ms. Layton served as the Vice
President and Director of Business Development of AmeriTech Corporation and from
June 1989 to December 1996, she was the President and Chief Executive Officer of
Strata Group, formerly Logica's Network Products Division. Ms. Layton holds a
B.S. in Mathematics from Southeast Missouri State University and an Executive
M.B.A. from Washington University and has completed the Executive Program in
Credit Analysis, Equity Valuation and Financial Reporting at Northwestern
University's Kellogg Graduate School.
Jeffrey M. Adamson joined the Company in January 2000 as Vice President,
Network Operations and Information Technology and currently serves as our Vice
President of Applications Services. Before joining General Magic, Mr. Adamson
served International Rectifier Corporation in various capacities from December
1992 to January 2000, most recently as Manager of I.S. Operations and Global
Technical Architecture.
21
Mr. Adamson holds a B.S. degree in Accounting and a M.S. in Accounting
Information Systems from the University of Tennessee.
Mary E. Doyle joined the Company in July 1996 as General Counsel and
Secretary and served as our Vice President of Business Affairs from January 1997
until September 1998, when she was named Senior Vice President of Business
Affairs. Before joining General Magic, Ms. Doyle served Teledyne, Inc. in
various positions from July 1984 to July 1996, most recently as General Counsel
of the Aerospace and Electronics segment from January 1995 through July 1996.
Ms. Doyle received an A.B. in Biology and Economics from the University of
California, Santa Cruz, and a J.D. from the University of California, Berkeley.
Pericles Haleftiras, Jr. joined the Company in April 2001 as Chief
Technology Officer. Before joining the Company, Mr. Haleftiras was the Chief
Executive Officer and founder of Xerago, LLC, a Web software development
services company, from July 1999 to December 2001. From December 1998 to June
1999 Mr. Haleftiras was interim Chief Technical Officer of RX.com, an Internet
prescription fulfillment company, from July 1997 to November 1998 Mr. Haleftiras
was the Chief Technical Officer and founder of Cyber.com, which provided
broadband in-room entertainment systems to the hospitality industry, and from
May 1985 to July 1997 Mr. Haleftiras was president of Structured Technology
Corporation, a defense software engineering company. Mr. Haleftiras holds a B.S.
in Computer Science from Quinnipiac University.
Mark Phillips joined the Company in September 2001 as Vice President,
Product Development. Before joining the Company, Mr. Phillips served as Chief
Technical Officer and Vice President of Engineering of OPI Software, a
procurement software company, from November 2000 to September 2001. From April
1999 to November 2000, Mr. Phillips was Vice President of Engineering of Angara
e-Commerce Services, a Web-based content personalization software company, and
from April 1996 to April 1999 he was Chief Technical Officer and Vice President
of Engineering of Insession Inc., an integration services software company. From
July 1993 to April 1996 Mr. Phillips was Senior Designer and Architect at Tandem
Computers. Mr. Phillips holds a M.S. in Physics from Oxford University.
David H. Russian joined the Company in May 2001 as Vice President, Finance
and Administration, and Chief Financial Officer. Before joining the Company, Mr.
Russian served as Chief Financial Officer of Bidland.com, Inc., an internet
software company, from July 1999 to June 2000. From June 1997 to June 1998, Mr.
Russian provided consulting services to Elemental Software, Inc., an intranet
software development company, and Silicon Wave Inc., a RF systems-on-chips
manufacturing company, and cofounded Indiqu.com, a content provider to wireless
devices. From October 1994 to October 1996 Mr. Russian was Vice President and
Chief Financial Officer of Brooktree Corporation, Inc., a Nasdaq traded
communications, imaging and multimedia semiconductor company. Mr. Russian holds
a B.S. in Accounting from San Diego State University and is a Certified Public
Accountant in the State of California.
Paula E. Skokowski joined the Company in May 2000 as Vice President of
Marketing. Before joining General Magic, Ms. Skokowski served as Director of
Marketing at Echelon Corporation from May 1994 to May 2000. Ms. Skokowski holds
a B.A. in Engineering Science from Oxford University and a M.S. in Robotics from
the University of California, Berkeley.
Mark D. Strumwasser joined the Company in April 2001 as Vice President,
Sales and Market Development. Before joining the Company, Mr. Strumwasser served
as Vice President of Business Development and Sales for One Voice Technologies,
Inc. from July 1999 to April 2001. From July 1994 to July 1999, Mr. Strumwasser
was Director of Sales, Distribution Business Unit, for Creative Labs, Inc. Mr.
Strumwasser holds a B.S. in Business Administration and Finance from California
State University, Northridge.
ITEM 2. PROPERTIES
Our operations are located in a single building in Sunnyvale, California.
This facility consists of three floors, each comprising approximately 39,000
square feet. We currently occupy two of the three floors under a lease that
expires in June 2002. Effective January 2002, we entered into a new lease for
our current facility that will reduce our occupied space to approximately 59,000
square feet. This lease expires in June 2006. In
22
July 2001, we opened a sales and development office in Carlsbad, California that
consisted of approximately 2,000 square feet. The current lease expires in
August 2004. We do not own any real estate.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company effected an initial public offering ("IPO") on February 9,
1995, with its common stock traded on The Nasdaq National Market under the
symbol "GMGC." As of December 31, 2001, there were 926 stockholders of record of
the Company's common stock. Because many of such shares are held by brokers and
other institutions on behalf of stockholders, the Company is unable to estimate
the total number of stockholders represented by these holders of record. The
following table sets forth, for the quarters indicated, the high and low bid
price per share of the Company's common stock for the last two fiscal years as
reported on The Nasdaq National Market:
<Table>
<Caption>
PRICE RANGE
--------------
HIGH LOW
------ -----
CALENDAR 2001:
First Quarter............................................... $ 3.19 $1.03
Second Quarter.............................................. 1.90 0.63
Third Quarter............................................... 1.10 0.26
Fourth Quarter.............................................. 0.72 0.26
CALENDAR 2000:
First Quarter............................................... $18.75 $3.53
Second Quarter.............................................. 9.63 2.47
Third Quarter............................................... 8.63 4.25
Fourth Quarter.............................................. 6.16 1.06
</Table>
The Company has never paid cash dividends on its common stock. The Company
currently expects that it will retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying cash
dividends in the foreseeable future.
In consideration of the establishment of the Company's financing
arrangement with Paul Revere Capital Partners Ltd. ("Paul Revere"), the Company
issued warrants to purchase 200,000 shares of its common stock to Paul Revere,
effective March, 2001, in reliance on the exemption from securities registration
afforded by Rule 506 of Regulation D as promulgated by the United States
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The warrants have a three year term and are immediately exercisable.
In consideration of the establishment of the Company's financing
arrangement with Hyperion Partners Corp. ("Hyperion"), the Company issued
warrants to purchase 103,125 shares of its common stock to Hyperion, effective
as of December 2001, in reliance on the exemption from securities registration
afforded by Rule 506 of Regulation D as promulgated by the United States
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The warrants have a three year term and are immediately exercisable.
In consideration of the establishment of the Company's financing
arrangement with Atlas Capital Services, LLC ("Atlas"), the Company issued
warrants to purchase 267,713 shares of its common stock to Atlas, effective as
of December 2001, in reliance on the exemption from securities registration
afforded by
23
Rule 506 of Regulation D as promulgated by the United States Securities and
Exchange Commission under the Securities Act of 1933, as amended. The warrants
have a three year term and are immediately exercisable.
ITEM 6. SELECTED FINANCIAL DATA
This data should be read in conjunction with Item 8, Consolidated Financial
Statements and Supplementary Data thereto, and with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The consolidated statement of operations data and the consolidated balance
sheet data for each of the years in the five year period ended December 31,
2001, are derived from our consolidated financial statements. The diluted net
loss per share computation excludes potential shares of common stock (preferred
stock, options to purchase common stock, and warrants to purchase common stock)
since their effect would be antidilutive. See Note 1 of the Notes to
Consolidated Financial Statements for a detailed explanation of the
determination of the shares used to compute actual basic and diluted net loss
per share. The historical results are not necessarily indicative of results to
be expected for any future period.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenue........................... $ 5,632 $ 10,674 $ 2,484 $ 2,286 $ 3,456
Cost of revenue -- related party........ 2,633 4,538 195 -- --
Network operations...................... 5,233 9,068 7,387 3,405 --
Research and development................ 6,531 6,018 12,524 17,656 21,015
Selling, general and administrative..... 13,402 17,834 22,976 20,642 9,360
Depreciation and amortization........... 5,710 6,102 4,902 3,044 2,849
Write-off of acquired technology and
in-process research and development... -- -- -- 2,827 --
Loss from operations.................... (27,877) (32,886) (45,500) (45,651) (30,696)
Net loss................................ (27,536) (35,107) (47,575) (38,908) (28,384)
Loss applicable to common
stockholders.......................... (27,183) (42,893) (61,154) (61,783) (28,384)
Basic and diluted loss per share........ (0.38) (0.77) (1.56) (2.09) (1.06)
CONSOLIDATED BALANCE SHEET DATA:
Total assets............................ 15,345 30,973 41,705 47,298 36,297
Deferred revenue, noncurrent............ -- -- -- 2,000 4,186
Long-term debt.......................... 650 -- -- 3,778 3,199
Other long-term liabilities............. 2,581 2,161 2,692 683 2,446
Redeemable convertible preferred
stock................................. -- 7,136 10,274 28,235 --
Total stockholders' (deficit) equity.... 6,039 15,745 12,046 (1,113) 17,298
</Table>
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed in the Risk Factors section of Item 1
and elsewhere in this report on Form 10-K, 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.
OVERVIEW
General Magic, Inc. offers a suite of voice infrastructure software
products to Global 2000 companies to enable the rapid creation of
personality-rich voice access to new and existing Web-based enterprise
applications. This product suite, known as magicTalk(R), is comprised of the
Voice Gateway and the Enterprise Platform.
The magicTalk product suite is designed for use in building and deploying
voice-enabled enterprise applications in the emerging voice self-service market.
The Voice Gateway, first released in May 2001, integrates speech recognition,
text-to-speech, media resources and telephony technologies with a VoiceXML
interpreter to enable user-friendly telephone access to new or existing
enterprise applications and information. The Enterprise Platform, first released
in December 2001, is enterprise-class voice infrastructure software that allows
Web and Java(TM) developers to create their own brand of voice-applications that
communicate to the end user through the magicTalk Voice Gateway. The Enterprise
Platform includes prepackaged application design, system testing, debugging,
deployment and management software.
In addition to our magicTalk product suite, we offer supporting services.
These include product training, voice user interface design consulting,
technical support and hosting. In addition, we offer our customers application
development services, delivered directly or through professional services and
consulting companies with whom we partner.
The principal target market for our voice infrastructure software and
supporting services is the Global 2000 enterprise. We offer these enterprises
the ability to leverage investments in both call center and e-business
infrastructure (both intranets and extranets) to expand their business reach by
adding the voice channel to new and existing Web services and information. By
adding voice access to corporate information for customers, suppliers and
employees, enterprises can reduce costs, improve customer retention, improve
workforce productivity and increase revenues.
In 2001, our primary source of revenue was professional services and
hosting revenue from OnStar Corporation, a wholly-owned subsidiary of General
Motors Corporation. Going forward, we expect to reduce our dependency on OnStar
as we seek new customers for our recently released voice infrastructure software
suite of products.
The accompanying consolidated financial statements have been prepared on a
going concern basis, which means that they were prepared on the assumption that
we would have a continuity of operations, realization of assets, and liquidation
of liabilities and commitments in the normal course of business. Since our
inception, however, we have incurred significant losses, including a net loss of
$27.2 million for the twelve-month period ended December 31, 2001. As of
December 31, 2001, we had an accumulated deficit of $340.7 million. This,
combined with our current cash position, raises substantial doubt about our
ability to continue as a going concern. As of March 27, 2002, we had cash, cash
equivalents and short-term investment balances of $12.0 million, which includes
proceeds from the equity financing arrangement with institutional investors
concluded on March 27, 2002. A cash flow analysis, which was prepared as of
March 31, 2002 to determine whether we will be able to fund negative cash flows,
based on our current cash "burn" rate, through December 31, 2002, projects that
we require total estimated additional cash, cash equivalents and short-term
investments amounting to an additional $8.0 million as of March 31, 2002. This
analysis did not take into
25
account any increase in revenues from current customers, revenues from new
customers, or new financings for the period March 31, 2002 through December 31,
2002. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty, and there
can be no assurance that we will be able to generate sufficient additional
revenues or to raise sufficient additional cash to continue our operations on an
ongoing basis.
We plan to continue to spend significant amounts to develop, enhance and
maintain our voice infrastructure software products and services and to expand
our marketing and sales efforts. As a result, we will need to generate
significant revenues to achieve cash breakeven and profitability. There can be
no assurance that we will be successful in our efforts to reach cash breakeven
or 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 both cash breakeven and profitability, the price of our stock may
decline substantially.
The following tables set forth a summary of our unaudited quarterly
operating results for each of the eight quarters in the period ended December
31, 2001. The information has been derived from our unaudited consolidated
financial statements that, in management's opinion, have been prepared on a
basis consistent with the audited consolidated financial statements contained
elsewhere in this annual report and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of this
information when read in conjunction with our audited consolidated financial
statements and notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<Table>
<Caption>
FOR QUARTERS ENDED
-----------------------------------------------------------------------------
2001 2000
------------------------------------- -------------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31 MARCH 31 JUNE 30 SEPT 30 DEC 31
-------- ------- ------- ------ -------- ------- ------- ------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenue................... 1,216 982 1,619 1,815 2,596 2,262 3,183 2,633
Cost of revenue-related party... 524 411 805 893 1,171 1,359 975 1,033
Network operations.............. 1,461 1,412 1,236 1,124 3,080 2,948 1,291 1,749
Research and development........ 1,535 1,748 1,245 2,003 2,130 1,115 1,810 963
Selling, general and
administrative................ 3,611 3,971 3,050 2,770 7,053 4,771 2,792 3,218
Depreciation and amortization... 1,450 1,375 1,451 1,434 1,484 1,524 1,588 1,506
Loss from operations............ (7,365) (7,935) (6,168) (6,409) (12,322) (9,455) (5,273) (5,836)
------ ------ ------ ------ ------- ------- ------ ------
Net loss........................ (7,101) (7,708) (6,054) (6,673) (12,063) (9,072) (6,027) (7,945)
------ ------ ------ ------ ------- ------- ------ ------
Loss applicable to common
stockholders.................. (7,234) (7,790) (6,539) (5,620) (12,211) (16,545) (6,111) (8,026)
Basic and diluted loss per
share......................... (0.11) (0.11) (0.09) (0.07) (0.26) (0.32) (0.10) (0.13)
</Table>
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General Magic's discussion and analysis of its financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect our reported assets,
liabilities, revenues and expenses, and our related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, allowance for doubtful accounts,
and accounting for income taxes. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. This forms the basis of judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Factors that could cause or contribute to these differences include
the factors discussed above under Item 1, Business -- Risk Factors of this
report on Form 10-K.
