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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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(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, 1998
[ ] 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 May 1, 1998, the aggregate market value of the
voting stock held by non-affiliates of the Registrant was $74,091,785.44. 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 May
1, 1998 was 15,293,614.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT LOCATION IN FORM 10-K
Proxy Statement for the 1998 Annual Meeting of Part III
Stockholders to be held on June 15, 1998
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8X8, INC.
INDEX
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 8. Financial Statements and Supplementary Data................. 27
Consolidated Balance Sheets................................. 29
Consolidated Statements of Operations....................... 30
Consolidated Statements of Stockholders' Equity............. 31
Consolidated Statements of Cash Flows....................... 32
Notes to Consolidated Financial Statements.................. 33
Consolidated Quarterly Financial Data....................... 45
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 46
Signatures............................................................ 47
Exhibit Index......................................................... 48
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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
8x8, Inc. ("8x8" or the "Company") designs, develops and markets highly
integrated, proprietary video communication semiconductors and associated
software to original equipment manufacturers (OEMs) of corporate video
communication systems. To address new opportunities, the Company has leveraged
its strengths in semiconductor design and related software to develop and market
low cost video communication systems (hereinafter referred to as its
"VideoCommunicators"). The Company began shipping the first product in its
planned family of VideoCommunicator products, ViaTV videophone model VC100, in
February 1997. Subsequently, the Company introduced the VC105, an upgraded
VC100, and added three new models, the VC50, VC55 and VC150, to the ViaTV
product line. The Company also has introduced versions of its ViaTV videophones
designed for European and Asian markets.
The Company's video communication semiconductors combine a reduced
instruction set computer (RISC) microprocessor, a digital signal processor
(DSP), specialized video processing circuitry, static random access memory
(SRAM) and proprietary software on a single chip. The Company's semiconductors
perform the real time compression and decompression (codec) of video and audio
information and establish and maintain network connections in a manner
consistent with international standards for video telephony. These
semiconductors are designed to provide video communication over a broad range of
network types including standard analog telephone lines (commonly known as plain
old telephone service or POTS), integrated services digital networks (ISDN),
local area networks (LAN) and digital subscriber lines (DSL). Customers for the
Company's video communication semiconductors include Mitsubishi, PictureTel,
Siemens, Sony, Tandberg, VideoServer, VCON and Vtel.
The Company's VideoCommunicators are based on its proprietary
semiconductor, software and systems technology. The ViaTV videophones are
designed to be compliant with the H.324 international standard for video
telephony over POTS and to be compatible with personal computer (PC) and non-PC
based systems that adhere to the H.324 standard. The ViaTV videophones are
designed to communicate with full duplex audio and video rates of up to 15
frames per second.
The VC105 ViaTV product connects to a television set and a standard
touch-tone telephone adding video to an otherwise normal telephone call, without
the need for a PC. The VC50 and VC55 are designed without a camera and utilize
an external camera device such as a camcorder or digital still camera in
addition to a television and a touch-tone telephone. In addition to video
communication capability, the VC55 includes an internet web browser developed by
PlanetWeb, Inc. The VC150 includes a built-in liquid crystal display (LCD) and
camera, thus requiring only the addition of a touch-tone telephone to permit
video communication.
INDUSTRY BACKGROUND
The continued expansion of the video communication market is dependent on
several factors including system cost, network bandwidth, the acceptance of
video telephony standards and compression technologies. Decreases in system
costs will expand the number of potential consumers and applications for video
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communication systems. Increases in available bandwidth improve the data
carrying capacity of networks, while improvements in compression technologies
utilize a given bandwidth more efficiently. Increased bandwidth and better
compression both permit the transmission of higher quality audio and video.
Finally, video telephony standards are key to widespread adoption as they are
designed to permit the interoperability between systems offered by different
vendors. The cost of video communication systems has decreased dramatically
since the introduction of the first video communication systems several decades
ago. Currently, corporate room video communication systems that operate over
ISDN and LAN networks are available for less than $10,000, while desktop ISDN
and POTS videophones are sold for less than $2,000.
Videophones that operate over POTS with the addition of a display screen
and a telephone, such as the Company's VC105 product, are now available for less
than $500. As a result, the market for video communication, formerly primarily
limited to the corporate boardroom, has expanded, with increasing corporate
applications as well as greater usage by small businesses and within the home.
Since the first video communication products were introduced in the late
1970's, users have faced a tradeoff between the cost and availability of network
bandwidth and the quality of video images that can be transmitted over the
network. High capacity connections, such as T1/E1 (1.5/2.0 megabits per second
(Mbps) and ISDN (128 kilobits per second (Kbps)) provide greater bandwidth, but
are significantly more costly and less available than analog POTS lines. The
POTS network now offers one-way data transmission rates of up to 56.6 Kbps but
remains limited to rates of up to 33.6 Kbps for the symmetrical data
transmission required for video communication. A number of technologies have
been deployed or are under development which aim to increase the bandwidth
available from existing copper telephone lines. These include faster POTS modems
and residential ISDN, DSL and cable transmission service.
The challenge faced by developers of video communication systems has been
to provide the best possible image quality through the efficient compression of
video and audio data for transmission over available network bandwidth. Because
video images contain a large amount of information, video communication systems
must compress the video and audio data to fit the available network bandwidth
while attempting to maintain the quality and synchronization of audio and video.
For example, a digitized normal television signal contains approximately 160
Mbps of information, which must be compressed by a factor of over 6000 to 1 to
permit symmetrical transmission over POTS at a rate of 25 Kbps. A video
bandwidth of 25 Kbps is typical in a 33.6 Kbps POTS connection, allowing for
audio, data and control overhead. The quality of transmitted video images is a
function of network bandwidth and the sophistication of the hardware and
software used to compress and decompress the data. By using sophisticated
compression algorithms and advanced DSP semiconductors, such as the Company's
video communication semiconductors, video communication system manufacturers can
achieve improved video quality over all network types, including POTS.
The proliferation of video communication equipment has been influenced by
the adoption of international video telephony standards. If complied with, the
standards permit interoperability between systems offered by different vendors.
Increased usage of video communication in the corporate market has been
facilitated by the adoption of the H.320 standard, which defined the video
telephony protocols used by systems connected over ISDN. The adoption of H.320
enabled interoperability between systems from different vendors, encouraged new
market entrants, and contributed to significantly lower system pricing and an
increased installed base. The Company believes that the H.320 standard expanded
the market for business video communication systems over ISDN. Similarly, the
H.324 standard for video telephony over POTS may result in expanded home use of
videophones.* Other standards, such as H.323, are being developed for
communication over packet-based networks, such as LANs and DSL and cable
networks.
Until recently, nearly all video communication products have been targeted
at corporate users with access to high bandwidth connections such as T1/E1 and
ISDN. However, the vast majority of consumers continue
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* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 and "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
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to have limited access to bandwidth beyond that provided by standard analog POTS
lines. The Company believes that significant demand exists for inexpensive
videophone products that would allow users to transmit video images with audio
over normal telephone lines.* In addition, the Company believes that, as higher
bandwidth infrastructure, whether ISDN, DSL or cable networks, becomes more
available, a market for inexpensive videophones that operate over such networks
will develop.*
As a result of the availability of 33.6 Kbps POTS transmission rates, video
compression advances and the adoption of the H.324 standard, low cost POTS
videophones have been developed by the Company and a number of other suppliers.
These products may be introduced in a variety of product configurations and
physical forms (i.e., "form factors"), including those based on telephones and
using a television for display, such as the VC105, or using an LCD for display,
such as the VC150, and those based on the PC. An increasing number of PCs are
being shipped with pre-installed H.324 compliant software. Significant sales of
such H.324 products, if achieved, may increase the usefulness of and demand for
additional H.324 compliant videophones by providing potential videophone
purchasers with other parties to call.*
8X8 STRATEGY
Key elements of the Company's strategy include:
- Expand Upon Core Technology. The Company intends to further develop each
element of its video communication technology, including semiconductor,
software and systems technology. Certain of the Company's ongoing
development efforts are targeted at reducing overall system costs through
integration of additional functions onto the Company's semiconductors.*
At the same time, the Company is continuously developing technology to
improve video and audio quality at varying bandwidths, add video
communication features and ensure compliance with all current and
emerging video telephony standards to encourage proliferation of the
Company's and its OEM customers' system products.*
- Broaden and Enhance VideoCommunicator Family. The Company is currently
selling four models of the ViaTV videophone, all of which currently
operate over POTS and have been introduced since the beginning of 1997.
In addition to the introduction of these products, the Company also has
made available software upgrades to its installed base, adding features
such as pan/tilt/zoom, snapshot mode, auto-answer and picture and audio
quality enhancements. The Company plans to extend its VideoCommunicator
product line in the future by developing products in new form factors and
with new features.* The Company further intends to differentiate its
current products in the future by adding features and providing further
picture and audio quality enhancements.*
- Extend Marketing Channels. The Company currently sells its video
communication semiconductor and software products to OEMs and
distributors. The Company sells its VideoCommunicators to OEMs, retail
stores, distributors and directly to end-users. The Company's
semiconductor and system products are sold in a number of countries
throughout North America, Asia and Europe. The Company continues to work
to broaden the marketing and distribution of its products.*
- Enhance and Increase Capabilities Over Network Infrastructures. The
Company's semiconductor, software and systems technologies currently
enable, to varying degrees, video communication over the POTS, ISDN, LAN,
DSL and cable networks. The Company's current VideoCommunicator products
operate on the POTS network. The Company intends to further enhance the
capabilities to permit operation of the products of its OEM customers and
its VideoCommunicators on additional networks, including those listed
above and those that may emerge in the future.*
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 and "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
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PRODUCTS
VideoCommunicator Products
The Company develops, markets and sells its VideoCommunicator products and
a variety of video communication semiconductors and related software and
reference boards. The table below describes the Company's VideoCommunicator
products:
- ------------------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION FEATURES
- ------------------------------------------------------------------------------------------------------------------
ViaTV Model VC50 Modular H.324 modular videophone with built-in 33.6 Kbps - 3 camera inputs
Videophone modem requiring connection to a television, a digital - Accessory port input
video camera and a touch-tone telephone.
- ------------------------------------------------------------------------------------------------------------------
ViaTV Model VC55 Modular H.324 modular videophone with built-in 33.6 Kbps - 3 camera inputs
Videophone modem requiring connection to a television, a digital - Accessory port input
video camera and a touch-tone telephone; internet - Web browsing
access device with email. - Email
- ------------------------------------------------------------------------------------------------------------------
ViaTV Model VC105 Set-top H.324 set-top videophone/built-in 33.6 Kbps modem - Built-in video camera
Videophone requiring connection to a television and touch-tone - Accessory port input
phone.
- ------------------------------------------------------------------------------------------------------------------
ViaTV Model VC150 Desktop H.324 videophone requiring connection to a touch-tone - Built-in video camera
Videophone telephone. - Built-in 4" LCD display
- Accessory port input
- ------------------------------------------------------------------------------------------------------------------
The Company's VideoCommunicators, the VC50, VC55, VC105 and VC150 models,
all connect to a standard touch-tone telephone and add video to an otherwise
normal telephone call, without the need for a PC. These ViaTV videophones are
designed to be compliant with the H.324 international standard for video
telephony over POTS and to be compatible with PC and non-PC based systems that
adhere to the H.324 standard. In addition, the ViaTV videophones are designed to
communicate with full duplex audio and video rates of up to 15 frames per
second. The ViaTV products, which are based on the Company's proprietary
semiconductor and software technology, include a V.34 modem and display video on
the display screen in several sizes, as well as in a simultaneous remote and
self-view mode. Additional features include caller ID, electronic pan/tilt/zoom,
snapshot mode, video privacy mode and an auto-answer feature with an optional
security password. The ViaTV videophones are controlled through the touch-tone
keypad of the user's telephone and menu driven instructions that appear on the
video display screen.
The VC50, VC55 and VC105 require the use of a television as the display,
while the VC150 includes a built-in four-inch LCD video display. Further, while
the VC105 and VC150 each contain a built-in video camera, the VC50 and VC55 are
designed to be connected to a camcorder, digital snapshot camera or other
composite video source. Particular aspects of each product are as follows:
- VC50 Modular Videophone. The VC50 Modular Videophone requires the use of
a television as a display. In addition, because the VC50 model does not
include a built-in video camera, it requires connection to a composite
video source, such as a camcorder, a digital camera or a video cassette
recorder. The VC50 videophone has three separate video inputs so that it
can be connected to multiple cameras, which may be remotely selected for
viewing. As a result of this and the auto-answer feature present in all
ViaTV products, the VC50 model is appropriate for security and monitoring
applications. The accessory port of the VC50 unit also permits attachment
of various peripheral devices, such as a wireless keyboard that transmits
text on the display screen along with video. The VC50 product may be
connected to high performance digital video and document cameras as well
as full-duplex speakerphones to create a room based, corporate video
communication system.
- VC55 Modular Videophone. Similar to the VC50 Modular Videophone, the VC55
model also has internet and email capabilities enabled by software
developed by PlanetWeb, Inc. internet browsing and email may be
accomplished by the use of the telephone keypad and a pop-up screen
keyboard or
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with the use of the optional wireless keyboard. The VC50 and VC55 Modular
Videophones were both introduced in September 1997.
