<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(D) OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
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)
--------------------------------------------------------------
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 _______
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON AUGUST 7,
1998 WAS 14,036,374.
================================================================================
<PAGE> 2
CIDCO INCORPORATED
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
ITEM 1. Financial Statements:
Balance sheet at June 30, 1998
and December 31, 1997 ......................................3
Statement of operations for the three and six months
ended June 30, 1998 and 1997 ...............................4
Statement of cash flows for the six months
ended June 30, 1998 and 1997 ...............................5
Notes to financial statements ................................6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............8
ITEM 3. Quantitative and Qualitative Disclosure
about Market Risks.........................................22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ...........................................23
ITEM 2. Changes in Securities .......................................23
ITEM 3. Defaults Upon Senior Securities .............................23
ITEM 4. Submission of Matters to a Vote of Security Holders .........23
ITEM 5. Other Information ...........................................23
ITEM 6. Exhibits and Reports on Form 8-K ............................23
SIGNATURES .................................................................24
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIDCO INCORPORATED
BALANCE SHEET
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 17,116 $ 48,253
Short-term investments ............................. 38,186 26,486
Accounts receivable, net of allowance
for doubtful accounts of $3,911 and $3,301......... 38,470 58,082
Inventories......................................... 27,771 12,904
Deferred tax asset ................................. 11,808 11,808
Other current assets ............................... 8,000 1,306
-------- --------
Total current assets .............................. 141,351 158,839
Property and equipment, net .......................... 16,735 12,591
Other assets ......................................... 5,657 1,998
-------- --------
$163,743 $173,428
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 29,796 $ 29,868
Accrued liabilities................................. 13,737 10,955
Accrued taxes payable .............................. -- 1,875
-------- --------
Total current liabilities ......................... 43,533 42,698
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 35,000 shares
authorized, 14,955 and 14,955 shares issued........ 149 149
Additional paid-in capital.......................... 89,608 89,608
Treasury stock, at cost (919 and 1,000 shares)...... (11,899) (12,942)
Retained earnings................................... 42,352 53,915
Total stockholders' equity ........................... 120,210 130,730
-------- --------
$163,743 $173,428
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
CIDCO INCORPORATED
STATEMENT OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales .......................... $ 43,387 $ 58,288 $112,740 $135,318
Cost of sales .................. 32,990 31,239 85,046 74,022
-------- -------- -------- --------
Gross margin ................... 10,397 27,049 27,694 61,296
-------- -------- -------- --------
Operating expenses:
Research and development .... 3,218 4,464 6,808 8,524
Selling and marketing ....... 15,765 16,020 33,414 36,448
General and administrative .. 2,053 2,355 5,535 5,245
Restructuring ............... -- -- 2,672 --
------- ------- ------- -------
21,036 22,839 48,429 50,217
------- ------- ------- -------
Income (loss) from operations .. (10,639) 4,210 (20,735) 11,079
Other income, net .............. 983 691 2,432 1,150
------- ------- -------- -------
Income (loss) before income
taxes ....................... (9,656) 4,901 (18,303) 12,229
Provision (benefit) for income
taxes ....................... (3,669) 1,860 (6,955) 4,791
-------- ------- -------- -------
Net income (loss) ............. $ (5,987) $ 3,041 $(11,348) $ 7,438
======== ======= ======== =======
Basic earnings (loss) per share $ (0.43) $ 0.22 $ (0.81) $ 0.53
========= ======== ======== =======
Diluted earnings (loss) per share $ (0.43) $ 0.22 $ (0.81) $ 0.52
========= ======== ======== =======
Common shares outstanding ...... 14,035 13,828 14,019 13,952
======== ======== ======== ======
Common shares assuming dilution.. 14,035 13,999 14,019 14,338
======== ======== ======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
CIDCO INCORPORATED
STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) ............................... $(11,348) $ 7,438
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization.................. 1,935 3,395
Equity in losses of affiliate.................. 205 1,237
Changes in assets and liabilities:
Accounts receivable .......................... 19,612 10,105
Inventories .................................. (14,867) 6,470
Other current assets ......................... (6,694) 455
Other assets ................................. (3,864) (112)
Accounts payable ............................. (72) (2,846)
Accrued liabilities .......................... 2,782 3,137
Accrued taxes payable ........................ (1,875) (676)
-------- --------
Net cash provided by (used in) operating
activities ............................. (14,186) 28,603
Cash flows used in investing activities: -------- --------
Acquisition of property and equipment ........... (6,079) (1,880)
Sale (purchase) of short-term investments, net... (11,694) (2,419)
Net cash used in investing -------- --------
activities ............................. (17,773) (4,299)
-------- --------
Cash flows provided by (used in) financing
activities:
Issuance of Common Stock......................... 822 862
Purchase of treasury stock....................... -- (12,942)
------- -------
Net cash provided by (used in) financing
activities ................................ 822 (12,080)
------- -------
Net increase (decrease) in cash and cash equivalents (31,137) 12,224
Cash and cash equivalents at beginning of period .. 48,253 26,509
------- -------
Cash and cash equivalents at end of period ........ $17,116 $38,733
======= =======
Supplemental disclosure of cash flow information:
Cash paid for income taxes ....................... $ 2,075 $ 5,660
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying financial information is unaudited, but, in the opinion of
management, reflects all adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position,
operating results and cash flows for those periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The financial information should be read in conjunction
with the audited financial statements and notes thereto for the year ended
December 31, 1997 included in the Company's most recent Annual Report on Form
10-K filed with the Securities and Exchange Commission. Results for the interim
period are not necessarily indicative of results for the entire year.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130, which the
Company was required to adopt in the quarter ended March 31, 1998, establishes
standards for reporting comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income as defined includes all changes in equity (net
assets) during a period from non-owner sources. Examples of items to be included
in comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gain/loss on available-for-sale
securities. No comprehensive income information has been presented as the impact
of the disclosure required by FAS 130 is immaterial to the financial statements
of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("FAS 131"). This statement establishes
standards for the way companies report information about operating segments in
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The disclosures prescribed by FAS 131 are effective for calendar 1998, but are
not required for interim financial statements in 1998.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Earnings per Share
The Company adopted Statement of Financial Accounting Standards No.128,
"Earnings Per Share" ("SFAS 128") during the fourth quarter of 1997. SFAS 128
requires presentation of both basic and diluted earnings per share ("EPS") on
the face of the income statement, basic EPS, which replaces primary EPS, is
computed by dividing net income available to common stockholders (numerator) by
the weighted average number of common shares outstanding (denominator) during
the period. Unlike the computation of primary EPS, basic EPS excludes the
dilutive effect of stock options. Diluted EPS replaces fully diluted EPS and
gives effect to all dilutive potential common shares outstanding during a
period. In computing diluted EPS, the average stock price for the period is used
in determining the number of shares assumed to be purchased from exercise of
stock options rather than the higher of the average or ending stock price as
used in the computation of fully diluted EPS.