26
Our critical accounting policies are as follows:
REVENUE RECOGNITION
Our revenue recognition policy is significant because our revenue is a key
component of our results of operations. Revenue recognition rules for software
companies are very complex and require following very specific and detailed
guidelines in measuring revenue; however, certain judgments affect the
application of our revenue policy. Revenue results are difficult to predict, and
any shortfall in revenue or delay in recognizing revenue could cause our
operating results to vary significantly from quarter to quarter and could result
in future operating losses.
We have generated our revenues primarily through the following two sources:
(a) service revenues; and (b) licensing revenues. Service revenues represent
fees associated with the initial development of the OnStar Virtual Advisor,
on-going development of new features and functionality for the OnStar Virtual
Advisor, maintenance, hosting and support services for the OnStar Virtual
Advisor, and subscription fees for the Portico service. Licensing revenues
primarily represent revenue from license fees for our technologies and royalty
revenue from original equipment manufacturer ("OEM") shipments of devices
incorporating our technologies.
The development fees for the OnStar Virtual Advisor are recognized under
the percentage-of-completion method based on either the achievement and
acceptance of milestones or the performance of services. Support, maintenance
and hosting fees for the OnStar Virtual Advisor are recognized ratably over the
period the service or maintenance is provided.
We generally recognize software license revenue in accordance with
Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. Revenue recognized from software arrangements is allocated to each
element of the arrangement based on the relative fair values of the elements,
such as software products, post contract customer support, installation or
training. The determination of fair value is based on objective evidence that is
specific to the vendor. If evidence of fair value for the undelivered elements
of the arrangement does not exist, all revenue from the arrangement is deferred
until such time as evidence of fair value does exist or until all elements of
the arrangement are delivered.
License revenue is recognized when there is persuasive evidence of an
arrangement and delivery to the customer has occurred, provided we have vendor
specific objective evidence of fair value for undelivered elements, if any, and
the arrangement does not require significant customization of software, the fee
is fixed and determinable and collectibility is considered probable. If the
arrangement involves significant customization of software, the fees, excluding
the portion attributable to maintenance, are recognized using the
percentage-of-completion method based on either the achievement and acceptance
of milestones or the performance of services. Revenue from associated
maintenance contracts is recognized ratably over the term of the maintenance
contract on a straight-line basis.
We recognize nonrefundable, nonrecoupable license fees upon delivery of our
technology to our licensees when we have no continuing obligation to the
customer. Royalties associated with OEM licensees are recognized upon shipment
of the product incorporating our technology to the OEM's customers provided that
the collection of the related receivable is deemed probable. Royalties
associated with potential OEM product returns are estimated and provided for in
the period of sale. Licensing revenue from network operators is recognized as
earned based upon usage and, in certain cases, based on subscriber registration.
Advance payments of licensing revenue and fees received prior to revenue
recognition are recorded as deferred revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
A considerable amount of judgment is required when we assess the ultimate
realization of receivables, including assessing the probability of collection,
current economic trends, historical bad debts and the current credit-worthiness
of each customer. We maintain allowances for doubtful accounts that may result
from the inability of our clients to make required payments. For the year ended
December 31, 2001, accounts receivable from one major customer, OnStar
Corporation, accounted for 95% of total accounts receivable. If the financial
27
condition of OnStar were to deteriorate resulting in an impairment of its
ability to make payments, we may make additional allowances thus increasing the
expense for bad debt. Additionally, if future bad debts differ from our
historical loss experience, additional bad debt expense will be recognized above
our estimates.
ACCOUNTING FOR INCOME TAXES
As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. We must then assess the
likelihood that our net deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To date, we have established a 100% valuation
allowance against our deferred tax assets.
RESULTS OF OPERATIONS
The Company recorded a net loss applicable to common stockholders of $27.2
million, or $0.38 per share, for the year ended December 31, 2001, compared to a
net loss applicable to common stockholders of $42.9 million, or $0.77 per share,
for the year ended December 31, 2000, and a net loss applicable to common
stockholders of $61.2 million, or $1.56 per share, for the year ended December
31, 1999. The net loss per share for the year ended December 31, 2001, included
the net loss for the period and $353 thousand in net adjustments to accumulated
deficit related to dividends on preferred stock, preferred stock and warrants
with beneficial conversion rights issued during the period, and the conversion
of Series D and Series F preferred stock at a discount to carrying value.
Excluding the effect of these adjustments, the loss per share for the year ended
December 31, 2001, would remain $0.38 per share. The net loss per share for the
year ended December 31, 2000, included the net loss for the period and $7.8
million in adjustments to accumulated deficit related to dividends on preferred
stock and preferred stock and warrants with beneficial conversion rights issued
during the period. Excluding the effect of these adjustments, the loss per share
for the year ended December 31, 2000, would have been $0.63 per share. The net
loss per share for the year ended December 31, 1999, included the net loss for
the period and $13.6 million in adjustments to accumulated deficit related to
preferred stock with beneficial conversion rights issued during the period.
Excluding the effect of these adjustments, the loss per share for the year ended
December 31, 1999, would have been $1.22 per share.
REVENUE
Total revenue for the year ended December 31, 2001, was $5.6 million,
compared to $10.7 million and $2.5 million for the years ended December 31, 2000
and 1999, respectively. Total revenue for 2001 consists primarily of
development, support, and hosting fees for the OnStar Virtual Advisor and
subscription fees for the Portico service. Total revenue for 2000 consists of
service revenue primarily related to the development of the OnStar Virtual
Advisor. Total revenue for 1999 consists of license fees for the Company's Magic
Cap and software modem technologies, subscription fees for the Portico service,
and revenue for the development of the Virtual Advisor for OnStar. Service
revenue for 1999 consists of subscription fees for the Portico service and
OnStar development fees. Licensing revenue for 1999 includes $1.5 million
associated with a license to Mitsubishi Electric Corporation ("MELCO"), which
became effective in August 1999 pursuant to the terms of a June 1997 settlement
agreement. The decrease in total revenue from 2000 to 2001 was primarily due to
a reduction in revenues associated with the initial development of the OnStar
Virtual Advisor and was partially offset by new revenue resulting from the
development of new features and functionality requested for the Virtual Advisor
service, and maintenance, hosting and support of the service. The increase in
total revenue from 1999 to 2000 was due primarily to service revenue for the
OnStar Virtual Advisor.
For the year ended December 31, 2001, we derived approximately 95% of our
total revenues from a single customer, OnStar Corporation, a subsidiary of
General Motors Corporation. OnStar is not contractually obligated to purchase
further development services from us after the expiration of the Services
Addendum in August 2002, or to extend the network operations contract at the
expiration of its current term in
28
December 2002. In addition, OnStar may terminate its network operations
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. There can be no assurance that we will continue to receive
significant revenues from OnStar in the future if we are unable to extend the
Services Addendum beyond August 2002, or to extend the network operations
contract beyond the end of 2002. For more information on the risks posed by our
reliance on a single major customer, please see "Risk Factors -- We currently
rely on a major customer (a related party) for substantially all of our
revenues."
COST OF SERVICE REVENUE -- RELATED PARTY
Cost of service revenue -- related party for the year ended December 31,
2001, was $2.6 million compared to $4.5 million and $195 thousand for the years
ended December 31, 2000 and 1999, respectively. In 2001, 2000 and 1999, the cost
of service revenue related to the services performed for OnStar. The decrease in
cost of service revenue from 2000 to 2001 was primarily due to a reduction in
initial development costs associated with the OnStar Virtual Advisor and was
partially offset by the development cost of new features and functionality
requested for the Virtual Advisor service, and maintenance, hosting and support
of the service. The increase in cost of service revenue from 1999 to 2000 was
directly related to the increase in initial development costs associated with
the OnStar Virtual Advisor.
NETWORK OPERATIONS
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. Network operations expense for
the year ended December 31, 2001, was $5.2 million compared to $9.1 million and
$7.4 million for the years ended December 31, 2000 and 1999, respectively. The
decrease in network operations expense from 2000 to 2001 was primarily due to
the discontinuation of the myTalk service and expense reduction in
telecommunications charges associated therewith. The increase in network
operations expense from 1999 to 2000 was due to the continued build up of the
network operations center to support myTalk and the OnStar Virtual Advisor.
RESEARCH AND DEVELOPMENT
Research and development expense for the year ended December 31, 2001, was
$6.5 million, compared to $6.0 million and $12.5 million for the years ended
December 31, 2000 and 1999, respectively. The increase from 2000 to 2001 was
primarily due to expenses associated with the development of our magicTalk
Enterprise Platform suite of voice infrastructure software products. The
decrease from 1999 to 2000 was due to the direct charging of development costs
to OnStar Virtual Advisor, which is a part of cost of service revenue. To date,
the Company has expensed all software development costs as incurred.
We expect research and development expenses to increase modestly in 2002 as
compared to 2001 as we continue to enhance our voice infrastructure software
product suite.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the year ended December 31,
2001, was $13.4 million compared to $17.8 million and $23.0 million for the
years ended December 31, 2000 and 1999, respectively. The decrease from 2000 to
2001 was primarily due to a reduction in marketing expenses associated with the
discontinued myTalk service coupled with staff reductions and lower professional
service expenses in the general and administrative areas. These reductions were
partially offset by increased spending to develop market demand and distribution
channels for our voice infrastructure software and supporting services. The
decrease from 1999 to 2000 was due to the discontinuation of the myTalk service
and general cost reduction efforts.
We expect that our selling expense will increase significantly in 2002
compared to 2001 as a result of our continued efforts to develop market demand
and distribution channels for our voice infrastructure software and supporting
services.
29
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the year ended December 31, 2001,
was $5.7 million compared to $6.1 million and $4.9 million for the years ended
December 31, 2000 and 1999, respectively. The decrease from 2000 to 2001 was
primarily due to a reduction in equipment purchases for our network operations
center and the end of depreciable lives for many of the network operations
center assets purchased in 1998. The increase from 1999 to 2000 was primarily
due to equipment purchases for our network operations center made during 2000.
OTHER INCOME (EXPENSE), NET
Total other income (expense), net for the year ended December 31, 2001 was
$343 thousand, compared to $(2.2) million and $(2.1) million for the years ended
December 31, 2000 and 1999, respectively. The decrease in expense from 2000 to
2001 was due primarily to the write-off of $2.8 million of impaired investments
in Icras, Inc. ("Icras") and Conita Technologies, Inc. and cancellation fees
associated with the discontinuance of the myTalk service recorded in 2000. The
expense in 1999 included the recognition of a loss of $(3.6) million to account
for 100% of the net losses of Icras through July 31, 1999.
Excluding the losses from impaired investments, expense associated with the
discontinuance of the myTalk service, and the Icras losses, other income, net,
consisted primarily of interest income and expense. The fluctuations in interest
income from 2000 to 2001 and from 1999 to 2000 were primarily due to the
Company's fluctuating cash, cash equivalent and short-term investment balances.
Future net interest income is likely to decrease as cash equivalents and
short-term investments are consumed by our normal operating requirements, unless
we generate additional cash.
INCOME TAXES
Income taxes for the year ended December 31, 2001, were $2 thousand,
compared to $39 thousand and $23 thousand for the years ended December 31, 2000
and 1999, respectively. Income taxes were primarily related to the annual
Delaware Franchise Tax.
LIQUIDITY AND CAPITAL RESOURCES
One of the primary material known uncertainties with respect to our
financial condition centers on our need to generate additional revenues or to
obtain additional funding to support our continuing operations through December
31, 2002 (see "Risk Factors -- We have a history of losses and our ability to
continue as a going concern is at risk"). Our principal sources of liquidity are
our cash, cash equivalents and short-term investment balances that totaled $12.0
million as of March 27, 2002, which includes proceeds from the equity financing
arrangement with institutional investors we concluded on March 27, 2002 (see
Subsequent Events -- Note 14 to the accompanying consolidated financial
statements). A cash flow analysis, which was prepared as of March 31, 2002 to
determine, based on our current cash "burn" rate, whether we will be able to
fund negative cash flows through December 31, 2002 with this $12.0 million
balance at March 31, 2002, projects that we require total estimated additional
cash, cash equivalents and short-term investments of approximately $8.0 million
to fund our operations through December 31, 2002. Based on our average monthly
cash "burn" rate of $1.8 million per month for the fiscal year ended December
31, 2001, we currently expect our cash, cash equivalents and short-term
investment balances of $12.0 million as of March 27, 2002 will be sufficient to
fund our operations into September 2002. (Please note that this is a
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act of 1995). This raises substantial doubt about our ability
to continue as a going concern.
We will be required to generate additional revenue or to raise additional
public or private financing to support our continuing operations beyond
September 2002. There can be no assurance that our efforts to generate or to
raise this additional capital will be successful or that if successful, we will
be able to raise additional capital on terms favorable to our company or our
stockholders. If adequate funds are not available to satisfy our short-term or
long-term capital requirements, we will be required to significantly limit its
operations, which will have a material adverse effect on our business, financial
condition and ongoing
30
operations. In the event we raise additional equity financing, further dilution
to our stockholders will likely result. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
To accomplish our goal of seeking to raise additional capital, we have
entered into several non-exclusive financing arrangements with Hyperion Partners
Corp., a Georgia based investment banking firm, Ladenburg Thalmann & Co., Inc.,
a New York based investment banking firm, and others, as described below. The
market for private equity investments in public companies is currently, in
management's view, difficult and unpredictable. Accordingly, there can be no
assurance that we will be successful in our efforts to identify investors to
invest in our equity securities or that current unfavorable market conditions
will improve. As such, no assurance can be given that we will be able to raise
sufficient funds to meet our needs.
On September 7, 2000, we entered into a letter agreement with the
investment banking firm of Ladenburg Thalmann & Co., Inc., pursuant to which
Ladenburg Thalmann agreed to act as our exclusive placement agent for the
offering of up to $45,000,000 worth of the Company's common stock on a
"reasonable best efforts" basis. From November 29, 2000 through July 18, 2001,
the Company consummated sales of 9,545,410 shares of its common stock to
institutional investors identified by Ladenburg Thalmann for an aggregate
purchase price of $16,599,313. This arrangement with Ladenburg Thalmann expired
on March 31, 2001.
