<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1996
REGISTRATION NO. 333-15627
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
8X8, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3674 77-0142404
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
Incorporation or
Organization)
</TABLE>
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2445 MISSION COLLEGE BOULEVARD
SANTA CLARA, CA 95054
(408) 727-1885
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOE PARKINSON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
8X8, INC.
2445 MISSION COLLEGE BOULEVARD
SANTA CLARA, CA 95054
(408) 727-1885
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
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<S> <C>
JEFFREY D. SAPER, ESQ. BROOKS STOUGH, ESQ.
KURT J. BERNEY, ESQ. BRIAN K. BEARD, ESQ.
BRETT D. BYERS, ESQ. WILLIAM A. HOLMES, ESQ.
CAINE T. MOSS, ESQ. GUNDERSON DETTMER
WILSON SONSINI GOODRICH STOUGH VILLENEUVE
& ROSATI, P.C. FRANKLIN & HACHIGIAN, LLP
650 PAGE MILL ROAD 155 CONSTITUTION DRIVE
PALO ALTO, CALIFORNIA 94304-1050 MENLO PARK, CALIFORNIA 94025
(415) 493-9300 (415) 321-2400
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective
If this Form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE(3)
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Common Stock, par value
$0.001........................ 2,875,000 shares $10.00 $28,750,000 $8,712.12
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(1) Includes up to 375,000 shares of Common Stock which may be purchased by the
Underwriters to cover overallotments, if any.
(2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the
registration fee.
(3) Fee previously paid in connection with original filing on November 6, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
8X8, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
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<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors...... Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........... Front Cover Page of Prospectus;
Underwriting
6. Dilution.................................. Risk Factors; Dilution
7. Selling Security Holders.................. Not Applicable
8. Plan of Distribution...................... Outside and Inside Front Cover Pages of
Prospectus; Underwriting
9. Description of Securities to be
Registered................................ Front Cover Page of Prospectus; Prospectus
Summary; Capitalization; Description of
Capital Stock
10. Interests of Named Experts and Counsel.... Legal Matters
11. Information with Respect to the
Registrant................................ Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Dilution;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal Stockholders;
Description of Capital Stock; Shares
Eligible for Future Sale; Legal Matters;
Experts; Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to the registration or qualification under the securities
laws of any such State.
SUBJECT TO COMPLETION, DATED DECEMBER 18, 1996
2,500,000 SHARES
LOGO
COMMON STOCK
All of the 2,500,000 shares of Common Stock offered hereby are being sold
by 8x8, Inc. ("8x8" or the "Company"). Prior to this offering (the "Offering"),
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between $8.00
and $10.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company's
Common Stock has been approved for quotation on the Nasdaq National Market under
the symbol "EGHT."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
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Per Share........................................ $ $ $
Total(3)......................................... $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $1,050,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
375,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $ , the Underwriting Discounts and
Commissions will total $ and the Proceeds to Company
will total $ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1996.
---------------------------
MONTGOMERY SECURITIES DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1996
<PAGE> 4
LOGO
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The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
------------------------
This Prospectus includes trademarks and trade names of the Company and
other corporations.
------------------------
As used in this Prospectus, "8x8" and the "Company" refer to 8x8, Inc. and
its subsidiaries, unless the context otherwise indicates. Except as otherwise
indicated, the information presented in this Prospectus assumes that (i) the
Underwriters' over-allotment option is not exercised, (ii) all outstanding
shares of the Company's Preferred Stock are converted into Common Stock upon the
closing of this Offering and (iii) the Company has filed an Amended and Restated
Certificate of Incorporation immediately after the closing of this Offering to
eliminate the Company's currently existing classes of Preferred Stock and
authorize undesignated Preferred Stock. See "Capitalization," "Description of
Capital Stock" and "Underwriting."
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors" and
Consolidated Financial Statements and Notes thereto, appearing elsewhere in this
Prospectus. The discussion in this Prospectus contains forward-looking
statements. The outcome of the events described in such forward-looking
statements is subject to risks and uncertainties. The Company's actual results
may differ materially from those discussed in such forward-looking statements.
Factors that may cause or contribute to such differences include those discussed
in sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as those
discussed elsewhere in this Prospectus.
THE COMPANY
8x8, Inc. ("8x8" or the "Company") designs, develops and markets highly
integrated, proprietary video compression semiconductors and associated software
to original equipment manufacturers ("OEMs") of corporate video conferencing
systems. To address new opportunities, the Company intends to leverage its
strengths in semiconductor design and related software by introducing video
conferencing systems for the consumer market. The first product in the Company's
planned family of VideoCommunicators is the VC100, which is currently under
development. The VC100 connects to a television set and a standard touch-tone
telephone adding video to an otherwise normal telephone call, without the need
for a personal computer ("PC"). The Company plans to introduce the VC100 in
early 1997 targeted at the consumer market. Although the Company has a
functioning VC100 prototype, the Company must satisfy additional technical and
other milestones in order to commercially introduce the VC100 in early 1997.
Technical milestones include debugging the current VC100 prototype design,
receiving necessary domestic and international regulatory approvals and
completing reliability testing.
The proliferation of video conferencing products is dependent on several
factors including network bandwidth, advanced compression technologies and the
acceptance of video telephony standards. Increases in available bandwidth
improve the data carrying capacity of networks, while improvements in
compression technologies utilize a given bandwidth more efficiently. Finally,
video telephony standards are key to widespread adoption as they are designed to
permit the interoperability between systems offered by different vendors.
As a result of recent technological advances and the adoption of the H.324
standard for video telephony over standard analog telephone lines (commonly
known as plain old telephone service, or "POTS"), consumer video phones are
being developed by a number of suppliers. These products are being introduced in
a variety of product configurations and physical forms (i.e., "form factors"),
including those based on telephones and televisions 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, should increase
the usefulness and demand for additional H.324 compliant video phones by
providing potential video phone purchasers with other parties to call.
The Company's video compression semiconductors combine, on a single chip, a
reduced instruction set computer ("RISC") microprocessor, a digital signal
processor ("DSP"), specialized video processing circuitry, static random access
memory ("RAM") and proprietary software to 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
conferencing over a broad range of network types including POTS, integrated
services digital networks ("ISDN"), local area networks ("LAN") and asymmetric
digital subscriber lines ("ADSL"). Customers for the Company's video compression
semiconductors include PictureTel, Siemens, Sony, VideoServer, VCON and Vtel.
The Company's VideoCommunicators will be based on its proprietary
semiconductor, software and systems technology. The VC100 is based primarily
upon the Company's existing technology and is 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. The VC100 is
designed to communicate with full duplex audio and video rates of up to 12
frames per second. In addition, the Company is currently
3
<PAGE> 6
developing a second VideoCommunicator, the VC200, a non-PC based POTS video
phone with a built-in liquid crystal display. See "Business -- Products" and
"Business -- Licensing and Development Arrangements" for a discussion of the
development status of the VC100, the VC200 and the successor products to the
Company's video compression semiconductors and certain related licensing and
development arrangements (including an arrangement pursuant to which Kyushu
Matsushita Electric Co., Ltd. has licensed all of the Company's technology
underlying the Company's VideoCommunicators currently under development).
Although the Company has received certain revenues from these licensing and
development arrangements in the past, there can be no assurance that the Company
will receive any revenues from these arrangements in the future. The Company
intends to sell its VideoCommunicators through a direct marketing effort
utilizing a combination of advertising, toll-free telemarketing and direct mail
supported by co-marketing arrangements with third parties and resale through the
retail channel.
During fiscal years 1992 through 1995, the Company's revenues were derived
primarily from the sale of math co-processors. However, the Company's revenues
from math co-processors subsequently declined and revenues from the Company's
sale of video compression semiconductors increased, comprising the majority of
the Company's total revenues during the first half of fiscal 1997. During these
periods, the Company also derived revenues from certain licensing transactions.
Nonetheless, there can be no assurance that the Company will receive revenues
from the licensing of its technology in the future. See "Business -- Licensing
and Development Arrangements." Because the Company's video compression
semiconductor business has not provided, and is not expected to provide,
sufficient revenues to profitably operate the Company, the Company believes that
its future profitability will be largely dependent on the success of its
VideoCommunicator business. As a result, the Company believes that its
historical operating results will not be comparable to, and should not be relied
upon as an indication of, future operating results.
The Company was incorporated in February 1987 in California under the name
Integrated Information Technology, Inc. In April 1996, the Company changed its
name to 8x8, Inc. and in December 1996 reincorporated in Delaware. The Company's
executive offices are located at 2445 Mission College Boulevard, Santa Clara, CA
95054, and its telephone number is (408) 727-1885.
