Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-15627
8X8, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0142404
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2445 MISSION COLLEGE BLVD.
SANTA CLARA, CA 95054
(408) 727-1885
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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 $.001 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price of the Registrant's common stock on the
Nasdaq National Market System on June 15, 2000, the aggregate market value of
the voting stock held by non-affiliates of the Registrant was $227,103,000.
Shares of the Registrant's common stock held by each officer and director and by
each person who owns 5% or more of the Registrant's 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.
The number of shares of the Registrant's common stock outstanding as of
June 15, 2000 was 23,059,076.
DOCUMENTS INCORPORATED BY REFERENCE
Items 11, 12, and 13 of Part III incorporate information by reference from
the Proxy Statement for the Annual Meeting of Stockholders to be held on August
14, 2000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
8X8, INC.
INDEX
PART I
PAGE
----
Item 1. Business............................................ 2
Item 2. Properties.......................................... 24
Item 3. Legal Proceedings................................... 24
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 25
Item 6. Selected Financial Data............................. 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 26
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................... 32
Item 8. Financial Statements and Supplementary Data......... 32
Consolidated Balance Sheets............................... 34
Consolidated Statements of Operations..................... 35
Consolidated Statements of Stockholders' Equity........... 36
Consolidated Statements of Cash Flows..................... 37
Notes to Consolidated Financial Statements................ 38
Consolidated Quarterly Financial Data..................... 55
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure....................... 55
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................ 55
Item 11. Executive Compensation............................. 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 56
Item 13. Certain Relationships and Related Transactions..... 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 56
Signatures.................................................. 57
Exhibit Index............................................... 58
1
3
This Report on Form 10-K contains forward-looking statements, including but
not limited to those specifically identified as such, that involve risks and
uncertainties. The statements contained in this Report on Form 10-K that are not
purely historical are forward-looking statements, including without limitation
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
Report on Form 10-K are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including, but not limited to, those set forth below under
the headings "Manufacturing," "Competition" and "Factors That May Affect Future
Results" and elsewhere in this Report on Form 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
8x8, Inc., which is doing business today as Netergy Networks, Inc.,
develops and markets telecommunication equipment and technology exclusively for
Internet protocol (IP) telephony applications. The Company has two lines of
products: Advanced Telephony Solutions and Network Communications Technologies.
The Solutions products include network software and appliances that allow
service providers to build IP-based telephone systems. The Technologies product
line includes protocol software and communication semiconductors marketed to
original equipment manufacturers (OEMs) of telephones and terminal adapters, and
to other semiconductor companies. These technologies are used to make
cost-effective IP telephones, as well as cable and DSL modems that are IP
telephony capable.
Today, substantial changes are enveloping the telecommunications industry,
driven by both technological and regulatory changes. The circuit-switched analog
network, which is more than 100 years old, is being replaced by fully digital,
packet-switched networks that are more efficient and that can offer far greater
functionality than the old networks. This new functionality will include
everything from personal phone numbers that move with consumers to unified
messaging to computer control of phone systems. These innovations will increase
productivity and make telephone systems easier to manage for both businesses and
consumers. Deregulation is allowing competition between both local and long
distance telephone companies, making connectivity a commodity and lowering
profit margins for service providers. In this environment, service providers are
being forced to provide innovative new services to differentiate themselves from
their competition and to increase revenues.
This confluence of regulatory and technological change is creating a new
telecommunications landscape, one that will be dominated by services, not
connectivity. As during all market and technical discontinuities, the companies
that provide the tools and infrastructure used to create and deliver these
services will have the opportunity to gain market share at the expense of legacy
providers.
With its combination of network software products for service creation and
communication technologies for network appliances, the Company stands ready to
provide the service delivery products and technologies that service providers
need to prosper on this new landscape.
HISTORY
The Company began developing its multimedia communication technology in the
form of programmable multimedia semiconductors and accompanying software in
1990, and has subsequently become a leading manufacturer of semiconductors for
the embedded videoconferencing and videophone markets. Customers for the
Company's multimedia processors include OEM manufacturers such as Sony
Electronics, Inc., Samsung, Mitsubishi, Panasonic, and PictureTel Corporation.
The primary customer applications for the Company's semiconductors are
multimedia communication terminals (such as videophones, telephones or room
conferencing systems) for the integrated services digital network (ISDN), the
public switched telephone network
2
4
(PSTN), and IP networks such as local area networks (LANs), wide area networks
(WANs), and the Internet. The Company maintains sales and marketing operations
for its multimedia communication semiconductor business, but is focusing
virtually all its research and development efforts on IP telephony products.
In an effort to expand the available market for its multimedia
communication products, and to capitalize on its vertically integrated
technology, the Company began developing low cost consumer videophones and
marketing these products to consumers under the ViaTV brand name in 1997. Over
the next two years, the Company became a leading manufacturer of consumer
videophones. However, in 1999 the Company determined that a combination of
factors including the high cost of maintaining a consumer distribution channel,
the slower than expected growth rate of the consumer videophone market, and the
low gross margins typical of a consumer electronics product made it unlikely
that the consumer videophone business would be profitable in the foreseeable
future. Therefore, the Company announced in April 1999 that it would cease
production of the ViaTV product line and withdraw from its distribution channels
over the subsequent several quarters. By March 2000 the Company had completed
its exit from the consumer videophone business and expects no further revenues
from ViaTV products.
In June 1998, using technology designed for its consumer videophone
business, the Company entered the video monitoring market, focusing on security
applications for small businesses. The Company's first product was the RSM-1500
Remote Surveillance Module, which was subsequently replaced with an improved
RSM-1600 model. The RSM-1600 module enables real-time remote video monitoring
over POTS lines. Its target market is primarily owners of small businesses such
as convenience stores and restaurants who need the ability to view their
premises from any remote location in the world at any time. Other products in
the Company's video monitoring line include the RSM-3000 Remote Surveillance
Module, which enables real-time video monitoring over ISDN lines; the RSM-700
Expander Module, which expands the number of monitoring devices that can attach
to the RSM-1600 or RSM-3000, and the RSM-PC software application, which allows a
PC to view the video feed from the RSM-1600. Until recently, the Company sold
its RSM products to security distributors and dealers in North America and
Europe. However, in 2000 the Company determined that its video monitoring
business was not well aligned with its strategic focus on the IP telephony
market, and in May 2000 announced the sale of its entire video monitoring
business to Interlogix, a leading manufacturer of security equipment. The
Company is currently transitioning its video monitoring operations to Interlogix
and expects no further revenues from this business.
The Company entered the market for embedded IP telephony products in
December 1998 with the announcement of its Audacity Internet Telephony
Processor. The Audacity processor combines IP telephony protocol support with
audio compression/decompression capability and runs multiple simultaneous IP
phone calls on a single integrated circuit. In April 1999, the Company announced
its Netergy Media Hub (formerly known as the Symphony module), an integrated
system product that is based on the Audacity semiconductor and that connects up
to four analog telephone lines to an IP network. In September 1999, the Company
announced its Audacity-T2 IP Phone Processor, which combines all the digital
processing required to implement an IP telephone onto a single integrated
circuit. The Company's embedded IP telephony products target OEM manufacturers
of IP telephony equipment, such as voice-enabled cable and DSL modems, as well
as IP phones and gateways.
In May 1999, the Company acquired Odisei S.A., a privately held developer
of IP telephony software based in Sophia Antipolis, France. The Company has
leveraged the acquisition of Odisei to develop and market IP telephony solutions
to service providers such as competitive local exchange carriers (CLECs) and
Internet service providers (ISPs). In March 2000 the Company announced its
Netergy Advanced Telephony System (ATS), an all-Internet protocol (IP) hosted
iPBX(TM) solution that allows service providers to offer dial tone and advanced
private branch exchange (PBX) services to business customers over any broadband
IP connection, including DSL, cable, T1/E1, frame relay and broadband wireless.
The ATS makes use of the Companies embedded IP telephony products, including the
Netergy Media Hub, semiconductors and embedded IP telephony software.
3
5
In March 2000, the Company announced that it would change its name, subject
to shareholder approval, to Netergy Networks, Inc. The name change reflects the
Company's strategic transition to the IP telephony market.
In May 2000, the Company announced that it had entered into a definitive
agreement to acquire UIForce, Inc., a developer of IP-based software
applications (such as voicemail and unified messaging) based in Montreal,
Canada. UIForce also develops a service creation environment (SCE) that allows
telecommunication service providers to develop, deploy and manage telephony
applications and services to their customers. The Company intends to integrate
the UIForce products into its IP telephony solutions product line.
INDUSTRY BACKGROUND
Traditional telecommunications networks such as the PSTN, ISDN, and
corporate PBXs utilize a "circuit-switched" topology in which two communicating
telephones are connected via a fixed electrical path that travels through a
series of switches across the network. In many cases, the connection between the
terminals consists of both analog and digital components; for example a normal
residential phone call uses an analog connection from each caller's house to the
closest telephone exchange, and a digital connection between the exchanges. The
circuit-switched topology allots a fixed bandwidth to the digital component of
the connection; typically this is 64 kilobits per second (Kbps) for a voice
call.
Circuit-switched networks, such as the PSTN, have been built over decades
for the single purpose of carrying real-time voice communications. These
networks provide very high reliability, a guaranteed quality of service (QoS)
and ubiquitous availability. The common standard of reliability for a voice
network is 99.999% ("five-nines") reliability, meaning that the network can only
be down for a few minutes per year. The vast majority of calls over the PSTN
have imperceptible delay and a consistently satisfactory audio quality known as
"toll quality." In addition, the PSTN is ubiquitous, with over 500 million lines
installed throughout the world.
Circuit-switched networks, however, have some inherent disadvantages.
First, the PSTN was designed to carry low-fidelity audio and nothing else.
Although the PSTN is often used to transmit data -- for dial-up Internet
connections, for example -- and images (facsimiles), it does so at very low data
rates and resolutions, making the PSTN poorly suited for delivering
high-fidelity audio, entertainment-quality video or other rich multimedia
content. PSTN networks are expensive to build because each subscriber's
telephone must be individually connected to the central office switch, which is
several miles away from the average subscriber's location. The PSTN is also less
efficient than modern networks because it allots fixed bandwidth throughout the
duration of each call, whether or not voice is actually being transmitted.
Further, it is difficult for telecommunications service providers to provide new
or differentiated services because the network was not designed to do so.
Equipment providers for the circuit-switched telecommunications network are
traditional switch and PBX (private branch exchange) manufacturers such as
Lucent Technologies, Nortel Networks and Siemens AG. Service providers for this
market are regional Bell operating companies (RBOCs), long distance carriers and
national public telephone companies.
In contrast to the PSTN, data networks -- such as the Internet or a
corporate LAN -- utilize a "packet-switched" topology in which information
between two communicating terminals (for example, a PC downloading a page from a
web server) is transmitted in the form of small data packets that travel through
a series of switches, routers and hubs across the network. Individual packets do
not necessarily travel along the same path, nor arrive in the same order in
which they were sent. If the terminals are not exchanging data then no bandwidth
is allotted to their connection. Information is sent strictly in digital form
over the entire connection, and the most common protocol used for communicating
is the Internet protocol (IP).
Packet-switched networks have been built mainly for carrying non real-time
data. The advantages of such networks are efficiency, flexibility and
scalability. Bandwidth is only consumed when needed. Networks can be built in a
variety of configurations to suit the number of users, client/server application
requirements and
4
6
desired availability of bandwidth. Many terminals can share the same connection
to the network. In terms of scalability, the exponential growth of the Internet
in recent years has proven the scalability of packet networks.
Historically, however, packet-switched networks offer limited or no QoS;
typical networks cannot guarantee that a transmitted packet will arrive at its
destination within a given amount of time, or at all, and cannot guarantee a
minimum bandwidth available to a particular connection. Furthermore, traditional
packet-switched networks offer only moderate reliability; for example, it is not
uncommon for a corporate LAN to be down several hours every month.
Equipment providers for the packet-switched telecommunications network are
data networking companies like Cisco Systems, Inc., 3Com Corporation and Nortel
Networks. Service providers for this market are mainly Internet service
providers (ISPs).
Until recently circuit-switched networks for real-time voice and video
communications have been completely separate from packet-switched data networks.
For example, a typical residential customer uses a different service provider
and a different network for Internet access and for telephone calls. Most
businesses have completely separate networks for voice (based on a PBX) and data
(based on routers and hubs). Recently, however, a strong trend towards the
convergence of voice, video and data over packet-switched networks has emerged
within the telecommunication industry, mainly focused on IP networks. This
convergence has been driven by several factors, including:
- The deregulation of the telecommunications industry, which has allowed
new competitive local exchange carriers (CLECs) and long distance
carriers to compete with established service providers in offering
telephony services. The resulting competition has reduced margins for
long distance services and promises to do so for local telephone service
as well;
- The growth of IP backbone networks for carrying both data and voice;
- The emergence of high-bandwidth, or broadband, access devices such as
cable and DSL modems that extend broadband IP access, and thus the
ability to carry voice, to homes and businesses.
Initial applications for IP telephony focused on reducing long distance and
international toll charges, principally for consumers but also for some large,
multi-national enterprises. The first voice over IP (VoIP) product, launched in
1995, was a software package that allowed PC users to talk for free over the
Internet. Because this service used the public Internet, the quality of calls
was sometimes poor, but the service allowed consumers to avoid paying very high
tariffs on international phone calls. As reliable IP backbone connections became
available, service providers were able to use VoIP to offer reduced long
distance rates (toll bypass) to consumers generally, usually via a 10-10-xxx
access number. In toll bypass applications, calls are routed off the PSTN and
onto the IP network at the local exchange using gateway equipment. The call is
routed back to the PSTN (again via a gateway) at the local exchange nearest the
far end of the call. The advantage of toll bypass is that it lowers the cost of
long distance calls and uses standard telephone equipment (no PC required).
As broadband connectivity to the edge of the network becomes both more
available and less expensive, it will become possible to offer VoIP services to
businesses and consumers. To date, broadband connectivity to residences is not
sufficiently widespread to make VoIP services viable as a consumer service. AT&T
and other cable television system operators are upgrading their systems to make
delivering VoIP services practical, but it will be several years before such
services are widely available to consumers. However, inexpensive broadband IP
connectivity is readily available to businesses in North America today, making
it practical to begin delivery of VoIP services to enterprises. Doing so has the
potential to both substantially lower the cost of telephone service and to
increase the breadth of features available to businesses.
A business today requires an individual phone for each office worker,
typically dozens for small and medium sized enterprises (SMEs). Until recently,
there were two ways that businesses could obtain this type of phone service:
subscribe to Centrex services from their local telephone company or buy a PBX
system. In a Centrex service, the telephone company provides a telephone line
from its central office switch for each "extension" and associates all of the
lines with a central number assigned to the business. Centrex, however,
5
7
scales poorly for both regulatory and architectural reasons. That is, it is
expensive on a per line basis when compared to enterprise-owned PBXs, which
typically deliver additional functionality as well. In addition, Centrex
services do not offer the ability for computer telephony integration (CTI)
application development, require long lead times for moves, adds and changes,
and are difficult to manage.
Rather than subscribe to individual telephone lines for each employee
(Centrex), most companies purchase a PBX, a telephone switch that allows dozens
or hundreds of employees to share a few incoming and outgoing telephone lines,
allowing efficient usage of those lines. Traditional PBXs use circuit-switched
technology and must be installed on the enterprise premise because every phone
is connected to it by an individual cable. These systems are expensive (from
$20,000 to $200,000, depending on the number of extensions), difficult to manage
and maintain, difficult to use, and cannot be easily integrated with the
enterprise's data processing systems.
With the availability of broadband IP connectivity to businesses, however,
a third alternative is emerging: hosted iPBX services. In this model, the
service provider delivers PBX functionality over an IP connection, which reduces
the scaling problems by allowing many extensions to share a single connection.
This solution also offers many of the advantages of an enterprise-owned PBX,
including easy integration with the enterprise data processing system and the
ability to support call centers, while eliminating the capital investment and
maintenance investment required for a PBX.
In order for the IP telephony market to continue to grow, several things
need to occur. First, IP networks must improve their QoS for real-time
communications, managing effects such as packet jitter, packet loss and
unreliable bandwidth, so that toll-quality service can be provided. Second, IP
communications equipment must achieve "five-nines" reliability that users of the
PSTN have come to expect from their telephone service. Third, IP telephone
service providers must offer cost and feature benefits to their customers that
are sufficient to cause the customers to switch away from traditional telephony
service providers.
PRODUCTS
As noted in the Overview, above, the Company has two product lines:
Advanced Telephony Solutions and Network Communication Technologies. Solutions
products include network software and network appliances for the customer
premise to service providers, and Technologies products include primarily IP
telephony semiconductors and protocol software to telecommunications OEMs and
other semiconductor companies.
Advanced Telephony Solutions
The Company offers a range of network software and network appliances that
allow service providers to offer a variety of business communications
applications and services over packet switched networks. Historically,
telecommunications service providers such as local and long distance telephone
companies and ISPs have essentially offered connectivity to their customers,
whether it was voice connectivity or data connectivity. In today's deregulated
telecommunications environment with its multiple communication providers,
connectivity has become a commodity. The rise of ubiquitous, broadband IP
networks has also brought other changes, specifically the ability to deliver
applications over these networks as services, which has in turn given rise to a
new class of service providers: applications service providers (ASPs).
To escape the commodity trap, connectivity providers would like to offer
value-added services such as PBX functionality and voice messaging to business
customers. To take advantage of this trend, the Company has developed a network
application called the Netergy(TM) iPBX Server System, which, over IP networks,
allows service providers to offer PBX functionality as a service to business
customers. Because the Netergy iPBX application uses an IP network instead of a
circuit-switched one, it can be located in the service provider's data center,
which may be miles away from the customer enterprise premise and connected to it
by only a single broadband IP link.
The Netergy iPBX solution was designed to address the shortcomings of
traditional Centrex service offerings in a number of ways. First, the use of an
IP network allows the iPBX to scale easily and economically, because subscribers
can add additional extensions without adding a new cable for each
6
8
extension. Additional IP phones are plugged into the existing LAN. Second, the
iPBX solution was designed to be easy to manage and use by incorporating
graphical user interfaces in the product's administrator and end-user software.
Third, the iPBX was designed with industry standard computer interfaces, making
it easier to integrate with an enterprise's computer and data processing systems
to implement call centers and customer relationship management systems. Finally,
the redundancies built into the system increase its reliability, particularly
when compared to enterprise owned PBXs.
Because service providers require complete, essentially turn-key solutions,
the Company produces the complete range of network software and network
appliances necessary to do so. This is called the Netergy Advanced Telephony
System (ATS). The Company has developed these products based on its own
technology, including IP telephony semiconductors, protocol and vocoder
software, iPBX network software, and user interface software. The table below
describes the Company's current offerings in the Solutions area:
PRODUCT DESCRIPTION
- ------- -----------
Netergy iPBX Server Running on a cluster of five Netra t1 servers from Sun
Software Microsystems, this product is designed to support 100 iPBX
instances with up to 100 extensions each.
Netergy Media Hubs Media Hubs are customer premise equipment that adapt
standard analog telephones and fax machines for IP service.
The Company makes Media Hub models with four and sixteen
lines.
Netergy User Interface A series of Java and Web-based applications designed to
Software allow attendants, end users and system managers to easily
control a Netergy iPBX system.
Netergy iPBX Evaluation A self-contained iPBX system designed to allow service
System providers to evaluate the iPBX system's features and
functionality.
Netergy CTI Software A software development environment designed to allow
Developer's Kit programmers to write, test and prototype computer telephony
integration (CTI) applications.
NETERGY IPBX SERVER SOFTWARE -- Introduced in March 2000, the Netergy iPBX
Server Software runs on a cluster of Sun Microsystems Netra t1s to provide full
PBX functionality over IP networks. The iPBX software was designed specifically
to allow service providers to deliver hosted iPBX services to small- and
medium-sized business customers. The Netergy iPBX will allow service providers
to support up to 100 discrete iPBXs -- each dedicated to an individual
customer -- and up to 10,000 total extensions. The iPBX Server Software is
written completely in Java.
