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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 March 31, 2000.
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 May 4, 2000
was 14,424,932.
CIDCO INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Financial Statements:
Balance sheets at March 31, 2000
and December 31, 1999 .........................................3
Statements of operations and comprehensive income (loss)
for the three months ended March 31, 2000 and 1999 .............4
Statements of cash flows for the three months
ended March 31, 2000 and 1999 .................................5
Notes to financial statements .....................................6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................7
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk..........16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings .................................................17
ITEM 2. Changes in Securities .............................................17
ITEM 3. Defaults Upon Senior Securities ...................................17
ITEM 4. Submission of Matters to a Vote of Security Holders ...............17
ITEM 5. Other Information .................................................17
ITEM 6. Exhibits and Reports on Form 8-K ..................................17
SIGNATURES ...................................................................18
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIDCO INCORPORATED
BALANCE SHEETS
(in thousands, except per share data; unaudited)
March 31, December 31,
2000 1999
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 9,679 $ 29,323
Short-term investments ....................... 17,978 10,547
Accounts receivable, net of allowance
for doubtful accounts of $278 and $1,127 ... 19,911 22,407
Inventories .................................. 20,273 25,688
Other current assets ......................... 743 1,002
-------- --------
Total current assets ....................... 68,584 88,967
Property and equipment, net ..................... 5,756 6,653
Other assets .................................... 2,899 711
-------- --------
$ 77,239 $ 96,331
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 2,994 $ 9,412
Accrued liabilities........................... 4,834 8,738
-------- --------
Total current liabilities .................. 7,828 18,150
Stockholders' equity:
Common stock, $.01 par value; 35,000 shares
authorized, 14,422 and 14,418 shares issued 144 144
Treasury stock, at cost (560 and 675 shares) . (2,478) (2,988)
Additional paid-in capital .................. 90,035 88,916
Accumulated Deficit ......................... (18,290) (7,891)
-------- --------
Total stockholders' equity ................ 69,411 78,181
-------- --------
$ 77,239 $ 96,331
======== ========
The accompanying notes are an integral part of these financial statements.
CIDCO INCORPORATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Loss)
(in thousands, except per share data; unaudited)
Three months ended
March 31,
---------------------
2000 1999
-------- --------
Sales .............................................. $ 16,481 $ 47,202
Cost of sales....................................... 15,343 35,038
-------- --------
Gross margin ....................................... 1,138 12,164
Operating expenses:
Research and development ....................... 2,431 1,936
Selling and marketing .......................... 7,919 7,332
General and administrative ..................... 1,384 1,519
-------- --------
11,734 10,787
-------- --------
Income (loss) from operations ...................... (10,596) 1,377
Other income, net .................................. 216 165
-------- --------
Income (loss) before income taxes .................. (10,380) 1,542
Provision for (benefit from) income taxes .......... -- --
-------- --------
Net income (loss) .................................. $(10,380) $ 1,542
======== ========
Net earnings (loss) per share - basic .............. $ (0.75) $ 0.11
======== ========
Net earnings (loss) per share - diluted ............ $ (0.75) $ 0.11
======== ========
Shares used in per-share calculation - basic ....... 13,811 13,759
======== ========
Shares used in per-share calculation - diluted ..... 13,811 14,400
======== ========
Comprehensive income (loss):
Net income (loss) .................................. $(10,380) $ 1,542
Change in unrealized gain (loss) on investments, net 235 (4)
-------- --------
Total comprehensive income (loss) .................. $(10,145) $ 1,538
======== ========
The accompanying notes are an integral part of these financial statements.