THE OFFERING
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<S> <C>
Common Stock offered by the Company............. 2,500,000 shares
Common Stock to be outstanding after the 13,195,348 shares(1)
Offering......................................
Use of Proceeds................................. For general corporate purposes including working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... EGHT
</TABLE>
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues....................... $36,001 $31,082 $34,401 $19,929 $28,774 $12,122 $10,075
Gross profit......................... 23,509 16,945 14,932 8,025 12,106 4,197 868
Income (loss) from operations........ 7,527 (1,473) 243 (6,527) (4,149) (3,781) (5,894)
Net income (loss).................... 4,960 (841) (348) (5,881) (3,217) (3,701) (5,913)
Pro forma net loss per share......... $ (.28) $ (.32) $ (.50)
Shares used in pro forma per share
calculations....................... 11,654 11,585 11,800
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED(2)
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital..................................................................... $ 5,728 $ 27,093
Total assets........................................................................ 12,856 34,221
Total liabilities................................................................... 5,105 5,105
Stockholders' equity................................................................ 7,751 29,116
</TABLE>
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(1) Based on shares outstanding as of September 30, 1996, but includes an
aggregate of 270,913 shares of Common Stock issuable upon conversion of
Series D Preferred Stock issued in October 1996. Excludes, as of September
30, 1996, (i) an aggregate of 1,543,787 shares of Common Stock issuable on
the exercise of outstanding options granted under the Company's 1992 Stock
Option Plan and 1996 Stock Plan and (ii) an aggregate of 1,871,330 shares of
Common Stock reserved for issuance under the Company's 1992 Stock Option
Plan, 1996 Stock Plan, 1996 Director Option Plan and 1996 Employee Stock
Purchase Plan. See "Management -- Compensation Plans" and Note 6 of Notes to
Consolidated Financial Statements.
(2) Adjusted to reflect (i) the sale of 270,913 shares of Series D Preferred
Stock by the Company for aggregate proceeds of approximately $1.5 million in
October 1996 and (ii) the sale of 2,500,000 shares of Common Stock by the
Company at an assumed public offering price of $9.00 per share after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds" and "Capitalization."
5
<PAGE> 8
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements contained under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and under "Business," as well as
other statements contained in this Prospectus regarding matters that are not
historical facts are forward-looking statements (as such term is defined in the
rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")). Because the outcome of the events described in such
forward-looking statements is subject to risks and uncertainties, actual results
may differ materially from those expressed in or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed herein under "Risk Factors."
The Company undertakes no obligation to release publicly the result of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RISK FACTORS
An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
the following risk factors should be considered carefully by potential
purchasers in evaluating an investment in the Common Stock offered hereby.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
After a modest operating profit in fiscal 1994, the Company recorded
operating losses of $6.5 million and $4.1 million in the years ended March 31,
1995 and 1996, respectively. Revenues fluctuated from $34.4 million in fiscal
1994 to $19.9 million in fiscal 1995 to $28.8 million in fiscal 1996. The
Company recorded an operating loss of $3.8 million for the six months ended
September 30, 1995, which increased to $5.9 million for the six months ended
September 30, 1996. Revenues declined from $12.1 million for the six months
ended September 30, 1995 to $10.1 million for the six months ended September 30,
1996. In view of the Company's operating losses, there can be no assurance that
the Company will either become profitable or sustain profitability on an annual
or quarterly basis. Losses will likely continue unless the Company's initial
VideoCommunicators, particularly the VC100, are successfully introduced and
achieve widespread consumer market acceptance, of which there can be no
assurance. The Company currently anticipates that for the quarter ending
December 31, 1996 its total revenues will be lower and its operating loss will
be higher than the corresponding amounts for the quarter ended September 30,
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON FUTURE VIDEOCOMMUNICATOR REVENUES
The Company believes that its business and future profitability will be
largely dependent on the development and successful introduction and marketing
of its first VideoCommunicator, the VC100, as the Company's video compression
semiconductor and related software business has not provided, and is not
expected to provide, sufficient revenues to profitably operate the Company. The
Company currently plans to introduce the VC100 in early 1997. The Company has in
the past experienced delays in the development of new products and the
enhancement of existing products, and such delays may occur in the development
and introduction of the VC100. Moreover, the Company must achieve significant
technological and business milestones in order to permit the introduction and
marketing of the VC100 product. These milestones include debugging the current
VC100 prototype design; receiving necessary domestic and international
regulatory approvals; completing reliability testing; procuring adequate
semiconductor foundry and electronic subcontract manufacturing services and
capacity; establishing production of the VC100 in volumes on a cost effective
basis and at acceptable quality levels; implementing the marketing, sales,
distribution and customer support strategy for the VC100 product; and
establishing direct marketing capabilities and distribution relationships with
third parties. There can be no assurance that any of these or other milestones
will be met in sufficient time to permit the introduction of the VC100 by early
1997, if at all. If the Company is unable for any reason to develop, introduce
and market the VC100 product in a timely manner or, if the VC100 product does
not achieve sufficient market acceptance, it would have a material adverse
effect on the Company's business and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- 8x8 Strategy."
6
<PAGE> 9
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's future operating results are expected to fluctuate as the
Company proceeds with the development, introduction and marketing of its family
of non-PC based VideoCommunicators. Moreover, because the Company's video
compression semiconductor and related software business has not provided, and is
not expected to provide, sufficient revenues to profitably operate the Company,
the Company believes that its future profitability will be largely dependent on
the success of its VideoCommunicator business. As a result, the Company believes
that its historical operating results will not be comparable to, and should not
be relied upon as an indication of, future operating results. In addition, the
Company's operating results have fluctuated significantly and may continue to
fluctuate in the future, on an annual and a quarterly basis, as a result of a
number of factors, many of which are outside the Company's control, including
changes in market demand, the timing of customer orders, competitive market
conditions, lengthy sales 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 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, product pricing, the allocation between international and domestic sales,
the percentage of direct sales and sales to distributors, and manufacturing and
component costs. The Company may also be required to reduce prices in response
to competitive pressure or other factors or increase spending to pursue new
market opportunities. Any decline in average selling prices of a particular
product which is not offset by a reduction in production costs or by sales of
other products with higher gross margins would decrease the Company's overall
gross margin and adversely affect the Company's operating results. In
particular, 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. Moreover, the Company believes
that the introduction of its family of VideoCommunicators may adversely impact
its gross margins due in part to higher unit costs associated with initial
production of its first products as well as substantially different cost and
pricing structures related to the manufacture and sale of consumer products.
Variations in timing of sales may cause significant fluctuations in future
operating results. In addition, because a significant portion of the Company's
business may be derived from orders placed by a limited number of large
customers, the timing of such orders can also cause significant fluctuations in
the Company's operating results. Anticipated orders from customers may fail to
materialize, and delivery schedules may be deferred or canceled for a number of
reasons, including changes in specific customer requirements. If sales do not
meet the Company's expectations in any given quarter, the adverse impact of the
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the 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 strategic shift towards the introduction and marketing of
VideoCommunicators, such as the VC100, may result in substantially different
patterns in operating results. For example, the Company's operating results may
be subject to increased seasonality with sales higher during the Company's third
fiscal quarter, corresponding to the Christmas shopping season. The Company
intends to spend substantial additional amounts on advertising, toll-free
marketing and customer support. There can be no assurance as to the amount of
such spending or that revenues adequate to justify such spending will result. As
a result of its shift to selling VideoCommunicators, the Company may experience
different inventory, product return, price protection and warranty cost
patterns.
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 Common Stock. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
7
<PAGE> 10
COMPETITION
The Company competes with independent manufacturers of video compression
semiconductors and, after the planned introduction of its VideoCommunicators,
will compete with manufacturers of video conferencing 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 its planned 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 the following segments:
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
Electric Industrial Co., Ltd. ("Matsushita"), Philips, Samsung and Sony.
Many of these potential competitors sell television and telephone products
into which they may integrate video conferencing systems, thereby
eliminating a consumer's need to purchase a separate video conferencing
system, such as the VC100.
Personal computer system and software manufacturers. Potential customers
for the Company's VideoCommunicators may elect instead to buy PCs equipped
with video conferencing capabilities. As a result, the Company may face
competition from Intel; PC system manufacturers such as Apple, Compaq, IBM
and Sony; PC software suppliers such as Microsoft and Netscape; and PC
add-on component suppliers.
Existing manufacturers of video conferencing equipment. Manufacturers of
more expensive corporate video conferencing systems may enter the market
for lower cost consumer video conferencing products. Potential competitors
include Compression Labs, PictureTel, Sony 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 recently been announced or introduced by companies such as Philips and
Sony.
