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This manually signed original report consists of 40 sequentially numbered pages.
The exhibit index is contained on pages 36 and 37 of this report.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 1996.
Commission file number: 0-23296
CIDCO INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3500734
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
220 Cochrane Circle
Morgan Hill, CA 95037
(Address of principal executive offices and zip code)
(408) 779-1162
(Registrant's telephone number, including area code)
----------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01
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 Exchange 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 the 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. ( )
Aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the closing sale price of such stock at $14.38 on March 13,
1997: $207,685,000
Number of shares outstanding of the Registrant's Common Stock on March 13, 1997:
14,442,622
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders is incorporated by reference into Part III (Items 11, 12, and 13)
hereof.
- --------------------------------------------------------------------------------
<PAGE>
CIDCO INCORPORATED
INDEX
PART I. Page
Item 1. Business ..................................................3
Item 2. Properties ...............................................11
Item 3. Legal Proceedings ........................................11
Item 4. Submission of Matters to a Vote of Security Holders ......11
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters ..........................................12
Item 6. Selected Financial Data ....................................13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................14
Item 8. Financial Statements and Supplementary Data ................18
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure .........................32
PART III.
Item 10. Directors and Executive Officers of the Registrant .........33
Item 11. Executive Compensation .....................................35
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................35
Item 13. Certain Relationships and Related Transactions .............35
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...36
SIGNATURES ..................................................................38
<PAGE>
Part I.
Item 1. Business
CIDCO Incorporated ("Cidco" or the "Company") designs, develops and
markets subscriber telephone equipment that supports intelligent network
services being promoted by telephone operating companies ("telcos"). The
Company's first area of focus has been Caller ID, a service that allows
subscribers to view the telephone number and name of the calling party before
the call is answered. The Company's Caller ID products connect directly into
subscribers' telephone lines, receive complex network signaling and display call
information on a liquid crystal display ("LCD"). Since the introduction of its
first Caller ID unit in 1989, the Company has become the leading provider of
Caller ID equipment, having sold more than fourteen million units.
The Company has developed or is currently developing a number of new
products for existing and future telephone services, including a family of
intelligent feature telephones, first introduced in September 1994. These phones
support an entire package of network services including Caller ID, Call Return,
Call Forwarding, and Voice Mail in a single device. In addition, the Company has
introduced a display unit that combines two of the most popular services, Caller
ID and Call Waiting, into a unit which essentially provides "visual call
waiting".
The Company's most recent products include a screenphone with a large
display capable of accommodating Bellcore Analog Display Services Interface
("ADSI") scripts, which enable phone companies to provide sophisticated advanced
telephone transaction and e-mail services; and the iPhone, developed in
conjunction with InfoGear Technology, which provides Internet access without
using a computer.
Cidco sells its products to individual subscribers through direct
fulfillment relationships with certain regional Bell operating companies
("RBOCs"), to telcos directly, to major national and regional retailers and to
original equipment manufacturers ("OEMs"). Cidco's customers include Ameritech
Services, Inc. ("Ameritech"), A&A Int'l (Radio Shack), Bell Atlantic
Teleproducts ("Bell Atlantic"), Bell South Corporation ("Bell South"), K-Mart,
GTE, SBC Communications, Inc. ("Southwestern Bell"), US West Communications,
Inc. ("US West"), Telia Systems A.B., and Walgreens.
Industry Background
Prior to its court-mandated break-up in 1984, AT&T was a regulated
monopoly that provided local and long distance services, and customer telephone
equipment to over two-thirds of the telephone subscribers in the United States.
Today's competitive telecommunications industry has evolved principally as a
result of AT&T's divestiture of the RBOCs. The RBOCs, which currently account
for approximately 77% of local telephone access lines in the United States, and
independent telcos, such as GTE, provide standard dial tone service and local
telephone access lines. Interexchange carriers, such as AT&T, MCI Corp. and
Sprint, provide long distance services. Since the divestiture, AT&T (and its
recently spun off affiliate Lucent Technologies) has continued to sell switching
equipment and telephone equipment, while the RBOCs have been prohibited from
manufacturing any type of telephony equipment. This prohibition has been
eliminated by the Telecommunications Act of 1996, although final implementing
regulations have not yet been issued by the Federal Communications Commission
("FCC"). The RBOCs have been permitted to sell telephony equipment manufactured
by others bearing the RBOC's tradename and may purchase network equipment from
vendors other than AT&T. Consumers are no longer required to lease telephones
from AT&T and now purchase telephone equipment from numerous suppliers,
including retail stores. The AT&T divestiture, therefore, resulted in not only a
more deregulated telephone service industry, but also a more dynamic and
competitive telephony equipment industry in the United States.
The RBOCs and the independent telcos have approached saturation levels
for the installation of local telephone access lines, thus limiting future
growth of their core business. In order to supplement growth in revenues from
standard dial tone service within their respective service areas, the RBOCs and
the independent telcos have offered intelligent network services for which they
can charge their subscribers additional monthly fees. In addition, the telcos
have used these services to respond to increased competition from alternative
service providers such as cellular companies, cable companies, data transmission
companies and competitive access providers by differentiating their services and
creating consumer awareness and customer loyalty.
<PAGE>
Although services such as call waiting, call forwarding and speed
dialing have been available for over ten years, more recent investments by the
telcos to upgrade their networks and accommodate new signaling technologies have
enabled the rapid introduction of intelligent network services known as CLASS
(custom local area signaling services). These services include:
o Caller ID, which displays information about an incoming call (including
the number and name of the caller and the time and date of the call) on
a display screen built into the telephone or a separate display unit
connected to the telephone;
o Repeat Dialing, which continues to dial a busy number until the
connection is made;
o Selective Call Forward, which lets the subscriber preselect certain
numbers to be forwarded to another number;
o Automatic Call Back, which automatically dials the number of the last
incoming call;
o Selective Call Block, which lets the subscriber select certain
telephone numbers to be blocked;
o Distinctive Ringing, which lets the subscriber preselect numbers to
ring with a distinctive-sounding ring;
o Call Trace, which allows a subscriber to have a call traced by the
telephone company; and
o Caller ID on Call Waiting, which allows the subscriber to utilize
Caller ID service to identify an incoming call while already engaged in
a telephone conversation.
In addition to these CLASS services, the Company believes important
future services will include information services, transaction services,
messaging services and call management services, accessed via ADSI protocols and
the Internet.
The ability of telcos to achieve high penetration levels for
intelligent network services, especially Caller ID, is dependent, in part, upon
the availability of a new generation of subscriber telephone equipment. Most
existing telephones discourage use of these current and future services because
they require subscribers to remember and dial sequences of symbols and numbers
to access the services. Such telephones are also incapable of receiving the
complex network signaling required for Caller ID service and other future
services and do not have a display screen and controls for viewing and managing
call information. Therefore, a market for a new generation of user-friendly,
intelligent, network-compatible subscriber telephone equipment has emerged.
This new generation of subscriber telephone equipment must operate
reliably over a wide range of telephone network conditions. Although general
specifications exist for Caller ID and other intelligent network services,
network variations among telcos often require manufacturers to debug and field
test their products on various telephone networks in order to ensure that their
equipment operates properly throughout these networks and meets the high
standards of reliability and compatibility required by the telcos.
Traditional consumer telephone suppliers, which sell primarily through
retailers, have focused on the types of high volume "generic" equipment that are
most suitable for such a distribution channel. However, the market for
intelligent network subscriber telephone equipment currently relies in
significant part on specialized distribution arrangements and requires close
working relationships with the RBOCs and independent telcos to address
compatibility issues promptly as they arise. This created an opportunity for
entrants in the market for intelligent network subscriber equipment.
<PAGE>
Caller ID Service
Caller ID service, first introduced by New Jersey Bell in 1987, was the
first intelligent network service to require specialized subscriber telephone
equipment. Caller ID not only requires compatibility with complex network
signaling, but also a screen on which to display Caller ID information.
Originally, Caller ID service provided only the number of the party initiating
the call and transmitted data only within local area networks ("LATA"s). Since
the early 1990's, certain telcos have offered both number and name
identification. In December 1995, the FCC mandated that Caller ID service be
supported nationally. California instituted Caller ID service in mid 1996,
making the service available in all 50 states, the District of Columbia and
Puerto Rico. Additionally, Caller ID on Call Waiting was first introduced in
late 1995. This service allows the subscriber to utilize Caller ID service to
identify a second incoming call while already engaged in a telephone
conversation.
Penetration for Caller ID service has increased as necessary approvals
by state public utility commissions have been obtained and as the telcos have
upgraded their switches and implemented new signaling technologies. Caller ID
service is also currently available in most of Canada and has been introduced in
Mexico, Hong Kong, Israel, New Zealand, Australia, Chili, France, Singapore,
Sweden and the United Kingdom. During 1997, Caller ID service is expected to be
introduced in a number of additional countries.
Strategy
The Company's objective is to envision, produce and distribute the
range of products that will become the primary telephony and communication
appliances utilized by customers of telephone operating companies. To achieve
this objective, the Company has developed the following strategy:
Leverage relationships with RBOCs, and independent telcos
The Company believes that it has established close working
relationships with certain RBOCs and independent telcos, which enable the
Company to design its products to be compatible with the existing and evolving
telco networks. These relationships allow the Company to understand variations
between networks and to design its products to operate reliably over a wide
range of network conditions. In addition, these relationships permit the Company
to design products to meet emerging standards and to respond to new intelligent
network services being introduced.
Enhance and expand distribution relationships with RBOCs
The Company has developed direct fulfillment relationships with certain
RBOCs, which allow it to market its equipment together with intelligent network
services and leverage the efforts of the RBOCs to market these services. Cidco
has experienced accelerated sales growth in regions where it maintains direct
fulfillment relationships. These fulfillment arrangements differ by RBOC, but
typically allow subscribers to purchase equipment with Caller ID service through
one phone call to an RBOC sales representative. In general, the RBOC
representative takes the customer's order for a Cidco product or connects the
subscriber to a Cidco sales representative through an on-line transfer. The
Company intends to develop direct fulfillment relationships with additional
RBOC's and to leverage existing and future fulfillment relationships as it
introduces new products.
Expanded cooperative marketing efforts
The Company has initiated joint marketing efforts with several RBOC's and
independent telco's to attract new subscribers. Through these programs, Cidco
contacts potential customers using outbound telemarketing, direct response
television and direct mail promotions. The RBOC pays the Company a commission to
acquire new Caller ID service subscribers. Frequently these programs involve
offering the subscriber a free Caller ID adjunct unit provided by the Company if
they sign up to receive Caller ID service. An increasing proportion of the
Company's sales of adjunct Caller ID units are being generated by these Cidco
direct marketing programs.