<PAGE> 7
Following is a reconciliation of the numerators and denominators of the basic
and diluted EPS:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) used to compute
earnings (loss) per common share ....... $(5,987) $ 3,041 $(11,348) $ 4,791
======= ======= ======== =======
Denominator used to computer basic
earnings (loss) per common share ....... 14,035 13,828 14,019 13,952
Shares issuable on exercise of
options (*) .......................... -- 171 -- 386
------- ------- -------- -------
Denominator used to compute diluted
earnings (loss) per common share...... 14,035 13,999 14,019 14,338
======= ====== ====== ======
Basic earnings (loss) per share......... $ (0.43) $ 0.22 $ (0.81) $ 0.53
======= ====== ======= ======
Diluted earnings (loss) per share....... $ (0.43) $ 0.22 $ (0.81) $ 0.52
======= ====== ======= ======
</TABLE>
(*) Potential common stock relating to options to purchase 94,786 shares of
common stock at prices ranging from $1.00 to $10.50 per share was excluded since
their inclusion would be anti-dilutive for the six months ended June 30, 1998.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition And Results
of Operations
The following information should be read in conjunction with the interim
financial statements and the notes thereto in Part I, Item 1 of this Quarterly
Report.
Historical Background
CIDCO Incorporated (the "Company"), a Delaware corporation, was
incorporated in July 1988 to design, develop and market subscriber telephone
equipment that would support Caller ID, Caller ID on Call Waiting and other
intelligent network services (collectively "Services") then being introduced by
Regional Bell Operating Companies ("RBOCs") and independent telephone operating
companies, both domestic and international (collectively with RBOCs, "Telcos").
The Company began operations in 1989, initially funding its business with a
capital investment made by its founders. Prior to its initial public offering,
the Company financed its growth principally through internally generated funds
and short-term borrowings. In March 1994, the Company completed its initial
public offering of Common Stock and had two subsequent public offerings in 1994
resulting in capital infusions to the Company totaling approximately $59.4
million.
Historically, the Company's primary sales and distribution channels have
been through direct marketing fulfillment relationships with certain Telcos
("Agency Fulfillment"), standard fulfillment of Telco-generated orders
("Non-Agency Fulfillment"), wholesale shipments directly to Telcos ("Direct to
Telco"), and, to a lesser extent, international accounts, retail stores
("Retail"), and original equipment manufacturers. Agency Fulfillment programs
are sales campaigns run by the Company involving the use of consumer mailings
and telemarketing to sell Services for the Telcos which utilize the Company's
products. As part of these programs the Company, acting as the Telco's "agent,"
generates an order for Services, such as Caller ID, and then ships an adjunct
product (or, less frequently, a phone product) to each Service customer
"acquired" through the campaign. The Company's own direct marketing of its
telephone products and Agency Fulfillment resulted in net sales of $127 million
and $36.7 million, in 1997 and in the first six months of 1998, respectively.
Non-Agency Fulfillment sales occur when the Company receives an order from a
Telco and ships the requested product directly to the end-user customer. In the
case of Non-Agency Fulfillment sales, the Telco generates the order by
performing the marketing activities themselves rather than retaining the Company
to perform such services, as in Agency Fulfillment programs. Agency Fulfillment
sales totaled 23% of sales in the first six months of 1998 and 49%, 25%, and 2%
of sales in 1997, 1996 and 1995, respectively. Non-Agency Fulfillment sales
accounted for 39% of sales in the first six months of 1998 and 35%, 43%, and 68%
of sales in 1997, 1996 and 1995, respectively.
<PAGE> 9
As a result of operating losses for the first six months of 1998 of $20.7
million, on July 22, 1998 the Company announced a new business strategy focusing
on core telephony products and services. The Company has adopted a restructuring
plan intended to significantly reduce its personnel and resources throughout the
core business. As part of this new strategy and restructuring plan, the Company
is exploring strategic alternatives with regard to its Internet Solutions
Division, including the possible spin-out, sale or wind-down of the division in
significant part due to the high level of marketing, sales and research and
development expense that would be required to develop the market for these
products and services. The Company has concluded that its core business cannot
successfully fund the level of market development expense required overtime for
success in this market. As part of the restructuring, the Company plans to
reduce its regular and temporary workforce by approximately 50% through
attrition and layoffs by the end of 1998. The Company employed 330 regular
employees and approximately 100 temporary and contract workers as of June 30,
1998. For additional information on the restructuring, see the paragraphs titled
"Restructuring" contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations of this Report.
This Report contains forward-looking statements which reflect the Company's
current views with respect to future events which may impact the Company's
results of operations and financial condition. In this report, the words
"anticipates," "believes," "expects," "intends," "future," and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors, including
those set forth below under the caption "Factors Which May Affect Future
Results," which could cause actual future results to differ materially from
historical results or those described in the forward-looking statements. The
forward-looking statements contained in this Report should be considered in
light of these factors. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof.