On June 28, 2001, we renewed our relationship with Ladenburg Thalmann by
entering into a non-exclusive placement agent and financial advisory agreement
with that firm, pursuant to which they agreed to assist us in the offering of up
to $15,000,000 worth of our common stock on a "reasonable best efforts" basis.
Under this arrangement, which is scheduled to expire on April 30, 2002 (unless
extended by the parties), 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
institutional investors. As of March 31, 2002, we had not yet raised any capital
pursuant to this agreement.
On November 7, 2001, we entered into a non-exclusive financial consulting
agreement with Hyperion Partners Corp. ("Hyperion"), pursuant to which Hyperion
agreed to assist us in the offering of shares of our common stock to
institutional investors who may wish to purchase our common stock from time to
time on specific terms to be negotiated between us and such institutional
investors. This engagement is scheduled to expire on May 6, 2002, unless
extended by the parties. As of March 31, 2002, we had raised approximately $8.1
million pursuant to this arrangement.
On November 21, 2002, we entered into a non-exclusive financial consulting
agreement with Atlas Capital Services, LLC ("Atlas"), pursuant to which Atlas
agreed to assist us in the offering of shares of our common stock in private
placements of up to $5,000,000 on a "reasonable best efforts" basis to
institutional investors who may wish to purchase our common stock from time to
time on specific terms to be negotiated between us and such institutional
investors. This engagement is scheduled to expire on May 21, 2002, unless
extended by the parties. As of March 31, 2002, we had raised approximately $3.6
million pursuant to this arrangement.
On February 18, 2002, we entered into a non-exclusive financial consulting
agreement with Occidental Solutions, Inc. ("Occidental"), pursuant to which
Occidental agreed to assist us in the offering of shares of our common stock in
private placements of at least $500,000 on a "best efforts" basis to
institutional investors who may wish to purchase our common stock from time to
time on specific terms to be negotiated between us and such institutional
investors. As of March 31, 2002, we had not yet raised any capital pursuant to
this arrangement.
Hyperion, Ladenburg Thalmann, Atlas, and Occidental are not committed to
purchase any of our securities, regardless of whether they do or do not
successfully identify others that are interested in purchasing or that do in
fact purchase our securities. We, in turn, are not obligated to sell any of our
securities to any prospective purchaser successfully identified by Hyperion,
Ladenburg Thalmann, Atlas or Occidental.
In consideration of the services to be rendered by such placement agents in
connection with these arrangements, we have agreed to pay cash fees, payable
upon the closing of the sale of any of the Company's
31
securities arranged by such agents, ranging from 3% to 4% of the amount that we
procure at such closing. In addition, we have agreed, in some cases, to
indemnify such agents against certain liabilities that may arise under the
Securities Act of 1933, as amended and, in some cases, to provide warrant
coverage of up to 3% of the amount of securities offered by us in a financing
arranged by such placement agents.
On September 26, 2001 we reached an agreement with certain of our investors
who held more than 40 percent of the then-outstanding Series D and Series F
preferred stock through which such investors converted all of their Series D and
Series F preferred stock holdings into 3,163,436 shares of the Company's common
stock and we redeemed all warrants held by them to purchase shares of the
Company's common stock. We paid the investors $400,000, together with $16,000 in
legal fees, for a total of $416,000, as an inducement to such investors to
convert their preferred stock holdings, which is reflected as dividends on
preferred stock paid in the third quarter so that the inducement will be
properly reflected in the loss applicable to the Company's common stockholders
in calculating loss per share. The conversion price for the Series D and Series
F preferred stock was $1.08 and $0.81 per share respectively.
Under a second agreement, effective as of October 15, 2001, the remaining
investors in the Company's Series D and Series F preferred stock converted their
Series D and Series F preferred stock into 4,581,022 shares of the Company's
common stock, and returned all warrants held by them and 481,024 shares of
common stock in exchange for notes aggregating $1,250,000, to be paid over the
18-month period from January 15, 2002 to April 15, 2003.
On October 16, 2001, we recorded a discount of $1.1 million that resulted
from the conversion of the remaining Series D and Series F preferred stock
referenced above.
On March 11, 2002, we notified the holders of our Series H preferred stock
of our election to exercise our right to require the conversion of all of the
outstanding shares of Series H preferred stock into shares of the Company's
common stock on March 25, 2002. On March 25, 2002, all outstanding shares of
Series H preferred stock (580 shares) were converted into 1,008,998 shares of
common stock. As of March 31, 2002, the Series G Convertible Preferred Stock,
which is held by General Motors Corporation, is the only outstanding series of
preferred stock in our Company.
In July of 2001, the Securities and Exchange Commission (SEC) issued Staff
Topic No. D-98, which provides clarification on the classification and
measurement of redeemable equity securities. This announcement provides
clarification about the balance sheet classification and measurement of
securities subject to either mandatory redemption features or whose redemption
is outside the control of the issuer. Our Series F preferred stock, which was
issued in September 1999 and completely converted into common stock as of
October 2001, had been classified as permanent equity. Based on the guidance in
Topic No. D-98, we have reclassified the Series F preferred stock outside of
permanent equity for all periods presented. Staff Topic D-98 is required to be
adopted retroactively on December 31, 2001.
In connection with our prior strategy, we entered into Magic Cap master
license agreements with eight of our Company's stockholders. We have satisfied
our obligations under seven of these agreements, and are subject to the
following obligations under the remaining agreement. We have 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 December 31, 2001, this obligation was
classified in other long-term liabilities and totaled $2.6 million. We do not
expect the licensee to develop or manufacture additional products that
incorporate the Company's Magic Cap technology.
As part of our 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. We have not made any significant
commitment or agreement with respect to any such transaction at this time.
32
Future operating cash flows relating to such leases are expected to be as
follows:
<Table>
<Caption>
OPERATING
YEARS ENDING DECEMBER 31, LEASES
------------------------- ---------
2002....................................................... $ 835
2003....................................................... 1,568
2004....................................................... 1,596
2005....................................................... 1,609
2006....................................................... 817
------
Total minimum lease payments..................... $6,425
======
</Table>
As of December 31, 2001 the Company leased two facilities under operating
leases extending through 2002 and 2004, respectively. Effective January 2002,
the Company entered into a new lease for its current facility that will commence
on July 1, 2002 and expires on June 30, 2006, with an option to extend the lease
term for a twenty-four month period beginning July 1, 2006 and expiring June 30,
2008. These leases require the Company to pay all executory costs, such as
maintenance and insurance, and provide for escalating rent payments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited exposure to financial market risks, including
changes in interest rates. The fair value of the Company's 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 its investment portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company required by
this Item are set forth at the pages indicated at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
Certain information required by Part III is omitted from this report in
that the Company intends to file its definitive proxy statement pursuant to
Regulation 14A (the "definitive Proxy Statement") not later than 120 days after
the end of the fiscal year covered by this report, and certain information
therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
information set forth in the definitive Proxy Statement under the heading
"Proposal No. 1 -- Election of Directors" and in Part I of this report under the
heading "Executive Officers of the Registrant."
The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to information set forth in the definitive Proxy Statement under the
heading "Executive Compensation and Other Matters."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
information set forth in the definitive Proxy Statement under the heading
"Executive Compensation and Other Matters."
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
information set forth in the definitive Proxy Statement under the heading "Stock
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
information set forth in the definitive Proxy Statement under the heading
"Certain Relationships and Related Transactions." See also Item 1
(Business -- Relationship with General Motors) of Part I of this Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
1. Financial Statements
<Table>
<Caption>
PAGE
----
Report of Management........................................ 35
Report of Independent Auditors.............................. 36
Consolidated Balance Sheets................................. 37
Consolidated Statements of Operations....................... 38
Consolidated Statements of Stockholders' Equity (Deficit)... 39
Consolidated Statements of Cash Flows....................... 40
Notes to Consolidated Financial Statements.................. 41
</Table>
2. Financial Statement Schedules
All schedules have been omitted because the required information is
not present or not present in amounts sufficient to require submission of
the schedules or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
3. Exhibits
See Index to Exhibits. The Exhibits listed in the accompanying Index
to Exhibits are filed as part of this report.
(b) Reports on Form 8-K
A Form 8-K was filed on October 1, 2001 to report that the Company had
concluded an agreement with certain of its investors to convert their Series D
and Series F preferred stock into common stock and to redeem all warrants to
purchase common stock of the Company held by them.
A Form 8-K was filed on October 18, 2001 to report that the Company had
concluded an agreement with certain of its investors to convert their Series D
and Series F preferred stock into common stock and to exchange 481,024 of the
converted shares, together with all warrants exercisable for common stock of the
Company held by them for a 5% subordinated note secured by the assets of the
Company in the original principal amount of $1,250,000.
A Form 8-K was filed on October 25, 2001 to report the Company's third
quarter 2001 financial results.
34
A Form 8-K/A was filed on November 9, 2001 to disclose portions of the
Development and License Agreement between the Company and General Motors
Corporation which had been redacted in the Company's original 8-K filing on
February 2, 2000.
A Form 8-K was filed on December 5, 2001 to report that the Company had
concluded a private financing transaction in which it sold an aggregate of
14,705,000 shares of its common stock to institutional investors for an
aggregate purchase price of $4,705,600.
A Form 8-K was filed on December 18, 2001 to announce the availability of
the Company's magicTalk Enterprise Platform 1.0 and to announce that a Fortune
10 services, technology and manufacturing company was among the first licensees
of the Platform.
35
REPORT OF MANAGEMENT
Responsibility for the preparation, integrity and objectivity of the
financial information presented in this annual report rests with the management
of General Magic, Inc. (the "Company"). The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, applying certain estimates and
judgments as required.
The Company maintains a system of internal accounting control designed to
be cost-effective while providing reasonable assurance that assets are
safeguarded and that transactions are executed in accordance with management's
authorization and are properly recorded in the financial records. Internal
control effectiveness is supported through careful selection and training of
personnel and quarterly financial reviews with the Company's senior management.
Management believes that the Company's internal controls provide reasonable
assurance that errors or irregularities that could be material to the
consolidated financial statements are prevented or would be detected within a
timely period by employees in the normal course of performing their assigned
functions.
KPMG LLP is retained to express an opinion on the Company's consolidated
financial statements. Their opinion is based on procedures believed by them to
be sufficient to provide reasonable assurance that the consolidated financial
statements are free of material misstatement.
The Audit Committee of the Board of Directors is composed solely of
nonemployee directors, and is responsible for recommending to the Board the
independent auditors firm to be retained for the coming year, subject to
stockholder approval. The Audit Committee meets periodically and privately with
the independent auditors and with the Company's management to review accounting,
auditing, internal control and financial reporting matters.
Kathleen M. Layton
Chief Executive Officer and President
David H. Russian
Chief Financial Officer
36
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of General Magic, Inc.:
We have audited the accompanying consolidated balance sheets of General
Magic, Inc. and subsidiary as of December 31, 2001 and 2000, 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, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of General
Magic, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has an accumulated deficit of $340.7 million at
December 31, 2001. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG LLP
Mountain View, California
February 1, 2002, except as to Note 1 and Note 14,
which are as of March 27, 2002
37
GENERAL MAGIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-------------------------
2001 2000
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,989 $ 12,344
Short-term investments.................................... 995 6,700
Accounts receivable (includes related party receivables of
$1,179 and $1,537 at December 31, 2001 and December 31,
2000 respectively)..................................... 1,247 1,924
Other current assets...................................... 561 747
--------- ---------
Total current assets.............................. 11,792 21,715
--------- ---------
Property and equipment, net................................. 3,460 8,761
Other assets................................................ 93 497
--------- ---------
Total assets...................................... $ 15,345 $ 30,973
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 987 $ 1,888
Accrued expenses.......................................... 3,613 3,763
Notes Payable -- current.................................. 613 --
Deferred revenue and other current liabilities............ 862 280
--------- ---------
Total current liabilities......................... 6,075 5,931
Other long-term liabilities................................. 3,231 2,161
--------- ---------
Total liabilities................................. $ 9,306 $ 8,092
========= =========
Commitments
Redeemable, convertible Series D and Series F preferred
stock, $0.001 par value stated at involuntary liquidation
preference; authorized: 3 shares; issued and outstanding:
2001 -- 0; 2000 -- 1...................................... $ -- $ 7,136
Stockholders' equity:
Convertible preferred stock, $0.001 par value authorized:
424 shares; issued and outstanding: 2001 -- 2;
2000 --2............................................... 2 2
Common stock, $0.001 par value; authorized: 150,000
shares; issued and outstanding: 2001 -- 93,388;
2000 -- 64,861......................................... 93 65
Additional paid-in capital................................ 347,174 329,431
Accumulated other comprehensive gain/(loss)............... 1 (3)
Accumulated deficit....................................... (340,730) (313,547)
Less treasury stock, at cost: 2001 -- 527; 2000 -- 46..... (501) (203)
--------- ---------
Total stockholders' equity........................ 6,039 15,745
--------- ---------
Total liabilities and stockholders' equity........ $ 15,345 $ 30,973
========= =========
</Table>
The Notes to Consolidated Financial Statements are an integral part of these
financial statements.
38
GENERAL MAGIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Service revenue -- related party.......................... $ 5,357 $ 10,122 $ 310
Service revenue........................................... $ 214 $ 472 $ 604
Licensing revenue......................................... 61 80 1,570
-------- -------- --------
Total revenue..................................... 5,632 10,674 2,484
-------- -------- --------
Costs and expenses:
Cost of service revenue -- related party.................. 2,633 4,538 195
Network operations........................................ 5,233 9,068 7,387
Research and development.................................. 6,531 6,018 12,524
Selling, general and administrative....................... 13,402 17,834 22,976
Depreciation and amortization............................. 5,710 6,102 4,902
-------- -------- --------
Total costs and expenses.......................... 33,509 43,560 47,984
-------- -------- --------
Loss from operations........................................ (27,877) (32,886) (45,500)
Other income (expense), net................................. 343 (2,182) (2,052)
-------- -------- --------
Loss before income taxes.................................... (27,534) (35,068) (47,552)
Income taxes................................................ 2 39 23
-------- -------- --------
Net loss.................................................. (27,536) (35,107) (47,575)
-------- -------- --------
Beneficial conversion and redemption rights on redeemable,
convertible Series B preferred stock, beneficial exercise
rights on warrants and preferred stock dividend........... -- -- (112)
Beneficial redemption rights on redeemable, convertible
Series C preferred stock and preferred stock dividend..... -- -- (522)
Beneficial redemption rights on redeemable, convertible
Series D preferred stock and preferred stock dividend..... (67) (160) (602)
Beneficial redemption rights on redeemable, convertible
Series F preferred stock and preferred stock dividend..... (579) (260) (609)
Beneficial conversion rights on convertible Series G
preferred stock........................................... -- -- (11,734)
Beneficial conversion rights on convertible Series H
preferred stock........................................... (64) (7,366) --
Conversion of Series D and Series F preferred stock at a
discount.................................................. 1,063 -- --
-------- -------- --------
Loss applicable to common stockholders...................... $(27,183) $(42,893) $(61,154)
======== ======== ========
Basic and diluted loss per share............................ $ (0.38) $ (0.77) $ (1.56)
======== ======== ========
Shares used in computing per share amounts.................. 72,402 55,441 39,098
======== ======== ========
</Table>
The Notes to Consolidated Financial Statements are an integral part of these
financial statements.
