2
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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 June 30, 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 August 7,
2000 was 14,418,298.
<PAGE>
2
CIDCO INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1. Financial Statements:
Balance sheets at June 30, 2000
and December 31, 1999 ......................................3
Statements of operations and comprehensive income (loss)
for the three and six months ended June 30, 2000 and 1999 ..4
Statements of cash flows for the six months
ended June 30, 2000 and 1999 ...............................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 Risk.........18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings ............................................18
ITEM 2. Changes in Securities ........................................18
ITEM 3. Defaults Upon Senior Securities ..............................18
ITEM 4. Submission of Matters to a Vote of Security Holders ..........18
ITEM 5. Other Information ............................................18
ITEM 6. Exhibits and Reports on Form 8-K .............................18
SIGNATURES ...................................................................19
<PAGE>
5
The accompanying notes are an integral part of these financial statements.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIDCO INCORPORATED
BALANCE SHEETS
(in thousands, except per share data; unaudited)
June 30, December 31,
2000 1999
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 17,079 $ 29,323
Short-term investments ......................... 24,907 10,547
Accounts receivable, net of allowance
for doubtful accounts of $285 and $1,127 ..... 20,007 22,407
Inventories .................................... 15,390 25,688
Other current assets ........................... 4,426 1,002
---------- ----------
Total current assets ......................... 81,809 88,967
Property and equipment, net ....................... 5,346 6,653
Other assets ...................................... 2,925 711
---------- ----------
$ 90,080 $ 96,331
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 2,093 $ 9,412
Accrued liabilities............................. 10,531 8,738
---------- ----------
Total current liabilities .................... 12,624 18,150
---------- ----------
Stockholders' equity:
Common stock, $.01 par value; 35,000 shares
authorized,14,418 and 14,418 shares issued .. 144 144
Treasury stock, at cost (537 and 675 shares) .... (2,378) (2,988)
Additional paid-in capital ..................... 90,035 88,916
Accumulated deficit ............................ (10,345) (7,891)
---------- ----------
Total stockholders' equity ................... 77,456 78,181
---------- ----------
$ 90,080 $ 96,331
========== ==========
<PAGE>
CIDCO INCORPORATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data; unaudited)
Three months Six months
ended June 30, ended June 30,
------------------ -------------------
2000 1999 2000 1999
-------- ------ ------- -------
Sales $21,505 $47,101 $37,986 $94,303
Cost of sales .................... 17,268 34,508 32,424 69,546
------- ------- ------- -------
Gross margin ..................... 4,237 12,593 5,562 24,757
------- ------- ------- -------
Operating expenses:
Research and development .... 2,102 2,642 4,720 4,578
Selling and marketing ....... 8,658 6,593 16,577 13,925
General and administrative .. 1,298 1,539 2,682 3,058
------- ------- ------- -------
12,058 10,774 23,979 21,561
------- ------- ------- -------
Income (loss) from operations..... (7,821) 1,819 (18,417) 3,196
Other income, net ................ 15,701 230 15,917 395
------- ------- ------- -------
Income (loss) before income taxes 7,880 2,049 (2,500) 3,591
Provision for (benefit from)
income taxes .................. -- -- -- --
------- ------- ------- -------
Net income (loss) ................ $ 7,880 $ 2,049 $(2,500) $ 3,591
======= ======= ======= ========
Net earnings (loss) per
share - basic ................. $ 0.57 $ 0.15 $ (0.18) $ 0.26
======= ======= ======= ========
Net earnings (loss) per
share - diluted................ $ 0.55 $ 0.14 $ (0.18) $ 0.25
======= ======= ======= =======
Shares used in per-share
calculation - basic ........... 13,873 13,409 13,842 13,584
====== ====== ====== ======
Shares used in per-share
calculation - diluted.......... 14,302 14,471 13,842 14,435
====== ====== ======= ======
Comprehensive income (loss):
Net income (loss)................. $ 7,880 $ 2,049 $ (2,500) $ 3,591
Change in unrealized gain (loss)
on investments, net............ 102 (21) 245 (69)
------- ------- ------- -------
Total comprehensive income (loss). $ 7,982 $ 2,028 $ (2,255) $ 3,522
======= ======= ======= =======
<PAGE>
CIDCO INCORPORATED
STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Six months ended
June 30,
------------------
2000 1999
------- ------
Cash flows provided by operating activities:
Net income (loss) .................................... $ (2,500) $ 3,591
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization ..................... 2,156 2,787
Deferred taxes .................................... -- 1,490
Changes in assets and liabilities:
Accounts receivable .............................. 2,400 3,507
Inventories ...................................... 10,298 6,225
Income tax refunds receivable .................... -- 18,367
Other current assets ............................. (3,424) 1,288
Other assets...................................... (1,232) (129)
Accounts payable ................................. (7,168) (7,249)
Accrued liabilities .............................. 1,641 (3,190)
------- ------
Net cash provided by operating activities ...... 2,171 26,687
------- -------
Cash flows from investing activities:
Acquisition of property and equipment ................ (710) (1,390)
Sale (purchase) of short-term investments, net ....... (14,258) 5,220
------- -------
Net cash provided by (used in) investing activities (14,968) 3,830
------- -------
Cash flows from financing activities:
Issuance of common stock.............................. 553 178
Purchase of treasury stock ........................... -- (3,154)
------- --------
Net cash provided by (used in) financing activities 553 (2,976)
------- --------
Net increase (decrease) in cash and cash equivalents .... (12,244) 27,541
Cash and cash equivalents at beginning of period ........ 29,323 12,349
------- -------
Cash and cash equivalents at end of period .............. $ 17,079 $ 39,890
======= =======
Supplemental disclosure of cash flow information:
Issuance of warrants in connection with
marketing agreement ............................... $ 1,120 $ --
======= =======
Cash paid for income taxes ........................... $ -- $ --
======= =======
<PAGE>
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.