<PAGE>
Design high quality, innovative products
Besides requiring compatibility with the telcos' networks, Cidco's
customers also demand high quality products that are innovative, easy to use and
have consumer appeal. The design, functionality and aesthetic characteristics of
Caller ID and advanced telephone products can impact acceptance of Caller ID and
other services by customers and have become important criteria to the telcos in
choosing companies with which to develop direct fulfillment relationships. Cidco
believes that its ability to satisfy technological and ergonomic design
requirements is one of the factors that has enabled it to develop direct
fulfillment relationships with most RBOCs and independent telcos. The Company
intends to continue to emphasize quality, innovation and ease of use in its
product design.
Provide high quality support and service
The Company believes its ability to provide high quality support and
service has contributed to its success in developing and retaining its RBOC and
telco relationships. The Company intends to continue to provide high quality
support and service to telco subscribers, who expect the same level of support
and service that they receive from the telcos.
Be a low cost producer of intelligent network subscriber telephone equipment
The Company has benefited from its ability to reduce manufacturing
costs by engineering products for high volume assembly and by stressing low cost
manufacturing design while maintaining quality, consistency and reliability. The
Company has sold more than fourteen million Caller ID products to date, and
believes that its acquired knowledge will permit it to maintain low
manufacturing costs for its products, in the current market conditions.
Products
The Company introduced its first Caller ID unit in 1989. Since 1989,
the Company has broadened its Caller ID product family to include a variety of
models including stand-alone display units and screenphones with Caller ID
capability built in. To date, all of the Company's sales have been generated
from its Caller ID based products. These products include Caller ID Feature
Phones and a Caller ID Cordless Phone, which together accounted for 27 percent
of sales during the year ended December 31, 1996. Additional advanced
screenphone products and an Internet access telephone will be introduced in
1997.
Cidco's Caller ID and screenphone products display all transmitted
information before the incoming phone call is answered and store the call
information in memory. Among the features available on the Company's products
are backlit screens for easy viewing, memory capacity for up to 100 calls, a
"blocked call/new call" light, bilingual display and a "message waiting alert"
light that indicates to a network voice mail subscriber that new voice mail
messages have been received. The Company pioneered OTV(R) (one-time viewing),
which allows the screen on the Company's Caller ID units to display all Caller
ID information at one time. Additionally, the Company's latest product includes
Caller ID on Call Waiting. This allows the caller to utilize Caller ID service
to identify an incoming call while already engaged in another telephone
conversation. The Company's Caller ID units are compatible with the major
switches currently in use in the United States, including those manufactured by
AT&T, Northern Telecom, Siemens A.G. and L.M. Ericsson.
The Company's family of Caller ID products includes the following
principal models:
<TABLE>
Memory Typical
Model No. Capacity Product Features Retail Price
<CAPTION>
<S> <C> <C> <C>
PA-25 25 Calls OTV(R)(One-Time Viewing);
New Call/Blocked Call; LCD $30.00 - $40.00
Contrast Adjustment; Compact
design
JA-25 25 Calls OTV(R), New Call/Blocked Call
Light; LCD Contrast Adjustment $40.00 - $50.00
<PAGE>
JA-60 60 Calls OTV(R), New Call/Blocked Call
Light; Bilingual English/Spanish; $50.00 - $60.00
LCD Contrast Adjustment
SB-99 99 Calls OTV(R), New Call/Blocked $60.00 - $70.00
Call Light; Bilingual
English/Spanish; LCD Contrast
Adjustment; Back light Display;
Message Waiting Alert Light
CW-99 99 Calls OTV(R), Caller ID/Call Waiting; $80.00 - $90.00
(Caller ID MEC (Multiple extension
on Call capability); New Call/Blocked
Waiting Adjunct) Call Light; Bilingual English/
Spanish; LCD Contrast Adjustment;
Message Waiting Alert Light
SA-100A-27 100 Calls OTV(R), Two Line Capability; $90.00 - $100.00
New Call/Blocked Call Light;
Bilingual English/Spanish; LCD
Contrast Adjustment
CT-25R 25 Calls OTV(R), New Call/Blocked Call $90.00 - $100.00
(Caller ID Light; Bilingual English/Spanish;
Feature Phone) LCD Contrast Adjustment; 20 Speed
LCD Memory
CT-100 30 Calls OTV(R), New Call/Blocked Call $120.00 - $140.00
(Caller ID Light; Message Waiting Alert Light;
Speakerphone) LCD Call Contrast Adjustment;
3-way Calling; Forwarding; Volume
Adjustment; Busy Redial; 50 Number
Directory
CL-500CWi 25 Calls OTV(R); Bilingual English/Spanish; $180.00 - $210.00
(Caller ID One-touch access to Voice Mail;
Cordless Phone) Repeat Dialing; Call Forwarding;
Caller ID/Call Waiting; Message
Waiting Indication/Visual Message
Waiting; Line in Use Indicator Light;
Charge Indicator Light
CST-2000 50 Calls Message Waiting display; Platform $250.00 - $300.00
(ADSI for visual voice mail, home banking,
Screenphone) stock quotes, etc.; 14 one touch
Speed Dial keys; Directory stores 100
entries alphabetically; Redial list saves
and redials last 7 dialed numbers; Auto
name-matching from Directory or Speed
Dial List.
</TABLE>
Distribution
The Company's distribution strategy is to make its products available
to potential end users through multiple distribution channels. These channels
are:
Direct Fulfillment Arrangements
The Company currently has direct fulfillment arrangements with
Southwestern Bell, Ameritech, US West and, in 1997, Nynex. In most instances,
the RBOC sales representatives sell both network services and Cidco equipment to
customers and transmit equipment orders to Cidco electronically on a daily
basis. The Company then ships its equipment directly to the customers and bills
the RBOC, which, in turn, bills its customers. As part of these fulfillment
relationships, Cidco provides toll free after-sales service and support to help
the customer understand how to utilize the Caller ID service and equipment.
The Company continually seeks to strengthen its current RBOC marketing
alliances and to develop new alliances. The Company has found through experience
that sales of Caller ID service and equipment are more successful when the
customer can purchase both Caller ID service and equipment from a single source,
especially when payment for equipment can be made on an installment basis
through the customer's phone bill. The Company has found that customer
satisfaction with Caller ID service is enhanced when the customer receives
Caller ID equipment promptly after ordering the service and is provided a toll
free number for after-sales service and support. For these reasons, the Company
believes its inbound telemarketing and fulfillment arrangements will continue to
be an important marketing channel for its products.
<PAGE>
Joint Marketing Arrangements
The Company has expanded its cooperative marketing efforts with
Southwestern Bell , Bell Atlantic, US West and, in 1997, GTE. Under these
efforts, the Company coordinates sales campaigns involving the use of television
and radio advertising, consumer mailings and telemarketing to sell RBOC services
which utilize the Company's products. Sales attributed to these direct marketing
efforts are an increasing portion of adjunct business.
Direct Sales to Telcos
Through its direct sales force, the Company sells Caller ID units in
quantity to a number of telcos, either under the Cidco name or the respective
telcos' logo. The Company sells its products directly to most of the major
independent telcos in the United States, including GTE; as well as to Canadian
and international telephone companies.
Retail/OEM Sales
The Company sells to national, regional and local retailers and OEM
customers. A substantial portion of the Company's retail sales are made through
manufacturers' representatives or distributors with the support of the Company's
sales personnel. Cidco's OEM customer include Lucent Technologies and Radio
Shack. The Company's major U.S. retail customers include K-Mart, Target Stores,
Walgreens Company, Office Depot and Price/Costco.
Significant Customers
For the year ended December 31, 1996, sales to Southwestern Bell,
Ameritech (or their Caller ID service subscribers) and Bell Atlantic represented
36.5%, 19.2% and 11.8%, respectively, of the Company's sales. In 1995, sales to
Ameritech and Southwestern Bell represented 32.3%, and 32.1%, respectively, of
the Company's sales.
Product Development
The Company's product development efforts are focused on new products
that support additional intelligent network services, product enhancements,
international standards compliance and the continued improvement of hardware
components to reduce manufacturing costs. For example, in 1996 the Company
introduced an ADSI telephone, a Caller ID on Call Waiting corded telephone and a
cordless Caller ID on Call Waiting telephone. The ADSI technology will enable
subscribers to utilize current intelligent network services for call management
and future informational and transactional services.
The Company's product development group is experienced in engineering
products for high-volume assembly, stressing low-cost manufacturing design while
maintaining quality, consistency and reliability. The Company's products utilize
proprietary electrical, mechanical and software design. The Company's ability to
emulate various telephone switch signaling characteristics through specially
designed test equipment in its development facility, together with its field
test program, enable it to develop products that are compatible with the various
telephone networks. This capability is crucial to the Company's continued
success.
In 1996, the Company invested in InfoGear Technology Corporation
("InfoGear"). The Company also entered into a joint development agreement with
InfoGear to develop the iPhone. The iPhone is a high-end telephone that combines
access to advanced telephone services, the Internet and e-mail in a single,
easy-to-use platform. Under the agreement, the Company contributed advanced
telephony technology and manufacturing and marketing expertise, while InfoGear
provided the client/server software and user interface. The iPhone was conceived
by engineers at National Semiconductor Corporation, who have licensed the
technology to InfoGear and are also equity shareholders in InfoGear.
<PAGE>
In 1994, 1995 and 1996, the Company's research and development
expenditures were $5.2 million, $9.7 million and $13.2 million, respectively.
Research and development expenses primarily have represented salaries for
research and development personnel, associated personnel benefits and tooling
and supplies for research and development activities.
At December 31, 1996, 63 employees were engaged in product development.
There can be no assurance that the Company's product development efforts will
result in commercially successful products, or that the Company's products will
not be rendered obsolete by changing technology or new product introductions by
others.
Manufacturing
The Company's manufacturing operations are limited to the testing,
quality control and shipping of finished products. The Company presently uses
third party contract assembly companies located in Bangkok and Korat, Thailand;
Batam, Indonesia; Dan Shui Zhen, Canton, China; and Jahoz Bahan, Malaysia to
manufacture its products. All of these manufacturers have been certified
pursuant to ISO 9002. The Company's manufacturers perform comprehensive
inspection, testing and statistical process control testing, utilizing the
Company's internally designed automated testing equipment. To date, the Company
has not experienced significant product warranty returns.
Many of the key components used in the Company's products are currently
being purchased from single sources. The Company has developed a proprietary
microcontroller which is produced by an independent foundry Company in multiple
locations under contract with the Company to ensure adequate supply. The Company
uses unique Application Specific Integrated Circuits ("ASIC") in its individual
products. The inability to obtain sufficient quantities of components or
comparable products as required, or to develop alternative manufacturing
capability if and as required in the future, could result in delays or
reductions in product shipments that could materially and adversely affect the
Company's business, operating results and financial condition.
Competition
The market for the Company's products is highly competitive and subject
to rapid technological change. At present, the Company's principal competitors
in the market for Caller ID display units are Intellidata Technologies
Corporation, Bell South Products, Nortel, Southwestern Bell Freedom Phone and
Thomson ("GE"). The Company's Caller ID products also compete with Caller ID
telephones manufactured by AT&T, Nortel, Panasonic, Sony, Thomson and others.