The principal competitive factors in the market for video compression
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 direct competitors in this market
including Lucent Technologies and Texas Instruments. Certain of the Company's
competitors for video compression semiconductors maintain their own
semiconductor foundries and may therefore benefit from certain capacity, cost
and technical advantages.
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. A number 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.
A number of companies have licensed portions of the Company's technology
(including an affiliate of Matsushita which has licensed substantially all of
the Company's technology underlying the Company's VideoCommunicators currently
under development) and, therefore, may be able to use this technology to produce
products that compete directly with the Company's VideoCommunicators. See
"Business -- Licensing and Development Arrangements."
8
<PAGE> 11
UNCERTAINTY OF MARKET ACCEPTANCE; LIMITS OF EXISTING TECHNOLOGY
Previous efforts to sell consumer video phones have been unsuccessful and
there can be no assurance that the market for such products will develop. The
Company has no reliable data to suggest that there will be significant customer
demand for such products, including the Company's VideoCommunicators. For such
products to achieve widespread consumer acceptance, the installed base must
reach a critical mass. Failure of the market for consumer video telephony to
develop or achieve critical mass would have a material adverse effect on the
Company's business and operating results.
In addition, the data carrying capacity of standard analog phone lines is
limited. Currently, modems used for the transmission of data over standard
analog phone lines are limited to data transfer rates of up to 33.6 kilobits per
second ("Kbps"). Using such modems, the Company's VC100 may initially be capable
of delivering video data at rates only up to 12 frames per second. This compares
to 30 frames per second provided by television, 24 frames per second provided by
movies and 24 or more frames per second provided by ISDN video teleconferencing.
At rates less than approximately 24 frames per second, 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 related to the H.324 standard on POTS could
have a material adverse effect on the Company's business and results of
operations. See "Business -- Sales and Marketing."
DEPENDENCE ON H.324 STANDARD FOR VIDEO TELEPHONY
The H.324 standard has only recently received industry endorsement as an
international protocol for video telephony using POTS. The Company believes that
adherence to this standard is an important factor in the development of this
marketplace and, if the H.324 standard is not widely implemented in the
industry, different vendors' products will not be compatible, which may deter or
delay growth in the market and reduce the demand for consumer video telephony
products. However, the emergence of industry standards may also lower barriers
to entry and result in increased competition. There can be no assurance that the
H.324 standard will not change or be supplanted by other standards, which could
render the Company's H.324 compliant products uncompetitive. There can be no
assurance that, even with the H.324 standard in place, a market for video
telephony products compatible with H.324 will develop. Further, the
implementation of the H.324 standard by different manufacturers may vary. Such
variation could degrade the quality and limit the interoperability of POTS based
systems, which may inhibit widespread acceptance of consumer video telephony
products.
NO HISTORY OF DIRECT CONSUMER MARKETING
In recent years, the Company has been a provider of video compression
semiconductors to OEMs of video conferencing systems. Accordingly, the Company
has had no prior experience in marketing commercial quantities of consumer
products such as the VC100. In order to achieve significant market penetration
and brand awareness for the VC100, the Company must expand its sales and
marketing efforts and develop direct consumer marketing capabilities. There can
be no assurance that the Company will be successful in these areas or that the
Company will be able to achieve significant market penetration with its VC100.
See "Business -- Sales and Marketing."
POTENTIAL REDUCTION IN LICENSING REVENUES
The Company has in the past received substantial revenues from licensing of
technology. Licensing revenues were $8.1 million and $1.8 million in the year
ended March 31, 1996 and the six months ended September 30, 1996, respectively.
There can be no assurance that the Company will receive revenues from licensing
of its technology in the future.
PRODUCT CONCENTRATION; POTENTIAL LOSS OF SEMICONDUCTOR SALES; DEPENDENCE ON
VIDEO CONFERENCING INDUSTRY
In the years ended March 31, 1994, 1995 and 1996 and the six month period
ended September 30, 1996, sales of video compression semiconductors accounted
for approximately 12%, 42%, 63% and 81%, respectively,
9
<PAGE> 12
of the Company's total revenues. Pending a successful introduction of its
VideoCommunicators, sales of video compression semiconductors will continue to
account for a substantial majority of total revenues. Moreover, successful
introduction of VideoCommunicators may adversely affect sales of semiconductors
to the Company's existing customers that currently, or may in the future, sell
products that compete with the Company's VideoCommunicators.
Sales of the Company's existing compression semiconductors and planned
VideoCommunicators are also dependent on the video conferencing industry. Thus,
regardless of the success or failure of its VideoCommunicators, the Company will
continue to be substantially dependent on the video conferencing industry. Any
reduction in the demand for the Company's video compression semiconductors
(particularly prior to significant VideoCommunicator revenues) or any general
decline in the market for video conferencing products could have a material
adverse effect on the Company's business, and operating results. See
"Business -- Sales and Marketing" and "Business -- Competition."
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. Product revenues from the Company's ten largest customers, in the years
ended March 31, 1994, 1995 and 1996 and the six months ended September 30, 1996
accounted for approximately 55%, 44%, 39% and 53%, respectively, of its total
revenues. During these periods, excluding one company paying certain
non-recurring licensing fees during the year ended March 31, 1996, the Company
had only three customers that accounted for 10% or more of total revenues: IBM
(during the year ended March 31, 1994), Compression Labs (during the year ended
March 31, 1995) and an affiliate of Matsushita (during the six months ended
September 30, 1996). Sales of video compression semiconductors to relatively few
customers may continue to account for a significant portion of its total
revenues. Substantially all the Company's 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. The loss of, or any reduction in orders from, significant customers
could have a material adverse effect on the Company's business and operating
results. See "Business -- Sales and Marketing."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT INTRODUCTION
The video compression semiconductor and video conferencing 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, 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.
The Company is currently a developer and supplier of video compression
semiconductors which it has sold since 1991. The Company was previously involved
in several other businesses which have since been discontinued. Prior product
lines that were discontinued include math co-processors and Motions Picture
Expert Group ("MPEG") semiconductors, discontinued in June 1995 and September
1996, respectively. Prior development efforts that were discontinued include
Intel compatible x86 microprocessors and graphics semiconductors, discontinued
in June 1995 and during the quarter ended September 30, 1994, respectively. The
Company discontinued its products and efforts in these areas in part because of
rapid changes in the personal computer marketplace and severe price competition
for certain of these components. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company plans to introduce additional VideoCommunicators and video
compression semiconductors subsequent to the introduction of the VC100. There
can be no assurance that these or any future products will be successfully
developed or introduced to the market. The Company has in the past experienced
delays in the development of new products and the enhancement of existing
products, and such delays may occur in the
10
<PAGE> 13
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, 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 "Business -- Research and Development."
MANAGEMENT OF GROWTH
The development, introduction and marketing of the Company's
VideoCommunicators will place a significant strain on the Company's limited
personnel, management and other resources. The Company's ability to manage any
future growth effectively will require it to attract, train, motivate and manage
new employees successfully, to effectively integrate new employees into its
operations and to continue to improve its operational, financial and management
systems. In particular, the Company intends to hire additional research and
development personnel and to develop direct consumer marketing capabilities by
increasing the size of its domestic and international sales and marketing staff.
The Company's failure to manage its growth effectively could have a material
adverse effect on the Company's business and operating results. See
"Business -- 8x8 Strategy."
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 laws, which afford only limited protection. There can
be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. The Company also relies in part on patent
law to protect its intellectual property in the United States and abroad. The
Company currently holds three United States patents, including patents relating
to video compression and memory architecture technology, and has 11 United
States patent applications pending. The Company has a number of foreign patent
applications pending. There can be no assurance that any patent, trademark or
copyright owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. Thus,
effective intellectual property protection may be unavailable or limited in
certain foreign countries. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad 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. 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. In addition, as is common in its industry, the
Company has from time to time received notification from other companies of
intellectual property rights held by those companies upon which the Company's
products may infringe. For example, the Company recently received an allegation
of infringement from Elk Industries, Inc. 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 could be required to seek licenses from other companies or to refrain from
using, manufacturing or selling certain products or using certain processes.
Although holders of patents and other intellectual property rights often offer
licenses to their patents or other intellectual property rights, no assurance
can be given that licenses would be offered to the Company, that the terms of
any offered license would be acceptable to the Company or that failure to obtain
a license would not have a material adverse effect on the Company's business and
operating results.
11
<PAGE> 14
The Company relies upon certain software licensed from third parties. There
can be no assurance that the software licensed by the Company will continue to
provide competitive features and functionality or that licenses for software
currently utilized by the Company or other software which the Company may seek
to license in the future will be available to the Company on commercially
reasonable terms or at all. The loss of, or inability to maintain, existing
licenses could result in shipment delays or reductions until equivalent software
or suitable alternative products could be developed, identified, licensed and
integrated, and the inability to license key new software that may be developed,
on commercially reasonable terms, would have a material adverse effect on the
Company's business and operating results.