The Netra cluster running the iPBX Server Software is located in the
service provider's data center. It is connected to the customer's premise using
any broadband IP connection, usually DSL or T1. For telephone sets, customers
can use Netergy Media Hubs to adapt standard analog telephones to IP service or
they can use next-generation IP phones. The Netergy iPBX Server System connects
to the PSTN and the long-distance IP backbone through a gateway.
The Netergy iPBX Server Software provides complete PBX functionality: call
hold, call transfer, three-way conferencing, multi-line phone support, paging,
hunt groups, voicemail (optional, includes interactive voice response menuing
and automated call distribution), direct inbound dialing, and more. Each Netergy
iPBX Server can be custom configured for each customer. Support for Sun
Microsystems' Java Telephony Application Programming Interface (JTAPI 1.3)
allows customers to deploy CTI applications from third-party vendors.
Service providers control and configure the iPBX Server Software via a Web
interface, allowing the system administrator to manage the iPBX from any
location using any workstation with a browser. The administrator interface
provides control of phone number block assignment, dial plans, service
provisioning, DID assignments, iPBX status, bandwidth management and network
topology. The iPBX supports external billing, voicemail, interactive voice
response, automatic call distribution, auto attendants, directory service,
unified messaging modules and OSS (operation, service and support) integration.
The iPBX Server Software is in trial deployment, and the Company has not derived
significant revenue from this product to date.
7
9
NETERGY MEDIA HUBS -- The Company makes two models of Media Hubs, the MH4
and MH16, where the number designates the number of analog lines provided. Media
Hubs adapt conventional telephony equipment, such as telephones and fax
machines, to use over IP networks. Each Media Hub supports as many simultaneous
connections as it has analog lines and multiple Media Hubs can be used in an IP
telephony system to provide as many lines as required.
In concert with the Netergy iPBX Server Software, Media Hubs offers a full
range of PBX features, including call waiting, call hold, call transfer,
three-way calling, message waiting indicator, and call forwarding. During a
phone call, the feature set can be controlled via the touch-tone keypad of a
standard telephone. Because it uses standard touch-tone telephones as both its
audio and user interface, Netergy-based systems are both reliable and
cost-effective, especially when compared to proprietary digital PBX telephones.
Media Hubs with 16 lines are designed to be placed in a central wiring
closet, while the four line version is designed to be located near the
telephones that it supports. For example, a Netergy Media Hub MH4 could be
located at the union of four office cubicles, eliminating the need for a
separate twisted-pair wiring network for telephones in an office.
Netergy Media Hubs support the MGCP IP telephony standard with Netergy
extensions for auto-discovery and configuration. All Netergy Media Hubs
incorporate FLASH memory and remote upgrade capability, so that the Netergy iPBX
Server Software can upgrade the Media Hubs automatically via the network as
required.
The MH4 is in limited deployment and the MH16 is in pre-production. The
Company has not derived significant revenue from either product to date.
NETERGY IPBX USER INTERFACE SOFTWARE -- The Company has announced three
user interface applications for the Netergy iPBX Server System: Communication
Center, Switchboard and Administrator. All of these applications are designed to
harness the graphical capabilities of personal computers and workstations to
make the iPBX system easy and intuitive to use.
The Netergy Communications Center software with Call Announcer is designed
for the end users of the iPBX system. It provides Caller ID, call transfers,
conference call setup, on-screen directories, contact management and call
logging. It also lets users set up and control their voicemail, set forwarding
numbers and filters, and set up personal speed dial numbers.
The Netergy Switchboard software is the attendant interface for the Netergy
iPBX System. A Java-based application, Switchboard runs on a personal computer
or workstation to allow attendants route incoming calls to an enterprise with a
point-and-click interface. Switchboard provides caller ID for multiple incoming
calls, extension status, two-click call transfers, corporate voice mailbox
management and multi-attendant support. Its graphical interface minimizes
training and improves attendant productivity.
With the Netergy iPBX, customers control their own moves, adds and changes
using a Java-based application called Netergy Administrator. Adding additional
lines is easy: the customer simply connects an additional Netergy Media Hub to
the IP network. The Netergy Auto Discovery mechanism automatically configures
the Media Hub. The customer then uses Administrator to assign extension numbers,
associate user names and create a voicemail account for each line. Administrator
also allows the customer to define hunt groups, set user permissions, define
phone button functions, set voicemail parameters (optional), etc., all with a
point-and-click interface.
Prototype versions of these interface software packages are in trial
deployment. The Company has derived no significant revenue from these products
to date.
NETERGY IPBX EVALUATION SYSTEM -- The Netergy iPBX Evaluation System allows
service providers to evaluate the Netergy iPBX Server Software. The Evaluation
System offers all of the PBX functionality of the Netergy iPBX, but supports
only two simultaneous instances of the Netergy iPBX Server Software. The
Evaluation System includes all of the hardware and software necessary to
simulate a hosted iPBX environment.
8
10
Service providers can use the Evaluation System to completely deploy a
Netergy iPBX within their laboratories, supporting two iPBX instances and 16
extensions (four per MH4). With this system, service providers can simulate
delivering hosted iPBX services to two separate customers or link the two iPBX
instances together with a virtual tie line.
NETERGY CTI SOFTWARE DEVELOPER'S KIT (SDK) -- The Netergy CTI SDK is a
self-contained software development environment for creating, testing and
debugging Java-based CTI call control applications. The kit is designed to allow
developers to prototype and test CTI applications without requiring access to a
traditional PBX. The SDK contains all of the components a developer needs to
begin creating JTAPI CTI applications, including:
- A developer version of the Netergy iPBX Server Software
- Sample CTI application called ePhone
- Java-based sample code using JTAPI
- A virtual Netergy Media Hub
- Detailed installation and user documentation
Network Communication Technologies
The Company offers a range of technology products that allow
telecommunication equipment OEMs to build IP phones, add IP telephony functions
to DSL and cable modems, build IP to PSTN gateway products, and build IP
telephony systems. Products include semiconductor, embedded software and system
level products.
The Company's IP telephony semiconductor products are based on the
Company's proprietary architecture. This architecture combines, on a single
chip, a custom RISC microprocessor, DSP capability, static random access memory
and proprietary software, which together perform the core processing functions
required for IP telephony and other digital communication applications.
The Company's system level products are based upon its proprietary
semiconductor architecture and are highly integrated gateway systems which allow
for voice and data communications over broadband networks such as cable, DSL,
and LANs.
The table below summarizes the Company's current Network Communication
Technologies product offerings:
PRODUCT DESCRIPTION APPLICATIONS
------- ----------- ------------
Audacity(TM) Internet Telephony Communication semiconductor for IP - Low density analog/IP gateways
Processor phone gateways.
Audacity-T2 IP Phone Processor Communication semiconductor for IP - Cable modem audio communication
phones. systems
- DSL audio communication systems
Veracity VoIP Software Stacks Communication protocol and vocoder - Cable modem audio communication
software for Audacity processors systems
and other industry standard DSPs. - DSL audio communication systems
- Signaling gateways
Netergy Media Hub 4-line VoIP gateway for broadband - IP Centrex systems
networks. - iPBX systems
AUDACITY INTERNET TELEPHONY PROCESSOR -- The Audacity ITP is designed to
support IP based phone terminals and gateways operating over broadband networks.
The Audacity ITP translates audio signals from analog telephones into the
compressed data format needed for real time audio transmission over networks
that use packet protocols, including corporate LANs, WANs and the Internet. Two
versions of the Audacity ITP are available: the 8x84006ARCA provides full-duplex
acoustic echo cancellation, DTMF detection and generation, and SGCP or H.323
communication stacks for up to two channels of G.728, four channels of
9
11
G.723 and up to eight channels of G.711 or G.722. The 8x84106ARCA provides
identical audio performance but adds a graphics display channel for driving TV
or LCD screens for a user interface, or for network data or graphics.
Implemented in the Company's proprietary "dual programmable" architecture, the
Audacity ITP has the flexibility of a general-purpose RISC processor while
supplying the processing power of a single-instruction, multiple-datapath DSP.
The RISC processor runs the user interface and the SGCP or H.323 communication
stacks under the control of a POSIX operating system, which performs memory
management and process scheduling functions. The DSP executes the audio codec,
DTMF detection/generation and echo cancellation routines.
The Audacity ITP is available in quantity, but due to the limited
deployment of IP telephony networks, the Company has not derived significant
revenue from this product to date.
AUDACITY-T2 IP PHONE PROCESSOR -- The Audacity-T2 chip is a single-chip IP
phone processor. It is designed to integrate all of the digital functions
required to build an IP phone onto a single chip, which includes formatting
digital audio data for transmission over packet networks, including Ethernets,
the Internet, DSL links, digital cable systems and so on. The Audacity-T2 chip
uses the Company's proprietary MIPSx5 RISC processor with DSP extensions. As
such, it can run both the communication protocol stacks and vocoder processes
simultaneously, reducing cost and complexity. It supports three protocols: SIP,
MGCP and H.323v2 and the G.711, G.722, G.723, G.726, G.728 and G.729 vocoders.
The chip also executes DTMF detection/generation and echo cancellation routines.
The Audacity-T2 IP Phone Processor is available in sample quantities to
customers. The Company has derived no significant revenue from this product to
date.
VERACITY VOIP EMBEDDED SOFTWARE -- The Veracity software product provides
complex DSP and protocol functions required in VoIP terminal devices. The
Veracity Software, or stack(s), includes three standardized VoIP protocols, six
ITU-standard audio vocoders, a suite of audio services, TCP/IP networking,
network provisioning and management elements and an embedded, real-time
operating system. The Company supplies the Veracity stacks with its Audacity
semiconductors to provide customers with both the chips and the software
required for VoIP terminal applications. The Company also licenses the Veracity
stacks for use on other platforms.
Prototypes of the Veracity VoIP Embedded Software are available for testing
IP telephony terminals and for trial deployments of IP telephony systems. The
Company has derived no significant revenue from this product.
NETERGY MEDIA HUB MH4 -- The Netergy Media Hub MH4, is a four-line, VoIP
gateway designed to be used in a variety of applications including telephony
over cable and DSL networks as well as the emerging iPBX segment. About the size
of a video cassette tape, the Media Hub uses the Audacity ITP to deliver four
independent voice telephone lines over broadband IP networks. Multiple Media
Hubs may be used together for applications requiring more than four telephone
lines.
The Media Hub connects to cable, DSL modems or LANs via a standard Ethernet
connection and it connects up to four telephones with standard RJ-11 connectors.
The Media Hub supports numerous industry standard audio codecs including the
G.711, G.722, G.723 and G.728 audio codecs. Any codec can be used on any line,
and the codecs can be changed dynamically during a call. The Media Hub also
provides full-duplex acoustic echo cancellation (AEC) on each line. With its
multi-codec capability, the module can respond to varying network congestion by
switching among audio codecs both at the initiation of a call and also during a
call. This ability to select lower bandwidth codecs allows system operators to
make the most efficient use of their networks while maintaining call quality.
The Media Hub supports the following call control protocols: H.323, MGCP and the
Cable Labs PacketCable Network Client Specification.
The MH4 is in limited deployment, primarily for system trials. The Company
has not derived significant revenue from this product to date.
SEMICONDUCTOR REFERENCE DESIGNS -- The Company sells reference designs,
based on the Company's semiconductors, that serve as prototype system products.
These reference designs allow a customer to leverage
10
12
the Company's system design expertise and accelerate its time to market with new
products. Each reference design is provided with schematics, complete
documentation, embedded software and board-level software diagnostics.
VIDEOCONFERENCING SEMICONDUCTORS -- Although it is no longer actively
developing and marketing video conferencing semiconductors, the Company
continues to supply and support its videoconferencing semiconductor customers.
These chips are based on the Company's proprietary architecture, which combines,
on a single chip, a custom RISC microprocessor, a high performance DSP core,
static random access memory and proprietary software, which together perform the
core processing functions required by video communication and other digital
video applications. The VCP, LVP and VCPex semiconductors also include
specialized video processing circuitry.
The table below describes the Company's videoconferencing semiconductors
and their applications:
PRODUCT DESCRIPTION APPLICATIONS
- ------- ----------- ------------
Video Communications H.320 compression semiconductor for - PC ISDN video communication add-
Processor (VCP) ISDN video communication systems; in boards
or H.323 semiconductor for LAN - ISDN group video communication
videoconferencing systems or - systems
Internet phone calls. - LAN video communication systems
- Internet phone calls
Low bit-rate H.324 compression semiconductor for - Consumer video telephones for
Videophone Processor POTS video communication systems; POTS
(LVP) Compression semiconductor for video - PC videophone add-in boards for
capture and encoding systems. POTS
- Cameras with embedded compression
- Video capture PC add-in boards
Enhanced Video Successor product to the VCP and - See VCP and LVP applications
Communications LVP. above
Processor (VCPex)
Video to PCI Interface chip which connects the - PC (POTS, ISDN or LAN-based)
Interface Chip (VPIC) VCP/LVP devices to the PCI Bus. video communication boards
TECHNOLOGY
The Company has developed a broad range of telephony technologies,
including telephony call management software, system design, call control
protocol software, vocoders, and semiconductors. The following sections describe
this technology more fully.
Telephony Call Management Software
The foundation of the Company's telephony solution product line is the
Netergy iPBX Server Software package. This PBX software was designed
specifically to allow telephone companies to offer PBX functionality as a
service over broadband IP networks. The PBX software uses an IP network for both
its switching fabric and media connections, providing the call routing, setup
and teardown necessary to establish a connection between two terminals on an IP
network. It also provides a variety of more complex PBX features such as call
transfers, hunt groups, ring groups and n-way conferencing.
The iPBX Server Software runs on a cluster of carrier-grade server
platforms that are located in the service provider's data center. A cluster
typically consists of both active and backup servers. Each active server runs
several copies or "instances" of the iPBX software simultaneously, each of which
is dedicated to a particular customer. The server cluster in the data center is
linked to customer sites with a dedicated broadband IP link such as a T1 or DSL
line. On the customer premise, Netergy Media Hubs or IP telephones are connected
to the IP link via an IP router and Ethernet hubs or switches. Media Hubs
connect standard
11
13
analog telephones and fax machines to the IP network. To provide a high degree
of scalability and reliability, Netergy Networks uses a modular and distributed
architecture for the iPBX system. In this architecture, a single instance of the
iPBX server software provides complete PBX functionality, but it is designed to
support approximately 100 extensions. Limiting the number of extensions
supported limits both the processing capacity and memory requirements of the
server platform, allowing less powerful, less expensive servers to be used.
Multiple iPBX instances can be run on each server, and the system can be scaled
by adding more servers.
This modular approach has another advantage. By limiting the capacity and
therefore the size and processing requirements of the iPBX software, an instance
of the iPBX can be dedicated to a specific customer. Doing so allows each
instance to be customized for each customer by linking it to customer-specific
computer programs for call center automation or by selecting unique functions
for feature phone buttons.
Much of the flexibility of the iPBX is due to the use of abstraction layers
between the core iPBX engine and the devices with which it interfaces and which
it controls. To allow it to interface to a variety of different telephone sets,
PSTN gateways and softswitches, the iPBX uses hardware drivers that support
various industry standard and proprietary call setup and teardown protocols.
Currently, the iPBX supports session initiation protocol (SIP), media gateway
control protocol (MGCP), H.323v2 and a variety of proprietary protocols.
To allow easy integration with computer programs (computer telephony
integration, or CTI), the iPBX was based on the ECTF C.001 specification for PBX
functionality and supports Sun Microsystems' Java Telephony Application Program
Interface (JTAPI 1.3). The ECTF C.001 specification defines a consistent call
control behavior for PBXs, making it easier to develop computer programs that
can control a PBX, and the JTAPI provides an industry standard series of
function calls to allow computer programs to control PBXs from more than one
manufacturer. Computer programs interfaced to the PBX might provide a graphical
user interface to make call transfers or conference calls easy, or they might
connect a company's customer relationship management software directly to the
phone system, displaying customer information on a computer screen when that
customer calls for support.
The Netergy iPBX was written entirely in the Java programming language.
Java provides a number of important advantages over older computer languages
such as C and C++. For example, all Java programs run in a Java Virtual Machine,
which translates Java code to a specific operating environment, such as Windows
or Sun Solaris. The Virtual Machine also provides memory management, eliminating
pointer arithmetic and supplying automatic garbage collection, frequent sources
of problems in other development environments. Java removes coding ambiguities
(direct access to memory, machine dependent integer format, unsigned numbers,
etc.), as well, another common problem with C and C++.
Running each instance of the iPBX in its own Java Virtual Machine (VM)
offers a number of advantages. First, every instance of the iPBX is completely
insulated from every other instance, so a failure in one should never cause a
failure in any other. In other operating environments, system resources such as
communications routines, database managers and so on are frequently shared
between all of the programs that run on that machine. If one program misuses a
display driver, for example, all of the other programs running on that machine
may be affected. Because each Java VM provides all of these resources to the
program it hosts, this kind of inter-process interference does not occur.
A second advantage is security. Because each iPBX instance is separate from
all others, its configuration data is separate also. Thus, it is much less
likely that another user will inadvertently (or purposely) misconfigure another
customer's iPBX.
System Design
The Company has developed expertise in integrating its semiconductors and
software with peripheral components to produce complete IP telephony and
multimedia communication systems. The Company's system technology consists of
modular subsystems that can be combined and rearranged to interface to various
networks (such as POTS, ISDN, Ethernet LAN and home networks) and to interface
to various telephony devices, such as the analog phones in a home. The Company's
system design expertise includes design and
12
14
testing for national and international regulatory requirements such as consumer
safety, public telephone network requirements and electromagnetic emissions.
The Company's system designs are sometimes deployed as the customer premise
equipment and terminals used by the advanced telephony system.
Embedded Software
The Company has developed a broad range of application software that runs
on the Company's semiconductor products. The Company's application software
allows the use of its semiconductors in systems that conform with various
emerging and established international telephony standards for vocoders and call
signaling protocols. By refining its software, the Company can enhance quality,
address new standards and add significant features and functionality to systems
that contain the semiconductor product. In addition, certain of the Company's
customers have licensed source code to which they add proprietary features and
custom interfaces, and in some cases, port to other semiconductor architectures.
Call signaling protocol stacks are complex software programs required to
make voice calls over IP networks, including the Internet. Vocoders format and
compress digital audio signals and serve as the interface between the old phone
networks and new VoIP networks. Developing and establishing interoperability for
VoIP software requires major engineering resources and significant development
time, which is why many OEMs choose to license it instead. The Company's
protocol stacks support the three most commonly deployed VoIP protocols, along
with seven vocoders.
Written entirely in ANSI C, the Companies VoIP software is highly modular
and portable, making it straightforward to use with industry-standard operating
systems. It can be compiled and run unchanged under the Company's own POSIX
micro-kernel, Linux and Solaris. Using a thin translation layer it can be
adapted to run on other embedded operating systems such as VxWorks and pSOS.
The Company's protocol stacks were designed specifically for embedded
applications such as consumer electronics products and terminals, rather than
for personal computers. The stacks are extremely efficient and compact,
requiring a fraction of the memory of PC-derived implementations. The Company
has also designed a compact real-time POSIX micro-kernel along with TCP/IP, RTP
and other network services that provides process scheduling and communication
support services for its protocol stacks and vocoders. This micro-kernel is
appropriate for very low-cost VoIP devices where a large, costly real-time
operating system is not practical.
Semiconductor Architecture
The Company's IP and multimedia communication semiconductors are based on
programmable processor architectures that enable implementation of multimedia
communication applications in a highly efficient manner. In such an application,
a multimedia communication terminal must compress and transmit one or multiple
sources of audio, video, graphics and/or other data while simultaneously
receiving and decompressing similar data from a remote source. The Company's
semiconductor architectures employ 32-bit RISC microprocessor cores which
execute the embedded applications software. Some of the Company's semiconductors
also employ a 64-bit Single Instruction Multiple Data (SIMD) DSP to accelerate
the processing of signal processing intensive operations.