The Company expects competition to increase in the future from existing and new
competitors, possibly including current customers. Most of these current and
potential competitors have substantially greater financial, marketing and
technical resources than the Company. Increased competition could materially and
adversely affect the Company's results of operations through price reductions
and loss of market share. There can be no assurance that the Company will be
able to continue to compete successfully against its existing competitors or
that it will be able to compete successfully against new competitors.
The Company believes that the principal competitive factors in its
market are knowledge of the requirements of the various telcos, product
reliability, product design, customer service and support, and product price
relative to performance. The Company believes it presently competes favorably
with respect to each of these factors.
Government Regulation
The sale of Caller ID services by telcos is subject to regulation by
state public utilities commissions and other regulatory authorities. Protests
from special interest groups that object to Caller ID on the basis of privacy
have been effective in slowing down the regulatory approval process. To
facilitate the implementation of Caller ID service, many telephone companies
already offer or plan to offer a "call blocking" service. Under call blocking,
callers can block the display of their numbers on a per-line or per-call basis.
To date, all 50 states and Washington D.C. have implemented Caller ID
regulations with per-call blocking, per-line blocking or both.
<PAGE>
Patents, Proprietary Rights and Licenses
The Company has acquired one patent related to core Caller ID
technology, and has two patents issued on its new Caller ID/Call Waiting
extension protocol. The Company currently has eight patent applications on file
with the US Patent and Trademark Office and several foreign filed patent
applications based on its US filings. The Company is presently initiating a
licensing program under its current patent portfolio.
The Company relies to a certain extent on trade secret laws to
establish and maintain those proprietary rights which it believes are not
reverse engineerable by third parties. Although the Company has obtained
confidentiality agreements from all of its employees, including its key
executives and engineers in its product development group, there can be no
assurance that third parties will not independently develop the same or similar
technology, obtain unauthorized access to the Company's proprietary technology
or misuse the technology to which the Company has granted access. It is for this
reason the Company has organized an internal legal department and is actively
pursuing patent protection for its Research and Development efforts.
A portion of the messaging technology used in the Company's Caller ID
products is based on a patent licensed from AT&T on a non-exclusive basis. AT&T
reserved the right to use the technology for all purposes relating to businesses
of AT&T and its subsidiaries, and receives royalties from sales of the Company's
Caller ID products other than to itself or the RBOCs. The Company incurred
royalties of $1.4 million, $1.9 million and $1.2 million to AT&T in 1994, 1995
and 1996, respectively. The AT&T license agreement has no expiration date but is
terminable by either party. If the AT&T license was terminated and the Company
was unable to negotiate a new patent license agreement, the Company would no
longer be authorized to manufacture or sell Caller ID products in the United
States which fall within the scope of the AT&T patent, other than to the RBOCs
or AT&T.
The Company has a nontransferable, nonexclusive license agreement with
Nortel to utilize Nortel's patents for Caller ID on Call Waiting technology.
Under the agreement, the Company will pay royalties to Nortel for each licensed
product sold, leased or put into use by the Company other than direct sales to
Nortel beginning January 1, 1997. The agreement also provided for a one-time
payment in full satisfaction of royalties on all units incorporating Nortel's
patents which were sold by the Company prior to January 1, 1997. Future
royalties are payable at a variable rate based on product type and number of
units sold.
The Company has a nontransferable, exclusive license agreement with Focus
Semiconductor ("Focus") to utilize patents for Caller ID technology incorporated
in a part used in virtually all products sold by the Company. The Company pays
royalties to Focus for each part included in the Company's products beginning in
October 1996. Royalties are payable at a variable rate based on the number of
parts used. Total Focus royalty expense incurred in 1996 was $397,000.
The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. In the course of its business, the Company has been approached by
parties alleging infringement by its product or technology of the proprietary
rights of others. In an effort to reduce the potential for litigation, the
Company on occasion is using its own patent portfolio as a basis for negotiating
a cross license with patent holders for technology which the Company deems
valuable to the Company in the future. For other claims of infringement, the
Company utilizes its research and development to design around the claimed
technology, or relies on contract indemnification to resolve the matter. In the
opinion of management, the outcome of such claims will not have a material
adverse effect on the results of operations or financial condition of the
Company.
Additionally, there can be no assurance that third parties will not
assert infringement claims against the Company in the future in connection with
its products, that any such assertion of infringement will not result in
litigation, or that the Company would prevail in such litigation or be able to
license any valid and infringed patents of third parties on commercially
reasonable terms. Furthermore, litigation, regardless of its outcome, could
result in substantial cost to and diversion of effort by the Company. Any
infringement claims or litigation against the Company could materially and
adversely affect the Company's business, results of operations and financial
condition.
<PAGE>
Employees
At December 31, 1996, the Company employed 416 full-time persons, of
whom 63 were engaged in product development, 50 in sales and marketing, 138 in
customer service, 128 in operations and 37 in management, finance and
administration. The Company has no collective bargaining agreement with its
employees and believes that its relationship with its employees is good.
Item 2. Properties
The Company's principal administrative, development, distribution and
support facility is located in Morgan Hill, California and consists of a five
building campus of approximately 123,000 square feet under leases which expire
between January 1999 and March 2006. The Company owns a 3.24 acre parcel in the
same business park. The Company also leases approximately 6,000 square feet of
office space in Valhalla, New York, 1,500 square feet of office space in
Chicago, Illinois, and 1,200 square feet of office space in St. Louis, Missouri
for its sales and customer training activities. These leases expire in May 2000,
April 1999 and May 1999, respectively.
Item 3. Legal Proceedings
In the course of its business, the Company has been named as a
defendant in certain actions and could incur an uninsured liability in one or
more of them. The amount of any such liability is not determinable or estimable.
However, in the opinion of management, the outcome of such litigation will not
have a material adverse effect on the results of operations or financial
condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
<PAGE>
Part II.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Since the initial public offering of the Company's Common Stock on
March 3, 1994, the Common Stock has been traded on the Nasdaq National Market
under the symbol CDCO.
The following table sets forth for the periods indicated the high and
low closing sales price per share of Common Stock on the Nasdaq National Market
as reported by Nasdaq:
1995 High Low
- ---- ------ ------
1st Quarter ......................................... $34.25 $23.25
2nd Quarter.......................................... $37.63 $26.38
3rd Quarter.......................................... $39.50 $29.50
4th Quarter.......................................... $36.50 $22.25
1996
- ----
1st Quarter.......................................... $38.00 $25.88
2nd Quarter.......................................... $41.00 $30.50
3rd Quarter.......................................... $36.00 $15.75
4th Quarter.......................................... $20.13 $16.81
As of December 31, 1996, there were 104 holders of record of the
Company's Common Stock, which does not include those beneficial owners whose
shares are held in street or nominee name.
After completion of the announced stock buyback of up to 1,000,000
shares of the Company's Common Stock, the Company intends to retain all of its
earnings to finance future growth. The Company does not anticipate paying any
cash dividends in the foreseeable future.
Effective January 27, 1997, the Company adopted a Shareholder's Rights Plan
wherein stock rights will be distributed as a dividend at the rate of one right
for each share of Common Stock held on February 14, 1997, the record date for
such dividend. The key terms of the Shareholders Rights Plan will be activated
if any person acquires 15 percent or more of the Company's Common Stock without
the approval of the Company's Board of Directors. Once the Plan is activated,
each right will entitle the holder to purchase at a price of $95, a fraction of
a share of Preferred Stock which is equivalent to $190 worth of the Company's
Common Stock at the then current market value. Any person currently holding 15
percent or more of the stock will be "grandfathered" for existing holdings. The
Company's Board of Directors has retained the right to amend the Shareholder's
Rights Plan at any time prior to its activation.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share data) Year ended December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ----------- ---------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales ....................................... $ 215,197 $ 193,668 $ 100,290 $ 34,993 $ 15,704
Research and development (1) ................ 13,170 9,709 5,175 3,740 1,157
Income (loss) from operations (1) ........... 27,236 36,491 19,124 6,772 (149)
Net income (loss) (2) ....................... 18,523 22,613 11,657 4,145 (146)
Earnings per share (2) ...................... $ 1.21 $ 1.51 $ 0.90 $ 0.38 $ --
Weighted average shares...................... 16,893 14,979 13,020 10,777 --
Dividends ................................... $ -- $ -- $ -- $ 2,389 $ --
</TABLE>
<TABLE>
As of December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ---------
<CAPTION>
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ................... $ 26,509 $ 19,290 $ 28,224 $ 475 $ 1,027
Short-term investments ...................... 38,560 21,342 19,936 -- --
Working capital ............................. 110,469 91,355 74,003 6,257 361
Total assets ................................ 152,613 127,151 108,598 15,423 4,353
Mandatorily redeemable Preferred Stock ...... -- -- -- 18,740 --
Stockholders' equity (deficit) .............. $ 128,846 $ 106,214 $ 81,306 $ (11,258)$ 745
</TABLE>
QUARTERLY DATA:
Year ended December 31, 1996
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Sales ........................ $ 51,686 $ 60,446 $ 45,959 $ 57,106
Gross margin ................. 22,623 26,526 22,892 23,339
Income (loss) from operations 10,550 10,051 7,600 (965)
Net income ................... 6,570 6,365 5,340 248
Earnings per share ........... $ 0.44 $ 0.42 $ 0.33 $ 0.02
Year ended December 31, 1995
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- --------- --------- --------
Sales ........................ $ 49,542 $ 46,161 $ 46,611 $ 51,354
Gross margin ................. 22,120 19,212 23,207 21,057
Income from operations ....... 10,267 8,257 9,424 8,543
Net income ................... 6,431 5,181 5,805 5,196
Earnings per share ........... $0.43 $ 0.35 $ 0.39 $ 0.35
(1) Research and development includes a one-time charge of $1,770,000 in May
1993 related to the settlement of an engineering contract.
(2) Because of the Company's Subchapter S status through April 30, 1993, net
income (loss) through the second quarter of 1993 reflects a pro forma
provision (benefit) for income taxes as if the Company had been subject
to federal income and California franchise taxation as a Subchapter C
corporation for that period.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
HISTORICAL BACKGROUND
Cidco was incorporated in July 1988 to design, develop and market
subscriber telephone equipment that supports intelligent network services being
introduced by Regional Bell Operating Companies ("RBOC"). The Company began
operations in 1989, funding its business with a capital investment made by its
founders. Prior to its initial public offering in March 1994, the Company
financed its growth principally through internally generated funds and
short-term borrowings.
In March 1994, the Company closed an initial public offering of its
common stock and had two subsequent public offerings in 1994 resulting in
capital infusions to the Company totaling approximately $59.4 million, net of
stock offering costs, Preferred Stock redemptions and debt repayment.
