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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1999.
Commission file number: 0-23296
CIDCO INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3500734
(State or other jurisdiction of (IRS 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)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the closing sale price of such stock at $7.25 on March 21,
2000 was $90,861,582. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
Number of shares outstanding of the Registrant's Common Stock on March 21, 2000:
14,424,932
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders is incorporated by reference into Part III (Items 10, 11, 12, and
13) hereof.
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This report consists of 56 sequentially numbered pages. The exhibit index is
contained on page 43 of this report.
CIDCO INCORPORATED
INDEX
PART I. Page
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Item 1. Business ..........................................................3
Item 2. Properties .......................................................14
Item 3. Legal Proceedings ................................................14
Item 4. Submission of Matters to a Vote of Security Holders ..............14
PART II.
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters ...........................................15
Item 6. Selected Financial Data ..........................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........................17
Item 7A.Quantitative and Qualitative Disclosure About Market Risk ........25
Item 8. Financial Statements and Supplementary Data ......................26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................42
PART III.
Item 10. Directors and Executive Officers of the Registrant ...............42
Item 11. Executive Compensation ...........................................42
Item 12. Security Ownership of Certain Beneficial Owners and Management ...42
Item 13. Certain Relationships and Related Transactions ...................42
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..43
SIGNATURES ...................................................................44
Forward-Looking Statements
This Report contains forward-looking statements, which reflect the
Company's current views with respect to future events, which may impact the
Company's results of operations and financial condition. In this Report, the
words "anticipates," "believes," "expects," "intends," "future," and similar
expressions identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties and other factors, including
those set forth below under the caption "Factors Which May Affect Future
Results," which could cause actual future results to differ materially from
historical results or those described in the forward-looking statements. The
forward-looking statements contained in this Report should be considered in
light of these factors. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof.
Part I.
Item 1. Business
CIDCO Incorporated ("CIDCO" or the "Company") is a leading innovator in
advanced telephony products - from Caller ID and Network Service equipment to
Internet appliances and services - which support Caller ID, Voice Mail,
Three-way Caller Conferencing, Caller ID on Call Waiting and/or other
intelligent Network ("Network") Services (collectively "Services") being offered
by Regional Bell Operating Companies ("RBOCs") and independent telephone
operating companies (collectively with RBOCs, "Telcos") as well as Internet
Service Providers (ISP's), both domestic and international. The Company is a
leading supplier of Caller ID equipment in the United States and has sold over
32 million product units, including Caller ID display units, Network feature
telephones, advanced cordless telephones, smart screen phones and Internet
appliance devices. The Company's products are provided to telephone subscribers
primarily through distribution arrangements with leading Telcos. Internet
appliance devices are distributed through Retailers, Telco's and other ISP's.
The Company was incorporated in Delaware in 1988. The Company's principal
executive offices are located at 220 Cochrane Circle, Morgan Hill, California
(telephone number 408-779-1162). The Company's common stock trades on The Nasdaq
Stock Market under the symbol "CDCO".
The first Service to require specialized subscriber telephone equipment
was Caller ID, first introduced by New Jersey Bell in 1987. Caller ID not only
requires compatibility with complex Network signaling, but also a screen on
which to display Caller ID information. Originally, Caller ID Service provided
only the number of the party initiating the call and transmitted data only
within local area Networks. Since the early 1990's, certain Telcos have offered
both number and name identification. In December 1995, the Federal
Communications Commission (the "FCC") mandated that Caller ID Service be
supported nationally. California was the last state to provide the Service,
instituting it in mid-1996, making the Service available in all 50 states, the
District of Columbia and Puerto Rico. Additionally, Caller ID on Call Waiting
was first introduced in late 1995. This Service, also known as Type II Caller
ID, allows the subscriber to utilize Caller ID Service to identify a second
incoming call while already engaged in a telephone conversation. A third type of
Caller ID product was introduced in 1998 - Caller ID Deluxe or Caller ID on Call
Waiting with call disposition. Call disposition allows the user to make use of
the following functions while already engaged in a telephone conversation: put
the original call on hold and answer the new call, conference in the new call,
play a short message and put the new call on hold, send the caller to voice mail
or let the caller know the call will be returned later.
CIDCO sells its telephony products to individual subscribers through
direct marketing relationships with certain Telcos ("Direct Marketing
Services"), fulfillment of Telco-generated orders ("Fulfillment"), wholesale
shipments directly to Telcos ("Direct to Telco"), and to a lesser extent,
international accounts, retail stores ("Retail") and via its own direct
marketing activities (telemarketing, web marketing, direct mail, direct response
advertising). CIDCO's customers include, among others, Bell Atlantic Corporation
("Bell Atlantic"), GTE Corporation, SBC Inc.( Pacific Bell, Southern New England
Telecommunications, Southwestern Bell, and Ameritech), Sprint Communications
Company, L.P. ("Sprint"), U S WEST Communications, Inc. ("U S WEST"), Telefonica
de Argentina, and TELEFONOS de MEXICO, S.A. de C.V.. With the introduction of
its MailStation(R)1 device during 1999, CIDCO has also increased its retail
presence with relationships so far with Comp USA, Good Guys, and Staples.
1 MailStation is a registered trademark of CIDCO Corporation
Penetration for Caller ID Service has increased as necessary approvals
by state public utility commissions have been obtained and as the Telcos have
upgraded their switches and implemented new signaling technologies. Caller ID
Service is also currently available in much of Canada, Mexico and numerous
European, Asian, African and South American countries.
Since its founding in 1988, the Company has concentrated its product
development and marketing efforts on products that support Network Feature
Services and that more recently leverage Internet services. The Company's
products can be categorized into three primary product families: Internet
appliances, accessory products, and Network feature phones.
Internet Appliances
In 1996, the Company began developing a line of next-generation,
telephone-based "information appliances" which allow access to the World Wide
Web and E-mail, as well as Services such as traditional Caller ID, Call Waiting
and Network Voice Mail. The Company's first such product in the Internet
appliances market was the CIDCO i-Phone(R)2 ("i-Phone"), developed in
conjunction with InfoGear Technology Corporation ("InfoGear"), a privately held
corporation in which the Company is an investor. The Company began commercial
shipments of the i-Phone in the first quarter of 1998. Due to a company
resturcturing it discontinued the i-Phone Division in late 1998, but continues
to have an equity interest in InfoGear.
While CIDCO's i-Phone product was ahead of its time, management learned
that the E-mail function on the i-Phone was perceived as the most valuable
feature on the device and also the most commonly used function by many of its
early adopters. Capitalizing on its initial investment, in July 1999, CIDCO
introduced the MailStation, a simple, inexpensive, single-use E-mail device
designed to bring E-mail to consumers who do not have access to or the need for
a personal computer in their homes. The MailStation uses the Internet/telephony
networks to enable consumers to handle interpersonal communication in a non-PC
environment.
The Company is negotiating with various online providers to provide
additional services in the form of content via the MailStation including
headline news, weather, sports, stock quotes and TV listings. The Company
anticipates that this will be the first step toward offering consumers access to
information, commerce and communications, in an intuitive and automated fashion
which is convenient and valuable in their everyday lives. Services available
through the MailStation are on a subscription basis, generating a recurring
revenue.
2 i-Phone is a registered trademark of InfoGear Technology Corporation.
Accessory Products
The Company's accessory products include a line of Telephone Company
(Telco) Network Feature adjunct units which connect to subscribers' telephone
lines, receive network signaling from Telco central office switching equipment
and display call information on a liquid crystal display ("LCD"). In 1999, the
Company introduced a new adjunct that handles voice mail Services offered by the
Telco's. CIDCO also re-engineered one of their top selling Type II Caller ID
adjuncts to be more competitive in the market. Since the introduction of its
first Caller ID unit in 1989, the Company has become a leading provider of
Network Feature Service equipment, having sold more than thirty million adjunct
units.
Network Feature Phones
The Company offers an extended line of Network Feature phones capable
of supporting a wide variety of Telco Network Services including Caller ID, Call
Return, Call Forwarding and central office Voice Mail in a single device. The
Company focused the majority of its recent development in this area on
900-megahertz (MHz) cordless feature phones. At the beginning of 1999, the
Company released the CL980 900MHz digital spread spectrum (DSS) cordless
speakerphone, and followed with the CL940 and CL990, which were released during
the third quarter. These three offer state-of-the-art radio technology and
feature variety to coincide with the Telephone Company's "Good", "Better",
"Best" marketing strategy. In addition to these the Company has developed some
lower cost 900MHz analog cordless telephones ideally suited for Telco
promotional efforts.
Industry Background
Prior to its court-mandated break-up in 1984, American Telephone &
Telegraph ("AT&T") was a regulated monopoly that provided local and long
distance services, and customer telephone equipment to over two-thirds of the
telephone subscribers in the United States. Today's competitive
telecommunications industry has evolved principally as a result of AT&T's
divestiture of the RBOCs. The RBOCs, which currently account for approximately
77% of local telephone access lines in the United States, provide standard dial
tone service and local telephone access lines. Interexchange carriers, such as
AT&T, MCI WorldCom and Sprint, provide long distance and other services. Since
the divestiture, Lucent Technology (former equipment entity of AT&T) has
continued to sell switching equipment and telephone equipment, while the RBOCs
have been prohibited from manufacturing any type of telephony equipment. This
prohibition has been eliminated by the Telecommunications Act of 1996. The RBOCs
have been permitted to sell telephony equipment manufactured by others bearing
the RBOCs tradename and may purchase Network equipment from vendors other than
AT&T. Consumers are no longer required to lease telephones from AT&T and now
purchase telephone equipment from numerous suppliers. The AT&T divestiture,
therefore, resulted in a more deregulated telephone service industry, and a more
dynamic and competitive telephony equipment industry in the United States.
The Telcos have approached saturation levels for the installation of
local telephone access lines, thus limiting future growth of their core
business. In order to supplement growth in revenues from standard dial tone
service within their respective service areas, the Telcos have offered second
lines and Services for which they can charge their subscribers additional
monthly fees. In addition, the Telcos have used these Services to respond to
increased competition from alternative service providers such as cellular
companies, cable companies, data transmission companies and competitive access
providers by differentiating their Services and creating consumer awareness and
customer loyalty.
Although Services such as call waiting, call forwarding and speed
dialing have been available for over ten years, more recent investments by the
Telcos to upgrade their Networks and to accommodate new signaling technologies
have enabled the rapid introduction of Services known as CLASS (custom local
area signaling services). These include:
o Caller ID, which displays information about an incoming call (including
the number and name of the caller and the time and date of the call) on
a display screen built into the telephone or a separate display unit
connected to the telephone;
o Repeat Dialing, which continues to dial a busy number until the
connection is made;
o Selective Call Forward, which lets the subscriber pre-select certain
numbers to be forwarded to another number;
o Automatic Call Back, which automatically dials the number of the last
incoming call;
o Selective Call Block, which lets the subscriber select certain telephone
numbers to be blocked;
o Distinctive Ringing, which lets the subscriber pre-select numbers to
ring with a distinctive sounding ring;
o Call Trace, which allows a subscriber to have a call traced by the
telephone company; and
o Caller ID on Call Waiting, which allows the subscriber to utilize Caller
ID Service to identify an incoming call while already engaged in a
telephone conversation.
The ability of Telcos to achieve high penetration levels for Services
is dependent, in part, upon the availability of a new generation of subscriber
telephone equipment. Most existing telephones discourage use of these current
and future Services because they require subscribers to remember and dial
sequences of symbols and numbers to access the Services. Such telephones are
also incapable of receiving the complex Network signaling required for Caller ID
Service and other future Services and do not have a display screen and controls
for viewing and managing call information. Therefore, a market for a new
generation of user-friendly, intelligent, Network-compatible subscriber
telephone equipment emerged.
This new generation of subscriber telephone equipment must operate
reliably over a wide range of telephone Network conditions. Although general
specifications exist for Caller ID and other Services, Network variations among
Telcos often require manufacturers to debug and field test their products on
various telephone Networks in order to ensure that their equipment operates
properly throughout these Networks and meets the high standards of reliability
and compatibility required by the Telcos.
Traditional consumer telephone suppliers, which sell primarily through
Retailers, have focused on the types of high volume "generic" equipment that are
most suitable for such a distribution channel. However, the market for
intelligent Network subscriber telephone equipment currently relies in
significant part on specialized distribution arrangements and requires close
working relationships with the RBOCs and independent Telcos to address
compatibility issues promptly as they arise. This created an opportunity for
entrants in the market for intelligent Network subscriber equipment.
Strategy
CIDCO's mission is to provide the world's easiest-to-use personal
communication products and services. The Company's objective is to envision,
produce and distribute a range of products that will become the primary
telephony and communication appliances utilized by customers of Telcos and
non-computer Internet users. To achieve this objective, the Company has
developed the following strategy:
Diversify Product Line
The Company has expanded its product offerings into a number of new
business areas, including its new E-mail appliance, MailStation, a mid-level and
lower-end cordless telephone and a Network voice mail product. Additionally the
Company is seeking to continue to expand its product offering including adding a
high-end 2.4 GHz cordless phone and a second Internet appliance. The Company
added such new products to broaden its product line and the markets it can
address while continuing to leverage CIDCO's experience and core competencies.
Diversify Channels of Distribution
The Company is seeking to diversify its distribution channels toward
direct-to-end-user, Retail and other alternate distribution channels in areas
that do not conflict with its Telco partners, with the goals of broadening the
Company's market opportunities and adding predictability to the Company's
quarter-to-quarter revenues. In particular, the company believes the MailStation
and future Internet appliances will primarily be distributed through Retail and
other alternate distribution channels.
Strengthen Infrastructure
The Company's future success will require, among other things, that the
Company improve its operating, information, and E-mail service provider systems.
In 1998, the Company implemented a state-of-the-art, enterprise-wide accounting
and resource planning system which has improved the Company's ability to better
manage business processes and systems which, in turn, will improve customer
retention and new customer acquisition. In 1999, the Company established
Internet E-mail service provider capabilities in support of its entry into the
Internet a`ppliance and service market. The Company partnered with an E-mail
hosting company and two ISP's to provide the backbone for its E-mail service.
These partners have been integrated with the Company's high volume fulfillment
and customer care system to manage the new E-mail customers. Development of
content, information and commerce on the Company's Internet appliance will
necessitate continued investment in these systems and may require significant
investment in E-mail and Internet infrastructure or significant new partnerships
arrangements.
Leverage Relationships with Telcos
The Company believes that it has established close working
relationships with certain Telcos, which enable the Company to design its
products to be compatible with the existing and evolving Telco Networks. These
relationships allow the Company to understand variations between Networks and to
design its products to operate reliably over a wide range of Network conditions.
The Company has developed marketing and fulfillment relationships with certain
Telcos, which expand its ability to market its equipment to those Telcos and
leverage the efforts of the Telcos to market these Services. These arrangements
differ by Telco, but typically allow subscribers to purchase both Network
equipment and Services through one phone call to a Telco sales representative.
In general, the sales representative takes the customer's order for a CIDCO
product and relays the information to the Company for product fulfillment.
Collectively, these relationships permit the Company to design products to meet
emerging standards and to respond to new intelligent Network Services being
introduced. The Company intends to continue to leverage existing and future
marketing relationships as it introduces new products.
