Hot Stuff From The 10-Q
Portions of the 10-Q Filed August 14, 2000
The portions of the 10-Q excerpted here all had interesting information that was new to me. I note in particular that there is an “agreement” with IBM IN JULY (after the original June announcement), that management is negotiating on the Qwest contract, that research is down, and that general and administrative expense is down, that the NOC is being expanded.
------------------------------------------------- 10-Q Excerpts -------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
In July 2000, General Magic signed an agreement with IBM to jointly develop and deliver voice applications for companies in General Magic's target markets. The agreement provides that General Magic will integrate its magicTalk platform with IBM's DirectTalk platform and ViaVoice speech recognition engine to deliver and host end-to-end voice solutions. IBM and General Magic also plan to jointly market integrated magicTalk applications on DirectTalk through the existing IBM sales channel. IBM's DirectTalk is a voice-processing platform that connects self-service customer relationship management applications for effective call routing and response for 24 hours a day, 7 days a week, customer service.
RESULTS OF OPERATIONS
COST OF SERVICE REVENUE
Cost of service revenue for the three-month period ended June 30, 2000, was $1.4 million compared to none for the three-month period ended June 30, 1999. Cost of service revenue for the six-month period ended June 30, 2000, was $2.5 million compared to none for the six-month period ended June 30, 1999. Cost of service revenue consists of costs related to the development of the Virtual Advisor for OnStar.
NETWORK OPERATIONS
Network operations expense for the three-month period ended June 30, 2000, was $2.9 million compared to $1.6 million for the three-month period ended June 30, 1999. Network operations expense for the six-month period ended June 30, 2000, was $6.0 million compared to $3.5 million for the six-month period ended June 30, 1999. Network operations expense consists of personnel and related costs associated with running the network operations center and providing customer support and billing, access costs associated with the telephony and data network, and royalties paid to software and content providers. The increase for both the three-month and the six-month periods ended June 30, 2000 compared to the same periods ended June 30, 1999, was due primarily to increased telecommunication billings associated with the myTalk service. The Company expects network operations expense to increase modestly through 2000 as it adds network infrastructure to increase its hosting capacity.
RESEARCH AND DEVELOPMENT
Research and development expense for the three-month period ended June 30, 2000, was $1.0 million, compared to $3.1 million for the three-month period ended June 30, 1999. Research and development expense for the six-month period ended June 30, 2000, was $2.9 million, compared to $6.5 million for the six-month period ended June 30, 1999. The decrease for the six-month period ended June 30, 2000, compared to the six-month period ended June 30, 1999, was due to reduced spending on outside consultants and a decrease in headcount. The Company expects research and development expenses to increase slightly from the level in the three-month period ended June 30, 2000 through the remainder of 2000.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expense for the three-month period ended June 30, 2000, was $4.8 million, compared to $6.3 million for the three-month period ended June 30, 1999. Selling, general and administrative expense for the six-month period ended June 30, 2000, was $11.8 million, compared to $12.2 million for the six-month period ended June 30, 1999. The selling, general and administrative expense for the three-month and six-month periods ended June 30, 2000 compared to the same periods ended June 30, 1999 has decreased due to a decrease in headcount and reduced marketing and advertising expenses associated with the discontinuation of the myTalk service.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for the three-month period ended June 30, 2000, was $1.5 million, compared to $1.1 million for the three-month period ended June 30, 1999. Depreciation and amortization expense for the six-month period ended June 30, 2000, was $3.0 million, compared to $2.1 million for the six-month period ended June 30, 1999. The increase in both periods was due to equipment purchases and facility improvements related to the expansion of the Company's network operations center and amortization of intangible assets associated with a prior acquisition. The Company expects depreciation and amortization expense to increase modestly through the remainder of 2000 as the network operations center continues to expand to increase hosting capacity.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash, cash equivalents and short-term investment balances that totaled $24.6 million as of June 30, 2000, down $920 thousand from $25.5 million as of December 31, 1999.
During the six-month period ended June 30, 2000, 804 shares of the Series D preferred stock were converted into 5.0 million shares of common stock, 249 shares of the Series E preferred stock were converted into 655 thousand shares of common stock, the Series E warrant was exercised for 100 shares of Series E preferred stock, which was converted into 263 thousand shares of common stock, 319 shares of the Series F preferred stock were converted into 2.4 million shares of common stock, and 1,620 shares of the Series H Preferred Stock were converted into 2.7 million shares of common stock. On June 27, 2000, the holder of Series A preferred stock initiated, and on July 5, 2000, completed, the conversion of all of its shares of Series A.
As of June 30, 2000, 50,000 shares of Series A preferred stock were outstanding. As of June 30, 2000, no shares of the Series B or Series C preferred stock were outstanding. As of June 30, 2000, 186 shares of Series D preferred stock were outstanding, 350 shares of Series E preferred stock were outstanding, 525 shares of Series F preferred stock were outstanding, 1,500 shares of Series G preferred stock were outstanding, and 580 shares of Series H Preferred Stock were outstanding.