Implementation of SAB 101 is not expected to require us to change existing
revenue recognition policies and therefore is not expected to have a material
effect on the Company's financial position or results of operations.
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.
The adoption of certain provisions for FIN 44 prior to June 30, 2000 did not
have a material impact on the financial statements. 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):
Jun. 30, 2000 Dec. 31, 1999
------------- -------------
Inventories, net of reserves:
Finished Goods ...................... $ 12,244 $ 22,283
Raw Materials........................ 3,146 3,405
---------- ----------
$ 15,390 $ 25,688
========== ==========
<PAGE>
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 .................... $ 79
Unrealized losses in the period, net ......... (69)
------
Balance June 30, 1999 ........................ $ 10
======
Balance December 31, 1999 .................... $ (13)
Unrealized gain in the period, net ........... 245
------
Balance June 30, 2000 ........................ $ 232
======
Note 5. Earnings (loss) per Share
Basic Earnings Per Share ("EPS") is computed by dividing net income (loss)
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:
Three Months Three Months
ended June 30, ended June 30,
------------------- ------------------
2000 1999 2000 1999
------- ------- ------- -------
Net income (loss) used to compute
earnings per common share ........$ 7,880 $ 2,049 $(2,500) $ 3,591
======= ======= ====== =======
Denominator used to compute basic
earnings (loss) per common share . 13,873 13,409 13,842 13,584
Effect of dilutive securities (1) ... 429 1,062 -- 851
------- ------- ------- -------
Denominator used to compute diluted
earnings (loss) per common share . 14,302 14,471 13,842 14,435
======= ======= ======= =======
Basic earnings (loss) per share .....$ 0.57 $ 0.15 $(0.18) $ 0.26
======= ======= ======= =======
Diluted earnings (loss) per share ...$ 0.55 $ 0.14 $(0.18) $ 0.25
======= ======= ======= =======
(1) Stock options and warrants to purchase 747,984 shares of common stock
priced at $ 5.75 to $19.82 per share were excluded because their inclusion
would be anti-dilutive for the quarter ended June 30, 2000. Stock options
to purchase 292,659 shares of common stock priced at $7.41 to $24.95 per
share were excluded because their inclusion would be anti-dilutive for the
quarter ended June 30, 1999.
<PAGE>
Note 6. Segment Information
The Company operates in two market segments, telephony products and Internet
appliances. Telephony products include telephone equipment that supports Caller
ID, Caller ID on Call Waiting and other services introduced by telephone
companies. In 1999 the Company developed a product called MailStation, (TM)1 an
Internet appliance, which is a small device that allows one easy access to
checking of e-mails and access to Yahoo! content and services. The Company does
not manage these market segments on any basis other than the revenue information
disclosed below.
Summarized financial information by groups of similar products and services is
as follows (in thousands):