CIDCO INCORPORATED
STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three months ended
March 31,
-------------------
2000 1999
-------- --------
Cash flows provided by operating activities:
Net income (loss) .................................... $(10,380) $ 1,542
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization ..................... 1,236 1,427
Changes in assets and liabilities:
Accounts receivable .............................. 2,496 (11,077)
Inventories ...................................... 5,415 2,394
Income tax refunds receivable .................... -- 18,274
Other current assets ............................. 259 732
Other assets...................................... (1,068) (104)
Accounts payable ................................. (6,418) 5,401
Accrued liabilities .............................. (3,904) (1,210)
-------- --------
Net cash provided by (used in)
operating activities ................... (12,364) 17,379
Cash flows from investing activities:
Acquisition of property and equipment ................ (339) (464)
Sale (purchase) of short-term investments, net ....... (7,288) 2,875
-------- --------
Net cash provided by (used in)
investing activities ............... (7,627) 2,411
-------- --------
Cash flows from financing activities:
Issuance of common stock.............................. 347 57
Purchase of treasury stock ........................... -- (3,079)
-------- --------
Net cash provided by (used in)
financing activities ............... 347 (3,022)
-------- --------
Net increase (decrease) in cash and
cash equivalents ................... (19,644) 16,768
Cash and cash equivalents at beginning
of period ......................... 29,323 12,349
-------- --------
Cash and cash equivalents at end of period .............. $ 9,679 $29,117
======== ========
Supplemental disclosure of cash flow information:
Issuance of warrants in connection with
marketing agreement ................. $ 1,120 $ --
======== ========
Cash paid for income taxes ........................... $ -- $ --
======== ========
The accompanying notes are an integral part of these financial statements.
CIDCO INCORPORATED
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, 1999 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 Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
Management believes that its revenue recognition policies and practices are in
conformance with SAB 101.
In March 2000 the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions involving
Stock Compensation" an interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
Management believes that the impact of FIN 44 will not have a material effect on
the financial position or results of operations of the Company.
Note 3. Inventories
Inventories are stated at the lower of cost or market value, cost being
determined using the standard cost method (which approximates first in, first
out). The Company's inventories consist of finished goods and raw materials
purchased for the manufacture of finished goods.
The components of inventory are as follows (in thousands):
Mar. 31,2000 Dec. 31,1999
------------ ------------
Inventories, net of reserves:
Finished Goods ......................... $ 17,140 $ 22,283
Raw Materials........................... 3,133 3,405
-------- --------
$ 20,273 $ 25,688
======== ========
Note 4. Comprehensive Income (loss)
The Company's comprehensive income (loss) consists of net income (loss) and
unrealized gains and losses on investments. Accumulated balances of unrealized
gains and losses on investments are as follows:
Balance December 31, 1998 ................ $ (31)
Unrealized losses in the period, net ..... (4)
-----
Balance March 31, 1999 ................... $ (35)
=====
Balance December 31, 1999 ................ $ (92)
Unrealized gain in the period, net ....... 235
-----
Balance March 31, 2000 ................... $ 143
=====
Note 5. Earnings (loss) per Share
Basic Earnings Per Share ("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. Basic EPS excludes
the dilutive effect of stock options. Diluted EPS 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.
The following table is a reconciliation of the numerators and denominators
of the basic and diluted EPS:
Quarter ended March 31,
------------------------
2000 1999
-------- -------
Net income (loss) used to compute earnings
per common share ....................... $(10,380) $ 1,542
======== =======
Denominator used to compute basic earnings
(loss) per common share ................. 13,811 13,759
Shares issuable on exercise of options (1) .... -- 641
-------- -------
Denominator used to compute diluted earnings
(loss) per common share ................. 13,811 14,400
======== =======
Basic earnings (loss) per share ............... $ (0.75) $ 0.11
======== =======
Diluted earnings (loss) per share ............. $ (0.75) $ 0.11
======== =======
(1) Stock options and warrants to purchase 1,025,433 shares of common stock
priced at $ 1.88 to $19.82 per share were excluded because their inclusion would
be anti-dilutive for the quarter ended March 31, 2000. Stock options to purchase
321,159 shares of common stock priced at $4.75 to $24.95 per share were excluded
because their inclusion would be anti-dilutive for the quarter ended March 31,
1999.