LACK OF EXPERIENCE IN MANUFACTURING CONSUMER VIDEO TELEPHONY PRODUCTS
The Company is a fabless semiconductor manufacturer and has not
manufactured commercial quantities of any consumer video telephony products. To
achieve future profitability, the Company must be able to reliably manufacture
the VC100 and its other VideoCommunicators directly or through third party
subcontract manufacturers, in commercial quantities, on a cost effective basis
and in a timely manner, of which there can be no assurance. In view of the
Company's lack of manufacturing experience, there can be no assurance that
unforeseen technical or other difficulties will not arise which could interfere
with the manufacture thereof or prevent, or create delays in, marketing these
products. Any delay in the manufacture of the VideoCommunicators, quality
control problems, or inability to produce such products in commercial quantities
or on a cost effective basis could have a material adverse effect on the
Company's business and operating results.
DEPENDENCE ON THIRD PARTY MANUFACTURERS; COMPONENT AVAILABILITY
The Company uses independent foundries to fabricate, assemble and test its
video compression semiconductors. The Company does not have long-term purchase
agreements with its semiconductor foundries, and purchases semiconductor wafers
pursuant to purchase orders. Therefore these foundries are generally not
obligated to supply products to the Company for any specific period, in any
specific quantity or at any specific price. The Company secures assembly and
test services on a purchase order basis as well.
The Company plans to outsource the manufacture of its VideoCommunicators to
subcontract manufacturers. The Company is currently negotiating arrangements
with certain large subcontract manufacturing companies to produce its
VideoCommunicators. There can be no assurance that these negotiations will be
successful. The Company anticipates that its subcontract manufacturers will
procure components from their suppliers and perform assembly and testing of the
Company's VideoCommunicators on a turnkey basis. There can be no assurance that
these or additional contract manufacturers will be able to reliably manufacture
the Company's products in volumes, on a cost effective basis or in a timely
manner.
The Company's reliance on independent semiconductor foundries and
subcontract manufacturers involves a number of risks, including the lack of
direct control over the manufacturing process, the absence or unavailability of
adequate capacity, the unavailability of, or interruption in access to, certain
process technologies (particularly in the case of semiconductors) and reduced
control over delivery schedules, quality control, manufacturing yields and
costs. In the event that the Company's foundries and subcontract manufacturers
are unable or unwilling to continue to manufacture the Company's products in
required volumes, on a cost effective basis, in a timely manner or at all, the
Company will have to secure additional foundry or manufacturing capacity.
Available semiconductor foundry and manufacturing capacity at times has been
limited. Even if such additional capacity is available at commercially
acceptable terms, the qualification process could be lengthy and could create
delays in product shipments.
Certain components necessary for the manufacture of the Company's products
are obtained from a single supplier or a limited group of suppliers. These
include a digital camera, modem chips, certain application specific integrated
circuits ("ASICs") and other semiconductor components. The Company does not
maintain any long-term agreements with any of its suppliers of components.
Because the purchase of certain key components may involve long lead times, in
the event of unanticipated increases in demand for the Company's products, the
Company could be unable to manufacture certain products in a quantity sufficient
to
12
<PAGE> 15
meet end user demand. A shortage of any key component could have a material
adverse effect on the Company's business and operating results.
These risks and the related difficulties that the Company may experience
due to its reliance on independent semiconductor foundries, subcontract
manufacturers and component suppliers 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 ("FCC") regarding electromagnetic radiation and
standards established by Underwriters Laboratories, Inc., as well as similar
regulations and standards applicable in other countries. The Company's
VideoCommunicators must comply with these regulations and standards as a
prerequisite to commercial sales. As these regulations and standards evolve, the
Company may be required to modify its existing products or develop and support
new versions of its products. The failure of the Company's products to comply,
or delays in compliance, with the various existing and evolving government
regulations and industry standards could delay introduction of the
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 29%, 40%, 49%
and 62% of the total revenues in the years ended March 31, 1994, 1995 and 1996
and the six months ended September 30, 1996, respectively, and international
sales are likely to continue to represent a substantial portion of its total
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 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. While international sales are typically denominated in U.S. dollars,
fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to customers in a particular country, leading
to a reduction in sales or profitability in that country. Payment cycles for
international customers may be longer than those for customers in the United
States. 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. See
"Business -- Sales and Marketing" and "Business -- Manufacturing."
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS
While the Company expects that the proceeds from this Offering, its
existing cash balances and the amounts, if any, generated from operations will
be sufficient to meet its cash requirements for at least the next 12 months, 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 raise such capital on acceptable terms, if at all. If the Company is unable
to obtain such additional capital, the Company may be required to reduce the
scope of its planned product development and introduction, which could have a
material adverse effect on the Company's business and operating results. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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<PAGE> 16
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the continued service of, and on its
ability to attract and retain, qualified technical, marketing, sales and
managerial personnel. The competition for such personnel is intense,
particularly in Silicon Valley, where the Company's principal office is located,
and the loss of any of such persons, as well as 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. See "Business -- Employees" and "Management."
ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certain provisions of the Company's Certificate of Incorporation and
Bylaws, as in effect upon the closing of this Offering, may have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from attempting to acquire, control of the Company. Such provisions could
limit the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. Certain of these provisions eliminate the
right of the stockholders to act by written consent without a meeting, eliminate
cumulative voting by stockholders in the election of directors and specify
procedures for director nominations by stockholders and submission of other
proposals for consideration at stockholder meetings. In addition, the Company's
Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The Company has no present plans to issue
shares of Preferred Stock. Certain provisions of Delaware law applicable to the
Company could also delay or make more difficult a merger, tender offer or proxy
contest involving the Company, including Section 203 of the Delaware General
Corporation Law, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
unless certain conditions are met. Additionally, the issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, may discourage bids for the Common
Stock at a premium over the market price of the Common Stock and may adversely
affect the market price of, and the voting and other rights of the holders of,
the Common Stock. Such provisions could have the effect of delaying, deferring
or preventing a change in control of the Company, including without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of the Company's Common Stock. These provisions could also
limit the price that investors might be willing to pay in the future for shares
of the Company's Common Stock. See "Description of Capital Stock -- Preferred
Stock," "Description of Capital Stock -- Anti-Takeover of Provisions of
Certificate of Incorporation and Bylaws" and "Description of Capital
Stock -- Effect of Delaware Antitakeover Statute."
NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or be sustained after this Offering. The initial public offering price will be
determined through negotiations between the Company and the representatives of
the Underwriters based on several factors and may not be indicative of the
market price of the Common Stock after this Offering. See "Underwriting." The
market price of the shares of Common Stock is likely to be highly volatile and
may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results, announcements of technical
innovations, 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, certain of 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 Common Stock. In the past, following periods of volatility
in the market price of a
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<PAGE> 17
company's securities, securities class action litigation has 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.
DILUTION
Purchasers of the Common Stock offered hereby will suffer immediate and
substantial dilution in the net tangible book value of the Common Stock from the
initial public offering price. To the extent outstanding options to purchase the
Company's Common Stock are exercised, there will be further dilution. See
"Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sale of substantial amounts of shares in the public market or the prospect
of such sales could adversely affect the market price of the Company's Common
Stock. Upon completion of this Offering, the Company will have outstanding
13,195,348 shares of Common Stock. Of the shares outstanding prior to this
Offering, with the exception of 137,800 shares which will be immediately
eligible for sale under Rule 144 promulgated pursuant to the Securities Act, all
shares of Common Stock held by current stockholders are subject to lock-up
agreements under which the holders of such shares have agreed not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this Prospectus without the prior written consent of Montgomery Securities.
After the 180-day period, 9,501,587 shares held by current stockholders will be
eligible for sale under Rule 144 or Rule 701. The remaining 1,055,961 shares
held by existing stockholders will become eligible for sale from time to time in
the future under Rule 144 or Rule 701. In addition, the Company intends to file
a registration statement under the Securities Act, upon the effectiveness of
this Offering or shortly thereafter, covering the sale of shares of Common Stock
reserved for issuance under its Key Personnel Plan, 1992 Stock Option Plan, 1996
Stock Plan, 1996 Employee Stock Purchase Plan and 1996 Director Option Plan. As
of September 30, 1996, there were outstanding options to purchase a total of
1,543,787 shares of the Company's Common Stock, all of which are subject to
180-day lock-up agreements. A total of 230,534 shares issuable upon exercise of
such options, as of September 30, 1996, will be eligible for sale into the
public market 180 days after the date of this Prospectus. See
"Management -- Compensation Plans," "Shares Eligible for Future Sale" and
"Underwriting." Certain existing stockholders holding approximately 3,726,373
shares of Common Stock, are also entitled to registration rights with respect to
their shares of Common Stock. See "Description of Capital Stock -- Registration
Rights."