39
GENERAL MAGIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS
--------------- --------------- PAID-IN ACCUMULATED TREASURY EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL OTHER DEFICIT STOCK (DEFICIT)
------ ------ ------ ------ ---------- ----- ----------- -------- ------------
(IN THOUSANDS)
BALANCES, DECEMBER 31,
1998...................... 50 $-- 33,400 $33 $208,557 $-- $(209,500) $(203) $ (1,113)
--- -- ------ --- -------- --- --------- ----- --------
Issuance of common stock
under stock option and
purchase plans............ -- -- 1,087 1 1,993 -- -- -- 1,994
Issuance of Series D
preferred stock........... -- -- -- -- 251 -- (251) -- --
Issuance of Series E
preferred stock........... 1 -- -- -- 5,967 -- -- -- 5,967
Issuance of Series F
preferred stock........... -- -- -- -- -- -- (485) -- (485)
Issuance of Series G
preferred stock........... 2 2 -- -- 25,528 -- (11,734) -- 13,796
Issuance of common stock
under equity line......... -- -- 187 -- 246 -- -- -- 246
Conversion of preferred
stock..................... -- -- 8,574 9 30,332 -- -- -- 30,341
Dividends on preferred
stock..................... -- -- -- -- -- -- (1,109) -- (1,109)
Compensation associated with
stock options............. -- -- -- -- 772 -- -- -- 772
Accumulated other
comprehensive loss........ -- -- -- -- -- (3) -- -- (3)
Net loss.................... -- -- -- -- -- -- (47,575) -- (47,575)
--- -- ------ --- -------- --- --------- ----- --------
BALANCES, DECEMBER 31,
1999...................... 53 2 43,248 43 273,646 (3) (270,654) (203) 2,831
--- -- ------ --- -------- --- --------- ----- --------
Issuance of common stock
under stock option and
purchase plans............ -- -- 1,365 2 4,770 -- -- -- 4,772
Issuance of Series H
preferred stock........... 2 -- -- -- 28,006 -- (7,366) -- 20,640
Issuance of common stock.... -- -- 3,897 4 8,904 -- -- -- 8,908
Conversion of preferred
stock..................... (53) -- 16,351 16 13,758 -- -- -- 13,774
Dividends on preferred
stock..................... -- -- -- -- -- -- (420) -- (420)
Compensation associated with
stock options............. -- -- -- -- 347 -- -- -- 347
Net loss.................... -- -- -- -- -- -- (35,107) -- (35,107)
--- -- ------ --- -------- --- --------- ----- --------
BALANCES, DECEMBER 31,
2000...................... 2 $2 64,861 $65 $329,431 $(3) $(313,547) $(203) $ 15,745
=== == ====== === ======== === ========= ===== ========
Issuance of common stock
under stock option and
purchase plans............ -- -- 60 -- 83 -- -- -- 83
Issuance of common stock.... -- -- 20,621 20 12,266 -- -- -- 12,286
Conversion of preferred
stock..................... -- -- 7,846 8 5,331 -- 1,063 (298) 6,104
Dividends on preferred
stock..................... -- -- -- -- 64 -- (710) -- (646)
Compensation associated with
stock options............. -- -- -- -- (1) -- -- -- (1)
Accumulated other
comprehensive loss........ -- -- -- -- -- 4 -- -- 4
Net loss.................... -- -- -- -- -- -- (27,536) -- (27,536)
--- -- ------ --- -------- --- --------- ----- --------
BALANCES, DECEMBER 31,
2001...................... 2 $2 93,388 $93 $347,174 $ 1 $(340,730) $(501) $ 6,039
=== == ====== === ======== === ========= ===== ========
</Table>
The Notes to Consolidated Financial Statements are an integral part of these
financial statements.
40
GENERAL MAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $(27,536) $(35,107) $(47,575)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 5,710 6,102 4,902
Loss on sale of property and equipment.................... 165 162 --
Equity in net loss of unconsolidated affiliate............ -- -- 3,557
Write down of impaired investment in unconsolidated
affiliate.............................................. -- 2,849 --
Compensation expense associated with stock options........ -- 172 772
Deferred revenue.......................................... 582 (5,615) 5,895
Changes in items affecting operations:
Accounts receivable -- related party...................... (358) (1,537) --
Other current assets...................................... 1,220 (367) 933
Accounts payable, accrued expenses and other
liabilities............................................ (510) (4,551) (530)
-------- -------- --------
Net cash used in operating activities....................... (20,727) (37,892) (32,046)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments....................... (7,455) (20,010) (7,057)
Proceeds from sales and maturities of short-term
investments............................................ 13,160 15,800 16,642
Purchases of property and equipment....................... (274) (2,968) (9,059)
Other assets.............................................. (13) 174 (3,125)
-------- -------- --------
Net cash provided by (used in) investing activities......... 5,418 (7,004) (2,599)
-------- -------- --------
Cash flows from financing activities:
Repayment of capital lease obligations.................... -- -- (54)
Repayment of debt......................................... -- -- (6,111)
Proceeds from sale of common stock and warrants, net of
offering cost.......................................... 12,369 12,555 2,240
Proceeds from sale of redeemable, preferred stock......... -- -- 25,968
Proceeds from sale of preferred stock..................... -- 21,640 13,796
Preferred stock dividends................................... (415) -- --
Other long-term liabilities............................... -- -- 6
-------- -------- --------
Net cash provided by financing activities................... 11,954 34,195 35,845
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (3,355) (10,701) 1,200
Cash and cash equivalents, beginning of year................ 12,344 23,045 21,845
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 8,989 $ 12,344 $ 23,045
======== ======== ========
Supplemental disclosures of cash flow information:
Income taxes paid during the year......................... $ 2 $ 39 $ 23
Interest paid during the year............................. -- -- 328
Noncash investing and financing activities:
Conversion of preferred stock into common stock........... (1,063) 43,813 1,618
Conversion of redeemable preferred stock into preferred
stock.................................................. -- -- 28,722
Preferred stock redemption and conversion rights and
dividends.............................................. 295 7,786 13,578
Reclassification of advance royalties from deferred
revenue to other long-term liabilities................. -- -- 2,000
</Table>
The Notes to Consolidated Financial Statements are an integral part of these
financial statements.
41
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
General Magic, Inc. (the Company) was incorporated in California in May
1990 and reorganized as a Delaware corporation in February 1995. The Company was
considered to be in the development phase through December 31, 1999.
The Company offers a suite of voice infrastructure software products to
Global 2000 companies to enable the rapid creation of personality-rich voice
access to new and existing web-based enterprise applications. This product
suite, known as magicTalk(R), is comprised of the Voice Gateway and the
Enterprise Platform. The Company offers Global 2000 enterprises the ability to
leverage investments in both call center and e-business infrastructure (both
intranets and extranets) to expand their business reach by adding the voice
channel to new and existing Web services and information.
The Company is subject to all of the risks inherent in the establishment of
a new business enterprise. The Company must, among other things, secure adequate
financial and human resources to meet its requirements; achieve market
acceptance for its voice application services and products; establish and
maintain relationships with businesses with high volume customer interactions;
establish and maintain alliances with companies that offer technology solutions
for businesses with high volume customer interactions; respond effectively to
competitive developments; meet the challenges inherent in the timely development
and deployment of complex technologies; generate sufficient revenues from its
services to permit the Company to operate profitably; and protect its
intellectual property. Any failure to achieve these objectives could have a
material adverse effect on the Company's business, operating results and
financial condition.
LIQUIDITY
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets, and liquidation of liabilities and commitments in the normal course of
business. The Company has incurred significant losses, including a net loss of
$27.2 million for the twelve-month period ended December 31, 2001. As of
December 31, 2001, the Company had an accumulated deficit of $340.7 million.
This raises substantial doubt about the Company's ability to continue as a going
concern. As of March 27, 2002, the Company has cash, cash equivalents and
short-term investment balances of approximately $12.0 million, which include
proceeds from the equity financing arrangement with institutional investors
concluded on March 27, 2002 (see Subsequent Events -- Note 14 to the
accompanying consolidated financial statements). A cash flow analysis has been
prepared as of March 31, 2002, to determine whether the Company will be able to
fund negative cash flows, based on its current cash "burn" rate, through
December 31, 2002. This analysis did not take into account any increase in
revenues or revenues from new customers for the period March 31, 2002 through
December 31, 2002, and would require the Company to have total estimated
additional cash, cash equivalents and short-term investments amounting to $8.0
million at March 31, 2002.
Management is currently pursuing additional financing opportunities in
order to provide the funding necessary to continue product development
activities and bring its new products to market. The Company has engaged several
placement agents on a non-exclusive basis to raise additional funding on a
reasonable best efforts basis. There can be no assurance that these efforts will
be successful. The accompanying consolidate financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
42
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company generally recognizes software license revenue in accordance
with Statement of Position ("SOP") 97-2, Software Revenue Recognition and SOP
98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions. Revenue recognized from software arrangements is allocated
to each element of the arrangement based on the relative fair values of the
elements, such as software products, post contract customer support,
installation or training. The determination of fair value is based on objective
evidence that is specific to the vendor. If evidence of fair value for the
undelivered elements of the arrangement does not exist, all revenue from the
arrangement is deferred until such time as evidence of fair value does exist or
until all elements of the arrangement are delivered.
License revenue is recognized when there is persuasive evidence of an
arrangement and delivery to the customer has occurred, provided the Company has
vendor specific objective evidence of fair value for undeliverable elements, if
any, and the arrangement does not require significant customization of software,
the fee is fixed and determinable and collectibility is considered probable. If
the arrangement involves significant customization of software, the fees,
excluding the portion attributable to maintenance are recognized using the
percentage-of-completion method based on either the achievement and acceptance
of milestones or the performance of services. Revenue from associated
maintenance contracts is recognized ratably over the term of the maintenance
contract on a straight-line basis. Service revenue, consisting primarily of
consulting, implementation, and hosting is generally recognized at the time the
service is performed.
The Company recognizes nonrefundable, nonrecoupable license fees upon
delivery of its technology to its licensees when no continuing obligation for
the Company exists. Royalties associated with OEM licensees are recognized upon
shipment of the product incorporating the Company's technology to the OEM's
customers provided that the collection of the related receivable is deemed
probable. Royalties associated with potential OEM product returns are estimated
and provided for in the period of sale. Licensing revenue from network operators
is recognized as earned based upon usage and, in certain cases, based on
subscriber registration. Advance payments of licensing revenue and fees received
prior to revenue recognition are recorded as deferred revenue.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments with original
remaining maturities of three months or less at the date of acquisition to be
cash equivalents. Cash equivalents consist primarily of U.S. government
securities, commercial paper, and money market mutual funds.
The Company has classified its short-term investments as
"available-for-sale." These investments are recorded at fair value and
unrealized gains and losses, if material, are recorded as a component of
comprehensive income. Interest income is recorded using the effective interest
rate, with amortization of associated premium or discount included in
"investment income." The cost of securities sold is determined based upon the
specific identification method.
PROPERTY AND EQUIPMENT
Property, equipment, and leasehold improvements are recorded at original
cost less accumulated depreciation. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives of the respective
assets, generally three to five years. Leasehold improvements and assets
recorded
43
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under capital leases are amortized on a straight-line basis over the shorter of
the lease terms or the estimated useful lives of the respective assets.
RECOVERABILITY OF LONG-LIVED ASSETS
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. An impairment loss
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
The loss would be measured by the amount by which the carrying amount of the
assets exceeds the fair market value of the assets.
SOFTWARE DEVELOPMENT COSTS
Development costs incurred in the research and development of new software
products are expensed as incurred until technological feasibility has been
established. Software development expenses incurred for product enhancements
after the product has reached technological feasibility have not been material
and, accordingly, such costs have been charged to operations or cost of service
as incurred. From inception through December 31, 2001, no software development
costs have been capitalized.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rate is recognized in
the statement of operations in the period that includes the enactment date. A
valuation allowance is recorded to reduce deferred tax assets to an amount whose
realization is more likely than not.
NET LOSS PER SHARE
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. As of December 31, 2001, 2000, and 1999 there were
10,558,472, 8,328,984, and 7,079,042 options outstanding, respectively. As of
December 31, 2001, there were warrants for the purchase of 4,696,138 shares of
common stock outstanding, 8,907,363 shares of common stock issuable upon the
conversion of Series G preferred stock, and 1,004,527 shares of common stock
issuable upon the conversion of Series H preferred stock.
COMPREHENSIVE INCOME/LOSS
There were no material differences between the Company's comprehensive loss
and net loss for the periods presented.
ACCOUNTING ESTIMATES
Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles in the United States
of America. Those estimates and assumptions
44
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported revenues and expenses during the reporting period. Estimates are
used for, but not limited to: allocation of revenues in multiple element
arrangements, allowance for doubtful accounts, depreciable lives of assets,
useful lives of intangible assets and tax valuation allowances. Future events
and their effects cannot be perceived with certainty. As a result, the estimates
used in preparation of the financial statements will change as new events occur,
as additional information is obtained and as the Company's operating environment
changes. Actual results could differ from those estimates.
ADVERTISING COSTS
Costs incurred for producing and publishing advertisements are expensed
when incurred. The Company did not incur any advertising expense during 2001,
while advertising expenses were $887,485, and $2,885,251 for 2000, and 1999,
respectively.
AMORTIZATION OF INTANGIBLES
Goodwill and other intangibles are amortized on a straight-line basis over
the respective estimated useful life of the assets ranging from two to five
years.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value-based method of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations, as allowed under SFAS No. 123, "Accounting for
Stock-Based Compensation," to account for all of its employee stock-based
compensation plans. Non-employee options are accounted for in accordance with
SFAS 123.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
NEW PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, 142 and 143.
SFAS No. 141 "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets" eliminate the pooling-of-interests method of accounting for
business combinations and require that goodwill and certain intangible assets
not be amortized. Instead, these assets will be reviewed for impairment annually
with any related losses recognized in earnings when incurred. The statements
will be effective for the Company as of January 1, 2002 for existing goodwill
and intangible assets and for business combinations completed after June 30,
2001. SFAS No. 141 and No. 142 are not expected to have a material effect on the
Company's consolidated financial position and results of operations.