Continued Cooperative Marketing Efforts
The Company has ongoing Direct Marketing Services programs with Telcos
to attract new subscribers and sell new product and Services to those
subscribers. 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 Services, in turn, 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, on behalf of the
Telco, ships an adjunct product or a phone product to each customer "acquired"
through the campaign. The Company intends to leverage its Direct Marketing
Services programs as it introduces new products.
Design High Quality, Innovative Products
CIDCO's customers demand high-quality products that are innovative,
easy to use and have consumer appeal. The design, functionality and aesthetic
characteristics of advanced telephone and Internet appliance products can impact
E-mail service revenue and acceptance of Telco Services by customers and have
become important criteria to the Telcos in choosing companies with which to
develop relationships. The Company intends to continue to emphasize quality,
innovation and ease of use in its product design.
Provide High Quality Support and Service
The Company believes its ability to provide high-quality support and
service is beneficial to its success in developing and retaining certain
customer relationships. Telco subscribers expect the same level of support and
service that they receive from the Telcos. Telcos have become particularly more
demanding in this regard over the past two years.
Be a Low Cost Producer of Intelligent Network Subscriber Telephone Equipment
The Company intends to benefit from its ability to reduce manufacturing
costs by engineering products for high volume assembly and by stressing low cost
manufacturing design while maintaining quality, consistency and reliability. The
Company believes that its experience and acquired knowledge will permit it to
achieve low manufacturing costs for its products, under current market
conditions.
Products
The Company introduced its first Caller ID unit in 1989. Since then,
the Company has broadened its product family to include a variety of models
including stand-alone Caller ID display units and Network Feature Phones with
Caller ID capability built in. Additionally, the Company has introduced a simple
Internet appliance which it currently markets through both the Telco and Retail
channel. Through 1999, substantially all of the Company's sales were generated
from its Caller ID based and Network Feature phone products and Direct Marketing
Services to Telcos.
CIDCO's Caller ID and Network Feature phone products display all
transmitted information before the incoming phone call is answered and stores
the call information in memory. Among the features available on the Company's
products are backlit screens for easy viewing, memory capacity for up to 100
calls, a "blocked call/new call" light, bilingual display, a "message waiting
alert" light that indicates to a Network voice mail subscriber that new voice
mail messages have been received and call disposition. The Company pioneered
OTV(R)3 (one-time viewing), which allows the screen on the Company's Caller ID
units to display all Caller ID information at one time. Additionally, some of
the Company's latest products include Caller ID on Call Waiting or Caller ID
Deluxe (Caller ID on Call Waiting with call disposition). Caller ID on Call
Waiting allows the caller to utilize Caller ID Service to identify an incoming
call while already engaged in another telephone conversation. Call disposition
allows the user to make use of the following functions while already engaged in
a telephone conversation: put the original call on hold and answer the new call,
conference in the new call, play a short message and put the new call on hold,
send the caller to voice mail or let the caller know the call will be returned
later. The Company's Caller ID units are intended to be compatible with the
major switches currently in use in the United States, including those
manufactured by Lucent Technology, Northern Telecom, Siemens A.G. and L.M.
Ericsson.
The Company's family of products includes the following principal
models:
Memory Typical
Model No. Capacity Product Features Retail Price
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MailStation 400 Standard Internet E-mail (POP3 & SMTP) For $99.00-$179.00
Typical Up To 5 Separate Users; Graphical Display
Messages Uses Simple Intuitive Screens, 6"x2.5" Display;
Portable; Weighs 2.2 Pounds; Operates On AA
Batteries; Compose and Save E-mail Offline;
Access New Messages With a Single Press of a
Button; Large Keyboard, 16.5 mm Pitch.
PA-25 25 Call OTV (One-Time Viewing); Type I Caller ID $9.95-$19.99
Records Adjunct. New CallLight; LCD Contrast
Adjustment; Bilingual.
CW-99/DB99 99 Call OTV; Type II Caller ID(Caller ID on Call $29.95-$39.99
Records Waiting); New Call Light; Bilingual English/
Spanish; Message Waiting Alert Light.
VM-100 Voice Voice Mail Acquisition and Retention Adjunct. $29.95-$39.95
Mail Pre-programmed Voice Mail Navigation Keys for
Adjunct Telco Network Voice Mail Functions; Message
Waiting Alert Light.
DM-80 80 Call OTV; Type II Caller ID; Voice Mail; Trilight $49.95-$69.99
Records Alert; Bilingual English/Spanish; Message
Waiting Alert Light; Pre-programmed Call
Waiting Deluxe (Call Disposition) and Central
Office Voice Mail Keys; 60 Number Directory;
One-Touch Dialback Key.
CT-5 50 Call Type I Caller ID;Message Waiting Alert Light; $39.95-$49.95
Records Call Hold; Dedicated Central Office Voice Mail
Access Key; Redial Key; Nine Programmable Class
Feature Keys.
CT-15 40 Call Type II Caller ID; Message Waiting Alert $69.95-$79.95
Records Light; Dedicated Central Office Voice Mail
Access Key; Backlit Display; Speakerphone;
Nine Programmable Class Feature Keys.
CL-910 40 Call 900 MHz Analog Type II Caller ID; $89.95-$119.95
Records Cordless Phone
CL-940 50 Call 900 MHz Digital Spread Spectrum Type II $149.00-$169.00
Records Caller ID; One-touch Access to Central
Office Voice Mail; Type II Caller ID;
50 Number Personal Directory; Visual Message
Waiting Indicator.
CL-980 50 Call 900 MHz Digital Spread Spectrum Type II $169.00-$199.00
Records Caller ID; Dial-in-Base Speakerphone;
One-touch Access to Central Office Voice
Mail; Type II Caller ID; 50 Number Personal
Directory; Visual Message Waiting Indicator;
Network Voicemail Navigation Keys.
CL-990 50 Call 900 MHz Digital Spread Spectrum Type II $199.00-$229.00
Records Caller ID; Dial-in-Base Speakerphone;
Dual Backlit Caller ID Display in Base;
One-touch Access to Central Office Voice Mail;
Type II Caller ID; 50 Number Personal Directory;
Visual Message Waiting Indicator; Network
Voicemail Navigation Keys.
3 OTV (One-time viewing) is a registered trademark of CIDCO Corporation
Distribution
The Company's distribution strategy is to make its products available
to potential end users through multiple distribution channels. These channels
are:
Direct Marketing Services Arrangements
In 1999, the Company continued its cooperative marketing efforts with
Bell Atlantic, Pacific Bell, Sprint, Southwestern Bell, and U S WEST. With these
efforts, the Company coordinates sales campaigns involving the use of consumer
mailings and telemarketing to sell Telco Services that utilize the Company's
products.
Fulfillment Arrangements
In 1999, the Company had Fulfillment arrangements with Bell Atlantic,
Cincinnati Bell, Southwestern Bell and SNET. In most instances, the Telco sales
representatives sell both Network Services and CIDCO equipment to customers and
transmit equipment orders to CIDCO electronically on a daily basis. The Company
then ships its equipment directly to the customers and bills the Telco, which in
turn bills its customers. As part of these Fulfillment relationships, CIDCO
provides toll free after-sales service and support to help the customer
understand how to utilize the Feature Service and equipment.
The Company continually seeks to strengthen its current Telco marketing
alliances and to develop new alliances. The Company has found through experience
that sales of Feature Service and equipment are more successful when the
customer can purchase both Feature Service and equipment from a single source,
especially when payment for equipment can be made on an installment basis
through the customer's phone bill. The Company has found that customer
satisfaction with Feature Service is enhanced when the customer receives the
equipment promptly after ordering the Service and is provided a toll free number
for after-sales service and support.
Direct Sales to Telcos
Through its direct sales force, the Company sells Network Feature
Service products in quantity to a number of Telcos, either under the CIDCO name
or the respective Telcos' logo. The Company sells its products directly to most
of the major independent Telcos in the United States; as well as to certain
Canadian and international telephone companies.
Direct Marketing Sales
In 1997, the Company developed direct marketing programs for CIDCO
branded Network Feature Phones. These programs involve catalog, direct mail,
telemarketing, web commerce and direct response advertising directly to end
users. In 1999 and 1998 respectively, sales from these programs were $6.9
million and $10.1 million. However, the cost of acquisition continues to
increase as penetration rates increase. Consequently, the Company has decided to
pursue this avenue of selling its products only to the extent that it can be
done profitably and does not compete with its Telco partners.
Retail Sales
Having sharply curtailed Retail efforts in recent years, the Company is
re-launching its retail efforts and capabilities for the MailStation and future
Internet appliances. At the end of 1999 Good Guys was selling the MailStation.
CompUSA and Staples have increased the number of storefronts to approximately
1,000 by the end of February 2000. The Company hopes to increase the number of
retail store fronts during year 2000.
Significant Customers
For the year ended December 31, 1999, sales to Bell Atlantic,
Southwestern Bell and Pacific Bell represented 28.5%, 17.7% and 19.5%
respectively, of the Company's sales. In 1998, sales to Southwestern Bell, Bell
Atlantic, and U S West represented 21.6%, 18.1%, and 11.6% respectively, of the
Company's sales.
Product Development
The Company's product development efforts are focused on new products
that support additional Services, Internet/electronic messaging, product
enhancements, international standards compliance and the continued improvement
of hardware components to reduce manufacturing costs. The Company believes that
product and technology leadership along with a low-cost offering are keys to
long-term success in an industry that evolves as rapidly as the Telco equipment
market does today. Furthermore, the Company believes that its future operating
results will depend on its ability to continue to enhance existing products as
well as to develop and bring new products to market in a timely manner, that
meet market and customer requirements.
In 1999, the Company organized product development into two primary
product categories:
Internet Appliances
In July, 1999 the Company introduced the MailStation, a simple,
inexpensive, single-use E-mail device that will finally bring E-mail to the
masses, especially to those who do not have access to or the need for a personal
computer in their homes. The MailStation uses the Internet/telephony networks to
enable consumers to handle interpersonal communication in a non-PC environment.
The MailStation is the first in a series of Internet appliances that the Company
plans on offering over the next couple of years, specifically the Company plans
to introduce a second product during the second half of year 2000. This product
will have a higher screen quality, be able to handle attachments to E-mails and
have expanded capabilities to obtain information from and perform commerce with
the Internet.
Accessory Products and Network Feature Phones
The Company's Accessory Products include a full line of Network Feature
Service products aimed at the consumer residential market. In 1999, the Company
focused its engineering efforts on expanding its offering of 900 MHz cordless
Network Feature phones and a Network voicemail adjunct. At the beginning of 1999
the Company introduced its CL980 900 MHz DSS cordless speaker phone, and
followed with the CL940 and CL990, which were released during the third quarter.
These three phones offer state-of-the-are 900 MHz DSS radio technology and
feature variety to coincide with the Telephone Company's "Good", "Better",
"Best" marketing strategy. In addition to these new products the Company has
developed some lower cost 900 MHz analog cordless telephones ideally suited for
Telco promotional efforts.
The Company's product development groups are experienced in engineering
products in the telecommunications industry. The Company's products utilize
proprietary electrical, mechanical and software designs. The Company's ability
to emulate various telephone switch-signaling characteristics through specially
designed test equipment in its development facility, together with its field
test program, enable it to develop products that are compatible with the various
telephone and Internet networks.
In 1999, 1998 and 1997 the Company's research and development
expenditures were $9.1 million, $10.8 million and $16.9 million, respectively.
Research and development expenses primarily have represented salaries for
research and development personnel, associated personnel benefits, tooling,
contracted engineering services, and supplies for research and development
activities.
At December 31, 1999, 34 employees were engaged in product development.
There can be no assurance that the Company's product development efforts will
result in commercially successful products, or that the Company's products will
not be rendered obsolete by changing technology or new product introductions by
others.
Manufacturing
The Company's products are manufactured for the Company by third
parties that are primarily located in Malaysia, China and Thailand. The
Company's manufacturing operations are limited to the testing, quality control
and shipping of finished products. All of the Company's contract manufacturers
have been certified pursuant to ISO 9002. The Company's manufacturers perform
comprehensive inspection, testing and statistical process control testing,
utilizing the Company's internally designed automated testing equipment. To
date, the Company has not experienced significant product warranty returns.
Many of the key components used in the Company's products are 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.
Competition
The market for the Company's products is highly competitive and subject
to rapid technological change. At present, the Company's principal competitors
for display units are Bell South Products, Northern Telecom and GE/Thomson
("GE"). The Company's Network Feature telephones compete with those manufactured
by Lucent/Phillips, Northern Telecom, Panasonic, Sony, GE/Thomson, V-Tech and
others. The MailStation presently competes with devices manufactured by Landel
Technologies and V-Tech. Certain of these companies have significantly more
financial and technical resources than the Company. The Company's competitors
also include in-house divisions of the Company's current and potential
customers, as well as companies such as, Innotrac, offering specific services.
In addition, 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 elect to perform 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. The Company expects
competition to increase in the future from existing and new competitors,
possibly including current customers. The Company believes that the principal
competitive factors in its market are knowledge of the requirements of the
various Telcos, product reliability, product design, customer service and
support, and product price relative to performance. The Company believes it
presently competes favorably with respect to each of these factors.
Government Regulation
The sale of Network Feature Services by Telcos is subject to regulation
by state public utilities commissions and other regulatory authorities. Protests
from special interest groups that object to Caller ID on the basis of privacy
concerns have been effective in slowing down the regulatory approval process. To
facilitate the implementation of Caller ID Service, many telephone companies
already offer or plan to offer a "call blocking" Service. Under call blocking,
callers can block the display of their numbers on a per-line or per-call basis.
To date, all 50 states and Washington D.C. have implemented Caller ID
regulations with per-call blocking, per-line blocking or both.
Patents, Proprietary Rights and Licenses
The Company has acquired one U.S. patent related to core Caller ID
technology, has two U.S. patents issued on its new Caller ID/Call Waiting
extension protocol, and has a number of additional patents which address certain
features and functions of the Company's products. The Company currently has a
number of patent applications on file with the United States Patent and
Trademark Office.
A portion of the messaging technology used in the Company's products is
based on a patent licensed from Lucent on a non-exclusive basis. Lucent reserved
the right to use the technology for all purposes relating to businesses of
Lucent and its subsidiaries, and receives royalties from sales of the Company's
products other than to itself or the RBOCs. The Company paid royalties of $0.6
million, $0.9 million and $2.0 million to Lucent in 1999, 1998 and 1997,
respectively. The Lucent license agreement has no expiration date but is
terminable by either party for breach. If the Lucent license was terminated and
the Company was unable to negotiate a new patent license agreement, the Company
would no longer be authorized to manufacture or sell products in the United
States which fall within the scope of the Lucent patent, other than to RBOCs or
Lucent.
The Company has a non-transferable, non-exclusive license agreement
with Northern Telecom to utilize Northern Telecom's patents for Caller ID on
Call Waiting technology. Under the agreement, the Company pays royalties to
Northern Telecom for each licensed product sold, leased or put into use by the
Company other than direct sales to Northern Telecom beginning January 1, 1997.
The agreement also provided for a one-time payment in full satisfaction of
royalties on all units incorporating Northern Telecom's patents, which were sold
by the Company prior to January 1, 1997. Royalties incurred after January 1,
1997 are payable at a variable rate based on product type and number of units
sold. Total Northern Telecom royalty expense incurred in 1999, 1998 and 1997 was
$2.0 million, $1.8 million and $0.6 million, respectively.