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
The Company 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 Services then being introduced by 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 Direct Marketing Services, Fulfillment, Direct to Telco, and, to a lesser
extent, international accounts, Retail, and OEM customers. Direct Marketing
Services 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 on the Telco's behalf an adjunct product or a phone product to each
customer "acquired" through the campaign. Fulfillment sales occur when the
Company receives an order and ships the requested product directly to the
customer. In the case of Fulfillment sales, the Telcos generate orders by
performing the marketing activities themselves rather than retaining the Company
to perform such services, as in Direct Marketing Services programs. Direct
Marketing Services sales totaled 5%, and 21% of sales for the quarter ended
March 31, of 2000 and 1999, respectively. Fulfillment sales accounted for 54%,
and 43% of sales for the quarter ended March 31, of 2000 and 1999, respectively.
As a result of lower level Telco promotional activity in the fourth quarter
of 1999 and the anticipation that Telco demand will remain soft through the
third quarter of 2000, the Company has resized its Telco business to match an
estimated quarterly break-even point of approximately $20 million in revenue
which the Company may or may not achieve. The Company recorded approximately
$500 thousand in severance cost in the first quarter of 2000. No additional
material severance costs are anticipated. The Company expects to begin realizing
the benefit from such terminations during the second quarter of 2000.
This Report contains forward-looking statements that reflect the Company's
current views with respect to future events that 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.
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:
As a Percentage of Sales
Three months ended
March 31,
------------------------
2000 1999
----- -----
Sales .......................................... 100.0% 100.0%
Cost of sales .................................. 93.1 74.2
----- -----
Gross margin ................................... 6.9 25.8
----- -----
Operating expenses:
Research and development .................... 14.8 4.1
Selling and marketing ....................... 48.1 15.6
General and administrative .................. 8.3 3.2
----- -----
71.2 22.9
----- -----
Income (loss) from operations .................. (64.3) 2.9
Other income, net .............................. 1.3 0.4
----- -----
Income (loss) before income taxes .............. (63.0) 3.3
Provision (benefit) for income taxes ........... __ __
----- -----
Net income (loss) .............................. (63.0)% 3.3%
===== =====
Sales
Sales are recognized upon shipment of the product to the customer less
reserves for anticipated returns or, in the case of Direct Marketing Services,
non-retention of certain Services provided by the Telcos, and customer credit
worthiness. Sales decreased 65% to $16.5 million in the first quarter of 2000
from $47.2 million in the first quarter of 1999. Sales from Direct Marketing
Services Programs decreased to $0.9 million in the first quarter of 2000 from
$9.9 million in the first quarter of 1999. Fulfillment sales decreased to $8.9
million in the first quarter of 2000 from $20.1 million in the first quarter of
1999. Adjunct product sales decreased to 53% of dollar sales volume in the first
quarter of 2000 from 59% of dollar sales volume in the first quarter of 1999.
Unit sales of adjunct products decreased in the first quarter of 2000 to 0.6
million from 1.5 million in the first quarter of 1999. These decreases were due
to decreased unit sales of the Company's adjunct products through both the
Company's Fulfillment sales channel and Direct Marketing Services programs for
Network Feature Services on behalf of certain Telcos as the Company chose not to
participate in risky, low profit agency programs. In addition, the average
selling price of adjunct products dropped 14% from the first quarter of 1999 to
the first quarter of 2000 due to continued competitive pricing pressures.
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 6.9% in the first quarter of 2000 from 25.8% in the first quarter of 1999.
This decrease included a $1.3 million expense for the allowance for excess
inventory. The Company's gross margin prior to this reserve was 14.8%, down from
25.8% in the same quarter last year. This decline in gross margin was attributed
to an unusually high percentage of sales coming from low margin adjunct product
and low margin promotional programs. The Company expects gross margins to vary
in the future due to changes in sales mix by distribution channel and product
mix. For the remainder of 2000, the Company believes gross margins will range
between 15% to 25%.