The Company's VCP and LVP semiconductors currently in production are
manufactured using a 5-volt, 0.5 micron, 3-layer metal complementary metal oxide
semiconductor (CMOS) process technology. The VCPex and Audacity Internet
Telephony Processor (ITP) semiconductors currently in production are
manufactured using a 3.3-volt, 0.35 micron, 4-layer metal CMOS process
technology. The Audacity-T2 IP Phone Processor semiconductor currently available
as engineering samples is manufactured using a 1.8 volt, 0.18 micron, 6-layer
metal CMOS process technology.
The Company's RISC processor cores use a proprietary instruction set
specifically designed for multimedia communication applications. The RISC cores
control the overall chip operation and manage the input/output interface through
a variety of specialized ports which connect the chip directly to external host,
audio and network subsystems. The cores are programmable in the C programming
language and allow
13
15
customers to add their own features and functionality to the device software
provided by the Company. The RISC cores access 32-bit instructions and data
through a bus that interfaces to internal and external static random access
memory (SRAM). The RISC core in the Audacity-T2 semiconductor also contains an
extended instruction set to execute specialized DSP instructions.
The Company's DSP core architecture is a SIMD processor that implements
computationally intensive video, audio and graphics processing routines as well
as certain digital communications protocols. The DSP core in the VCP and LVP
semiconductors operates at frequencies up to 72 MHz, while the VCPex and
Audacity ITP DSP cores operate at 80 MHz. A new version of the Audacity ITP DSP
core is in design which is intended to operate at up to 125 MHz. The DSP cores
are programmable with a proprietary instruction set consisting of
variable-length 32-bit and 64-bit microcode instructions that provide the
flexibility to improve algorithm performance, enhance video and/or audio quality
and maintain compliance with changing digital video, audio, graphics and
communication protocol standards. The DSP cores access their instructions
through an internal bus that interfaces to on-chip SRAM and ROM that is
preprogrammed with video and audio processing subroutines.
The RISC and DSP cores combined provide an efficient and flexible
architecture that can be reconfigured through a change of application software.
This flexibility allows the architecture to implement the fundamental processing
steps that form the basis of MGCP, SIP and H.323 standards-based audio telephony
systems and H.320, H.323 and H.324 (together, H.32x) standards-based video
communication systems in embedded software that runs on the integrated circuit
device.
CUSTOMERS AND MARKETING
Advanced Telephony Solutions
CUSTOMERS -- During fiscal 2000, the Company announced the Netergy iPBX
Server Software and a limited external deployment of hosted iPBX services based
on it by Dialink, a competitive local exchange carrier (CLEC) based in the San
Francisco Bay Area. In addition to the Dialink customer trial, the Company is in
laboratory trial testing with several other service providers and has obtained
INIP certification, which provides for system interoperability with leading
telecommunications vendor products. The Company is currently establishing
contact with a range of service providers in preparation for general
availability of the iPBX software product in the second half of fiscal 2001.
SALES AND MARKETING -- The Company markets the iPBX software and integrated
third-party software products through a direct sales force. In addition, the
Company has established a relationship with Exodus Communications, a hosted
service provider partner, and intends to establish relationships with system
integrators that can serve as resellers. The sales force operates from the
Company's headquarters in Santa Clara, California, to support sales in North
America. The Company uses a combination of employees and outside contractors to
provide the business modeling tools, sales presentations, product literature and
technical publications (white papers) necessary to support the direct sales of
the iPBX products. The Company also utilizes several marketing programs to
support the sale and distribution of its products, including participation in
industry trade shows and conferences. The Company also publishes technical
articles, distributes sales and product literature and has an active public
relations plan to encourage coverage of the Company's products and technology by
the media.
COMPETITION -- The Company competes with suppliers of traditional PBXs,
Centrex equipment and newer generation IP-based solutions that seek to sell such
products to telecommunication service providers, which in turn offer voice
services to the Small Medium Enterprise (SME) marketplace. This market is
rapidly shifting to a network centric, IP-based solutions model. New IP-based
solutions are cannibalizing traditional markets due to increased efficiencies of
IP technology, lower costs, increases in return on investment (ROI), improved
features sets and the requirement for rapid innovation. As an IP-based solution,
the Solutions iPBX product competes by leveraging the innate efficiencies of IP
architectures and combining those efficiencies with best-of-class features from
competitive products. This market is characterized by rapid technological
change, intense competition and first mover advantage.
14
16
The main competition includes Lucent, Nortel Networks, VocalData, VocalTec
Communications, Inter-tel and several other providers of traditional and newer
generation IP-based solutions. Although each of these companies is in
competition with the Company's iPBX product suite, all today provide solutions
based on past-generation integrated solutions, whereas the ATS product suite and
hosted iPBX establishes a new methodology for addressing an existing growth
market. Directly competitive products targeted for general release in calendar
year 2001 are currently under development at several pre-IPO startup companies,
including BroadSoft, Sylantro Systems, IPCell Technologies and Shoreline
Communications.
Principle competitive factors in the market for hosted iPBX solutions
include product feature parity, interface design, product reliability,
time-to-market, adherence to standards, price, functionality and IP network
delivery/design. The Company believes that the market for iPBX solutions is
currently in the initial adoption phase and that growth of the market will be
driven by the ability of iPBX products to meet the advanced feature requirements
of service providers, by the lower costs of IP-based solutions, and by a general
trend toward the replacement of circuit-switched networks with packet switched
ones.
We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. If our
competitors successfully introduce new products or enhance their existing
products, this could reduce the sales or market acceptance of our products and
services, increase price competition or make our products obsolete. To be
competitive, we must continue to invest significant resources in research and
development, sales and marketing and customer support. We may not have
sufficient resources to make these investments or to make the technological
advances necessary to be competitive, which in turn will cause our business to
suffer.
Network Communication Technologies
CUSTOMERS -- The Company markets its OEM semiconductor, system and software
products through its own direct sales force as well as through distributors. The
Company sells its Audacity ITP and Audacity-T2 semiconductors to OEMs of VoIP
products such as Philips and CIDCO. In March 2000, the Company announced that is
would actively pursue customers to license portions of its semiconductor
technology and to license its VoIP firmware for operation on third party
processors. The Company has already licensed portions of its semiconductor
technology and VoIP firmware to STMicroelectronics and to Alcatel
Microelectronics. The Company is also selling its Media Hub system technology
through partners such as AG Communications to establish initial market presence.
The Company sells its LVP semiconductors and related software and reference
board designs to OEMs of POTS video communication systems for the consumer
market such as Kyushu Matsushita Electric Co., Ltd., (KME), Samsung, Leadtek
Research, Inc., and Truedox Technology Corporation. The Company is selling its
VCP and VCPex semiconductors and related software and reference designs
primarily to OEMs of ISDN office videoconferencing systems including PictureTel
Corporation, Sony Electronics, Inc., Ezenia!, VCON Telecommunications Ltd. and
VTEL Corporation.
SALES AND MARKETING -- The Company employs a direct sales force to market
its Technologies products that supports domestic and international sales and
operates from the Company's headquarters in Santa Clara, California and a
European office in London, England. The Company's sales and marketing personnel
typically provide support to its OEM and distributor customers through sales
literature, periodic training, customer symposia, pre-sales support and joint
sales calls. The Company utilizes several marketing programs to support the sale
and distribution of its products, including participation in industry trade
shows and conferences. The Company also publishes technical articles,
distributes sales and product literature and has an active public relations plan
to encourage coverage of the Company's products and technology by the media.
COMPETITION -- With regard to its Technologies product line, the Company
competes with both manufacturers of digital signal processing semiconductors and
media hub products developed for the growing VoIP marketplace. The Company also
competes with manufacturers of multimedia communication semiconductors, and
systems. The markets for the Company's products are characterized by intense
competition, declining average selling prices and rapid technological change.
15
17
The principal competitive factors in the market for IP telephony and
videoconferencing semiconductors and firmware include product definition,
product design, system integration, chip size, code size, functionality,
time-to-market, adherence to industry standards, price and reliability. The
Company has a number of competitors in this market including Analog Devices,
Audio Codes, Broadcom Corporation, Conexent, DSP Group, Lucent Technologies,
Motorola, Inc., Philips Electronics, Texas Instruments/Telogy Networks, Inc.,
Mitel Semiconductors, Winbond Electronics, and Radvision Ltd. Certain of the
Company's competitors for IP telephony and videoconferencing semiconductors
maintain their own semiconductor foundries and may therefore benefit from
certain capacity, cost and technical advantages.
Principle competitive factors in the market for VoIP media hub products
include product definition, product design, system integration, system
functionality, time-to-market, interoperability with common network equipment,
adherence to industry standards, price and reliability. Currently there are a
limited number of system suppliers offering residential and small office VoIP
media hub-like products, including Komodo Technology, Soliton Systems, Nx
Networks and MCK Communications. The Company expects, however, that this market
will be characterized by intense competition, declining average selling price
and rapid technology change. In addition, the presence of the Company in the
VoIP systems business may result in certain customers or potential customers
perceiving the Company as a competitor or potential competitor, which may be
used by other semiconductor manufacturers to their advantage.
The Company's reliance on developing vertically integrated technology,
comprising systems, circuit boards, software and semiconductors, places a
significant strain on the Company and its research and development resources.
Competitors that focus on one aspect of technology, such as systems or
semiconductors, may have a considerable advantage over the Company. In addition,
many of the Company's current and potential competitors have longer operating
histories, are substantially larger, and have greater financial, manufacturing,
marketing, technical and other resources. Many also have greater name
recognition and a larger installed base of products than the Company.
Competition in the Company's markets may result in significant price reductions.
As a result of their greater resources, many current and potential competitors
may be better able than the Company to initiate and withstand significant price
competition or downturns in the economy. There can be no assurance that the
Company will be able to continue to compete effectively, and any failure to do
so would have a material adverse effect on the Company's business and operating
results.
MANUFACTURING
The Company outsources the manufacturing of its semiconductors and its IP
telephony system products to independent foundries and subcontract
manufacturers, respectively. The Company's primary semiconductor manufacturer is
Taiwan Semiconductor Manufacturing Corporation. Subcontract manufacturers
include EFA Corporation in Taiwan. The Company also relies on Amkor Electronics
in South Korea, Integrated Packaging Assembly Corporation in San Jose,
California, and Digital Testing Services in Santa Clara, California, for
packaging and testing of its semiconductors. The Company does not have long term
purchase agreements with its subcontract manufacturers or its component
suppliers. There can be no assurance that the Company's subcontract
manufacturers will be able or willing to reliably manufacture the Company's
products, or that the Company's component suppliers will be able or willing to
reliably supply components for the Company's products, in volumes, on a cost
effective basis or in a timely manner. The Company may experience difficulties
due to its reliance on independent semiconductor foundries, subcontract
manufacturers and component suppliers that could have a material adverse effect
on the Company's business and operating results.
RESEARCH AND DEVELOPMENT
Research and development expenses in the fiscal years ended March 31, 2000,
1999 and 1998 were $11.9 million, $9.9 million and $12.3 million, respectively.
The Company's development of new products and the enhancement of existing
products is essential to its success. Accordingly, the Company anticipates that
research and development expenses will continue to increase in the foreseeable
future. However, such expenses may fluctuate from quarter to quarter depending
on a wide range of factors, including the status of and prospects for various
development projects.
16
18
The Company's current and future research and development efforts relate
primarily to digital and multimedia communication systems and the components
which comprise those systems. Areas of emphasis will include enhanced versions
of its advanced telephony system and digital communication semiconductor
architectures intended to provide higher performance, enhanced functionality and
further integration of certain essential system functions. This integration is
designed to permit improved system price/performance. To expand its line of
telephony products, the Company is developing new form factors, network
topologies and embedded systems that are designed to comply with new and
emerging IP telephony standards. Future software developments may focus on
emerging audio and video telephony standards and protocols, quality and
performance enhancements to multimedia compression algorithms and additional
features supporting both the Company's Advanced Telephony Solutions and Network
Communication Technologies products.
If the Company is unable to develop and introduce new or enhanced products
in a timely manner, or if such new or enhanced products do not achieve
sufficient market acceptance, it would have a material adverse effect on the
Company's business and operating results.
LICENSING AND DEVELOPMENT ARRANGEMENTS
The Company has entered into licensing and development arrangements with
its customers to promote the design, development, manufacture and sale of the
Company's products. In order to encourage the use of its semiconductors, the
Company has licensed portions of its systems technology and software object code
for its semiconductors to virtually all of its semiconductor customers.
Moreover, many of the Company's OEM customers have licensed portions of the
source code to its software for its semiconductors. The Company intends to
continue to license its semiconductor, software and systems technology to other
companies, many of which are current or potential competitors of the Company.
Such arrangements may enable these companies to use the Company's technology to
produce products that compete with the Company's IP telephony and video
products.
The Company has also licensed the right to manufacture certain of its
multimedia communication semiconductors, subject to payment of royalties, to
several videoconferencing systems manufacturers. In addition, the Company has
licensed portions of its multimedia communication semiconductor technology to
ESS Technology. In addition, the Company has licensed portions of its embedded
software and DSP core technology to STMicroelectronics. Of these licensees, ESS
Technology and STMicroelectronics may sell semiconductors based on the licensed
technology to third parties, while the other licensees are limited to sale of
such semiconductors as part of multimedia communication systems or sub-systems.
The obligation of ESS Technology to pay royalties to the Company with regard to
the sale of semiconductors based on the licensed technology will expire in
October 2000.
In the fiscal years ended March 31, 2000, 1999 and 1998, technology
licensing revenues (all of which were nonrecurring) were $4.6 million, $5.5
million and $14.5 million, respectively. There can be no assurance that the
Company will receive such licensing revenues in the future.
The Company has in the past licensed and in the future expects to
continuing licensing its technology to others, many of whom are located or may
be located abroad. There are no assurances that such licensees will protect the
Company's technology from misappropriation.
In addition to licensing its technology to others, the Company from time to
time will take a license to others' technology. The Company relies upon certain
technology, including hardware and software, licensed from third parties. The
loss of, or inability to maintain, existing licenses could have a material
adverse effect on the Company's business and operating results.
EMPLOYEES
As of March 31, 2000, the Company employed a total of 147 people, including
19 in manufacturing operations, 72 in research and development, 38 in sales and
marketing and 18 in general and administrative capacities. The Company also
employs a number of temporary employees and consultants on a contract basis.
17
19
FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE A HISTORY OF LOSSES AND WE ARE UNCERTAIN AS TO OUR FUTURE PROFITABILITY
We recorded an operating loss of $27.1 million in the year ended March 31,
2000 and had an accumulated deficit of $53.7 million at March 31, 2000. In
addition, we recorded operating losses for the fiscal year ended March 31, 1999
and in three of the four quarters in fiscal 1998. We would not have been
profitable in fiscal 1998 had we not received nonrecurring license and other
revenues. We expect to continue to incur operating losses for the foreseeable
future, and such losses may be substantial. We will need to generate significant
revenue growth to achieve profitability. Given our history of fluctuating
revenues and operating losses, we cannot be certain that we will be able to
achieve profitability on either a quarterly or annual basis.
THE GROWTH OF OUR BUSINESS AND FUTURE PROFITABILITY DEPENDS ON FUTURE IP
TELEPHONY REVENUE
We believe that our business and future profitability will be largely
dependent on widespread market acceptance of our IP telephony products. Our
videoconferencing semiconductor business has not provided, nor is it expected to
provide, sufficient revenues to profitably operate our business. To date, we
have not generated significant revenue from the sale of our IP telephony
products. If we are not able to generate significant revenues selling into the
IP telephony market, it would have a material adverse effect on our business and
operating results.
THE GROWTH OF OUR BUSINESS DEPENDS ON THE GROWTH OF THE IP TELEPHONY MARKET
Success of our IP telephony product strategy assumes that there will be
future demand for IP telephony systems. In order for the IP telephony market to
continue to grow, several things need to occur. Telephone service providers must
continue to invest in the deployment of high speed broadband networks to
residential and commercial customers. IP networks must improve quality of
service for real-time communications, managing effects such as packet jitter,
packet loss and unreliable bandwidth, so that toll-quality service can be
provided. IP telephony equipment must achieve the 99.999% reliability that users
of the public switched telephone network have come to expect from their
telephone service. IP telephony service providers must offer cost and feature
benefits to their customers that are sufficient to cause the customers to switch
away from traditional telephony service providers. If any or all of these
factors fail to occur our business may not grow.
OUR FUTURE OPERATING RESULTS MAY NOT FOLLOW PAST OR EXPECTED TRENDS DUE TO MANY
FACTORS AND ANY OF THESE COULD CAUSE OUR STOCK PRICE TO FALL
Our historical operating results have fluctuated significantly and will
likely continue to fluctuate in the future, and a decline in our operating
results could cause our stock price to fall. On an annual and a quarterly basis
there are a number of factors that may affect our operating results, many of
which are outside our control. These include, but are not limited to:
- changes in market demand;
- the timing of customer orders;
- competitive market conditions;
- lengthy sales cycles, regulatory approval cycles;
- new product introductions by us or our competitors;
- market acceptance of new or existing products;
- the cost and availability of components;
- the mix of our customer base and sales channels;
- the mix of products sold;
- the management of inventory;
18
20
- the level of international sales;
- continued compliance with industry standards; and
- general economic conditions.
Our gross margin is affected by a number of factors including, product mix,
the recognition of license and other revenues for which there may be no or
little corresponding cost of revenues, product pricing, the allocation between
international and domestic sales, the percentage of direct sales and sales to
resellers, and manufacturing and component costs. The markets for our products
are characterized by falling average selling prices. We expect that, as a result
of competitive pressures and other factors, gross profit as a percentage of
revenue for our semiconductor products will likely decrease for the foreseeable
future. The market for IP telephony semiconductors is likely to be a high volume
market characterized by commodity pricing. We will not be able to generate
average selling prices or gross margins for our IP telephony semiconductors
similar to those that we have historically commanded for our videoconferencing
semiconductors. In addition, the gross margins for our Media Hub systems
products are, and will likely continue to be, substantially lower than the gross
margins for our videoconferencing semiconductors. In the likely event that we
encounter significant price competition in the markets for our products, we
could be at a significant disadvantage compared to our competitors, many of
which have substantially greater resources, and therefore may be better able to
withstand an extended period of downward pricing pressure.
Variations in timing of sales may cause significant fluctuations in future
operating results. In addition, because a significant portion of our business
may be derived from orders placed by a limited number of large customers,
including OEM customers, the timing of such orders can also cause significant
fluctuations in our operating results. Anticipated orders from customers may
fail to materialize. Delivery schedules may be deferred or canceled for a number
of reasons, including changes in specific customer requirements or international
economic conditions. The adverse impact of a shortfall in our revenues may be
magnified by our inability to adjust spending to compensate for such shortfall.
Announcements by us or our competitors of new products and technologies could
cause customers to defer purchases of our existing products, which would also
have a material adverse effect on our business and operating results.
As a result of these and other factors, it is likely that in some or all
future periods our operating results will be below the expectations of
securities analysts or investors, which would likely result in a significant
reduction in the market price of our common stock.
WE MAY NOT BE ABLE TO MANAGE OUR INVENTORY LEVELS EFFECTIVELY WHICH MAY LEAD TO
INVENTORY OBSOLESCENCE WHICH WOULD FORCE US TO LOWER OUR PRICES
Our products have lead times of up to several months, and are built to
forecasts that are necessarily imprecise. Because of our practice of building
our products to necessarily imprecise forecasts, it is likely that, from time to
time, we will have either excess or insufficient product inventory. Excess
inventory levels would subject us to the risk of inventory obsolescence and the
risk that our selling prices may drop below our inventory costs, while
insufficient levels of inventory may negatively affect relations with customers.
Any of these factors could have a material adverse effect on our operating
results and business.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO SUPPORT OUR GROWTH, AND FAILURE TO DO
SO IN A TIMELY MANNER MAY CAUSE US TO DELAY OUR PLANS FOR GROWTH
As of March 31, 2000, we had approximately $48.6 million in cash and cash
equivalents. We believe that we will be able to fund planned expenditures and
satisfy our cash requirements for at least the next twelve months from existing
cash balances. However, we may seek to explore business opportunities, including
acquiring or investing in complementary businesses or products, that will
require additional capital from equity or debt sources. Additionally, the
development and marketing of new products could require a significant commitment
of resources, which could in turn require us to obtain additional financing
earlier than otherwise expected. We may not be able to obtain additional
financing as needed on acceptable terms, or at all, which would force us to
delay our plans for growth and implementation of our strategy which could
seriously harm
19
21
our business, financial condition and results of operations. If we issue
additional equity or convertible debt securities to raise funds, the ownership
percentage of our existing stockholders would be reduced. New investors may
demand rights, preferences or privileges senior to those of existing holders of
our common stock.