<PAGE> 10
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 Statement of operations:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales .......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .................. 76.0 53.6 75.4 54.7
----- ----- ----- -----
Gross margin ................... 24.0 46.4 24.6 45.3
----- ----- ----- -----
Operating expenses:
Research and development ..... 7.5 7.7 6.0 6.3
Selling and marketing ........ 36.3 27.5 29.7 26.9
General and administrative ... 4.7 4.0 4.9 3.9
Restructuring .............. -- -- 2.4 --
----- ----- ----- -----
48.5 39.2 43.0 37.1
----- ----- ----- -----
Income (loss) from operations .. (24.5) 7.2 (18.4) 8.2
Other income, net .............. 2.3 1.2 2.2 0.8
--- --- --- ---
Income (loss) before income taxes (22.2) 8.4 (16.2) 9.0
Provision (benefit) for income
taxes ........................ (8.4) 3.2 (6.2) 3.5
------ ----- ------ -----
Net income (loss)............... (13.8)% 5.2% (10.0)% 5.7%
====== ===== ====== =====
</TABLE>
Sales
Sales are recognized upon shipment of the product to the customer, less
reserves for anticipated returns or, in the case of Agency Fulfillment,
non-retention of certain Services provided by the Telcos, and customer credit
worthiness. Sales decreased 26% to $43.4 million in the second quarter of 1998
from $58.3 million in the second quarter of 1997. In the first six months of
1998, sales decreased 20% to $112.7 million from $135.3 million in the first six
months of 1997. These decreases were primarily due to lower average selling
prices for adjunct products, partially offset by increases in SmartPhones sold
through the Company's Agency Fulfillment, Non-Agency Fulfillment and the
Company's own direct marketing programs, and international sales of the iPhone.
In the second quarter of 1998, 1.6 million adjunct products were sold, compared
with 1.6 million units sold in the second quarter of 1997. However, these sales
had significantly lower average selling prices per unit in 1998 than in 1997 due
to competitive pricing pressures from both Asian suppliers to the United States
market and certain North American suppliers. Total Agency Fulfillment programs
for Caller ID services on behalf of Telcos decreased to 23% of sales in the
first six months of 1998 from 49% in the first six months of 1997. Adjunct
product sales decreased to 73% of total sales in the first half of 1998, from
96% of dollar sales volume in the first half of 1997. The balance of sales were
due to increases in SmartPhone and iPhone sales. Unit sales of adjunct products
remained flat in the second quarter and half of 1998, as compared to the second
quarter and half of 1997, however, the average selling price of adjunct products
dropped 38% from the first half of 1997 to the first half of 1998. The Company
is evaluating its Agency Fulfillment business and may decline business in the
future which would result in margins below current levels. This may result in
lower sales in future periods.
<PAGE> 11
Gross margin
Cost of sales includes the cost of finished goods purchased from the
Company's offshore contract manufacturers, costs associated with procuring and
warehousing the Company's inventory and royalties payable on licensed technology
used in the Company's products. Gross margin as a percentage of sales decreased
to 24.0% in the second quarter of 1998, from 46.4% in the second quarter of
1997. Gross margin as a percentage of sales decreased to 24.6% in the first six
months of 1998 from 45.3% in the first half of 1997. These decreases were
primarily due to declines in average selling prices of 38% in the second quarter
of 1998, and a 36% decline in the first six months of 1998, relative to
comparable periods of 1997. These decreases in the average selling price of the
Company's adjunct products were caused by continued competitive pricing
pressures, an increased proportion of sales of adjunct products made Direct to
Telcos and international customers, with lower gross margins, and significant
decreases in sales of the Company's products through the Company's Agency
Fulfillment programs for Caller ID Services on behalf of the Telcos, which
typically yield higher gross margins. The increase in cost of sales in the first
half of 1998 included a first quarter charge of $4.0 million for the write-off
of inventory related to product performance issues on a key component used in
certain of the Company's adjunct products. The first half of 1997 included a
first quarter charge of $4.3 million to write down to net realizable value
certain of the Company's inventory and a number of large fulfillment programs
which provided free freight to the customer. The Company expects gross margins
to vary in the future due to changes in sales mix by geography, distribution
channel, type of service provided, and product. The Company believes gross
margins, excluding the impact of non-recurring charges, will remain at
approximately the level experienced in the first half of 1998 for the remainder
of 1998 as a result of competitive pricing pressures and the shift in channel
mix away from Agency Fulfillment programs.
Research and development expenses
Research and development expenses represent salaries for personnel,
associated 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 for tooling. Research
and development expenses decreased to $3.2 million in the quarter ended June 30,
1998 from $4.5 million in the second quarter of 1997. Research and development
expenses decreased to $6.8 million in the six month period ending June 30, 1998
from $8.5 million in the first half of 1997. These decreases primarily resulted
from reduced headcount and decreased spending on adjunct-related development
projects. No losses were recognized in the second quarter of 1998 related to the
Company's equity interest in InfoGear Technology Corporation (which developed
the software for the Company's initial Internet product) as the Company's equity
investment in InfoGear of $2.6 million had been fully expensed with $2.4 million
of expenses in 1997 and $0.2 million of expenses in the first quarter of 1998.
The Company recognized $1.2 million of expense in the first half of 1997 related
to its equity in losses at InfoGear. Development costs for Internet products are
expected to remain flat during the third quarter of 1998 while the Company
explores strategic alternatives regarding its Internet Solutions Division, as
discussed in the "Historical Background" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations of this Report. Due to
the fundamental market-based declines in the Company's core Telco Products and
Services business, the Company does not believe that it is feasible to continue
to invest its balance sheet resources at the level required to develop the
early-stage Internet business. Research and development expenses as a percentage
of sales decreased slightly to 7.5% in the quarter ended June 30, 1998 from 7.7%
in the same period of 1997 and decreased to 6.0% in the first half of 1998 from
6.3% in 1997. The Company expects that research and development expenses will
remain at approximately the level experienced in the first half of 1998 during
the remainder of 1998.
<PAGE> 12
Selling and marketing expenses
Selling and marketing expenses represent personnel costs, telephone and
electronic data exchange expenses, promotional costs and travel expenses.
Selling and marketing expenses decreased slightly to $15.8 million in the
quarter ended June 30, 1998, from $16.0 million in the comparable period of 1997
and decreased to $33.4 million in the six months ended June 30, 1998 from $36.4
million in the comparable period of 1997. As a percentage of sales, selling and
marketing expenses increased to 36.3% in the quarter ended June 30, 1998, from
27.5% in the same period of 1997. In the six months ended June 30, 1998, selling
and marketing expenses increased to 29.7% from 26.9% of sales. The decrease in
absolute dollars spent was due to a decrease in Agency Fulfillment sales
partially offset by increased telemarketing costs associated with the Company's
own direct marketing of its telephone products. Increases in selling and
marketing expenses as a percentage of sales were due to increased costs per
order as the Company experienced higher market penetration rates for Caller ID
services. The Company expects that selling and marketing expenses will remain at
approximately the same level as a percentage of sales for the remainder of 1998,
but may fluctuate based on the volume associated with direct marketing
activities and Agency Fulfillment Programs.