Research and development expenses
Research and development expenses consist of salaries for personnel,
associated benefits, contracted engineering services, 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 increased to $2.4 million in the
quarter ended March 31, 2000 from $1.9 million in the first quarter of 1999.
This increase primarily resulted from higher spending on MailStation(R)1 related
development projects. Research and development expenses as a percentage of sales
increased to 14.8% in the quarter ended March 31, 2000 from 4.1% in the same
period of 1999. This increase was primarily due to the decrease in net revenue.
The Company expects that research and development spending will remain at
approximately the same absolute dollar level experienced in the first quarter of
2000 for the remainder of 2000.
Selling and marketing expenses
Selling and marketing expenses consist of personnel costs, telephone and
electronic data exchange expenses, promotional costs and travel expenses.
Selling and marketing expenses increased to $7.9 million in the quarter ended
March 31, 2000, from $7.3 million in the comparable period of 1999. As a
percentage of sales, selling and marketing expenses increased to 48.1% in the
quarter ended March 31, 2000, from 15.6% in the same period of 1999. The above
dollar increase was primarily due to increased marketing costs for the Company's
MailStation marketing activities. The increase in percent was primarily due to
reduced net revenues for the quarter. The MailStation sales and marketing costs
totaled $1.5 million in the first quarter of 2000 as compared to $0.1 million in
the first quarter of 1999. This increase was offset by a decline in Direct
Marketing Service programs for Network services. The Company anticipates that
selling and marketing expenses both in absolute dollars and as a percentage of
sales will increase significantly as the Company invests heavily in marketing
programs to grow MailStation subscribers, slightly offset by planned reductions
in Telco acquisition sales programs.
Additionally, the Company entered into a relationship with Yahoo! that
provides for co-branding of product and technical collaboration to allow
MailStation subscribers access to Yahoo! content and services. CIDCO's retail
presence increased from 80 stores at the end of the fourth quarter to 1,000 at
the end of March 2000.
MailStation unit sales for this quarter were approximately 4,800, adding
approximately 3,250 subscribers, which increases the total base to approximately
9,150 subscribers. The Company anticipates that the subscriber base will
increase during the second quarter. The anticipated increase in subscribers is
expected to be caused by the Company's national MailStation advertising campaign
and the Company expects the number of retail store fronts to increase during the
quarter. However, there are no assurances that subscribers will substantially
increase during the quarter.
General and administrative expenses
General and administrative expenses consist primarily of salaries, benefits
and other expenses associated with the finance and administrative functions of
the Company. General and administrative expenses decreased to $1.4 million in
the quarter ended March 31, 2000 from $1.5 million in the comparable period of
1999. As a percentage of sales, general and administrative expenses increased to
8.3% in the quarter ended March 31, 2000 from 3.2% in the comparable period of
1999. The decreases in dollars was due to lower finance expenses, whereas, the
increase in percent was primarily driven by lower net revenues for the quarter.
The Company believes that general and administrative expenditures will remain at
approximately first quarter spending levels during the remainder of 2000, even
after resizing.
Footnotes
1 MailStation is a registered trademark of CIDCO Corporation.
Liquidity and capital resources
The Company's cash and cash equivalents decreased $19.6 million during the
quarter ended March 31, 2000 primarily from cash used in operations of $12.3
million and investing activities of $7.6 which was partially offset by proceeds
of $0.3 million from the issuance of common stock. Cash used in operations of
$12.3 million resulted primarily from a net loss of $10.4 million, decreased
accounts payable of $6.4 million, decreased accrued liabilities of $3.9 million,
and increased other assets of $1.0. Offsets to the above included a decrease in
inventory of $5.4 million, decreased accounts receivable of $2.5 million,
decreased other assets of $0.3 million, and depreciation expense of $1.2
million.