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<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $9.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, are estimated to be $19.9 million
($23.0 million if the Underwriters' over-allotment option is exercised in full).
Of the net proceeds of the Offering, the Company expects that through the
end of calendar 1997 it will use approximately $6 to $9 million for product
development, $6 to $9 million for marketing and $0.5 million for capital
equipment, with the balance being used for working capital and other purposes. A
portion of the net proceeds may also be used for investments in or acquisitions
of complementary businesses, products or technologies, although no such
transactions are currently under negotiation. Pending such uses, the Company
plans to invest the net proceeds in short-term, interest-bearing, investment
grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently does not anticipate paying any cash dividends on its
capital stock in the foreseeable future.
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<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, (i) on an actual basis, (ii) on a pro forma basis to reflect
the sale of 270,913 shares of Series D Preferred Stock by the Company in October
1996, the automatic conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this Offering and the filing of Amended and
Restated Certificate of Incorporation immediately after the closing of the
Offering to eliminate the Company's currently existing classes of Preferred
Stock and authorize undesignated Preferred Stock; and (iii) as adjusted to
reflect the receipt by the Company of the net proceeds from the sale of the
2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $9.00 per share, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------
AS
ACTUAL PRO FORMA ADJUSTED
------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, including current portion..................... $ -- $ -- $ --
Stockholders' equity:
Preferred Stock, par value $0.001 per share; actual:
5,411,820 shares authorized, 3,455,460 shares issued and
outstanding; pro forma and as adjusted: 5,000,000 shares
authorized, no shares issued or outstanding.............. 4 -- --
Common Stock, par value $0.001 per share; actual: 40,000,000
shares authorized, 6,968,975 shares issued and
outstanding; pro forma: 40,000,000 shares authorized,
10,695,348 shares issued and outstanding; as adjusted:
40,000,000 shares authorized, 13,195,348 shares issued
and outstanding (1)...................................... 7 11 13
Additional paid in capital.................................. 14,520 16,010 35,883
Notes receivable from stockholders.......................... (1,078) (1,078) (1,078)
Accumulated deficit......................................... (5,702) (5,702) (5,702)
------- ------- -------
Total stockholders' equity............................... 7,751 9,241 29,116
------- ------- -------
Total capitalization................................... $7,751 $ 9,241 $ 29,116
======= ======= =======
</TABLE>
- ---------------
(1) Excludes, as of September 30, 1996, (i) an aggregate of 1,543,787 shares of
Common Stock issuable on the exercise of outstanding options granted under
the Company's 1992 Stock Option Plan and 1996 Stock Plan and (ii) an
aggregate of 1,871,330 shares of Common Stock reserved for issuance under
the Company's 1992 Stock Option Plan, 1996 Stock Plan, 1996 Director Option
Plan and 1996 Employee Stock Purchase Plan. See "Management -- Compensation
Plans."
17
<PAGE> 20
DILUTION
The pro forma net tangible book value of the Company at September 30, 1996,
giving effect to (i) the sale of 270,913 shares of Series D Preferred Stock by
the Company in October 1996 and (ii) the conversion of all outstanding shares of
Preferred Stock into Common Stock upon the closing of this Offering, was
approximately $9.2 million, or $0.86 per share of Common Stock. "Pro forma net
tangible book value" per share represents the amount of total tangible assets of
the Company less total liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect to the sale by the Company of 2,500,000
shares of Common Stock offered hereby (and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses) at an
assumed initial public offering price of $9.00 per share, the pro forma net
tangible book value of the Company at September 30, 1996 would have been $29.1
million, or $2.21 per share. This represents an immediate increase in pro forma
net tangible book value of $1.35 per share to existing stockholders and an
immediate dilution of $6.79 per share to new investors purchasing in this
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................... $ 9.00
Pro forma net tangible book value before this Offering............ $0.86
Increase per share attributable to new investors.................. 1.35
-----
Pro forma net tangible book value per share after this Offering..... 2.21
------
Dilution per share to new investors................................. $ 6.79
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1996 and after giving effect to the issuance of an aggregate of 270,913 shares
of Series D Preferred Stock in October 1996, the differences between the number
of shares of Common Stock purchased from the Company, the total consideration
paid and the average price per share paid by the Company's existing stockholders
and the new investors in this Offering with respect to the 2,500,000 shares of
Common Stock to be sold by the Company. The calculations in this table with
respect to shares of Common Stock to be purchased by new investors in this
Offering reflect an assumed initial public offering price of $9.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 10,695,348 81.1% $16,054,000 41.6% $ 1.50
New investors........................ 2,500,000 18.9 22,500,000 58.4 9.00
---------- ----- ----------- -----
Total...................... 13,195,348 100.0% $38,554,000 100.0% $ 2.92
========== ===== =========== =====
</TABLE>
The foregoing computations exclude as of September 30, 1996, (i) an
aggregate of 1,543,787 shares of Common Stock issuable on the exercise of
outstanding options granted under the Company's 1992 Stock Option Plan and 1996
Stock Plan and (ii) an aggregate of 1,871,330 shares of Common Stock reserved
for issuance under the Company's 1992 Stock Option Plan, 1996 Stock Plan, 1996
Director Option Plan and 1996 Employee Stock Purchase Plan. See
"Management -- Compensation Plans."
18
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data presented below for
each of the years ended March 31, 1994, 1995 and 1996 and for the six months
ended September 30, 1995 and 1996, and the selected consolidated balance sheet
data as of March 31, 1995 and 1996 and September 30, 1996, are derived from, and
are qualified by reference to, the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The selected consolidated
statement of operations data for the years ended March 31, 1992 and 1993 and the
selected consolidated balance sheet data as of March 31, 1992, 1993 and 1994 are
derived from the audited historical financial statements of the Company, which
are not included herein. The Company's future operating results are expected to
fluctuate as the Company proceeds with the development, introduction and
marketing of its family of VideoCommunicators. Moreover, because the Company's
video compression semiconductor and related software business has not provided,
and is not expected to provide, sufficient revenues to profitably operate the
Company, the Company believes that its future profitability will be largely
dependent on the success of its VideoCommunicator business. As a result, the
Company believes that its historical operating results will not be comparable
to, and should not be relied upon as an indication of, future operating results.
The data set forth below are qualified in their entirety by, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues................ $36,001 $31,082 $34,401 $19,929 $28,774 $12,122 $10,075
Cost of revenues.............. 12,492 14,137 19,469 11,904 16,668 7,925 9,207
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 23,509 16,945 14,932 8,025 12,106 4,197 868
Operating expenses:
Research and development... 6,797 7,005 6,540 8,107 7,714 3,997 3,992
Selling, general and
administrative........... 9,185 11,413 8,149 6,445 7,938 3,378 2,711
Restructuring costs........ -- -- -- -- 603 603 59
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 15,982 18,418 14,689 14,552 16,255 7,978 6,762
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................. 7,527 (1,473) 243 (6,527) (4,149) (3,781) (5,894)
Other income, net............. 264 282 189 611 952 80 127
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
for income taxes........... 7,791 (1,191) 432 (5,916) (3,197) (3,701) (5,767)
Provision (benefit) for income
taxes...................... 2,831 (350) 780 (35) 20 -- 146
------- ------- ------- ------- ------- ------- -------
Net income (loss)............. $ 4,960 $ (841) $ (348) $(5,881) $(3,217) $(3,701) $(5,913)
======= ======= ======= ======= ======= ======= =======
Pro forma loss per share(1)... $ (0.28) $ (0.32) $ (0.50)
======= ======= =======
Shares used in pro forma per
share calculations(1)...... 11,654 11,585 11,800
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
------- ------- ------- ------- ------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............... $10,976 $10,355 $10,683 $11,983 $ 9,333 $ 5,728
Total assets.................. 24,265 24,586 21,908 20,644 23,067 12,856
Total liabilities............. 10,764 11,920 9,579 6,661 11,693 5,105
Total stockholders' equity.... 13,501 12,666 12,329 13,983 11,374 7,751
</TABLE>
- ---------------
(1) See Note 1 of the Notes to the Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used to
compute per share amounts.
19
<PAGE> 22
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. The Company initially developed and
sold math co-processors compatible with systems based on Intel's
microprocessors. During the years ended March 31, 1992 through 1995, the
Company's revenues were derived primarily from the sale of math co-processors.
As Intel's microprocessors eliminated the need for a separate math co-processor,
the Company's revenues from math co-processors declined.