The Company relies to a certain extent on trade secret laws to
establish and maintain those proprietary rights which it believes are not
reverse engineerable by third parties. Although the Company has obtained
confidentiality agreements from its employees, including its key executives and
engineers in its product development group, there can be no assurance that third
parties will not independently develop the same or similar technology, obtain
unauthorized access to the Company's proprietary technology or misuse the
technology to which the Company has granted access. It is for this reason the
Company has an internal legal department and is actively pursuing patent
protection for its Research and Development efforts.
The Company has patent protection on certain aspects of its existing
technology and also relies on trade secrets, copyrights, trademarks and
contractual provisions to protect its proprietary rights. There can be no
assurance that the Company's protective measures will be adequate to protect the
Company's proprietary rights, that others have not or will not independently
develop or otherwise acquire equivalent or superior technology, or that the
Company will not be required to obtain royalty-bearing licenses to use other
intellectual property in order to utilize the inventions embodied in its
patents. There also can be no assurance that any patents will be issued pursuant
to the Company's current or future patent applications or that patents issued
pursuant to such applications or any patents the Company currently owns will not
be invalidated, circumvented or challenged. Moreover, there can be no assurance
that the rights granted under any such patents will provide competitive
advantages to the Company or be adequate to safeguard and maintain the Company's
proprietary rights. In addition, the laws of certain countries in which the
Company's products may from time-to-time be sold may not protect intellectual
property rights to the same extent as the laws of the United States.
The telecommunications industry, like many technology-based industries,
is characterized by frequent claims and litigation involving patent and other
intellectual property rights. The Company from time-to-time may be notified by
third parties that they believe the Company may be infringing patents or other
proprietary rights of third parties. The Company has in the past and may in the
future have to seek a license under such patent or proprietary rights, or
redesign or modify their products and processes in order to avoid infringement
of such patent or other proprietary rights. There can be no assurance that such
a license would be available on acceptable terms, if at all, or that the Company
could so avoid infringement of such patent or proprietary rights, in which case
the Company's business, financial condition and results of operations could be
materially and adversely affected. Additionally, litigation may be necessary to
protect the Company's proprietary rights. Any claims or litigation involving the
Company's owned or licensed patents or other intellectual property rights may be
time consuming and costly, or cause product shipment delays, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Employees
At December 31, 1999, the Company employed 242 full-time persons, of
whom 34 were engaged in product development, 26 in sales and marketing, 108 in
customer service/call center, 29 in operations, 16 in information services and
29 in management, finance and administration. The Company has no collective
bargaining agreement with its employees and believes that its relationship with
its employees is good.
Executive Officers
As of March 26, 2000, the executive officers of the Company are as follows:
Name Age Position
----------------- --- ------------------------------------------------------
Paul G. Locklin 54 President, Chief Executive Officer and Chairman of the
Board of Directors
Richard D. Kent 43 Chief Financial Officer, Chief Operating Officer and
Corporate Secretary
William A. Sole 42 Executive Vice President, Worldwide Sales and Marketing
Ian G. A. Laing 42 Executive Vice President, Network Phones and Accessory
Products
Timothy J. Dooley 44 Executive Vice President, Strategic Business
Development
Paul G. Locklin, President and Chief Executive Officer and
Chairman of the Board of Directors
Paul G. Locklin returned to CIDCO in July of 1998. Mr. Locklin, a
co-founder of CIDCO, was President, Chief Executive Officer, and a Director of
the Company from 1989 to 1997. Prior to founding the Company with Mr. Robert
Diamond, Mr. Locklin established PCI, an international electronics manufacturer
that specialized in liquid crystal displays, wire bondable printed circuit
substrates, and high-volume contract assembly. While at PCI, Mr. Locklin served
as President and CEO. Previous to his time at PCI, Mr. Locklin held a research
position for the Color and Chemical Division of Hercules Inc. Mr. Locklin
received a Bachelor of Science in Marketing from California State University at
Hayward.
Richard D. Kent, Chief Financial Officer, Chief Operating Officer, and
Corporate Secretary
Richard D. Kent joined CIDCO in June 1994 as Corporate Controller.
After being promoted in January 1997, Mr. Kent served as Vice President of
Finance and Chief Financial Officer. In July of 1998, Mr. Kent took on the
additional duties of Chief Operating Officer and Corporate Secretary. Prior to
joining CIDCO, he served as Corporate Controller of Radius, Inc., a computer
peripheral manufacturer, and Wiltron Company, an automated test equipment
manufacturer. Mr. Kent is a Certified Public Accountant and received a Bachelor
of Science in Business Administration with an emphasis in Finance and Accounting
from University of California at Berkeley.
William A. Sole, Executive Vice President, Worldwide Sales and Marketing
William A. Sole joined CIDCO in April 1998 and serves as the Executive
Vice President of Worldwide Sales and Marketing. Prior to joining CIDCO, Mr.
Sole served as Vice President of Sales at Voysys, a maker of small business
voice mail systems and integrated voice communication systems. During the two
years prior to employment with Voysys, Mr. Sole held various senior sales and
marketing positions at Wyse Technology. Mr. Sole received a B. A. in Materials
Logistics Management from Michigan State University and a MBA from Pepperdine
University.
Ian G.A. Laing, Executive Vice President, Network Phones and Accessory Products
Ian G. A. Laing joined CIDCO in July 1996 and serves as the Executive
Vice President, Network Phones and Accessory Products. Prior to joining CIDCO,
Mr. Laing spent over 16 years at AT&T in R & D, and general management
assignments. He served as Director of Product Development for AT&T's consumer
products, after holding the position of General Manager of AT&T's corded
telephone business unit. Mr. Laing received a Bachelor of Science in Electrical
Engineering from Rutgers University, a Masters of Science in Electrical
Engineering from Stanford University and a Masters degree in Management Science
from Stanford University.
Timothy J. Dooley, Executive Vice President, Strategic Business Development
Timothy J. Dooley joined CIDCO initially in September 1994, and served as
Vice President, Sales, and later as Vice President and General Manager of the
Accessory Products Division. Mr. Dooley now serves CIDCO as Executive Vice
President of Strategic Business Development. Previously, he served in various
capacities at GTE. Mr. Dooley received a B. A. in Business with an emphasis in
Marketing from Washington State University.
Item 2. Properties
The Company's principal administrative, development, distribution and
support facility is located in Morgan Hill, California and consists of a four
building campus of approximately 111,000 square feet under leases that expire
between June 2000 and March 2006. The Company owns a 3.24-acre parcel in the
same business park. The Company also leases approximately 6,500 square feet of
storage space in Morgan Hill, California. The Company leases approximately 1,100
square feet of office space in Palo Alto, California under a lease that expires
in November 2002. In addition, the Company retains storage space in Salinas,
California based on square footage used during the month payable on a
month-to-month basis.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Part II.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol CDCO.
The following table sets forth for the periods indicated the high and
low closing sales price per share of Common Stock on The Nasdaq Stock Market as
reported by Nasdaq:
1999 High Low
- ---- ------- -------
1st Quarter .............................. $ 4.88 $ 2.75
2nd Quarter............................... $ 7.75 $ 3.88
3rd Quarter............................... $ 16.13 $ 7.25
4th Quarter............................... $ 14.25 $ 3.88
1998
- ----
1st Quarter............................... $ 20.25 $ 9.25
2nd Quarter............................... $ 9.44 $ 4.63
3rd Quarter............................... $ 5.00 $ 1.78
4th Quarter............................... $ 3.50 $ 1.38
As of December 31, 1999, there were 147 holders of record of the
Company's Common Stock, which does not include those beneficial owners whose
shares are held in street or nominee name.
The Company's loan agreements prohibit the payment of dividends without
the lender's consent. The Company's policy is to utilize available cash in
operations and accordingly does not expect to pay dividends.
On January 27, 1999, the Company announced the board of director's
authorization to purchase up to two million shares of its outstanding Common
Stock. The authorization was for a period of one year which expired on January
31, 2000. As of January 31, 2000, the Company had repurchased approximately
713,000 shares at an aggregate purchase price of $3.2 million.
<PAGE>
Item 6. Selected Financial Data
(in thousands, except per share data)
Year ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Statement of Operations Data:
Sales ........................ $158,593 $174,703 $257,033 $215,197 $193,668
Research and development ..... 9,107 10,821 16,859 13,170 9,709
Income(loss)from operations(1) (1,235) (62,052) 18,363 27,236 36,491
Net income(loss)(1) .......... (30) (51,439) 12,910 18,523 22,613
Basic earnings(loss)per
share(2) .................. $ -- $ (3.66) $ 0.93 $ 1.30 $ 1.60
Diluted earnings(loss)per
share(2) .................. $ -- $ (3.66) $ 0.90 $ 1.21 $ 1.51
Common shares outstanding(2) . 13,608 14,049 13,948 14,284 14,135
Common shares assuming
dilution(2) ............... 13,608 14,049 14,340 16,893 14,979
Dividends .................... $ -- $ -- $ -- $ -- $ --
As of December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash and cash equivalents .. $ 29,323 $ 12,349 $ 48,253 $ 26,509 $ 19,290
Short-term investments ..... 10,546 13,975 26,486 38,560 21,342
Working capital ............ 70,815 70,238 112,980 110,469 91,355
Total assets ............... 96,331 107,667 173,428 152,613 127,151
Stockholders' equity ....... $ 78,181 $ 80,402 $130,730 $128,846 $106,214
QUARTERLY DATA:
(in thousands, except per share data; unaudited)
Year ended December 31, 1999
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Sales .............................. $ 47,202 $ 47,101 $ 36,862 $ 27,428
Gross margin ....................... 12,164 12,593 10,666 8,266
Loss from operations................ 1,377 1,819 41 (4,472)
Net income(loss).................... 1,542 2,048 514 (4,134)
Basic earnings(loss)per share(2) ... $ 0.11 $ 0.15 $ 0.04 $ (0.30)
Diluted earnings(loss)per share(2) . $ 0.11 $ 0.14 $ 0.03 $ (0.28)
Year ended December 31, 1998
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Sales .............................. $ 69,354 $ 43,387 $ 31,338 $ 30,624
Gross margin ....................... 17,299 10,397 (3,481) 6,712
Loss from operations (1)............ (10,094) (10,639) (36,339) (4,980)
Net loss (1) ....................... (5,361) (5,987) (35,333) (4,758)
Basic loss per share (2) ........... $ (0.38) $ (0.43) $ (2.51) $ (0.34)
Diluted loss per share (2) ......... $ (0.38) $ (0.43) $ (2.51) $ (0.34)
(1) 1998 Operating Loss includes charges of $29.2 million primarily for
restructuring and obsolete inventory write-offs. First quarter 1998
loss includes charges of $2.7 million. Third quarter 1998 loss includes
charges of $26.5 million.
(2) For an explanation of the number of shares used to compute earnings per
share, see Note 2 of Notes to Financial Statements.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following information should be read in conjunction with the financial
statements and supplementary information thereto in Part II, Item 8 of this
Annual 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 24%, 32%, and 49% of sales in 1999, 1998 and
1997, respectively. Fulfillment sales accounted for 24%, 34%, and 35% of sales
in 1999, 1998 and 1997, respectively.
As a result of operating losses incurred in the first six months of
1998, the Company adopted a new business strategy focusing on its core telephony
products and services. The Company decided that its core business could not
successfully fund the level of market development expense required over time for
success in marketing the i-Phone and discontinued operation of its i-Phone
division, taking a restructuring charge in the third quarter of $19.9 million.
As part of the Company's change in direction, Co-Founder and Chairman of the
Board of Directors, Paul G. Locklin, returned to the Company as its President
and Chief Executive Officer in the third quarter of 1998.
As a result of lower level of 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 is resizing 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. This will result in a restructuring
charge in the first quarter of 2000. The expense reduction related to the
restructuring will be fully effective in 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:
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Sales ................................ 100.0% 100.0% 100.0%
Cost of sales ........................ 72.4 82.3 55.1
-------- -------- --------
Gross margin ......................... 27.6 17.7 44.9
-------- -------- --------
Operating expenses:
Research and development ........... 5.7 6.2 6.6
Selling and marketing .............. 19.4 30.6 27.6
General and administrative ......... 3.5 5.0 3.6
Restructuring ...................... (0.2) 11.4 --
-------- -------- --------
28.4 53.2 37.8
-------- -------- --------
Income (loss) from operations ........ (0.8) (35.5) 7.1
-------- -------- --------
Other income
Interest income ...................... 0.8 2.1 1.1
-------- -------- --------
0.8 2.1 1.1
-------- -------- --------
Income (loss) before income taxes .... 0.0 (33.4) 8.2
Provision (benefit) for income taxes . -- (4.0) 3.2
-------- -------- --------
Net income (loss) .................... 0.0% (29.4)% 5.0%
======== ======== ========
1999 Compared to 1998
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,
less reserves for non-retention of certain Services provided by the Telcos, and
customer credit worthiness. Sales decreased 9% to $158.6 million in 1999 from
$174.7 million in 1998, primarily due a drop in unit volume of 29%, which was
partially offset by an increase in the average unit price of 27%. The volume
decline was principally due to a drop in lower priced adjunct units while the
average price increase was due to a shift in product mix from lower priced
adjuncts to higher priced Network Featured, cordless phones. Additionally, the
Company's adjunct sales decreased 31% to 3.7 million units in 1999 from 5.4
million units in 1998, primarily arising from the decline in Fulfillment sales
and the Telco customers shifting focus from adjuncts to integrated Network
Feature phones. Direct Marketing Services programs decreased to 24% of sales in
1999 from 32% in 1998. This decline in Direct Marketing Services business
resulted from increased penetration levels in feature Services in various
marketing areas making new subscribers increasingly difficult and expensive to
acquire. Also, the Company chose not to participate in risky low margin agency
programs. The Company expects that the Agency and Direct Marketing Services
business will continue to decline as the high cost to acquire new customers will
make this business very risky and low margin. Additionally, due to merger
activity in the US Telco market, the Company expects a general slow down in
demand during the first three quarters of 2000.
Gross Margin
Cost of sales includes the cost of finished goods purchased from the
Company's offshore contract manufacturers, all 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
increased to 27.5% in 1999 from 17.7% in 1998 due to the overall increase in
average sales resulting from product mix changes in addition to the absence of
discontinued product related expenses experienced in 1998. Expenses attributable
to inventory liquidation were $9.3 million in 1998 or 5.3% as a percentage of
sales. Royalties payable to other patent holders remained approximately the same
in 1999 as in 1998. Although gross margins vary due to changes in sales mix by
distribution channel and product mix, the Company expects that gross margins
will range from 20% to 30% in 2000.
Research and Development Expenses
Research and development expenses include salaries for personnel,
associated benefits, tooling, contracted engineering services, and supplies for
research and development activities. The Company's policy is to expense all
research and development expenditures as incurred except for certain investments
in tooling. Research and development expenses decreased 16% to $9.1 million in
1999 from $10.8 million in 1998 due primarily to decreased spending on new
development projects. Research and development expenses as a percentage of sales
decreased to 5.7% in 1999 from 6.2% in 1998. The Company expects research and
development expenses will be in the same absolute dollar range as the past two
years, however, the Company expects the percentage of sales to rise as sales
decline.