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 decreased to $2.1 million in
the quarter ended June 30, 1998 from $2.4 million in the comparable period of
1997. In the second quarter of 1997, general and administrative expenses were
higher due to a one-time charge on contractually obligated expenses incurred as
part of the relinquishment of day-to-day duties of certain executives in the
second quarter of 1997. As a percentage of sales, general and administrative
expenses increased to 4.7% in the quarter ended June 30, 1998 from 4.0% in the
comparable period of 1997 due to the reduction in sales. In the six months ended
June 30, 1998, general and administrative expenses increased slightly to $5.5
million from $ 5.2 million. This increase reflects a one-time charge of $1.2
million related to legal, accounting, and consulting costs associated with
negotiations for a potential acquisition by the Company during the first quarter
of 1998, which the Company subsequently terminated. The Company believes that
general and administrative expenditures will decline in the remainder of 1998,
excluding one-time charges.
Restructuring
The Company incurred a pretax restructuring charge of $2.7 million in the
first quarter of 1998 as it announced and implemented several streamlining
programs including relocating its distribution center to Texas, combining
certain marketing and operations functions, restructuring research and
development activities and discontinuing certain products, resulting in asset
write-downs and the elimination of approximately 100 positions. Approximately
$0.6 million of the restructuring charge is expected to require cash outlays and
is expected to be substantially incurred over the next 12 months. The remaining
$2.1 million represents asset write-downs of inventory of $1.1 million and
leasehold improvements of $1.1 million related to discontinued products and
relocation of the distribution center from California to Texas.
<PAGE> 13
On July 22, 1998, the Company announced a new business strategy focusing on
core telephony products and services, and a restructuring plan to be implemented
in the second half of 1998 which is expected to result in one-time charges in
the range of $9.0 to $13.0 million in the third quarter of 1998, as discussed in
the "Historical Background" section of Management's Discussion and Analysis of
Financial Condition and Results of Operations of this Quarterly Report. The
restructuring is expected to reduce permanent and temporary headcount by
approximately 50% as the Company focuses on its core telephony products and
services business. The restructuring is expected to require cash outlays of
approximately $6.0 million, which is expected to be substantially incurred over
the next 12 months.
The following table lists the components of the restructuring accrual for the
six months ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
Asset
Employee Write-
Costs downs Leases Total
-------- ------ ------ -----
<S> <C> <C> <C> <C>
Reserve provided ....................... $ 437 $2,080 $155 $2,672
Reserve utilized in first quarter..... -- (1,020) -- (1,020)
Balance at March 31, 1998............ $ 437 $1,060 $155 $1,652
===== ====== ==== ======
Reserve utilized in second quarter.... (304) -- (25) (329)
Balance at June 30, 1998............. $ 133 $1,060 $130 $1,323
===== ====== ==== ======
</TABLE>
Provision (benefit) for income taxes
The benefit for income taxes for the quarter ended June 30, 1998, and
provision for income taxes for the quarter ended June 30, 1997, reflect an
effective tax rate of 38%. The benefit for income taxes for the six months ended
June 30, 1998, and provision for income taxes for the six months ended June 30,
1997, reflect an effective tax rate of 38% and 39%, respectively.
Liquidity and capital resources
The Company had working capital of $97.8 million as of June 30, 1998, as
compared to $116.1 million at December 31, 1997. The Company's current ratio
decreased to 3.2 to 1, as of June 30, 1998, from 3.7 to 1, as of December 31,
1997. The Company's cash, cash equivalents and short-term investments decreased
$19.4 million during the six months ended June 30, 1998. Cash used by operations
of $14.2 million resulted primarily from increased inventory of $14.9 million, a
net loss of $11.3 million, and an increase in other current assets and other
assets of $6.7 and $3.9 million, respectively, partially offset by decreased
accounts receivable balances of $19.6 million. Inventory increases were
primarily due to a significant sales shortfall and a shift in shipping inventory
from offshore contract manufacturers by sea instead of air freight in order to
reduce cost of goods sold and thus improve profit margins. The Company has more
recently re-evaluated this practice and has determined that air freight is an
effective means of supporting customer needs while maintaining lower levels of
inventory and commensurately higher cash balances. The Company purchased its
headquarters building for $3.2 million by exercising an option in its lease on
March 19, 1998. On July 20, 1998, the Company entered into a sales contract to
sell and lease-back the building. The contract provides for a sales price of
$4.9 million and the Company anticipates the sale will close late in the third
quarter or early in the fourth quarter of 1998.
<PAGE> 14
The Company has an unsecured bank line-of-credit agreement which provides
for borrowings of up to $25 million. The interest rate on borrowings under the
line-of-credit is prime less 0.25%. The line is primarily used as security for
letters of credit used to purchase inventory from international suppliers. As of
June 30, 1998, the Company had not borrowed any funds under the line. Letters of
credit secured by this line totaled $8.7 million as of June 30, 1998. The
line-of-credit agreement has an annual profitability covenant which the Company
plans to renegotiate.
The Company plans to continue to invest in its infrastructure, including
information systems, to gain efficiencies, assure Year 2000 compliance, and meet
the demands of its markets and customers. The Company believes its 1998 capital
expenditures will be approximately $2.0 million during the remaining six months
of 1998. The 1998 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,
cash equivalents, short-term investments, and borrowing capacity will satisfy
the Company's working capital and capital expenditure requirements for the next
twelve months. The Company anticipates that its cash, cash equivalents and
short-term investments may decrease to $20 to $30 million by the end of the
third quarter of 1998 due to the costs of the announced restructuring, its Q2
operating loss, and its anticipated Q3 operating losses. Reversal of this trend
is dependent upon the Company's ability to restructure its business and staffing
levels to the appropriate size, given its anticipated future sales volumes and
margins.