SFAS No. 143 "Accounting for Asset Retirement Obligations" requires the
recognition of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the carrying
amount of the related long-lived asset is correspondingly increased. Over time,
the liability is accreted to its present value and the related capitalized
charge is depreciated over the useful life of the asset. SFAS 143 is effective
for fiscal years beginning after June 15, 2002. SFAS 143 is not expected to have
a material effect on the Company's consolidated financial position and results
of operations.
In July of 2001, the Securities and Exchange Commission (SEC) issued Staff
Topic No. D-98, which provides clarification on the classification and
measurement of redeemable equity securities. This announcement provides
clarification about the balance sheet classification and measurement of
securities subject to
45
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
either mandatory redemption features or whose redemption is outside the control
of the issuer. The Company's Series F preferred stock, which was issued in
September 1999 and completely converted into common stock as of October 2001,
had been classified by the Company as permanent equity. Based on the guidance in
Topic No. D-98, the Company has reclassified its Series F preferred stock
outside of permanent equity for all periods presented. Staff Topic D-98 is
required to be adopted retroactively on December 31, 2001.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 addresses accounting and reporting for
the disposal of long-lived assets, including the disposal of a segment of
business. SFAS 144 is effective for fiscal years beginning after December 15,
2001, with earlier application encouraged. SFAS 144 is not expected to have a
material effect on the Company's consolidated financial position and results of
operations.
NOTE 2: AGREEMENTS WITH STOCKHOLDERS
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 obligation 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 December 31, 2001, this obligation was
classified in other long-term liabilities and totaled $2.6 million. The Company
does not expect the licensee to develop or manufacture additional products that
incorporate the Company's Magic Cap technology.
NOTE 3: RELATED PARTY
On November 9, 1999, the Company entered into a Preferred Stock and Warrant
Purchase Agreement and a Development and License Agreement with General Motors
Corporation through its OnStar Corporation subsidiary for total consideration in
the amount of $20.0 million. Approximately $13.8 million of that sum has been
allocated to purchase of the Company's Series G Preferred Stock and associated
warrants, and the balance, approximately $6.2 million, has been allocated to
development services and license rights provided to OnStar under the Development
and License Agreement. The allocation was based on the relative fair values of
the preferred stock and the warrants issued in connection with the transaction,
and the Development and License Agreement. The fair value of the preferred stock
was calculated by reference to the number of common shares into which the
preferred stock could be converted. The fair value of the warrants was
calculated using an options pricing model with the following variables: term of
3 years; volatility of 104.3%; common stock price of $2.31 per share; a
risk-free interest rate of 5.9%; and an exercise price of $1.68 per share. The
fair value of the Development and License Agreement was calculated by applying a
rate per hour to the number of hours then expected to complete the work as
originally specified. As a result of the transaction, General Motors has the
right to vote as of December 31, 2001, 8.7% of the voting stock of the Company
and to elect one director to the Company's board of directors.
Since that date, the Company has entered into further development and
service arrangements with OnStar including a Service Agreement that was entered
into in May 2001, effective January 1, 2001, whereby the Company operates the
Virtual Advisor service, maintains compliance with designated service levels and
provides second level support to OnStar, and a Service Addendum effective August
1, 2001, pursuant to which the Company is providing a fixed level of effort to
develop and implement enhancements to the Virtual Advisor service and to support
and maintain the Virtual Advisor software.
For each of the twelve-month periods ended December 31, 2001 and December
31, 2000, OnStar accounted for 95% of the Company's total revenue. This customer
accounted for 95% and 80% of accounts receivable as of December 31, 2001 and
December 31, 2000, respectively.
46
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: CONSOLIDATED FINANCIAL STATEMENT DETAILS
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents and short-term investments consisted of the following (in
thousands):
<Table>
<Caption>
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ---------- ---------- ----------
AS OF DECEMBER 31, 2001
Money market funds.................................. $ 8,691 $ $ $ 8,691
Commercial paper.................................... 995 -- -- 995
------- -------
$ 9,686 $ 9,686
------- -------
AS OF DECEMBER 31, 2000
Money market funds.................................. $ 4,175 $ $ $ 4,175
Government securities............................... 500 -- -- 500
Commercial paper.................................... 13,664 -- -- 13,664
------- -------
$18,339 $18,339
------- -------
</Table>
The Company's cash and investments were classified as follows (in
thousands):
<Table>
<Caption>
AS OF DECEMBER 31,
------------------
2001 2000
------- --------
Cash and cash equivalents................................... $8,989 $12,344
Short-term investments...................................... 995 6,700
------ -------
$9,984 $19,044
====== =======
</Table>
All short-term investments have weighted-average original maturities of
less than one year.
PROPERTY AND EQUIPMENT
The components of property and equipment were as follows (in thousands):
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------
2001 2000
-------- --------
Network operations center................................... $13,936 $14,926
Office equipment and computers.............................. 6,300 6,659
Furniture and fixtures...................................... 2,252 2,230
Leasehold improvements...................................... 1,153 1,425
------- -------
23,641 25,240
Less accumulated depreciation and amortization.............. 20,181 16,479
------- -------
$ 3,460 $ 8,761
======= =======
</Table>
47
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------
2001 2000
-------- --------
Employee compensation....................................... $1,955 $2,228
Other....................................................... 1,658 1,535
------ ------
$3,613 $3,763
====== ======
</Table>
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following (in thousands):
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------
2001 2000
-------- --------
Prepaid royalty liability................................... $2,581 $2,000
Note payable non-current.................................... $ 650 $ --
Other....................................................... -- 161
------ ------
$3,231 $2,161
====== ======
</Table>
OTHER INCOME (EXPENSE), NET
Other income, net consisted of the following (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------
2001 2000 1999
----- ------- -------
Gain on sale of Starfish, Inc............................. $ -- $ 37 $ 321
Write-off of impaired investment in Conita................ -- (762) --
Cancellation expense associated with closing of myTalk.... -- (625) --
Write-off of impaired investment in Icras................. -- (2,087) --
Equity in net loss of Icras............................... -- -- (3,557)
Interest income........................................... 620 1,253 1,068
Interest expense.......................................... (294) (1) (52)
Other..................................................... 17 3 168
----- ------- -------
$ 343 $(2,182) $(2,052)
===== ======= =======
</Table>
NOTE 5: FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
short-term investments. The Company maintains cash and cash equivalents and
certain other financial instruments with various financial institutions. These
financial institutions are located in the United States, and the Company's
policy is designed to limit exposure to any one institution. The Company's
periodic evaluations of the relative credit standing of these financial
institutions are considered in its investment strategy. The Company invests its
excess cash in Money Market funds, U.S. government securities and commercial
paper. These investments are typically short-term and bear minimal market risk.
48
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable, other accrued
liabilities, and long-term debt approximate fair value.
NOTE 6: INVESTMENT IN CONITA TECHNOLOGIES, INC.
In January 1998, the Company discontinued the operations of its South
Carolina office and entered into an agreement with Conita Technologies, Inc.
("Conita"), a company founded by former employees of the South Carolina office.
Under the agreement, the Company obtained a 10% minority interest in Conita
through the purchase of preferred stock for a total of $758,000. The Company
accounted for its investment in Conita under the cost method.
In December 2000, the Company determined its investment in Conita was
impaired due to Conita's inability to secure capital needed to fund operations
through 2001. Based on this information, the Company wrote off its Conita
investment.
NOTE 7: DIVESTITURE OF THE DATAROVER DIVISION AND INVESTMENT IN ICRAS
Effective October 1998, the Company divested its DataRover handheld
communications device division ("DataRover Division") in a transaction with
DataRover Mobile Systems, Inc., which later changed its name to Icras, Inc.
("Icras"). Pursuant to the transaction, the Company contributed cash and certain
other assets of its DataRover Division totaling $3,361,000 in value to Icras.
The Company also licensed certain of its technologies to Icras. In consideration
therefor, the Company received non-voting, non-redeemable preferred stock and
49% of the outstanding common stock of Icras. The Company did not recognize any
gain or loss as a result of the divestiture of the DataRover Division, and
accounted for its investment in Icras under the modified equity method, which
required the Company to record 100% of the losses incurred by Icras. As of
September 30, 1999, the Company had written off its entire original investment
in Icras.
In connection with the divestiture of the DataRover Division, approximately
30 employees of the Company became employees of Icras. The Company provided for
accelerated vesting of options to acquire 256,000 shares of the Company's common
stock held by such employees, and granted an additional 320,000 options to
acquire the Company's common stock to such employees. The newly granted options
vested ratably at 1/24 per month over a two-year period. The Company recorded
compensation expense of $1,634,000 associated with the fair value of the
accelerated and newly granted options and severance paid pursuant to an
agreement with a Company executive. The compensation expense relating to the
options was determined using the Black-Scholes fair market valuation method. The
value attributable to the accelerated options was expensed in the fourth quarter
of 1998 while the value associated with the new grant was expensed over the
two-year vesting period of the grant.
In March 1999, the Company purchased handheld communication units from Oki
Electric Industry Co., Ltd. ("Oki Electric") for Icras under an existing letter
of credit for a total of $2,179,000. Icras was obligated to reimburse the
Company the actual cost of such units, and its obligation was secured by all
personal property of Icras. Prior to the August 5, 1999 financing described
below, the total receivable from Icras, reflecting this and other obligations,
was $2,089,000.
On August 5, 1999, in connection with a third party Icras financing
transaction, the Company exchanged all of its preferred stock and common stock
for Series AA convertible preferred stock. In connection with this transaction,
the Company also agreed to reduce the note receivable due from Icras to
$500,000, and released its security interest in all personal property of Icras
other than its DataRover 840 inventory. As a result of this transaction, the
Company then owned less than 20% of the outstanding common stock of Icras and
accounted for this investment under the cost method.
49
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 2000, the Company was informed by the management of Icras that
its financial condition had deteriorated and that without additional financing,
Icras was likely to cease its operations within thirty days. Although the
Company has a security interest in the DataRover 840 inventory, due to current
handheld device technology market conditions it is unclear what, if any, value
can be attributed to it. Based on this information, the Company adjusted its
investment in Icras to zero.
NOTE 8: PREFERRED STOCK
In February 1998, the Company entered into an agreement with Microsoft
Corporation ("Microsoft") for the sale of 50,000 shares of Series A Convertible
Preferred Stock and the license of certain of the Company's technology. The
aggregate consideration for the sale of Series A preferred stock was $4,500,000.
In July 2000, Microsoft converted all of its Series A preferred stock into
common stock. As of December 31, 2001, there were no shares of the Series A
preferred stock outstanding.
In March 1998, the Company entered into a financing transaction with a
group of private investors that provided $5,000,000 in cash, less offering
expenses, to the Company from the sale of 5,000 shares of its 5 1/2% Cumulative
Convertible Series B Preferred Stock. As part of the financing transaction, the
Company issued warrants to acquire 320,000 shares of common stock at an exercise
price of $3.38 per share. The warrants have a five-year term and are immediately
exercisable. In June 1998, for an aggregate purchase price of $2,000,000,
certain holders of the Company's Series B preferred stock exercised their right
to purchase 2,000 additional shares of Series B preferred stock and warrants to
acquire an additional 160,000 shares of the Company's common stock at an
exercise price of $18.75 per share. As of December 31, 2001, no shares of Series
B preferred stock were outstanding, and a total of 273,315 shares of common
stock were issuable upon the exercise of the associated warrants, representing
0.3% of the Company's then outstanding common stock and common stock equivalents
on a fully diluted basis.
In June 1998, the Company entered into a financing transaction with a group
of private investors that provided $30,000,000 in cash, less offering expenses,
to the Company from the sale of 3,000 shares of its Series C Convertible
Preferred Stock. As part of the financing transaction, the Company issued
warrants to acquire 150,000 shares of the Company's common stock. The warrants
had a three-year term and were immediately exercisable. As of December 31, 2001,
no shares of Series C preferred stock were outstanding, and the associated
warrants had expired.
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 accrued
dividends quarterly at a rate of 5% per annum of the stated value ($10,000 per
share). As of December 31, 2001, no shares of Series D preferred stock were
outstanding (as described below), and a total of 107,960 shares of common stock
were issuable upon the exercise of the associated warrants, representing 0.1% of
the Company's then outstanding common stock and common stock equivalents on a
fully diluted basis.
On June 18, 1999, the Company entered into an agreement with Excite, Inc.
in which the Company sold 599 shares of its Series E Convertible Preferred Stock
and a warrant to purchase an additional 100 shares of Series E preferred stock
for cash proceeds of $6.0 million, net of issuance costs of $33,000. As of
December 31, 2001, no shares of Series E preferred stock or associated warrants
were outstanding.
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
Series F preferred stock accrued dividends quarterly at a rate of 5% per annum
of the stated value ($10,000 per share). As of December 31, 2001, no shares of
Series F preferred stock were outstanding (as described below).
50
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 26, 2001 the Company reached an agreement with certain of its
investors who held more than 40 percent of the then-outstanding Series D and
Series F preferred stock through which such investors converted all of their
Series D and Series F preferred stock holdings into 3,163,436 shares of the
Company's common stock and the Company redeemed all warrants held by them to
purchase shares of the Company's common stock. The Company paid the investors
$400,000, together with $16,000 in legal fees, for a total of $416,000, as an
inducement to such investors to convert their preferred stock holdings, which is
reflected as dividends on preferred stock paid in the third quarter so that the
inducement will be properly reflected in the loss applicable to the Company's
common stockholders in calculating loss per share. The conversion price for the
Series D and Series F preferred stock was $1.08 and $0.81 per share
respectively.
Under a second agreement, effective as of October 15, 2001, the remaining
investors in the Company's Series D and Series F preferred stock converted their
Series D and Series F preferred stock into 4,581,022 shares of the Company's
common stock, and returned all warrants held by them and 481,024 shares of
common stock in exchange for notes aggregating $1,250,000, to be paid over the
18-month period from January 15, 2002 to April 15, 2003.
In November 1999, the Company entered into a preferred stock agreement with
OnStar, a subsidiary of General Motors Corporation, pursuant to which the
Company issued 1,500 shares of Series G Convertible Preferred Stock and a
warrant to purchase an additional 500 shares of Series G Convertible Preferred
Stock to OnStar. The shares of Series G preferred stock are convertible, at the
option of the holder, into common stock of the Company at a conversion rate
equal to $10,000 divided by $1.684 (as adjusted for any stock dividends,
combinations, splits, reclassifications, exchanges, recapitalizations, capital
reorganizations, and the like with respect to such shares). In addition, upon
the consent of the holders of at least fifty percent of the Series G preferred
stock then outstanding, all outstanding shares of the Series G preferred stock
will be converted into shares of common stock automatically and without any
further action by the holders of such shares.