Selling and Marketing Expenses
Selling and marketing expenses include acquisition costs, personnel
costs, telephone and electronic data exchange expenses, promotional costs and
travel expenses. Selling and marketing expenses decreased to $30.6 million in
1999 from $53.6 million in 1998 and as a percentage of sales decreased to 19.4%
in 1999 from 30.6% in 1998. The absolute dollar decrease in selling expenses was
due principally to the lower levels of advertising and telemarketing expenses
associated with the decrease in the Company's Direct Marketing Services sales.
The Company anticipates that selling and marketing expenses as a percentage of
sales will increase significantly as the Company invests heavily in marketing
programs to grow MailStation subscribers. This increase will be slightly offset
by planned reductions in Telco acquisition sales programs.
General and Administrative Expenses
General and administrative expenses include salaries, benefits and
other expenses associated with the finance and administrative functions of the
Company. General and administrative expenses decreased to $5.5 million in 1999
from $8.7 million in 1998 and as a percentage of sales decreased to 3.5% in 1999
from 5.0% in 1998. The absolute dollar decrease reflects decreased accounting,
legal and human resources costs. The Company believes that general and
administrative expenses will decrease slightly in absolute dollars in 2000,
however, may increase as a percentage of sales as sales decline.
Other Income
Other income in 1999 primarily comprises interest income from the
investment of available cash balances and royalties from the licensing of
technology.
Provision for (benefit from)Income Taxes
The provision for (benefit from) income taxes reflects an effective tax
rate of 0.0% in 1999 and (11.9)% in 1998. The Company expects no tax provision
in 2000 due to a loss carry-forward from 1998.
1998 Compared to 1997
Sales
Sales decreased 32% to $174.7 million in 1998 from $257.0 million in
1997, primarily due to the 33% decrease in average sales price per adjunct unit.
This pricing decrease was due to competitive pricing pressures from both Asian
suppliers to the United States market and certain domestic suppliers as well as
a decline in Direct Marketing programs. Prices have stabilized since Asian
currencies stopped their decline against the US Dollar. It is expected that
future price declines will be dependant on currency exchange rates and the
health of the Asian economy. Additionally, the Company's adjunct unit sales
decreased 25% to 5.4 million units in 1998 from 7.2 million units in 1997,
primarily arising from the decline in Fulfillment sales and the Telco customers
shifting focus from adjuncts to integrated Network Service phones. These
declines were partially offset by the increase in phone unit sales to 0.9
million units in 1998 from 0.4 million units in 1997. Direct Marketing Services
programs decreased to 32% of sales in 1998 from 49% in 1997. This decline in
Direct Marketing Services business results from increased penetration levels in
feature Services in various marketing areas making new subscribers increasingly
difficult and expensive to acquire. Also, the Company chose not to participate
in risky low margin agency programs.
Gross Margin
Gross margin as a percentage of sales decreased to 17.7% in 1998 from
44.9% in 1997 due to the overall decrease in average sales prices and the
extensive liquidation of discontinued products. One-time charges attributable to
inventory liquidation were $9.3 million in 1998 or 5.3% as a percentage of
sales. These were offset by royalty expense, which declined in 1998 to $2.9
million compared with $3.9 million in 1997, due to the re-negotiation of a
component licensing agreement such that there was no royalty payable in 1998.
Royalties payable to other patent holders remained approximately the same in
1998 as in 1997.
Research and Development Expenses
Research and development expenses decreased 36% to $10.8 million in
1998 from $16.9 million in 1997 due primarily to decreased spending on new
development projects and the decline of equity losses in InfoGear, Inc.
Additionally, the Company discontinued the i-Phone division in the last quarter
of 1998, resulting in research and development personnel reductions and the
writing-off of substantially all related assets. Research and development
expenses as a percentage of sales decreased to 6.2% in 1998 from 6.6% in 1997.
Selling and Marketing Expenses
Selling and marketing expenses decreased to $53.6 million in 1998 from
$70.9 million in 1997 and as a percentage of sales increased to 30.6% in 1998
from 27.6% in 1997. The absolute dollar decrease in selling expenses was due
principally to the lower levels of advertising and telemarketing expenses
associated with the decrease in the Company's Direct Marketing Services sales.
General and Administrative Expenses
General and administrative expenses decreased to $8.7 million in 1998
from $9.3 million in 1997 and as a percentage of sales increased to 5.0% in 1998
from 3.6% in 1997. The absolute dollar decrease reflects decreased legal and
human resources costs.
Restructuring
The Company incurred a pretax restructuring charge of $2.7 million in the
first quarter of 1998 as it implemented several streamlining programs, including
combining certain marketing and operations functions, restructuring research and
development activities and discontinuing certain products, resulting in asset
write-downs and the elimination of approximately 100 positions. On July 22,
1998, the Company implemented a new business strategy focusing on core telephony
products and services, and a restructuring plan that resulted in one-time
charges of $17.2 million in the third quarter of 1998. The Company's
restructuring plan significantly reduced its personnel and resource costs
throughout the core business. As part of this strategy and restructuring plan,
during the second half of 1998, the Company explored strategic alternatives with
regard to its i-Phone Division, including the possible spin-out, sale or
wind-down of the division in significant part due to the high level of
marketing, sales and research and development expense that would be required to
develop the market for these products and services. As of December 31, 1998, the
Company sold a relatively minor amount of these assets and discontinued
operation of the Division, including laying-off substantially all of the
Division's employees. The restructuring has reduced permanent headcount from the
prior year's level by approximately 41% as the Company focused on its core
telephony products and services business.
Other Income
Other income in 1998 includes interest income from the investment of
available cash balances, royalties from the licensing of technology and proceeds
from the sale of future production rights to a next development model i-Phone.
Provision for (benefit from) Income Taxes
The provision for (benefit from) income taxes reflects an effective tax
rate of (11.9)% in 1998 and 39% in 1997.
Liquidity and Capital Resources
The Company's cash and cash equivalents increased $17.0 million during 1999
primarily from cash generated by operations of $18.1 million, the sale of short
term investments of $3.3 million and proceeds from issuance of common stock of
$1.1 million. Offsets include the purchase of property and equipment of $2.4
million and the purchase of treasury stock of $3.2 million. Cash generated by
operations of $18.1 million was attributable to a collection of the tax
receivable of $18.4 million, a decrease in accounts receivable of $5.3 million,
a decrease in deferred taxes of $1.5 million and depreciation of $5.4 million
which was offset by an increase in inventory of $3.6 million, a decrease in
accounts payable of $3.0 million, and a decrease in accrued liabilities of $6.0
million.
The Company's working capital as of December 31, 1999 was $70.8 million compared
to $70.2 million as of December 31, 1998. The improvement in working capital was
due to an increase in cash and short-term investments of $13.5 million, an
increase in inventory of $3.6 million and a decrease in accounts payable and
accrued liabilities of $9.1 million. Offsetting the above changes was a decrease
in accounts receivable of $5.3 million, a decrease in income tax receivable of
$18.4 million, a decrease in deferred tax asset of $1.5 million and a decrease
in other current assets of $0.5 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 8.50% per annum at December 31, 1999.
Borrowings under the line are secured by the assets of the Company. As of
December 31, 1999, 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. Letters of credit secured by this line
totaled $4 million as of December 31, 1999. As of the end of 1999, the Company
was in compliance with the line of credit covenants.
On January 27, 1999, the Company announced the board of director
authorization to purchase up to two million shares of its outstanding Common
Stock. As of January 31, 2000, the Company had repurchased approximately 713,000
shares at an aggregate purchase price of $3.2 million. The authorization was for
a period of one year which expired on January 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. The Company believes its 2000 capital expenditures will
be approximately $3.0 million. The 2000 capital expenditures are expected to be
funded from available working capital. Additionally, the company plans to invest
significantly in marketing programs to increase E-mail subscriber growth related
to the MailStation and subsequent products. The company may spend as much as $20
million on these marketing programs. 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 Caller ID and Maturation of Market
Approximately 48%, 65% and 84% of the Company's revenues during 1999,
1998 and 1997, respectively, came from the Company's Direct Marketing Services
and Fulfillment programs for Caller ID adjunct and telephone products and
customer acquisition services through Telcos. The size of the overall market for
Caller ID products and Services is a function of the total number of potential
subscribers with Caller ID-enabled telephone lines and the rate of adoption of
Caller ID Services, or the "penetration rate," among those subscribers. Based
upon the Company's projections of penetration rates, the Company believes that
the annual market for new Caller ID subscribers in the United States may have
peaked in 1997, with a resulting leveling off in Caller ID sales to new
subscribers expected in 1999 and beyond. Customer adoption of Caller ID Services
has been in the past, and likely will be in the future, dependent on a variety
of factors, including the rate at which Telcos from time-to-time elect to
promote Caller ID, the perceived value of the Services to end users, including
the extent to which other end users have also adopted and/or not blocked Caller
ID Services, and the end user cost for the Services. There can be no assurances
that Telcos will continue to promote Caller ID, that Caller ID Services will
gain market acceptance or that, in areas where the Services are accepted, those
markets will not become saturated. In addition, even if peak market penetration
for Caller ID Service has not been achieved for the entire domestic United
States market, one or more regional markets may become saturated. Further, the
market for Caller ID adjunct products may be eroded as Caller ID functionality
is designed into competitively priced phone products as a standard feature.
Declines in demand for or revenues from Caller ID, whether due to reduced
promotion of such Services by Telcos, competition, market saturation, price
reduction, technological change or otherwise, could have a material adverse
affect on the Company's business, operating results or financial condition. In
addition, as penetration rates for adoption of Caller ID 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 Caller ID Services increases, which may result
in pressures on the Company's profitability.
Dependence on Telcos; Concentrated Customer Base
A significant portion of the Company's revenues is derived from a small
number of Telcos. During 1999, 1998 and 1997 respectively, the percentage of
revenue derived by the Company from its significant (greater than 10% of total
sales) customers was 66% (three customers), 62% (four customers) and 77% (four
customers). There can be no assurance that the Company will retain its current
Telco customers or that it will be able to attract additional customers. The
Company generally does not enter into long-term contracts with its Telco or
other customers and no 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 effect 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 Services on a system-wide or regional basis.
The extent to which the Telcos determine to implement and/or from time-to-time
promote Services may be affected by a wide variety of factors, including
regulatory approvals, technical requirements, budgetary constraints at the
Telcos, consolidation among Telcos, market saturation for the Services, the
profitability of the Services to the Telcos, market acceptance for the Services
and other factors. The Company typically has little control over any of these
factors. There can be no assurances that the Telcos will continue to implement
and/or promote Caller ID or other Services, or that the Company's product and
program offerings will be selected by the Telcos. Moreover, the Company believes
that certain Telcos have begun to perform 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 effect
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 Internet services and information
systems. In particular, the Company must seek to refine and improve its Internet
service provider and mail hosting capabilities and systems in support of its
1999 entry into the Internet appliances and services market. 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, Internet services, and information systems may adversely affect both
the Company's ability to obtain and/or retain its Internet appliance services
subscribers and 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, business units, products or product categories,
changes in earnings estimates by market analysts, speculation in the press or
analyst community and general market conditions or market conditions specific to
the technology industry or the telecommunications industry in particular. The
stock prices for many companies in the technology sector have experienced wide
fluctuations that often have been unrelated to their operating performance. Such
fluctuations may adversely affect the market price of the Company's Common
Stock.
Year 2000 Compliance
During 1998 and 1999, the Company performed a comprehensive Year 2000 Compliance
Program focused on preparing for issues potentially created through the switch
over to the year 2000. The Company's program was a success, and no significant
Year 2000 issues have been observed or experienced as a result of the change
over to the year 2000. There is a small risk that problems associated with the
Year 2000 change over may yet occur, however, the Company's management believes
that the probability of any significant problems is very low.
Item 7A Quantitative and Qualitative Disclosure About Market Risk
Management believes that the market risk associated with the Company's
market risk sensitive instruments as of December 31, 1999 is not material due
to the short-term nature of the investments, and therefore, disclosure is not
required.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements:
Financial Statements: Page
----
Report of Independent Accountants ........................................26
Balance Sheets at December 31, 1999 and 1998 .............................27
Statements of Operations for the three years
ended December 31, 1999.................................................28
Statements of Stockholders' Equity for
the three years ended December 31, 1999 ................................29
Statements of Cash Flows for
the three years ended December 31, 1999 ................................30
Notes to Financial Statements ............................................31
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts .........................42
All other financial statement schedules are omitted because the
information called for is not present in amounts sufficient to require
submission of the schedules or because the information is shown either
in the financial statements or the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of CIDCO Incorporated
In our opinion, the financial statements in the above index present fairly, in
all material respects, the financial position of CIDCO Incorporated at December
31, 1999 and 1998 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999 are in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the above index present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 21, 2000
CIDCO INCORPORATED
BALANCE SHEETS
(in thousands, except per share data)
December 31,
--------------------
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 29,323 $ 12,349
Short-term investments .................................. 10,546 13,975
Accounts receivable, net of allowances
for doubtful accounts of $1,127 and $1,885
at December 31, 1999 and 1998, respectively .......... 22,407 27,689
....................................................... 25,688 22,086
Inventories ............................................. -- 1,490
Deferred tax asset ...................................... -- 18,367
Income tax refund receivable ............................ 1,002 1,547
--------- ---------
Other current assets ....................................
Total current assets ................................. 88,966 97,503
Property and equipment, net ............................. 6,653 9,691
Other assets ............................................ 712 473
--------- ---------
$ 96,331 $ 107,667
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 9,412 $ 12,446
Accrued liabilities ..................................... 8,622 14,585
Accrued taxes payable ................................... 116 234
--------- ---------
Total current liabilities ............................ 18,150 27,265
--------- ---------
Commitments and contingencies (Note 8) Stockholders' equity:
Common stock, $.01 par value; 35,000 shares
authorized, 14,418 and 14,418 shares issued
and outstanding at December 31, 1999 & 1998 .......... 144 144
Treasury Stock, at cost (675 and 339 shares) ............ (2,988) (4,600)
Additional paid-in capital .............................. 88,916 88,916
Accumulated deficit ..................................... (7,891) (4,058)
--------- ---------
Total stockholders' equity ........................... 78,181 80,402
--------- ---------
$ 96,331 $ 107,667
========= =========
The accompanying notes are an integral part of these financial statements.