Factors That May Affect Future Results
Dependence on Caller ID and Maturation of Market. Approximately 84%, 68%
and 70% of the Company's revenues during 1997, 1996 and 1995, respectively, came
from the Company's Agency Fulfillment and Non-Agency Fulfillment programs for
Caller ID adjuncts and, to a lesser extent, telephone products with Caller ID
support and customer acquisition services through Telcos. Total Agency
Fulfillment and Non-Agency Fulfillment programs for Caller ID services on behalf
of Telcos decreased to 61% of total revenue in the first six months of 1998 from
85% of revenue in the first six months of 1997. The size of the overall market
for Caller ID products and services is a function of the total number of
potential subscribers with Caller ID-enabled telephone lines and the rate of
adoption of Caller ID services, or the "penetration rate," among those
subscribers. Based upon the Company's projections of penetration rates, the
Company believes that the annual market for new Caller ID subscribers in the
United States may have peaked in 1997, with a resulting slowdown in Caller ID
sales to new subscribers expected in 1998 and beyond. Customer adoption of
Caller ID services has been in the past, and likely will be in the future,
dependent on a variety of factors, including the rate at which Telcos from
time-to-time elect to promote Caller ID, the perceived value of the services to
end users, including the extent to which other end users have also adopted
and/or not blocked Caller ID services, and the end user cost for the services.
There can be no assurances that Telcos will continue to promote Caller ID, that
Caller ID services will gain market acceptance or that, in areas where the
services are accepted, those markets will not become saturated. In addition,
even if peak market penetration for Caller ID service has not been achieved for
the entire domestic United States market, one or more regional markets may
become saturated. Further, the market for Caller ID adjunct products may be
eroded as Caller ID functionality is designed into competitively priced phone
products as a standard feature. Declines in demand for or revenues from Caller
ID, whether due to reduced promotion of such services by Telcos, competition,
market saturation, price reduction, technological change or otherwise, could
have a material adverse affect on the Company's business, operating results or
financial condition.
<PAGE> 15
In the first 6 months of 1998 revenues from Agency Fullfillment and
Non-Agency Fulfillment programs declined as a result of lower average selling
prices, resulting in first half operating losses. In addition, as penetration
rates for adoption of Caller ID services increase, the expenses, or "cost per
order," the Company must incur in its Agency Fulfillment arrangements to obtain
incremental end user adoption of Caller ID services increases, which may result
in pressures on the Company's profitability.
Dependence on Telcos; Concentrated Customer Base. A significant portion of
the Company's revenues are derived from a small number of Telcos. During 1997,
1996 and 1995 respectively, the percentage of revenue derived by the Company
from its significant (greater than 10% of total sales) customers was 77% (four
customers), 68% (three customers) and 64% (two customers). There can be no
assurance that the Company will retain its current Telco customers or that it
will be able to attract additional customers. Industry practice with Telcos has
allowed for no long term contracts with the Company's Telco or other customers
and no on-going minimum purchases are required of those customers. Moreover, the
arrangements are typically both nonexclusive and terminable at-will following a
specified notice period, generally 20 to 60 days. In addition, these Telco
customers may have significant leverage over the Company and may try to obtain
terms relatively favorable to the customer and/or subsequently change the terms,
including pricing and/or payment terms, on which the Company and such customers
do business. If the Company accepts such terms, including pricing and/or payment
terms, on which it does business, the Company's operating margins and/or cash
flows may decline and such declines may have a material adverse affect on the
Company's business, results of operations or financial condition.
The Company's sales and operating results are substantially dependent on
the extent of, and the timing of, a small number of Telcos' respective decisions
to implement and from time-to-time promote Caller ID, Caller ID on Call Waiting
and other Services on a system-wide or regional basis. The extent to which the
Telcos determine to implement and/or from time-to-time promote Services may be
affected by a wide variety of factors, including regulatory approvals, technical
requirements, budgetary constraints at the Telcos, consolidation among Telcos,
market saturation for the Services, the profitability of the Services to the
Telcos, market acceptance for the Services and other factors. The Company
typically has little control over any of these factors. There can be no
assurances that the Telcos will continue to implement and/or promote Caller ID
or other Services, or that the Company's product and program offerings will be
selected by the Telcos. Moreover, the Company believes that certain Telcos have
begun to perform directly themselves the customer acquisition services currently
undertaken by the Company through its agency programs, rather than through third
parties such as the Company. In addition, the Telcos are increasingly choosing
to unbundle their vendor selection for products and services, making the
barriers to entry much less complex, and allowing competitors to more easily
enter into any one of these three markets (i.e., product, fulfillment services
and agency marketing services). The continuation of these trends among the
Telcos could have a material adverse affect on the Company's business, results
of operations and financial condition. The Company operates with little or no
backlog and its quarterly results are substantially dependent on these Telcos'
implementation and/or promotion of Services on a system-wide or regional basis
during each quarter. The Company's operating expenses are based on anticipated
sales levels, and a high percentage of such expenses are relatively fixed. As
result, to the extent that the Telcos delay the implementation and/or promotion
of these Services which were anticipated for a particular quarter, the Company's
sales and operating results in that quarter may be materially and adversely
affected.
<PAGE> 16
New Product Introduction; Technological Change. The telecommunications
industry is subject to rapid technological change, changing customer
requirements, frequent new product introductions and changing industry standards
which may render existing products and services obsolete. The Company's future
success will depend in large part on its ability to timely develop (or source)
and introduce new products and services which keep pace with, and correctly
anticipate, these changes and which meet new, evolving market standards and
changing customer requirements, as well as its ability to enhance and improve
existing products and services. The Company is currently seeking to leverage its
customer acquisition and Fulfillment expertise into other market opportunities,
such as customer acquisition for wireless telephone services and products.
Product introductions and short product life cycles necessitate high levels of
expenditure for research and development and new customer acquisition. There can
be no assurance that the Company's existing markets will not be eroded or that
the Company will be able to correctly anticipate and/or timely develop and
introduce products and services which meet the requirements of the changing
marketplace or which achieve market acceptance. If the Company is unable to
develop and introduce products and services which timely meet the changing
requirements of the marketplace and achieve market acceptance, the Company's
business, results of operations or financial condition may be materially and
adversely affected.
In particular, the Company has been seeking to expand its product offerings into
a number of new business areas including the Internet and electronic commerce,
and has devoted about half of its research and development resources for the
past 12 months on developing telephone based "information appliances" which
allow access to the World Wide Web via telephone-based, or telephone-like,
devices. Certain of such devices would also be intended to enable electronic
commerce and services-based business models. These are significantly new areas
for the Company and its existing research and development, sales and marketing
personnel. There can be no assurances that the Company will be successful in
timely developing such products or that, if developed, there will be a market
for such products. Moreover, there can be no assurances that the Company's
existing personnel will have the skills necessary to timely develop, market and
sell products for this market or that, if it becomes necessary to do so, the
Company will be able to hire the necessary skilled personnel to develop, market
and/or sell products in these new areas. On July 22, 1998 the Company announced
that it is seeking "strategic alternatives" for its Internet business unit due
to the significant cash resources needed to successfully develop this new
market. For additional information see the sections titled Liquidity and capital
resources, Restructuring, and Research and Development contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations of this
Report.