WE DEPEND ON PURCHASE ORDERS FROM KEY CUSTOMERS AND FAILURE TO RECEIVE
SIGNIFICANT PURCHASE ORDERS IN THE FUTURE WOULD CAUSE A DECLINE IN OUR OPERATING
RESULTS
Historically, a significant portion of our sales have been to relatively
few customers, although the composition of these customers has varied. Revenues
from our ten largest customers for the fiscal years ended March 31, 2000, 1999
and 1998 accounted for approximately 35%, 40% and 61%, respectively, of total
revenues. 3Com Corp. accounted for 20% of total revenues during the year ended
March 31, 1998. Substantially all of our product sales have been made, and are
expected to continue to be made, on a purchase order basis. None of our
customers has entered into a long-term agreement requiring it to purchase our
products. In the future, we will need to gain purchase orders for our products
to earn additional revenue. Further, all of our license and other revenues are
nonrecurring.
THE IP TELEPHONY MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE DEPEND
ON NEW PRODUCT INTRODUCTION IN ORDER TO MAINTAIN AND GROW OUR BUSINESS
IP telephony is an emerging market that is characterized by rapid changes
in customer requirements, frequent introductions of new and enhanced products,
and continuing and rapid technological advancement. To compete successfully in
this emerging market, we must continue to design, develop, manufacture and sell
new and enhanced products that provide increasingly higher levels of performance
and reliability and lower cost, take advantage of technological advancements and
changes, and respond to new customer requirements. Our success in designing,
developing, manufacturing and selling such products will depend on a variety of
factors, including:
- the identification of market demand for new products;
- product selection;
- timely implementation of product design and development;
- product performance;
- cost-effectiveness of products under development;
- effective manufacturing processes; and
- the success of promotional efforts.
We have in the past experienced delays in the development of new products
and the enhancement of existing products, and such delays will likely occur in
the future. If we are unable, due to resource constraints or technological or
other reasons, to develop and introduce new or enhanced products in a timely
manner, if such new or enhanced products do not achieve sufficient market
acceptance or if such new product introductions decrease demand for existing
products our operating results would decline and our business would not grow.
IF WE DO NOT DEVELOP AND MAINTAIN SUCCESSFUL PARTNERSHIPS FOR IP TELEPHONY
PRODUCTS, WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR SOLUTIONS
We are entering into new market areas and our success is partly dependent
on our ability to forge new marketing and engineering partnerships. IP telephony
communications systems are extremely complex and no single company possesses all
the required technology components needed to build a complete end to end
solution. Partnerships will be required to augment our development programs and
to assist us in marketing complete solutions to our targeted customers. We may
not be able to develop such partnerships in the course of our product
development. Even if we do establish the necessary partnerships, we may not be
able to adequately capitalize on these partnerships to aid in the success of our
business.
20
22
INABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY OR INFRINGEMENT BY US OF A THIRD
PARTY'S PROPRIETARY TECHNOLOGY WOULD DISRUPT OUR BUSINESS
We rely in part on trademark, copyright and trade secret law to protect our
intellectual property in the United States and abroad. We seek to protect our
software, documentation and other written materials under trade secret and
copyright law, which afford only limited protection. We also rely in part on
patent law to protect our intellectual property in the United States and abroad.
We currently hold nineteen United States patents, including patents relating to
programmable integrated circuit architectures, telephone control arrangements,
software structures and memory architecture technology, and have a number of
United States and foreign patent applications pending. We cannot predict whether
such patent applications will result in an issued patent. We may not be able to
protect our proprietary rights in the United States or abroad (where effective
intellectual property protection may be unavailable or limited) and competitors
may independently develop technologies that are similar or superior to our
technology, duplicate our technology or design around any patent of ours. We
have in the past licensed and in the future expect to continue licensing our
technology to others, many of whom are located or may be located abroad. There
are no assurances that such licensees will protect our technology from
misappropriation. Moreover, litigation may be necessary in the future to enforce
our intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
management time and resources and could have a material adverse effect on our
business and operating results.
There has been substantial litigation in the semiconductor, electronics and
related industries regarding intellectual property rights, and from time to time
third parties may claim infringement by us of their intellectual property
rights. Our broad range of technology, including systems, digital and analog
circuits, software and semiconductors, increases the likelihood that third
parties may claim infringement by us of their intellectual property rights. If
we were found to be infringing on the intellectual property rights of any third
party, we could be subject to liabilities for such infringement, which could be
material, and we could be required to refrain from using, manufacturing or
selling certain products or using certain processes, either of which could have
a material adverse effect on our business and operating results. From time to
time, we have received, and may continue to receive in the future, notices of
claims of infringement, misappropriation or misuse of other parties' proprietary
rights. There can be no assurance that we will prevail in these discussions and
actions, or that other actions alleging infringement by the Company of
third-party patents will not be asserted or prosecuted against the Company.
We rely on certain technology, including hardware and software licensed
from third parties. The loss of, or inability to maintain, existing licenses
could have a material adverse effect on our business and operating results.
THE FAILURE OF IP NETWORKS TO MEET THE RELIABILITY AND QUALITY STANDARDS
REQUIRED FOR VOICE COMMUNICATIONS WOULD RENDER OUR PRODUCTS OBSOLETE
Circuit-switched networks such as the public switched telephone network
feature a very high reliability, with a guaranteed quality of service. The
common standard for reliability of carrier-grade real-time voice communications
is 99.999%, meaning that the network can be down for only a few minutes per
year. In addition, such networks have imperceptible delay and consistently
satisfactory audio quality. Emerging broadband IP networks such as LANs, WANs
and the Internet, or emerging last mile technologies such as cable, DSL and
wireless local loop will not be used for telephony unless such networks and
technologies can provide reliability and quality consistent with these
standards.
OUR PRODUCTS MUST COMPLY WITH INDUSTRY STANDARDS AND FCC REGULATIONS, AND
CHANGES MAY REQUIRE US TO MODIFY EXISTING PRODUCTS
In addition to reliability and quality standards, the market acceptance of
telephony over broadband IP networks is dependent upon the adoption of industry
standards so that products from multiple manufacturers are able to communicate
with each other. IP telephony products rely heavily on standards such as H.323,
SIP,
21
23
SGCP, MGCP, and H.GCP to interoperate with other vendors' equipment. There is
currently a lack of agreement among industry leaders about which standard should
be used for a particular application, and about the definition of the standards
themselves. Furthermore, the industry has had difficulty achieving true
multivendor interoperability for highly complex standards such as H.323. We also
must comply with certain rules and regulations of the Federal Communications
Commission regarding electromagnetic radiation and safety standards established
by Underwriters Laboratories as well as similar regulations and standards
applicable in other countries. Standards are continuously being modified and
replaced. As standards evolve, we may be required to modify our existing
products or develop and support new versions of our products. The failure of our
products to comply, or delays in compliance, with various existing and evolving
industry standards could delay or interrupt volume production of our IP
telephony products, which would have a material adverse effect on our business
and operating results.
FUTURE REGULATION OR LEGISLATION COULD RESTRICT OUR BUSINESS OR INCREASE OUR
COST OF DOING BUSINESS
At present there are few laws or regulations that specifically address
access to or commerce on the Internet, including IP telephony. We are unable to
predict the impact, if any, that future legislation, legal decisions or
regulations concerning the Internet may have on our business, financial
condition and results of operations. Regulation may be targeted towards, among
other things, assessing access or settlement charges, imposing tariffs or
imposing regulations based on encryption concerns or the characteristics and
quality of products and services, which could restrict our business or increase
our cost of doing business. The increasing growth of the broadband IP telephony
market and popularity of broadband IP telephony products and services heighten
the risk that governments will seek to regulate broadband IP telephony and the
Internet. In addition, large, established telecommunications companies may
devote substantial lobbying efforts to influence the regulation of the broadband
IP telephony market, which may be contrary to our interests.
WE MAY TRANSITION TO SMALLER GEOMETRY PROCESS TECHNOLOGIES AND HIGHER LEVELS OF
DESIGN INTEGRATION WHICH COULD DISRUPT OUR BUSINESS
We continuously evaluate the benefits, on an integrated circuit,
product-by-product basis, of migrating to smaller geometry process technologies
in order to reduce costs. We have commenced migration of certain future products
to smaller geometry processes. We believe that the transition of our products to
increasingly smaller geometries will be important for us to remain competitive.
We have in the past experienced difficulty in migrating to new manufacturing
processes, which has resulted and could continue to result in reduced yields,
delays in product deliveries and increased expense levels. Moreover, we are
dependent on relationships with our foundries and their partners to migrate to
smaller geometry processes successfully. If any such transition is substantially
delayed or inefficiently implemented we may experience delays in product
introductions and incur increased expenses. As smaller geometry processes become
more prevalent, we expect to integrate greater levels of functionality as well
as customer and third-party intellectual property into our products. Some of
this intellectual property includes analog components for which we have little
or no experience or in-house expertise. We cannot predict whether higher levels
of design integration or the use of third-party intellectual property will
adversely affect our ability to deliver new integrated products on a timely
basis, or at all.
OUR ANNOUNCED ACQUISITION OF UFORCE, INC. AND ANY FUTURE ACQUISITIONS MAY BE
DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION
We announced our intention to acquire UForce on May 19, 2000. Completion of
the transaction is subject to certain closing conditions. To the extent that we
are successful in closing the transaction, there are risks associated with the
assimilation and integration of UForce, including:
- unanticipated problems and costs associated with combining the businesses
and integrating UForce's products and technologies;
- impact of integration efforts on management's attention to our core
business;
- adverse effects on existing business relationships with suppliers and
customers;
22
24
- risks associated with entering markets in which we have limited or no
prior experience; and
- potential loss of key employees, particularly those of the acquired
organizations.
If we are unable to successfully integrate UForce or to create new or
enhanced products, we may not achieve the anticipated benefits from the pending
acquisition. If we fail to achieve the anticipated benefits from the
acquisition, we may incur increased expenses, experience a shortfall in our
anticipated revenues and we may not obtain a satisfactory return on our
investment. In addition, if any significant number of UForce employees fail to
remain employed with us, we may experience difficulties in achieving the
expected benefits of the acquisition.
Beginning in the three months ended September 30, 2000, we will begin to
incur charges associated with this acquisition including amortization of
intangible assets and goodwill, in-process research and development and
potentially from non-cash compensation charges associated with certain stock
options assumed as part of the transaction. We expect these charges to be
significant.
IF WE DISCOVER PRODUCT DEFECTS, WE MAY HAVE PRODUCT-RELATED LIABILITIES WHICH
MAY CAUSE US TO LOSE REVENUES OR DELAY MARKET ACCEPTANCE OF OUR PRODUCTS
Products as complex as those offered by us frequently contain errors,
defects and functional limitations when first introduced or as new versions are
released. We have in the past experienced such errors, defects or functional
limitations. We sell products into markets that are extremely demanding of
robust, reliable, fully functional products. Therefore delivery of products with
production defects or reliability, quality or compatibility problems could
significantly delay or hinder market acceptance of such products, which could
damage our credibility with our customers and adversely affect our ability to
retain our existing customers and to attract new customers. Moreover, such
errors, defects or functional limitations could cause problems, interruptions,
delays or a cessation of sales to our customers. Alleviating such problems may
require significant expenditures of capital and resources by us. Despite testing
by us, our suppliers or our customers may find errors, defects or functional
limitations in new products after commencement of commercial production,
resulting in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from our other
development efforts, product repair or replacement costs, claims by our
customers or others against us, or the loss of credibility with our current and
prospective customers.
WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS, WHICH SUBJECTS US TO RISKS THAT
COULD CAUSE OUR OPERATING RESULTS TO DECLINE
Sales to customers outside of the United States represented 47%, 43% and
47% of total revenues in the fiscal years ended March 31, 2000, 1999 and 1998,
respectively. Specifically, sales to customers in the Asia Pacific region
represented 24%, 26% and 25% of our total revenues for the fiscal years ended
March 31, 2000, 1999 and 1998, respectively, while sales to customers in Europe
represented 23%, 17% and 22% of our total revenues for the same periods,
respectively.
International sales of our semiconductors will continue to represent a
substantial portion of our product revenues for the foreseeable future. In
addition, substantially all of our current products are, and substantially all
of our future products will be, manufactured, assembled and tested by
independent third parties in foreign countries. International sales and
manufacturing are subject to a number of risks, including general economic
conditions in regions such as Asia, changes in foreign government regulations
and telecommunications standards, export license requirements, tariffs and
taxes, other trade barriers, fluctuations in currency exchange rates, difficulty
in collecting accounts receivable and difficulty in staffing and managing
foreign operations. We are also subject to geopolitical risks, such as
political, social and economic instability, potential hostilities and changes in
diplomatic and trade relationships, in connection with its international
operations. A significant decline in demand from foreign markets could have a
material adverse effect on our business and operating results.
23
25
WE NEED TO HIRE AND RETAIN KEY PERSONNEL TO SUPPORT OUR PRODUCTS
The development and marketing of our IP telephony products will continue to
place a significant strain on our limited personnel, management and other
resources. Competition for highly skilled engineering, sales, marketing and
support personnel is intense because there are a limited number of people
available with the necessary technical skills and understanding of our market,
particularly in the San Francisco Bay area where we are located. Any failure to
attract, assimilate or retain qualified personnel to fulfill our current or
future needs could impair our growth. We currently do not have employment
contracts with any of our employees and we do not maintain key person life
insurance policies on any of our employees.
OUR STOCK PRICE HAS BEEN VOLATILE AND WE CANNOT ASSURE YOU THAT OUR STOCK PRICE
WILL NOT DECLINE
The market price of the shares of our common stock has been and is likely
to be highly volatile. It may be significantly affected by factors such as:
- actual or anticipated fluctuations in our operating results;
- announcements of technical innovations;
- loss of key personnel;
- new products or new contracts by us, our competitors or their customers;
- governmental regulatory action; and
- developments with respect to patents or proprietary rights, general
market conditions, changes in financial estimates by securities analysts
and other factors which could be unrelated to, or outside our control.
The stock market has from time to time experienced significant price and
volume fluctuations that have particularly affected the market prices for the
common stocks of technology companies and that have often been unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against the issuing
company. If our stock price is volatile, we may also be subject to such
litigation. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would disrupt business and could
cause a decline in our operating results. Any settlement or adverse
determination in such litigation would also subject us to significant liability.
ITEM 2. PROPERTIES
The Company's principal operations are located in a 45,623 square foot
facility in Santa Clara, California. Design, limited manufacturing, research,
marketing and administrative activities are performed in this facility. This
lease expires in May 2003. The Company also leases on a short-term basis office
facilities for its sales management office outside of London, England and its
research and development facility in Sophia Antipolis, France. The Company's
believes that its existing facilities and planned future expansions are adequate
to meet its current and foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal claims and litigation that have
arisen in the normal course of the Company's operations. While the results of
such claims and litigation cannot be predicted with certainty, the Company
believes that the final outcome of such matters will not have a significant
adverse effect on the Company's financial position or results of operations.
However, should the Company not prevail in any such litigation, its operating
results and financial position could be adversely impacted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company effected its initial public offering on July 2, 1997 under the
name 8x8, Inc.. From that date through April 3, 2000 the Company's common stock
was traded on the Nasdaq National Market under the symbol "EGHT." Starting April
4, 2000 the Company's common stock has been traded on the Nasdaq National Market
under the symbol "NTRG." No dividends have ever been paid or declared on 8x8's
common stock. The Company does not anticipate paying any cash dividends on its
capital stock in the foreseeable future. As of June 19, 2000, there were 257
holders of record of the Company's common stock. Many of the Company's shares of
common stock are held by brokers and other institutions on behalf of
stockholders, therefore, the Company is unable to determine the total number of
stockholders represented by these record holders. Responses from brokers and
other institutions regarding shares held on behalf of other stockholders
indicate that there were at least 19,232 such other stockholders as of June 19,
2000.
PRICE RANGE OF COMMON STOCK
PERIOD HIGH LOW
------ ---- ---
Fiscal 1999
First Quarter............................................. $ 7 1/8 $5
Second Quarter............................................ $ 5 1/16 $1 7/8
Third Quarter............................................. $ 9 3/8 $2 1/4
Fourth Quarter............................................ $ 7 $3 11/16
Fiscal 2000
First Quarter............................................. $ 6 1/4 $3 15/16
Second Quarter............................................ $ 5 1/2 $2 3/4
Third Quarter............................................. $ 5 5/6 $3 15/16
Fourth Quarter............................................ $34 5/8 $5 5/8
25
27
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues........................ $ 25,384 $ 31,682 $49,776 $ 19,146 $28,774
Net income (loss)..................... (24,848) (19,224) 3,727 (13,613) (3,217)
Net income (loss) per share:
Basic............................... $ (1.38) $ (1.28) $ 0.31 $ (2.56) $ (0.70)
Diluted............................. $ (1.38) $ (1.28) $ 0.25 $ (2.56) $ (0.70)
Total assets.......................... $ 59,983 $ 28,709 $46,429 $ 12,727 $23,067
Total long-term debt.................. $ 5,498 $ -- $ -- $ -- $ --
The Company's fiscal year 2000 was a 53 week fiscal year, while fiscal
1999, 1998, 1997 and 1996 were 52 week fiscal years. The net loss for fiscal
2000 included a $6.4 million charge for a discount on common stock issued to
STMicroelectronics NV (see Note 4 of the Notes to Consolidated Financial
Statements or "Notes") and in-process research and development costs of $10.1
million related to the acquisition of Odisei on May 24, 1999 (see Note 2 of the
Notes). In fiscal 1999, the Company recorded a $5.7 million charge associated
with the write off of ViaTV videophone inventories associated with the Company's
decision to cease production of the ViaTV product line and withdraw from its
distribution channels (see Note 12 of the Notes).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We began developing multimedia communication technology in the form of
programmable multimedia semiconductors and accompanying software in 1990, and
have subsequently become a leading manufacturer of semiconductors for the
embedded videoconferencing and videophone markets. We maintain sales and
marketing operations to support our multimedia semiconductor business, but we
have focused virtually all of our ongoing research and development efforts on IP
telephony products and technologies.
In an effort to expand the available market for our multimedia
communication products, and to capitalize on our vertically integrated
technology, we began developing low cost consumer videophones and marketing
these products to consumers under the ViaTV brand name in 1997. Over the next
two years, we became a leading manufacturer of consumer videophones. However, in
1999 we determined that a combination of factors including the high cost of
maintaining a consumer distribution channel, the slower than expected growth
rate of the consumer videophone market, and the low gross margins typical of a
consumer electronics product made it unlikely that the consumer videophone
business would be profitable in the foreseeable future. Therefore, we announced
in April 1999 that we would cease production of the ViaTV product line and
withdraw from our ViaTV distribution channels over the subsequent several
quarters, resulting in a charge of $5.7 million related to the write off of
ViaTV inventories. By March 2000 we had completed the exit from the consumer
videophone business and we expect no further revenues from ViaTV products.
In June 1998, using technology designed for our consumer videophone
business, we entered the video monitoring market, focusing on security
applications for small businesses. Our first product was the RSM-1500 Remote
Surveillance Module, which was subsequently replaced with an improved RSM-1600
model. The RSM-1600 module enables real-time remote video monitoring over POTS
lines. Its target market is primarily owners of small businesses such as
convenience stores and restaurants who need the ability to view their premises
from any remote location in the world at any time. Other products in our video
monitoring line include the RSM-3000 Remote Surveillance Module, which enables
real-time video monitoring over ISDN lines; the RSM-700 Expander Module, which
expands the number of monitoring devices that can attach to the RSM-1600 or
RSM-3000, and the RSM-PC software application, which allows a PC to view the
video feed from the RSM-1600. Until recently, we sold our RSM products to
security distributors and dealers in North America and Europe. However, in an
effort to align our strategic focus on the IP telephony market, we announced the
sale of our entire video monitoring business to Interlogix, a leading
manufacturer of security
26
28
equipment, in May 2000. We are currently transitioning our video monitoring
operations to Interlogix and expect no further revenues from this business. See
further discussion under "Recent Events" below.