Three Months Six months
ended June 30, ended June 30,
------------------ -------------------
2000 1999 2000 1999
------- ------- ------- -------
Telephony Products...... $15,658 $47,101 $31,473 $93,550
Internet Devices........ 5,847 -- 6,513 753
------- ------- ------- -------
Total sales............. $21,505 $47,101 $37,986 $94,303
======= ======= ======= =======
1 MailStation is a trademark of CIDCO Corporation.
<PAGE>
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 7% and 12% of sales for the quarter ended June
30, of 2000 and 1999, respectively. Fulfillment sales accounted for 35%, and 16%
of sales for the quarter ended June 30, of 2000 and 1999, respectively. Direct
to Telco sales accounted for 58% and 72% of sales for the quarter ended June 30,
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 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 began to realize the
benefit from such resizing 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, including Telco demand,
gross margin, expected spending in various functions and MailStation subscriber
and retail store front increases. 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>
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:
Three months Six months
ended June 30, ended June 30,
------------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
Sales .......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .................. 80.3 73.3 85.4 73.8
------- ------- ------- -------
Gross margin ................... 19.7 26.7 14.6 26.2
------- ------- ------- -------
Operating expenses:
Research and development .... 9.8 5.6 12.4 4.8
Selling and marketing ....... 40.3 14.0 43.6 14.8
General and administrative .. 6.0 3.3 7.1 3.2
------- ------- ------- -------
56.1 22.9 63.1 22.8
------- ------- ------- -------
Income (loss) from operations .. (36.4) 3.8 (48.5) 3.4
Other income, net .............. 73.0 0.5 41.9 0.4
------- ------- ------- -------
Income (loss) before income taxes 36.6 4.3 (6.6) 3.8
Provision for (benefit from)
income taxes ................ -- -- -- --
-------- -------- -------- --------
Net income (loss) .............. 36.6% 4.3% (6.6)% 3.8%
======== ======== ======== ========
Sales
Telco sales are recognized upon shipment of the product to the customer less
reserves for anticipated returns and bad debt or, in the case of Direct
Marketing Services, non-retention of certain Services provided by the Telcos.
Retail sales of MailStation are recognized upon activation of the E-mail service
less reserves for anticipated returns and bad debt. Sales decreased 54% to $21.5
million in the second quarter of 2000 from $47.1 million in the second quarter
of 1999.
Sales from Direct to Telco and Direct Marketing Services Programs decreased
to $12.5 and $1.4 million, respectively in the second quarter of 2000 from $34.0
and $5.7 million, respectively in the second quarter of 1999. Partially
offsetting this decline was a slight increase in Fulfillment sales to $7.6
million in the second quarter of 2000 from $7.4 million in the second quarter of
1999. The decline in Direct to Telco sales was primarily due to SBC
Communications, Inc. ("SBC")consolidation activities in the Telco Channel which
resulted in customer delays in running promotional programs. In particular, the
merger of Ameritech with SBC has resulted in significantly lower demand. The
decline in Direct Marketing Services Programs for Network Feature Services on
behalf of certain Telcos was a result of the Company electing not to participate
in risky, low profit agency programs. The Company expects demand to increase
slightly in the third quarter and more significantly in the fourth quarter as
the consolidation is now complete.
Unit sales of adjunct and phone products decreased in the second
quarter of 2000 to 0.4 million and 0.1 million, respectively from 1.4 million
and 0.2 million in the second quarter of 1999. Partially offsetting this decline
was an increase in MailStation unit sales from zero in the second quarter of
1999 to approximately 42 thousand in the second quarter of 2000. The above
adjunct and phone unit volume declines were due to decreased unit sales through
both the Company's Direct to Telco sales channel and Direct Marketing Services
due to reasons stated above.
Adjunct and phone product sales decreased to 21% and 52%, respectively of
dollar sales in the second quarter of 2000 from 43% and 57%, respectively of
dollar sales in the second quarter of 1999. Partially offsetting this decline
was an increase in MailStation sales to 27% of dollar sales in the second
quarter of 2000.
In addition to the volume declines mentioned above, the Company
experienced an overall decline in average selling price. The average selling
price of adjunct and phone products dropped 9% and 30%, respectively from the
second quarter of 1999 to the second quarter of 2000 due to continued
competitive pricing pressures as well as product and channel mix changes.
Gross margin
Cost of sales includes the cost of finished goods purchased from the
Company's off-shore 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 19.7% in the second quarter of 2000 from 26.7% in the second quarter of 1999.
This decrease was attributable to the decrease of Direct Marketing Service
Programs that historically carried higher gross margins in addition to higher
freight and re-work costs. 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 decreased to $2.1 million in the
quarter ended June 30, 2000 from $2.6 million in the second quarter of 1999.
This decrease primarily resulted from lower spending on MailStation and
telephone related development projects due to recent completion of the
MailStation and CL991 project which incorporates paging and call screening in
our high end cordless phones. Research and development expenses as a percentage
of sales increased to 9.8% in the quarter ended June 30, 2000 from 5.6% 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
increase somewhat as future projects in both the MailStation and cordless phone
areas get to the more spending intensive phase as the products are brought to
market.
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 $8.7 million in the quarter ended
June 30, 2000, from $6.6 million in the comparable period of 1999. As a
percentage of sales, selling and marketing expenses increased to 40.3% in the
quarter ended June 30, 2000, from 14.0% 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 in addition to increased marketing costs
for the Company's MailStation marketing activities. The MailStation sales and
marketing costs totaled $3.7 million in the second quarter of 2000 as compared
to $0.1 million in the second quarter of 1999. This increase was partially
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 1,000 stores at the end of the first quarter to 2,000 at
the end of June 2000.