The Company's sales and distribution channels include direct marketing
fulfillment programs, standard fulfillment of telephone company orders, and bulk
sales directly to telephone companies, retail stores, international accounts and
OEM customers. Direct marketing fulfillment programs are sales campaigns run by
the Company involving the use of television and radio advertising, consumer
mailings and telemarketing to sell RBOC services which utilize the Company's
products. In 1996, direct marketing programs resulted in net sales of $54
million. Fulfillment sales, excluding the direct marketing programs, occur when
the Company receives an order either electronically or through an on-line
transfer of the customer by the RBOC, and the Company ships the requested
product directly to the customer. In the case of standard fulfillment sales, the
RBOC generates the order by performing the marketing activities themselves.
Standard fulfillment sales accounted for 43%, 68% and 50% of sales in 1996, 1995
and 1994, respectively. Direct marketing fulfillment sales totaled 25%, 2% and
0% of sales in 1996, 1995 and 1994, respectively.
The discussion and analysis which follows contains trend analysis and
other forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the factors
that may affect future results set forth below and elsewhere in this report.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of sales represented by certain line items in the Company's income statement:
Year ended December 31,
1996 1995 1994
---- ---- ----
Sales ..................................... 100.0% 100.0% 100.0%
Cost of sales ............................. 55.7 55.8 55.1
----- ----- -----
Gross margin .............................. 44.3 44.2 44.9
----- ----- -----
Operating expenses:
Research and development ................ 6.1 5.0 5.1
Selling and marketing ................... 22.2 17.4 17.4
General and administrative .............. 3.4 3.0 3.3
----- ----- -----
31.7 25.4 25.8
----- ----- -----
Income from operations .................... 12.6 18.8 19.1
----- ----- -----
Other income (expense), net:
Interest income.......................... 3.1 0.6 0.6
Interest expense......................... (1.4) -- --
----- ----- -----
1.7 0.6 0.6
----- ----- -----
Income before income taxes ................ 14.3 19.4 19.7
Provision for income taxes ................ 5.7 7.7 8.1
----- ----- -----
Net income ................................ 8.6% 11.7% 11.6%
===== ===== =====
<PAGE>
1996 COMPARED TO 1995
Sales
Sales are recognized upon shipment of the product to the customer less
reserves for anticipated returns or retention of certain services provided by
the RBOC, and customer credit worthiness. The Company's sales increased 11% to
$215.2 million in 1996 from $193.7 million in 1995, primarily due to higher unit
sales of the Company's integrated corded and cordless feature phones, which were
sold primarily through Ameritech and Southwestern Bell. The average selling
price of units sold increased slightly, as unit sales of phones increased as a
percentage of sales, while adjunct volumes remained relatively constant. The
total fulfillment business remained constant at approximately 70% of sales.
However, the Company's direct marketing programs accounted for 37% of the
fulfillment sales channel in 1996. In 1995, these direct marketing programs
accounted for only 3% of the fulfillment sales channel. The Company anticipates
that these direct marketing programs will continue to be a significant source of
sales throughout 1997. Additionally, the Company has negotiated significant
contracts with GTE for direct marketing programs and Nynex for standard
fulfillment business, both of which will begin shipping in 1997.
Gross margin
Cost of sales primarily includes the cost of finished goods purchased
from the Company's offshore contract manufacturers, as well as, all costs
associated with procuring and warehousing the Company's inventory, and royalties
payable on licensed technology used in the Company's products. Royalty expense
in 1996 was $2.1 million compared with $1.9 million in 1995. Gross margin as a
percentage of sales increased nominally to 44.3% in 1996 from 44.2% in 1995. In
1996, direct marketing program sales increased gross margins; however, this
increase was offset by a $2.5 million provision for bad debt recorded in the
fourth quarter of 1996 when the Company became aware of the additional reserves
needed in excess of the original estimates. The Company expects gross margins to
vary in the future due to changes in product and distribution mix. The Company
believes gross margins may increase in 1997 with the anticipated level of direct
marketing programs, which typically have higher gross margins, although pricing
pressures in certain distribution channels may offset these increases.
Research and development expenses
Research and development expenses represent primarily salaries for
personnel, personnel benefits, and tooling and supplies for research and
development activities. The Company's policy is to expense all research and
development expenditures as incurred except for certain investments in tooling.
Research and development expenses increased 36% to $13.2 million in 1996 from
$9.7 million in 1995, due primarily to increased spending on personnel and new
development projects such as ADSI, cordless telephones and advanced screen
phones which provide access to the Internet. Research and development expenses
as a percentage of sales increased to 6.1% in 1996 from 5.0% in 1995. The
Company expects that research and development expenses as a percentage of sales
will continue at approximately the current level in 1997.
Selling and marketing expenses
Selling and marketing expenses represent primarily personnel costs,
telephone and electronic data exchange expenses, promotional costs and travel
expenses. Selling and marketing expenses increased to $47.7 million in 1996 from
$33.6 million in 1995 and as a percentage of sales increased to 22.2% in 1996
from 17.4% in 1995. These increases were due principally to the Company
significantly expanding promotion of intelligent network services through
several direct mail, direct response television and telemarketing campaigns
resulting in increased advertising and telemarketing agency costs. The Company
anticipates that selling and marketing expenses as a percentage of sales will
increase significantly in 1997 due to the anticipated level of direct marketing
activities.
General and administrative expenses
General and administrative expenses represent primarily salaries,
benefits and other expenses associated with the finance and administrative
functions of the Company. General and administrative expenses increased to $7.3
million in 1996 from $5.8 million in 1995. General and administrative expenses
increased as a percentage of sales to 3.4% in 1996 from 3.0% in 1995. These
increases reflect higher spending on legal costs, information systems and
administrative staff required to support the Company's growth. The Company
believes that general and administrative expenses as a percentage of sales will
continue at approximately the current level in 1997.
<PAGE>
Other income (expense), net
Other income in 1996 principally reflects interest income from the
investment of available cash balances which were substantially higher on average
in 1996 than in 1995. Other expense consists of interest expense related to the
issuance of long-term debt, which was repaid at the end of 1996.
Provision for income taxes
The provision for income taxes in 1996 and 1995 reflects a rate of 40%.
1995 COMPARED TO 1994
Sales
The Company's sales increased 93% to $193.7 million in 1995 from $100.3
million in 1994, resulting primarily from higher unit sales through the
Company's direct fulfillment programs, as Ameritech and Southwestern Bell
continued to promote Caller ID heavily. In particular, higher unit sales of the
Company's integrated feature phones contributed substantially to the increase in
sales, as Ameritech and Southwestern Bell promoted a combination of intelligent
network services utilizing these phones.
Gross margin
Gross margin as a percentage of sales decreased to 44.2% from 44.9% in
1994. This decrease was primarily a result of the Company building the
infrastructure to handle the volume of shipments and corresponding returns that
occur through certain promotions aimed at direct fulfillment customers. Royalty
expense in 1995 was $1.9 million as compared with $1.4 million in 1994.
Research and development expenses
Research and development expenses increased 88% to $9.7 million in 1995
from $5.2 million in 1994, resulting primarily from increased spending on
personnel and new development projects such as ADSI and cordless telephones.
Research and development expenses as a percentage of sales decreased from 5.1%
in 1994 to 5.0% in 1995, primarily due to the rapid increase in sales.
Selling and marketing expenses
Selling and marketing expenses increased from $17.4 million in 1994 to
$33.6 million in 1995, due principally to the cost of supporting the Company's
rapidly growing fulfillment sales activities and to investments in other
marketing channels. In particular, the Company continued its high level of sales
support resulting in increased personnel costs. Additionally, the Company
initiated the promotion of intelligent network services through several direct
mail and telemarketing campaigns resulting in increased advertising and
telemarketing agency costs. As a percentage of sales, selling and marketing
expenses remained the same at 17.4%.
General and administrative expenses
General and administrative expenses increased from $3.3 million in 1994
to $5.8 million in 1995, reflecting additional administrative staff and
professional staff required to support the rapid growth of the Company. General
and administrative expenses decreased as a percentage of sales from 3.3% in 1994
to 3.0% in 1995.
Other income (expense), net
Other income (expense), net in 1995 principally reflects interest
income from the investment of available cash balances which were substantially
higher on average in 1995 than in 1994.
Provision for income taxes
The provision for income taxes in 1995 reflects a rate of 40%, down
from 41% in 1994.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $7.2 million during
1996 primarily from cash generated from operations of $28.9 million offset by
the purchase of short-term investments of $17.4 million and acquisition of
property and equipment of $5.5 million. Cash generated from operations of $28.9
million resulted primarily from earnings of $18.5 million, depreciation and
amortization of $5.5 million and an increase in accounts payable of $5.5
million.
The Company had working capital of $110.5 million at December 31, 1996,
as compared to $91.4 million at December 31, 1995. The Company's current ratio
improved from 5.4 to 1, as of December 31, 1995, to 5.6 to 1, as of December 31,
1996.
In May 1996, the Company renegotiated its line of credit, increasing
the amount of the line to $25 million, none of which has been drawn down. The
interest rate on the line of credit is prime less 0.25%. The line is secured by
substantially all of the Company's assets. As of December 31, 1996, the Company
had not barrowed any funds under the line.
In June 1996, the Company issued $150 million of 3.75% convertible
subordinated notes due June 30, 2003. The notes were convertible into the
Company's Common Stock at a conversion rate of one share of Common Stock for
each $41.00 in principal amount of the notes. The note agreement contained
covenants which, among other matters, restricted or limited the ability of the
Company to pay dividends or incur indebtedness. Interest on the notes was
payable quarterly commencing September 30, 1996. The notes were fully redeemed
on December 30, 1996.
On January 27, 1997, the Company announced its plans to purchase up to
1 million shares of its outstanding Common Stock. As of February 28, 1997, the
Company had repurchased 691,600 shares at an aggregate purchase price of $8.7
million.
The Company plans to continue to invest in its infrastructure to gain
efficiencies and meet the demands of growth. The Company believes its 1997
capital expenditures will be approximately $7 million. The 1997 capital
expenditures are expected to be funded from available working capital. The
planned expenditure level is subject to adjustment as changing economic
conditions necessitate. The Company believes its current cash, short-term
investments and line of credit will satisfy the Company's working capital and
capital expenditure requirements through the end of 1997.
Inflation
Management believes inflation has not had a material effect on the
Company's operations or on its financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company is not certain whether it has experienced or will
experience seasonality in its sales or operating results due to the emerging
nature of its markets and rapidly changing sales mix. The Company has
experienced and may in the future experience significant fluctuations in sales
and operating results from quarter to quarter due to a combination of factors.