- VC105 Set-top Videophone. The VC105 Set-top Videophone is a successor to
the Company's initial VideoCommunicator product, the VC100, which was
first sold in February 1997. While the VC105 model does require the use
of a television as a display, it contains a built-in digital video
camera. Thus, it is a simple to install and use videophone, targeted
primarily for home and small-business video communication use.
- VC150 Desktop Videophone. The VC150 Desktop Videophone, which the Company
first shipped in March 1998, contains a built-in digital camera and a
built-in four-inch LCD display. As a result, it merely requires
connection to a touch-tone telephone. Thus, it is suited for desktop or
countertop use in a home or business environment.
The Company offers a number of accessories for use with its ViaTV
videophones, including wireless keyboards and cameras for use with the VC50 and
VC55 models and an international travel kit for use with the ViaTV products.
Currently, the Company is developing additional accessories for its ViaTV
products, including a full-duplex speakerphone.*
The Company plans to extend its VideoCommunicator product line in the
future by developing products in new form factors and products that are designed
to comply with emerging video telephony standards.* The Company further intends
to differentiate its products by adding features and providing further picture
and audio quality enhancements.* See "Research and Development."
The Company is dependent on continual and successful development and
introduction of new products. See "Factors That May Affect Future
Results -- Rapid Technological Change; Dependence on New Product Introduction"
and "Factors That May Affect Future Results -- Compliance with Regulations and
Industry Standards."
Video Communication Semiconductors
The Company's video communication semiconductors are based on the Company's
proprietary architecture. This architecture combines, on a single chip, a custom
RISC microprocessor, a high performance DSP core, specialized video processing
circuitry, static random access memory and proprietary software, which together
perform the core processing functions required by video communication and other
digital video applications.
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 and "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
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The table below describes the Company's video communication semiconductors
and their applications:
- --------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION APPLICATIONS
------- ----------- ------------
- --------------------------------------------------------------------------------------------
Video H.320 compression semiconductor - PC ISDN video communication add-in
Communications for ISDN video communication boards
Processor (VCP) systems; or H.323 Semiconductor - ISDN group video communication
for LAN video conferencing systems systems
or internet phone calls. - LAN video communication systems
- Internet phone calls
- --------------------------------------------------------------------------------------------
Low bit-rate H.324 compression semiconductor - Consumer video telephones for POTS
Videophone for POTS video communication - PC videophone add-in boards for
Processor (LVP) systems Compression semiconductor POTS
for video capture and encoding - Cameras with embedded compression
systems - Video capture PC add-in boards
- --------------------------------------------------------------------------------------------
Video to PCI Interface chip which connects the - PC (POTS, ISDN or LAN-based) video
Interface Chip VCP/LVP devices to the PCI Bus communication boards
(VPIC)
- --------------------------------------------------------------------------------------------
VCPex Recently announced successor to - See VCP and LVP applications above
the VCP and LVP
- --------------------------------------------------------------------------------------------
- VCP -- Video Communications Processor. The Company's VCP is an integrated
video communication semiconductor, which allows OEMs to develop video
communication systems based on the H.320 standard for ISDN video
communication or on the H.323 standard for LAN video communication or
internet phone calls. In recent quarters, the VCP accounted for the
majority of the Company's semiconductor product sales. The Company's
proprietary RISC and DSP technology allows a single VCP semiconductor to
output up to 30 frames per second of H.320 based video over an ISDN line.
The VCP includes video processing circuitry that compresses and
decompresses video images. Systems designed using multiple VCPs are
capable of providing full-duplex video quality approaching that of a
television. The VCP can reside on PC add-in cards or non-PC based
corporate conference room systems.
- LVP -- Low bit-rate Videophone Processor. The LVP semiconductor is
designed to support H.324 based videophones using standard POTS phone
lines. Systems based on the LVP benefit from the same RISC and DSP
technology found in the Company's VCP product, and are designed to
deliver video at up to 15 frames per second over a standard POTS
telephone line. The LVP can be designed into systems in a variety of form
factors, including non-PC based systems that utilize a telephone and
either a television or LCD display. The LVP can also be designed into PC
videophone add-in boards and used for multimedia compression applications
which require high processing power to compress high bandwidth digital
video, such as cameras with embedded compression, PC add-in boards for
video capture and editing and CD-ROM title development. The LVP is the
core video communication semiconductor inside the Company's ViaTV
products.
- VPIC -- Video to PCI Interface Chip. The VPIC is a companion
semiconductor to the Company's video communication semiconductors. The
VPIC provides a direct interface between the Company's compression
semiconductors and the high speed PCI expansion bus found in PCs. By
providing a direct path into the PC's graphic display memory, the VPIC
allows PC board designers to improve the performance and quality of their
designs based on the Company's video communication semiconductors.
- VCPex. The Company recently announced the introduction of its VCPex
semiconductor, which is the successor to its VCP and LVP semiconductors.
The VCPex provides greater functionality and operates at greater speeds
than the VCP and LVP.
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The Company intends to design future generations of its video communication
semiconductors to allow the development of video communication systems with
price/performance improvements.* See "Research and Development."
Application Software
The Company sells its semiconductors with its proprietary application
specific software to address the unique system requirements of various
international video telephony standards. This software, which is a combination
of microcode assembly and C firmware, enables the Company's proprietary
semiconductor architecture to implement multiple compression standards such as
H.320, H.323, H.324 and MPEG. In many cases, by enhancing its application
software, the Company can improve the quality of transmitted video images,
address emerging standards and add user features to its existing video
communication semiconductors. Certain of the Company's video communication
software may be ported to other platforms such as PCs or embedded controllers.
The Company supplies an Application Programmers Interface (API) with its
software to allow limited customization through an external microprocessor or
host controller. The Company also sells licenses for the source code for its
software to customers who wish to modify the software by adding their own
features and controls. Development kits are also licensed to customers allowing
them to write, compile and develop software for the Company's proprietary
semiconductor architecture.
Reference Boards and Designs
The Company provides a range of printed circuit boards and designs as
reference boards or reference designs to its customers that serve as examples
for targeted applications. Each reference board and reference design is provided
with schematics, complete documentation, video processor software and
board-level software diagnostics. This allows the customer to leverage the
Company's systems design expertise. These reference boards and reference designs
enable customers to more quickly introduce new products and improve the
Company's technical support capabilities. Examples of the Company's reference
board designs include the DVC9-I, which is designed for H.320 systems based on
the VCP, and the DVC9-P, which is designed for H.324 systems based on the LVP.
The Company also recently announced its DVC10 reference board design based on
its VCPex semiconductor for use with H.320, H.323 and H.324 systems. Each of the
Company's reference boards and reference designs specifies the use of one of the
Company's video communication semiconductors on the board or within the design.
TECHNOLOGY
The Company has developed the following technologies:
Semiconductor Architecture
The Company's video communication semiconductors share a common
architecture that enables implementation of video communication applications in
a highly efficient manner. In such an application, a video communication
terminal must compress and transmit audio and video data while simultaneously
receiving and decompressing video data from a remote source. The Company's
semiconductor architecture integrates two core processors that run in parallel:
a 32-bit RISC microprocessor and a 64-bit Single Instruction Multiple Data
(SIMD) DSP.
The Company's VCP and LVP semiconductors currently in production are
manufactured using 0.5 micron, 3-layer metal complementary metal oxide
semiconductor (CMOS) process technology, while the VCPex is based on 0.35
micron, 4-layer metal CMOS process technology. The VCP and LVP operate at 5
volts, while the VCPex operates at 3.3 volts.
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 and "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
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The Company's RISC processor core uses a proprietary instruction set
specifically designed for video communication applications. The RISC core in the
VCP and LVP operates at frequencies up to 36 MHz, while the VCPex RISC core
operates at 40 MHz. The RISC core controls the overall chip operation and
manages the input/output interface through a variety of specialized ports which
connect the chip directly to external host, audio and network subsystems. This
core is programmable in the C programming language and allows customers to add
their own features and functionality to the device software provided by the
Company. The RISC core accesses 32-bit instructions and data through a bus that
interfaces to external static random access memory (SRAM).
The Company's DSP core 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 operates at
frequencies up to 72 MHz, while the VCPex DSP core operates at 80 MHz. The DSP
core is 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 audio quality
and maintain compliance with changing digital video standards. The DSP core
accesses their instructions through an internal bus that interfaces to 8
kilobytes of on-chip SRAM and 8 kilobytes of on-chip read-only memory (ROM) that
is preprogrammed with video and audio processing subroutines.
The RISC and DSP cores combine to 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 H.320, H.323 and H.324 (together, H.32x) standards-
based video communication systems.
The Company's semiconductors contain hardware-accelerated video pre- and
post-processing capabilities that enhance video quality and provide an interface
to various video capture and display devices. These capabilities include
filtering, scaling, noise reduction and interlacing.
The Company's semiconductors contain interfaces to the external devices
that comprise a typical video communication system. These interfaces include a
digital video port, digital audio port, a programmable serial port (for
communication via a synchronous digital interface) and a host port (for
communication with a PC or microcontroller). In addition, the semiconductors
contain memory bus interfaces to external SRAM for access to stored RISC
instruction and data and to external dynamic random access memory (DRAM) for
access to stored video and graphics data.
Application 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
international video telephony standards. By refining its software, the Company
can enhance picture quality, address new standards and add significant user
features. In addition, certain of the Company's customers have licensed source
code to which they add proprietary features, custom interfaces and, in some
cases, algorithm improvements. See "Licensing and Development Arrangements."
The Company's software can be categorized as follows:
- Control protocols that run on the RISC and manage user control, call
negotiation, call progress and mixing and separation of audio, video and
other data.
- Audio and video codec routines that run on the DSP.
- Digital communication protocols that interface to external communications
networks such as POTS and ISDN.
- Development tools such as compilers, assemblers and debuggers that allow
the Company and customers to write new applications and modify existing
applications.
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Algorithm Expertise
The Company has devoted significant resources to develop video and audio
codec algorithms to meet international video telephony standards. While the
H.32x standards clearly specify the syntax requirements of a standards-compliant
decoder, and thus what constitutes a valid H.32x bitstream, they do not specify
the methods by which an H.32x encoder generates such a bitstream. The
flexibility of the Company's video communication semiconductor architecture
allows the Company to apply its core algorithm expertise to develop products for
a variety of video communication applications.
The Company's algorithm expertise enables the following:
- Video Coding Efficiency and Video Quality. The Company's proprietary
motion search, mode decision and rate buffer control algorithms enhance
video quality for H.32x video communication applications.
- Integrated Control of Real-Time Systems. Video communication systems are
inherently complex due to the convergence of video, audio and control
information. The Company's proprietary semiconductor architecture and
interrupt-driven control software manage these varying data streams in
concert thereby reducing the complexity of the external system design. In
addition, the Company's single-chip control of audio and video data in
certain applications provides for audio/video synchronization and low
end-to-end latency.
- Robustness to Varying Network Conditions. Video communication systems
must interface to networks with transmission characteristics that vary
over time. These characteristics can cause network bandwidth to change
and can result in the loss or corruption of transmitted information. The
Company has developed control algorithms that adapt to changes in network
bandwidth and that recover from the loss or corruption of data in a way
that reduces negative perceptual effects on the user.
System Design
The Company has developed expertise in integrating its semiconductors and
software with peripheral components to produce complete video communication
systems. The Company's system technology consists of modular subsystems that can
be rearranged to interface to various networks (such as POTS, ISDN and LAN) and
to interface to various video capture and display devices.
CUSTOMERS AND MARKETING
The Company markets its semiconductors and associated software through its
own direct sales force as well as through distributors. The Company sells its
VCP semiconductors and related software and reference designs primarily to OEMs
of ISDN office video communication systems that use the H.320 standard,
including PictureTel, Siemens, Sony, VideoServer, VCON and Vtel. The Company
sells its LVP semiconductors and related software and reference board designs to
OEMs of POTS video communication systems for the consumer market using the H.324
standard, such as Kyushu Matsushita Electric Co., Ltd. (KME), Leadtek, Sony and
Truedox.
The Company markets its VideoCommunicators through retail channels such as
Best Buy, CompUSA, Fry's Electronics, J & R Computer World, OfficeMax and
Staples; catalogs such as Hammacher Schlemmer and MicroWarehouse; and
distributors such as D&H, IngramMicro and Wynit. The Company also sells its
VideoCommunicators through a direct marketing effort utilizing a combination of
advertising and toll-free telemarketing in the United States and the United
Kingdom. In conjunction with the Company's distributors and resellers, the ViaTV
products are sold in a number of countries throughout North America, Europe and
Asia. The Company's VideoCommunicators sales efforts are supported by
co-marketing relationships with third parties such as EFA Corporation, GTE and
AT&T.
The Company's direct sales force supports domestic and international sales
and operates from the Company's headquarters in Santa Clara, California and a
European office in London. As of March 31, 1998, the Company employed 35 persons
in sales and marketing. These persons provide account support for direct,
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OEM, distributor and retail channel customers of the Company's products. In
addition, these persons staff the Company's telemarketing and end user customer
support efforts for its VideoCommunicator products. The Company's sales and
marketing personnel typically provide support to its OEM, distributor and retail
channel 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. In relation to its ViaTV products, the
Company also utilizes advertising in print media and on television and radio, in
some cases in conjunction with its OEM, distributor and retail channel
customers.