On March 29, 2000, the Company entered into a private financing transaction with a group of existing investors to provide $22,000,000 in cash to the Company from the sale of 2,200 shares of its Series H Convertible Preferred Stock (the "Series H Preferred Stock") and warrants to acquire 1,883,200 shares of the Company's common stock (the "Warrants"). The Warrants have a three-year term and are immediately exercisable. The financing transaction closed on April 20, 2000.
The Series H Preferred Stock will not bear any dividends.
In April 1998, the Company entered into an agreement with Qwest Communications International, Inc. to purchase telecommunications services at fixed prices for an initial term of three years. The Company is currently obligated to purchase $13.0 million in telecommunications services during the three-year period ending April 30, 2001, of which $4.8 million has been purchased as of June 30, 2000. The charges underlying this commitment are expensed in the periods in which they occur. Based on the terms of the contract, Qwest's level of performance under the contract, and the Company's discontinuation of the myTalk service, the Company has commenced negotiations with Qwest to terminate the contract or renegotiate its terms, including the purchase commitment. There is no assurance the Company will be successful in these discussions.
In connection with its prior strategy, the Company entered into Magic Cap master license agreements with eight of its stockholders. The Company has satisfied its obligations under six of these agreements, and is subject to the following obligations under the remaining two agreements. In December 1999, the Company compromised its obligation to refund one licensee a prepaid royalty, together with interest, totaling $2.3 million in consideration of the issuance to the licensee of 267,559 shares of the Company's common stock and an agreement to pay a total of $1,250,000 in five quarterly installments commencing January 2000. As of June 30, 2000, $750 thousand remains to be paid under this arrangement and is classified in accounts payable. 267,559 shares of common stock were issued to the licensee during the six-month period ending June 30, 2000. The Company has agreed to refund the second remaining licensee any amount of a $2.0 million prepaid royalty not recouped by January 1, 2003, plus accrued interest. The amount of any such refund is payable on or before December 31, 2003. As of June 30, 2000, this obligation was classified in other long-term liabilities. The Company does not expect the second licensee to develop or manufacture additional products that incorporate the Company's Magic Cap technology.
Since the Company's inception, it has generated only minimal revenues and has relied principally on third party financing to fund its operations. The Company has incurred significant losses and has substantial negative cash flow. As of June 30, 2000, the Company had an accumulated deficit of $299.4 million, which includes a net loss of $21.1 million for the six-month period ended June 30, 2000. The Company expects to incur significant losses at least for the next eighteen months.
The Company expects that its cash, cash equivalents and short-term investment balances of $24.6 million as of June 30, 2000, and the cash expected to be available under the Company's equity line of credit arrangement, will be adequate to fund the Company's operations through the year 2000
WE ARE DEPENDENT ON A FEW CUSTOMERS AND EXPECT TO DERIVE A SIGNIFICANT AMOUNT OF REVENUE FROM A SINGLE CUSTOMER.
We have entered into commercial arrangements with Qwest Communications Corporation, Intuit(R) Inc., Excite@Home, the OnStar Corporation, a subsidiary of General Motors Corporation and Global Services Network, Inc. ("GSN"). Qwest and Intuit have placed their projects on hold. We plan to advance our relationships with OnStar and GSN and, in 2000, we expect to derive a significant portion of our revenue from OnStar.
INTENSE COMPETITION IN THE MARKET FOR VOICE APPLICATION SERVICES AND PRODUCTS COULD PREVENT US FROM ACHIEVING OR SUSTAINING PROFITABILITY.
The market for voice application services and products is intensely competitive. A number of companies have developed, or are expected to develop, voice applications and/or platform technologies that compete with ours. Competitors in the voice application and platform technologies markets include companies that offer hosted or customer premise equipment-based voice-activated solutions to the telecommunications market, such as AccessLine Communications Corporation, Call Sciences Inc., Comverse Technology, Inc., InterVoice-Brite Inc. and Webley Systems, Inc.; speech recognition vendors, such as Nuance Communications Inc., SpeechWorks International and Vocalis Group plc, to the extent that they engage in or support the development of voice applications; value-added resellers of speech recognition technology, such as NetbyTel.com Inc. and VocalPoint, Inc.; and companies in the voice portal category, such as BeVocal, Inc., Lucent Technologies, Inc., Motorola Inc., Quack.com Inc. and Tellme Networks Inc. Wireless communications infrastructure companies, such as Telefonaktiebolaget LM Ericsson or Phone.com Inc., may extend their offerings to provide the capabilities of the magicTalk communications platform, as may software developers such as Microsoft Corporation and Oracle Corp., or telecommunications companies such as AT&T Corp. and Sprint Communications Company, L.P. |