These factors include: the timing of the initiation of Caller ID, Caller ID on
Call Waiting and ADSI service by a telco on a system-wide or regional basis; the
timing of significant orders for the Company's products; the extent to which
telcos promote Caller ID service and fluctuations in such promotional
activities; the success of the Company's own direct marketing programs, in
particular, deriving adequate sales and volumes and control of related costs;
the addition or loss of distribution channels or outlets; changes in telco
service charges for Caller ID service; new product introductions by the Company
or its competitors; technical difficulties with telco networks; changes in the
Company's product mix or sales mix by distribution channel that may affect sales
prices, margins or both; further expansion of the Company's marketing and
service operations; disruptions in sources of supply; changes in material costs;
regulatory changes; general economic conditions and other factors. The Company's
operating expenses are based on anticipated sales levels, and a high percentage
of such expenses are relatively fixed. Because the Company has minimal backlog
and its sales in each quarter result primarily from orders received in that
quarter, variations in the timing of major orders for the Company's products can
cause significant fluctuations in operating results from quarter to quarter.
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements:
Financial Statements: Page
Report of Independent Accountants ...............................18
Balance Sheet at December 31, 1996 and 1995 .....................19
Income Statement for the three years
ended December 31, 1996 .......................................20
Statement of Stockholders' Equity (Deficit) for
the three years ended December 31, 1996 .......................21
Statement of Cash Flows for
the three years ended December 31, 1996 .......................22
Notes to Financial Statements ...................................23
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts .................31
All other financial statement schedules are omitted because the
information called for is not present in amounts sufficient to
require submission of the schedules or because the information
is shown either in the financial statements or the notes
thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
CIDCO Incorporated
In our opinion, the financial statments listed in the above index present
fairly, in all material respects, the financial position of CIDCO Incorporated
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
January 27, 1997
<PAGE>
CIDCO INCORPORATED
BALANCE SHEET
(in thousands, except per share data)
December 31,
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 26,509 $ 19,290
Short-term investments ................................ 38,560 21,342
Accounts receivable, net of allowances for
doubtful accounts of $2,966 and $3,150 ............... 48,242 49,624
Inventories ........................................... 14,555 17,916
Deferred tax asset .................................... 5,086 2,974
Other current assets .................................. 1,284 1,146
-------- --------
Total current assets ................................ 134,236 112,292
Property and equipment, net .............................. 14,118 14,112
Other assets ............................................. 4,259 747
-------- --------
$152,613 $127,151
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 16,880 $ 11,373
Accrued liabilities ................................... 6,211 8,422
Accrued taxes payable ................................. 676 1,142
-------- --------
Total current liabilities ........................... 23,767 20,937
======== ========
Commitments (Note 8)
Stockholders' equity:
Common stock, $.01 par value; 35,000 shares authorized,
14,399 and 14,133 shares issued and outstanding ..... 144 141
Additional paid-in capital ............................ 87,725 83,449
Retained earnings ..................................... 40,977 22,624
-------- --------
Total stockholders' equity ......................... 128,846 106,214
-------- --------
$152,613 $127,151
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
INCOME STATEMENT
(in thousands, except per share data)
Year ended December 31,
1996 1995 1994
---- ---- ----
Sales ............................... $ 215,197 $ 193,668 $ 100,290
Cost of sales ....................... 119,817 108,072 55,227
--------- --------- ---------
Gross margin ........................ 95,380 85,596 45,063
--------- --------- ---------
Operating expenses:
Research and development ........ 13,170 9,709 5,175
Selling and marketing ........... 47,720 33,634 17,438
General and administrative ...... 7,254 5,762 3,326
--------- --------- ---------
68,144 49,105 25,939
--------- --------- ---------
Income from operations .............. 27,236 36,491 19,124
--------- --------- ---------
Interest income (expense), net:
Interest income ................. 6,729 1,197 634
Interest expense ................ (3,093) -- --
---------
3,636 1,197 634
--------- --------- ---------
Income before income taxes .......... 30,872 37,688 19,758
Provision for income taxes .......... 12,349 15,075 8,101
--------- --------- ---------
Net income .......................... $ 18,523 $ 22,613 $ 11,657
========= ========= =========
Earnings per share .................. $ 1.21 $ 1.51 $ 0.90
========= ========= =========
Weighted average shares ............. 16,893 14,979 13,020
========= ========= =========
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Accretion of Retained
Additional Preferred Stock Earnings Total
Common Stock Paid-in Redemption (Accumulated Stockholder's
Shares Amount Capital Values Deficit) Equity (Deficit)
------ ------ ------- -------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993................. 9,000 $ 90 $ -- $ (1,937) $ (9,411) $ (11,258)
Issuance of Common Stock.................. 4,950 50 81,083 81,133
Unrealized losses from investments........ (195) (195)
Tax benefit from exercise of
stock options........................... 374 374
Accretion of Preferred Stock
redemption values....................... (549) (549)
Redemption of Preferred Stock............. 2,486 (2,486) --
Employee stock options exercised.......... 83 -- 144 144
Net income................................ 11,657 11,657
------ ------ ------ ------ ------ ------
Balance at December 31, 1994................ 14,033 140 81,601 -- (435) 81,306
Unrealized gains from investments......... 446 446
Tax benefit from exercise of
stock options........................... 1,114 1,114
Employee stock options exercised.......... 85 1 445 446
Employee stock purchase plan.............. 15 -- 289 289
Net income................................ 22,613 22,613
------ ------ ------ ------ ------ ------
Balance at December 31, 1995................ 14,133 141 83,449 -- 22,624 106,214
Unrealized gains from investments......... (170) (170)
Tax benefit from exercise of
stock options........................... 1,828 1,828
Employee stock options exercised.......... 241 3 1,883 1,886
Employee stock purchase plan.............. 25 -- 565 565
Net income................................ 18,523 18,523
------ ------ ------ ------ ------ -------
Balance at December 31, 1996................ 14,399 $ 144 $ 87,725 $ -- $ 40,977 $ 128,846
====== ====== ========= ========= ========= =========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
CIDCO INCORPORATED
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income ............................................. $ 18,523 $ 22,613 $ 11,657
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 5,525 3,597 1,018
Equity in losses of affiliate......................... 428 -- --
Deferred income taxes ................................ (2,584) (1,830) (1,405)
Changes in assets and liabilities:
Accounts receivable ................................ 1,382 (14,744) (26,631)
Inventories ........................................ 3,361 (3,425) (9,838)
Other current assets ............................... (138) 702 (1,538)
Other assets ....................................... (468) 145 (75)
Accounts payable ................................... 5,507 (8,381) 15,685
Accrued liabilities ................................ (2,211) 3,010 3,940
Accrued taxes payable............................... (466) (984) 2,125
---------- ----------- ----------
Net cash provided by (used in) operating activities 28,859 703 (5,062)
---------- ---------- ----------
Cash flows used in investing activities:
Acquisition of property and equipment .................. (5,531) (10,526) (7,021)
Purchase of equity interest in affiliate................ (3,000) -- --
Purchase of short-term investments, net ................ (17,388) (960) (20,131)
---------- ---------- ----------
Net cash used in investing activities .......... (25,919) (11,486) (27,152)
---------- ---------- ----------
Cash flows provided by (used in) financing activities:
Issuance of Common Stock, net of issuance costs......... 2,451 735 81,278
Proceeds from issuance of long-term debt................ 150,000 -- --
Repayment of long-term debt............................. (150,000) -- --
Tax benefit from exercise of stock options.............. 1,828 1,114 374
Repayment of bank borrowings............................ -- -- (2,400)
Redemption of Series A Senior Preferred Stock .......... -- -- (13,778)
Redemption of Series B Junior Preferred Stock .......... -- -- (5,511)
---------- ---------- ----------
Net cash provided by financing activities ...... 4,279 1,849 59,963
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ...... 7,219 (8,934) 27,749
Cash and cash equivalents at beginning of year ............ 19,290 28,224 475
---------- ---------- ----------
Cash and cash equivalents at end of year .................. $ 26,509 $ 19,290 $ 28,224
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ................. $ 3,093 $ 154 $ 27
========== ========== ==========
Cash paid during the year for income taxes ............. $ 13,625 $ 17,117 $ 7,380
========== ========== ==========
Supplemental disclosure of non-cash investing and
financing activities:
Accretion of mandatorily redeemable Series A Senior
and Series B Junior Preferred Stock redemption values
-- -- $ 549
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
CIDCO INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
CIDCO Incorporated (the "Company"), a Delaware corporation, designs,
develops and markets subscriber telephone equipment for use with intelligent
network services. The Company started its operations in June 1989. The Company
sells its products to individual customers through its direct fulfillment
relationships with certain Regional Bell Operating Companies ("RBOC"), to telcos
directly, to major national and regional retail chains and to OEMs.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash equivalents
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents.
Short-term investments
The Company classifies its investment securities as available for sale.
Realized gains or losses are determined on the specific identification method
and are reflected in income. Net unrealized gains or losses are recorded
directly in stockholders' equity except those unrealized losses that are deemed
to be other than temporary which are reflected in the income statement.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the standard cost method (which approximates first in, first
out). Substantially all of the Company's inventories consist of finished goods.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets,
ranging from three to five years. Leasehold improvements are stated at cost.
Amortization is computed using the straight-line method and the shorter of the
remaining lease term or the estimated useful lives of the improvements.
Investments in affiliates
Investments in affiliates, where the Company owns more than 20 percent but
not in excess of 50 percent, are accounted for using the equity method.
New accounting standard
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell, except for assets that are covered by
APB Opinion No. 30. Adoption of SFAS 121 did not have any impact on the
Company's results of operations or financial position.
Warranty costs
Anticipated costs related to product warranties are charged to income as
sales are recognized. The Company has not experienced significant warranty
claims to date.
Revenue recognition
Direct sales and sales through fulfillment arrangements are recognized upon
shipment of the product to the customer. Allowances are established to recognize
any risk related to the creditworthiness of customers and for estimated returns.
Sales through certain promotions aimed at direct fulfillment customers have
certain rights of return or are dependent on the customer's retention of certain
services provided by the RBOC. The Company reserves for estimated returns or
retention from all direct fulfillment customers, including these promotions, at
the time of shipment.
<PAGE>
Advertising costs
Advertising costs are expensed as incurred as defined by Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for 1996,
1995 and 1994 were $20.7 million, $4.5 million and $2.3 million, respectively.
Income taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at the
tax rate expected to be in effect when the temporary differences reverse.
Earnings per share
Earnings per share represent net income, adjusted to add back interest
expense on the convertible notes net of taxes when applicable, divided by the
weighted average number of shares of Common Stock and dilutive Common Stock
equivalents outstanding during the period. Common Stock equivalents include
shares issuable upon the exercise of stock options (using the treasury stock
method) and shares issuable upon conversion of the convertible notes described
in Note 7. Stock options, granted between May 4, 1993 and March 10, 1994 at
prices lower than the initial public offering price, are included in the
calculation as if they were outstanding from inception of the Company through
March 10, 1994.
Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." See Note 9.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company limits the amount of
credit exposure to any one financial institution and financial instrument. The
Company's trade accounts receivable are derived primarily from sales in the
United States, Canada, Europe and the Far East. The Company maintains reserves
for potential credit losses; historically, such losses have been within
management's expectations.