Historically, a significant portion of the Company's sales has been to
relatively few customers, although the composition of these customers has
varied. Revenues from the Company's ten largest customers in the years ended
March 31, 1998, 1997 and 1996 accounted for approximately 61%, 61% and 65%,
respectively, of its total revenues. During these periods the Company had three
customers that accounted for 10% or more of total revenues: 3Com accounted for
20% during the year ended March 31, 1998; ASCII, the Company's former
distributor in Japan, accounted for 13% during the year ended March 31, 1997;
and ESS Technology accounted for 24% during the year ended March 31, 1996. In
addition, the Company has recently been, and will continue in the foreseeable
future to be, dependent on the video communication industry. The loss of, or any
reduction in orders from, a significant customer, or any general decline in the
market for video communication products, could have a material adverse effect on
the Company's business and operating results. See "Factors That May Affect
Future Results -- Product Concentration; Potential Loss of Semiconductor Sales;
Dependence on Video Communication Industry" and "Factors That May Affect Future
Results -- Dependence on Key Customers."
Sales to customers outside of the United States represented 47%, 54% and
49% of total revenues in the fiscal years ended March 31, 1998, 1997 and 1996,
respectively. Specifically, sales to customers in the Asia Pacific region
represented 25%, 33% and 32% of the Company's total revenues for the years ended
March 31, 1998, 1997 and 1996, respectively, while sales to customers in Europe
represented 22%, 21% and 17% of the Company's total revenues for the same
periods, respectively. Such reliance on foreign customers involves a number of
risks. See "Factors That May Affect Future Results -- International Operations."
As a result of consumer preferences, marketplace conditions and the limits
of video communications over the POTS infrastructure, a significant market for
the ViaTV videophones and the Company's OEM customers products for POTS may not
develop. See "Factors That May Affect Future Results -- Uncertainty of Market
Acceptance; Limits of Existing Technology."
MANUFACTURING
The Company outsources the manufacture of its VideoCommunicators and
semiconductors to subcontract manufacturers and independent foundries. The
Company's VideoCommunicator subcontract manufacturers include EFA Corporation in
Taiwan, Flash Electronics in Fremont, California and Vtech Communications in
Hong Kong, while its semiconductor manufacturers include Taiwan Semiconductor
Manufacturing Corporation and UMC in Taiwan. The company also relies on Amkor
Electronics in South Korea 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 contract 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 subcontract manufacturers,
semiconductor foundries and component suppliers that could have a material
adverse effect on the Company's business and operating results.
In addition, from time to time the Company may issue non-cancelable
purchase orders to its third-party manufacturers for raw materials used in its
VideoCommunicator products to ensure availability for long lead-
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time items or to take advantage of favorable pricing terms. If the Company
should experience decreased demand for its VideoCommunicator products, the
Company would still be required to take delivery of and make payment for such
raw materials. In the event of a significant decrease in VideoCommunicator
product demand, such purchase commitments could have a material adverse effect
on the Company's business and operating results. The Company's reliance on
foreign subcontract manufacturers involves a number of risks. See "Factors That
May Affect Future Results -- International Operations."
RESEARCH AND DEVELOPMENT
As of March 31, 1998, the Company had 55 employees engaged in research and
development. Research and development expenses in the years ended March 31,
1998, 1997 and 1996 were $12.3 million, $10.5 million and $7.7 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 developments 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.*
The Company's current and future research and development efforts relating
primarily to video communication semiconductors have and will continue to focus
on the Company's next generations of these products.* Areas of emphasis will
include an enhanced version of its video communication semiconductor
architecture 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.* Future software
developments may focus on emerging video telephony standards, picture quality
enhancements and additional features supporting both the Company's systems
products and its OEM customer products.*
Research and development efforts relating to the Company's
VideoCommunicators are directed towards the addition of features and picture and
audio quality enhancements.* To expand its family of VideoCommunicators, the
Company is developing new form factors and products that are designed to comply
with emerging video telephony standards.*
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. See "Factors That May Affect Future
Results -- Uncertainty of Market Acceptance; Limits of Existing Technology" and
"Factors That May Affect Future Results -- Rapid Technological Change;
Dependence on New Product Introduction."
LICENSING AND DEVELOPMENT ARRANGEMENTS
The Company has entered into licensing and development arrangements with
other companies to promote the design, development, manufacture and sale of the
Company's products. 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 VideoCommunicators. See "Competition." The Company's
most significant licenses are with 3Com and KME.
On May 5, 1997, the Company entered into a license agreement with 3Com.
Pursuant to the agreement, the Company has granted to 3Com, for an initial
license fee plus certain royalties, a license to make, use and sell systems and
products containing the Company's proprietary technology relating to its
VideoCommunicators and its PC-related video communication products. As a result,
3Com has a license to substantially all of the Company's technology underlying
its VideoCommunicators. 3Com is prohibited under the agreement
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 and "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
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from selling the Company's semiconductors on the open market. Both parties have
also agreed to license to each other any enhancements to the technology which
are developed by either party, unless 3Com elects to discontinue sharing at any
time or the Company elects to discontinue sharing (which it may do at any time
following June 30, 2000). Any enhancements or other technology developed by 3Com
cannot be sublicensed by the Company or incorporated into semiconductors which
the Company sells on the open market in component form, but can be incorporated
into semiconductors that the Company uses in the VideoComunicators. Pursuant to
the Company's agreement with 3Com, the Company was prohibited, until May 5,
1998, from licensing the technology to others, except in limited circumstances.
The KME agreement provides to KME, for a license fee previously paid in
full to the Company, all of the source code and object code of the H.324
software for 8x8's LVP semiconductor product and related development software,
as well as certain board schematics (the "H.324 Technology"), and grants KME a
perpetual, nonexclusive, nonassignable worldwide license to make, use or sell
products with the H.324 Technology. Under this arrangement, KME also has a
nonassignable option, upon payment of additional consideration, to obtain the
Company's LVP and VCP semiconductor technology for use only on systems assembled
by KME or its affiliates, which would include any entity controlled directly or
indirectly by Matsushita. As a result, KME has a license to substantially all of
the Company's technology underlying its VideoCommunicators. In addition, KME
must pay to the Company a royalty for any LVP or VCP semiconductor it
manufactures or any product wherein KME uses any part of the LVP or VCP
semiconductor technology. Both parties agree to license to the other party, at
no charge, any enhancements to the H.324 Technology or the LVP or VCP
semiconductor made by either party, until such time as KME decides to
discontinue sharing of enhancements.
The Company has licensed portions of its semiconductor, software and
systems technology to others. The Company has licensed the right to manufacture
certain of its video communication semiconductors, subject to payment of
royalties, to several video communication systems manufacturers. In addition,
the Company has licensed portions of its video communication semiconductor
technology to ESS Technology. Of these licensees, ESS Technology 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 video
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, or earlier, if the Company
exercises its right to a royalty-free license to certain technology of ESS
Technology. 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. In addition to KME and 3Com, a number of video
communication system manufacturers have licensed substantial portions of the
Company's source code.
In the years ended March 31, 1998, 1997 and 1996, technology licensing
revenues (all of which were nonrecurring) were $14.5 million, $3.9 million and
$9.0 million, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." There can be no assurance that
the Company will receive such licensing revenues in the future. See "Factors
That May Affect Future Results -- No Assurance of Future License and Other
Revenues."
In addition to licensing its technology to others, the Company from time to
time will take a license to others' technology. For example, the web browser
software running on the VC55 was developed by, and is licensed from, PlanetWeb,
Inc. 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. Also, the Company's reliance on
licensing technology from third parties subjects the Company to certain risks.
See "Factors That May Effect Future Results -- Dependence on Proprietary
Technology; Reliance on Third Party Licenses."
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COMPETITION
The Company competes with both independent manufacturers of video
communication semiconductors and with the introduction of its VideoCommunicator
products now competes with manufacturers of video communication products
targeted at the consumer market. The markets for the Company's products are
characterized by intense competition, declining average selling prices and rapid
technological change.
The competitive factors in the market for the Company's VideoCommunicators
include audio and video quality, phone line connectivity at high transmission
rates, ability to connect and maintain stable connections, ease of use, price,
access to enabling technologies, product design, time-to-market, adherence to
industry standards, interoperability, strength of distribution channels,
customer support, reliability and brand name. The Company expects intense
competition for its VideoCommunicators from:
- Large consumer electronics manufacturers. The Company will face intense
competition from many well known, established suppliers of consumer
electronics products, which may include Lucent Technologies, Matsushita,
Philips, Samsung and Sony. The Company does face competition from 3Com.
Many of these potential competitors sell television and telephone
products into which they may integrate video communication systems,
thereby eliminating a consumer's need to purchase a separate video
communication system, such as the Company's ViaTV product.
- Personal computer system and software manufacturers. Potential customers
for the Company's VideoCommunicators may elect instead to buy PCs
equipped with video communication capabilities, which are currently
available. As a result, the Company faces or may face competition from
Intel; PC system manufacturers such as Apple, Compaq, Dell, IBM and Sony;
PC software suppliers such as Microsoft and Netscape; and PC add-on
component suppliers.
- Existing manufacturers of corporate video communication
equipment. Manufacturers of more expensive corporate video communication
systems have continually reduced the cost of their products and may enter
the market for lower cost consumer video communication products.
Potential competitors include PictureTel, Polycom, Sony, Tandberg, VCON
and Vtel.
- Emerging suppliers of internet appliances. Potential customers for the
Company's VideoCommunicators may elect instead to buy standalone internet
access terminals which may provide some or all of the functionality of
the Company's products. Consumer products for television-based internet
access have been announced or introduced by companies such as Microsoft,
Philips and Sony.
C-Phone, Leadtek, 3Com and Truedox are among the companies selling low cost
videophones. Many other companies have announced the development of low cost
videophones. The Company expects that additional companies will introduce
products that compete with the VideoCommunicators in the future. Certain
manufacturers or potential manufacturers of low cost videophones have licensed
or purchased, or may license or purchase, the Company's technology and
semiconductors in order to do so. KME and 3Com in particular have licensed
substantially all of the technology underlying the VideoCommunicators, and may
use such technology to introduce products that compete with the
VideoCommunicators. Each of Leadtek and Truedox license the Company's technology
and purchase the Company's video communication semiconductors. The Company
aggressively licenses its semiconductor, software and systems technology and
sells its semiconductor and system products to third parties. Thus, it is likely
that additional of the Company's OEM customers will become competitors with
respect to the Company's VideoCommunicator business. Other competitors may
purchase video communication semiconductor and related technology from other
suppliers.
The principal competitive factors in the market for video communication
semiconductors include product definition, product design, system integration,
chip 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, Chromatic Research, Lucent Technologies, Motorola,
Philips, Texas Instruments and Winbond Electronics. Potential competitors
include ESS Technology, which has licensed certain of the Company's video
communication semiconductor technology, and Rockwell Semiconductor Systems.
Certain of the Company's competitors for video communication semiconductors
maintain their own semiconductor foundries and may therefore benefit from
certain capacity, cost and technical advantages. In addition, the presence of
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the Company in the video communication 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.
EMPLOYEES
As of March 31, 1998, the Company employed a total of 136 people, including
25 in manufacturing operations, 55 in research and development, 35 in sales and
marketing and 21 in general and administrative capacities. The Company also
employs a number of temporary employees and consultants on a contract basis.
The Company's future success will depend, in part, upon its ability to
attract and retain qualified personnel. Competition for qualified personnel in
the electronics and communications industries is intense, particularly in the
San Francisco Bay area where the Company is located. There can be no assurance
that the Company will be successful in retaining its key employees or that it
will be able to attract skilled personnel as the Company grows. See "Factors
That May Affect Future Results -- Management of Growth and Change; Dependence on
Key Personnel."
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors as well as the factors discussed above under the
headings "Competition" and "Manufacturing" should be considered in conjunction
with the information in this Report on Form 10-K.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company recorded operating losses in three of the four quarters in
fiscal 1998 and recorded operating losses of $13.6 million and $4.1 million in
the years ended March 31, 1997 and 1996, respectively. The Company would not
have been profitable in fiscal 1998 had it not received nonrecurring license and
other revenues. Revenues fluctuated from $28.8 million in fiscal 1996 to $19.1
million in fiscal 1997 to $49.8 million in fiscal 1998. In view of the Company's
historical operating losses, there can be no assurance that the Company will be
able to sustain profitability on either an annual or quarterly basis.
NO ASSURANCE OF FUTURE LICENSE AND OTHER REVENUES
The Company has in the past received substantial revenues from licensing of
technology. License and other revenues, all of which were nonrecurring, were
$14.5 million, $3.9 million and $9.0 million in the fiscal years ended March 31,
1998, 1997 and 1996, respectively. There can be no assurance that the Company
will receive revenues from licensing of its technology in the future, which
could have a material adverse effect on the Company's business and operating
results.