In 1990, the Company began development of semiconductors and related
software for the video conferencing and digital video playback markets. In
fiscal 1994, 1995, 1996 and the six months ended September 30, 1996, sales of
the Company's video compression semiconductors and related software accounted
for 12%, 42%, 63% and 81%, respectively, of total revenues.
Since June 1995, the Company has been executing a new business strategy
designed to discontinue efforts unrelated to video conferencing. As part of this
strategy, the Company discontinued its efforts to develop Intel compatible x86
microprocessors in June 1995, reduced its workforce in May 1996 and sold its
remaining MPEG inventory in September 1996. To address new opportunities, the
Company intends to leverage its strengths in semiconductor design and related
software by introducing video conferencing systems for the consumer market. The
first product in the Company's planned family of VideoCommunicators is the
VC100, which is currently under development and is based primarily on the
Company's existing technology. The VC100 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 Company plans to introduce the VC100 in
early 1997 targeted at the consumer market. In addition, the Company is
currently developing a second VideoCommunicator, the VC200, a non-PC based POTS
video telephone with a built-in liquid crystal display. See "Business --
Products" and "Business -- Licensing and Development Arrangements" for a
discussion of the development status of the VC100, the VC200 and the successor
products to the Company's video compression semiconductors and certain related
licensing and development arrangements (including an arrangement pursuant to
which Kyushu Matsushita Electric Co., Ltd. has licensed all of the Company's
technology underlying the Company's VideoCommunicators currently under
development). Although the Company has received certain revenues from these
licensing and development arrangements in the past, there can be no assurance
that the Company will receive any revenues from these arrangements in the
future.
The Company's future operating results are expected to fluctuate as the
Company proceeds with the development, introduction and marketing of its
VideoCommunicators. Moreover, because the Company's video compression
semiconductor and related software business has not provided, and is not
expected to provide, sufficient revenues to profitably operate the Company, the
Company believes that its future profitability will be largely dependent on the
success of its VideoCommunicator business. As a result, the Company believes
that its historical operating results will not be comparable to, and should not
be relied upon as an indication of, future operating results. The successful
development, introduction and marketing of the Company's VideoCommunicators are
subject to a number of substantial risks and contingent on the achievement of
numerous significant milestones, many of which are beyond the control of the
Company. See "Risk Factors."
Historically, the Company has sold its video compression semiconductors and
related software to video conferencing OEMs and distributors. The Company
intends to sell its VideoCommunicators through a direct marketing effort
utilizing a combination of advertising, toll-free telemarketing and direct mail
supported by co-marketing arrangements with third parties and resale through the
retail channel.
The Company believes that the introduction of its family of
VideoCommunicators may adversely impact its gross margins due in part to higher
unit costs associated with initial production of its first products as well as
substantially different cost and pricing structures related to the manufacture
and sale of consumer products.
20
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statement of operations as a percentage of total revenues for the
periods indicated. The data set forth below should be read in conjunction with
the Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Total revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................... 56.6 59.7 57.9 65.4 91.4
----- ----- ----- ----- -----
Gross margin....................................... 43.4 40.3 42.1 34.6 8.6
Operating expenses:
Research and development......................... 19.0 40.7 26.8 33.0 39.6
Selling, general and administrative.............. 23.7 32.3 27.6 27.8 26.9
Restructuring costs.............................. -- -- 2.1 5.0 0.6
----- ----- ----- ----- -----
Total operating expenses................. 42.7 73.0 56.5 65.8 67.1
----- ----- ----- ----- -----
Income (loss) from operations...................... 0.7 (32.7) (14.4) (31.2) (58.5)
Other income (expense), net........................ 0.5 3.1 3.3 0.7 1.3
----- ----- ----- ----- -----
Income (loss) before provision for income taxes.... 1.2 (29.6) (11.1) (30.5) (57.2)
Provision (benefit) for income taxes............... 2.3 (0.2) 0.1 0.0 1.5
----- ----- ----- ----- -----
Net (loss)......................................... (1.1)% (29.4)% (11.2)% (30.5)% (58.7)%
===== ===== ===== ===== =====
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1994, 1995 AND 1996
Total Revenues. Total revenues consist of product sales and the licensing
of technology. Total revenues were $34.4 million, $19.9 million and $28.8
million in fiscal 1994, 1995 and 1996, respectively. Total revenues fluctuated
primarily due to the declining sales of math co-processors and increasing sales
of the Company's video compression semiconductors. Math co-processor total
revenues declined from $27.5 million in fiscal 1994 to $10.9 million in fiscal
1995 and to $2.5 million in fiscal 1996, while total revenues from video
compression semiconductors increased from $4.1 million in fiscal 1994 to $8.3
million in fiscal 1995 and to $18.2 million in fiscal 1996. During fiscal 1996,
the Company derived revenues of approximately $3.8 million from the sale of its
MPEG semiconductors. In September 1996, the Company sold the last of its MPEG
inventory. Accordingly, the Company does not expect to derive any future
revenues from the sale of MPEG products. In fiscal 1996, total revenues included
$8.1 million of technology licensing revenue, of which $6.8 million was derived
from one customer. During fiscal 1994 and 1995, the Company generated no
technology licensing revenues. See "Business -- Licensing and Development
Arrangements."
Gross Profit. The cost of revenues consists of costs associated with wafer
fabrication, assembly and testing performed by third-party vendors and direct
and indirect costs associated with purchasing, scheduling and quality assurance.
The Company's gross profit was $14.9 million, $8.0 million and $12.1 million, or
43%, 40% and 42% of total revenues, in fiscal 1994, 1995, and 1996,
respectively. The gross profit for fiscal 1996 was favorably impacted by
technology licensing revenues and adversely impacted by negative margin from
sales of MPEG products. The Company sold its remaining MPEG inventory in
September 1996.
Research and Development. Research and development expenses consist
primarily of personnel, mask 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 $6.5 million, $8.1 million and $7.7 million, or 19%, 41% and 27%
of total revenues, in fiscal 1994, 1995 and 1996, respectively. A significant
portion of research and development expenses during these periods was
attributable to the development of products that were subsequently discontinued,
including an Intel compatible x86 microprocessor and graphics and MPEG
semiconductors. During fiscal 1997, research and development expenses are
expected to be concentrated on video compression semiconductors and
VideoCommunicators.
21
<PAGE> 24
Selling, General and Administrative. 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 shows and other marketing and
promotional expenses. Selling, general and administrative expenses were $8.1
million, $6.4 million and $7.9 million, or 24%, 32% and 28% of total revenues,
in fiscal 1994, 1995 and 1996, respectively. In fiscal 1995, selling, general
and administrative expenses decreased by $1.7 million primarily due to decreases
in advertising and sales commissions associated with the Company's math
co-processor business. Selling, general and administrative expenses increased by
$1.5 million in fiscal 1996 primarily due to higher compensation expenses and,
to a lesser extent, higher legal and bad debt expenses.
Restructuring costs. During fiscal 1996, the Company recorded
restructuring charges related to concentrating its research and development
activities on video conferencing products and eliminating certain unrelated
product development efforts. The restructuring costs related primarily to a
write off of equipment associated with the eliminated development efforts.
Other income, net. In fiscal 1994, 1995 and 1996, other income was
$189,000, $611,000 and $952,000, respectively. In fiscal 1994 and 1995, other
income consisted primarily of interest income. Interest income increased in
fiscal 1995 due to the increase in cash balances resulting from an equity
financing that occurred in April 1994. 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. At September 30, 1996, the book
value of the remaining investments totaled $400,000.
Income Taxes. In fiscal 1995 and 1996, the Company was not profitable and
incurred no material income tax expense. Income tax expense in fiscal 1994 on
pre-tax income of $432,000 was $780,000 due to a valuation reserve primarily
relating to the Company's state deferred tax assets.
The Internal Revenue Service (the "IRS") is currently conducting an
examination of the Company's federal income tax return for the fiscal year ended
March 31, 1992. In August 1995, the IRS asserted a deficiency against the
Company for the taxable year 1992 of approximately $1.4 million for accumulated
earnings taxes, together with a penalty 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 has
not made any payments under this assessment. On October 30, 1995, in accordance
with IRS procedures, the Company formally protested this assessment. The Company
has not received an official response from the IRS to this protest. The outcome
of this matter cannot be predicted. In the event that the IRS prevails, the
Company will have to make cash payments for the amount of the deficiency,
penalty and accrued interest. However, any adverse outcome of this assessment is
not likely to impact the Company's tax position on this matter for any other
fiscal year. In addition, the IRS has requested information related to the
Company's federal tax returns for the year ended March 31, 1995. The IRS has
disclosed to the Company that the purpose of this request was to gain
information regarding the economic circumstances underlying the Company's loss
for the year ended March 31, 1995.