Use of estimates and assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3. BALANCE SHEET COMPONENTS
December 31,
------------------
1996 1995
---- ----
(in thousands)
Property and equipment, net:
Land .......................................... $ 866 $ 866
Computers and office equipment ................ 14,432 10,317
Furniture and fixtures ........................ 2,123 1,795
Leasehold improvements ........................ 7,181 6,093
---------- --------
24,602 19,071
Less accumulated depreciation and amortization (10,484) (4,959)
---------- --------
$ 14,118 $ 14,112
========== ========
Accrued liabilities:
Accrued compensation........................... $ 1,799 $ 2,795
Accrued referral fees.......................... 31 2,521
Other.......................................... 4,381 3,106
---------- --------
$ 6,211 $ 8,422
========== ========
<PAGE>
NOTE 4. SHORT-TERM INVESTMENTS
The Company's short-term investments consist primarily of municipal bonds.
As of December 31, 1996, approximately $13 million of such investments had
maturities of greater than one year. However, all such securities mature within
three years. The cost and fair value of the Company's short-term investments are
as follows (in thousands):
December 31,
----------------------
1996 1995
-------- --------
Fair value............................................ $ 38,560 $ 21,342
Cost.................................................. 38,426 20,924
-------- --------
Unrealized gains...................................... $ 134 $ 418
======== ========
NOTE 5. INVESTMENT IN AFFILIATE
During 1996, the Company acquired for $3 million in cash a 33% interest in
the outstanding stock of InfoGear Technology ("InfoGear"), a company involved in
the development of an Internet phone. The Company's equity in losses of InfoGear
for the period ended December 31, 1996 was approximately $428,000, which has
been included as a component of research and development expense for the year
ended December 31, 1996. The Company has an exclusive right to distribute
through RBOC channels any product developed by InfoGear for the 18 month period
beginning with the first commercial shipment of such product. As of December 31,
1996, the Company's net investment in InfoGear totaled $2.6 million, which is
included as a component of other assets.
NOTE 6. LINE OF CREDIT
In May 1996, the Company renegotiated its line of credit, increasing the
amount of the line from $20 million to $25 million. Borrowings under the line
bear interest at 0.25% below the bank's base rate and the interest is payable
monthly. The bank's base rate was 8.25% per annum at December 31, 1996.
Borrowings under the line are secured by substantially all of the Company's
assets. As of December 31, 1996, the Company had not borrowed any funds under
the line.
NOTE 7. LONG-TERM DEBT
On June 28, 1996, the Company issued $150 million of 3.75% convertible
subordinated notes due June 30, 2003. The notes were convertible into the
Company's Common Stock at a conversion rate of one share of Common Stock for
each $41.00 in principal amount of the notes. The note agreement contained
covenants which, among other matters, restricted or limited the ability of the
Company to pay dividends or incur indebtedness. Interest on the notes was
payable quarterly commencing September 30, 1996. The notes were fully redeemed
on December 30, 1996.
NOTE 8. LEASES AND COMMITMENTS
Leases
The Company leases its headquarters, call center and distribution
facilities in Morgan Hill, California, under operating leases which expire from
1999 through 2006. The Company also leases sales facilities in New York, under
an agreement which expires in May 2000, in Illinois, under an agreement which
expires in April 1999 and in Missouri, under an agreement which expires in May
1999.
<PAGE>
Future minimum lease payments under non-cancelable leases at December 31,
1996 were as follows (in thousands):
Year ending December 31,
1997............................................................ $ 1,377
1998............................................................ 1,422
1999............................................................ 1,200
2000............................................................ 855
2001............................................................ 763
Thereafter...................................................... 2,290
---------
Total minimum lease payments.................................... $ 8,607
=========
Rent expense for 1996, 1995 and 1994 was $1.4 million, $1.1 million and
$638,000, respectively.
Licenses
The Company has a nontransferable, nonexclusive license agreement with AT&T
to utilize AT&T's patent related to data display devices. The Company pays
royalties to AT&T for each licensed product sold, leased or put into use by the
Company other than direct sales to AT&T, the Regional Bell Operating Companies
and other AT&T licensees under the patent. Royalties are payable at a rate of
one dollar per unit. Total AT&T royalty expense incurred in 1996, 1995 and 1994
was $1.2 million, $1.9 million and $1.4 million, respectively.
The Company has a nontransferable, nonexclusive license agreement with
Nortel to utilize Nortel's patents for Caller ID on Call Waiting technology.
Under the agreement, the Company will pay royalties to Nortel for each licensed
product sold, leased or put into use by the Company other than direct sales to
Nortel beginning January 1, 1997. The agreement also provided for a one-time
payment in full satisfaction of royalties on all units incorporating Nortel's
patents which were sold by the Company prior to January 1, 1997. Future
royalties are payable at a variable rate based on product type and number of
units sold.
The Company has a nontransferable, exclusive license agreement with Focus
Semiconductor ("Focus") to utilize patents for Caller ID technology incorporated
in a part used in virtually all products sold by the Company. The Company pays
royalties to Focus for each part included in the Company's products beginning in
October 1996. Royalties are payable at a variable rate based on the number of
parts used. Total Focus royalty expense incurred in 1996 was $397,000.
401(k) plan
Effective in 1993, the Company implemented a Savings and Profit Sharing
Plan (the "401(k) Plan") which qualifies as a thrift plan under section 401(k)
of the Internal Revenue Code. All employees who have completed one year of
service and are 21 years of age or older on or before the semi-annual entry
periods are eligible to participate in the 401(k) Plan. The 401(k) Plan allows
participants to contribute up to 12% of the total compensation that would
otherwise be paid to the participant, not to exceed the amount allowed by
applicable Internal Revenue Service guidelines. For each year, the Company will
contribute for each participant a matching contribution equal to 25% of the
participant's before-tax contributions for the year not to exceed 1% of his or
her compensation. In addition, the Company may choose to make elective
contributions to the 401(k) Plan for a particular plan year. The Company made
contributions of $76,000, $43,000 and $32,000 to the 401(k) Plan for the years
ended December 31, 1996, 1995 and 1994, respectively.
Pending litigation
In the course of its business, the Company has been named as a defendant in
certain actions and could incur an uninsured liability in one or more of them.
The amount of any such liability is not determinable or estimable. However, in
the opinion of management, the outcome of such litigation is not expected to
have a material adverse effect on the results of operations or financial
condition of the Company.
<PAGE>
NOTE 9. COMMON STOCK AND STOCK PLAN
Common stock
The Company is authorized to issue up to 35 million shares of Common Stock,
each with a par value of $0.01 per share. Holders of Common Stock are entitled
to one vote per share on all matters voted on by the Company's stockholders. In
March 1994, the Company completed an initial public offering (the "Offering") of
3.4 million shares of Common Stock and realized net proceeds of $45.9 million.
In conjunction with the Offering, all outstanding shares of mandatorily
redeemable Preferred Stock were redeemed for $19.3 million. In August 1994, the
Company completed a second public offering of 3.5 million shares of Common Stock
at a price of $22 per share. Of such shares, selling stockholders sold 3.4
million shares and the Company sold 100,000 shares and realized net proceeds of
$1.7 million. In December 1994, the Company completed an additional public
offering of 1.9 million shares of Common Stock at a price of $23.75 per share.
Of such shares, the Company sold 1.5 million shares for net proceeds of $33.5
million and selling stockholders sold 375,650 shares.
Directors' stock option plan
In January 1994, the Company's stockholders approved the 1994 Directors'
Stock Option Plan (the "Directors' Option Plan"). A total of 100,000 shares of
Common Stock have been reserved for issuance under the Directors' Option Plan,
which provides for the granting of stock options to non-employee directors of
the Company. Such options vest immediately with respect to 20% of such shares,
with the remainder vesting in four equal annual installments commencing one year
after the date of grant. In January 1994, the Company granted one director an
option under the Directors' Option Plan to purchase 33,350 shares of Common
Stock at an exercise price of $11.20 per share. No options were granted under
the Director's Option Plan during 1995 or 1996.
Stock option plan
In May 1993, the Company adopted a stock option plan (the "Stock Option
Plan") under which employees and consultants may be granted options to purchase
shares of Common Stock at prices at least equal to the fair market value of the
Company's Common Stock on the date of grant. The options expire ten years from
the date of grant. A total of 1.0 million shares of Common Stock were reserved
for issuance under the Stock Option Plan, which expires ten years after
adoption. Options generally vest in annual increments of 33 1/3% per year
commencing one year from the date of grant. The Stock Option Plan is
administered by the Compensation Committee of the Board of Directors, which
determines the vesting provisions, the form of payment for shares and all other
terms of the options. In January 1994, the Board of Directors increased the
number of shares authorized under the Stock Option Plan to 1.4 million shares.
In May 1995, the stockholders approved an amendment to increase the number of
shares authorized under the Stock Option Plan to 2.15 million shares.
The following table summarizes stock option activity under the Stock Option
Plan:
<TABLE>
<CAPTION>
Options Outstanding
------------------
Shares
Available Weighted Average
for Grant Shares Exercise Price
--------- ------ --------------
<S> <C> <C> <C>
Balance at December 31, 1993.................. 25,300 974,700 $ 1.48
Additional shares authorized, January 1994. 400,000 -- --
Options granted............................ (233,500) (233,500) $ 21.44
Options exercised.......................... -- (82,896) $ 1.76
Options canceled........................... 6,000 (6,000) $ 17.40
------- --------- --------
Balance at December 31, 1994.................. 197,800 1,119,304 $ 5.54
Additional shares authorized, May 1995..... 750,000 -- --
Options granted............................ (475,750) 475,750 $ 30.46
Options exercised.......................... -- (85,183) $ 5.34
Options canceled........................... 13,417 (13,417) $ 27.73
------- --------- --------
Balance at December 31, 1995.................. 485,467 1,496,454 $ 13.27
Options granted............................ (509,800) 509,800 $ 25.48
Options exercised.......................... -- (240,465) $ 7.80
Options canceled........................... 126,883 (126,883) $ 28.55
------- --------- --------
Balance at December 31, 1996.................. 102,550 1,638,906 $ 16.69
------- --------- --------
</TABLE>
<PAGE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------
Weighted Average Weighted Average Weighted Average
Range of Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
----------------- ----------- ---------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 1.00 609,132 6.35 $ 1.00 609,132 $ 1.00
$ 4.00 - $ 24.90 413,629 8.84 $ 17.52 97,641 $ 13.89
$ 24.95 - $ 34.70 464,645 8.70 $ 30.40 90,425 $ 28.61
$ 35.12 - $ 38.33 151,500 8.61 $ 35.47 41,688 $ 35.31
--------- ---- -------
$ 1.00 - $ 38.33 1,638,906 7.85 $ 16.69 838,886 $ 7.18
========= ==== =======
</TABLE>
Employee stock purchase plan
The Company's 1994 Employee Stock Purchase Plan (the "Stock Purchase Plan")
was adopted by the Board of Directors and approved by the Company's stockholders
in January 1994. Under the Stock Purchase Plan, an eligible employee may
purchase shares of Common Stock from the Company through payroll deductions of
up to 10% of his or her base compensation, at a price per share equal to 85% of
the lesser of the fair market value of the Company's Common Stock as of the
first day or the last day of each six-month offering period. The first offering
period ended on December 31, 1994 and new offering periods commence on January 1
and July 1 of each year thereafter. The Company has reserved 200,000 shares of
Common Stock for issuance under the Stock Purchase Plan. As of December 31,
1996, approximately 40,192 shares have been issued under the Stock Purchase Plan
at an aggregate purchase price of $854,000.