We entered the market for embedded IP telephony products in December 1998
with the announcement of our Audacity Internet Telephony Processor. The Audacity
processor combines IP telephony protocol support with audio
compression/decompression capability and runs multiple simultaneous IP phone
calls on a single integrated circuit. In April 1999, we announced our Netergy
Media Hub (formerly known as the Symphony module), an integrated system product
that is based on the Audacity semiconductor and that connects up to four analog
telephone lines to an IP network. In September 1999, we announced our
Audacity-T2 IP Phone Processor, which combines all the digital processing
required to implement an IP telephone onto a single integrated circuit. Our
embedded IP telephony products target OEM manufacturers of IP telephony
equipment, such as voice-enabled cable and DSL modems, as well as IP phones and
gateways.
In May 1999, we acquired Odisei S.A., a privately held developer of IP
telephony software based in Sophia Antipolis, France. We have leveraged the
acquisition of Odisei to develop and market IP telephony solutions to service
providers such as competitive local exchange carriers (CLECs) and Internet
service providers (ISPs). In March 2000 the Company announced its Netergy
Advanced Telephony System (ATS), an all-IP hosted iPBX solution that allows
service providers to offer dial tone and advanced private branch exchange (PBX)
services to business customers over any broadband IP connection, including DSL,
cable, T1/E1, frame relay and broadband wireless. The ATS makes use of our
embedded IP telephony products, including the Netergy Media Hub, semiconductors
and embedded IP telephony software.
In March 2000, 8x8 announced that it would change its name, subject to
shareholder approval, to Netergy Networks, Inc. The name change reflects 8x8's
strategic transition to the IP telephony market.
RECENT EVENTS
On May 19, 2000, the Company entered into a definitive agreement to acquire
UForce, Inc. ("UForce"), a developer of IP-based software applications (such as
voicemail and unified messaging) based in Montreal, Canada, by issuing
approximately 3.6 million shares of our common stock in exchange for all of the
outstanding shares of UForce. In addition, we will issue common stock options
for approximately 1.0 million shares in exchange for all outstanding UForce
stock options. The transaction will be accounted for using the purchase method.
The acquisition is subject to certain closing conditions, and we anticipate
completing the acquisition during our second fiscal quarter ending September 30,
2000.
Also, on May 19, 2000, the Company entered into an agreement with
Interlogix, Inc. ("Interlogix") whereby the Company agreed to sell certain
assets and license certain technology related to the Company's video monitoring
business. The Company is obligated to provide Interlogix with future updates and
upgrades to the licensed technology. The assets sold included certain accounts
receivable, inventories, machinery, equipment, and intangibles. Interlogix
agreed to pay the Company $5.5 million, subject to certain adjustments, for the
assets and the associated technology license, which has an initial term of three
years. Upon the earlier of six months from the date of the agreement or upon
delivery of certain remaining obligations, the Company will commence recognition
of the resulting net gain over the remaining term of the technology license.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data
for each of the years ended March 31, 2000, 1999 and 1998, as well as the
percentage of our total revenues represented by each item. Cost of product
revenues is presented as a percentage of product revenues and cost of license
and other revenues is presented as a percentage of license and other revenues.
You should read this information in conjunction with
27
29
our annual audited consolidated financial statements and related notes included
elsewhere in this annual report:
YEAR ENDED MARCH 31,
-----------------------------------------------
2000 1999 1998
-------------- ------------- ------------
($ IN MILLIONS)
Product revenues............................ $ 20.8 82% $ 26.2 83% $35.3 71%
License and other revenues.................. 4.6 18% 5.5 17% 14.5 29%
------ ---- ------ --- ----- ---
Total revenues.................... 25.4 100% 31.7 100% 49.8 100%
------ ---- ------ --- ----- ---
Cost of product revenues.................... 8.5 41% 24.2 92% 17.8 50%
Cost of license and other revenues.......... 0.1 3% 0.1 2% 1.1 8%
------ ---- ------ --- ----- ---
Total cost of revenues............ 8.6 34% 24.3 77% 18.9 38%
------ ---- ------ --- ----- ---
Gross profit................................ 16.8 66% 7.4 23% 30.9 62%
------ ---- ------ --- ----- ---
Operating expenses:
Research and development.................... 11.9 47% 9.9 31% 12.3 25%
Selling, general and administrative......... 21.3 84% 17.7 56% 17.4 35%
In-process research and development......... 10.1 40% -- --% -- --%
Amortization of intangibles................. 0.6 2% -- --% -- --%
------ ---- ------ --- ----- ---
Total operating expenses.......... 43.9 173% 27.6 87% 29.7 60%
------ ---- ------ --- ----- ---
Income (loss) from operations............... (27.1) (107)% (20.2) (64)% 1.2 2%
Other income, net........................... 2.8 11% 1.0 3% 1.5 3%
Interest expense............................ (0.4) 2% -- --% -- --%
------ ---- ------ --- ----- ---
Income (loss) before income taxes........... (24.7) (97)% (19.2) (61)% 2.7 5%
(Benefit)provision for income taxes......... 0.1 1% -- --% (1.0) (2)%
------ ---- ------ --- ----- ---
Net income (loss)........................... $(24.8) (98)% $(19.2) (61)% $ 3.7 7%
====== ==== ====== === ===== ===
Revenues
Total revenues were $25.4 million, $31.7 million and $49.8 million for the
fiscal years ended March 31, 2000, 1999 and 1998, respectively. Total revenues
for fiscal 2000 were divided among multimedia communication semiconductors
($11.3 million), IP telephony semiconductors ($37,000), video monitoring systems
($6.0 million), ViaTV systems ($3.0 million), Media Hub systems ($451,000) and
nonrecurring license and other revenues ($4.6 million). In fiscal 1999, total
revenues were divided among multimedia communication semiconductors ($10.3
million), video monitoring systems ($3.0 million), ViaTV systems ($12.9 million)
and nonrecurring license and other revenues ($5.5 million). In fiscal 1998,
total revenues were divided among multimedia communication semiconductors ($21.9
million), ViaTV systems ($13.4 million) and nonrecurring license and other
revenues ($14.5 million).
Product revenues were $20.8 million in fiscal 2000, a decrease of $5.4
million from the $26.2 million reported in fiscal 1999. The decrease in product
revenues in fiscal 2000 compared to fiscal 1999 is primarily due to a decrease
in sales of our ViaTV systems resulting from our decision in April 1999 to
discontinue production of ViaTV products and withdraw from our retail and
distribution channels. This decrease was partially offset by increases in sales
of multimedia communication semiconductors and video monitoring systems
products. In fiscal 1999, product revenues decreased by $9.1 million from the
$35.3 million reported in fiscal 1998. The decrease in product revenues in
fiscal 1999 compared to fiscal 1998 is primarily due to a decrease in sales of
our multimedia communication semiconductors, partially offset by an increase in
sales of our ViaTV and video monitoring system products.
License and other revenues consist of technology licenses, including
royalties required under such licenses, and nonrecurring engineering fees for
services performed by us for our customers. License and other revenues were $4.6
million in fiscal 2000, a decrease of $900,000 from the $5.5 million reported in
fiscal 1999,
28
30
due primarily to a decrease in nonrecurring engineering fees. In fiscal 1999,
license and other revenues decreased by $9.0 million from the $14.5 million
reported in fiscal 1998, due in part to the approximately $5.3 million paid by
3Com in fiscal 1998 for a license to substantially all of the technology
underlying our ViaTVs.
Revenues from our ten largest customers in the fiscal years ended March 31,
2000, 1999 and 1998 accounted for approximately 35%, 40% and 61%, respectively,
of our total revenues. During the fiscal years ended March 31, 2000 and 1999, no
customer accounted for 10% or more of total revenues.
Sales to customers outside the United States represented 47%, 43% and 47%
of total revenues in the fiscal years ended March 31, 2000, 1999 and 1998,
respectively. Specifically, sales to the Asia Pacific region represented 24%,
26% and 25% of our total revenues for the fiscal years ended March 31, 2000,
1999 and 1998, respectively. Our sales to Europe represented 23%, 17% and 22% of
total revenues for the fiscal years ended March 31, 2000, 1999 and 1998,
respectively.
Cost of Revenues and Gross Profit
The cost of product revenues consists of costs associated with components,
semiconductor wafer fabrication, system and semiconductor assembly and testing
performed by third-party vendors and direct and indirect costs associated with
purchasing, scheduling and quality assurance. Gross profit from product revenues
was $12.3 million, $2.0 million and $17.5 million for the fiscal years ended
March 31, 2000, 1999 and 1998, respectively. Product gross margin increased to
59% in fiscal 2000 compared to 8% in fiscal 1999 and 50% in fiscal 1998. The
increase in gross profit and margin from product revenue in fiscal 2000 compared
to fiscal 1999 is due to an increase in higher margin multimedia communication
semiconductor and video monitoring system revenues as a percentage of total
revenues and due to significantly higher gross margins realized on sales of our
ViaTV products as we were able to sell such product at prices higher than
previously anticipated. As discussed above, we recorded a $5.7 million charge
associated with the write-off of ViaTV product inventory in the fourth quarter
of fiscal 1999 due to our decision to cease production of the ViaTV product line
and withdraw from our distribution channels which adversely impacted our gross
margins in fiscal 1999.
Gross profit from license and other revenues, all of which were
nonrecurring, was $4.5 million, $5.4 million and $13.4 million in fiscal 2000,
1999 and 1998, respectively. In fiscal 1998 cost of license and other revenues
consisted of personnel and other costs incurred by us to perform certain
development work under terms of a non-recurring engineering contract with one of
our customers. There can be no assurance that we will receive any revenues from
such license and other revenue sources in the future.
Our gross margin is affected by a number of factors including, product mix,
the recognition of license and other revenues for which there may be no or
little corresponding cost of revenues, product pricing, the allocation between
international and domestic sales, the percentage of direct sales and sales to
resellers, and manufacturing and component costs. The markets for our products
are characterized by falling average selling prices. We expect that, as a result
of competitive pressures and other factors, gross profit as a percentage of
revenue for our multimedia communication semiconductor products will likely
decrease for the foreseeable future. Because the market is emerging, the average
selling price for IP telephony semiconductors is uncertain. We may not be able
to attain average selling prices ("ASPs") similar to those of our historical
videoconferencing semiconductors. If ASPs are lower, gross margins will be lower
than our historical gross margins, unless costs for IP telephony semiconductors
are also proportionately lower. In the likely event that we encounter
significant price competition in the markets for our products, we could be at a
significant disadvantage compared to our competitors, many of whom have
substantially greater resources, and therefore may be better able to withstand
an extended period of downward pricing pressure.
Research and Development Expenses
Research and development expenses consist primarily of personnel, system
prototype design and fabrication, mask, prototype wafer and equipment costs
necessary for us to conduct our development efforts. Research and development
costs, including software development costs, are expensed as incurred. Research
and development expenses were $11.9 million, $9.9 million and $12.3 million for
fiscal 2000, 1999 and 1998,
29
31
respectively. Higher research and development expenses during fiscal 2000 as
compared to fiscal 1999 were due primarily to increased spending related to
Netergy iPBX system software development. Significant expenses were also
incurred in fiscal 2000 related to development efforts associated with the
Audacity-T2 processor and Media Hub products. Lower research and development
expenses during fiscal 1999 as compared to fiscal 1998 were due to decreases in
profit sharing and incentive bonuses, non-recurring ViaTV and video monitoring
system design costs, and costs associated with materials and tooling used in
prototype builds of our ViaTV and Video Monitoring system products. During
fiscal 1998, research and development costs would have been higher, except that
certain research and development personnel performed non-recurring engineering
services under a revenue-generating contract. The costs associated with this
contract were included in the cost of license and other revenues.
We expect to continue to allocate substantial resources to research and
development. However, future research and development costs may vary both in
absolute dollars and as a percentage of total revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of personnel
and related overhead costs for sales, marketing, finance, human resources and
general management. Such costs also include advertising, sales commissions,
trade show and other marketing and promotional expenses. Selling, general and
administrative expenses were $21.3 million, $17.7 million and $17.4 million in
fiscal 2000, 1999 and 1998, respectively. The increase in expenses in fiscal
2000 compared to fiscal 1999 is primarily the result of a $6.4 million charge
recorded as in connection with the sale of 3.7 million shares of our common
stock to STMicroelectronics at $7.50 per share. The charge reflects a portion of
the discount from the fair market value of our common stock on the date of the
agreement. This increase was offset by lower costs associated with the
marketing, advertising and promotion of the ViaTV product line and lower
headcount required to support these activities as we exited from the consumer
videophone business. In fiscal 1999, expenses increased due to costs associated
with the marketing, advertising and promotion of our ViaTV videophone product
line, additional headcount required to support these activities, and expenses
associated with our implementation of a new enterprise-wide database and
information management system. These increases were substantially offset by
decreases in profit sharing and incentive bonuses, and commission expenses.
As we introduce and promote new IP telephony products, and attempt to
expand distribution channels for such products, future selling, general and
administrative costs may vary both in absolute dollars and as a percentage of
total revenues. See "Factors That May Affect Future Results -- Potential
Fluctuations in Operating Results."
In-Process Research and Development and Amortization of Intangibles
In conjunction with the May 1999 acquisition of Odisei, we recorded
intangible assets related to goodwill and workforce that are being amortized on
a straight-line basis over five and three years, respectively. Amortization of
goodwill and workforce charged to operations was $614,000 for the fiscal year
ended March 31, 2000. In addition, we incurred an in-process research and
development charge of $10.1 million in the first quarter of fiscal 2000 related
to the acquisition of Odisei.
Other Income, Net
In fiscal 2000, 1999 and 1998, other income, net, was approximately $2.8
million, $1.0 million and $1.5 million, respectively. The increase in other
income, net, in fiscal 2000 is due primarily to a $1.9 million gain realized
from the sale of a cost basis equity investment, offset by approximately
$205,000 of losses realized on the sale of certain of our investments classified
as available-for-sale. The decrease in other income, net, earned in fiscal 1999
compared to fiscal 1998 is due primarily to a decrease in interest income
resulting from lower average cash equivalent and short-term investment balances
as compared to fiscal 1998.
30
32
Interest Expense
Interest expense of $391,000 included interest charges associated with the
convertible subordinated debentures issued in December 1999, as well as the
amortization of the related debt discount and debt issuance costs.
(Benefit) Provision for Income Taxes
The provision of $120,000 for the year ended March 31, 2000 represents
certain foreign taxes. There was no tax provision for the year ended March 31,
1999 due to the net losses incurred. The tax benefit for the year ended March
31, 1998 resulted from the reversal of approximately $1.0 million of our income
tax liability in the first quarter of fiscal 1998 upon notice from the Internal
Revenue Service that it had reversed a previously asserted deficiency related to
the taxable year 1992.
At March 31, 2000, we had net operating loss carryforwards for federal and
state income tax purposes of approximately $35.7 million and $13.1 million,
respectively, which expire at various dates beginning in 2005. In addition, at
March 31, 2000, we had research and development credit carryforwards for federal
and state tax reporting purposes of approximately $1.7 million and $1.2 million,
respectively. The federal credit carryforwards will begin expiring in 2010 while
the California credit will carryforward indefinitely. Under the ownership change
limitations of the Internal Revenue Code of 1986, as amended, the amount and
benefit from the net operating losses and credit carryforwards may be impaired
or limited in certain circumstances.
At March 31, 2000, we had gross deferred tax assets of approximately $18.6
million. The weight of available evidence indicates that it is more likely than
not that we will not be able to realize our deferred tax assets and thus a full
valuation reserve has been recorded at March 31, 2000.
Year 2000 Impact
We have not experienced any problems with our computer systems or our
products relating to their inability to recognize appropriate dates related to
the year 2000. We are also not aware of any material problems with our clients
or vendors. Accordingly, we do not anticipate incurring material expenses or
experiencing any material operational disruptions as a result of any year 2000
issues.
Liquidity and Capital Resources
As of March 31, 2000, we had cash and cash equivalents totaling $48.6
million, representing an increase of $32.8 million from March 31, 1999. We
currently have no bank borrowing arrangements.
Cash used in operations of $4.1 million in fiscal 2000 reflected a net loss
of $24.8 million, a decrease in deferred revenue of $3.4 million, and a non-cash
adjustment for a gain on sale of investments, net, of $1.7 million. Cash used in
operations was partially offset by cash provided by a decrease in accounts
receivable of $3.5 million, a decrease in inventory of $2.5 million, and
non-cash items, including depreciation and amortization of $1.7 million,
amortization of intangibles of $614,000, in-process research and development of
$10.1 million, and discount on issuance of common stock of $7.4 million. Cash
provided by investing activities in fiscal 2000 is attributable to proceeds from
the sale of an investment of $1.9 million, offset by acquisitions of property
and equipment of $1.7 million and cash paid for acquisitions, net, of $149,000.
Cash flows from financing activities in fiscal 2000 consisted primarily of
proceeds from the sale of convertible subordinated debentures of $7.5 million
and sales of the Company's common stock totaling $29.8 million, offset by debt
issuance costs of $617,000. For the year, cash and cash equivalents increased
$32.8 million.
Cash used in operations of $10.4 million in fiscal 1999 reflected a net
loss of $19.2 million, an increase in accounts receivable of $1.4 million, and a
decrease in accounts payable of $708,000. Cash used in operations was partially
offset by cash provided by a decrease in inventory of $8.8 million, an increase
in deferred revenue of $1.6 million, and non-cash items, including a deferred
compensation charge of $416,000 and depreciation and amortization of $967,000.
Cash used in investing activities in fiscal 1999 is primarily attributable to
capital expenditures of $1.8 million. Cash flows from financing activities in
fiscal 1999 consisted primarily of net proceeds from the repayment of
stockholders' notes receivable and sales of the Company's common stock upon the
exercise of employee stock options. For the year, cash and cash equivalents
decreased by $10.9 million.
31
33
Cash used in operations of $6.5 million in fiscal 1998 reflected a $3.5
million increase in accounts receivable, a $11.6 million increase in inventory,
and a $522,000 increase in prepaid expenses and other assets. Cash used in
operations was partially offset by net income of $3.7 million, increases of $2.1
million in deferred revenue, $1.2 million in accounts payable, $519,000 in
accrued compensation, and non-cash items, including a deferred compensation
charge of $1.3 million and depreciation and amortization of $901,000. Cash used
in investing activities for fiscal 1998 was primarily attributable to capital
expenditures of approximately $1.0 million. Cash flows from financing activities
in fiscal 1998 consisted primarily of $24.7 million in net proceeds from the
sale of common stock in our initial public offering. For the year, cash and cash
equivalents increased by $18.0 million.
We believe that we will be able to fund planned expenditures and satisfy
our cash requirements for at least the next twelve months from cash flow from
operations, if any, and existing cash balances. As of March 31, 2000, we had
approximately $48.6 million in cash and cash equivalents. However, there can be
no assurance that we will not seek to exploit business opportunities that will
require us to raise additional capital from equity or debt sources to finance
our growth and capital requirements. In particular, the development and
marketing of new products could require a significant commitment of resources,
which could in turn require us to obtain additional financing earlier than
otherwise expected. There can be no assurance that we will be able to obtain
additional financing as needed on acceptable terms or at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial market risk consists primarily of risks associated with
international operations and related foreign currencies. We derive a significant
portion of our revenues from customers in Europe and Asia. In order to reduce
the risk from fluctuation in foreign exchange rates, the vast majority of our
sales are denominated in U.S. dollars. In addition, all of our arrangements with
our semiconductor foundry and assembly vendors, and with our primary subcontract
manufacturer for our Media Hub systems, are denominated in U.S. dollars. We have
subsidiaries in Europe, and as such we are exposed to market risk from changes
in exchange rates. We have not entered into any currency hedging activities. To
date, our exposure to exchange rate volatility has not been significant,
however, there can be no assurance that there will not be a material impact in
the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
FINANCIAL STATEMENTS:
Report of Independent Accountants......................... 33
Consolidated Balance Sheets at March 31, 2000 and 1999.... 34
Consolidated Statements of Operations for each of the
three years in the period ended March 31, 2000......... 35
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended March 31,
2000................................................... 36
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 2000......... 37
Notes to Consolidated Financial Statements................ 38
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts.......... 54
Schedules other than the one listed above have been omitted because they
are inapplicable, because the required information has been included in the
financial statements or notes thereto, or the amounts are immaterial.