Significant undetected errors or delays in new products or releases may affect
market acceptance of the Company's products and could have a material adverse
effect on the Company's business, results of operations or financial condition.
There can be no assurances that, despite testing by the Company or its Telco
customers, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of market share, failure
to achieve market acceptance, or recalls due to product defects. Any such
occurrences could have a material adverse effect on the Company's business,
results of operations or financial condition. Further, if the Company were to
experience delays in the commercialization and introduction of new or enhanced
products, if customers were to experience significant problems with products or
if customers were dissatisfied with product functionality or performance, this
could have a material adverse effect on the Company's business, results of
operations or financial condition.
<PAGE> 17
Viability of Internet and Electronic Commerce as New Business Areas. The
Company has recently begun to promote the adoption and sale of telephone-based
devices which allow access to the World Wide Web and which also may be designed
to enable electronic commerce and services-based business models. On July 22,
1998 the Company announced that it is seeking "strategic alternatives" for its
Internet business unit due to the significant cash resources needed to
successfully develop this new market. Following this announcement, potential and
existing customers for the Company's internet products have told the Company
they intend to defer product purchases until the strategic alternative decision
is made and communicated. The market for such Internet phones is very new and
currently unproven, with several competing technological platform standards
available. Both the extent and/or timing of consumer acceptance for Internet
phones, and the particular technology platform(s) for such phones which may
ultimately gain market acceptance, is highly uncertain. A viable market for
Internet phones and/or electronic commerce may not develop for a number of
reasons, including customer preference and usage patterns, the cost of the
device to end users, potentially inadequate development of the necessary
Internet infrastructure, delayed or discontinued versions of software from
InfoGear Technology Corporation, delayed development of Internet enabling
technologies, inadequate Internet performance improvements, changing Internet
standards and protocols and increased government regulation. Changes in, or
insufficient availability of, telecommunications services to support the
Internet also could result in slower response times and adversely affect usage
of the Internet generally and Internet phones and electronic commerce in
particular. Moreover, adverse publicity and consumer concern about the security
of transactions conducted on the Internet and the privacy of users may also
inhibit the growth of the market for Internet telephones and electronic
commerce. If the use of the Internet does not continue to grow or grows more
slowly than expected, if the infrastructure for the Internet does not
effectively support growth that may occur, if end user costs for Internet phones
are not reduced whether through manufacturing cost reductions, subsidy-based
business models or otherwise, or if concerns about Internet security do not
abate, the Company's ability to profit from Internet phones and electronic
commerce would be materially adversely affected. Moreover, there can be no
assurances that this market will develop or that, if a market develops, the
Company will be able to timely develop and bring to market products which gain
market acceptance or which generate significant revenues or profits.
Fluctuations in Quarterly Revenues and Operating Results. The Company has
experienced in the past, and may experience in the future, significant
fluctuations in sales and operating results from quarter to quarter as a result
of a variety of factors, including the timing of orders for the Company's
products from Telcos and other customers; the success of the Company's own
direct marketing programs; the Company's ability to derive adequate sales
volumes while controlling related costs, credit risks and customer returns; the
effect of the restructuring on the Company's cash balances; the ability of the
Company to successfully downsize the business to meet the Company's anticipated
revenues; the addition or loss of distribution channels or outlets; the impact
on adoption rates of changes in monthly end-user charges for Services; the
timing and market acceptance of new product introductions by the Company or its
competitors; increases in the cost of acquiring end-user customers for Services
and the resulting effects on profitability; 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; technological
difficulties and resource constraints encountered in developing, testing and
introducing new products; uncertainties involved in the Company's entry into
markets for new Services; disruption in sources of supply, manufacturing and
<PAGE> 18
product delivery; changes in material costs; regulatory changes; general
economic conditions, competitive pressures, including reductions in average
selling prices and resulting erosions of margins; and other factors.
Accordingly, the Company's quarterly results are difficult to predict until the
end of each particular quarter, and delays in product delivery or closing of
expected sales near the end of a quarter can cause quarterly revenues and net
income to fall significantly short of anticipated levels. Because of these
factors, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and that such comparisons should
not be relied upon as indications of future performance. Due to all of the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
Need to Develop Alternative Distribution Channels. Historically, the
Company's Telco customers have been the primary distribution channel for the
Company's products. However, the Company is seeking to diversify its
distribution channels toward direct-to-end-user, retail, targeted vertical
market segments and other alternate distribution channels, with the goals of
broadening the Company's market opportunities and adding predictability to the
Company's quarter-by-quarter revenues. Moving into these new channels may
involve a number of risks, including, among other things, the establishment of
new channel relationships and presence, the cost of creating brand awareness and
end-user demand in the new channels, the viability of the Company's product
offerings in the new channels and managing conflicts among different channels
offering the Company's products. There can be no assurance that the Company will
be successful in identifying and exploiting alternate distribution channels or
in addressing any one or more of these risks. If the Company is not successful,
it may lose significant sales opportunities and will continue to be
substantially dependent upon the Telco channel for sales of its products.
Risks Related to Contract Manufacturing; Limited Sources of Supply. The
Company's products are manufactured for the Company by third parties which are
primarily located in Malaysia, China and Thailand. The use of third parties to
manufacture products involves a number of risks, including limited control over
production facilities and schedules and the management of supply chains for the
manufactured products. Moreover, reliance on contract manufacturers in foreign
countries subjects the Company to risks of political instability, financial
instability, expropriation, currency controls and exchange fluctuations, and
changes in tax laws, tariffs and rules. See "Risks Relating to International
Sales." Many of the key components used in the Company's products are available
either only from single sources or, even if potentially available from multiple
sources, involve relatively long lead times to manufacture, such that the
Company cannot quickly obtain additional supply without incurring significant
incremental costs. In general, the Company does not have supply contracts with
its suppliers and it orders parts on a purchase order basis. The Company's
inability to obtain sufficient quantities of components 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, results of operations and financial
condition.