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's historical operating results have fluctuated significantly
and will likely continue to fluctuate in the future. On an annual and a
quarterly basis there are a number of factors that may affect the operating
results of the Company, many of which are outside the Company's control. These
include, but are
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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 the Company or its competitors, market acceptance
of new or existing products, the cost and availability of components, the mix of
the Company's customer base and sales channels, the mix of products sold, the
management of inventory and the accuracy of the reporting of sell-through by
resellers of the Company's products, the level of international sales, continued
compliance with industry standards and general economic conditions.
The Company's 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 the
Company's products are characterized by falling average selling prices. The
Company expects that, as a result of competitive pressures and other factors,
gross profit as a percentage of revenue for the Company's semiconductor products
will likely decrease for the foreseeable future. In addition, the gross margins
for the Company's VideoComunicators are, and will continue to be, substantially
lower than the gross margins for its semiconductors. Thus, the growth of the
Company's VideoCommunicator business has reduced overall product gross profit as
a percentage of revenue. Continued growth of the Company's VideoCommunicator
business relative to its semiconductor business will result in a further
reduction in product gross profit as a percentage of revenue.
If the Company cannot adequately compensate for falling average selling
prices with lower costs of sales, its gross margins will be reduced and there
may be a material adverse effect on the Company's business and operating
results. In the event that the Company encounters significant price competition
in the markets for its products, the Company could be at a significant
disadvantage compared to its 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 the Company's
business, including sales of its VideoCommunicator products, 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 the
Company's operating results. For example, 3Com, which purchased approximately
34% of videophone systems sold by the Company in the year ended March 31, 1998,
has not ordered additional products from the Company since delivery of its
purchases in the quarter ended December 31, 1998. 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 the Company's revenues may be magnified by the Company's inability
to adjust spending to compensate for such shortfall. Announcements by the
Company or its competitors of new products and technologies could cause
customers to defer purchases of the Company's existing products, which would
also have a material adverse effect on the Company's business and operating
results.
The Company's products have lead times of up to four months, and are built
to forecasts that are necessarily imperfect, particularly given the early stage
of the videophone market. Because of the Company's practice of building its
products to necessarily imprecise forecasts, it is likely that, from time to
time, the Company will have either excess or insufficient product inventory.
This risk is heightened because of the need for and presence of significant
VideoCommunicator inventory in retail distribution. Further, because retailers
and other distributors may have significant quantities of VideoCommunicator
inventory on hand and generally have contractual rights to price protection if
the Company decreases the selling price, in the event of a significant price
decrease, the Company's cost of such inventory may exceed the Company's actual
selling price. Excess inventory levels will subject the Company to the risk of
inventory obsolescence and the risk that the Company's selling prices may drop
below the Company's inventory costs, while insufficient levels of inventory may
negatively affect relations with customers. Any of these factors could have a
material adverse effect on the Company's operating results and business.
The Company's introduction of VideoCommunicators has resulted in
substantially different patterns in operating results. For example, during
fiscal 1998, the Company's operating results were subject to increased
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seasonality with sales higher during the Company's third fiscal quarter,
corresponding to the Christmas shopping season. In addition, the Company is
spending substantial additional amounts on advertising, support of the retail
channel, toll-free marketing and customer support. There can be no assurance
that revenues adequate to justify such spending will result. The Company's shift
to sale of VideoCommunicators has resulted in higher levels of product inventory
and product returns, the necessity of granting price protection to resellers,
more lengthy receivable collection cycles and higher warranty costs, which may
have a material adverse effect on the Company's business and operating results.
As a result of these and other factors, it is likely that in some future
period the Company's operating results will be below the expectations of
securities analysts or investors, which would likely result in a significant
reduction in the market price for the Company's common stock.
DEPENDENCE ON KEY CUSTOMERS
Historically, a significant portion of the Company's sales has been to
relatively few customers, although the composition of these customers has
varied. Revenues from the Company's ten largest customers in the years ended
March 31, 1998, 1997 and 1996 accounted for approximately 61%, 61% and 65%,
respectively, of total revenues. During these periods the Company had three
customers that accounted for ten percent or more of total revenues. 3Com
accounted for 20% of total revenues during the year ended March 31, 1998; ASCII,
the Company's former distributor in Japan, accounted for 13% of total revenues
during the year ended March 31, 1997; and ESS Technology accounted for 24% of
total revenues during the year ended March 31, 1996. Substantially all the
Company's product sales have been made, and are expected to be made, on a
purchase order basis. None of the Company's customers has entered into a
long-term agreement requiring it to purchase the Company's products. Further,
all of the Company's license and other revenues are nonrecurring.
UNCERTAINTY OF MARKET ACCEPTANCE; LIMITS OF EXISTING TECHNOLOGY
Previous efforts to sell consumer videophones have been unsuccessful and
there can be no assurance that the market for such products will develop. The
current installed base of H.324 compliant videophones, which are compatible with
the Company's ViaTV videophones, is quite limited, providing few parties for a
purchaser of a single videophone to call. In addition, many consumers may not
wish to be seen during a telephone call. The Company has no reliable data to
suggest that there will be significant customer demand for such products,
including the Company's VideoCommunicators and products offered by certain of
the Company's OEM customers.
The Company's current ViaTV product line as well as products made by the
Company's OEM customers for use on POTS, is not capable of delivering video data
at rates of 24 frames per second. Below this data rate, the human eye can detect
degradation of video quality. Further, POTS infrastructure varies widely in
configuration and integrity, which can result in decreased rates of transmission
and difficulties in establishing and maintaining connections. Actual or
perceived technical difficulties or insufficient video quality related to video
communication on POTS could impede market acceptance and have a material adverse
effect on the Company's business and results of operations.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT INTRODUCTION
The video communication semiconductor and video communication markets are
characterized by rapid changes in customer requirements, frequent introductions
of new and enhanced products, and continuing and rapid technological
advancement. To compete successfully, the Company 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. The Company's 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.
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The Company plans to introduce additional VideoCommunicators and video
communication semiconductors. The development of new products or enhancements to
existing products involves technical and other risks, which the Company may not
fully understand. In addition, new product introductions or enhancements to
products may decrease demand for existing products resulting in higher than
expected product returns and/or excess inventory of existing products. The
Company has 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 the Company is 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, it would have a material adverse effect on the Company's business and
operating results.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RELIANCE ON THIRD PARTY LICENSES
The Company relies in part on trademark, copyright and trade secret law to
protect its intellectual property in the United States and abroad. The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright law, which afford only limited protection. The
Company also relies in part on patent law to protect its intellectual property
in the United States and abroad. The Company currently holds four United States
patents, including patents relating to video compression and memory architecture
technology, and has a number of United States and foreign patent applications
pending. There can be no assurance that any such patent applications will result
in an issued patent. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad (where
effective intellectual property protection may be unavailable or limited) will
be adequate or that competitors will not independently develop technologies that
are similar or superior to the Company's technology, duplicate the Company's
technology or design around any patent of the Company. 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. Moreover, litigation may be necessary in the future to enforce
the Company's 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 the
Company's business and operating results.
There has been substantial litigation in the semiconductor, electronics and
related industries regarding intellectual property rights, and there can be no
assurance that third parties will not claim infringement by the Company of their
intellectual property rights. The Company's broad range of technology, including
systems, digital and analog circuits, software and semiconductors, increases the
likelihood that third parties may claim infringement by the Company of their
intellectual property rights. If the Company were found to be infringing on the
intellectual property rights of any third party, the Company could be subject to
liabilities for such infringement, which could be material, and the Company
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 the Company's business and operating results.
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.
COMPLIANCE WITH REGULATIONS AND INDUSTRY STANDARDS
The Company must comply with certain rules and regulations of the Federal
Communications Commission regarding electromagnetic radiation and standards
established by Underwriters Laboratories as well as similar regulations and
standards applicable in other countries. The failure of the Company's products
to comply, or delays in compliance, with the various existing and evolving
government regulations and industry
17
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standards could delay or interrupt volume production of VideoCommunicators,
which would have a material adverse effect on the Company's business and
operating results.
INTERNATIONAL OPERATIONS
Sales to customers outside of the United States represented 47%, 54% and
49% of total revenues in the fiscal years ended March 31, 1998, 1997 and 1996,
respectively. Specifically, sales to customers in the Asia Pacific region
represented 25%, 33% and 32% of the Company's total revenues for the years ended
March 31, 1998, 1997 and 1996, respectively, while sales to customers in Europe
represented 22%, 21% and 17% of the Company's total revenues for the same
periods, respectively.
International sales of the Company's semiconductors will continue to
represent a substantial portion of the Company's product revenues for the
foreseeable future. In addition, substantially all of the Company's current
products are, and substantially all of the Company's 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. The Company is 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, such as may result from the current economic conditions in
the Asia Pacific region, could have a material adverse effect on the Company's
business and operating results.
MANAGEMENT OF GROWTH AND CHANGE; DEPENDENCE ON KEY PERSONNEL
The development and marketing of the Company's VideoCommunicators will
continue to place a significant strain on the Company's limited personnel,
management and other resources, particularly in light of the Company's limited
experience in developing, manufacturing, marketing and selling consumer
products. The Company's ability to manage any future growth effectively will
require it to successfully attract, train, motivate, retain and manage
employees, particularly key engineering and managerial personnel, to effectively
integrate new employees into its operations and to continue to improve its
operational, financial and management systems. The Company's failure to manage
its growth and changes in its business effectively and to attract and retain key
personnel could have a material adverse effect on the Company's business and
operating results.
Further, the Company is highly dependent on the continued service of and
its ability to attract and retain qualified technical, marketing, sales and
managerial personnel. The competition for such personnel is intense,
particularly in the San Francisco Bay area where the Company is located. The
loss of any such person or the failure to recruit additional key technical and
sales personnel in a timely manner would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business. The Company currently does not
have employment contracts with any of its employees and does not maintain key
person life insurance policies on any of its employees.
PRODUCT CONCENTRATION; DEPENDENCE ON VIDEO COMMUNICATION INDUSTRY
Sales of video communication products accounted for approximately 100%, 86%
and 66% of total product revenues in the fiscal years ended March 31, 1998, 1997
and 1996, respectively. Any general decline in the market for video
communication products could have a material adverse effect on the Company's
business and operating results.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of the Company's 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 the Company's
18
21
operating results; announcements of technical innovations; loss of key
personnel; new products or new contracts by the Company, its competitors or
their customers; governmental regulatory action; 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 the control of, the Company. 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 the Company's 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. There can be no assurance
that such litigation will not occur in the future with respect to the Company.
Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business and operating results. Any settlement or adverse
determination in such litigation would also subject the Company to significant
liability, which would have a material adverse effect on the Company's business
and financial condition.
NEED FOR ADDITIONAL CAPITAL
The Company believes that it may require additional financial resources
over the next several years for working capital, research and development,
expansion of sales and marketing resources, and capital expenditures. Net cash
used in operating activities for the year ended March 31, 1998 was approximately
$6.5 million, resulting primarily from cash requirements of the Company's
VideoCommunicator business. The Company has incurred and will continue to incur,
significant costs related on the development of ViaTV products, advertising for
its ViaTV products, support of the retail sales channel and growth in ViaTV
inventory. The Company believes that it will be able to fund planned
expenditures and satisfy its cash requirements for at least the next twelve
months from cash flow from operations, if any, and existing cash balances. As of
March 31, 1998, the Company had approximately $26.7 million in cash and cash
equivalents. However, the Company is operating in a rapidly changing industry.
There can be no assurance that the Company will not seek to exploit business
opportunities that will require it to raise additional capital from equity or
debt sources to finance its 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 the Company to obtain additional
financing earlier than otherwise expected. There can be no assurance that the
Company will be able to obtain additional financing as needed on acceptable
terms or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" under
Item 7 below.
ITEM 2. PROPERTIES
The Company's principal operations are located in an approximately 45,623
square foot facility in Santa Clara, California. This lease expires in April
1999. The Company also leases 2,663 square feet in London, England. This lease
expires in January 1999 and the Company has no option to extend the lease. The
Company's existing facilities are adequate to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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. Since
that date, 8x8's common stock has been traded on the Nasdaq National Market
under the symbol "EGHT." No dividends have ever been paid or declared on 8x8's
common stock. The Company currently does not anticipate paying any cash
dividends on its capital stock in the foreseeable future. As of March 31, 1998,
there were 238 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 5,525 such other stockholders as
of March 31, 1998.
PRICE RANGE OF COMMON STOCK
PERIOD HIGH LOW
------ ----- -----
July 2, 1997 to September 30, 1997.......................... $11 13/1 $6 5/8
October 1, 1997 to December 31, 1997........................ $16 $10 7/1
January 1, 1998 to March 31, 1998........................... $10 7/ $5 1/2
On February 17, 1998, the Company, issued to Stanford University a warrant
to purchase 10,000 shares of the Company's common stock at a per share exercise
price of $5.50, then equal to its fair market value. This warrant expires on or
before February 17, 1999. This warrant and the underlying shares are not
registered under the Securities Act of 1933, as amended, and were issued
pursuant to the exemption provided by Section 4(2) of such Act.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues............................ $49,776 $19,146 $28,774 $19,929 $34,401
Net income (loss)......................... 3,727 (13,613) (3,217) (5,881) (348)
Net income (loss) per share:
Basic..................................... $ 0.31 $ (2.56) $ (0.70) $ (1.34) $ (0.08)
Diluted................................... $ 0.25 $ (2.56) $ (0.70) $ (1.34) $ (0.08)
Total assets.................... $46,429 $12,727 $23,067 $20,644 $21,908
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was incorporated in February 1987 in California and
reincorporated in Delaware in December 1996. Since June 1995, the Company has
been executing a business strategy designed to focus the Company's efforts
towards video communication. As part of this strategy, the Company discontinued
sales of its MPEG semiconductor product line and reduced its workforce in the
quarter ended June 30, 1996.