Additionally, Cisco Systems announced the acquisition of InfoGear
Technology in the first quarter. The Company currently holds approximately a 5 %
interest in InfoGear, which should convert to approximately 245,000 shares of
Cisco Systems stock. The Company carries this investment on its balance sheet at
zero value. The acquisition has been approved by the board of directors of each
company and is subject to various closing conditions. The transaction is
expected to close in the second or third quarter of 2000.
The Company had a working capital balance of $60.7 million as of March 31,
2000, as compared to $70.8 million at December 31, 1999. The Company's current
ratio increased to 8.8 to 1, as of March 31, 2000, from 4.9 to 1, as of December
31, 1999. The decrease in working capital was due to a reduction in cash and
short-term investments of $12.3 million, accounts receivable of $2.5 million,
inventory of $5.4 million, and other current assets of $0.3 million. Offsetting
the above was a decrease in trade payables of $6.4 million, other accrued
liabilities of $3.9 million.
The Company has a line of credit for up to $15 million. Borrowings under
the line bear interest at the bank's base rate and the interest is payable
monthly. The bank's base rate was 9.00% per annum at March 31, 2000. Borrowings
under the line are collateralized by the assets of the Company. As of March 31,
2000, the Company had not borrowed any funds under the line. The line is
primarily used as security for letters of credit used to purchase inventory from
international suppliers. There were no outstanding Letters of Credit secured by
this line as of March 31, 2000.
The Company plans to continue to invest in its infrastructure, including
information systems, to gain efficiencies and meet the demands of its markets
and customers. In particular, the Company will invest in its infrastructure to
refine and improve its Internet service provider and mail hosting capabilities
and systems in support of its 1999 entry into the Internet appliance and service
market. The Company believes its remaining 2000 capital expenditures will be
approximately $3.0 million. The remaining 2000 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 is exploring
the possibility of obtaining debt or equity financing in the next twelve months
to provide additional funding for the MailStation business. There can be no
assurances that additional financing will be available on terms acceptable to
the Company.
Factors That May Affect Future Results
Dependence on Telco Services and Maturation of Market
Approximately 53%, and 59% of the Company's revenues in the quarter ended
March 31.of 2000 and 1999, respectively, came from the Company's sales of
Network Feature adjuncts and the balance from Network Feature phones and
MailStations. The size of the overall market for Network Feature products and
Services is a function of the total number of potential subscribers with Network
Feature-enabled telephone lines and the rate of adoption of Network Feature
Services, or the "penetration rate," among those subscribers. Customer adoption
of Network Feature 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 Network Feature Services, the perceived value
of the Services to end users, including the extent to which other end users have
also adopted Network Feature Services, and the end user cost for the Services.
There can be no assurances that Telcos will continue to promote Network Feature
Services, that one or more Network Feature 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 Network Feature
Service has not been achieved for the entire United States market, one or more
regional markets may become saturated. Further, the market for Network Feature
adjunct products may be eroded as Network Feature functionality is designed into
competitively priced phone products as a standard feature. Declines in demand
for or revenues from Network Feature Services, whether due to reduced promotion
of such Services by Telcos, competition, market saturation, price reduction,
technological change or otherwise, will have a material adverse affect on the
Company's business, operating results or financial condition. In addition, as
penetration rates for adoption of Network Feature Services increase towards
projected saturation levels, the expenses, or "cost per order," the Company must
incur in its Direct Marketing Services arrangements to obtain incremental end
user adoption of Network Feature Services increases, which may result in
unfavorable pressures on the Company's profitability.