<PAGE> 19
Dependence on Key Personnel; Hiring and Retention of Employees. The
Company's success depends to a significant extent on the services of its senior
management and other key employees and its ability to attract and retain highly
skilled technical, managerial, sales and marketing personnel. Competition for
such personnel is intense. The Company's restructuring in the third and fourth
quarters poses additional risk as several key executives, engineers and other
personnel have been layed off. There can be no assurance that the Company will
be successful in continuously recruiting new personnel or in retaining existing
personnel. The loss of one or more key employees, or the Company's inability to
attract additional qualified employees or retain other employees could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company may experience increased
compensation costs in order to attract and retain skilled employees.
Risks Relating to International Sales. The Company has had relatively
limited international sales to date. However, the Company believes that
international sales, particularly in Asia, may represent an increasing
percentage of the Company's sales in the future. The Company's future success
will depend in part on its ability to compete in Japan and elsewhere in Asia and
this will depend on the continuation of favorable trading relationships between
the region and the United States. The Company's entry into international markets
will likely require significant management attention and may require significant
engineering efforts to adapt the Company's products to such countries' telephone
systems. Moreover, the rate of customer acceptance of Caller ID in areas outside
of the United States is highly uncertain. There can be no assurance that the
Company's Caller ID or other products will gain meaningful market penetration in
any foreign jurisdictions, whether due to local consumer preferences, local
regulatory requirements, technological constraints in the local networks, the
extent to which the local Telcos determine to promote Caller ID, or other
factors. In particular, the Company believes that technological constraints in
the Japanese telephone networks could delay the scope of the introduction of
Caller ID in the Japanese market. Dependence on revenues from international
sales involves a number of inherent risks, including new or different
regulations, economic slowdown and/or downturn in the general economy in one or
more local markets, international currency fluctuations, general strikes or
other disruptions in working conditions, political instability, trade
restrictions, changes in tariffs, the difficulties associated with staffing and
managing international operations, generally lengthy receivables collection
periods, unexpected changes in or impositions of legislative or regulatory
requirements, reduced protection for intellectual property rights in some
countries, potentially adverse taxes, delays resulting from difficulty in
obtaining export licenses for certain technology and other trade barriers.
International sales will also be impacted by the specific economic conditions in
each country.
Management of Infrastructure. The Company's future success will require,
among other things, that the Company continue to improve its operating and
information systems. In particular, the Company must constantly seek to improve
its order entry, tracking and product fulfillment service capabilities and
systems in order to retain and/or obtain Telco customers due to ever-increasing
demands/expectations from the Telcos. The failure of the Company to successfully
implement and continually improve its operating and information systems may
adversely affect both the Company's ability to obtain and/or retain its Telco
customers and accordingly, could have a material adverse effect on the Company's
business, results of operations or financial condition. Additionally, the
transition of systems, management and people related to the relocation of the
Company's distribution center to Austin, Texas is in process. The failure of the
Company to successfully manage this transition could have a material adverse
effect on the Company's business, results of operations or financial condition.
<PAGE> 20
Competition. The telecommunications industry is an intensely competitive
industry with several large vendors that develop and market Caller ID adjunct
display units and screen phone products. Certain of these vendors have
significantly more financial and technical resources than the Company. The
Company's competitors include in-house divisions of the Company's current and
potential customers, as well as small companies offering specific services and
large firms. In addition, competitors for the Company's phone products include
both large Asian, European and North American consumer electronics and
telecommunications products companies and smaller Asian, European and North
American manufacturers. If the Company's existing customers perform directly the
customer acquisition services currently undertaken by the Company through its
Agency Fulfillment programs, or if potential customers retain or increase
internal capabilities to provide such services, the Company's business, results
of operations and financial condition could be adversely affected. The
introduction of new competitive products into one or more of the Company's
various markets could have a material adverse effect on the Company's business,
results of operations or financial condition.
Limited Protection of Intellectual Property; Risk of Third-Party Claims of
Infringement. The Company has patent protection on certain aspects of its
existing technology and also relies on trade secrets, copyrights, trademarks and
contractual provisions to protect its proprietary rights. There can be no
assurance that the Company's protective measures will be adequate to protect the
Company's proprietary rights, that others have not or will not independently
develop or otherwise acquire equivalent or superior technology, or that the
Company will not be required to obtain royalty-bearing licenses to use other
intellectual property in order to utilize the inventions embodied in its
patents. There also can be no assurance that any patents will be issued pursuant
to the Company's current or future patent applications or that patents issued
pursuant to such applications or any patents the Company currently owns will not
be invalidated, circumvented or challenged. Moreover, there can be no assurance
that the rights granted under any such patents will provide competitive
advantages to the Company or be adequate to safeguard and maintain the Company's
proprietary rights. In addition, the laws of certain countries in which the
Company's products may from time-to-time be sold may not protect intellectual
property rights to the same extent as the laws of the United States. The
telecommunications industry, like many technology-based industries, is
characterized by frequent claims and litigation involving patent and other
intellectual property rights. The Company from time to time may be notified by
third parties that the Company may be infringing patents owned by or proprietary
rights of third parties. The Company has in the past and may in the future have
to seek a license under such patent or proprietary rights, or redesign or modify
their products and processes in order to avoid infringement of such patent or
proprietary rights. There can be no assurance that such a license would be
available on acceptable terms, if at all, or that the Company could so avoid
infringement of such patent or proprietary rights, in which case the Company's
business, financial condition and results of operations could be materially and
adversely affected. Additionally, litigation may be necessary to protect the
Company's proprietary rights. Any claims or litigation involving the Company's
owned or licensed patents or other intellectual property rights may be time
consuming and costly, or cause product shipment delays, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
<PAGE> 21
Volatility of Stock Price. The market price of the Company's Common Stock
has experienced significant fluctuations and may continue to fluctuate
significantly. The market price of the Common Stock may be significantly
affected by factors such as the announcement of new products or product
enhancements by the Company or its competitors, technological innovation by the
Company or its competitors, quarterly variations in the Company's or its
competitors' products and services, changes in revenue and revenue growth rates
for the Company as a whole or for specific geographic areas, business units,
products or product categories, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to the technology industry or the
telecommunications industry in particular. The stock prices for many companies
in the technology sector have experienced wide fluctuations which often have
been unrelated to their operating performance. Such fluctuations may adversely
affect the market price of the Company's Common Stock.