SIX MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1996
Total Revenues. The Company's total revenues decreased from $12.1 million
in the first six months of fiscal 1996 to $10.1 million in the first six months
of fiscal 1997, principally as a result of declining math co-processor revenues.
Math co-processor total revenues in the first six months of fiscal 1996 and 1997
were $1.8 million and $186,000, respectively. Total revenues from the sale of
video compression semiconductors were $8.0 million and $8.1 million for the
first six months of fiscal 1996 and 1997, respectively. The Company entered into
technology licensing agreements generating $2.3 million and $1.8 million in
licensing revenues during the first six months of fiscal 1996 and 1997,
respectively. See "Business -- Technology and Licensing Arrangements." Total
revenues for first six months of fiscal 1996 and 1997 included $2.2 million and
$1.9 million from MPEG sales, which were discontinued in September 1996.
Gross Profit. The Company's gross profit was $4.2 million and $868,000 in
the first six months of fiscal 1996 and 1997, respectively. This significant
decline in gross profit relates primarily to a $4.0 million charge
22
<PAGE> 25
for inventories in the first six months of fiscal 1997 related to the Company's
exit from the MPEG market. In September 1996, the Company sold its remaining
MPEG inventory.
Research and Development. Research and development expenses were $4.0
million and $4.0 million in the first six months of fiscal 1996 and 1997,
respectively. The research and development efforts in the six months ended
September 30, 1996 were primarily focused on video conferencing products. 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.
Selling, General and Administrative. Selling, general and administrative
expenses were $3.4 million and $2.7 million in the first six months of fiscal
1996 and 1997, respectively. Such expenses decreased partly due to a decrease in
headcount in the quarter ended June 30, 1996. The Company's selling, general and
administrative expenses will increase in future periods as it expands its sales
and marketing efforts in conjunction with the introduction and marketing of its
family of VideoCommunicators. Additionally, the Company's general and
administrative expenses will increase in future periods as the Company expands
its administrative staff and assumes additional responsibilities associated with
being a public company.
Restructuring costs. During fiscal 1997, the Company recorded an
additional charge for restructuring its operations by reducing its workforce. As
of September 30, 1996, the Company's restructuring actions were fully completed
and there were no outstanding restructuring cost accruals.
Income Taxes. The provision for income taxes for the six months ended
September 30, 1996 primarily represents certain foreign withholding taxes.
At September 30, 1996, the Company had approximately $7.5 million of
federal net operating loss carryforwards and approximately $1.2 million of
research and development tax credit carryforwards available to offset future
taxable income; such carryforwards expire beginning in the year 2010. Under the
ownership changes limitations provided by the Internal Revenue Code of 1986, as
amended, the amount of, and benefit from, the net operating losses and credit
carryforwards may be impaired or limited in certain circumstances. At September
30, 1996, the Company's net operating loss carryforwards were not subject to any
such limitations.
At September 30, 1996, the Company had gross deferred tax assets of
approximately $7.0 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
September 30, 1996.
23
<PAGE> 26
QUARTERLY RESULTS
The following tables set forth consolidated statements of operations data
for the six quarters in the period ended September 30, 1996, both in dollar
amounts and as percentages of total revenues. The data set forth has been
derived from unaudited consolidated financial statements of the Company and has
been prepared on the same basis as the audited financial statements, and in the
opinion of management, includes all normal recurring adjustments that the
Company considers necessary for a fair presentation of the results of the
interim periods and should be read in conjunction with the Consolidated
Financial Statements and Notes thereto. The operating results for any quarter
are not necessarily indicative of results for future quarters. Further, because
of the Company's planned reliance on its VideoCommunicators, the Company's
historical operating results will not be comparable to, and should not be relied
upon as an indication of, future operating results.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1996 1996 1996
-------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total revenues............................ $ 4,881 $ 7,241 $7,083 $ 9,569 $ 5,703 $ 4,372
Cost of revenues.......................... 4,184 3,741 3,019 5,724 7,330 1,877
------- ------ ------ ------ ------- ------
Gross profit (loss)....................... 697 3,500 4,064 3,845 (1,627) 2,495
------- ------ ------ ------ ------- ------
Operating expenses
Research and development................ 2,296 1,701 1,633 2,084 1,854 2,138
Selling, general and administrative..... 1,803 1,575 2,243 2,317 1,520 1,191
Restructuring costs..................... 603 -- -- -- 59 --
------- ------ ------ ------ ------- ------
Total operating expenses........ 4,702 3,276 3,876 4,401 3,433 3,329
------- ------ ------ ------ ------- ------
Income (loss) from operations............. (4,005) 224 188 (556) (5,060) (834)
Other income (expense), net............... 152 (72) 233 639 53 74
------- ------ ------ ------ ------- ------
Income (loss) before income taxes......... (3,853) 152 421 83 (5,007) (760)
Provision for income taxes................ -- -- -- (20) (100) (46)
------- ------ ------ ------ ------- ------
Net income (loss)......................... $ (3,853) $ 152 $ 421 $ 63 $ (5,107) $ (806)
======= ====== ====== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
------------------------------------------------------------------
QUARTER ENDED
------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1996 1996 1996
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................... 85.7 51.7 42.6 59.8 128.5 42.9
----- ----- ----- ----- ----- -----
Gross margin.............................. 14.3 48.3 57.4 40.2 (28.5) 57.1
----- ----- ----- ----- ----- -----
Operating expenses
Research and development................ 47.0 23.5 23.0 21.8 32.5 48.9
Selling, general and administrative..... 36.9 21.7 31.7 24.2 26.7 27.2
Restructuring costs..................... 12.4 -- -- -- 1.0 --
----- ----- ----- ----- ----- -----
Total operating expenses........ 96.3 45.2 54.7 46.0 60.2 76.1
----- ----- ----- ----- ----- -----
Income (loss) from operations............. (82.0) 3.1 2.7 (5.8) (88.7) (19.0)
Other income (expense), net............... 3.1 (1.0) 3.3 6.7 0.9 1.7
----- ----- ----- ----- ----- -----
Income (loss) before income taxes......... (78.9) 2.1 6.0 0.9 (87.8) (17.3)
Provision for income taxes................ -- -- -- (0.2) (1.7) (1.0)
----- ----- ----- ----- ----- -----
Net income (loss)......................... (78.9)% 2.1% 6.0% 0.7% (89.5)% (18.3)%
===== ===== ===== ===== ===== =====
</TABLE>
24
<PAGE> 27
The Company's technology licensing activities have contributed to
fluctuations in the Company's quarterly revenues. Technology licensing revenues
for each of the six quarters in the period ended September 30, 1996, were $0.0,
$2.3 million, $2.8 million, $3.0 million, $1.0 million and $725,000,
respectively. In addition, revenues have fluctuated as the Company has
introduced new or enhanced versions of its video compression semiconductors and
as earlier products approached the end of their life cycle. In the quarter ended
March 31, 1996, the Company realized both significant technology licensing
revenues and "end of life" revenues related to the Company's prior generation of
video compression semiconductors. In contrast, the quarter ended June 30, 1996
reflects licensing revenues of only $1.0 million and insignificant revenues
related to these discontinued products.
In general, favorable gross margin fluctuations in the quarters ended
September 30, 1995 and December 31, 1995 reflect the impact of technology
license revenues, which have no material associated costs. However, in the
quarter ended June 30, 1996 the unfavorable gross margin fluctuation was due
primarily to a $4.0 million charge for inventories related to the Company's MPEG
inventory. In September 1996, the Company sold its remaining MPEG inventory.
Operating expenses have fluctuated as the Company discontinued its efforts
to develop an Intel compatible x86 microprocessor in the quarter ended June 30,
1995, reduced its workforce in the quarter ended June 30, 1996 and has focused
its efforts on developing its video compression semiconductors and its
VideoCommunicators.
The Company currently anticipates that for the quarter ending December 31,
1996 its total revenues will be lower and its operating loss will be higher than
the corresponding amounts for the quarter ended September 30, 1996.
The Company's operating results have fluctuated significantly and may
continue to fluctuate in the future, on an annual and a quarterly basis, as a
result of a number of factors, many of which are outside the Company's control,
including changes in market demand, the timing of customer orders, competitive
market conditions, lengthy sales 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 level of international sales,
continued compliance with industry standards and general economic conditions.