The holders of Series G preferred stock are entitled to receive, when, if
and as declared by the Company's Board of Directors, noncumulative cash
dividends at the rate of 7% of $10,000 per annum on each outstanding share of
Series G preferred stock (as adjusted for any stock dividends, combinations,
splits, recapitalizations and the like with respect to such shares).
The holders of Series G preferred stock are entitled to vote together with
the common stock as though part of that class and are entitled to vote on all
matters the number of votes equal to the largest number of whole shares of
common stock into which the holder's shares of Series G preferred stock may be
converted. The holders of Series G preferred stock are entitled to vote as a
separate class (i) on any matter as to which such class would be entitled to
vote under applicable law, (ii) on any matter proposing to change any provision
of the Certificate of Designations, Preferences and Rights of the Series G
Convertible Preferred Stock (the "Certificate of Designations") or the Company's
Certificate of Incorporation if such action would adversely alter or change the
preferences, rights, privileges or powers of, or the restrictions provided for
the benefit of, the holders of the Series G preferred stock, unless all series
of preferred stock are so altered or changed and (iii) on any matter to increase
or decrease the number of authorized shares of Series G preferred stock.
Furthermore, the holders of the Series G preferred stock, voting as a
separate class, have the right to elect one member of the Company's Board of
Directors until the earlier of (i) the date upon which less than 600 shares (as
adjusted for stock splits, recombinations, reclassifications and the like) of
Series G preferred stock are outstanding, (ii) the date upon which General
Motors Corporation and its affiliates own less than a majority of the
outstanding shares of Series G preferred stock (as adjusted for stock splits,
recombinations, reclassifications and the like), and (iii) the date of
consummation of an acquisition or asset transfer, as those terms are defined in
Section 3(b) of the Certificate of Designations. As of December 31, 2001, a
total of 11,876,484 shares of common stock were issuable upon the conversion of
all outstanding Series G preferred stock and associated warrants, representing
11.3% of the Company's then outstanding common stock and common stock
equivalents on a fully diluted basis.
51
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 less offering
expenses, 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.
As of December 31, 2001, a total of 1,694,793 shares of common stock were
issuable upon the conversion of all Series H Preferred Stock and associated
warrants, representing 1.4% of the Company's then outstanding common stock and
common stock equivalents on a fully diluted basis.
Adjustments to accumulated deficit of approximately $64 thousand were
recorded in the year ended December 31, 2001 to recognize the value of the
beneficial conversion and exercise rights associated with the Series H Preferred
Stock and related warrants issued during the period. Adjustments to accumulated
deficit of approximately $646 thousand were recorded in the year ended December
31, 2001, to record dividends on Series D and F Preferred Stock accrued for the
period.
As of December 31, 2001, 1,500 shares of Series G preferred stock were
outstanding, and 580 shares of Series H preferred stock were outstanding. (See
Subsequent Events -- Note 14.)
NOTE 9: STOCKHOLDERS' EQUITY
ACCOUNTING FOR STOCK-BASED COMPENSATION
As of December 31, 2001, the Company has five stock-based compensation
plans, which consist of four stock option plans and an employee stock purchase
plan. In addition, the Company granted an additional 3,335,000 options to
purchase common stock of the Company outside of any company stock option plan.
The Company applies APB Opinion No. 25 and related interpretations for stock
options issued to employees. Compensation expense recognized under these plans
for 2001, 2000, and 1999 was $0, $172,000, and $772,000, respectively and relate
to options for non-employees and the divestiture of Icras (see Note 6). The
Company has adopted the pro forma disclosure provisions of SFAS No. 123.
Excluding the compensation expense recorded in 2001, 2000 and 1999, had
compensation cost for the Company's five stock-based compensation plans been
determined based on the fair value approach described in SFAS No. 123, the
Company's net loss and loss per share would have been increased to the pro forma
amounts indicated below.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net loss
As reported........................................ $(27,536) $(35,107) $(47,575)
Pro forma.......................................... (33,273) (39,984) (52,594)
Net loss per share
As reported........................................ $ (0.38) $ (0.77) $ (1.56)
Pro forma.......................................... (0.46) (0.86) (1.69)
</Table>
STOCK OPTION PLANS
During 2001, the Company had three stock option plans under which options
were granted: the 2000 Stock Option Plan ("2000 Stock Option Plan"), the 2000
Nonstatutory Stock Option Plan ("Nonstatutory Plan"), and the 1994 Outside
Directors Stock Option Plan, as amended ("Directors Option Plan"). The 2000
Stock Option Plan was approved by the stockholders of the Company at its annual
meeting in June 2000, and the Nonstatutory Plan was adopted by the Board of
Directors in July 2000. The 1990 Stock Option Plan expired by its terms in
August 2000, and no options to purchase common stock of the Company have been
52
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted under the 1990 Stock Option Plan since August 2000. However, as of
December 31, 2001, there were 4,268,968 options outstanding and exercisable
under the 1990 Stock Option Plan.
Under the 2000 Stock Option Plan, the Company reserved an aggregate of
2,550,000 shares of common stock for issuance. The 2000 Stock Option Plan
provides that stock options may be granted to employees (including officers),
directors, consultants, advisers and other independent contractors at an
exercise price not less than 100% of the fair market value, as determined by the
Board of Directors, for incentive stock options, and 50% of the fair market
value for nonqualified stock options, on the grant date. All options granted
under the 2000 Stock Option Plan must have a term not greater than 10 years from
the date of grant. The Board of Directors determines the number of shares for
which an option may be granted. Options issued under the 2000 Stock Option Plan
generally vest 25% after one year and then ratably at 1/48 per month thereafter
over a total of four years. However, in May of 1999, 154,000 options were
granted to Company employees (excluding officers), subject to acceleration of
vesting upon achievement of specified milestones, and in September 1999, 244,000
options were granted to Company employees (excluding officers) which vested and
became fully exercisable after one year. As of December 31, 2001, 100% of the
May 1999 and September 1999 grants were fully exercisable. Also, in April 2001,
the Company granted 1,332,500 options to purchase common stock of the Company to
employees (including certain officers), which vested at the rate of 25% for each
period of six months of continuous employment after the date of grant until
fully vested. As of December 31, 2001, 25% of the April 2001 options were
exercisable.
Under the Nonstatutory Plan, the Company has reserved an aggregate of
3,500,000 shares of common stock for issuance. The Nonstatutory Plan provides
that stock options may be granted to employees, officers, directors and
consultants, including advisors; provided that the aggregate number of shares
issued to officers and directors cannot exceed 40% of the number of shares
reserved for issuance under the Plan as determined at the time of each such
issuance to an officer or director, except that shares issued to officers not
previously employed by the Company as an inducement essential to entering into
employment contracts with the Company are not included in such calculations. The
term of each option grant under the Nonstatutory Plan is determined by the
Board. The Board of Directors determines the number of shares for which an
option may be granted. Options issued under the Nonstatutory Plan generally vest
25% after one year and then ratably at 1/48 per month thereafter over a total of
four years. The exercise price may not be less than 50% of the fair market value
of the Company's common stock on the date such option is granted; provided that
any officer or director or other person whose transactions are subject to
Section 16 of the Securities Exchange Act of 1934 must generally be granted
options whose exercise price is not less than 85% of the fair market value on
the date of grant.
Under the Directors Option Plan, the Company has reserved an aggregate of
550,000 shares of common stock for issuance. The Directors Option Plan provides
for the automatic grant of nonqualified stock options to directors of the
Company who are not employees of (i) the Company, (ii) a stockholder of the
Company, (iii) a holder of a technology license from the Company, or (iv) any
parent or subsidiary of the same ("Eligible Outside Directors"). Each person who
is newly elected or appointed as an Eligible Outside Director is automatically
granted an option to purchase 40,000 shares of common stock. Each Eligible
Outside Director is automatically granted an option to purchase 10,000 shares of
common stock on the day following each anniversary date of election or
appointment, subject to the director's option to decline the grant. The exercise
price of the options in all cases is equal to the fair market value of common
stock on the grant date. The initial grant options generally vest and become
exercisable 25% after the first year and then ratably at 1/48 per month
thereafter. The anniversary grant options generally vest and become exercisable
at the rate of 1/12 per month beginning three years after the grant date.
Generally, options must be exercised within 10 years.
53
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INDIVIDUAL STOCK OPTION AGREEMENTS GRANTED OUTSIDE OF COMPANY STOCK OPTION
PLANS
In addition to the three stock option plans under which options were
granted during 2001, the Company has reserved an aggregate of 2,650,000 shares
of common stock for the grant of non-plan options to its newly hired executive
officers, Kathleen M. Layton, David H. Russian, Mark D. Strumwasser, Pericles
Haleftiras, Jr. and Mark Phillips pursuant to individual stock option agreements
between the Company and each such individual. Each such non-plan option was
granted for a term of 10 years at an exercise price equal to the fair market
value on the grant date. Subject to the optionholder's continued employment, 50%
of the shares subject to each such non-plan option vests at the rate of 25% on
the first anniversary of the date of grant and at the rate of 1/48 per month
thereafter for each full month of continuous employment until fully vested, and
the other 50% of the shares subject to each such non-plan option vests at the
rate of 25% for each period of six months of continuous employment after the
date of grant until fully vested.
NON-PLAN OPTION GRANTED TO STEVEN MARKMAN
In April 2001, the Company reserved an additional 685,000 shares of common
stock for the grant of non-plan options to Steven Markman in lieu of payment of
cash compensation to which Dr. Markman was entitled pursuant to his Employment
Agreement with the Company. The option was granted for a term of 10 years at an
exercise price equal to the fair market value on the grant date, and became
fully vested six months after the date of grant.
Under SFAS No. 123, the fair value of each option grant under the stock
option plans is estimated on the respective date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for 2001, 2000, and 1999: zero dividend yield; expected
volatility of 126% for 2001, 70% for 2000 and 1999; risk free interest rates of
4.59%, 5.92%, and 5.52%, respectively; and expected lives of 3.58, 3.50, and
3.30, respectively. The expected volatility assumption was estimated based on
historical industry stock price volatility as well as the Company's historical
stock price volatility, and assumes increases and decreases in stock prices. The
expected volatility assumption used in the Black-Scholes option pricing model
may not be indicative of the historic or future performance of the Company's
common stock.
54
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the Company's stock option plans was as follows (in
thousands, except per share amounts):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
Outstanding, beginning of year.............................. 8,329 7,079 7,315
Granted..................................................... 5,671 3,940 2,692
Exercised................................................... (12) (1,328) (995)
Canceled.................................................... (3,755) (1,362) (1,933)
------- ------- -------
Outstanding, end of year.................................... 10,233 8,329 7,079
------- ------- -------
Shares available for future grant........................... 3,642 1,512 1,701
Options authorized to be issued............................. 13,420 13,420 13,420
Options exercisable, end of year............................ 5,089 3,276 3,210
Weighted-average exercise prices:
Outstanding at beginning of year.......................... $ 4.68 $ 4.21 $ 4.44
Granted................................................... 1.09 5.25 3.50
Exercised................................................. 1.21 3.50 1.67
Canceled.................................................. 4.67 5.02 5.40
Outstanding, end of year.................................. 2.70 4.68 4.21
Options exercisable, end of year............................ 3.38 4.01 3.87
Weighted-average fair value of options granted during the
year...................................................... $ 0.85 $ 2.84 $ 1.84
</Table>
The following table summarizes information about options outstanding under
the Company's stock option plans as of December 31, 2001 (shares in thousands):
<Table>
<Caption>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- --------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING PRICE
- ------------------------ -------------- ------------ --------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
$ 0.35 to $ 0.49 95 9.93 $ 0.38 -- $ --
$ 0.55 to $ 0.83 635 9.69 $ 0.66 46 $ 0.80
$ 0.92 to $ 1.06 2,706 9.08 $ 0.97 1,229 $ 0.97
$ 1.15 to $ 1.94 2,420 8.62 $ 1.52 691 $ 1.71
$ 2.09 to $ 3.44 1,499 6.25 $ 2.77 1,142 $ 2.81
$ 3.75 to $ 5.63 1,268 8.00 $ 4.52 759 $ 4.29
$ 6.00 to $ 7.81 1,556 6.95 $ 6.62 1,175 $ 6.61
$10.00 to $12.50 54 5.98 $11.98 47 $11.93
------ -----
$ 0.35 to $12.50 10,233 8.13 $ 2.70 5,089 $ 3.38
====== =====
</Table>
1995 EMPLOYEE STOCK PURCHASE PLAN
As of December 31, 2001, the Company had reserved an aggregate of 466,627
shares of common stock for issuance under the 1995 Employee Stock Purchase Plan,
as amended ("Purchase Plan"). The Purchase Plan permits eligible employees to
purchase common stock at a discount through payroll deductions during 12-month
and 6-month offering periods. The price for the initial offering period was
equal to 85% of the fair
55
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market value of common stock at the close of business on the day prior to the
first day of the initial offering period or the fair market value of common
stock on the last day of the purchase period, whichever was lower. The price at
which stock is purchased under the Purchase Plan for all subsequent periods is
equal to 85% of the fair market value of common stock on the first day of the
offering period, or the last day of the purchase period, whichever is lower.
Under the Purchase Plan, the Company sold 47,764, 37,478, and 92,411 shares to
its employees in 2001, 2000, and 1999 respectively.
Under SFAS No. 123, the fair value of employees' purchase rights was
estimated using the Black-Scholes model with the following assumptions for 2001,
2000, and 1999: zero dividend yield and expected life of 12 months for each
year; expected volatility of 126% for 2001, 70% for 2000 and 1999; and risk free
interest rates of 3.32%, 5.92%, and 5.01%, respectively. The expected volatility
assumption was estimated based on historical industry stock price volatility as
well as the Company's historical stock price volatility, and assumes increases
and decreases in stock prices. The expected volatility assumption used in the
Black-Scholes option pricing model may not be indicative of the historic or
future performance of the Company's common stock. The weighted-average fair
value of purchase rights (including the 15% discount off of the quoted market
price of common stock) granted in 2001, 2000, and 1999 was $0.57, $2.34, and
$1.09, respectively.
NOTE 10: RETIREMENT PLAN
The Company has a deferred compensation plan for all employees who are at
least 21 years of age. Under the plan, which qualifies under Section 401(k) of
the Internal Revenue Code of 1986, as amended, eligible employees may contribute
from 2% to 20% of their pretax compensation, up to the annual limits imposed by
the Internal Revenue Service.