In the fiscal years ended March 31, 1998, 1997 and 1996, sales of the
Company's video communication products accounted for 100%, 86% and 66%,
respectively, of product revenues.
To address new opportunities, the Company has leveraged its strengths in
semiconductor design and related software to develop and market low cost video
communication systems (hereinafter referred to as its "VideoCommunicators"). The
Company began shipping the first product in its planned family of
VideoCommunicator products, ViaTV videophone model VC100, in February 1997.
Subsequently, the Company introduced the VC105, an upgraded VC100, and added
three new models, the VC50, VC55 and VC150, to the
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ViaTV product line. The Company also has introduced versions of its ViaTV
videophones designed for European and Asian markets.
The Company is marketing its VideoCommunicators through retail channels,
catalogs and original equipment manufacturers (OEMs) as well as through direct
marketing efforts utilizing a combination of advertising, toll-free
telemarketing and direct mail supported by co-marketing arrangements with third
parties. The Company sells its video communication semiconductors and related
software to OEMs and distributors.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Statements of Operations and the notes thereto:
Revenues
YEAR ENDED MARCH 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN MILLIONS)
Product revenues..................... $35.3 71% $15.2 80% $19.8 69%
License and other revenues........... 14.5 29% 3.9 20% 9.0 31%
----- --- ----- --- ----- ---
$49.8 100% $19.1 100% $28.8 100%
===== === ===== === ===== ===
Total revenues were $49.8 million, $19.1 million and $28.8 million for the
fiscal years ended March 31, 1998, 1997 and 1996, respectively. Total revenues
for fiscal 1998 were divided among video communication semiconductors (44%),
videophone systems (27%) and nonrecurring license and other revenues (29%). In
fiscal 1997, total revenues were divided between semiconductors (80%) and
nonrecurring license and other revenues (20%). In fiscal 1996, total revenues
were divided between semiconductors (69%) and nonrecurring license and other
revenues (31%).
Product revenues were $35.3 million in fiscal 1998, an increase of $20.1
million above the $15.2 million reported in fiscal 1997, and $15.5 million above
the $19.8 million reported in fiscal 1996. The increase in product revenues is
primarily due to sales generated from the Company's ViaTV products, combined
with an increase in sales of the Company's video communication semiconductors,
offset by a decrease in both MPEG semiconductor and math co-processor sales due
to the discontinuation of such product lines in fiscal 1997.
License and other revenues consist of technology licenses, including
royalties required under such licenses, and nonrecurring engineering fees for
services performed by the Company for its customers. License and other revenues
were $14.5 million in fiscal 1998, an increase of $10.6 million above the $3.9
million reported in fiscal 1997, and $5.5 million above the $9.0 million
reported in fiscal 1996. In fiscal 1998, license and other revenues included
approximately $5.3 million paid by 3Com for a license to substantially all of
the Company's technology underlying its video communicators. There can be no
assurance that the Company will receive any revenues from licensing or other
such arrangements in the future.* See "Factors That May Affect Future
Results -- No Assurance of Future License and Other Revenues" and "Factors That
May Affect Future Results -- Dependence on Key Customers."
Product sales and license and other revenues derived from 3Com represented
approximately 20% of total revenues for the fiscal year ended March 31, 1998.
Product sales to ASCII, the Company's former distributor in Japan (the Company
terminated its distribution relationship with ASCII effective June 30, 1997),
represented approximately 13% of total revenues for the fiscal year ended March
31, 1997. License and other revenues derived from ESS Technology represented
approximately 24% of total revenues for the fiscal year ended March 31, 1996.
Dependence on significant customers entails certain risks.* See "Factors That
May
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
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Affect Future Results -- Potential Fluctuations in Operating Results" and
"Factors That May Affect Future Results -- Potential Fluctuations in Operating
Results -- Dependence on Key Customers."
The Company's sales to Europe represented 22%, 21% and 17% of total
revenues for the fiscal years ended March 31, 1998, 1997, 1996, respectively.
The Company's sales to the Asia Pacific region represented 25%, 33% and 32% of
total revenues for the fiscal years ended March 31, 1998, 1997, and 1996,
respectively. See "Factors That May Affect Future Results -- International
Operations."
Cost of Revenues
YEAR ENDED MARCH 31,
-----------------------
1998 1997 1996
----- ----- -----
(IN MILLIONS)
Cost of product revenues............................ $17.8 $12.0 $16.7
As a percentage of product revenues................. 50% 79% 84%
Cost of license and other revenues.................. $ 1.1 $ -- $ --
As a percentage of license and other revenues....... 7% 0% 0%
The cost of product revenues consists of costs associated with
VideoCommunicator components, semiconductor wafer fabrication, VideoCommunicator
and semiconductor assembly and testing performed by third-party vendors and
direct and indirect costs associated with purchasing, scheduling and quality
assurance. Costs of product revenues were $17.8 million, $12.0 million and $16.7
million for the fiscal years ended March 31, 1998, 1997, and 1996, respectively.
The cost of product revenues in fiscal 1998 included costs associated with
increased shipments of its VideoCommunicator products, which the Company began
shipping in February 1997, as well as increased shipments of the Company's video
communication semiconductor products. The cost structure of the Company's ViaTV
product line is substantially different from the Company's video communication
semiconductor products and the cost of product revenues for the ViaTV product
line is substantially greater as a percentage of related revenues. In fiscal
1997, cost of product revenues included a $4.0 million charge associated with
the write-off of inventories related to the Company's discontinuation of the
MPEG product line in September 1996. As a result of this write-off, costs for
the period increased and were equal to 79% of product revenue. In fiscal 1996,
cost of product revenues were adversely impacted by the costs of the MPEG
product line which exceeded the revenue generated by this product line.
Cost of license and other revenues was $1.1 million for the fiscal year
ended March 31, 1998 and consisted of personnel and other costs incurred to
perform certain development work under terms of a nonrecurring engineering
contract between the Company and one of its customers. There were no costs
associated with license and other revenues in the fiscal years ended March 31,
1997 and 1996, respectively.
Gross Profit
YEAR ENDED MARCH 31,
----------------------
1998 1997 1996
----- ---- -----
(IN MILLIONS)
Gross profit......................................... $30.9 $7.1 $12.1
As a percentage of total revenues.................... 62% 37% 42%
Total gross profit was $30.9 million, $7.1 million and $12.1 million in
fiscal 1998, 1997 and 1996, respectively. Gross profit from product revenues was
$17.5 million, $3.2 million and $3.1 million for the fiscal years ended March
31, 1998, 1997, and 1996, respectively. Gross profit from license and other
revenues, all of which were nonrecurring, less related costs, was $13.4 million,
$3.9 million and $9.0 million in fiscal 1998, 1997 and 1996, respectively. There
can be no assurance that the Company will receive any revenues from such license
and other revenues sources in the future.* See "Factors That May Affect Future
Results -- No Assurance of Future License and Other Revenues."
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 and "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
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25
The increase in gross profit and margin from product revenues in fiscal
1998 was due primarily to the increase in video communication semiconductor
revenues. In fiscal 1997, the significant decline in gross profit and margin
relates primarily to charges associated with the write-off of inventories
related to the Company's exit from the MPEG market. In fiscal 1997, the Company
sold its remaining MPEG inventory. The gross profit from product revenues for
fiscal 1996 was adversely impacted by negative margin from sales of MPEG
products.
The markets for the Company's products are characterized by falling average
selling prices, which could have a material adverse effect on the Company's
future business and operating results if the Company cannot achieve lower cost
of sales.* The Company expects that, as a result of competitive pressures and
other factors, gross profit as a percentage of revenue for the Company's
semiconductor products will likely decrease for the foreseeable future.* Gross
profit as a percent of revenue is substantially lower for the sales of ViaTV
products than for sales of the Company's semiconductors. If ViaTV product
revenue continues to grow as a percentage of total product revenue, the Company
expects that gross profit as a percentage of total product revenue will
decrease.* See "Factors That May Affect Future Results -- Fluctuations in
Operating Results."
Operating Expenses -- Research and Development
YEAR ENDED MARCH 31,
----------------------
1998 1997 1996
----- ----- ----
(IN MILLIONS)
Research and development............................. $12.3 $10.5 $7.7
As a percentage of total revenues.................... 25% 55% 27%
Research and development expenses consist primarily of personnel, system
prototype design and fabrication, mask, prototype wafer and equipment costs
necessary for the Company to conduct its development efforts. Research and
development costs, including software development costs, are expensed as
incurred. Research and development expenses were $12.3 million, $10.5 million
and $7.7 million for fiscal 1998, 1997 and 1996, respectively. During fiscal
1998 and 1997, research and development expenses were concentrated on video
communication semiconductors and VideoCommunicators. Higher research and
development expenses during fiscal 1998 were due to increased headcount,
increased engineering and prototype expenses associated with the Company's
VideoCommunicator products, and mask and prototype costs associated with the
ongoing development of the Company's next generation video communication
semiconductor product. A significant portion of research and development
expenses during fiscal 1996 was attributable to the development of products that
were subsequently discontinued, including an Intel compatible x86 microprocessor
and graphics and MPEG semiconductors.
During fiscal 1998, the overall increase in research and development
expenses was partially offset by the use of research and development personnel
to perform nonrecurring engineering services under a revenue generating
contract. The costs associated with this contract are included in the cost of
license and other revenues. Although total research and development expenses
increased from fiscal 1997 to fiscal 1998 as a result of the factors listed
above, the non-cash compensation expense recognized on certain stock option
grants and charged to research and development decreased to $416,000 in fiscal
1998 from $1.1 million in fiscal 1997.
The Company expects 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.* See
"Factors That May Affect Future Results -- Rapid Technological Change;
Dependence on New Product Introduction."
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 and "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
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26
Operating Expenses -- Selling, General and Administrative
YEAR ENDED MARCH 31,
----------------------
1998 1997 1996
----- ----- ----
(IN MILLIONS)
Selling, general and administrative.................. $17.4 $10.1 $7.9
As a percentage of total revenues.................... 35% 53% 27%
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 $17.4 million, $10.1 million and $7.9 million in
fiscal 1998, 1997 and 1996, respectively. Expenses increased due to additional
headcount, higher compensation costs and costs associated with the marketing,
advertising and promotion of the Company's VideoCommunicator product line. The
Company expects that its sales and marketing expenses may increase as the
Company launches new VideoCommunicator products and promotes its current
VideoCommunicator products.* Therefore, 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."
While total expenses increased from fiscal 1997 to fiscal 1998 as a result
of the factors listed above, the non-cash compensation expense recognized on
certain stock option grants and charged to selling, general and administrative
decreased to $741,000 in fiscal 1998 from $3.1 million in fiscal 1997.
Restructuring Costs
YEAR ENDED MARCH 31,
--------------------
1998 1997 1996
---- ---- ----
(IN MILLIONS)
Restructuring costs.................................... $-- $0.1 $0.6
As a percentage of total revenues...................... 0% 1% 2%
During fiscal 1997, the Company recorded a $59,000 charge for restructuring
its operations by reducing its workforce. As of March 31, 1997, the Company's
restructuring actions were fully completed and there were no remaining
restructuring cost accruals.
During fiscal 1996, the Company recorded a $603,000 restructuring charge
related to discontinuing certain research and development activities not related
to video communication products. These restructuring costs related primarily to
the write-off of equipment associated with the discontinued research and
development efforts.
Other Income, Net
In fiscal 1998, 1997 and 1996, other income, net, was $1.5 million,
$120,000 and $952,000, respectively. In fiscal 1998, other income, net,
consisted primarily of interest income from the Company's short-term cash
investments. Interest income in fiscal 1998 included interest earned on the
proceeds from the Company's initial public offering in July 1997. During fiscal
1996, the Company acquired equity positions in four privately held companies. In
fiscal 1996, the Company realized $727,000 of income by selling the stock of one
of these entities. The Company's investment in each of these entities represents
less than 15% of the outstanding voting stock of these entities and accordingly,
the Company has accounted for these investments on a cost basis. As of March 31,
1998, these investments were fully reserved.
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 and "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
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27
(Benefit) Provision for Income Taxes
In August 1995, the Internal Revenue Service (IRS) asserted a deficiency
against the Company for the taxable year 1992. The IRS alleged that as of March
31, 1992, the Company had accumulated earnings beyond the reasonable needs of
its business. The Company contested this assessment. On May 15, 1997, the
Company received a notice from the IRS indicating that the IRS fully reversed
its assertion of deficiency. As a result, the Company reversed approximately
$1.0 million of its income tax liability during fiscal 1998. In fiscal 1997 and
1996, the provisions for income taxes were not material and represented certain
foreign withholding taxes and taxes related to the Company's foreign subsidiary.