Pro forma net income and earnings per share
Had stock-based compensation cost for the Company's Stock Option Plan and
Stock Purchase Plan been determined based on the fair value at the grant dates
using the Black-Scholes model as prescribed by SFAS No. 123, the Company's
results for the year ended December 31, 1996 and 1995 would have been as follows
(in thousands):
1996 1995
-------- ---------
Net income as reported............................ $ 18,523 $ 22,613
Pro forma net income.............................. $ 16,219 $ 21,424
Earnings per share as reported.................... $ 1.21 $ 1.51
Pro forma earnings per share...................... $ 1.08 $ 1.44
The pro forma effect on net income and earnings per share for 1996 and 1995
is not representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following weighted average assumptions:
1996 1995
---- ----
Stock option plan:
Expected dividend yield......................... 0.0% 0.0%
Expected stock price volatility................. 65% 61%
Risk free interest rate......................... 5.78% 6.13%
Expected life of options (years)................ 2.3 2.3
Stock purchase plan:
Expected dividend yield......................... 0.0% 0.0%
Expected stock price volatility................. 71% 59%
Risk free interest rate......................... 5.29% 5.75%
Expected life of option (years)................. 0.5 0.5
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted under the Stock Option Plan during 1996 and 1995 was
$10.62 and $12.58, respectively. The weighted average estimated grant date fair
value, as defined by SFAS 123, for purchase rights granted under the Stock
Purchase Plan during 1996 and 1995 was $10.88 and $9.81, respectively.
<PAGE>
NOTE 10. MANDATORILY REDEEMABLE PREFERRED STOCK
In March 1994, the Company completed an initial public offering. In
conjunction with the offering, all outstanding shares of mandatorily redeemable
Preferred Stock were redeemed for $19.3 million. There were 175,000 shares of
non-voting Preferred Stock authorized, of which 125,000 shares had been
designated as Series A Senior Preferred Stock ("Series A") and 50,000 shares had
been designated as Series B Junior Preferred Stock ("Series B").
The holders of Preferred Stock were entitled to receive dividends of $12.00
per share per annum compounded annually prior and in preference to holders of
Common Stock. In addition, the holders of Series A received dividends prior and
in preference to the holders of Series B. All dividends were cumulative whether
or not declared by the Board of Directors.
The Company was required to redeem 125,000 shares of Series A and 50,000
shares of Series B Preferred Stock outstanding at a redemption price of $100 per
share plus any accrued but unpaid dividends upon a liquidity event as defined in
the Preferred Stock agreement, including the closing of an initial public
offering. As of the redemption, cumulative dividends totaling $1.8 million were
charged as an accretion of the outstanding Preferred Stock redemption value with
a corresponding increase in the value of the outstanding Preferred Stock. The
total accretion of $2.5 million also included the amortization of the issuance
costs of the Series A of $697,000.
NOTE 11. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Year ended December 31,
-------------------------------------
1996 1995 1994
-------- -------- -------
Current:
Federal......................... $ 12,229 $ 13,768 $ 7,444
State........................... 2,704 3,137 1,844
-------- -------- -------
14,933 16,905 9,288
-------- -------- -------
Deferred:
Federal......................... (2,002) (1,582) (1,019)
State........................... (582) (248) (168)
-------- -------- --------
(2,584) (1,830) (1,187)
-------- -------- --------
$ 12,349 $ 15,075 $ 8,101
======== ======== =======
The difference between income taxes at the statutory federal income tax
rate and income taxes reported in the income statement are as follows:
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Federal statutory tax rate........................ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit........ 4.5 5.0 5.3
Research and development tax credits.............. (0.7) (0.8) (1.0)
Other............................................. 1.2 0.8 1.7
---- ---- ----
40.0% 40.0% 41.0%
==== ==== ====
<PAGE>
Deferred income taxes result from temporary differences in the recognition
of certain expenses for financial and income tax reporting purposes. The net
deferred tax asset consists of the following (in thousands):
December 31,
-----------------------
Deferred tax asset: 1996 1995
-------- --------
State taxes....................................... $ 717 $ 825
Non-deductible reserves........................... 3,887 2,121
Inventory basis difference........................ 577 84
Depreciation...................................... 1,027 580
Other............................................. 9 3
-------- --------
Gross deferred tax asset............................ 6,217 3,613
Gross deferred tax liability........................ (104) (84)
-------- --------
Net deferred tax asset.............................. $ 6,113 $ 3,529
======== ========
NOTE 12. SIGNIFICANT CUSTOMERS
The Company's sales to significant customers as a percentage of total sales
are as follows:
Year ended December 31,
--------------------------
Customer 1996 1995 1994
---- ---- ----
A.............................................. 36.5% 32.1% 25.2%
B.............................................. 19.2% 32.3% 23.4%
C.............................................. 11.8% * *
The Company's accounts receivable from significant customers are as
follows:
December 31,
-------------------
Customer 1996 1995
---- ----
A..................................................... 31.9% 28.0%
B...................................................... 28.0% 49.5%
C..................................................... 20.6% *
*Amounts less than 10% have been omitted from the above tables.
NOTE 13. SUBSEQUENT EVENTS
On January 21, 1997, the Company offered Stock Option Plan participants the
right to replace any remaining unexcercised stock options with an equal number
of options at an exercise price of $12.43, the closing market price on such
date. The replacement options vest in annual increments of 33 1/3% per year
commencing January 21, 1998.
Effective January 27, 1997, the Company adopted a Shareholder's Rights Plan
wherein stock rights will be distributed as a dividend at the rate of one right
for each share of Common Stock held on February 14, 1997, the record date for
such dividend. The key terms of the Shareholders Rights Plan will be activated
if any person acquires 15 percent or more of the Company's Common Stock without
the approval of the Company's Board of Directors. Once the Plan is activated,
each right will entitle the holder to purchase at a price of $95, a fraction of
a share of Preferred Stock which is equivalent to $190 worth of the Company's
Common Stock at the then current market value. Any person currently holding 15
percent or more of the stock will be "grandfathered" for existing holdings. The
Company's Board of Directors has retained the right to amend the Shareholder's
Rights Plan at any time prior to its activation.
<PAGE>
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Balance at
beginning end
(in thousands) of year Additions Deductions of year
------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for doubtful accounts.... $ 372 $ 4,316 $ (2,826) $ 1,862
Year ended December 31, 1995:
Allowance for doubtful accounts.... $ 1,862 $ 12,084 $ (10,796) $ 3,150
Year ended December 31, 1996:
Allowance for doubtful accounts.... $ 3,150 $ 11,768 $ (11,952) $ 2,966
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
Part III.
Item 10. Directors and Executive Officers of Registrant
The executive officers and directors of the Company are as follows:
Name Age Position
Robert L. Diamond .. 64 Chairman of the Board and Director
Paul G. Locklin..... 51 President, Chief Executive Officer and Director
Richard D. Kent .... 40 Vice President Finance and Administration
and Chief Financial Officer
Marv Tseu........... 48 Executive Vice President, Sales and Marketing
Ian G. A. Laing..... 39 Executive Vice President, Research and Development
Timothy J. Dooley... 40 Vice President, Sales
Thomas C. Bristovish 46 Vice President, Sales
Edward J. Forker.... 47 Vice President, Sales
Mark A. Sherman..... 42 Vice President, Operations
Scott C. McDonald... 43 Director
Ernest K. Jacquet 49 Director
Richard M. Moley ... 57 Director
Daniel L. Eilers.... 41 Director
Mr. Diamond, a co-founder of the Company, has been chairman of the
board, and a director since its incorporation in 1988. From 1971 until he
co-founded Cidco, Mr. Diamond was president of Robert Diamond Inc., an
engineering consulting and manufacturers' representative firm. Mr. Diamond
received a BSEE degree from Worcester Polytechnic Institute, with high honors.
Mr. Locklin, a co-founder of the Company, has been president, chief
executive officer and a director of the Company since 1988. From 1972 until
1986, Mr. Locklin served as president and chief executive officer of PCI Pte.
Ltd. ("PCI"), an international electronics manufacturer that specialized in
liquid crystal displays, wire bondable printed circuit substrates and high
volume contract assembly. From 1986 until he co-founded Cidco, Mr. Locklin
served as president of the U.S. subsidiary of PCI. Mr. Locklin received a B.S.
degree in marketing from California State University at Hayward.
Mr. Kent joined the Company in June 1994 as corporate controller and
in June 1995, became chief accounting officer as well. In December 1996, Mr.
Kent was promoted to chief financial officer and vice president of finance and
administration. From October 1990 until starting at Cidco, he served as
corporate controller of Radius, Inc., a computer peripheral manufacturer. Mr.
Kent is a Certified Public Accountant. He holds a B.S. degree in Business from
the University of California at Berkeley and graduated with honors.
Mr. Tseu joined Cidco in July 1996 to serve as executive vice
president of sales and marketing. Prior to joining Cidco, Mr. Tseu served as
vice president of marketing and sales at Plantronics, Inc. Prior to his time at
Plantronics, Mr. Tseu was an area manager for AT&T Consumer Products Division
and spent twelve years with Pacific Telephone Company (now Pacific Bell). He
earned his B.S. degree in economics from Stanford University.
Mr. Laing joined Cidco in June 1996 to serve as executive vice
president of research and development. Prior to joining Cidco, Mr. Laing served
as director of product development for consumer products at AT&T where he spent
most of his career. He spent this past year at an acclaimed Sloan Fellowship
Management Program at Stanford University, where he had earned his M.S. degree
in electrical engineering.
Mr. Dooley has been Cidco's vice president of sales since April 1994,
when he was promoted from director of business developement, the post he had
held since joining the Company in July 1991. Prior to working for Cidco, Mr.
Dooley served in product and marketing management positions for GTE, Sylvan
Learning Corporation and Kenworth Truck Company. He is a graduate of Washington
State University and holds a B.A. degree in Business Administration.
<PAGE>
Mr. Bristovish has served as Cidco's vice president of sales since
joining the Company in April 1994. Prior to working for Cidco, he spent eleven
years at Colonial Data, a leading telecommunications manufacturer, where he most
recently held the position senior vice president: sales and marketing. Mr.