32
34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of 8x8, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly in all material respects, the financial
position of 8x8, Inc. and its subsidiaries at March 31, 2000 and March 31, 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 2000 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with 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
May 10, 2000, except for Note 13, which is as of May 19, 2000
33
35
8X8 INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31,
--------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 48,576 $ 15,810
Accounts receivable, net.................................. 1,394 5,886
Accounts receivable from related party.................... 1,000 --
Inventory................................................. 1,367 3,915
Prepaid expenses and other current assets................. 1,043 878
-------- --------
Total current assets.............................. 53,380 26,489
Property and equipment, net................................. 2,687 2,163
Intangibles and other assets................................ 3,916 57
-------- --------
$ 59,983 $ 28,709
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,887 $ 1,917
Accrued compensation...................................... 2,154 1,236
Accrued warranty.......................................... 694 1,043
Deferred revenue.......................................... 731 4,089
Other accrued liabilities................................. 1,245 1,190
Income taxes payable...................................... 384 411
-------- --------
Total current liabilities......................... 7,095 9,886
Convertible subordinated debentures......................... 5,498 --
-------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Convertible preferred stock, $0.001 par value:
Authorized: 5,000,000 shares;
No shares issued or outstanding at March 31, 2000 or
1999.................................................. -- --
Common stock, $0.001 par value:
Authorized: 40,000,000 shares;
Issued and outstanding: 22,958,921 shares at March 31,
2000 and 15,425,752 shares at March 31, 1999.......... 23 15
Additional paid-in capital................................ 101,559 48,363
Notes receivable from stockholders........................ (69) (266)
Deferred compensation..................................... (376) (197)
Accumulated other comprehensive loss...................... -- (193)
Accumulated deficit....................................... (53,747) (28,899)
-------- --------
Total stockholders' equity........................ 47,390 18,823
-------- --------
$ 59,983 $ 28,709
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
34
36
8X8, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
-------------------------------
2000 1999 1998
-------- -------- -------
Product revenues............................................ $ 20,817 $ 26,189 $35,288
License and other revenues.................................. 4,567 5,493 14,488
-------- -------- -------
Total revenues.................................... 25,384 31,682 49,776
-------- -------- -------
Cost of product revenues.................................... 8,448 24,199 17,764
Cost of license and other revenues.......................... 150 82 1,087
-------- -------- -------
Total cost of revenues............................ 8,598 24,281 18,851
-------- -------- -------
Gross profit................................................ 16,786 7,401 30,925
-------- -------- -------
Operating expenses:
Research and development.................................. 11,909 9,922 12,317
Selling, general and administrative....................... 21,307 17,712 17,381
In-process research and development....................... 10,100 -- --
Amortization of intangibles............................... 614 -- --
-------- -------- -------
Total operating expenses.......................... 43,930 27,634 29,698
-------- -------- -------
Income (loss) from operations............................... (27,144) (20,233) 1,227
Other income, net........................................... 2,807 1,009 1,518
Interest expense............................................ (391) -- --
-------- -------- -------
Income (loss) before income taxes........................... (24,728) (19,224) 2,745
(Benefit) provision for income taxes........................ 120 -- (982)
-------- -------- -------
Net income (loss)........................................... $(24,848) $(19,224) $ 3,727
======== ======== =======
Net income (loss) per share:
Basic..................................................... $ (1.38) $ (1.28) $ 0.31
Diluted................................................... $ (1.38) $ (1.28) $ 0.25
Shares used in per share calculations:
Basic..................................................... 18,071 15,018 12,083
Diluted................................................... 18,071 15,018 15,128
The accompanying notes are an integral part of these consolidated financial
statements.
35
37
8X8, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE OTHER
------------------- ------------------- PAID-IN FROM DEFERRED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION LOSS
---------- ------ ---------- ------ ---------- ------------ ------------ -------------
Balance at March 31, 1997.... 3,726,373 $4 6,990,286 $ 7 $ 23,291 $(1,078) $(2,781) --
Issuance of common stock
upon initial public
offering, net of issuance
costs of $2,231........... -- -- 4,140,000 4 24,675 -- -- --
Issuance of common stock
upon exercise of options
and purchases under the
employee stock purchase
plan...................... -- -- 483,593 -- 597 -- -- --
Conversion of convertible
noncumulative preferred
stock to common stock..... (3,726,373) (4) 3,726,373 4 -- -- -- --
Issuance of warrant......... -- -- -- -- 17 -- -- --
Repayment of notes
receivable from
stockholders.............. -- -- -- -- -- 162 -- --
Repurchase of unvested
common stock.............. -- -- (46,638) -- (23) 23 -- --
Deferred compensation
related to stock
options................... -- -- -- -- (772) -- 2,037 --
Unrealized loss on
investments............... -- -- -- -- -- -- -- (45)
Net income.................. -- -- -- -- -- -- -- --
Total comprehensive
income.................... -- -- -- -- -- -- -- --
---------- -- ---------- --- -------- ------- ------- -----
Balance at March 31, 1998.... -- -- 15,293,614 15 47,785 (893) (744) (45)
Issuance of common stock
upon exercise of options
and purchases under the
employee stock purchase
plan...................... -- -- 389,823 -- 838 -- -- --
Repayment of notes
receivable from
stockholders.............. -- -- -- -- -- 498 -- --
Repurchase of unvested
common stock.............. -- -- (257,685) -- (129) 129 -- --
Deferred compensation
related to stock
options................... -- -- -- -- (131) -- 547 --
Unrealized loss on
investments............... -- -- -- -- -- -- -- (148)
Net loss.................... -- -- -- -- -- -- -- --
Total comprehensive loss.... -- -- -- -- -- -- -- --
---------- -- ---------- --- -------- ------- ------- -----
Balance at March 31, 1999.... -- -- 15,425,752 15 48,363 (266) (197) (193)
Issuance of common stock in
conjunction with the
acquisition of Odisei
S.A. ..................... -- -- 2,988,646 3 13,264 (76) -- --
Issuance of common stock to
STMicroelectronics, net of
issuance costs............ -- -- 3,700,000 4 35,089 -- -- --
Issuance of warrants with
convertible debentures.... -- -- -- -- 2,467 -- -- --
Issuance of common stock
upon exercise of options
and purchases under the
employee stock purchase
plan...................... -- -- 906,119 1 2,079 -- -- --
Repayment of notes
receivable from
stockholders.............. -- -- -- -- -- 240 -- --
Repurchase of common stock.. -- -- (61,596) -- (43) 33 -- --
Deferred compensation
related to stock
options................... -- -- -- -- 340 -- (179) --
Realized loss on
investments............... -- -- -- -- -- -- -- 193
Net loss.................... -- -- -- -- -- -- -- --
Total comprehensive loss..... -- -- -- -- -- -- -- --
---------- -- ---------- --- -------- ------- ------- -----
Balance at March 31, 2000.... -- $-- 22,958,921 $23 $101,559 $ (69) $ (376) $ --
========== == ========== === ======== ======= ======= =====
ACCUMULATED
DEFICIT TOTAL
----------- --------
Balance at March 31, 1997.... $(13,402) $ 6,041
Issuance of common stock
upon initial public
offering, net of issuance
costs of $2,231........... -- 24,679
Issuance of common stock
upon exercise of options
and purchases under the
employee stock purchase
plan...................... -- 597
Conversion of convertible
noncumulative preferred
stock to common stock..... -- --
Issuance of warrant......... -- 17
Repayment of notes
receivable from
stockholders.............. -- 162
Repurchase of unvested
common stock.............. -- --
Deferred compensation
related to stock
options................... -- 1,265
Unrealized loss on
investments............... --
Net income.................. 3,727
Total comprehensive
income.................... -- 3,682
-------- --------
Balance at March 31, 1998.... (9,675) 36,443
Issuance of common stock
upon exercise of options
and purchases under the
employee stock purchase
plan...................... -- 838
Repayment of notes
receivable from
stockholders.............. -- 498
Repurchase of unvested
common stock.............. -- --
Deferred compensation
related to stock
options................... -- 416
Unrealized loss on
investments............... --
Net loss.................... (19,224)
Total comprehensive loss.... -- (19,372)
-------- --------
Balance at March 31, 1999.... (28,899) 18,823
Issuance of common stock in
conjunction with the
acquisition of Odisei
S.A. ..................... -- 13,191
Issuance of common stock to
STMicroelectronics, net of
issuance costs............ -- 35,093
Issuance of warrants with
convertible debentures.... -- 2,467
Issuance of common stock
upon exercise of options
and purchases under the
employee stock purchase
plan...................... -- 2,080
Repayment of notes
receivable from
stockholders.............. -- 240
Repurchase of common stock.. -- (10)
Deferred compensation
related to stock
options................... -- 161
Realized loss on
investments............... -- --
Net loss.................... (24,848) --
Total comprehensive loss..... -- (24,655)
-------- --------
Balance at March 31, 2000.... $(53,747) $ 47,390
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
36
38
8X8, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss)........................................... $(24,848) $(19,224) $ 3,727
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization............................. 1,286 967 901
Amortization of deferred compensation..................... 161 416 1,265
Amortization of intangibles............................... 614 -- --
Amortization of debt discount............................. 218 -- --
In-process research and development....................... 10,100 -- --
Discount on issuance of common stock...................... 7,400 -- --
Gain on sale of investments, net.......................... (1,687) -- --
Other..................................................... -- (148) (15)
Changes in assets and liabilities, net of effects of
business acquired:
Accounts receivable, net.................................. 3,492 (1,359) (3,515)
Inventory................................................. 2,548 8,843 (11,580)
Prepaid expenses and other current assets................. (74) (2) (522)
Intangibles and other assets.............................. (22) 104 (46)
Accounts payable.......................................... (71) (708) 1,246
Accrued compensation...................................... 583 (209) 519
Accrued warranty.......................................... (349) (418) (142)
Deferred revenue.......................................... (3,358) 1,642 2,084
Other accrued liabilities................................. (48) (197) 698
Income taxes payable...................................... (27) (125) (1,118)
-------- -------- --------
Net cash used in operating activities.................. (4,082) (10,418) (6,498)
-------- -------- --------
Cash flows from investing activities:
Acquisitions of property and equipment.................... (1,693) (1,760) (927)
Cash paid for acquisitions, net........................... (149) -- --
Proceeds from sale of investment.......................... 1,880 -- --
Other..................................................... -- (25) (58)
-------- -------- --------
Net cash provided by (used in) investing activities.... 38 (1,785) (985)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible subordinated
debentures............................................. 7,500 -- --
Debt issuance costs....................................... (617) -- --
Proceeds from issuance of common stock, net............... 29,763 838 25,276
Repayment of notes receivable from stockholders........... 240 498 162
Notes receivable from stockholders........................ (76) -- --
-------- -------- --------
Net cash provided by financing activities.............. 36,810 1,336 25,438
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 32,766 (10,867) 17,955
Cash and cash equivalents beginning of year................. 15,810 26,677 8,722
-------- -------- --------
Cash and cash equivalents end of year....................... $ 48,576 $ 15,810 $ 26,677
======== ======== ========
Supplemental non-cash disclosures:
Taxes paid.................................................. $ 34 $ 126 $ 136
======== ======== ========
Repurchase of unvested common stock......................... $ 33 $ 129 $ 23
======== ======== ========
Issuance of common stock in conjunction with acquisition of
Odisei.................................................... $ 13,267 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
37
39
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
8x8, Inc. (the "Company" or "8x8") was incorporated in California in
February 1987. In December 1996, the Company was reincorporated in Delaware. In
March 2000, the Company announced that it would change its name, subject to
shareholder approval, to Netergy Networks, Inc.
The Company is a leading developer of digital communications products and
technologies, including highly integrated Internet protocol (IP) telephony
solutions marketed to telephone service providers, semiconductors and related
embedded technology marketed to original equipment manufacturers (OEMs) of
telecommunication and videoconferencing equipment, and remote video monitoring
systems marketed primarily to dealers and distributors of security products.
See Note 13 regarding the sale of net assets and the license of certain
related technologies associated with the Company's video monitoring business as
of May 19, 2000.
FISCAL YEAR
The Company's fiscal year ends on the last Thursday in March. For purposes
of these consolidated financial statements, the Company has indicated its fiscal
year ends on March 31. Fiscal year 2000 was a 53 week year, while fiscal years
1999 and 1998 were 52 week years.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment to OEMs and
end users. Reserves for sales returns and allowances are recorded at the time of
shipment. Certain of the Company's sales to distributors are made under
agreements which provide for returns or credits under certain circumstances. The
Company defers recognition of revenue on sales to distributors under such
agreements until products are resold by the distributor to the end user. License
revenue, net of any discount granted, is recognized after execution of a license
agreement and delivery of the product, provided there are no remaining
obligations relating to development, upgrades, new releases, or other future
deliverables, and provided that the license fee is fixed or determinable, and
collection of the fee is probable.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. Management determines
the appropriate classification of debt and equity securities at the time of
purchase and reevaluates the classification at each reporting date. The cost of
the Company's investments is determined based upon specific identification.
38
40
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 31, 1999, the Company classified $14.1 million of its investments,
primarily consisting of money market funds with an effective maturity of three
months or less, as available-for-sale. Investments classified as
available-for-sale are reported at fair value with unrealized gains and losses,
net of related tax, if any, recorded as a separate component of stockholders'
equity. Unrealized losses on available-for-sale investments were $193,000 at
March 31, 1999. Realized losses on investments classified as available for sale
were approximately $205,000 during the year ended March 31, 2000. Realized and
unrealized gains and losses for all other investments were not significant for
the years ended March 31, 2000, 1999 and 1998.
INVENTORY
Inventory is stated at the lower of standard cost, which approximates
actual cost using the first-in, first-out method, or market.
NONMARKETABLE EQUITY INVESTMENTS
Nonmarketable equity investments, included in other assets, of less than
20% of the investee's outstanding voting stock are accounted for using the cost
method because the Company does not have an ability to significantly influence
the operating and financial policies of the investees. Losses resulting from
impairment in the value of investments which are other than a temporary decline
are recorded in the period in which such losses occur. The Company realized a
gain of approximately $1.9 million on the sale of a nonmarketable equity
investment during the fiscal year ended March 31, 2000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method, based upon the shorter of the estimated useful lives, ranging from three
to five years, or the lease term of the respective assets as follows:
Machinery and computer equipment......... 3 years
Furniture and fixtures................... 5 years
Licensed software........................ 3 years
Leasehold improvements................... Shorter of lease term or useful life of
the asset
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles acquired in connection with the acquisition
of Odisei S.A. ("Odisei") in May 1999 were approximately $3.7 million, and
related accumulated amortization was $614,000 at March 31, 2000 (see Note 3).
The acquisition was accounted for as a purchase, and the excess of the purchase
price over the fair value of net liabilities acquired was allocated primarily to
workforce and goodwill, which are being amortized over lives of three and five
years, respectively. The Company reviews the carrying value of goodwill and
other intangible assets whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable.
WARRANTY EXPENSE
The Company accrues for the estimated cost which may be incurred under its
product warranties upon revenue recognition.
RESEARCH AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Software development costs incurred prior to the establishment of technological
feasibility are included in research and development and
39
41
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are expensed as incurred. The Company defines establishment of technological
feasibility as the completion of a working model. Software development costs
incurred subsequent to the establishment of technological feasibility through
the period of general market availability of the product are capitalized, if
material. To date, all software development costs have been expensed as
incurred.
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency of the Company's foreign
subsidiaries. Exchange gains and losses resulting from transactions denominated
in currencies other than the U.S. dollar are included in the results of
operations for the year. To date, such amounts have not been significant. Total
assets of the Company's foreign subsidiaries were $1,644,000, $656,000 and
$620,000 as of March 31, 2000, 1999 and 1998, respectively. The Company does not
undertake any foreign currency hedging activities.
INCOME TAXES
Income taxes are accounted for using the asset and liability approach.
Under the asset and liability approach, a current tax liability or asset is
recognized for the estimated taxes payable or refundable on tax returns for the
current year. A deferred tax liability or asset is recognized for the estimated
future tax effects attributed to temporary differences and carryforwards. If
necessary, the deferred tax assets are reduced by the amount of benefits that,
based on available evidence, are not expected to be realized.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and trade accounts receivable. The Company places its
cash and cash equivalents and short-term investments primarily in market rate
accounts with reputable financial institutions. The Company has not experienced
any material losses relating to any investment instruments. The Company sells
its products to OEMs and distributors throughout the world. The Company performs
ongoing credit evaluations of its customers' financial condition and maintains
an allowance for uncollectible accounts receivable based upon the expected
collectibility of all accounts receivable. At March 31, 2000, two customers
accounted for 16% and 14% of accounts receivable, respectively. At March 31,
1999, two customers accounted for 20% and 10% of accounts receivable,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments is determined by the
Company, using available market information and valuation methodologies
considered to be appropriate. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
significant effect on the estimated fair value amounts. The carrying amounts of
the Company's cash equivalents, short-term investments, accounts receivable, and
nonmarketable equity investments, approximate their fair values due to their
short maturities. The fair value of the Company's convertible subordinated
debentures (see Note 7) of $7.7 million has been estimated using discounted cash
flow analysis, based on the incremental borrowing rate currently available to
the Company for a loan with similar terms and maturity.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related
interpretations thereof. The Company provides additional pro forma disclosures
as
40
42
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required under Statement of Financial Accounting Standards No. 123 ("FAS 123"),
"Accounting for Stock-Based Compensation." See Note 9.
COMPREHENSIVE INCOME
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Comprehensive income, as
defined, includes all changes in equity (net assets) during a period from
non-owner sources. The primary difference between net income and comprehensive
income, for the Company, is due to unrealized losses on short-term investments
classified as available-for-sale. Comprehensive income is being shown in the
consolidated statements of stockholders' equity.
SEGMENT INFORMATION
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." This statement establishes standards for the way companies
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and services,
geographical areas and major customers. In accordance with the provisions of FAS
131, beginning with the second quarter of fiscal 2000, the Company has
determined that it has two reportable operating segments. See Note 11.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current year presentation.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding during the period (denominator). Diluted net income
(loss) per share is computed using the weighted average number of common shares
and potential common shares outstanding during the period. Potential common
shares result from the assumed exercise, using the treasury stock method, of
outstanding convertible noncumulative preferred stock (Preferred Stock), common
stock options, convertible subordinated debentures, warrants and unvested
restricted common stock having a dilutive effect.
The numerators for each period presented are equal to the reported net
income (loss). The reconciliation of the denominators used in computing basic
and diluted per share amounts is as follows (in thousands):
YEAR ENDED MARCH 31,
--------------------------
2000 1999 1998
------ ------ ------
Basic shares............................................. 18,071 15,018 12,083
Effect of dilutive securities:
Preferred Stock........................................ -- -- 973
Common stock options................................... -- -- 1,376
Unvested restricted common stock....................... -- -- 696
------ ------ ------
Diluted shares........................................... 18,071 15,018 15,128
====== ====== ======
41
43
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following equity instruments were not included in the computations of
net income (loss) per share because the effect on the calculations would be
anti-dilutive (in thousands):
MARCH 31,
--------------------------
2000 1999 1998
----- ----- ----
Common stock options..................................... 4,174 3,430 287
Warrants................................................. 701 -- --
Convertible subordinated debentures...................... 638 -- --
Unvested restricted common stock......................... 516 143 --
----- ----- ---
Total.......................................... 6,029 3,573 287
===== ===== ===
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000 pursuant to the issuance
of FAS 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
deferred the effective date of FAS 133 by one year. FAS 133 establishes methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. The Company
does not expect that the adoption of FAS 133 will have a material impact on its
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25." FIN 44 clarifies the application of APB
25 for certain issues including: (a) the definition of employee for purposes of
applying APB 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. In
general, FIN 44 is effective July 1, 2000. We do not expect the adoption of FIN
44 to have a material effect on our consolidated financial position or results
of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company is
required to adopt SAB 101 by no later than the fourth quarter of fiscal 2001.