MailStation new subscriber growth for quarter ended June 30, 2000 was
approximately 8,500 subscribers, which increased the total base to approximately
17,400 subscribers. The Company anticipates that the subscriber base will
increase during the third quarter. The anticipated increase in subscribers is
expected as a result of a national MailStation advertising campaign and the
number of retail store fronts 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 $1.3
million in the quarter ended June 30, 2000 from $1.5 million in the comparable
period of 1999. As a percentage of sales, general and administrative expenses
increased to 6.0% in the quarter ended June 30, 2000 from 3.3% in the comparable
period of 1999. The decreases in dollars was due to lower finance expenses; 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 second quarter spending levels during the remainder of 2000.
Other Income
Other income primarily consists of interest income earned on investments.
Other income increased to $15.7 million in the quarter ended June 30,2000 from
$0.2 million in the comparable period of 1999 primarily as a result of a gain of
$15.4 million arising from the sale of our holding in Infogear Technology to
Cisco systems, Inc. ("Cisco"). As a percentage of sales, other income increased
to 73.0% in the quarter ended June 30, 2000 from 0.5% in the comparable period
of 1999.
Liquidity and capital resources
The Company's cash and cash equivalents dropped by $12.2 million during
the six months ended June 30, 2000. Cash generated by operating and financing
activities amounted to $2.2 million and $0.6 million respectively which was
offset by cash used in investing activities of $15.0 million. Cash generated by
operating activities of $2.2 million consisted of depreciation expense of $2.2
million, a reduction in inventories and accounts receivable of $10.3 million and
$2.4 million respectively and an increase in accrued liabilities of $1.6
million. Offsetting the above was a net loss of $2.5 million in addition to an
increase in other current assets, other non-current assets and a decrease in
accounts payable of $3.4 million, $1.2 million, and $7.2 million respectively.
Additionally, Cisco completed the acquisition of InfoGear Technology on
June 6, 2000. Approximately 245,000 shares of Cisco stock, valued at $15.4
million, were received by the Company for its 5% stake in InfoGear Technology.
Upon the closing of their acquisition of InfoGear Technology, the gain,
calculated on close, was recorded in other income. The value of the Cisco stock
is reflected on the June 30, 2000 balance sheet in marketable securities. The
Company is restricted from selling this stock until mid-August when Cisco
reports its year-end results. The Company expects to liquidate the shares
promptly after the restriction is removed.
The Company had a working capital balance of $69.2 million as of June
30, 2000, as compared to $70.8 million at December 31, 1999. The Company's
current ratio increased to 6.5 to 1, as of June 30, 2000, from 4.9 to 1, as of
December 31, 1999. The decrease in working capital was due to a reduction in
accounts receivable of $2.4 million, inventory of $10.3 million, and an increase
in accrued liabilities of $1.6 million. Offsetting the above were increases in
cash and short term investments and other current assets of $2.1 million and
$3.4 million, respectively in addition to a decrease in accounts payable of $7.2
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 9.5% per annum at June 30, 2000. Borrowings
under the line are collateralized by the assets of the Company. As of June 30,
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. During the quarter, the Company had violated two
covenants related to its line of credit for which waivers were granted. There
were no outstanding Letters of Credit secured by this line as of June 30, 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 $2.5 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.
Factors That May Affect Future Results
Dependence on Telco Services and Maturation of Market
Approximately 52%, 27% and 21% of the Company's revenues in the quarter
ended June 30, 2000 came from the Company's sales of Network Feature phones,
adjuncts and MailStations, respectively. The Company's revenues for the quarter
ended June 30, 1999 for Network Feature phones, adjuncts and MailStations were
57%, 43% and 0% respectively. 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. Because of these reasons, the Company has elected, in most
circumstances, not to aggressively pursue Direct Marketing Service arrangements
and expects this trend to continue.
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 June 30, of 2000 and 1999, the
percentage of revenue derived by the Company from its significant (greater than
10% of total sales) customers was 63% (three customers) and 81% (three
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 a 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 and advertising 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, in the Telco channel,
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 internet
appliance business is an emerging business and new entrants are likely. Many of
the Company's existing and prospective competitors are larger and have greater
resources and experience in the retail channel than the Company. 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 June 30, 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 20 below.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the three
months ended June 30, 2000.
<PAGE>
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 14, 2000 By: -----------------------------------
--------------- Paul G. Locklin
Date President and Chief Executive Officer
Chairman of the Board of Directors
August 14, 2000
--------------- ------------------------------------
Date Richard D. Kent
Chief Financial Officer, Chief
Operations Officer, Chief Accounting
Officer and Corporate Secretary
<PAGE>
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.
--------