The Company may, at its discretion, contribute to the plan. No employer
contributions have been made in any of the periods presented.
NOTE 11: COMMITMENTS
LONG-TERM DEBT
In connection with the conversion of the Company's Series D and Series F
preferred stock (see Preferred Stock -- Note 8) during October 2001, the Company
issued 5% Secured Notes Due April 15, 2003 in the aggregate original principal
amount of $1,250,000 (the "Notes") to certain holders of the Series D and Series
F preferred stock in exchange for 481,024 shares of common stock and all
warrants to purchase shares of the Company's common stock held by such investors
that were issued in connection with the issuance of the Company's Series B
Convertible Preferred Stock, Series D Convertible Preferred Stock and Series H
Convertible Preferred Stock (representing 1,013,776 shares). The principal is
repaid at a rate of 12% of original principal for the first four (4) quarters,
24% and 28% for the remaining quarters respectively. Interest is due quarterly.
The first principal and interest payment is due January 2002. The Notes are
secured by all of the assets of the Company.
LEASE COMMITMENTS
As of December 31, 2001 the Company leased two facilities under operating
leases extending through 2002 and 2004, respectively. Effective January 2002,
the Company entered into a new lease for its current facility that will commence
on July 1, 2002 and expires on June 30, 2006, with an option to extend the lease
term for a twenty-four month period beginning July 1, 2006 and expiring June 30,
2008. These leases require the Company to pay all executory costs, such as
maintenance and insurance, and provide for escalating rent payments. The Company
is amortizing the total rent payments over the lease term on a straight-line
basis for the leases.
56
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense was approximately $646,000, $664,000, and $688,000 for the
fiscal years ended December 31, 2001, 2000, and 1999 respectively. Future
minimum lease payments under noncancelable operating leases as of December 31,
2001 and including the new lease entered into on January 3, 2002 are as follows
(in thousands):
<Table>
<Caption>
OPERATING
YEARS ENDING DECEMBER 31, LEASES
- ------------------------- ---------
2002........................................................ $ 835
2003........................................................ 1,568
2004........................................................ 1,596
2005........................................................ 1,609
2006........................................................ 817
------
Total minimum lease payments...................... $6,425
======
</Table>
NOTE 11: INCOME TAXES
Total income tax expense for the years ended December 31, 2001, 2000, and
1999 was allocated as follows:
<Table>
<Caption>
AS OF DECEMBER 31,
------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Income from continuing operations........................... $2 $39 $23
Stockholders' equity, for compensation expense for tax
purposes in excess of amounts recognized for financial
reporting purposes........................................ -- -- --
-- --- ---
$2 $39 $23
== === ===
</Table>
Income tax expense attributable to income from continuing operations
consists of:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Continuing operations:
Current:
Federal................................................... -- -- --
State..................................................... $2 $39 $23
-- --- ---
$2 $39 $23
Deferred:
Federal................................................... -- -- --
State..................................................... -- -- --
-- --- ---
Income tax expense..................................... $2 $39 $23
== === ===
</Table>
57
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between income tax expense and the amount resulting from
applying the Federal statutory rate of 34% to income before income taxes is
attributable to the following:
<Table>
<Caption>
AS OF DECEMBER 31,
-----------------------------
2001 2000 1999
------- -------- --------
(IN THOUSANDS)
Income taxes (benefit) at Federal statutory rate............ $(9,362) $(11,923) $(16,167)
State taxes (benefit) net................................... 2 39 23
Stock-based compensation.................................... -- 59 593
Nondeductible expenses...................................... 2 10 31
Current year operating losses and temporary differences for
which no tax benefit is recognized........................ 9,360 11,854 13,990
Other....................................................... 0 0 1,553
------- -------- --------
Income tax expense................................ $ 2 $ 39 $ 23
======= ======== ========
</Table>
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets are as follows:
<Table>
<Caption>
AS OF DECEMBER 31,
---------------------
2001 2000
--------- ---------
(IN THOUSANDS)
Accruals and other reserves................................. $ 915 $ 3,555
Deferred revenue............................................ 344 --
Loss carryovers and deferred start-up expenditures.......... 105,853 97,180
Foreign tax credit carryforward............................. 1,215 1,215
Research and experimentation credit carryforward............ 9,107 8,171
Acquired intangibles........................................ 758 873
Fixed assets................................................ 1,628 1,631
--------- ---------
Deferred tax assets......................................... 119,820 112,625
Valuation allowance......................................... (119,820) (112,625)
========= =========
Deferred tax liabilities.................................... -- --
--------- ---------
Net deferred tax assets........................... $ -- $ --
========= =========
</Table>
Management has established a valuation allowance equal to 100% of the net
deferred tax assets because, based on all relevant evidence, it is not more
likely than not that the Company will realize the deferred tax assets. The net
increase in the total valuation allowance for the years ended December 31, 2001
and 2000 was $7,195,000 and $8,880,000, respectively.
As of December 31, 2001, the Company has available net operating loss
carryforwards for federal income tax purposes of approximately $294,083,000, of
which $17,026,000 relates to deductions for stock options and the remainder
relates to continuing operations. As of December 31, 2001, the Company has
available net operating loss carryforwards for state income tax purposes of
approximately $100,521,000 of which $8,701,000 relates to deductions for stock
options and the remainder relates to continuing operations. The federal net
operating losses will expire, if not utilized, in 2006 through 2021. The state
net operating loss carryforwards will expire, if not utilized, beginning in 2002
through 2011.
As of December 31, 2001, the Company has available for carryover research
and experimentation tax credits for federal income tax purposes of approximately
$6,963,000, of which $343,000 relates to credits for
58
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock options and the remainder relates to continuing operations. As of December
31, 2001, the Company has available for carryover research and experimentation
tax credits for state income tax purposes of approximately $3,249,000, of which
$332,000 relates to credits for stock options and the remainder relates to
continuing operations. The federal research and experimentation tax credits will
expire, if not utilized, in 2006 through 2021. California research and
experimentation credits carry forward indefinitely until utilized.
The Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Accordingly, the Company's ability to
utilize net operating loss and credit carryforwards may be limited as a result
of such an "ownership change" as defined in the Internal Revenue Code.
NOTE 13: SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements.
It also establishes standards for related disclosures about products and
services, major customers, and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is available and is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company's chief operating decision maker is its Chief
Executive Officer ("CEO"). Financial information for separate components of the
Company's business is not evaluated by the CEO for review and analysis.
Allocation of resources and assessment of performance is based on the Company's
consolidated financial information, which is available to the CEO in
substantially the form presented in the accompanying consolidated statement of
operations. The Company therefore operates in a single operating segment: voice
application services.
For the year ended December 31, 2001, revenue from one major customer, a
stockholder in the Company, accounted for 95% of total revenue. For the year
ended December 31, 2000, revenue from one major customer, a stockholder in the
Company, accounted for 95% of total revenue. For the year ended December 31,
1999, revenue from one major customer, a stockholder in the Company, accounted
for 61% of total revenue.
For the year ended December 31, 2001, accounts receivable from one major
customer, a stockholder in the Company, accounted for 95% of total accounts
receivable. For the year ended December 31, 2000 one major customer, a
stockholder in the Company, accounted for 80%. For the year ended December 31,
1999, no single customer accounted for more than 10% of total accounts
receivable.
The Company's revenue was generated principally from its headquarters in
North America and all of the Company's tangible assets are located at its North
American headquarters.
NOTE 14: SUBSEQUENT EVENTS
(A) SERIES H PREFERRED STOCK CONVERSION
On March 11, 2002, the Company notified holders of the Company's Series H
preferred stock, that it was exercising its right to require the conversion of
all of the then-outstanding Series H preferred stock into shares of the
Company's common stock on March 25, 2002. On March 25, 2002, all of the
then-outstanding shares of Series H preferred stock (580 shares) were converted
into 1,008,998 shares of common stock.
(B) FINANCING TRANSACTIONS
On March 27, 2002, the Company concluded a private financing transaction
with a group of institutional investors to provide $7.0 million in cash to the
Company, less offering expenses, from the sale of
59
GENERAL MAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
33,333,333 shares of its common stock pursuant to the Company's "shelf"
registration statement (File No. 333-66126) which was declared effective by the
Securities and Exchange Commission on November 27, 2001. The common stock was
sold for a purchase price per share equal to 80% of the average of the closing
bid prices of the Company's common stock on The Nasdaq National Market during
the five trading days prior to March 25, 2002, or $0.21 per share.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENERAL MAGIC, INC.
By: /s/ KATHLEEN M. LAYTON
------------------------------------
Kathleen M. Layton
Chief Executive Officer and
President
Dated: April 1, 2002
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kathleen M. Layton and Mary E. Doyle
his/her true and lawful attorney-in-fact and agent, with full power of
substitution and, for him/her and in his/her name, place and stead, in any and
all capacities to sign any and all amendments to this Report on Form 10-K, and
to file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he/she might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, or
his/her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE: DATE:
--------- ------ -----
By: /s/ SUSAN G. SWENSON Chairman of the Board April 1, 2002
- --------------------------------------------
Susan G. Swenson
By: /s/ KATHLEEN M. LAYTON Chief Executive Officer and President April 1, 2002
- -------------------------------------------- (Principal Executive)
Kathleen M. Layton
By: /s/ DAVID H. RUSSIAN Chief Financial Officer April 1, 2002
- -------------------------------------------- (Principal Financial and Accounting
David H. Russian Officer)
By: /s/ ELIZABETH A. FETTER Director April 1, 2002
- --------------------------------------------
Elizabeth A. Fetter
By: /s/ CHESTER A. HUBER, JR. Director April 1, 2002
- --------------------------------------------
Chester A. Huber, Jr.
By: /s/ PHILIP D. KNELL Director April 1, 2002
- --------------------------------------------
Philip D. Knell
By: /s/ TOM D. SEIP Director April 1, 2002
- --------------------------------------------
Tom D. Seip
</Table>
61
GENERAL MAGIC, INC.
EXHIBITS TO FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Agreement and Plan of Merger between General Magic, Inc., a
California corporation, and the Company is incorporated by
reference to Exhibit 2.1 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on January 13, 1995 (File No.
33-87164)
3.2 Certificate of Incorporation of the Company is incorporated
by reference to Exhibit 3.2 to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange
Commission on February 9, 1995 (File No. 33-87164)
3.3 Certificate of Amendment of Certificate of Incorporation of
the Company is incorporated by reference to Exhibit 3.3 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission
on January 13, 1995 (File No. 33-87164)
3.4 Certificate of Correction of the Certificate of Amendment of
the Company is incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on September 25, 1996
(File No. 333-12667)
3.5 Certificate of Retirement and Elimination of Classes of
Common Stock and Series of Preferred Stock of the Company is
incorporated by reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on August 11, 1997 (File No.
333-33329)
3.6 Certificate of Designation of Series A Convertible Preferred
Stock of the Company is incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-3
filed with the Securities and Exchange Commission on May 1,
1998 (File No. 333-51685)
3.7 Certificate of Designation of the 5 1/2% Cumulative
Convertible Series B Preferred Stock of the Company is
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on May 1, 1998 (File No. 333-51685)
3.8 Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock of the Company is
incorporated by reference to Exhibit 3.1 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on June 29, 1998 (File No. 000-25374)
3.9 Certificate of Amendment to Certificate of Incorporation of
the Company is incorporated by reference to Exhibit 4.10 to
the Company's Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on February 4, 1999
(File No. 333-71781)
3.10 Certificate of Amendment of Certificate of Designations,
Preferences and Rights of Series C Convertible Preferred
Stock of the Company is incorporated by reference to Exhibit
4.11 to the Company's Registration Statement on Form S-8
filed with the Securities and Exchange Commission on
February 4, 1999 (File No. 333-71781)
3.11 Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock of the Company is
incorporated by reference to Exhibit 3.1 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on April 2, 1999
3.12 Certificate of Designations, Preferences and Rights of
Series E Convertible Preferred Stock of the Company is
incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on July 16, 1999 (File No.
333-83075)
3.13 Certificate of Designations, Preferences and Rights of
Series F Convertible Preferred Stock of the Company is
incorporated by reference to Exhibit 3.1 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on September 10, 1999
</Table>
62
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.14 Certificate of Designations, Preferences and Rights of
Series G Convertible Preferred Stock of the Company is
incorporated by reference to Exhibit 3.1 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on February 2, 2000
3.15 Certificate of Designations, Preferences and Rights of
Series H Convertible Preferred Stock of General Magic, Inc.
is incorporated by reference to Exhibit 4.3 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on March 31, 2000
3.16 Third Amended and Restated Bylaws of the Company are
incorporated by reference to Exhibit 4.28 to the Company's
Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on August 8, 2001 (File No.
333-67062)
3.17 Certificate of Merger of Netphonic Communications, Inc. into
the Company is incorporated by reference to Exhibit 4.7 to
the Company's Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on February 4, 1999
(File No. 333-71781)
3.18 Certificate of Amendment to Certificate of Incorporation is
incorporated by reference to Appendix A to the Company's
Preliminary Proxy filed with the Securities and Exchange
Commission on May 2, 2000
3.19 Certificate of Amendment to Certificate of Incorporation is
incorporated by reference to Appendix A to the Company's
Preliminary Proxy filed with the Securities and Exchange
Commission on January 11, 2002
4.1 Form of Certificate for Common Stock is incorporated by
reference to Exhibit 4.1 to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed with the Securities
and Exchange Commission on January 31, 1995 (File No.