Statements of Operations
(in thousands, except per share data)
Year ended December 31
-------------------------------
1999 1998 1997
--------- --------- ---------
Sales ........................................ $ 158,593 $ 174,703 $ 257,033
Cost of sales ................................ 114,904 143,776 141,672
--------- --------- ---------
Gross margin ................................. 43,689 30,927 115,361
--------- --------- ---------
Operating expenses:
Research and development ................. 9,107 10,821 16,859
Selling and marketing .................... 30,692 53,577 70,851
General and administrative ............... 5,504 8,723 9,288
Restructuring ............................ (379) 19,858 --
--------- --------- ---------
44,924 92,979 96,998
--------- --------- ---------
Income(loss) from operations ................. (1,235) (62,052) 18,363
Other income ................................. 1,205 3,658 2,793
--------- --------- ---------
Income(loss) before income taxes ............. (30) (58,394) 21,156
Provision for (benefit from) for income taxes -- (6,955) 8,246
--------- --------- ---------
Net income(loss) ............................. $ (30) $ (51,439) $ 12,910
========= ========= =========
Net earnings(loss) per share-basic ........... $ 0.00 $ (3.66) $ 0.93
========= ========= =========
Net earnings(loss) per common share-diluted .. $ 0.00 $ (3.66) $ 0.90
========= ========= =========
Shares used in per share calculation-basic ... 13,608 14,049 13,948
========= ========= =========
Shares used in per share calculation-diluted . 13,608 14,049 14,340
========= ========= =========
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retained Total Total
Common Stock Treasury Stock Add'l. Earnings Stock- Compre-
------------- -------------- Paid-in (Accum. holders' hensive
Shares Amount Shares Amount Capital Deficit) Equity Income
------ ------ ------ ------- ------- -------- -------- --------
Balance at
December 31, 1996 ... 14,399 $ 144 -- $ -- $87,725 $ 40,977 $128,846 $
Unrealized gains
from investments .... 28 28 28
Tax benefit from
exercise of
stock options ....... 787 787
Treasury stock
purchased ........... (1,000)(12,942) (12,942)
Employee stock
options exercised ... 3 521 6,577 21 (5,914) 684
Employee stock
purchase plan ....... 16 16 202 230 (15) 417
Net income ............. 12,910 12,910 12,910
------ ------ ------ ------- ------- -------- -------- --------
Balance at
December 31, 1997 ... 14,418 144 (463) (6,163) 88,763 47,986 130,730 $ 12,938
========
Unrealized losses
from investments .... (31) (31) (31)
Tax benefit from
exercise of
stock options........ 153 153
Employee stock
options exercised.... 61 773 (198) 575
Employee stock
purchase plan ....... 63 790 (376) 414
Net loss................ (51,439) (51,439) (51,439)
------ ------ ------ ------- ------- -------- -------- --------
Balance at
December 31, 1998 ... 14,418 144 (339) (4,600) 88,916 (4,058) 80,402 $(51,470)
========
Unrealized losses
from investments .... (92) (92) (92)
Treasury stock
purchased............ (713) (3,154) (3,154)
Employee stock
options exercised.... 311 3,891 (2,999) 892
Employee stock
purchase plan ....... 66 875 (712) 163
Net loss................ (30) (30) (30)
------ ------ ------ ------- ------- -------- -------- --------
Balance at
December 31, 1999.... 14,418 $ 144 (675)$(2,988)$88,916 $ (7,891)$ 78,181 $ (122)
====== ====== ====== ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
CIDCO INCORPORATED
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income (loss) ........................ $ (30) $(51,439) $ 12,910
Adjustments to reconcile net income
to net cash flow from operating
activities:
Depreciation and amortization ............ 5,446 2,880 5,933
Equity in losses of affiliate ............ -- 1,605 2,369
Property and equipment retirements ....... -- 10,300 --
Deferred income taxes .................... 1,490 11,100 (6,477)
Changes in assets and liabilities:
Accounts receivable ................... 5,282 30,393 (9,840)
Inventories ........................... (3,602) (9,182) 1,651
Income tax refund receivable .......... 18,367 (18,367) --
Other current assets .................. 545 (241) (22)
Other assets .......................... (239) (862) (353)
Accounts payable ...................... (3,034) (17,422) 12,988
Accrued liabilities ................... (5,963) 3,630 4,744
Accrued taxes payable ................. (118) (1,641) 1,199
-------- -------- --------
Net cash provided by
(used in) operating activities ... 18,144 (39,246) 25,102
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment .... (2,408) (10,280) (4,406)
Sale of short-term investments, net....... 3,337 12,480 12,102
-------- -------- --------
Net cash provided by
investing activities ............ 929 2,200 7,696
-------- -------- --------
Cash flows from financing activities:
Issuance of Common Stock,
net of issuance costs ................. 1,055 989 1,101
Purchase of Treasury Stock ............... (3,154) -- (12,942)
Tax benefit from exercise
of stock options ...................... -- 153 787
-------- -------- -------
Net cash provided by
(used in) financing activities ... (2,099) 1,142 (11,054)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents ............. 16,974 (35,904) 21,744
Cash and cash equivalents
at beginning of year ............. 12,349 48,253 26,509
-------- -------- --------
Cash and cash equivalents
at end of year ................... $ 29,323 $ 12,349 $ 48,253
======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the year
for income taxes ................. $ -- $ 1,855 $ 10,973
======== ======== ========
The accompanying notes are an integral part of these financial statements.
CIDCO INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
CIDCO Incorporated (the "Company"), a Delaware corporation, designs,
develops and markets advanced telephony products from subscriber telephone
equipment for use with intelligent Network Services to Internet appliances and
services. The Company started its operations in June 1989. The Company sells its
products to individual customers through its Direct Marketing and Fulfillment
relationships with certain Regional Bell Operating Companies ("RBOC"), to Telcos
directly, to Internet Service Providers and to major national and regional
Retail chains.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents.
Short-Term Investments
The Company classifies its investment securities as available for sale.
Realized gains or losses are determined on the specific identification method
and are reflected in income. Net unrealized gains or losses are recorded
directly in stockholders' equity except those unrealized losses that are deemed
to be other than temporary which are reflected in the income statement.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined using the standard cost method (which approximates first in, first
out). The Company's inventories consist of finished goods and raw materials
purchased for the manufacture of finished goods.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of the assets,
ranging from three to five years. Leasehold improvements are stated at cost.
Amortization is computed using the straight-line method and the shorter of the
remaining lease term or the estimated useful lives of the improvements.
Investments in Affiliates
Investments in affiliates, where the Company owns more than 20 percent but
not in excess of 50 percent and does not otherwise exercise control, are
accounted for using the equity method.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes new standards of accounting and reporting for derivative instruments
and hedging activities. In July 1999, the FASB issued SFAS No 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS 137 deferred the effective date of SFAS
133 until fiscal years beginning after June 15, 2000. The Company will adopt
SFAS No. 133 during its year ended December 31, 2001. To date, the Company has
not engaged in derivative or hedging activities.
Warranty Costs
Anticipated costs related to product warranties are charged to income as
sales are recognized. The Company has not experienced significant warranty
claims to date.
Revenue Recognition
Direct sales and sales through Fulfillment arrangements are recognized upon
shipment of the product to the customer. Allowances are established to recognize
any risk related to the creditworthiness of customers and for estimated returns.
Sales through certain promotions aimed at Fulfillment customers are dependent on
the customer's retention of certain Services provided by the Telco. The Company
reserves for estimated non-retention of such Services by these customers. Retail
sales of MailStation are recognized upon mail service activation or sell
through. Bundled hardware and service revenues are recognized over the
contracted service period which is typically 12 months.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for 1999,
1998 and 1997 were $12.5 million, $32.5 million, and $32.4 million,
respectively.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for expected tax consequences of temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities.
Earnings per Share
Basic Earnings Per Share ("EPS") is computed by dividing net income
available to common stockholders (numerator - computed as net income adjusted
for any accretion of dividends paid on preferred stock) 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.
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS:
Year ended December 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net income (loss) .............................. $ (30) $(51,439) $ 12,910
======== ======== ========
Weighted average shares - basic ................ 13,608 14,049 13,948
Effect of dilutive securities -
employee stock options.............. -- -- 392
-------- -------- --------
Weighted average shares - diluted .............. 13,608 14,049 14,340
======== ======== ========
Net earnings (loss) per common share - basic ... $ 0.00 $ (3.66) $ 0.93
======== ======== ========
Net earnings (loss) per common share - diluted . $ 0.00 $ (3.66) $ 0.90
======== ======== ========
Potential shares of common stock issuable upon the exercise of 1,144,961 and
232,256 options as at December 31, 1999 and 1998 have been excluded from the
diluted net loss per share calculation above as their effect would be anti-
dilutive.
Stock-Based Compensation
The Company accounts for stock-based employee compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
The Company provides additional pro forma disclosures as required under
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation."
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable. The Company limits the amount of
credit exposure to any one financial institution and financial instrument. The
Company's trade accounts receivable are derived primarily from sales in the
United States and South America. The Company maintains reserves for potential
credit losses; historically, such losses have been within management's
expectations.
NOTE 3. BALANCE SHEET COMPONENTS
(in thousands)
December 31,
-------------------
1999 1998
-------- --------
Inventories, net of reserves:
Finished goods .................................. $ 22,283 $ 14,005
Raw materials (1) .............................. 3,405 8,081
-------- --------
$ 25,688 $ 22,086
======== ========
Property and equipment, net:
Land ............................................ $ 866 $ 866
Computers and office equipment .................. 16,884 16,868
Tooling ......................................... 8,619 6,187
Furniture and fixtures .......................... 2,134 2,134
Leasehold improvements .......................... 2,607 2,648
-------- --------
31,110 28,703
Less accumulated depreciation and amortization .. (24,457) (19,012)
-------- --------
$ 6,653 $ 9,691
======== ========
Accrued liabilities:
Accrued compensation ............................ $ 1,447 $ 1,619
Accrued restructuring ........................... 150 3,883
Sales taxes payable ............................. 1,676 2,004
Other ........................................... 5,349 7,079
-------- --------
$ 8,622 $ 14,585
======== ========
(1) For December 31, 1998 balances, an additional reserve of $3,935 (in
thousands) related to i-Phone raw materials has been included in
resturcturing. See Note 6.
NOTE 4. INVESTMENTS
The Company's short-term investments consist primarily of municipal bonds.
As of December 31, 1999, approximately $5.5 million of such investments had
maturities of greater than one year. However, all such securities mature within
three years. The cost and fair value of the Company's short-term investments are
as follows (in thousands):
December 31,
--------------------
1999 1998
-------- --------
Fair value .............................................. $ 10,546 $ 13,975
Cost .................................................... 10,536 13,873
-------- --------
Unrealized gains ........................................ $ 10 $ 102
======== ========
NOTE 5. INVESTMENT IN AFFILIATE
During 1996, the Company acquired for $3 million in cash a 33% interest in
the outstanding stock of InfoGear Technology Corporation ("InfoGear"), a company
involved in the development of software for Internet phones. The Company's
equity in losses of InfoGear has been included as a component of research and
development expense for the years ended December 31, 1998 and 1997, $0.6 million
and $2.4 million, respectively. In 1998, the Company invested an additional $1.4
million in Infogear that the Company wrote off as worthless as part of the
restructuring costs. See Note 6 below.
NOTE 6. RESTRUCTURING
The Company incurred a pretax restructuring charge of $2.7 million in the
first quarter of 1998 as it announced and implemented several streamlining
programs, including combining certain marketing and operations functions,
restructuring research and development activities and discontinuing certain
products, resulting in asset write-downs and the elimination of approximately
100 positions. Approximately $0.6 million of the restructuring charge required
cash outlays. The remaining $2.1 million represents asset write-downs of $1.1
million and leasehold improvements of $1.0 million related to discontinued
products and relocation of the Company's distribution center from California to
Texas. The Company determined that moving the distribution center has not
produced the cost savings and relocated the distribution center back to
California where the distribution function can be fully integrated with the rest
of the Company.
On July 22, 1998, the Company announced a new business strategy focusing on
core telephony products and services, and a restructuring plan implemented in
the second half of 1998, which resulted in charges of $17.2 million in the third
quarter of 1998. The Company's restructuring plan significantly reduced its
personnel and resource costs throughout the core business. As part of this
strategy and restructuring plan, the Company explored strategic alternatives
with regard to its Internet Appliances Division, including the possible
spin-out, sale or wind-down of the division in significant part due to the high
level of marketing, sales and research and development expense that would be
required to develop the market for these products and services. As of December
31, 1999, the Company sold a relatively minor amount of these assets and
discontinued operation of the Division, including laying-off substantially all
of the Division's employees. The restructuring required a cash outlay of
approximately $5.9 million. The remaining $11.3 million represented asset
write-downs of $5.9 million and write-offs of investments in intangible assets
including a Sun Microsystems license of $3.0 million and equity in InfoGear
Technologies Corporation of $1.4 million.
The following table lists the components of the restructuring accrual for
the two years ended December 31, 1999:
Asset
Employee Write-
(in thousands): Costs downs Leases Total
-------- ------- ------ ------
Reserve initially provided in Q1 1998 ..... $ 437 $ 2,080 $ 155 $ 2,672
Additional reserve provided in Q3 1998..... 3,616 13,506 65 17,187
Reserve utilized in 1998 .................. (3,993) (11,651) (336) (15,976)
Reserve utilized in 1999 .................. -- (3,354) -- (3,354)
Reserve returned to profit in 1999 ........ -- (379) -- (379)
-------- ------- ------ -------
Balance at December 31, 1999 .............. $ 60 $ 202 $ (112) $ 150
======== ======= ====== =======
NOTE 7 LINE OF CREDIT
The Company has a line of credit for up to $15 million. Borrowings under
the line bear interest the bank's base rate and the interest is payable monthly.
The bank's base rate was 8.50% per annum at December 31, 1999. Borrowings under
the line are secured by the assets of the Company. As of December 31, 1999, 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. Letters of credit secured by this line totaled $4 million as of
December 31, 1999.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its headquarters, call center and distribution
facilities in Morgan Hill, California, under operating leases which expire from
2000 through 2006. The Company also leases office space in Palo Alto, California
under an operating lease that expires in 2002.
Future minimum lease payments under non-cancelable leases at December 31,
1999 were as follows (in thousands):
Year ending December 31,
2000 ........................................................... $ 1,268
2001 ........................................................... 1,244
2002 ........................................................... 1,236
2003 ........................................................... 1,268
Thereafter ..................................................... 2,576
--------
Total minimum lease payments ................................... $ 7,592
========
Rent expense for 1999, 1998 and 1997 was $1.2 million, $0.9 million, and
$1.4 million, respectively.
Licenses
The Company has a nontransferable, nonexclusive license agreement with
Lucent to utilize Lucent's patent related to data display devices. The Company
pays royalties to Lucent for each licensed product sold, leased or put into use
by the Company other than direct sales to Lucent, the Regional Bell Operating
Companies and other Lucent licensees under the patent. Royalties are payable at
a rate of one dollar per unit. Total Lucent royalty expense incurred in 1999,
1998 and 1997 was $0.6 million, $0.9 million, and $2.0 million, respectively.
The patent and license agreement expire in 2003.
The Company has a nontransferable, nonexclusive license agreement with
Northern Telecom to utilize Northern Telecom's patents for Caller ID on Call
Waiting technology. Under the agreement, the Company pays royalties to Northern
Telecom for each licensed product sold, leased or put into use by the Company
other than direct sales to Northern Telecom beginning January 1, 1997. The
agreement also provided for a one-time payment in full satisfaction of royalties
on all units incorporating Northern Telecom's patents that were sold by the
Company prior to January 1, 1997. Royalties are payable at a variable rate based
on product type and number of units sold. Total Northern Telecom royalty expense
incurred in 1999 and 1998 was $2.0 million and $1.8 million, respectively.