The Company has reviewed SAB 101 and believes it should not have a significant
impact on its revenue recognition practices.
42
44
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS:
MARCH 31,
------------------
2000 1999
------- -------
(IN THOUSANDS)
Accounts receivable......................................... $ 1,836 $ 6,572
Less: allowance for doubtful accounts..................... (442) (686)
------- -------
$ 1,394 $ 5,886
======= =======
Inventories:
Raw materials............................................. $ 65 $ 952
Work-in-process........................................... 797 892
Finished goods............................................ 505 2,071
------- -------
$ 1,367 $ 3,915
======= =======
Property and equipment:
Machinery and computer equipment.......................... $ 4,841 $ 4,317
Furniture and fixtures.................................... 1,230 691
Licensed software......................................... 3,544 3,457
Leasehold improvements.................................... 644 600
------- -------
10,259 9,065
Less: accumulated depreciation and amortization........... (7,572) (6,902)
------- -------
$ 2,687 $ 2,163
======= =======
NOTE 3 -- ACQUISITION OF ODISEI:
In May 1999, the Company acquired Odisei, a privately held, development
stage company based in Sophia Antipolis, France, that develops software for
managing voice-over IP networks. The consolidated financial statements reflect
the acquisition of Odisei for approximately 2,988,000 shares of the Company's
common stock. Certain of the shares issued to Odisei employee shareholders are
subject to repurchase if the employee departs prior to vesting. Approximately
507,000 shares issued in exchange for restricted stock previously held by
employees of Odisei are subject to repurchase at March 31, 2000. The purchase
price of the acquisition of approximately $13.5 million, which includes
approximately $277,000 of acquisition related costs, was used to acquire the net
assets of Odisei. The purchase price was allocated to tangible assets acquired
and liabilities assumed based on the book value of Odisei's current assets and
liabilities, which the Company believes approximates their fair value. In
addition, the Company engaged an independent appraiser to value the intangible
assets, including amounts allocated to Odisei's in-process research and
development. The in-process research and development relates to Odisei's initial
product for which technological feasibility had not been established and was
estimated to be approximately 60% complete. The fair value of the in-process
technology was based on a discounted cash flow model which discounts expected
future cash flows to present value, net of tax. In developing cash flow
projections, revenues were forecasted based on relevant factors, including
aggregate revenue growth rates for the business as a whole, characteristics of
the potential market for the technology and the anticipated life of the
technology. Projected annual revenues for the in-process research and
development projects were assumed to ramp up initially and decline significantly
at the end of the in-process technology's economic life. Operating expenses and
resulting profit margins were forecasted based on the characteristics and cash
flow generating potential of the acquired in-process technology. Associated
risks include the inherent difficulties and uncertainties in completing the
project and thereby achieving technological feasibility, and risks related to
the impact of potential changes in market conditions and technology. The
resulting estimated net cash flows have been discounted at a rate of 27%. This
discount
43
45
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate was based on the estimated cost of capital plus an additional discount for
the increased risk associated with in-process technology. Based on the
independent appraisal, the value of the acquired Odisei in-process research and
development, which was expensed in the fiscal year ended March 31, 2000, was
$10.1 million. The excess of the purchase price over the net tangible and
intangible assets acquired and liabilities assumed was allocated to goodwill.
The allocation of the purchase price is as follows (in thousands):
In-process research and development........................ $10,100
Workforce.................................................. 200
Net tangible liabilities................................... (219)
Goodwill................................................... 3,464
-------
$13,545
=======
The Company's consolidated statement of operations for the fiscal year
ended March 31, 2000 includes the results of Odisei from the date of
acquisition. Had the acquisition taken place as of the beginning of either
fiscal 2000 or fiscal 1999, the pro forma net loss for both periods would have
been substantially the same.
NOTE 4 -- RELATIONSHIP WITH STMICROELECTRONICS:
During the fourth quarter of fiscal 2000, the Company sold 3.7 million
shares of its common stock to STMicroelectronics NV ("STM") at a purchase price
of $7.50 per share. In addition, the Company granted STM the right to a seat on
the Company's Board of Directors as long as it holds at least 10% of the
Company's outstanding shares. STM will have certain rights to maintain its
percentage ownership interest of the Company's outstanding voting securities
provided, however, that its total percentage ownership of the outstanding voting
stock of the Company shall not exceed 19.9%. The Company also granted to STM a
non-exclusive, royalty-bearing license to certain technology and will undertake
certain joint development activities with a subsidiary of STM. Under the terms
of the agreement, STM guaranteed certain minimum payments to the Company
totaling $1.0 million for prepaid royalties and certain non-recurring
engineering services.
Net proceeds from the sale of stock were $27.7 million, representing a
discount of approximately $7.4 million from the $35.1 million fair market value
of the stock on the date of the agreement. The $7.4 million discount has been
reflected in the fiscal 2000 consolidated financial statements with a charge of
$6.4 million to selling, general and administrative expense and $1.0 million
recorded as a sales discount attributable royalty and engineering services to be
provided to STM by the Company.
NOTE 5 -- TRANSACTIONS WITH RELATED PARTIES:
The Company purchased $956,000 and $3.8 million of raw materials inventory
from Sanyo Semiconductor Corporation ("Sanyo") and an affiliate of Sanyo during
the fiscal years ended March 31, 1999 and 1998, respectively. An executive of
Sanyo served on the Company's Board of Directors through July 15, 1999.
A representative of National Semiconductor Corporation ("National") was a
member of the Company's Board of Directors until May 19, 1997. The Company
subleased to National a portion of its facilities under a month to month
sublease arrangement until August 1, 1997. Proceeds from the sublease were
recorded as a reduction to operating expenses and aggregated $149,000 during the
fiscal year ended March 31, 1998.
During the fiscal year ended March 31, 1998, the Company's product revenues
included $355,000 in sales to ASCII Corporation ("ASCII"). The Company
terminated its distribution relationship with ASCII effective June 30, 1997. An
executive of ASCII was a member of the Company's Board of Directors until May
27, 1997.
During fiscal 2000 and 1999, the Company paid a member of the Board of
Directors approximately $41,000 and $85,000, respectively, for technical
consulting services provided on behalf of the Company.
44
46
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- INCOME TAXES:
Income (loss) before income taxes includes $160,500, $105,000 and $91,000
of income of its foreign subsidiary for the fiscal years ended March 31, 2000,
1999 and 1998, respectively. The components of the consolidated (benefit)
provision for income taxes consisted of the following (in thousands):
YEAR ENDED MARCH 31,
-----------------------
2000 1999 1998
---- ---- -------
Current:
Federal.................................................. $ -- $(26) $(1,018)
State.................................................... -- -- --
Foreign.................................................. 120 26 36
---- ---- -------
$120 $ -- $ (982)
==== ==== =======
Deferred tax assets are comprised of the following (in thousands):
MARCH 31,
--------------------
2000 1999
-------- --------
Research and development credit carryforwards............... $ 2,982 $ 2,403
Net operating loss carryforwards............................ 11,678 7,165
Inventory valuation......................................... 1,104 3,037
Reserves and allowances..................................... 697 969
Other....................................................... 2,162 1,923
-------- --------
18,623 15,497
Valuation allowance......................................... (18,623) (15,497)
-------- --------
Total............................................. $ -- $ --
======== ========
Management believes that, based on a number of factors, the weight of
objective available evidence indicates that it is more likely than not that it
will not be able to realize its deferred tax assets. Accordingly, a full
valuation allowance was recorded at March 31, 2000 and March 31, 1999.
At March 31, 2000, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $35.7 million and $13.1
million, respectively, which expire at various dates beginning in 2005. The net
operating loss carryforwards include approximately $3.2 million resulting from
employee exercises of non-qualified stock options or disqualifying dispositions
the tax benefits of which, when realized, will be accounted for as an addition
to additional paid-in capital rather than as a reduction of the provision for
income taxes. In addition, at March 31, 2000, the Company had research and
development credit carryforwards for federal and state tax reporting purposes of
approximately $1.7 million and 1.2 million, respectively. The federal credit
carryforwards will begin expiring in 2010 while the California credit will
carryforward indefinitely. Under applicable tax laws, the amount of and benefits
from net operating losses and credits that can be carried forward may be
impaired or limited in certain circumstances. Events which may cause limitations
in the amount of net operating loss carryforwards that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50% over a three year period.
45
47
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the tax (benefit) provision to the amounts computed
using the statutory U.S. federal income tax rate of 34% is as follows (in
thousands):
YEAR ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
(Benefit) provision at statutory rate................. $(8,408) $(6,572) $ 933
State income taxes (benefit) before valuation
allowance, net of federal effect.................... (251) (729) 160
In-process research and development................... 3,434 -- --
Discount on issuance of common stock.................. 2,176 -- --
Reversal of previously accrued income taxes payable... -- -- (1,018)
Research and development credits...................... (338) (483) (385)
Valuation allowance................................... 3,125 7,712 (995)
Non-deductible compensation........................... 55 165 504
Foreign income taxes.................................. 166 -- --
Other................................................. 261 (93) (181)
------- ------- -------
(Benefit) provision for income taxes.................. $ 120 $ -- $ (982)
======= ======= =======
The tax benefit for the year ended March 31, 1998 resulted from the
reversal of approximately $1.0 million of our income tax liability in the first
quarter of fiscal 1998 upon notice from the Internal Revenue Service that it had
reversed a previously asserted deficiency related to the taxable year 1992.
NOTE 7 -- CONVERTIBLE SUBORDINATED DEBENTURES:
In December 1999, the Company issued $7.5 million of 4% Series A and Series
B convertible subordinated debentures (the "Debentures"). The Debentures mature
on December 17, 2002 unless converted earlier. The $3.75 million Series A
debentures and $3.75 million Series B debentures are convertible into the
Company's common stock at a conversion price equal to $7.05 and $35.50,
respectively. Interest is payable semiannually.
For the Series A and Series B debentures, the lender received a three year
warrant to purchase approximately 532,000 common shares of the Company at $7.05
per share and 106,000 shares at $35.50 per share, respectively. The Company also
issued warrants to the placement agent in conjunction with the Series A and
Series B debentures equal to approximately 53,000 shares and 11,000 shares,
respectively, at substantially the same terms granted to the lender.
Using the Black-Scholes pricing model, the Company determined that the debt
discount associated with the fair value of the warrants issued to the lender
approximated $2.2 million. The amortization of the debt discount is being
reflected as a non-cash charge to interest expense over the term of the
warrants. The Company recognized approximately $218,000 of interest expense
associated with amortization of the debt discount during the fiscal year ended
March 31, 2000. The debt discount, net of accumulated amortization, is reflected
as a reduction in the face value of the Debentures.
The costs of issuing the Debentures totaled $864,000, including a non-cash
charge of $247,000 for the value of the warrants issued to the placement agent,
were recorded in Intangibles and Other Assets and are being amortized to
interest expense over the term of the Debentures.
46
48
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCIES:
The Company leases its primary facility under a noncancelable operating
lease agreement that expires in May 2003. This agreement provides for annual
increments of rent in predetermined amounts and requires the Company to pay
property taxes, insurance and normal maintenance costs.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
YEAR ENDING MARCH 31,
- ---------------------
2001........................................................ $1,247
2002........................................................ 1,276
2003........................................................ 1,202
2004........................................................ 196
2005 and thereafter......................................... --
------
Total minimum payments...................................... $3,921
======
Rent expense for all operating leases for the years ended March 31, 2000,
1999 and 1998 was $1.3 million, $890,000 and $1.1 million, respectively.
The Company is involved in various legal claims and litigation that have
arisen in the normal course of the Company's operations. While the results of
such claims and litigation cannot be predicted with certainty, the Company
believes that the final outcome of such matters will not have a significant
adverse effect on the Company's financial position or results of operations.
However, should the Company not prevail in any such litigation, its operating
results and financial position could be adversely impacted.
NOTE 9 -- STOCKHOLDERS' EQUITY:
COMMON STOCK AND PREFERRED STOCK
In July 1997, the Company completed an initial public offering (the
"Offering") of its common stock, selling 4,140,000 shares at $6.50 per share.
Net proceeds to the Company were approximately $24.7 million after deducting
related issuance costs. As of the closing date of the Offering, all of the
Preferred Stock outstanding was converted into an aggregate of 3,726,373 shares
of common stock.
1992 STOCK OPTION PLAN
The Board of Directors has reserved 3,000,000 shares of the Company's
common stock for issuance under 1992 Stock Option Plan (the "1992 Plan"). The
1992 Plan provides for granting incentive and nonstatutory stock options to
employees at prices equal to the fair market value of the stock at the grant
dates. Options generally vest over periods ranging from two to four years.
Vesting for certain options accelerates if certain predefined milestones are
met.
KEY PERSONNEL PLAN
In July 1995, the Board of Directors adopted the Key Personnel Plan. The
Board of Directors has reserved 2,200,000 shares of the Company's common stock
for issuance under this plan. The Key Personnel Plan provides for granting
incentive and nonstatutory stock options to officers of the Company at prices
equal to the fair market value of the stock at the grant dates. Options
generally vest over periods ranging from two to four years. Vesting for certain
options accelerated in fiscal 1998 upon the achievement of certain predefined
milestones.
47
49
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 STOCK PLAN
In June 1996, the Board of Directors adopted the 1996 Stock Plan (the "1996
Plan") and reserved 1,000,000 shares of the Company's common stock for issuance
under this plan. In June 1997, the Company's shareholders authorized an increase
in the number of shares of the Company's common stock reserved for issuance
under the 1996 Plan to 1,500,000 shares. This amount is increased annually on
the first day of each of the Company's fiscal years in an amount equal to 5% of
the Company's common stock issued and outstanding at the end of the immediately
preceding fiscal year subject to certain maximum limitations. This provision
resulted in an increase of 771,287 and 764,680 shares issuable under the 1996
Plan during the fiscal years ended March 31, 2000 and 1999, respectively. The
1996 Plan provides for granting incentive and nonstatutory stock options to
employees at prices equal to the fair market value of the stock at the grant
dates as determined by the Company's Board of Directors. Options generally vest
over a period of not more than five years.
1996 DIRECTOR OPTION PLAN
The Company's 1996 Director Option Plan (the "Director Plan") was adopted
in June 1996 and became effective upon the closing of the Offering. A total of
150,000 shares of common stock have been reserved for issuance under the
Director Plan. The Director Plan provides for the periodic grant of nonstatutory
stock options to certain non-employee directors of the Company (the "Outside
Directors"). The Director Plan provides that each option will become exercisable
in monthly installments over a period of one year from the date of grant. The
exercise price per share of all options granted under the Director Plan will be
equal to the fair market value of a share of the Company's common stock on the
date of grant. Options granted to Outside Directors under the Director Plan have
a ten year term, or shorter upon termination of an Outside Director's status as
a director. If not terminated earlier, the Director Plan will have a term of ten
years.
1999 NONSTATUTORY STOCK OPTION PLAN
In fiscal 2000, the Company's Board of Directors approved the 1999
Nonstatutory Stock Option Plan (the "1999 Plan") with 600,000 shares initially
reserved for issuance thereunder. Under terms of the 1999 Plan, options may not
be issued to either Officers or Directors of the Company provided, however, that
options may be granted to an Officer in connection with the Officer's initial
employment by the Company. Vesting for
48
50
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain options accelerates if certain predefined milestones are met. Option
activity under the Company's stock option plans is summarized as follows:
OPTIONS SHARES SUBJECT WEIGHTED AVERAGE
AVAILABLE FOR TO OPTIONS EXERCISE PRICE
GRANT OUTSTANDING PER SHARE
------------- -------------- ----------------
Balance at March 31, 1997................. 452,656 2,291,150 $2.83
Increase in options available for
grant................................ 650,000 -- --
Granted................................. (1,273,665) 1,273,665 $7.92
Exercised............................... -- (413,033) $0.50
Returned to plan........................ 291,918 (291,918) $4.73
---------- ----------
Balance at March 31, 1998................. 120,909 2,859,864 $5.26
Increase in options available for
grant................................ 764,680 -- --
Granted................................. (3,243,175) 3,243,175 $3.32
Exercised............................... -- (202,332) $1.00
Returned to plan........................ 2,470,397 (2,470,397) $6.74
---------- ----------
Balance at March 31, 1999................. 112,811 3,430,310 $2.60
Increase in options available for
grant................................ 1,371,287 -- --
Granted................................. (2,105,015) 2,105,015 $7.94
Exercised............................... -- (725,209) $2.12
Returned to plan........................ 636,354 (636,354) $3.40
---------- ----------
Balance at March 31, 2000................. 15,437 4,173,762 $5.25
========== ----------
Options exercisable at March 31, 2000... 1,538,091 $2.72
==========
Significant option groups outstanding at March 31, 2000 and related
weighted average exercise price and contractual life information are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE WEIGHTED
-------------------------- -------------------------- AVERAGE
WEIGHTED WEIGHTED REMAINING
RANGE OF AVERAGE AVERAGE CONTRACTUAL LIFE
EXERCISE PRICES SHARES EXERCISE PRICE SHARES EXERCISE PRICE (YEARS)
- ---------------- --------- -------------- --------- -------------- ----------------
$ 0.01 to $ 3.16 2,181,822 $ 2.32 1,271,980 $ 2.19 7.2
$ 3.16 to $ 6.32 1,205,640 $ 4.52 206,015 $ 4.44 9.0
$ 6.32 to $ 9.49 180,000 $ 7.20 48,851 $ 7.08 8.5
$ 9.49 to $12.65 175,000 $ 9.50 7,290 $ 9.50 9.8
$12.65 to $22.14 360,300 $18.23 3,955 $18.00 9.9
$22.14 to $31.62 71,000 $26.75 -- $ -- 9.6
--------- ---------
4,173,762 $ 5.25 1,538,091 $ 2.72 8.1
========= =========
In September 1998, the Board of Directors approved a proposal under which
employees elected to cancel approximately 2,107,000 options in exchange for
grants of new options with an exercise price equal to the then current fair
market value. In consideration for such repricing, each participating employee
agreed that they forfeit their right to exercise such options should they resign
from the Company within 12 months of the repricing date.
During the year ended March 31, 1997, options to purchase 2,156,800 shares
under the Key Personnel Plan were exercised for partial recourse notes. Shares
issued under this plan are subject to repurchase at their original issuance
price if the employee leaves the Company prior to vesting. During fiscal 2000,
1999 and 1998,
49
51
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company repurchased 46,296, 257,685 and 46,638 unvested shares,
respectively. As of March 31, 2000, 9,569 shares were not vested.
In conjunction with the Offering, the Company recorded a deferred
compensation charge of approximately $7,267,000 with respect to options repriced
and certain additional options granted in fiscal 1997. In addition, the Company
recorded an additional deferred compensation charge of approximately $406,000 in
connection with certain options granted to non-officer employees in fiscal 2000.
The Company recognized $161,000, $416,000 and $1,265,000 of said amounts as
compensation expense in the fiscal years ended March 31, 2000, 1999 and 1998,
respectively. The Company recognizes deferred compensation over the related
vesting period of the options (which is generally 48 months). At March 31, 2000
the balance of deferred compensation was $376,000. Deferred compensation is
subject to reduction for any employee who terminates employment prior to the
expiration of such employee's option vesting period.