Dependence on Telcos; Concentrated Customer Base
A significant portion of the Company's revenues is derived from a small
number of Telcos. During the quarter ended March 31, of 2000 and 1999, the
percentage of revenue derived by the Company from its significant (greater than
10% of total sales) customers was 61% (three customers) and 72% (two customers),
respectively. There can be no assurance that the Company will retain its current
Telco customers or that it will be able to attract additional customers. The
Company generally does not enter into long term contracts with its Telco or
other customers where on-going minimum purchases are required. 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, on which the Company and such customers do business. If the
Company is forced to accept such terms and/or change the terms, including
pricing, on which it does business, the Company's operating margins may decline
and such decline 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, this relatively small number of Telcos'
respective decisions to implement and from time-to-time promote Caller ID,
Caller ID on Call Waiting and other Network Services on a system-wide or
regional basis. The extent to which the Telcos determine to implement and/or
from time-to-time promote Network 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 Network Feature 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 for themselves the
customer acquisition services currently undertaken by the Company through its
Direct Marketing programs, rather than through third parties such as the
Company. The continuation of this trend 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 the 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.
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 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. Product introductions and short
product life cycles necessitate high levels of expenditure for research and
development. 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 is seeking to further expand its product and
service offerings in a new business area, Internet/E-mail appliances, and
expects to devote a significant portion of its research and development
resources on developing and selling 2nd and 3rd generation Internet appliances
which would allow electronic messaging and other functionality via an
easy-to-use device. In this regard, the Company has introduced the MailStation
Internet E-mail appliance and intends to introduce follow-on products. A
significant aspect of this product and services offering will be the provision
of Internet services, yielding a recurring revenue stream from users of the
products or "subscribers". 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. Products of this nature rely to a great extent upon retail
distribution and brand recognition. There can be no assurance that the Company
will be successful in implementing a successful national retail distribution
channel, and a brand marketing campaign. More over, there can be no assurance
that the Company will achieve the significant subscriber growth required for
success in this offering.
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 customers, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of market share or
failure to achieve market acceptance. 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.
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, in particular, deriving adequate sales volumes
while controlling related costs; 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 operating expenses;
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 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 and
other alternate distribution channels to the extent such channels do not
conflict with current Telco partnerships, with the goals of broadening the
Company's market opportunities and adding predictability to the Company's
quarter-by-quarter revenues. The Company believes its MailStation business's
success depends on the successful development of a strong retail distribution
channel. 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, will continue to be substantially dependent
upon the Telco channel for sales of its products and may not be able to grow the
Internet business.
Risks Related to Contract Manufacturing; Limited Sources of Supply
The Company's products are manufactured for the Company by third parties
that 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 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.
Dependence on Key Personnel
Hiring and Retention of Employees The Company's continued growth and
success depend to a significant extent on the continued 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. There can be no assurance that the Company will be
successful in continuously recruiting new personnel or in retaining existing
personnel. None of the Company's employees is subject to a long-term employment
agreement. 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 Latin
America, Asia-Pacific and Europe, 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 Latin America, Japan and elsewhere in the
Asia-Pacific region, and in Europe, 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 Network Feature Services in areas outside of the
United States is highly uncertain. There can be no assurance that the Company's
Network Feature products will gain meaningful market penetration in target
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 Network Feature Services,
or other factors. 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 longer 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 and
tracking and product fulfillment service capabilities and systems in order to
retain and/or obtain Telco customers. The failure of the Company to successfully
manage and 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.
Competition
The telecommunications industry is an intensely competitive industry with
several large vendors that develop and market Network Feature 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 companies offering
specific services and large firms. In addition to U.S. companies, competitors
for the Company's phone products include both large Asian and European consumer
electronics companies and smaller Asian and European manufacturers. If the
Company's existing customers perform directly the customer acquisition services
currently undertaken by the Company through its Direct Marketing Services
programs, or if potential customers retain or increase internal capabilities to
provide such services, the Company's business, results of operation 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 secret protection, 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 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.
Possible 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, 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 that
often have been unrelated to their operating performance. Such fluctuations may
adversely affect the market price of the Company's Common Stock.