401(k) Plan
Effective in 1993, the Company implemented a Savings and Profit Sharing
Plan (the "401(k) Plan") which qualifies as a thrift plan under section 401(k)
of the Internal Revenue Code. All employees who are 21 years of age or older on
or before the quarterly entry periods are eligible to participate in the 401(k)
Plan. The 401(k) Plan allows participants to contribute up to 15% of the total
compensation that would otherwise be paid to the participant, not to exceed the
amount allowed by applicable Internal Revenue Service guidelines. Effective July
1, 1997, the Company contributed for each participant a matching contribution
equal to 50% of the participant's before-tax contributions for the year not to
exceed a $2,500 per year maximum per plan participant. Prior to July 1, 1997,
the Company contributed for each participant a matching contribution equal to
25% of the participant's before-tax contributions for the year not to exceed 1%
of his or her compensation. In addition, the Company may choose to make elective
contributions to the 401(k) Plan for a particular plan year. The Company made
contributions of $305,344, $526,000 and $298,000 to the 401(k) Plan for the
years ended December 31, 1999, 1998, and 1997, respectively.
Pending Litigation
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.
NOTE 9. COMMON STOCK AND STOCK PLAN
Common Stock
The Company is authorized to issue up to 35 million shares of Common Stock,
each with a par value of $0.01 per share. Holders of Common Stock are entitled
to one vote per share on all matters voted on by the Company's stockholders. In
March 1994, the Company completed an initial public offering (the "Offering") of
3.4 million shares of Common Stock and realized net proceeds of $45.9 million.
In conjunction with the Offering, all outstanding shares of mandatorily
redeemable Preferred Stock were redeemed for $19.3 million. In August 1994, the
Company completed a second public offering of 3.5 million shares of Common Stock
at a price of $22 per share. Of such shares, selling stockholders sold 3.4
million shares and the Company sold 100,000 shares and realized net proceeds of
$1.7 million. In December 1994, the Company completed an additional public
offering of 1.9 million shares of Common Stock at a price of $23.75 per share.
Of such shares, the Company sold 1.5 million shares for net proceeds of $33.5
million and selling stockholders sold 375,650 shares.
Directors' Stock Option Plan
In January 1994, the Company's stockholders approved the 1994 Directors'
Stock Option Plan (the "Directors' Option Plan"). Initially, a total of 100,000
shares of Common Stock were reserved for issuance under the Directors' Option
Plan, which provides for the granting of stock options to non-employee directors
of the Company. Such options vest immediately with respect to 20% of such
shares, with the remainder vesting in four equal annual installments commencing
one year after the date of grant. In May 1997, the stockholders approved an
amendment to increase the number of shares authorized under the Directors' Stock
Option Plan to 250,000 shares. In 1997, the Company granted three directors
options under the Directors' Option Plan to purchase a total of 93,325 shares of
Common Stock at an average exercise price of $16.23 per share. In 1998, the
Company granted a director options under the Directors' Option Plan to purchase
30,000 shares at an exercise price of $4.75 per share. This option vests in four
equal annual installments commencing one year after the date of grant. An option
for 33,325 shares was cancelled in 1999. In 1999, the Company granted each of
three new directors options under the Director's Option Plan to purchase 30,000
shares of common stock at an exercise price of $8.63 per share. Each option
vests in for equal annual installments, commencing on the date of the grant.
Stock Grant to Former Executive Officer
In March 1997, the Company's then President and Chief Executive Officer,
Daniel L. Eilers, was granted a ten-year stock option to purchase up to 600,000
shares of the Company's Common Stock at an exercise price of $14.25 per share.
The option was scheduled to vest in equal monthly installments over five years.
This stock option was not issued under either of the Company's stock option
plans and the Company filed a Form S-8 Registration Statement with the
Securities and Exchange Commission covering the shares issuable upon exercise of
the stock option. In September 1998, a Separation Agreement and Mutual Release,
was executed which enabled a total of up to 300,000 of these shares to vest
subject to certain time limits, and repriced 120,000 of the vested shares at
$3.00 per share.
Employee Stock Option Plans
In May 1993, the Company adopted a stock option plan (the "Plan") under
which the employees and advisors may be granted options to purchase shares of
Common Stock at prices at least equal to the fair market value of the Company's
Common Stock on the date of grant. An aggregate of 2.9 million shares of Common
Stock have been reserved for issuance under the 1993 Stock Option Plan. In April
1998 the Company adopted a second stock option plan (the "1998 Plan") under
which employees and consultants may be granted options to purchase shares of
Common Stock at an exercise price no less than eighty-five (85%) of the fair
market value of the Company's Common Stock on the date of grant. A total of
700,000 shares were reserved for issuance under this plan (400,000 at inception
in April and 300,000 shares added in October 1998). Options under both plans
expire ten years from the date of grant. Generally, options granted prior to
August 1, 1997 vested in three equal annual installments commencing one year
from the date of grant. Effective on August 2, 1997, the Board of Directors
changed the standard vesting period for future options to vest 25% after one
year, and an additional 2.1% each month thereafter until fully vested. The Stock
Option Plans are administered by the Compensation Committee of the Board of
Directors, which determines the vesting provisions, the form of payment for
shares and all other terms of the options. The stock option plans were amended
in October 1998 by the Company's Board of Directors to make the Plans
competitive with plans offered by other companies in the Company's market.
On January 21, 1997, the Company offered Stock Option Plan participants the
right to replace any remaining unexercised stock options with an equal number of
options at an exercise price of $12.43, the closing market price on such date.
Due to the broad decline in market price of the Company's stock, a substantial
amount of outstanding stock options had exercise prices considerably above the
current market price. In an effort to provide incentives and retain current
employees, on August 17, 1998 eligible employees participating in the Company's
Stock Option Plans were offered the opportunity to elect to exchange outstanding
"underwater" options for options at an exercise price of $3.00 per share, the
closing market price on such date. As a provision of the repricing offer,
electing employees were not allowed to exercise their vested options until
August 17, 1999.
The following table summarizes stock option activity under the Employee
Stock Option Plans:
Options Outstanding
Shares ---------------------------
Available Weighted Average
for Grant Shares Exercise Price
----------- ---------- ----------------
Balance at December 31, 1996 ..... 102,550 1,638,906 $ 16.69
Additional shares authorized... 750,000 -- --
Options granted ............... (1,660,082) 1,660,082 $ 14.21
Options exercised ............. -- (525,421) $ 1.30
Options canceled .............. 1,207,807 (1,207,807) $ 23.98
----------- ----------
Balance at December 31, 1997 ..... 400,275 1,565,760 $ 14.57
Additional shares authorized,
April 1998 ................. 700,000 -- --
Options granted ............... (2,706,798) 2,706,798 $ 4.19
Options exercised ............. -- (61,278) $ 9.32
Options canceled .............. 2,340,318 (2,340,318) $ 11.45
----------- ----------
Balance at December 31, 1998 ..... 733,795 1,870,962 $ 2.71
Options granted ............... (216,175) 216,175 $ 6.00
Options exercised ............. -- (280,345) $ 2.86
Options canceled .............. 91,927 91,927) $ 2.75
----------- ---------- --------
Balance at December 31, 1999...... 609,547 1,714,865 $ 3.04
=========== ========== ========
The following table summarizes information concerning all outstanding and
exercisable stock options as of December 31, 1999, including outstanding options
to the former Executive Officer of 270,000 shares and Directors Option Plan of
180,000 shares:
Options
Options Outstanding Exercisable
---------------------------------------------- -----------
Wtd. Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------------- ----------- ------------ -------- ----------- -----------
$ 1.00 - $ 1.00 103,704 3.35 $ 1.00 103,704 $ 1.00
$ 1.88 - $ 3.00 1,475,152 8.64 $ 2.67 561,352 $ 2.78
$ 3.50 - $ 3.50 273,925 7.47 $ 5.72 33,063 $ 7.27
$ 9.75 - $19.82 312,084 6.78 $ 13.99 202,396 $ 14.36
---------- -----------
$ 1.00 - $19.82 2,164,865 7.97 $ 4.61 900,515 $ 5.34
========== ===========
Employee Stock Purchase Plan
The Company's 1994 Employee Stock Purchase Plan (the "Stock Purchase Plan)
was adopted by the Board of Directors and approved by the Company's stockholders
in January 1994. Under the Stock Purchase Plan, an eligible employee may
purchase shares of Common Stock from the Company through payroll deductions of
up to 10% of his or her compensation, at a price per share equal to 85% of the
lesser of the fair market value of the Company's Common Stock as of the first or
last trading day of each six month offering period. Offerings will commence on
the first trading day on or after January 1 and July 1 of each year and end on
the last trading day of the period six (6) months later. The Company reserved
200,000 shares of Common Stock for issuance under the stock Purchase Plan, and
as of June 30, 1999, the pool of shares available under the Stock Purchase Plan
was substantially depleted.
The Company's 1999 Employee Stock Purchase Plan (the "1999 ESPP") was
adopted by the Board of Directors in April 1999 and approved by the Company's
stockholders in May 1999. Under the 1999 ESPP, an eligible employee may purchase
shares of Common Stock from the Company through payroll deductions of up to 10%
of his or her compensation, at a price per share equal to 85% of the lesser of
the fair market value of the Company's Common Stock as of the first or last
trading day of each six month offering period. Offerings commenced on the first
trading day on or after August 1 and February 1 of each year and end on the last
trading day of the period six (6) months later. The Company reserved 350,000
shares of Common Stock for issuance under the 1999 ESPP.
Stockholder's Rights Plan
Effective January 27, 1997, the Company adopted a Stockholder's Rights Plan
wherein stock rights will be distributed as a dividend at the rate of one right
for each share of Common Stock held on February 14, 1997, the record date for
such dividend. The key terms of the Stockholder's Rights Plan will be activated
if any person acquires 15 percent or more of the Company's Common Stock without
the approval of the Company's Board of Directors. Once the Plan is activated,
each right will entitle the holder to purchase at a price of $95, a fraction of
a share of Preferred Stock which is equivalent to $190 worth of the Company's
Common Stock at the then current market value. Any person holding 15 percent or
more of the stock when the Stockholder's Rights Plan was adopted was
"grandfathered" for existing holdings. The Company's Board of Directors has
retained the right to amend the Stockholder's Rights Plan at any time prior to
its activation.
Pro Forma Net Income and Earnings Per Share
Had stock-based compensation cost for the Company's stock option and Stock
Purchase Plan been determined based on the fair value at the grant dates using
the Black-Scholes model as prescribed by SFAS 123, the Company's results for the
years ended December 31, 1999, 1998 and 1997 would have been as follows (in
thousands):
1999 1997
-------- -------- --------
Net income (loss) as reported .................... $ (30) $(51,439) $ 12,910
Pro forma net income (loss) ...................... $ (2,798) $(56,794) $ 9,725
Basic earnings (loss) per share as reported ...... $ 0.00 $ (3.66) $ 0.93
Diluted earnings (loss) per share as reported .... $ 0.00 $ (3.66) $ 0.90
Pro forma basic earnings (loss) per share ........ $ (0.21) $ (4.04) $ 0.70
Pro forma diluted earnings (loss) per share ...... $ (0.21) $ (4.04) $ 0.67
The pro forma effect on net income and earnings per share is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following weighted average assumptions:
1999 1998 1997
------ ------ ------
Stock option plan:
Expected dividend yield .................... 0.0% 0.0% 0.0%
Expected stock price volatility ............ 115% 118% 65%
Risk free interest rate .................... 5.46% 5.27% 6.11%
Expected life of options (years) ........... 3.7 3.1 2.7
Stock purchase plan:
Expected dividend yield .................... 0.0% 0.0% 0.0%
Expected stock price volatility ............ 103% 227% 65%
Risk free interest rate .................... 4.92% 4.87% 5.37%
Expected life of option (years) ............ 0.5 0.5 0.5
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted under the Stock Option Plan during 1999, 1998 and 1997
was $4.64, $2.91 and $5.64, respectively. The weighted average estimated grant
date fair value, as defined by SFAS 123, for purchase rights granted under the
Stock Purchase Plan during 1999, 1998 and 1997 was $1.29, $5.60 and $5.23,
respectively.
<PAGE>
NOTE 10. PROVISION FOR (BENEFIT FROM) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
Year ended December 31,
------------------------------------------
1999 1998 1997
--------- --------- ---------
Current:
Federal ........... $ (1,501) $ (18,230) $ 11,767
State ............. 11 175 2,956
--------- --------- ---------
(1,490) (18,055) 14,723
--------- --------- ---------
Deferred:
Federal ........... 1,490 8,750 (5,206)
State ............. -- 2,350 (1,271)
--------- --------- ---------
1,490 11,100 (6,477)
--------- --------- ---------
$ -- $ (6,955) $ 8,246
========= ========= =========
At December 31, 1999, the Company had approximately $12,700,000 of federal
operating loss carryforward available to offset future taxable income which
expires in 2019. At December 31, 1999, the Company had approximately $304,000 of
state research and development credit carryforward available to offset future
taxable income, available indefinitely.
The difference between income taxes at the statutory federal income tax
rate and income taxes reported in the income statement are as follows:
Year ended December 31,
---------------------------
1997 1997 1997
------- ---- ----
Federal statutory tax rate .................... (34.0)% (35.0)% 35.0%
State income taxes, net of federal benefit .... 22.0 2.8 5.1
Research and development tax credits .......... 0.0 0.0 (2.4)
Permanent differences ......................... (1,543.0) 0.2 --
Valuation allowance ........................... 1,554.0 25.0 --
Other ......................................... 1.0 (4.9) 1.3
------- ---- ----
0.0% (11.9)% 39.0%
======= ==== ====
Deferred income taxes result from temporary differences in the recognition
of certain expenses for financial and income tax reporting purposes. The net
deferred tax asset consists of the following (in thousands):
As of December 31,
---------------------------
1999 1998
---------- ----------
Deferred Tax Assets:
Non-deductible reserves ................. $ 6,247 $ 13,131
Inventory basis difference .............. 152 113
Depreciation ............................ 3,819 2,373
Other ................................... 361 563
Net operating loss ...................... 4,470 --
---------- ----------
Gross deferred tax asset .................... 15,049 16,180
Deferred tax liabilities .................... -- (104)
---------- ----------
Net deferred tax assets ..................... 15,049 16,076
Less valuation allowance .................... (15,049) (14,586)
---------- ----------
$ -- $ 1,490
========== ==========
<PAGE>
NOTE 11. SIGNIFICANT CUSTOMERS
The Company's sales to significant customers as a percentage of total sales
are as follows:
Year ended December 31,
------------------------------
Customer 1999 1998 1997
----- ---- ----
A .............................. 17.7% 21.6% 25.5%
B .............................. 28.5% 28.9% 14.0%
C .............................. * 11.6% 14.6%
D .............................. * * 23.3%
E .............................. 19.5% * *
The Company's accounts receivable from significant customers are as
follows:
December 31,
Customer 1999 1998
----- ----
A ................................... * 37.8%
B ................................... 23.3% 17.4%
C ................................... 12.2% *
*Amounts less than 10% have been omitted from the above tables.
sCHEDULE II: Valuation and Qualifying Accounts
Balance at Balance
beginning at end
(in thousands) of year Additions Deductions of year
---------- --------- ---------- --------
Year ended December 31, 1997
Allowance for
doubtful accounts ... $ 2,966 $ 9,490 $ (9,155) $ 3,301
Year ended December 31, 1998
Allowance for
doubtful accounts ... $ 3,301 $ 4,236 $ (5,652) $ 1,885
Year ended December 31, 1999
Allowance for
doubtful accounts ... $ 1,885 $ 3,836 $ (4,594) $ 1,127
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Not applicable.