33-87164)
4.2 Registration Rights Agreement, dated as of March 29, 2000,
by and among the Company and the investors signatory thereto
is incorporated by reference to Exhibit 4.4 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on March 31, 2000
4.3 Registration Rights Agreement by and among Registrant,
Halifax Fund, L.P., RBC International Investors, LDC,
Heracles Fund and Themis Partners L.P. dated March 3, 1998
is incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on May 1, 1998 (File No. 333-51685)
4.4 Form of Common Stock Purchase Warrant issued to investors
pursuant to the Preferred Stock Investment Agreement dated
March 3, 1998 is incorporated by reference to Exhibit 4.3 to
the Company's Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on May 1, 1998 (File
No. 333-51685)
4.5 Series G Preferred Stock and Warrant Purchase Agreement
dated November 9, 1999 between the Company and General
Motors Corporation, by and through its OnStar Division, is
incorporated by reference to Exhibit 4.1 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on February 2, 2000
4.6 Letter Agreement dated as of December 9, 1999 between the
Company and General Motors Corporation is incorporated by
reference to Exhibit 4.2 to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on
February 2, 2000
4.7 Form of Warrant for the Purchase of Shares of Series G
Convertible Preferred Stock is incorporated by reference to
Exhibit 4.3 to the Company's Report on Form 8-K filed with
the Securities and Exchange Commission on February 2, 2000
4.8 Registration Rights Agreement dated November 9, 1999 between
the Company and General Motors Corporation, by and through
its OnStar Division, is incorporated by reference to Exhibit
4.4 to the Company's Report on Form 8-K filed with the
Securities and Exchange Commission on February 2, 2000
4.9 Change of Control Plan and Summary Plan Description is
incorporated by reference to Exhibit 4.1 to the Company's
Report on Form 10-Q filed with the Securities and Exchange
Commission on November 14, 2000
</Table>
63
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.10 Securities Purchase Agreement, dated as of March 29, 2000,
by and among the Company and the investors listed on the
Schedule of Buyers attached thereto is incorporated by
reference to Exhibit 4.1 to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on March
31, 2000
4.11 Form of Warrant to Purchase Common Stock of General Magic
issued to investors pursuant to the Preferred Stock
Investment Agreement dated March 29, 2000 is incorporated by
reference to Exhibit 4.1 to the Company's Report on Form
8-K/A filed with the Securities and Exchange Commission on
August 10, 2000
4.12 Form of Warrant to Purchase Common Stock of General Magic
issued to each of Ladenburg Thalmann & Co., Inc. and Paul
Revere Capital Partners Ltd. is incorporated by reference to
Exhibit D to Exhibit 1.1 to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on
September 14, 2000
4.13 Conversion and Exchange Agreement dated as of October 15,
2001 between the Company and the investors listed on the
Schedule of Investors attached thereto is incorporated by
reference to Exhibit 99.1 to the Company's Report on Form
8-K filed with the Securities and Exchange Commission on
October 18, 2001
4.14 Form of 5% Secured Note Due April 15, 2003 dated as of
October 15, 2001 issued by the Company to the investors
listed on the Schedule of Investors attached to the
Conversion and Exchange Agreement is incorporated by
reference to Exhibit A to Exhibit 99.1 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on October 18, 2001
4.15 Security Agreement dated as of October 15, 2001 between the
Company and the investors listed on the Schedule of
Investors attached to the Conversion and Exchange Agreement
is incorporated by reference to Exhibit 99.2 to the
Company's Report on Form 8-K filed with the Securities and
Exchange Commission on October 18, 2001
4.16 Conversion and Redemption Agreement dated as of September
26, 2001 between the Company and the investors listed on the
attached Schedule of Investors is incorporated by reference
to Exhibit 99.1 to the Company's Report on Form 8-K filed
with the Securities and Exchange Commission on October 1,
2001
4.17 Common Stock Purchase Agreement dated March 29, 2001 between
the Company and Paul Revere Capital Partners Ltd. is
incorporated by reference to Exhibit 1.1 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on April 3, 2001
4.18 Stock Purchase Agreement dated May 7, 2001 between the
Company and Paul Revere Capital Partners Ltd. is
incorporated by reference to Exhibit 1.1 to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on May 25, 2001
4.19 Common Stock Purchase Agreement dated effective November 30,
2001 between the Company and the Purchasers identified in
the signature pages attached thereto is incorporated by
reference to Exhibit 4.1 to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on
December 5, 2001
4.20 Agreement dated effective November 30, 2001 between the
Company and Zimmer Lucas Partners and Strong River
Investments Ltd. is incorporated by reference to Exhibit 4.2
to the Company's Report on Form 8-K filed with the
Securities and Exchange Commission on December 5, 2001
4.21 Form of Warrant issued November 30, 2001 by the Company to
each of Atlas Capital Services, LLC, and Hyperion Partners
Corp. is incorporated by reference to Exhibit 4.3 to the
Company's Report on Form 8-K filed with the Securities and
Exchange Commission on December 5, 2001
4.22 Covenant Not to Sue by and between Registrant and Microsoft
Corporation dated February 27, 1998 is incorporated by
reference to Exhibit 4.7 to Amendment No. 2 to the Company's
Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on June 5, 1998 (File No. 333-51685)
10.1 Form of Indemnity Agreement for officers and directors of
the Company is incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 filed with
the Securities and Exchange Commission on February 9, 1995
(File No. 33-87164)
</Table>
64
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.2 The Company's Amended and Restated 1990 Stock Option Plan,
as amended through April 16, 1998, and related forms of
agreement, is incorporated by reference to Exhibit 10.2 to
the Company's Report on Form 10-Q filed with the Securities
and Exchange Commission on May 17, 1999
10.3 The Company's Amended and Restated 1995 Employee Stock
Purchase Plan, effective as of February 1, 1999, and
attached forms of agreement, is incorporated by reference to
Exhibit 4.17 to the Company's Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on
December 23, 1999 (File No. 333-93479)
10.4 Nonstatutory Stock Option Agreement dated as of May 28, 1999
between the Company and Philip D. Knell is incorporated by
reference to Exhibit 4.18 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on December 23, 1999 (File No. 333-93479)
10.5 The Company's 1994 Outside Directors Stock Option Plan, as
amended through April 16, 1998, and related forms of
agreement, is incorporated by reference to Exhibit 10.4 to
the Company's Report on Form 10-Q filed with the Securities
and Exchange Commission on May 17, 1999
10.6 Sublease between ARGOSystems, Inc. and the Company dated
April 12, 1994 for 420 N. Mary Avenue, Sunnyvale, California
is incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on February 9, 1995 (File
No. 33-87164)
10.7 Amendment No. 1 and Partial Termination of Sublease
Agreement between the Company and ArgoSystems, Inc. dated
April 1, 1997 is incorporated by reference to Exhibit 10.9
to the Company's Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1998
10.8 Amendment No. 2 to Sublease Agreement between the Company
and ArgoSystems, Inc. dated January 1, 1998 is incorporated
by reference to Exhibit 10.10 to the Company's Report on
Form 10-K filed with the Securities and Exchange Commission
on March 31, 1998
10.11(2) Software License and Services Agreement dated October 6,
1997 between the Company and Oracle Corporation, as amended,
is incorporated by reference to Exhibit 10.28 to the
Company's Report on Form 10-Q filed with the Securities and
Exchange Commission on May 17, 1999
10.12(2) Master Agreement for Internetworking Services dated
September 4, 1998 between the Company and GTE
Internetworking Incorporated, as amended, is incorporated by
reference to Exhibit 10.29 to the Company's Report on Form
10-Q filed with the Securities and Exchange Commission on
May 17, 1999
10.13(2) Flagship License Agreement dated March 31, 1998 between the
Company and Isocor, as amended, is incorporated by reference
to Exhibit 10.30 to the Company's Report on Form 10-Q filed
with the Securities and Exchange Commission on May 17, 1999
10.15(4) Development and License Agreement, dated November 9, 1999,
between the Company and General Motors Corporation, by and
through its OnStar Division, is incorporated by reference to
Exhibit 99.1 to the Company's Report on Form 8-K/A filed
with the Securities and Exchange Commission on November 9,
2001
10.16 Letter Agreement between the Company and Steven Markman
dated September 12, 1996 is incorporated by reference to
Exhibit 10.14 to the Company's Report on Form 10-K filed
with the Securities and Exchange Commission on March 31,
1998
10.17 Letter Agreement between the Company and Linda A. Hayes
dated August 7, 1997 is incorporated by reference to Exhibit
10.15 to the Company's Report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1998
10.18 Letter Agreement between the Company and Rose M. Marcario
dated October 15, 1999 is incorporated by reference to
Exhibit 10.40 to the Company's Report on Form 10-K filed
with the Securities and Exchange Commission on March 30,
2000
10.19 Letter Agreement dated October 5, 2000 between the Company
and Steven Markman is incorporated by reference to Exhibit
10.2 to the Company's Report on Form 10-Q filed with the
Securities and Exchange Commission on November 14, 2000
</Table>
65
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.20 2000 Stock Option Plan is incorporated by reference to
Appendix B to the Company's Preliminary Proxy filed with the
Securities and Exchange Commission on May 5, 2000
10.21 Letter Agreement dated September 7, 2000 between the Company
and Ladenburg Thalmann & Co., Inc. is incorporated by
reference to Exhibit 1.1 to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on
September 14, 2000
10.22 Form of Indemnity Agreement for Officers and Directors of
the Company is incorporated by reference to Exhibit 10.1 to
the Company's Report on Form 10-Q filed with the Securities
and Exchange Commission on May 15, 2000
10.23 Letter Agreement with Paula Skokowski dated April 20, 2000
is incorporated by reference to Exhibit 10.2 to the
Company's Report on Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2000
10.24 Letter Agreement with Linda A. Hayes dated May 25, 2000 is
incorporated by reference to Exhibit 10.4 to the Company's
Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2000
10.25 2000 Nonstatutory Stock Option Plan is incorporated by
reference to Exhibit 4.18 to the Company's Report on Form
S-8 filed with the Securities and Exchange Commission on
August 8, 2001 (File No. 333-67062)
10.26(5) Amendment dated March 30, 2000 to Flagship License Agreement
dated March 31, 1998 between the Company and Isocor is
incorporated by reference to Exhibit 10.37 to the Company's
Report on Form 10-K filed April 2, 2001
10.27(5) Amendment dated August 11, 1999 to Flagship License
Agreement dated March 31, 1998 between the Company and
Isocor is incorporated by reference to Exhibit 10.38 to the
Company's Report on Form 10-K filed April 2, 2001
10.29 Nonqualified Stock Option Agreement between the Company and
Kathleen M. Layton granted January 2, 2001 is incorporated
by reference to Exhibit 4.19 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on August 8, 2001 (File No. 333-67062)
10.30 Nonqualified Stock Option Agreement between the Company and
Kathleen M. Layton granted January 2, 2001 is incorporated
by reference to Exhibit 4.20 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on August 8, 2001 (File No. 333-67062)
10.31 Nonstatutory Stock Option Agreement between the Company and
David H. Russian granted May 31, 2001 is incorporated by
reference to Exhibit 4.21 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on August 8, 2001 (File No. 333-67062)
10.32 Nonstatutory Stock Option Agreement between the Company and
David H. Russian granted May 31, 2001 is incorporated by
reference to Exhibit 4.22 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on August 8, 2001 (File No. 333-67062)
10.33 Nonstatutory Stock Option Agreement between the Company and
Mark D. Strumwasser granted April 23, 2001 is incorporated
by reference to Exhibit 4.23 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on August 8, 2001 (File No. 333-67062)
10.34 Nonstatutory Stock Option Agreement between the Company and
Mark D. Strumwasser granted April 23, 2001 is incorporated
by reference to Exhibit 4.24 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on August 8, 2001 (File No. 333-67062)
10.35 Nonstatutory Stock Option Agreement between the Company and
Pericles Haleftiras, Jr. granted April 27, 2001 is
incorporated by reference to Exhibit 4.25 to the Company's
Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on August 8, 2001 (File No.
333-67062)
</Table>
66
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.36 Nonstatutory Stock Option Agreement between the Company and
Pericles Haleftiras, Jr. granted April 27, 2001 is
incorporated by reference to Exhibit 4.26 to the Company's
Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on August 8, 2001 (File No.
333-67062)
10.37 Nonstatutory Stock Option Agreement between the Company and
Steven Markman granted April 26, 2001 is incorporated by
reference to Exhibit 4.27 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on August 8, 2001 (File No. 333-67062)
10.38 Nonstatutory Stock Option Agreement between the Company and
Mark Phillips granted September 5, 2001
10.39 Nonstatutory Stock Option Agreement between the Company and
Mark Phillips granted September 5, 2001
10.40 Amendment to Letter Agreement dated June 28, 2001 between
the Company and Ladenburg Thalmann & Co., Inc. is
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3 filed with the Securities
and Exchange Commission on July 27, 2001 (File No.
333-66126)
10.41(6) Services Agreement effective as of January 1, 2001 between
the Company and OnStar Corporation is incorporated by
reference to Exhibit 10.1 to the Company's Report on Form
10-Q/A filed with the Securities and Exchange Commission on
November 13, 2001
10.42 Letter Agreement with Steven Markman dated May 10, 2001 is
incorporated by reference to Exhibit 10.2 to the Company's
Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2001
10.43 Letter Agreement with David Russian dated May 25, 2001 is
incorporated by reference to Exhibit 10.3 to the Company's
Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2001
10.44 Letter Agreement with Mark Strumwasser dated April 16, 2001
is incorporated by reference to Exhibit 10.4 to the
Company's Report on Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2001
10.45 Letter Agreement with Pericles Haleftiras, Jr. dated April
16, 2001 is incorporated by reference to Exhibit 10.5 to the
Company's Report on Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2001
10.46 Letter Agreement with Rose M. Marcario dated June 15, 2001
is incorporated by reference to Exhibit 10.6 to the
Company's Report on Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2001
10.47 Letter Agreement with Kathleen M. Layton dated July 15, 2001
is incorporated by reference to Exhibit 10.7 to the
Company's Report on Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2001
10.48 Letter Agreement with Jeff Adamson dated January 12, 2000 is
incorporated by reference to Exhibit 10.8 to the Company's
Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2001
10.49 Letter Agreement with Mark Phillips dated August 28, 2001 is
incorporated by reference to Exhibit 10.3 to the Company's
Report on Form 10-Q filed with the Securities and Exchange
Commission on November 14, 2001
10.50(7) Amendment Number One to Development and License Agreement
effective August 1, 2001 between the Company and General
Motors Corporation is incorporated by reference to Exhibit
10.1 to the Company's Report on Form 10-Q filed with the
Securities and Exchange Commission on November 14, 2001
10.51(7) Services Addendum effective August 1, 2001 between the
Company and OnStar Corporation is incorporated by reference
to Exhibit 10.2 to the Company's Report on Form 10-Q filed
with the Securities and Exchange Commission on November 14,
2001
</Table>
67
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23.1 Consent of Independent Auditors
24.1 Power of Attorney (See signature page)
</Table>
- ---------------
(1) Certain portions of this document are subject to an Application for
Confidential Treatment filed with the Commission on May 1, 1998.
(2) Certain portions of this document are subject to an Application for
Confidential Treatment filed with the Commission on May 17, 1999.
(3) Certain portions of this document are subject to an Application for
Confidential Treatment filed with the Commission on August 23, 1999.
(4) Certain portions of this document are subject to an Application for
Confidential Treatment filed with the Commission on February 2, 2000 and
amended on November 9, 2001.
(5) Certain portions of this document are subject to an Application for
Confidential Treatment filed with the Commission on April 2, 2001.
(6) Certain portions of this document are subject to an Application for
Confidential Treatment filed with the Commission on August 14, 2001 and
amended November 13, 2001.
(7) Certain portions of this document are subject to an Application for
Confidential Treatment filed with the Commission on November 14, 2001.
68