For disclosure under the provisions of FAS 123, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model, using the multiple option approach with the following
weighted-average assumptions:
YEAR ENDED MARCH 31,
---------------------------------------------
2000 1999 1998
------------- ------------ ------------
Expected volatility...................... 70% 71% 65%
Expected dividend yield.................. 0.0% 0.0% 0.0%
Risk-free interest rate.................. 5.5% to 6.4% 4.2% to 5.6% 5.7% to 6.5%
Weighted average expected option term.... 5.3 years 5.3 years 5.3 years
Weighted average fair value of options
granted................................ $5.12 $2.76 $4.89
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Stock Purchase Plan (the "Purchase Plan") was adopted in
June 1996 and became effective upon the closing of the Offering. Under the
Purchase Plan, a total of 500,000 shares of common stock were initially reserved
for issuance to participating employees who meet certain eligibility
requirements. At the start of each fiscal year, the number of shares of common
stock subject to the Purchase Plan increases so that 500,000 shares remain
available for issuance. This provision resulted in an increase of 187,491 shares
issuable under the Purchase Plan during the fiscal year ended March 31, 2000.
During fiscal 2000 and 1999, 180,910 and 187,491 shares, respectively, were
issued under the Purchase Plan.
The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions at a price equal to 85% of the fair market value of
the common stock at the beginning of each two year offering period or the end of
a six month purchase period, whichever is lower. The contribution amount may not
exceed ten percent of an employee's base compensation, including commissions but
not including bonuses and overtime, In the event of a merger of the Company with
or into another corporation or the sale of all or substantially all of the
assets of the Company, the Purchase Plan provides that a new exercise date will
be set for each option under the plan which exercise date will occur before the
date of the merger or asset sale.
50
52
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the purpose of providing pro forma disclosures, the estimated fair
value of stock purchase rights were estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
YEAR ENDED MARCH 31,
---------------------------------------
2000 1999 1998
----------- ---------- ----------
Expected volatility............................ 70% 71% 65%
Expected dividend yield........................ 0.0% 0.0% 0.0%
Risk-free interest rate........................ 5.84% 4.49% 5.63%
Weighted average expected option term.......... 1.25 years 0.9 years 1.2 years
Weighted average fair value of options
granted...................................... $5.52 $1.81 $2.62
CERTAIN PRO FORMA DISCLOSURES
The Company accounts for its stock plans in accordance with the provisions
of Accounting Principles Board Opinion No. 25. Had compensation cost for the
Company's stock plans been determined based on the fair value of options at
their grant dates, as prescribed in FAS 123, the Company's net income (loss)
would have been as follows (in thousands, except per share amounts):
YEAR ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- -------- ------
Net income (loss):
As reported........................................ $(24,848) $(19,224) $3,727
Pro forma.......................................... $(30,670) $(24,175) $ 58
Basic income (loss) per share:
As reported........................................ $ (1.38) $ (1.28) $ 0.31
Pro forma.......................................... $ (1.70) $ (1.61) $ 0.01
Diluted income (loss) per share:
As reported........................................ $ (1.38) $ (1.28) $ 0.25
Pro forma.......................................... $ (1.70) $ (1.61) $ 0.01
NOTE 10 -- EMPLOYEE BENEFIT PLANS:
401(k) SAVINGS PLAN
In April 1991, the Company adopted a 401(k) savings plan (the "Savings
Plan") covering substantially all of its U.S. employees. Eligible employees may
contribute to the Savings Plan up to the maximum allowed by the IRS from their
compensation. Effective January 1, 1998, the Company's matching contribution
increased from $300 to $1,500 per employee per calendar year at a dollar for
dollar rate of the employee contribution. The Company's matching contributions
vest over three years. The Company contributed $124,000 and $144,000 to the
Savings Plan during fiscal 2000 and 1999, respectively. The Company's
contributions were not significant for the fiscal year ended March 31, 1998.
PROFIT SHARING PLAN
In April 1995, the Company's Board of Directors approved a profit sharing
plan that provides for additional compensation to all employees of the Company
based on quarterly income before income taxes. The profit sharing plan was
effective beginning in fiscal 1996 and provided for payments of 15% of total
quarterly income before income taxes. In July 1997, the Board of Directors
amended the profit sharing plan such that future profit sharing amounts are
calculated as a percentage of net income. Charges related to this plan
approximated $685,000 for the fiscal year ended March 31, 1998, and were not
significant for the fiscal years ended March 31, 2000 or 1999.
51
53
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- SEGMENT REPORTING
Due to a change in the Company's organizational during its second quarter
ended September 30, 1999, the Company determined that it had two reportable
segments, Broadband Communications and Video Monitoring, as defined by Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Broadband Communications segment is
comprised of revenues and direct expenses associated with sales of the Company's
products focused on the IP telephony and videoconferencing markets. The Video
Monitoring segment is comprised of revenues and direct expenses associated with
sales of the Company's products focused on the video monitoring market. Due to
limitations in the Company's internal reporting systems, it is not practicable
to disclose results for the segments for the three months ended June 30, 1999 or
for the fiscal years ended March 31, 1999 and 1998. The following illustrates
results by segment for the period during which the information was available:
REVENUES OPERATING LOSS
-------- --------------
(IN THOUSANDS)
Broadband Communications.................................... $13,470 $ (857)
Video Monitoring............................................ 4,501 (528)
Corporate and Other......................................... 1,519 (12,140)
------- --------
8x8 results for nine months ended March 31, 2000............ 19,490 (13,525)
8x8 results for three months ended June 30, 1999............ 5,894 (13,619)
------- --------
8x8 results for fiscal year ended March 31, 2000............ $25,384 $(27,144)
======= ========
There are no intersegment revenues between the two reportable segments.
Shared support service functions such as human resources, facilities management
and other infrastructure support and overhead are not allocated, but rather are
included in the Corporate and Other category. In addition, all activities
associated with the Company's ViaTV product line, which has been discontinued,
have been included in the Corporate and Other Category. Lastly, special charges
which are reported separately in the Consolidated Statements of Operations are
not assigned or allocated to the segments, but rather have been included in the
Corporate and Other category. All other accounting policies are applied
consistently to the segments, where applicable. The only asset allocated by
segment is inventory. Inventory allocated to the Broadband Communications and
Video Monitoring segments at March 31, 2000 was approximately $983,000 and
$384,000, respectively.
The following illustrates net revenues by groupings of similar products:
YEAR ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Videophone systems.......................................... $ 9,006 $15,887 $13,360
Media hub systems........................................... 451 -- --
Multimedia communication semiconductors..................... 11,323 10,302 21,928
IP telephony semiconductors................................. 37 -- --
License and other revenues.................................. 4,567 5,493 14,488
------- ------- -------
$25,384 $31,682 $49,776
======= ======= =======
52
54
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following illustrates net revenues by geographic area. Revenues are
attributed to countries based on the destination of shipment:
YEAR ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
United States............................................... $13,381 $18,116 $26,381
Japan....................................................... 2,351 4,227 4,647
Europe...................................................... 5,808 5,393 10,951
Other foreign countries..................................... 3,844 3,946 7,797
------- ------- -------
$25,384 $31,682 $49,776
======= ======= =======
No customer represented greater than 10% of total revenues for either of
the fiscal years ended March 31, 2000 and 1999. Product sales and license and
other revenues derived from one customer represented approximately 20% of total
revenues for the fiscal year ended March 31, 1998.
NOTE 12 -- INVENTORY CHARGES:
In the fourth quarter of fiscal 1999, the Company determined that a
combination of factors including the high cost of maintaining a consumer
distribution channel, the slower than expected growth rate of the consumer
videophone market, and the low gross margins typical of a consumer electronics
product made it unlikely that the consumer videophone business would be
profitable in the foreseeable future. Therefore, the Company announced in April
1999 that it would cease production of the ViaTV product line and withdraw from
its distribution channels over the subsequent several quarters. In conjunction
with this decision the Company recorded a $5.7 million charge associated with
the write off of ViaTV videophone inventories.
NOTE 13 -- SUBSEQUENT EVENTS:
On May 19, 2000, the Company entered into an agreement to acquire UForce,
Inc. ("UForce") by issuing approximately 3.6 million shares of the Company's
common stock in exchange for all of the outstanding shares of UForce. In
addition, the Company will issue common stock options for approximately 1.0
million shares in exchange for all outstanding UForce stock options. The
transaction will be accounted for using the purchase method. The acquisition is
subject to certain closing conditions, and the Company anticipates completing
the acquisition during its second fiscal quarter ending September 30, 2000.
Also, on May 19, 2000, the Company entered into an agreement with
Interlogix, Inc. ("Interlogix") whereby the Company agreed to sell certain
assets and license certain technology related to the Company's video monitoring
business. The Company is obligated to provide Interlogix with future updates and
upgrades to the licensed technology. The assets sold included certain accounts
receivable, inventories, machinery, equipment, and intangibles. Interlogix
agreed to pay the Company $5.5 million, subject to certain adjustments, for the
assets and the associated technology license, which has an initial term of three
years. Upon the earlier of six months from the date of the agreement or upon
delivery of certain remaining obligations, the Company will commence recognition
of the resulting net gain over the remaining term of the technology license.
53
55
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS WRITE-OFFS/
BALANCE AT CHARGED TO RECOVERIES OF BALANCE AT
BEGINNING COSTS AND UNCOLLECTIBLE END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS PERIOD
- ----------- ---------- ---------- ------------- ----------
Allowance for doubtful accounts:
March 31, 1998............................... $374 $ 255 $19 $610
March 31, 1999............................... 610 86 10 686
March 31, 2000............................... 686 (200) 44 442
54
56
CONSOLIDATED QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
QUARTER ENDED
-----------------------------------------------------------------------------------------
MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
2000 1999 1999 1999 1999 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
Total revenues.................. $ 6,542 $ 6,238 $ 6,710 $ 5,894 $ 5,500 $10,079 $ 9,003 $ 7,100
Cost of revenues................ 1,806 1,993 1,446 3,353 8,348 5,630 5,913 4,390
------- ------- ------- -------- ------- ------- ------- -------
Gross profit (loss)............. 4,736 4,245 5,264 2,541 (2,848) 4,449 3,090 2,710
------- ------- ------- -------- ------- ------- ------- -------
Operating expenses:
Research and development...... 3,772 2,854 2,860 2,423 2,045 2,512 2,753 2,612
Selling, general and
administrative.............. 10,389 3,545 3,786 3,587 3,651 5,409 4,290 4,362
In-process research and
development................. -- -- -- 10,100 -- -- -- --
Goodwill amortization......... 190 189 185 50 -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Total operating
expenses............. 14,351 6,588 6,831 16,160 5,696 7,921 7,043 6,974
------- ------- ------- -------- ------- ------- ------- -------
Loss from operations............ (9,615) (2,343) (1,567) (13,619) (8,544) (3,472) (3,953) (4,264)
Other income, net............... 231 109 195 1,881 164 249 303 293
------- ------- ------- -------- ------- ------- ------- -------
Loss before income taxes........ (9,384) (2,234) (1,372) (11,738) (8,380) (3,223) (3,650) (3,971)
Provision for income taxes...... 54 -- 66 -- -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Net loss........................ $(9,438) $(2,234) $(1,438) $(11,738) $(8,380) $(3,223) $(3,650) $(3,971)
======= ======= ======= ======== ======= ======= ======= =======
Net loss per share:
Basic and diluted............. $ (0.47) $ (0.12) $ (0.08) $ (0.72) $ (0.55) $ (0.21) $ (0.24) $ (0.27)
Shares used in per share
calculations:
Basic and diluted............. 20,023 18,035 17,886 16,341 15,234 15,105 14,939 14,792
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended (the 2000 Proxy Statement), not later than 120
days after the end of the fiscal year covered by this Report, and certain
information included in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this is included in the 2000 Proxy Statement
under the captions "Election of Directors -- Nominees," "Additional
Information -- Executive Officers" and "Additional Information -- Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the 2000 Proxy
Statement under the captions "Election of Directors -- Compensation of
Directors," "Additional Information -- Executive Compensation" and is
incorporated herein by reference.
55
57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the 2000 Proxy
Statement under the caption "Additional Information -- Security Ownership" and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information required by this Item is set forth in the 2000 Proxy
Statement under the captions "Additional Information -- Certain Relationships
and Transactions," "Additional Information -- Employment Contracts and
Termination of Employment and Change in Control Arrangements," "Additional
Information -- Compensation Committee Interlocks and Insider Participation,"
"Additional Information -- Report of the Compensation Committee of the Board of
Directors" and "Additional Information -- Stock Performance Graph" and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
The information required by this item is included above in Item 8.
(a)(2) Financial Statement Schedules.
The information required by this item is included above in Item 8.
(a)(3) Exhibits.
The documents listed on the Exhibit Index appearing at page 58 of this
Report are filed herewith. Copies of the exhibits listed in the Exhibit Index
will be furnished, upon request, to holders or beneficial owners of the
Company's common stock.
(b) Reports on Form 8-K.
On May 26, 2000, the Company filed a Current Report on Form 8-K, pursuant
to Item 5, to report the sale of certain assets and the licensing of certain
technologies related to its video monitoring business unit to Interlogix, Inc.
on May 19, 2000.
On May 23, 2000, the Company filed a Current Report on Form 8-K, pursuant
to Item 5, to report that the Company had entered into an agreement on May 19,
2000 to acquire UForce, Inc., a developer of IP-based software applications
(such as voicemail and unified messaging) based in Montreal, Canada. UForce also
develops a service creation environment (SCE) that allows telecommunication
service providers to develop, deploy and manage telephony applications and
services to their customers.
On February 15, 2000, the Company filed a Current Report on Form 8-K,
pursuant to Item 5, to report that the Company had entered into an agreement on
January 24, 2000 to sell 3.7 million shares of its common stock to
STMicroelectronics NV at a purchase price of $7.50 per share.
56
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, 8x8, Inc., a Delaware corporation, has
duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Clara, State of
California, on June 28, 2000.
8X8, INC.
By: /s/ PAUL VOOIS
------------------------------------
Paul Voois,
Chairman & Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Paul Voois and David M. Stoll, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Report on Form 10-K has been signed by the following persons in the
capacities and on the date indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PAUL VOOIS Chairman of the Board and Chief June 28, 2000
- --------------------------------------------------- Executive Officer (Principal
Paul Voois Executive Officer)
/s/ DAVID M. STOLL Chief Financial Officer and Vice June 28, 2000
- --------------------------------------------------- President, Finance (Principal
David M. Stoll Financial and Accounting
Officer)
/s/ LEE CAMP Director June 28, 2000
- ---------------------------------------------------
Lee Camp
/s/ BERND GIROD Director June 28, 2000
- ---------------------------------------------------
Bernd Girod
/s/ GUY L. HECKER, JR. Director June 28, 2000
- ---------------------------------------------------
Guy L. Hecker, Jr.
/s/ CHRISTOS LAGOMICHOS Director June 28, 2000
- ---------------------------------------------------
Christos Lagomichos
/s/ JOE MARKEE Director June 28, 2000
- ---------------------------------------------------
Joe Markee
/s/ WILLIAM TAI Director June 28, 2000
- ---------------------------------------------------
William Tai
57
59
8X8, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
2.1 (c) Stock Exchange Agreement, dated as of May 13, 1999, by and
among 8x8, Inc., Odisei S.A. and the Security Holders named
therein and the agreements related thereto.
2.2 (g) Share Exchange Agreement, dated as of May 19, 2000, by and
among Netergy, UForce, all of the shareholders of UForce and
indirect owners of the shares of UForce.
3.1 (a) Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.2 (a) Bylaws of Registrant.
4.1 (d) Securities Purchase Agreement by and among Wingate Capital
Ltd. and Fisher Capital Ltd. (collectively the "Buyers") and
8x8, Inc. dated December 15, 1999, with Schedule and
Exhibits.
4.2 (d) Registration Rights Agreement by and among 8x8, Inc. and the
Buyers dated December 15, 1999.
4.3 (d) Form of Series A Warrant by and among 8x8, Inc. and
FleetBoston Robertson Stephens, Inc. dated December 16,
1999.
4.4 (d) Form of Series B Warrant by and among 8x8, Inc. and
FleetBoston Robertson Stephens Inc. dated December 16, 1999.
4.5 (d) Registration Rights Agreement by and among 8x8, Inc. and
FleetBoston Robertson Stephens Inc. dated December 16, 1999.
4.6 (f) Common Stock Purchase Agreement by and among 8x8, Inc. and
STMicroelectronics dated January 24, 2000.
4.7 (f) Form of Investor Rights Agreement by and among 8x8, Inc. and
STMicroelectronics dated January 24, 2000.
10.1 (a) Form of Indemnification Agreement.
10.2 (a) 1992 Stock Option Plan, as amended, and form of Stock Option
Agreement.
10.3 (a) Key Personnel Plan, as amended, and form of Stock Option
Agreement.
10.4 (a) 1996 Stock Plan, as amended, and form of Stock Option
Agreement.
10.5 (a) 1996 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.6 (a) 1996 Director Option Plan, as amended, and form of Director
Option Agreement.
10.7 (a) Amended and Restated Registration Rights Agreement dated as
of September 6, 1996 among the Registrant and certain
holders of the Registrant's Common Stock.
10.8 (a) Facility lease dated as of July 3, 1990 by and between
Sobrato Interests, a California Limited Partnership, and the
Registrant, as amended.
10.9 *(a) License Agreement dated as of May 7, 1996 by and between
Kyushu Matsushita Electric Industrial Co., Ltd. and the
Registrant.
10.12 (a) Promissory Note between Sandra L. Abbott and Registrant
dated June 29, 1996.
10.13 (a) Promissory Note between David M. Harper and Registrant dated
June 29, 1996.
10.14 (a) Promissory Note between Bryan R. Martin and Registrant dated
June 29, 1996.
10.15 (a) Promissory Note between Chris McNiffe and Registrant dated
June 29, 1996.
10.16 (a) Promissory Note between Mike Noonen and Registrant dated
June 29, 1996.
10.17 (a) Promissory Note between Samuel T. Wang and Registrant dated
June 29, 1996.
10.18 *(a) License Agreement dated as of May 5, 1997 by and between
U.S. Robotics Access Corporation and the Registrant.
58
60
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.19 (b) Warrant Number CS-01 issued by 8x8, Inc. to Stanford
University on February 17, 1998
10.20 (b) Fifth Amendment to Lease dated January 26, 1998 between
Sobrato Interests and the Registrant.
10.21 (b) Landlords Consent to Sublease dated February 23, 1998 among
Sobrato Interests, Bay Networks, Inc. and the Registrant.
10.22 (e) 1999 Nonstatutory Stock Option Plan, as amended, and form of
Stock Option Agreement.
10.23 (h) Asset Purchase Agreement by and among 8x8, Inc. and
Interlogix, Inc. dated May 19, 2000.
10.24 (h) Technology License Agreement by and among 8x8, Inc. and
Interlogix, Inc. dated May 19, 2000.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 57).
27.1 Financial Data Schedule.
- ---------------
* Confidential treatment was granted with respect to certain
portions of this exhibit.
(a) Incorporated by reference to identically numbered exhibits
filed in response to Item 16(a), "Exhibits," of the
registrant's Registration Statement on Form S-1 (File No.
333-15627), as amended, declared effective on July 1, 1997.
(b) Incorporated by reference to identically numbered exhibits
filed in response to Item 14(a), "Exhibits," of the
Registrant's Report on Form 10-K for the fiscal year ended
March 31, 1998.
(c) Incorporated by reference to identically numbered exhibits
filed in response to Item 7, "Exhibits," of the Registrant's
Report on Form 8-K dated June 7, 1999 and 8-K/A dated August
9, 1999.
(d) Incorporated by reference to identically numbered exhibits
filed in response to Item 6(a), "Exhibits," of the
Registrant's Report on Form 10-Q for the fiscal quarter
ended December 31, 1999.
(e) Incorporated by reference to exhibit 10.1 filed in response
to Item 6(a), "Exhibits," of the Registrant's Report on Form
10-Q for the fiscal quarter ended December 31, 1999.
(f) Incorporated by reference to identically numbered exhibits
filed in response to Item 7, "Exhibits," of the Registrant's
Report on Form 8-K filed on February 16, 2000.
(g) Incorporated by reference to identically numbered exhibits
filed in response to Item 7, "Exhibits," of the Registrant's
Report on Form 8-K filed on May 23, 2000.
(h) Incorporated by reference to identically numbered exhibits
filed in response to Item 7, "Exhibits," of the Registrant's
Report on Form 8-K filed May 26, 2000.
59