Item 3 Quantitative and Qualitative Disclosure About Market Risk
Management believes that the market risk associated with the Company's
market risk sensitive instruments as of March 31, 2000 is not material, and
therefore, disclosure is not required.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
On April 1, 1999, the Company filed a complaint against Active Voice
Corporation in U.S. District Court primarily seeking a Declaratory Judgment of
non-infringement and invalidity of U.S. Patent No. 5,327,493 involving detection
of tones, and secondarily for patent misuse and unfair competition. Active Voice
counter-claimed for infringement of U.S. Patent No. 5,327,493, and the Company
amended its complaint to include infringement by Active Voice of the Company's
U.S. Patent No. 4,366,348 involving Caller ID technology. The case is in the
discovery stage. The Company's management believes that it will prevail in any
litigation, and that the costs and risks of this litigation are not material to
its operations.
In the ordinary course of business, the Company may be involved in other
legal proceedings. As of the date hereof, the Company is not a party to any
other pending legal proceedings that 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
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits at page 19 below.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the three
months ended March 31, 2000.
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
May 13, 2000 By:/s/Paul G. Locklin
Date Paul G. Locklin
President and Chief Executive Officer
Chairman of the Board of Directors
May 13, 2000 /s/Richard D. Kent
Date Richard D. Kent
Chief Financial Officer, Chief Operations
Officer, Chief Accounting Officer and
Corporate Secretary
CIDCO INCORPORATED
Index to Exhibits
Exhibits Page
3.1 Amended and Restated Certificate of Incorporation. (1) --
3.2 Second Amended and Restated By-laws of CIDCO Incorporated
dated January 26, 1999. (6) --
4.1 Amended and Restated Loan and Security Agreement dated March 29,
1999 between Registrant and Comerica Bank-California. (7) --
4.2 Rights Agreement dated as of January 27, 1997, between the
Registrant and United States Trust Company of New York, as
Rights Agent. (3) --
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) --
10.17 Sublease dated Nov. 18, 1994, between Thoits Bros. and the
Registrant for 180 Cochrane Circle. (2) --
10.18 Lease dated Nov. 1, 1994, between Thoits Bros., Inc. and the
Registrant for 105 Cochrane Circle, Units A, B, C, D, and E. (2) --
10.20 Registrant's 1994 Directors' Stock Option Plan. (2) --
10.24 Employment Agreement dated June 28, 1996 between Registrant
and Ian Laing. (4) --
10.30 Registrant's Second Amended and Restated 1993 Stock Option
Plan. (5) --
10.31 Registrant's Amended and Restated 1998 Stock Option Plan. (5) --
10.32 Employment Agreement dated June 1, 1998 between Registrant
and Richard D. Kent. (5) --
10.33 Employment Termination Agreement dated Nov. 12, 1998 between
Registrant and Daniel L. Eilers. (5) --
10.34 Employment Agreement dated Nov. 12, 1998 between Registrant
and Paul G. Locklin. (6) --
10.35 Employment Agreement dated Sept. 30, 1994 between Registrant
and Timothy J. Dooley. (6) --
10.36 Separation Agreement dated Sept. 20, 1998 between Registrant
and Marv Tseu. --
10.37 Separation Agreement dated Sept. 20, 1998 between Registrant
and Jim Hindmarch. (6) --
10.38 Separation Agreement dated Nov. 20, 1998 between Registrant
and Ho Leung Cheung(6) --
10.39 Employment Agreement dated June 5, 1998 between Registrant
and William A. Sole. (7) --
10.40 Registrant's 1999 Employee Stock Purchase Plan (8) --
- ---------------------------------------
(1) Incorporated herein by reference to the Company's registration statement on
Form S-1, File No. 33-74114.
(2) Incorporated herein by reference to the Company's Form 10-K for the year
ended December 31, 1994.
(3) Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended March 31, 1997.
(4) Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended June 30, 1997.
(5) Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended September 30, 1998.
(6) Incorporated herein by reference to the Company's Form 10-K for the year
ended December 31, 1998.
(7) Incorporated herein by reference to the Company's Form 10-Q for the quarter
ended March 31, 1999.
(8) Incorporated herein by reference to the Company's Form 10-K for the year
ended December 31, 1999.
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