Year 2000 Compliance. Although the Company believes that its products will
record, store, process, calculate and present calendar dates falling on or after
(and if applicable, spans of time including) January 1, 2000, and will calculate
any information dependent on or relating to such dates in the same manner, and
with the same functionality, data integrity and performance, as such products
record, store, process, calculate and present calendar dates on or before
December 31, 1999, or calculate any information dependent on or relating to such
dates (collectively, "Year 2000 Compliant"), Year 2000 Compliant issues may
arise with respect to products furnished by third-party suppliers that may
result in unforeseen costs or delays to the Company and therefore may have a
material adverse effect on the Company.
The Company has reviewed its computer systems to identify the systems that could
be affected by Year 2000 Compliant issues and has developed an implementation
plan to attempt to address these issues. Any of the programs and/or systems
which the Company currently utilizes and that have time sensitive software may
not be Year 2000 Compliant. This could result in a major systems failure or
miscalculations. The Company presently believes that, with modifications to
existing software, Year 2000 Compliant issues should not pose significant
operational problems for the Company's computer systems as so modified and
converted. However, if such modification or conversions are not completed, the
Year 2000 Compliant problem could have a material adverse effect on the
operations of the Company.
<PAGE> 22
Risks Relating to Acquisitions. As part of its overall business plans, the
Company may from time-to-time consider and ultimately consummate acquisitions of
other companies or businesses or invest in joint ventures or independent
companies. Acquisitions require significant financial and management resources
both at the time of the transaction and during the process of integrating the
newly-acquired business into the Company's operations. The Company's operating
results could be adversely affected if it is unable to successfully integrate
such new businesses into its operations. There can be no assurance that any
acquired products, technologies or businesses will contribute at anticipated
levels to the Company's sales or earnings, or that sales and earnings from
combined businesses will not be adversely affected by the integration process.
Certain acquisitions or strategic transactions may be subject to approval by the
other party's board of directors or stockholders, domestic or foreign
governmental agencies, or other third parties. In addition, there is a risk that
proposed acquisitions or transactions could either fail to be concluded as
planned or not be concluded at all, in which latter case the Company's results
of operations could nonetheless be adversely effected as a result of expenses
incurred in negotiating the proposed acquisitions or transactions. Future
acquisitions by the Company could also result in the issuance of equity
securities or the rights associated with the equity securities, which could
potentially dilute earnings per share. In addition, future acquisitions could
result in the incurrence of debt, taxes, contingent liabilities, amortization
expenses related to goodwill and other intangible assets and expenses incurred
to align the accounting policies and practices of the acquired companies with
those of the Company. These factors could adversely affect the Company's future
operating results, financial position and cash flows.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risks
Not applicable.
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In the ordinary course of business, the Company may be involved in
legal proceedings. As of the date hereof, the Company is not a party to
any pending legal proceedings which it believes will materially affect
its financial condition or results of operations.
ITEM 2. Changes In Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
The company held its Annual Meeting of Stockholders on May 27, 1998.
There were two proposals under consideration; 1) the election of two
persons as Class A Directors to hold office for a three-year term and until
their respective successors are elected and qualified, and 2) to ratify the
appointment of Price Waterhouse LLP as independent public auditors for the
Company for the fiscal year ending December 31, 1998.
The results of the election of Class A Directors were as follows:
1) Daniel L. Eilers 2) Richard M. Moley
VOTES FOR 12,425,936 VOTES FOR 12,426,636
VOTES WITHHELD 232,161 VOTES AGAINST 231,461
The results of the appointment of Price Waterhouse LLP as independent
public auditors was as follows:
VOTES FOR 12,610,872
VOTES AGAINST 17,420
VOTES ABSTAINED 29,805
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits at page 25 below.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the six months
ended June 30, 1998.
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIDCO INCORPORATED
August 12, 1998 By:/s/Daniel L. Eilers
- --------------- -----------------------------------
Date Daniel L. Eilers
President & Chief Executive Officer
August 12, 1998 /s/Richard D. Kent
- --------------- -----------------------------------
Date Richard D. Kent
Vice President Finance
and Chief Financial Officer
<PAGE> 25
CIDCO INCORPORATED
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits Page
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation. (1) --
3.2 Amended and Restated By-Laws (8). --
3.3 Form of Certificate of Designation, Number, Powers, --
Preferences and Relative, Participating, Optional and
Other Special Rights and Qualifications, Limitations,
Restrictions and Other Distinguishing Characteristics of
the Registrant's Series A Junior Participating
Preferred Stock. (6)
4.1 Second Amendment to Revolving Credit Loan Agreement --
dated October 13, 1995 between Registrant and Comerica
Bank.(4)
4.2 Rights Agreement dated as of January 27, 1997, between --
the Registrant and United States Trust Company of New
York, as Rights Agent. (7)
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) --
<PAGE> 26
10.20 Registrant's 1994 Directors' Stock Option Plan. (8) --
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) --
10.24 Employment Agreement dated June 28, 1996 between Registrant --
and Ian Laing. (7)
10.25 Employment Agreement dated July 29, 1996 between Registrant --
and Marv Tseu. (7)
10.26 Employment Agreement dated December 16, 1996 between --
Registrant and Richard D. Kent. (7)
10.27 Employment Agreement dated March 17, 1997 between Registrant --
and Daniel L. Eilers. (7)
10.28 Option Agreement dated March 12, 1997 between Registrant and --
Daniel L. Eilers. (7)
10.29 1997 Annual Executive Incentive Plan (8) --
</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.
(6) Incorporated herein by reference to the Company's Form 8-A filed on
February 4, 1992.
(7) Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended March 31, 1997.
(8) Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended June 30, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 17,116
<SECURITIES> 38,186
<RECEIVABLES> 38,470
<ALLOWANCES> 3,911
<INVENTORY> 27,771
<CURRENT-ASSETS> 141,351
<PP&E> 16,735
<DEPRECIATION> 1,935
<TOTAL-ASSETS> 163,743
<CURRENT-LIABILITIES> 43,533
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 120,210
<TOTAL-LIABILITY-AND-EQUITY> 163,743
<SALES> 43,387
<TOTAL-REVENUES> 43,387
<CGS> 32,990
<TOTAL-COSTS> 21,036
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (10,639)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,656)
<INCOME-TAX> (3,669)
<INCOME-CONTINUING> (5,987)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,987)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