Part III.
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item other than information regarding
executive officers is set forth under the section of the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders (the "Proxy Statement")
entitled "ELECTION OF DIRECTORS" and "EXECUTIVE COMPENSATION AND OTHER MATTERS."
Information regarding the Company's executive officers may be found in the
section entitled "Executive Officers" in Part I of this 10-K.
Item 11. Executive Compensation
The information under the captions "Executive Compensation" and "Stock
Options and Bonuses" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Stock Ownership of Certain
Beneficial Owners" of the Proxy Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions" of the Proxy
Statement is incorporated herein by reference.
With the exception of the information specifically stated as being
incorporated by reference from the Company's Proxy Statement in Part III of this
Annual Report on Form 10-K, the Company's Proxy Statement is not to be deemed as
filed as part of this report. The Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days of the Company's fiscal year
end.
PART IV.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
See Item 8 of this Report.
(2) Financial Statement Schedules
See Item 8 of this Report.
(3) Index To Exhibits CIDCO INCORPORATED
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 47
(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.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on the 26th day of March
2000.
CIDCO INCORPORATED
By: /s/ Paul G. Locklin
Paul G. Locklin
President and Chief Executive Officer
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, each on the 26th day of March 2000.
/s/ Richard D. Kent Chief Financial Officer, Chief Operating
- ----------------------------- Officer, Corporate Secretary and
Richard D. Kent Principal Accounting Officer
/s/ Daniel L. Eilers Director
- -----------------------------
Daniel L. Eilers
/s/ John Floisand Director
- -----------------------------
John Floisand
/s/ Ernest K. Jacquet Director
- -----------------------------
Ernest K. Jacquet
/s/ Marv Tseu Director
- -----------------------------
Marv Tseu
/s/ Robert Lee Director
- -----------------------------
Robert Lee
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 333-71649 and No. 333-95379) of CIDCO Incorporated
of our report dated January 21, 2000 relating to the financial statements and
financial statement schedule which appear in this Form 10-K.
/s/
PricewaterhouseCoopers LLP
San Jose, California
March 28, 2000
Exhibit 10.40
CIDCO INCORPORATED
1999 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 Establishment. The CIDCO Incorporated 1999 Employee Stock
Purchase Plan (the "Plan") is hereby established effective as of the date on
which it is approved by the stockholders of the Company (the "Effective Date").
1.2 Purpose. The purpose of the Plan is to advance the interests
of Company and its stockholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock. The
Company intends that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code (including any amendments or replacements of such
section), and the Plan shall be so construed.
1.3 Term of Plan. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 Definitions. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a)"Board" means the Board of Directors of the Company. If one or more
Committees have been appointed by the Board to administer the Plan, "Board"
also means such Committee(s).
(b)"Code" means the Internal Revenue Code of 1986, as amended, and any
applicable regulations promulgated thereunder.
(c) "Committee" means a committee of the Board duly appointed to administer the
Plan and having such powers as specified by the Board. Unless the powers of
the Committee have been specifically limited, the Committee shall have all
of the powers of the Board granted herein, including, without limitation,
the power to amend or terminate the Plan at any time, subject to the terms
of the Plan and any applicable limitations imposed by law.
(d) "Company" means CIDCO Incorporated, a Delaware corporation, or any
successor corporation thereto.
(e) "Compensation" means, with respect to any Offering Period, base wages or
salary, overtime, bonuses, commissions, shift differentials, payments for
paid time off, payments in lieu of notice, and compensation deferred under
any program or plan, including, without limitation, pursuant to Section
401(k) or Section 125 of the Code. Compensation shall be limited to amounts
actually payable in cash or deferred during the Offering Period.
Compensation shall not include moving allowances, payments pursuant to a
severance agreement, termination pay, relocation payments, sign-on bonuses,
any amounts directly or indirectly paid pursuant to the Plan or any other
stock purchase or stock option plan, or any other compensation not included
above.
(f) "Eligible Employee" means an Employee who meets the requirements set forth
in Section 5 for eligibility to participate in the Plan.
(g) "Employee" means a person treated as an employee of a Participating Company
for purposes of Section 423 of the Code. A Participant shall be deemed to
have ceased to be an Employee either upon an actual termination of
employment or upon the corporation employing the Participant ceasing to be
a Participating Company. For purposes of the Plan, an individual shall not
be deemed to have ceased to be an Employee while on any military leave,
sick leave, or other bona fide leave of absence approved by the Company of
ninety (90) days or less. If an individual's leave of absence exceeds
ninety (90) days, the individual shall be deemed to have ceased to be an
Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in
good faith and in the exercise of its discretion whether an individual has
become or has ceased to be an Employee and the effective date of such
individual's employment or termination of employment, as the case may be.
For purposes of an individual's participation in or other rights, if any,
under the Plan as of the time of the Company's determination, all such
determinations by the Company shall be final, binding and conclusive,
notwithstanding that the Company or any governmental agency subsequently
makes a contrary determination.
(h) "Fair Market Value" means, as of any date if on such date the Stock is
listed on a national or regional securities exchange or market system or is
regularly quoted by a recognized securities dealer, the Fair Market Value
of a share of Stock shall be the closing sale price of a share of Stock (or
the mean of the closing bid and asked prices of a share of Stock if the
Stock is so quoted instead) as quoted on the Nasdaq National Market, The
Nasdaq SmallCap Market, such other national or regional securities exchange
or market system constituting the primary market for the Stock, or by such
recognized securities dealer, as reported in the Wall Street Journal or
such other source as the Company deems reliable. If the relevant date does
not fall on a day on which the Stock has traded, the date on which the Fair
Market Value is established shall be the last day on which the Stock was so
traded prior to the relevant date, or such other appropriate day as
determined by the Board, in its discretion. If, on the relevant date, there
is no public market for the Stock, the Fair Market Value of a share of
Stock shall be as determined in good faith by the Board.
(i) "Offering" means an offering of Stock as provided in Section 6. Offerings
may be sequential or concurrent.
(j) "Offering Date" means, for any Offering, the first day of the Offering
Period.
(k) "Offering Period" means a period established in accordance with Section
6.1.
(l) "Parent Corporation" means any present or future "parent corporation" of
the Company, as defined in Section 424(e) of the Code.
(m) "Participant" means an Eligible Employee who has become a participant in an
Offering Period in accordance with Section 7 and remains a participant in
accordance with the Plan.
(n) "Participating Company" means the Company or any Parent Corporation or
Subsidiary Corporation designated by the Board as a corporation the
Employees of which may, if Eligible Employees, participate in the Plan. The
Board shall have the sole and absolute discretion to determine from time to
time which Parent Corporations or Subsidiary Corporations shall be
Participating Companies.
(o) "Participating Company Group" means, at any point in time, the Company and
all other corporations collectively which are then Participating Companies.
(p) "Purchase Date" means, for any Offering, the last day of the Offering
Period; provided, however, that the Board in its discretion may establish
one or more additional Purchase Dates during any Offering Period.
(q) "Purchase Period" means a period determined in accordance with Section 6.2
(r ) "Purchase Price" means the price at which a share of Stock may be
purchased under the Plan, as determined in accordance with Section 9.
(s) "Purchase Right" means an option granted to a Participant pursuant to the
Plan to purchase such shares of Stock as provided in Section 8, which the
Participant may or may not exercise during the Offering Period in which
such option is outstanding. Such option arises from the right of a
Participant to withdraw any accumulated payroll deductions of the
Participant not previously applied to the purchase of Stock under the Plan
and to terminate participation in the Plan at any time during an Offering
Period.
(t) "Stock" means the common stock of the Company, as adjusted from time to
time in accordance with Section 4.2.
(u) "Subscription Agreement" means a written agreement in such form as
specified by the Company, stating an Employee's election to participate in
the Plan and authorizing payroll deductions under the Plan from the
Employee's Compensation.
(v) "Subscription Date" means the last business day prior to the Offering Date
of an Offering Period or such earlier date as the Company shall establish.
(w) "Subsidiary Corporation" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.
2.2 Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 Administration by the Board. The Plan shall be
administered by the Board. All questions of interpretation of the Plan, of any
form of agreement or other document employed by the Company in the
administration of the Plan, or of any Purchase Right shall be determined by the
Board and shall be final and binding upon all persons having an interest in the
Plan or the Purchase Right. Subject to the provisions of the Plan, the Board
shall determine all of the relevant terms and conditions of Purchase Rights;
provided, however, that all Participants granted Purchase Rights shall have the
same rights and privileges within the meaning of Section 423(b)(5) of the Code.
All expenses incurred in connection with the administration of the Plan shall be
paid by the Company.
3.2 Authority of Officers. Any officer of the Company shall
have the authority to act on behalf of the Company with respect to any matter,
right, obligation, determination or election that is the responsibility of or
that is allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 Policies and Procedures Established by the Company. The
Company may, from time to time, consistent with the Plan and the requirements of
Section 423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements of Section 423 of the Code, and (e) determination of the date and
manner by which the Fair Market Value of a share of Stock is determined for
purposes of administration of the Plan.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 Maximum Number of Shares Issuable. Subject to adjustment
as provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be three hundred fifty thousand (350,000) and
shall consist of authorized but unissued or reacquired shares of Stock, or any
combination thereof. If an outstanding Purchase Right for any reason expires or
is terminated or canceled, the shares of Stock allocable to the unexercised
portion of that Purchase Right shall again be available for issuance under the
Plan.
4.2 Adjustments for Changes in Capital Structure. In the event
of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and each Purchase
Right and in the Purchase Price. If a majority of the shares of the same class
as the shares subject to outstanding Purchase Rights are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "New Shares"), the Board may
unilaterally amend the outstanding Purchase Rights to provide that such Purchase
Rights are exercisable for New Shares. In the event of any such amendment, the
number of shares subject to, and the Purchase Price of, the outstanding Purchase
Rights shall be adjusted in a fair and equitable manner, as determined by the
Board, in its discretion. Notwithstanding the foregoing, any fractional share
resulting from an adjustment pursuant to this Section 4.2 shall be rounded down
to the nearest whole number, and in no event may the Purchase Price be decreased
to an amount less than the par value, if any, of the stock subject to the
Purchase Right. The adjustments determined by the Board pursuant to this Section
4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
-----------
5.1 Employees Eligible to Participate. Each Employee of a Participating Company
is eligible to participate in the Plan and shall be deemed an Eligible
Employee, except the following:
(a) Any Employee who is customarily employed by the Participating Company Group
for less than twenty (20) hours per week.; or
(b) Any Employee who is customarily employed by the Participating Company Group
for not more than five (5) months in any calendar year.
5.2 Exclusion of Certain Stockholders. Notwithstanding any provision of the
Plan to the contrary, no Employee shall be granted a Purchase Right under
the Plan if, immediately after such grant, the Employee would own, or hold
options to purchase, stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation,
as determined in accordance with Section 423(b)(3) of the Code. For
purposes of this Section 5.2, the attribution rules of Section 424(d) of
the Code shall apply in determining the stock ownership of such Employee.
6. OFFERINGS.
---------
The Plan initially shall be implemented on and after the Effective Date by
sequential Offerings of approximately six (6) months duration or such other
duration as the Board shall determine (an "Offering Period"). Offering Periods
shall commence on or about February 1 and August 1 of each year and end on or
about the last days of the next July and January, respectively, occurring
thereafter. Notwithstanding the foregoing, the Board may establish, a different
duration effective for one or more future Offering Periods, different commencing
or ending dates for such Offering Periods or concurrent Offering Periods;
provided, however, that no Offering Period may have a duration exceeding
twenty-seven (27) months. If the first or last day of an Offering Period is not
a day on which the national securities exchanges or Nasdaq Stock Market are open
for trading, the Company shall specify the trading day that will be deemed the
first or last day, as the case may be, of the Offering Period.
7. PARTICIPATION IN THE PLAN.
7.1 Initial Participation. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the office designated by the Company not later than
the close of business for such office on the Subscription Date established by
the Company for such Offering Period. An Eligible Employee who does not deliver
a properly completed Subscription Agreement to the Company's designated office
on or before the Subscription Date for an Offering Period shall not participate
in the Plan for that Offering Period or for any subsequent Offering Period
unless the Eligible Employee subsequently delivers a properly completed
Subscription Agreement to the appropriate office of the Company on or before the
Subscription Date for such subsequent Offering Period. An Employee who becomes
an Eligible Employee after the Offering Date of an Offering Period shall not be
eligible to participate in that Offering Period but may participate in any
subsequent Offering Period provided the Employee is still an Eligible Employee
as of the Offering Date of such subsequent Offering Period.
7.2 Continued Participation. A Participant shall automatically
participate in the next Offering Period commencing immediately after the
Purchase Date of each Offering Period in which the Participant participates
provided that the Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 12.1 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new Subscription
Agreement for a subsequent Offering Period in accordance with the procedures set
forth in Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement. In the
event that the Board establishes concurrent Offerings, Eligible Employees may
not participate simultaneously in more than one Offering.
8. RIGHT TO PURCHASE SHARES.
8.1 Grant of Purchase Right. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in that Offering Period
shall be granted automatically a Purchase Right consisting of an option to
purchase that number of whole shares of Stock determined by dividing Twelve
Thousand Five Hundred Dollars ($12,500) by the Fair Market Value of a share of
Stock on such Offering Date. No Purchase Right shall be granted on an Offering
Date to any person who is not, on such Offering Date, an Eligible Employee.
8.2 Pro Rata Adjustment of Purchase Right. Notwithstanding the
provisions of Section 8.1, if the Board establishes an Offering Period of any
duration other than six months, then the dollar amount in Section 8.1 shall be
determined by multiplying $2,083.33 by the number of months (rounded to the
nearest whole month) in the Offering Period and rounding to the nearest whole
dollar.
8.3 Calendar Year Purchase Limitation. Notwithstanding any
provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock under
the Plan to accrue at a rate which, when aggregated with such Participant's
rights to purchase shares under all other employee stock purchase plans of a
Participating Company intended to meet the requirements of Section 423 of the
Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or
such other limit, if any, as may be imposed by the Code) for each calendar year
in which such Purchase Right is outstanding at any time. For purposes of the
preceding sentence, the Fair Market Value of shares purchased during a given
Offering Period shall be determined as of the Offering Date for such Offering
Period. The limitation described in this Section shall be applied in conformance
with applicable regulations under Section 423(b)(8) of the Code.