At March 31, 1998, the Company had approximately $5.4 million of federal
net operating loss carryforwards and approximately $1.9 million of research and
development tax credit carryforwards available to offset future tax liabilities;
such carryforwards expire beginning in the years 2012 and 2009, respectively.
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, 1998, the Company had gross deferred tax assets of
approximately $7.8 million. The weight of available evidence indicates that it
is more likely than not that the Company will not be able to realize its
deferred tax assets and thus a full valuation reserve has been recorded at March
31, 1998.
Year 2000
Computer systems may experience problems handling dates beyond the year
1999 because many computer programs use only two digits to identify a year in a
date field. The Company is assessing both the readiness of its products and its
internal computer systems for handling the year 2000. The Company expects to
implement successfully the systems and programming changes necessary to address
year 2000 issues, and does not believe that the cost of such actions will have a
material effect on the Company's business and operating results. The Company is
also assessing the possible effects on the Company's operations of the year 2000
readiness of key suppliers, subcontractors and customers. The Company's reliance
on suppliers, subcontractors and customers, and, therefore, on the proper
functioning of their information systems and software, means that failure to
address year 2000 issues by its suppliers, subcontractors and customers could
have a material impact on the Company's business and operating results.
Liquidity and Capital Resources
As of March 31, 1998, the Company had cash and liquid investments totaling
$26.7 million, representing an increase of $18.0 million from March 31, 1997. In
July 1997, the Company completed an initial public 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. Prior to the
Company's initial public offering, the Company had satisfied its liquidity needs
principally from proceeds generated from two issuances of its equity securities
after fiscal 1994 and from cash generated from operations in fiscal 1994 and
prior years. The Company currently has no bank borrowing arrangements.
Net cash used in operations was $6.5 million, $4.3 million and $625,000 in
fiscal 1998, 1997 and 1996, respectively. Cash used in operations 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, 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 noncash items, including a deferred compensation charge of
$1.3 million. In addition to increased revenues, the increase in accounts
receivable in fiscal 1998 was partially due to increased ViaTV sales to
customers in the retail channel, which typically negotiate payment terms greater
than 30 days. The increase in inventory in fiscal 1998 was due to increases in
both ViaTV inventory held by the Company and inventory balances held by
retailers. Because the Company does not recognize revenue on the shipment of its
VideoCommunicator products to retailers or distributors until sell-through to
the distributor or retailer customer, product inventories at retailers and
distributors are reflected in the Company's inventories and are expected to
increase if the Company succeeds in further broadening its
25
28
distribution channels.* In addition, deferred revenue is expected to increase if
the Company succeeds in broadening its distribution channels and introducing
additional products into its distribution channels.*
Cash used in operations in fiscal 1997 reflects a net loss of $13.6
million, and a decrease in accounts payable of $4.2 million. Cash used in
operations was partially offset by cash provided by decreases in inventory and
accounts receivable of $6.1 million and $2.6 million, respectively, and a
non-cash deferred compensation charge of $4.5 million. Cash used in operations
in fiscal 1996 reflected a net loss of $3.2 million that was substantially
offset by changes in working capital. Cash used in investing activities for
fiscal 1998 was primarily attributable to capital expenditures of approximately
$1.0 million. Cash provided by investing activities for both fiscal 1997 and
1996 was primarily attributable to net sales of short-term investments of $5.2
million which was offset by capital expenditures of approximately $691,000 and
$1.0 million, respectively. At March 31, 1998, the Company did not have any
material capital commitments outstanding.
Cash flows from financing activities in fiscal 1998 consisted primarily of
$24.7 million in net proceeds from the sale of the Company's common stock in its
initial public offering. Cash flows from financing activities in fiscal 1997 and
1996 consisted primarily of proceeds from the sales of convertible noncumulative
preferred stock and sales of common stock upon the exercise of stock options,
respectively.
The Company believes that it may require additional financial resources
over the next several years for working capital, research and development,
expansion of sales and marketing resources, and capital expenditures.* Net cash
used in operating activities for the year ended March 31, 1998 was approximately
$6.5 million, resulting primarily from cash requirements of the Company's
VideoCommunicator business. The Company has incurred and will continue to incur,
significant costs related on the development of ViaTV products, advertising for
its ViaTV products, support of the retail sales channel and growth in ViaTV
inventory. The Company believes that it will be able to fund planned
expenditures and satisfy its cash requirements for at least the next twelve
months from cash flow from operations, if any, and existing cash balances.* As
of March 31, 1998, the Company had approximately $26.7 million in cash and cash
equivalents. However, the Company is operating in a rapidly changing industry.
There can be no assurance that the Company will not seek to exploit business
opportunities that will require it to raise additional capital from equity or
debt sources to finance its 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 the Company to obtain additional
financing earlier than otherwise expected.* There can be no assurance that the
Company will be able to obtain additional financing as needed on acceptable
terms or at all.*
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Manufacturing"
commencing on page 10, "Competition" on page 13 and "Factors That May Affect
Future Results" commencing on page 14 for a discussion of certain factors
that could affect future performance.
26
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
FINANCIAL STATEMENTS:
Report of Independent Accountants......................... 28
Consolidated Balance Sheets at March 31, 1998 and 1997.... 29
Consolidated Statements of Operations for each of the
three years in the period ended March 31, 1998......... 30
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended March 31,
1998................................................... 31
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 1998......... 32
Notes to Consolidated Financial Statements for each of the
three years in the period ended March 31, 1998......... 33
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts....... 44
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.
27
30
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, 1998 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1998, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards 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.
PRICE WATERHOUSE LLP
San Jose, California
May 1, 1998
28
31
8X8 INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
MARCH 31,
-------------------
1998 1997
------- --------
Current assets:
Cash and cash equivalents................................. $26,677 $ 8,722
Short-term investments.................................... 60 2
Accounts receivable, net.................................. 4,527 834
Accounts receivable from related parties.................. -- 178
Inventory................................................. 12,758 1,178
Prepaid expenses and other assets......................... 876 354
------- --------
Total current assets.............................. 44,898 11,268
Property and equipment, net................................. 1,370 1,344
Deposits and other assets................................... 161 115
------- --------
$46,429 $ 12,727
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,216 $ 1,146
Accounts payable to related parties....................... 409 233
Accrued compensation...................................... 1,445 926
Accrued warranty.......................................... 1,461 1,603
Deferred revenue.......................................... 2,447 363
Other accrued liabilities................................. 1,387 689
Income taxes payable...................................... 536 1,654
------- --------
Total current liabilities......................... 9,901 6,614
======= ========
Commitments and contingencies (Note 5)
Minority interest........................................... 85 72
------- --------
Stockholders' equity:
Convertible preferred stock, $0.001 par value:
Authorized: 5,000,000 shares;
Issued and outstanding: no shares at March 31, 1998 and
3,726,373 shares at March 31, 1997..................... -- 4
Common stock, $0.001 par value:
Authorized: 40,000,000 shares;
Issued and outstanding: 15,293,614 shares at March 31,
1998 and 6,990,286 shares at March 31, 1997............ 15 7
Additional paid-in capital................................ 47,785 23,291
Notes receivable from stockholders........................ (893) (1,078)
Deferred compensation..................................... (744) (2,781)
Unrealized loss on investments............................ (45) --
Accumulated deficit....................................... (9,675) (13,402)
------- --------
Total stockholders' equity........................ 36,443 6,041
------- --------
$46,429 $ 12,727
======= ========
The accompanying notes are an integral part of these financial statements.
29
32
8X8 INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
------------------------------
1998 1997 1996
------- -------- -------
Product revenues............................................ $34,933 $ 12,771 $17,772
Product revenues from related parties....................... 355 2,521 2,037
License and other revenues.................................. 14,488 3,854 7,215
License and other revenues from related parties............. -- -- 1,750
------- -------- -------
Total revenues.................................... 49,776 19,146 28,774
------- -------- -------
Cost of product revenues.................................... 17,764 12,030 16,668
Cost of license and other revenues.......................... 1,087 -- --
------- -------- -------
Total cost of revenues............................ 18,851 12,030 16,668
------- -------- -------
Gross profit................................................ 30,925 7,116 12,106
------- -------- -------
Operating expenses:
Research and development.................................. 12,317 10,510 7,714
Selling, general and administrative....................... 17,381 10,098 7,938
Restructuring costs....................................... -- 59 603
------- -------- -------
Total operating expenses.......................... 29,698 20,667 16,255
------- -------- -------
Income (loss) from operations............................... 1,227 (13,551) (4,149)
Other income, net........................................... 1,518 120 952
------- -------- -------
Income (loss) before income taxes........................... 2,745 (13,431) (3,197)
(Benefit) provision for income taxes........................ (982) 182 20
------- -------- -------
Net income (loss)........................................... $ 3,727 $(13,613) $(3,217)
======= ======== =======
Net income (loss) per share:
Basic..................................................... $ 0.31 $ (2.56) $ (0.70)
Diluted................................................... $ 0.25 $ (2.56) $ (0.70)
Shares used in per share calculations:
Basic..................................................... 12,083 5,312 4,598
Diluted................................................... 15,128 5,312 4,598
The accompanying notes are an integral part of these financial statements.
30
33
8X8, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE UNREALIZED
------------------- ------------------- PAID IN FROM DEFERRED LOSS ON
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION INVESTMENTS
---------- ------ ---------- ------ ---------- ------------ ------------ -----------
Balance at March 31,
1995.................... 3,041,820 $ 3 4,550,721 $ 5 $10,547 $ -- $ -- $ --
Issuance of common stock
upon exercise of
options................. -- -- 246,389 1 609 -- -- --
Repurchase of unvested
common stock............ -- -- (15,089) (1) (1) -- -- --
Net loss.................. -- -- -- -- -- -- -- --
---------- --- ---------- --- ------- ------- ------- ----
Balance at March 31,
1996.................... 3,041,820 3 4,782,021 5 11,155 -- -- --
Issuance of common stock
upon exercise of
options................. -- -- 2,188,265 2 1,095 (1,078) -- --
Issuance of common
stock................... -- -- 20,000 -- 10 -- -- --
Issuance of Series D
convertible
noncumulative preferred
stock................... 684,553 1 -- -- 3,764 -- -- --
Deferred compensation
related to stock
options................. -- -- -- -- 7,267 -- (2,781) --
Net 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................ -- -- -- -- -- -- -- --
---------- --- ---------- --- ------- ------- ------- ----
Balance at March 31,
1998.................... -- $-- 15,293,614 $15 $47,785 $ (893) $ (744) $(45)
========== === ========== === ======= ======= ======= ====
RETAINED
EARNINGS
(ACCUMULATED
DEFICIT) TOTAL
------------ --------
Balance at March 31,
1995.................... $ 3,428 $ 13,983
Issuance of common stock
upon exercise of
options................. -- 610
Repurchase of unvested
common stock............ -- (2)
Net loss.................. (3,217) (3,217)
-------- --------
Balance at March 31,
1996.................... 211 11,374
Issuance of common stock
upon exercise of
options................. -- 19
Issuance of common
stock................... -- 10
Issuance of Series D
convertible
noncumulative preferred
stock................... -- 3,765
Deferred compensation
related to stock
options................. -- 4,486
Net loss.................. (13,613) (13,613)
-------- --------
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............. -- (45)
Net income................ 3,727 3,727
-------- --------
Balance at March 31,
1998.................... $ (9,675) $ 36,443
======== ========
The accompanying notes are an integral part of these financial statements.
31
34
8X8, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
--------------------------------
1998 1997 1996
Cash flows from operating activities: -------- -------- --------
Net income (loss).......................................... $ 3,727 $(13,613) $ (3,217)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization......................... 901 873 775
Loss on disposition of capital equipment.............. -- -- 541
Amortization of deferred compensation................. 1,265 4,486 --
Writedown of nonmarketable equity investment.......... -- 400 --
Other................................................. (15) (5) --
Changes in assets and liabilities:
Accounts receivable, net............................ (3,515) 2,567 (384)
Inventory........................................... (11,580) 6,092 (5,788)
Income taxes receivable............................. -- -- 2,241
Prepaid expenses and other assets................... (522) (70) 175
Deposits and other assets........................... (46) -- --
Accounts payable.................................... 1,246 (4,202) 3,827
Accrued compensation................................ 519 (853) 575
Accrued warranty.................................... (142) 545 1
Deferred revenue.................................... 2,084 163 (565)
Other accrued liabilities........................... 698 (852) 1,174
Income taxes payable................................ (1,118) 120 20
-------- -------- --------
Net cash used in operating activities............ (6,498) (4,349) (625)
-------- -------- --------
Cash flows from investing activities:
Acquisitions of property and equipment................... (927) (691) (1,013)
Sales of short-term investments--available for sale...... -- 5,168 21,711
Purchases of short-term investments--available for
sale.................................................. -- -- (16,583)
Short-term investments--trading activity, net............ (58) 71 64
Purchase of nonmarketable equity investments............. -- -- (400)
-------- -------- --------
Net cash (used in) provided by investing
activities..................................... (985) 4,548 3,779
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible noncumulative
preferred stock, net.................................. -- 3,765 --
Proceeds from issuance of common stock, net.............. 25,276 29 608
Repayment of notes receivable from stockholders.......... 162 -- --
Proceeds from minority interest in subsidiary............ -- 77 --
-------- -------- --------
Net cash provided by financing activities........ 25,438 3,871 608
-------- -------- --------
Net increase in cash and cash equivalents.................. 17,955 4,070 3,762
Cash and cash equivalents beginning of the year............ 8,722 4,652 890
-------- -------- --------
Cash and cash equivalents end of the year.................. $ 26,677 $ 8,722 $ 4,652
======== ======== ========
Supplemental disclosure of cash flow information:
Taxes paid (refunded), net............................... $ 136 $ (139) $ (2,240)
======== ======== ========
The accompanying notes are an integral part of these financial statements.