Bristovish holds a BSEE degree from University of Connecticut and graduated with
honors.
Mr. Forker joined Cidco in June 1995 as vice president of
international sales. He heads up the Company's international subsidiary, Cidco
Worldwide, and oversees its branch office in Singapore. From 1992 unitl he
joined Cidco, Mr. Forker held the position of worldwide telecommunications sales
manager for Bay Networks, Inc. From 1987 to 1992, Mr. Forker served at Digital
Equipment Corporation, achieving the position of worldwide business development
manager for financial and professional services. Mr. Forker holds a B.A. in
Liberal Arts from the University of St. Thomas.
Mr. Sherman, with Cidco since September 1994, was named vice president
of operations for the Company in August 1995. Mr. Sherman has over 15 years
experience in operations principally in the high technoloy industry. Prior to
joining Cidco, he held senior management positions at KAO Infosystems
Corporation, from 1993 to 1994, and at NeXT Computer form 1991 to 1993.
Mr.Sherman holds a B.A. from Univeristy of Southern Florida.
Mr. McDonald became a director of the Company in January 1997. Prior
to joining the board, Mr. McDonald was employed by the Company since October
1993; most recently as executive vice president, chief operating and financial
officer. From March 1993 through September 1993, he was employed by PSI
Integration, Inc., as president. From February 1989 to February 1993, Mr.
McDonald served as chief financial officer and vice president of finance and
administration of Integrated Systems, Inc. Mr. McDonald received a B.S. degree
in Accounting from Akron University and an M.B.A. degree from Golden Gate
University.
<PAGE>
Mr. Jacquet has been a director of the Company since May 1993. Since
April 1990, he has been a general partner of Summit Partners, a venture capital
partnership that is the general partner of Summit Ventures III, L.P. and Summit
Investors II, L.P. Mr. Jacquet also serves as a director of several privately
held companies. Mr. Jacquet received B.S.E. and M.S.E. degrees, cum laude, from
the University of Michigan and an M.B.A. degree from Stanford Business School.
Mr. Moley became a director of the Company in January 1994. In 1996, he
became senior vice president of Cisco Systems, Inc. as part of the Cisco Systems
purchase of Stratacom, Inc., where he had been chairman of the board, chief
executive officer and president. Mr. Moley also serves as a director of Linear
Technology Corporation, a company engaged in the design, manufacture and
marketing of high performance linear integrated circuits. Mr. Moley received a
B.S. degree from Manchester University, England, an MSEE degree from Stanford
University and an M.B.A. degree from the University of Santa Clara.
Mr. Eilers recently joined Cidco's board of directors. Mr. Eilers spent
ten years at Apple Computer, Inc., where he held positions as senior vice
president of worldwide marketing and customer solutions and vice president of
strategy and corporate development. Mr. Eilers has also served as the president
and chief executive officer of Claris Corporation and, most recently, was the
president and chief executive officer of NAT Systems International, Inc., a
privately held enterprise software company.
The Company's Certificate of Incorporation provides for its Board of
Directors to be divided into three classes, as nearly equal in number as is
reasonably possible, serving staggered terms. At each year's annual meeting of
stockholders, one class of directors will be elected for a three-year term. The
initial terms of Messrs. Diamond and Locklin will expire at the 1997 annual
meeting at which they will be nominated for re-election. The current term of
Messrs. Eilers and McDonald will expire at the 1998 annual meeting and the
current term of Messrs. Moley and Jacquet will expire at the 1999 annual
meeting.
Officers serve at the discretion of the Board of Directors. The Board
of Directors has a Compensation Committee which determines the compensation of
the Company's officers, an Audit Committee which reviews the results and scope
of the audit and other services provided by the Company's independent
accountants and a Stock Option Committee which administers the Company's 1993
Stock Option Plan. Messrs. McDonald, Jacquet and Moley serve as the members of
the Compensation and Audit Committees and Messrs. Moley and Jacquet serve as the
members of the Stock Option Committee. There are no family relationships among
any of the executive officers or directors of the Company.
<PAGE>
Item 11. Executive Compensation
The information under the captions "Executive Compensation" and "Stock
Options and Bonuses" in the Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on May 14, 1997 (the "Proxy Statement") is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Stock Ownership of Certain
Beneficial Owners" of the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions" of the Proxy
Statement is incorporated herein by reference.
With the exception of the information specifically stated as being
incorporated by reference from the Company's Proxy Statement in Part III of this
Annual Report on Form 10-K, the Company's Proxy Statement is not to be deemed as
filed as part of this report. The Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of the Company's fiscal year
end.
<PAGE>
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) FINANCIAL STATEMENTS
See Item 8 of this Report.
(2) FINANCIAL STATEMENT SCHEDULES
See Item 8 of this Report.
<TABLE>
(3) INDEX TO EXHIBITS
<CAPTION>
Exhibits Page
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation. (1) --
3.2 Amended and Restated By-Laws (1). --
4.1 Second Amendment to Revolving Credit Loan Agreement dated
October 13, 1995 between Registrant and Comerica Bank. (4) --
10.4 Patent License Agreement dated as of May 1, 1989 between the
Registrant and American Telephone and Telegraph Company. (1) --
10.5 Form of Indemnification Agreement. (1) --
10.6 Employment Agreement dated as of January 11, 1994 between the
Registrant and Robert L. Diamond. (1) --
10.7 Employment Agreement dated as of January 11, 1994 between the
Registrant and Paul G. Locklin. (1) --
10.13 Agreement effective as of December 21, 1992 between the
Registrant and SBC Communications, Inc. (1), (2) --
10.14 Lease dated August 15, 1993 between Thoits Bros., Inc. and
the Registrant for 220 Cochrane Circle. (1) --
10.16 Lease dated May 31, 1994, between Thoits Bros., Inc. and the
Registrant for 225 Cochrane Circle, Units A, B, C, D, and E.
(4) --
10.17 Sublease dated November 18, 1994, between Thoits Bros. and the
Registrant for 180 Cochrane Circle. (3) --
10.18 Lease dated November 1, 1994, between Thoits Bros., Inc. and
the Registrant for 105 Cochrane Circle, Units A, B, C, D, and
E. (3) --
10.19 Registrant's Amended and Restated 1993 Stock Option Plan. (1) --
10.20 Registrant's 1994 Directors' Stock Option Plan. (1) --
10.21 Registrant's 1994 employee stock purchase plan. (1) --
10.22 Agreement dated January 1, 1995 between the Registrant and
Ameritech Services Inc. (5) --
10.23 Standard Form of Office Lease between Registrant and 400
Columbus Avenue, LLC dated May 19, 1995. (5) --
11.1 Computation of Earnings Per Share.
39
23 Consent of Independent Accountants. 40
</TABLE>
(1) Incorporated herein by reference to the Company's registration
statement on Form S-1, File No. 33-74114.
(2) Confidential treatment has been granted with respect to certain
portions of this document.
(3) Incorporated herein by reference to the Company's Form 10-K for the
year ended December 31, 1994.
(4) Incorporated herein by reference to the Company's Form 10-Q for the
quarter ended September 30, 1995.
(5) Incorporated herein by reference to the Company's Form 10-Q for the
quarter ended June 30, 1996.
(b) REPORTS ON FORM 8-K.
The Company filed one report on Form 8-K during the three months
ended December 31, 1996 related to the redemption of the $150
million convertible note due to ID Holding Partnership L.P. (an
affiliate of Forestmann Little & Co.).
<PAGE>
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 on the 14th day of
March, 1997.
CIDCO INCORPORATED
By: /s/Paul G. Locklin
--------------------
Paul G. Locklin
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, each on the 14th day of March, 1997.
/s/ Paul G. Locklin President and Chief Executive Officer
------------------------
Paul G. Locklin
/s/ Robert L. Diamond Chairman of the Board
-----------------------
Robert L. Diamond
/s/ Richard D. Kent Vice President Finance and
----------------------- Administration, Chief Financial Officer
Richard D. Kent
/s/ Scott C. McDonald Director
------------------------
Scott C. McDonald
/s/ Richard M. Moley Director
------------------------
Richard M. Moley
/s/ Ernest K. Jacquet Director
------------------------
Ernest K. Jacquet
Director
- --------------------------
Daniel L. Eilers
<PAGE>
EXHIBIT 11.1
CIDCO INCORPORATED
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share amounts) (1)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net income as reported....................................... $ 18,523 $ 22,613 $ 11,657
Adjustment to net income due to convertible note............. 1,856 -- --
--------- --------- ---------
Net income as adjusted....................................... $ 20,379 $ 22,613 $ 11,657
========= ========= =========
Weighted average shares outstanding.......................... 14,284 14,135 11,922
Shares issuable on exercise of options granted
between May 4, 1993 and March 10, 1994 (2)................ -- -- 183
Shares issuable on exercise of options....................... 750 844 728
Shares issuable on conversion of note........................ 1,859 -- --
Incremental shares outstanding in lieu of Preferred Stock (3) -- -- 187
--------- --------- ---------
Weighted average shares outstanding.......................... 16,893 14,979 13,020
========= ========= =========
Earnings per share........................................... $ 1.21 $ 1.51 $ 0.90
========= ========= =========
</TABLE>
(1) This Exhibit should be read with Note 2 of Notes to Financial
Statements.
(2) Stock options granted between May 4, 1993 and March 10, 1994 (using
the treasury stock method and the initial public offering price) have
been included in the computation of common and common equivalent
shares as if they were outstanding for all periods through the
effective date of the initial public offering.
(3) The computation of common and common equivalent shares assumes that
the number of shares of Common Stock required to be sold at the
initial public offering price to raise sufficient proceeds to redeem
the outstanding mandatorily redeemable Preferred Stock (including
accrued but unpaid dividends thereon) were outstanding from the date
the Preferred Stock was issued (May 1993) until March 10, 1994.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-78992) of CIDCO Incorporated of our report dated
January 27, 1997 appearing on page 18 of the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
PRICE WATERHOUSE LLP
San Jose, California
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(In thousands, except per share data; unaudited)
</LEGEND>
<CIK> 0000917639
<NAME> CIDCO Incorporated
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 26,509
<SECURITIES> 38,560
<RECEIVABLES> 51,208
<ALLOWANCES> (2,966)
<INVENTORY> 14,555
<CURRENT-ASSETS> 131,236
<PP&E> 24,602
<DEPRECIATION> (10,484)
<TOTAL-ASSETS> 152,613
<CURRENT-LIABILITIES> 23,767
<BONDS> 0
0
0
<COMMON> 144
<OTHER-SE> 128,702
<TOTAL-LIABILITY-AND-EQUITY> 152,613
<SALES> 215,197
<TOTAL-REVENUES> 221,926
<CGS> 119,817
<TOTAL-COSTS> 68,144
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,093
<INCOME-PRETAX> 30,872
<INCOME-TAX> 12,349
<INCOME-CONTINUING> 18,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,523
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
</TABLE>