9. PURCHASE PRICE.
--------------
The Purchase Price at which each share of Stock may be
acquired in an Offering Period upon the exercise of all or any portion of a
Purchase Right shall be established by the Board; provided, however, that the
Purchase Price shall not be less than eighty-five percent (85%) of the lesser of
(a) the Fair Market Value of a share of Stock on the Offering Date of the
Offering Period or (b) the Fair Market Value of a share of Stock on the Purchase
Date. Unless otherwise provided by the Board prior to the commencement of an
Offering Period, the Purchase Price for that Offering Period shall be
eighty-five percent (85%) of the lesser of (a) the Fair Market Value of a share
of Stock on the Offering Date of the Offering Period, or (b) the Fair Market
Value of a share of Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
--------------------------------------------------------
Shares of Stock acquired pursuant to the exercise of all or any portion of
a Purchase Right may be paid for only by means of payroll deductions from the
Participant's Compensation accumulated during the Offering Period for which such
Purchase Right was granted, subject to the following:
10.1 Amount of Payroll Deductions. Except as otherwise
provided herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period shall be determined by the
Participant's Subscription Agreement. The Subscription Agreement shall set forth
the percentage of the Participant's Compensation to be deducted on each payday
during an Offering Period in whole percentages of not less than one percent (1%)
(except as a result of an election pursuant to Section 10.3 to stop payroll
deductions effective following the first payday during an Offering) or more than
ten percent (10%). The Board may change the foregoing limits on payroll
deductions effective as of any future Offering Date.
10.2 Commencement of Payroll Deductions. Payroll deductions
shall commence on the first payday following the Offering Date and shall
continue to the end of the Offering Period unless sooner altered or terminated
as provided herein.
10.3 Election to Change or Stop Payroll Deductions. During an
Offering Period, a Participant may elect to increase or decrease the rate of or
to stop deductions from his or her Compensation by delivering to the Company's
designated office an amended Subscription Agreement authorizing such change on
or before the Change Notice Date, as defined below. A Participant who elects,
effective following the first payday of an Offering Period, to decrease the rate
of his or her payroll deductions to zero percent (0%) shall nevertheless remain
a Participant in the current Offering Period unless such Participant withdraws
from the Plan as provided in Section 12.1. The "Change Notice Date" shall be a
date prior to the end of the first pay period for which such election is to be
effective as established by the Company from time to time and announced to the
Participants. Unless otherwise established by the Company, the Change Notice
Date shall be the seventh (7th) day prior to the end of the first pay period for
which such election is to be effective.
10.4 Administrative Suspension of Payroll Deductions. The
Company may, in its sole discretion, suspend a Participant's payroll deductions
under the Plan as the Company deems advisable to avoid accumulating payroll
deductions in excess of the amount that could reasonably be anticipated to
purchase the maximum number of shares of Stock permitted (a) under the
Participant's Purchase Right or (b) during a calendar year under the limit set
forth in Section 8.3. Payroll deductions shall be resumed at the rate specified
in such Participant's then effective Subscription Agreement at the beginning,
respectively, of (a) the next Offering Period or (b) the next Offering Period
the Purchase Date of which falls in the following calendar year, unless the
Participant has either withdrawn from the Plan as provided in Section 12.1 or
has ceased to be an Eligible Employee.
10.5 Participant Accounts. Individual bookkeeping accounts
shall be maintained for each Participant. All payroll deductions from a
Participant's Compensation shall be credited to such Participant's Plan account
and shall be deposited with the general funds of the Company. All payroll
deductions received or held by the Company may be used by the Company for any
corporate purpose.
10.6 No Interest Paid. Interest shall not be paid on sums
deducted from a Participant's Compensation pursuant to the Plan.
10.7 Voluntary Withdrawal from Plan Account. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company's designated office a written notice on a form
provided by the Company for such purpose. A Participant who withdraws the entire
remaining balance credited to his or her Plan account shall be deemed to have
withdrawn from the Plan in accordance with Section 12.1. Amounts withdrawn shall
be returned to the Participant as soon as practicable after the notice of
withdrawal and may not be applied to the purchase of shares in any Offering
under the Plan. The Company may from time to time establish or change
limitations on the frequency of withdrawals permitted under this Section,
establish a minimum dollar amount that must be retained in the Participant's
Plan account, or terminate the withdrawal right provided by this Section.
11. PURCHASE OF SHARES.
11.1 Exercise of Purchase Right. On the Purchase Date of an
Offering Period, each Participant who has not withdrawn from the Plan and whose
participation in the Plan has not otherwise terminated before such Purchase Date
shall automatically acquire pursuant to the exercise of the Participant's
Purchase Right the number of whole shares of Stock determined by dividing (a)
the total amount of the Participant's payroll deductions accumulated in the
Participant's Plan account during the Offering Period and not previously applied
toward the purchase of Stock by (b) the Purchase Price. However, in no event
shall the number of shares purchased by the Participant during an Offering
Period exceed the number of shares subject to the Participant's Purchase Right.
No shares of Stock shall be purchased on a Purchase Date on behalf of a
Participant whose participation in the Offering or the Plan has terminated
before such Purchase Date.
11.2 Pro Rata Allocation of Shares. If the number of shares of
Stock which might be purchased by all Participants in the Plan on a Purchase
Date exceeds the number of shares of Stock available in the Plan as provided in
Section 4.1, the Company shall make a pro rata allocation of the remaining
shares in as uniform a manner as practicable and as the Company determines to be
equitable. Any fractional share resulting from such pro rata allocation to any
Participant shall be disregarded.
11.3 Delivery of Certificates. As soon as practicable after
each Purchase Date, the Company shall arrange the delivery to each Participant
of a certificate representing the shares acquired by the Participant on such
Purchase Date; provided that the Company may deliver such shares to a broker
designated by the Company that will hold such shares for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
11.4 Return of Cash Balance. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as practicable after such Purchase Date. However, if the
cash balance to be returned to a Participant pursuant to the preceding sentence
is less than the amount that would have been necessary to purchase an additional
whole share of Stock on such Purchase Date, the Company may retain the cash
balance in the Participant's Plan account to be applied toward the purchase of
shares in the subsequent Offering Period.
11.5 Tax Withholding. At the time a Participant's Purchase
Right is exercised, in whole or in part, or at the time a Participant disposes
of some or all of the shares he or she acquires under the Plan, the Participant
shall make adequate provision for the federal, state, local and foreign tax
withholding obligations, if any, of the Participating Company Group which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 Expiration of Purchase Right. Any portion of a
Participant's Purchase Right remaining unexercised after the end of the Offering
Period to which the Purchase Right relates shall expire immediately upon the end
of the Offering Period.
11.7 Reports and Stockholder Information to Participants. Each
Participant who has exercised all or part of his or her Purchase Right shall
receive, as soon as practicable after the Purchase Date, a report of such
Participant's Plan account setting forth the total payroll deductions
accumulated prior to such exercise, the number of shares purchased, the Purchase
Price for such shares, the date of purchase and the cash balance, if any,
remaining immediately after such purchase that is to be refunded or retained in
the Participant's Plan account pursuant to Section 11.4. The report required by
this Section may be delivered in such form and by such means, including by
electronic transmission, as the Company may determine. In addition, each
Participant shall be provided information concerning the Company equivalent to
that information generally made available to the Company's common stockholders.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 Voluntary Withdrawal from the Plan. A Participant may
withdraw from the Plan by signing and delivering to the Company's designated
office a written notice of withdrawal on a form provided by the Company for this
purpose. Such withdrawal may be elected at any time prior to the end of an
Offering Period; provided, however, that if a Participant withdraws from the
Plan after a Purchase Date, the withdrawal shall not affect shares acquired by
the Participant on such Purchase Date. A Participant who voluntarily withdraws
from the Plan is prohibited from resuming participation in the Plan in the same
Offering from which he or she withdrew, but may participate in any subsequent
Offering by again satisfying the requirements of Sections 5 and 7.1. The Company
may impose, from time to time, a requirement that the notice of withdrawal from
the Plan be on file with the Company's designated office for a reasonable period
prior to the effectiveness of the Participant's withdrawal.
12.2 Return of Payroll Deductions. Upon a Participant's
voluntary withdrawal from the Plan pursuant to Section 12.1, the Participant's
accumulated payroll deductions which have not been applied toward the purchase
of shares shall be refunded to the Participant as soon as practicable after the
withdrawal, without the payment of any interest, and the Participant's interest
in the Plan shall terminate. Such accumulated payroll deductions to be refunded
in accordance with this Section may not be applied to any other Offering under
the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be
an Employee of the Participating Company Group for any reason, including
retirement, disability or death, or upon the failure of a Participant to remain
an Eligible Employee, the Participant's participation in the Plan shall
terminate immediately. In such event, the Participant's accumulated payroll
deductions which have not been applied toward the purchase of shares shall, as
soon as practicable, be returned to the Participant or, in the case of the
Participant's death, to the person or persons entitled thereto under Section 16,
and all of the Participant's rights under the Plan shall terminate. Interest
shall not be paid on sums returned pursuant to this Section 13. A Participant
whose participation has been so terminated may again become eligible to
participate in the Plan by satisfying the requirements of Sections 5 and 7.1.
14. CHANGE IN CONTROL.
14.1 Definitions.
(a) An "Ownership Change Event" shall be deemed to have occurred if any of the
following occurs with respect to the Company: (i) the direct or indirect
sale or exchange in a single or series of related transactions by the
stockholders of the Company of more than fifty percent (50%) of the voting
stock of the Company; (ii) a merger or consolidation in which the Company
is a party; (iii) the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or (iv) a liquidation or dissolution of
the Company.
(b) A "Change in Control" shall mean an Ownership Change Event or a series of
related Ownership Change Events (collectively, the "Transaction") wherein
the stockholders of the Company immediately before the Transaction do not
retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership
of more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations
to which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be. For purposes of the preceding
sentence, indirect beneficial ownership shall include, without limitation,
an interest resulting from ownership of the voting stock of one or more
corporations which, as a result of the Transaction, own the Company or the
Transferee Corporation(s), as the case may be, either directly or through
one or more subsidiary corporations. The Board shall have the right to
determine whether multiple sales or exchanges of the voting stock of the
Company or multiple Ownership Change Events are related, and its
determination shall be final, binding and conclusive.
14.2 Effect of Change in Control on Purchase Rights. In the
event of a Change in Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"Acquiring Corporation"), may assume the Company's rights and obligations under
the Plan. If the Acquiring Corporation elects not to assume the Company's rights
and obligations under outstanding Purchase Rights, the Purchase Date of the then
current Offering Period shall be accelerated to a date before the date of the
Change in Control specified by the Board, but the number of shares of Stock
subject to outstanding Purchase Rights shall not be adjusted. Each Participant
shall be notified in writing at least three (3) business days prior to such
accelerated Purchase Date that the Participant's Purchase Right shall be
exercised automatically on the accelerated Purchase Date, unless prior to such
date the Participant has withdrawn from the Plan as provided in Section 12.1.
All Purchase Rights which are neither assumed by the Acquiring Corporation in
connection with the Change in Control nor exercised as of the date of the Change
in Control shall terminate and cease to be outstanding effective as of the date
of the Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
Neither payroll deductions credited to a Participant's Plan
account nor a Participant' Purchase Right may be assigned, transferred, pledged
or otherwise disposed of in any manner other than by will or the laws of descent
and distribution or as provided in Section 16. Any such attempted assignment,
transfer, pledge or other disposition shall be without effect, except that the
Company may treat such act as an election to withdraw from the Plan as provided
in Section 12.1. A Purchase Right shall be exercisable during the lifetime of
the Participant only by the Participant.
16. DESIGNATION OF BENEFICIARY.
--------------------------
16.1 Designation Procedure. A Participant may file a written
designation of a beneficiary who is to receive (a) shares and cash, if any, from
the Participant's Plan account if the Participant dies subsequent to a Purchase
Date but prior to delivery to the Participant of such shares and cash or (b)
cash, if any, from the Participant's Plan account if the Participant dies prior
to the exercise of the Participant's Purchase Right. If a married Participant
designates a beneficiary other than the Participant's spouse, the effectiveness
of such designation shall be subject to the consent of the Participant's spouse.
A Participant may change his or her beneficiary designation at any time by
written notice to the Company.
16.2 Absence of Beneficiary Designation. If a Participant dies
without an effective designation pursuant to Section 16.1 of a beneficiary who
is living at the time of the Participant's death, the Company shall deliver any
shares or cash credited to the Participant's Plan account to the Participant's
legal representative.
17. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to
compliance with all applicable requirements of federal, state and foreign law
with respect to such securities. A Purchase Right may not be exercised if the
issuance of shares upon such exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or regulations
or the requirements of any securities exchange or market system upon which the
Stock may then be listed. In addition, no Purchase Right may be exercised unless
(a) a registration statement under the Securities Act of 1933, as amended, shall
at the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
18. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by virtue
of the Participant's participation in the Plan until the date of the issuance of
a certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
19. LEGENDS.
-------
The Company may at any time place legends or other identifying
symbols referencing any applicable federal, state or foreign securities law
restrictions or any provision convenient in the administration of the Plan on
some or all of the certificates representing shares issued under the Plan. The
Participant shall, at the request of the Company, promptly present to the
Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED
UNDER THE PLAN IN THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY
NOMINEE)."
20. NOTIFICATION OF DISPOSITION OF SHARES.
The Company may require the Participant to give the Company
prompt notice of any disposition of shares acquired by exercise of a Purchase
Right within two years from the date of granting such Purchase Right or one year
from the date of exercise of such Purchase Right. The Company may require that
until such time as a Participant disposes of shares acquired upon exercise of a
Purchase Right, the Participant shall hold all such shares in the Participant's
name (or, if elected by the Participant, in the name of the Participant and his
or her spouse but not in the name of any nominee) until the lapse of the time
periods with respect to such Purchase Right referred to in the preceding
sentence. The Company may direct that the certificates evidencing shares
acquired by exercise of a Purchase Right refer to such requirement to give
prompt notice of disposition.
21. NOTICES.
-------
All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. INDEMNIFICATION.
In addition to such other rights of indemnification as they may
have as members of the Board or officers or employees of the Participating
Company Group, members of the Board and any officers or employees of the
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan, or
any right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such person is liable
for gross negligence, bad faith or intentional misconduct in duties; provided,
however, that within sixty (60) days after the institution of such action, suit
or proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
23. AMENDMENT OR TERMINATION OF THE PLAN.
------------------------------------
The Board may at any time amend or terminate the Plan, except
that (a) such termination shall not affect Purchase Rights previously granted
under the Plan, except as permitted under the Plan, and (b) no amendment may
adversely affect a Purchase Right previously granted under the Plan (except to
the extent permitted by the Plan or as may be necessary to qualify the Plan as
an employee stock purchase plan pursuant to Section 423 of the Code or to obtain
qualification or registration of the shares of Stock under applicable federal,
state or foreign securities laws). In addition, an amendment to the Plan must be
approved by the stockholders of the Company within twelve (12) months of the
adoption of such amendment if such amendment would authorize the sale of more
shares than are authorized for issuance under the Plan or would change the
definition of the corporations that may be designated by the Board as
Participating Companies.
IN WITNESS WHEREOF, the undersigned Secretary of the Company
certifies that the foregoing sets forth the CIDCO Incorporated 1999 Employee
Stock Purchase Plan as duly adopted by the Board of Directors of the Company on
April 8, 1999.
------------------------------------
Secretary
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</LEGEND>
<CIK> 0000917639
<NAME> CIDCO INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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<RECEIVABLES> 22,407
<ALLOWANCES> 1,127
<INVENTORY> 25,688
<CURRENT-ASSETS> 88,966
<PP&E> 6,653
<DEPRECIATION> 24,457
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0
0
<COMMON> 144
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<SALES> 158,593
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<CGS> 114,904
<TOTAL-COSTS> 44,924
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<INCOME-PRETAX> (30)
<INCOME-TAX> 0
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