32
35
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 and
exchanged each share of each series of stock of the predecessor company for one
share of each corresponding series of stock of the Delaware successor. These
financial statements have been prepared giving effect to the reincorporation for
all periods presented.
The Company designs, manufactures and markets videophones for use in the
consumer market. The Company also designs, develops and markets highly
integrated proprietary video communication semiconductors and associated
software for videophones and video communication.
FISCAL YEAR
The Company's fiscal year ends on the last Thursday on or before March 31.
For purposes of these consolidated financial statements, the Company has
indicated its fiscal year as ending on March 31.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned 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
Revenues from product sales to original equipment manufacturers (OEMs) and
other end users are recognized upon shipment. License revenues are generally
recognized upon the delivery of the licensed technology provided no significant
future obligations exist and collection is probable. For financial reporting
purposes, revenues generated by sales to distributors and retailers under
agreements allowing certain rights of return are deferred until the product is
sold by the distributor or retailer. When no rights of return exist, revenues
generated by product sales are recognized upon shipment.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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. At March 31,
1998 and 1997, the Company classified its investments either as
available-for-sale or as trading. The cost of the Company's investments is
determined based upon specific identification. 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. At March 31, 1998 and 1997, the Company's investments classified as
available-for-sale totaled $26 million and $7.7 million, respectively, and were
primarily comprised of money market funds with an effective maturity of three
months or less. The investments classified as trading are reported at fair value
with realized and unrealized gains and losses being reported in the statement of
operations. The cost and fair value of investments classified as trading were
not significant at March 31, 1998
33
36
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and 1997. Realized and unrealized gains and losses were also not significant for
the years ended March 31, 1998, 1997 and 1996.
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 on the cost
method, because the Company does not have an ability to significantly influence
the operating and financial policies of the investees. Loss resulting from
impairment in the value of investments which is other than a temporary decline
is recorded in the period in which such loss occurs.
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
WARRANTY EXPENSE
The Company provides 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 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
subsidiary. 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 subsidiary were $620,000, $429,000, and $479,000 as of
March 31, 1998, 1997 and 1996, 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
34
37
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, cash equivalents,
short-term investments and trade accounts receivable. The Company places its
cash, cash equivalents and short-term investments primarily in market rate
accounts with reputable financial institutions. Cash equivalents present risk of
changes in value because of interest rate changes. 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, 1998,
one customer accounted for 30% of accounts receivable. At March 31, 1997, three
customers accounted for 16%, 15% and 10% of accounts receivable, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including cash
equivalents, short-term investments, accounts receivable, and nonmarketable
equity investments, approximate fair values.
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, "Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for its stock plans. The Company provides additional
pro forma disclosures as required under Statement of Financial Accounting
Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation." See Note
6.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with fiscal
1998 presentation.
NET INCOME (LOSS) PER SHARE
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 (FAS 128), "Earnings per Share," which was issued in February
1997, and which requires presentation of both basic and diluted net income
(loss) per share on the face of the statements of operations for all periods
presented. 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 and unvested restricted common stock having a dilutive
effect. All prior years' data in this report have been restated to reflect the
adoption of FAS 128. FAS 128 also requires a reconciliation of the numerators
and denominators of the basic and diluted per share calculations.
35
38
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There were no adjustments to the numerators for any period presented. The
reconciliation of the denominators is as follows (in thousands):
YEAR ENDED MARCH 31,
------------------------
1998 1997 1996
------ ----- -----
Basic shares........................................ 12,083 5,312 4,598
Effect of dilutive securities:
Preferred Stock................................... 973 -- --
Common stock options.............................. 1,376 -- --
Unvested restricted common stock.................. 696 -- --
------ ----- -----
Diluted shares...................................... 15,128 5,312 4,598
====== ===== =====
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):
YEAR ENDED MARCH 31,
------------------------
1998 1997 1996
------ ----- -----
Preferred Stock..................................... -- 3,726 3,042
Common stock options................................ 287 2,291 2,561
Unvested restricted common stock.................... -- 1,296 1
------ ----- -----
Total..................................... 287 7,313 5,604
====== ===== =====
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income." FAS 130 establishes standards for the reporting of comprehensive income
and its components in financial statements of the Company beginning in fiscal
1999. Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-owner sources. Reclassification of financial
statements for earlier periods for comparative purposes is required. Adoption by
the Company in fiscal 1999 is not expected to have a significant effect on the
Company's disclosure requirements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of
an Enterprise and Related Information." FAS 131 revises information regarding
the reporting of certain operating segments for periods beginning after December
15, 1997. The Statement also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
adopt FAS 131 in its fiscal 1999 annual report. The Company has not yet
determined the impact, if any, of adopting this new standard.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 97-2 (SOP 97-2)," Software Revenue
Recognition," which supersedes SOP 91-1. SOP 97-2 will become effective for
transactions entered into beginning in fiscal 1999. Retroactive application of
the provisions of SOP 97-2 is prohibited.
36
39
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS:
MARCH 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
Accounts receivable...................................... $ 5,137 $ 1,208
Less: allowance for doubtful accounts.................. (610) (374)
------- -------
$ 4,527 $ 834
======= =======
Inventories:
Raw materials.......................................... $ 3,864 $ 418
Work-in-process........................................ 5,337 613
Finished goods......................................... 3,557 147
------- -------
$12,758 $ 1,178
======= =======
Property and equipment:
Machinery and computer equipment....................... $ 3,837 $ 3,254
Furniture and fixtures................................. 691 671
Licensed software...................................... 2,268 2,137
Leasehold improvements................................. 600 554
------- -------
7,396 6,616
Less: accumulated depreciation and amortization.......... (6,026) (5,272)
------- -------
$ 1,370 $ 1,344
======= =======
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES:
During the fiscal year ended March 31, 1997, the Company's product revenues
included $106,000 in sales to Sanyo Semiconductor Corporation (Sanyo) which is
one of the Company's stockholders. Additionally, the Company purchased $3.8
million and $408,000 of raw materials inventory from Sanyo and an affiliate
during fiscal 1998 and 1997, respectively. An executive of Sanyo is also on the
Company's Board of Directors.
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, $276,000
and $205,000 during the fiscal years ended March 31, 1998, 1997 and 1996,
respectively.
During the fiscal years ended March 31, 1998, 1997 and 1996, the Company's
product revenues included $355,000, $2,415,000 and $2,037,000, respectively, 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 1996, the Company licensed certain technologies to VideoCore
Technology (VideoCore), a company founded by one of 8x8's former officers, in
exchange for cash and an equity interest in VideoCore. This license agreement
also provided for potential future license fees and royalty fees payable to the
Company. VideoCore, including the Company's equity interest, was subsequently
acquired by another entity.
During fiscal 1996, the Company licensed certain technologies to Enable
Semiconductor, a company founded by another of 8x8's former officers, in
exchange for cash and an equity interest in that company.
During fiscal 1997, the Company and certain of its employees formed VidUs,
Inc. (VidUs). At March 31, 1998, the Company owned 67% of VidUs and Company
employees owned the remaining 33%.
37
40
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
VidUs is engaged in the design of integrated camera and video compression
solutions as well as ethernet interface cards. VidUs has been consolidated in
the Company's financial statements since inception.
During fiscal 1998, the Company paid a member of the Board of Directors
approximately $50,000 for technical consulting services provided on behalf of
the Company.
NOTE 4 -- INCOME TAXES:
Income (loss) before income taxes includes $91,000, $74,000, and $51,000 of
income of its foreign subsidiary for the fiscal years ended March 31, 1998, 1997
and 1996, respectively. The components of the consolidated (benefit) provision
for income taxes consisted of the following (in thousands):
YEAR ENDED MARCH 31,
-----------------------
1998 1997 1996
------- ---- ----
Current:
Federal............................................. $(1,018) $ -- $--
State............................................... -- -- --
Foreign............................................. 36 182 20
------- ---- ---
$ (982) $182 $20
======= ==== ===
Deferred tax assets are comprised of the following (in thousands):
MARCH 31,
-----------------
1998 1997
------ -------
Research and development credit carryforwards............. $1,920 $ 1,573
Net operating loss carryforwards.......................... 1,839 3,780
Inventory valuation....................................... 1,020 932
Reserves and allowances................................... 891 846
Other..................................................... 2,116 1,650
------ -------
7,786 8,781
Valuation allowance....................................... (7,786) (8,781)
------ -------
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 and thus a full valuation
allowance has been recorded at March 31, 1998.
At March 31, 1998, the Company had approximately $5.4 million of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards expire at various dates beginning
2012. In addition, at March 31, 1998, the Company had research and development
credit carryforwards for federal and state tax reporting purposes of
approximately $1.9 million which begin expiring in 2009. Under the Tax Reform
Act of 1986, the amounts 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 losses 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. As of
March 31, 1998, the net operating loss carry forwards of the Company were not
subject to any material annual limitations.
38
41
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,
-----------------------------
1998 1997 1996
------- ------- -------
(Benefit) provision at statutory rate......... $ 933 $(4,567) $(1,087)
State income taxes before valuation allowance,
net of federal benefit...................... 160 (344) (177)
Reversal of previously accrued income taxes
payable..................................... (1,018) -- --
Research and development credits.............. (600) (373) (243)
Valuation allowance........................... (995) 4,012 1,414
Non-deductible compensation................... 504 1,525 --
Other......................................... 34 (71) 113
------- ------- -------
(Benefit) provision for income taxes.......... $ (982) $ 182 $ 20
======= ======= =======
In August 1995, the Internal Revenue Service (the IRS) asserted a
deficiency against the Company for the taxable year 1992 in the amount of
approximately $1,365,000, together with a penalty in the amount of approximately
$273,000 plus accrued interest. The IRS alleged that as of March 31, 1992, the
Company had accumulated earnings beyond the reasonable needs of the Company's
business. The Company did not make any payments and in accordance with IRS
procedures formally protested this assessment on October 30, 1995. In May 1997
the Company received a notice from the IRS indicating it had fully reversed the
August 1995 notice of deficiency. As a result, the Company reversed
approximately $1 million of its income tax liability during the first quarter of
fiscal 1998.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES:
The Company leases its primary facility under a noncancelable operating
lease agreement that expires in April 1999. 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 non-cancelable operating leases as of
March 31, 1998 are as follows (in thousands):
YEAR ENDED MARCH 31,
--------------------
1999........................................................ $1,038
2000........................................................ 80
------
Total minimum payments............................ $1,118
======
Rent expense for all operating leases for the years ended March 31, 1998,
1997 and 1996 was $1,075,000, $717,000 and $767,000, respectively.
From time to time, the Company receives notices from third parties
asserting claims against the Company or threatening the commencement of legal
proceedings against the Company. While the outcome of any resulting settlement
negotiations or legal proceedings cannot be predicted with certainty, the
management of the Company does not believe that any of the assertions of claims
or threats received to date will have a material adverse effect on the Company's
business, operating results or financial condition.
39
42
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- STOCKHOLDERS' EQUITY:
COMMON STOCK AND PREFERRED STOCK
In July 1997, the Company completed the 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.
On October 21, 1996, the Company's Board of Directors approved that,
effective upon the closing of the Offering, the Company will be authorized to
issue five million shares of undesignated preferred stock. The Board of
Directors has the authority to issue the undesignated preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof.
1987 INCENTIVE STOCK PLAN
In 1987, the Company adopted an Incentive Stock Plan (the 1987 Plan) which
was subsequently terminated by the Board of Directors in January 1992. The
Company had reserved 2,962,000 shares of its common stock for issuance under the
1987 Plan. The 1987 Plan provided for grants of stock purchase rights at prices
equal to the fair market value of stock as determined by the Company's Board of
Directors. Stock purchase rights granted under the plan generally vested over
five years. During the year ended March 31, 1996, unvested shares aggregating
15,089 were repurchased at prices ranging from $0.10 to $0.40 per share. In
January 1992, upon termination, all unissued shares under the 1987 Plan were
canceled. At March 31, 1998, all shares of common stock purchased under the 1987
Plan were fully vested.
1992 STOCK OPTION PLAN
In January 1992, the Board of Directors adopted the 1992 Stock Option Plan
(the 1992 Plan) and reserved 1,000,000 shares of the Company's common stock for
issuance under this plan. In August 1994, the Board of Directors authorized an
increase in the number of shares of the Company's common stock reserved for
issuance under the 1992 Plan to 2,000,000 shares. 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 and
reserved 2,000,000 shares of the Company's common stock for issuance under this
plan. In June 1996, the Board of Directors authorized an increase in the number
of shares of the Company's common stock reserved for issuance under the Key
Personnel Plan to 2,200,000 shares. 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.
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 to be 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
40
43
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
outstanding at the end of the immediately preceding fiscal year subject to
certain maximum limitations. 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 grant of nonstatutory stock
options to certain nonemployee directors of the Company (the Outside Directors).
The Director Plan provides that each Outside Director will be granted a
nonstatutory stock option to purchase 16,000 shares of common stock on the date
upon which such person first becomes an Outside Director or, if later, on the
effective date of the Director Plan. Thereafter, each Outside Director will be
automatically granted an option to purchase 4,000 shares of common stock on the
date such Outside Director is reelected to the Board of Directors, if on such
date, such Outside Director will have served on the Company's Board of Directors
for at least six months. 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.
Option activity under the stock option plans is summarized as follows:
WEIGHTED
OPTIONS SHARES SUBJECT AVERAGE EXERCISE
AVAILABLE FOR TO OPTIONS PRICE
GRANT OUTSTANDING PER SHARE
------------- -------------- ----------------
Balance at March 31, 1995.................. 880,185 1,098,350 $2.38
Increase in options available for grant.... 2,000,000 -- --
Granted.................................... (2,973,550) 2,973,550 $2.50
Exercised.................................. -- (246,389) $2.48
Returned to plan........................... 1,264,754 (1,264,754) $2.49
---------- ----------
Balance at March 31, 1996.................. 1,171,389 2,560,757 $2.46
Increase in options available for grant.... 1,200,000 -- --
Granted.................................... (4,947,462) 4,947,462 $1.68
Exercised.................................. -- (2,188,265) $0.50
Cancellation of options available for
grant.................................... (75) -- --
Returned to plan........................... 3,028,804 (3,028,804) $2.32
---------- ----------
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
---------- ----------
Options exercisable at March 31, 1998...... -- 776,576 $3.82
========== ==========
41
44
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant option groups outstanding at March 31, 1998 and related
weighted average exercise price and contractual life information are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------- --------------------- WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE REMAINING
EXERCISE EXERCISE CONTRACTUAL LIFE
RANGE OF EXERCISE PRICES SHARES PRICE SHARES PRICE (YEARS)
------------------------ --------- -------- --------- -------- ----------------
$0.50 to $1.40 887,164 $ 0.50 356,197 $ 0.50 7.7
$4.20 to $5.60 130,200 $ 5.21 72,876 $ 5.01 9.1
$5.60 to $7.00 1,492,800 $ 6.78 333,216 $ 6.80 9.0
$8.40 to $9.80 62,800 $ 9.32 -- -- 9.5
$9.80 to $11.20 98,500 $10.61 6,665 $10.50 9.5
$11.20 to $12.60 184,400 $11.33 7,622 $11.25 9.4
$12.60 to $14.00 4,000 $14.00 -- -- 9.6
--------- ---------
2,859,864 $ 5.26 776,576 $ 3.82 8.6
========= =========
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 of $0.50 if the employee departs prior to vesting. During fiscal 1998, the
Company repurchased 46,638 unvested shares and 579,647 shares were not vested at
March 31, 1998.
In June 1996, the Board of Directors approved a proposal under which
employees elected to cancel approximately 2,467,000 options in exchange for
grants of new options with an exercise price equal to the then current fair
market value as determined by the Board of Directors.
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. The Company recognized
$1,265,000 and $4,486,000 of said amount as compensation expense in the fiscal
years ended March 31, 1998 and 1997, respectively. The Company is recognizing
the deferred compensation over the related vesting period of the options (which
is generally 48 months). At March 31, 1998 the balance of this deferred
compensation was $744,000. This deferred compensation is subject to reduction
for any employee who terminates employment prior to the expiration of such
employee's option vesting period.
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,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Expected volatility............... 65% 0.0% 0.0%
Expected dividend yield........... 0.0% 0.0% 0.0%
Risk-free interest rate........... 5.7% to 6.5% 5.7% to 6.5% 5.1% to 6.7%
Weighted average expected option
term............................ 5.3 years 5.0 years 5.0 years
Weighted average fair value of
options granted................. $4.89 $0.60 $0.40
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 have been reserved for
issuance to participating employees who meet eligibility requirements. During
fiscal 1998, 70,560 shares were issued under the Purchase Plan.
42
45
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 shall
be set for each option under the plan which exercise date shall occur before the
date of the merger or asset sale.
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: a
risk-free interest rate of 5.63%, an expected life of 1.2 years, expected
volatility of 65% and no expected dividends. The weighted average grant date
fair value was $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,
-----------------------------
1998 1997 1996
------ -------- -------
Net income (loss):
As reported......................................... $3,727 $(13,613) $(3,217)
Pro forma........................................... 58 (14,744) (3,685)
Basic income (loss) per share:
As reported......................................... $ 0.31 $ (2.56) $ (0.70)
Pro forma........................................... $ 0.01 $ (2.78) $ (0.80)
Diluted income (loss) per share:
As reported......................................... $ 0.25 $ (2.56) $ (0.70)
Pro forma........................................... $ 0.01 $ (2.78) $ (0.80)
NOTE 7 -- 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. Under the Savings Plan,
eligible employees may contribute up to the maximum allowed by the IRS from
their compensation to the Savings Plan. 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. To date, the Company's
contributions have not been significant.
PROFIT SHARING PLAN
In April 1995, the Company's Board of Directors approved a profit sharing
plan which 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 1995, the Company's Board of
Directors amended the profit sharing plan so that 5% of profit sharing would be
based on the profitability of individual business units. In July 1997, the Board
of Directors amended the profit sharing plan such that future bonuses are
calculated as a
43
46
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
percentage of net income. Charges related to this plan were approximately
$685,000 in the fiscal year ended March 31, 1998, and were not significant for
the fiscal years ended March 31, 1997 or 1996.
NOTE 8 -- GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION:
The Company's export sales to Europe represented 22%, 21% and 17% of total
revenues in fiscal years 1998, 1997 and 1996, respectively. The Company's export
sales to the Asia Pacific region represented 25%, 33%, and 32% of total revenues
in fiscal years 1998, 1997 and 1996, respectively.
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. Product sales to one customer represented approximately 13% of total
revenues for the fiscal year ended March 31, 1997. License and other revenues
derived from one customer represented approximately 24% of total revenues for
the fiscal year ended March 31, 1996.
NOTE 9 -- RESTRUCTURING COSTS AND INVENTORY CHARGES:
During fiscal 1997, the Company recorded a charge for restructuring its
operations by reducing its workforce by approximately 25%. As of March 31, 1997,
the Company's restructuring actions were fully completed and there were no
remaining restructuring cost accruals.
During fiscal 1996, the Company recorded restructuring charges resulting
from the Company's decision to reduce the scope of its research and development
activities by eliminating certain product development efforts. The restructuring
costs related primarily to a write off of equipment associated with the
terminated development efforts.
During the quarter ended June 30, 1996, the Company recorded a charge of
$4.0 million related to its MPEG inventories. In September 1996, the Company
sold its remaining MPEG inventory.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS WRITE-OFFS/
BALANCE AT CHARGED TO RECOVERIES OF
BEGINNING COSTS AND UNCOLLECTIBLE BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS END OF PERIOD
----------- ---------- ---------- ------------- -------------
Allowance for doubtful accounts:
March 31, 1996.............................. $397 $234 $111 $520
March 31, 1997.............................. 520 -- 146 374
March 31, 1998.............................. 374 255 19 610
44
47
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,
1998 1997 1997 1997 1997 1996 1996 1996
--------- -------- --------- -------- --------- -------- --------- --------
Total revenues.................. $12,129 $15,138 $10,894 $11,615 $ 4,489 $ 4,582 $ 4,372 $ 5,703
Cost of revenues................ 4,891 6,879 4,537 2,544 1,302 1,283 1,942 7,503
------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss)............. 7,238 8,259 6,357 9,071 3,187 3,299 2,430 (1,800)
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development...... 2,838 3,284 2,982 3,213 2,608 3,141 2,340 2,421
Selling, general and
administrative.............. 4,723 5,358 3,760 3,540 3,115 2,003 1,733 3,247
Restructuring costs........... -- -- -- -- -- -- -- 59
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 7,561 8,642 6,742 6,753 5,723 5,144 4,073 5,727
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations... (323) (383) (385) 2,318 (2,536) (1,845) (1,643) (7,527)
Other income, net............... 423 515 480 100 (272) 265 74 53
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 100 132 95 2,418 (2,808) (1,580) (1,569) (7,474)
(Benefit) provision for income
taxes......................... 18 -- -- (1,000) 36 -- 46 100
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $ 82 $ 132 $ 95 $ 3,418 $(2,844) $(1,580) $(1,615) $(7,574)
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Basic......................... $ 0.01 $ 0.01 $ 0.01 $ 0.59 $ (0.50) $ (0.29) $ (0.30) $ (1.58)
Diluted....................... $ 0.01 $ 0.01 $ 0.01 $ 0.29 $ (0.50) $ (0.29) $ (0.30) $ (1.58)
Shares used in per share
calculations:
Basic......................... 14,581 14,274 13,682 5,794 5,651 5,495 5,321 4,782
Diluted....................... 16,113 16,723 16,090 11,587 5,651 5,495 5,321 4,782
45
48
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 to be held on June 15, 1998, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the 1998
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 1998 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 1998 Proxy
Statement under the captions "Election of Directors -- Compensation of
Directors," "Additional Information -- Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the 1998 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 1998 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 48 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.
None.
46
49
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 May 7, 1998.
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 Sandra L. Abbott, 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 May 7, 1998
- -------------------------------------------------------- Executive Officer (Principal
Paul Voois Executive Officer)
/s/ SANDRA L. ABBOTT Chief Financial Officer and May 7, 1998
- -------------------------------------------------------- Vice President, Finance
Sandra L. Abbott (Principal Financial and
Accounting Officer)
/s/ KEITH R. BARRACLOUGH President, Chief Operating May 7, 1998
- -------------------------------------------------------- Officer and Director
Keith R. Barraclough
/s/ BRYAN MARTIN Vice President, Engineering, May 7, 1998
- -------------------------------------------------------- Chief Technical Officer and
Bryan Martin Director
/s/ CHRIS MCNIFFE Vice President, Sales and May 7, 1998
- -------------------------------------------------------- Marketing and Director
Chris McNiffe
/s/ SAMUEL WANG Vice President, Process May 7, 1998
- -------------------------------------------------------- Technology and Director
Samuel Wang
/s/ BERND GIROD Director May 7, 1998
- --------------------------------------------------------
Bernd Girod
/s/ AKIFUMI GOTO Director May 7, 1998
- --------------------------------------------------------
Akifumi Goto
/s/ GUY L. HECKER Director May 7, 1998
- --------------------------------------------------------
Guy L. Hecker, Jr.
/s/ WILLIAM TAI Director May 7, 1998
- --------------------------------------------------------
William Tai
47
50
8X8, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
3.2+ Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.3+ Bylaws of Registrant.
10.1+ Form of Indemnification Agreement.
10.2+ 1992 Stock Option Plan, as amended, and form of Stock Option
Agreement.
10.3+ Key Personnel Plan, as amended, and form of Stock Option
Agreement.
10.4+ 1996 Stock Plan, as amended, and form of Stock Option
Agreement.
10.5+ 1996 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.6+ 1996 Director Option Plan, as amended, and form of Director
Option Agreement.
10.7+ 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+ Facility lease dated as of July 3, 1990 by and between
Sobrato Interests, a California Limited Partnership, and the
Registrant, as amended.
10.9*+ License Agreement dated as of May 7, 1996 by and between
Kyushu Matsushita Electric Industrial Co., Ltd. and the
Registrant.
10.12+ Promissory Note between Sandra L. Abbott and Registrant
dated June 29, 1996.
10.13+ Promissory Note between David M. Harper and Registrant dated
June 29, 1996.
10.14+ Promissory Note between Bryan R. Martin and Registrant dated
June 29, 1996.
10.15+ Promissory Note between Chris McNiffe and Registrant dated
June 29, 1996.
10.16+ Promissory Note between Mike Noonen and Registrant dated
June 29, 1996.
10.17+ Promissory Note between Samuel T. Wang and Registrant dated
June 29, 1996.
10.18*+ License Agreement dated as of May 5, 1997 by and between
U.S. Robotics Access Corporation and the Registrant.
10.19 Warrant Number CS-01 issued by 8x8, Inc. to Stanford
University on February 17, 1998.
10.20 Fifth Amendment to Lease dated January 26, 1998 between
Sobrato Interests and the Registrant.
10.21 Landlords Consent to Sublease dated February 23, 1998 among
Sobrato Interests, Bay Networks, Inc. and the Registrant.
21.1+ Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 47).
27.1 Financial Data Schedule.
- ---------------
* Confidential treatment was granted with respect to certain portions of this
exhibit.
+ Previously filed as an exhibit to the Registrant's Registration Statement on
Form S-1, Securities and Exchange Commission File No. 333-15627, declared
effective on July 1, 1997 and incorporated by reference herein.
48