Variations in timing of sales can cause significant fluctuations in future
operating results. In addition, because a significant portion of the Company's
business may be derived from orders placed by a limited number of large
customers, the timing of such orders can also cause significant fluctuations in
the Company's operating results. Anticipated orders from customers may fail to
materialize, and delivery schedules may be deferred or canceled for a number of
reasons, including changes in specific customer requirements. If sales do not
meet the Company's expectations in any given quarter, the adverse impact of the
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the 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 strategic shift towards the introduction and marketing of
VideoCommunicators such as the VC100 may result in substantially different
patterns in operating results. For example, the Company's operating results may
be subject to more heightened seasonality with sales higher during the Company's
third fiscal quarter, corresponding to the Christmas shopping season. The
Company intends to spend substantial additional amounts on advertising,
toll-free marketing and customer support. There can be no assurance as to the
amount of such spending or that revenues adequate to justify such spending will
result. As a result of its shift to selling VideoCommunicators, the Company may
experience different inventory, product return, price protection and warranty
cost patterns.
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
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significant reduction in the market price for the Common Stock. See "Risk
Factors -- Potential Fluctuations in Future Operations Results."
CERTAIN PRO FORMA DEDUCTIONS
The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation," which established a fair value based method of accounting for
employee stock option plans. Had compensation cost for the Company's option
plans been determined based on the fair market value at the grant dates, as
prescribed in FAS 123, the Company's net loss and pro forma net loss per share
would have been $3.5 million and $0.30 per share for fiscal 1996 and $6.2
million and $0.52 per share for the first six months of fiscal 1997,
respectively. See Note 6 of the Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since fiscal 1993, the Company has satisfied its liquidity needs
principally from proceeds generated from two issuances of its equity securities
and cash generated from operations in fiscal 1993 and prior years. At March 31,
1993, the Company had cash, cash equivalents and short term investments of $9.4
million, which decreased to $7.5 million at September 30, 1996. As part of the
Company's recent equity issuance (sold in September and October 1996), the
Company received an additional $1.5 million in October 1996. The Company
currently has no bank borrowing arrangements.
The Company's operating activities generated cash of $279,000 in fiscal
1994. The cash used for operations was $4.1 million, $625,000 and $4.3 million
in fiscal 1995, 1996 and the six months ended September 30, 1996, respectively.
Cash used in operations in fiscal 1995 reflects a net loss of $5.9 million that
was partially offset by cash generated by changes in working capital. Cash used
in operations in fiscal 1996 reflects a net loss of $3.2 million that was
substantially offset by changes in working capital. Cash used in operations in
the six months ended September 30, 1996 reflects a net loss of $5.9 million that
was partially offset by reductions in inventory and accounts receivable.
During fiscal 1994, 1995, 1996 and the six months ended September 30, 1996,
the Company's capital expenditures were $451,000, $1.5 million, $1.0 million and
$465,000, respectively. These capital expenditures related primarily to the
acquisition of machinery, equipment and software. At September 30, 1996 the
Company did not have any material capital commitments outstanding.
During fiscal 1994, 1995, 1996 and the six months ended September 30, 1996,
the Company's cash flows from financing activities generated cash of $11,000,
$7.5 million, $608,000 and $2.3 million from the sale of the Company's equity
securities.
The Company expects that the anticipated net proceeds of this Offering, its
existing cash resources, and the amounts, if any, generated from operations,
will be sufficient to meet the Company's cash requirements for at least the next
12 months. 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. There can be no
assurance that the Company will be able to raise such capital on acceptable
terms, if at all. See "Risk Factors -- Need for Additional Capital to Finance
Growth and Capital Requirements."
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BUSINESS
8x8, Inc. designs, develops and markets highly integrated, proprietary
video compression semiconductors and associated software to original equipment
manufacturers ("OEMs") of corporate video conferencing systems. To address new
opportunities, the Company intends to leverage its strengths in semiconductor
design and related software by introducing video conferencing systems for the
consumer market. The first product in the Company's planned family of
VideoCommunicators is the VC100, which is currently under development. The VC100
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 Company plans
to introduce the VC100 in early 1997 targeted at the consumer market. Although
the Company has a functioning VC100 prototype, the Company must satisfy
additional technical and other milestones in order to commercially introduce the
VC100 in early 1997. Technical milestones include debugging the current VC100
prototype design, receiving necessary domestic and international regulatory
approvals and completing reliability testing.
The Company's video compression semiconductors combine, on a single chip, a
reduced instruction set computer ("RISC") microprocessor, a digital signal
processor ("DSP"), specialized video processing circuitry, static random access
memory ("RAM") and proprietary software to 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 conferencing
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 asymmetric digital
subscriber lines ("ADSL"). Customers for the Company's video compression
semiconductors include PictureTel, Siemens, Sony, VideoServer, VCON and Vtel.
The Company's VideoCommunicators will be based on its proprietary
semiconductor, software and systems technology. The VC100 is based primarily
upon the Company's existing technology and is 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. The VC100 is
designed to communicate with full duplex audio and video rates of up to 12
frames per second. In addition, the Company is currently developing a second
VideoCommunicator, the VC200, a non-PC based POTS video phone with a built-in
liquid crystal display ("LCD"). See "Business -- Products" and
"Business -- Licensing and Development Arrangements" for a discussion of the
development status of the VC100, the VC200 and the successor products to the
Company's video compression semiconductors and certain related licensing and
development arrangements (including an arrangement pursuant to which Kyushu
Matsushita Electric Co., Ltd. has licensed all of the Company's technology
underlying the Company's VideoCommunciators currently under development).
Although the Company has received certain revenues from these licensing and
development arrangements in the past, there can be no assurance that the Company
will receive any revenues from these arrangements in the future. The Company
intends to sell its VideoCommunicators through a direct marketing effort
utilizing a combination of advertising, toll-free telemarketing and direct mail
supported by co-marketing arrangements with third parties and resale through the
retail channel.
INDUSTRY BACKGROUND
The proliferation of video conferencing products is dependent on several
factors including network bandwidth, advanced compression technologies and the
acceptance of video telephony standards. Increases in available bandwidth
improve the data carrying capacity of networks, while improvements in
compression technologies utilize a given bandwidth more efficiently. Finally,
video telephony standards are key to widespread adoption as they are designed to
permit the interoperability between systems offered by different vendors.
Since the first video conferencing 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 which 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
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more costly and less available than ubiquitous analog POTS lines (currently up
to 33.6 Kbps). The challenge faced by developers of video conferencing 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. The proliferation of video communications equipment has been
influenced by the adoption of international video telephony standards which, if
complied with, will permit interoperability between systems offered by different
vendors.
To date, nearly all video conferencing 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 to have limited access to
bandwidth beyond that provided by standard analog POTS lines. The Company
believes that significant demand exists for inexpensive video phone products
that would allow users to transmit video images with audio over normal telephone
lines. Several factors are contributing to the viability of consumer video
phones, including:
- Improved Bandwidth. 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
(currently up to 33.6 Kbps) and residential ISDN and ADSL service.
- Advanced Compression Techniques. 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. Because video
images contain a large amount of information, video conferencing 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 normal television signal contains 90 Mbps
of information, which must be compressed by a factor of approximately
2,700 to 1 to permit transmission over POTS at 33.6 Kbps. By using
sophisticated compression algorithms and advanced DSP semiconductors,
video conferencing system manufacturers can achieve improved video
quality.
- Adoption of Industry-Wide Standards. Increased usage of video
conferencing 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 conferencing systems over
ISDN. Similarly, the H.324 standard for video telephony over POTS may
result in expanded home use of video phones. Other standards, such as
H.323, are being developed for communications over packet-based networks,
such as LANs.
As a result of the above technological advances and the adoption of the
H.324 standard, low cost consumer POTS video phones are being developed by a
number of 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 VC100, or using an
LCD for display, such as the VC200, 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, should increase the
usefulness of and demand for additional H.324 compliant video phones by
providing potential video phone purchasers with other parties to call.
8X8 STRATEGY
The Company's strategy is to leverage its expertise in video compression
semiconductors, software and system design and its understanding of video
telephony standards to develop a family of cost effective VideoCommunicators for
the consumer video conferencing market. Key elements of the Company's strategy
include:
Leverage Proprietary Technology. The Company provides highly integrated
video compression semiconductors and related software to manufacturers of video
conferencing systems. The Company plans to leverage its proprietary
semiconductor and software expertise to develop its non-PC based
VideoCommunicators to address the consumer market. In addition, the Company
intends to develop future generations of highly integrated semiconductor and
software products for use in video conferencing systems developed both
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<PAGE> 31
by the Company and its OEM customers. The Company's ongoing development efforts
are targeted at reducing overall system costs continuously improving video and
audio quality at varying bandwidths and ensuring compliance with emerging video
telephony standards to encourage proliferation of its products.
Broaden and Enhance VideoCommunicator Family. The Company intends to
develop a variety of consumer video conferencing products. The initial product,
the VC100, currently under development and planned for introduction in early
1997 targeted at the consumer market, is based upon the Company's proprietary
semiconductor and software technology. The VC100 connects to a television and
standard touch-tone telephone and adds video to an otherwise normal telephone
call, without the need for a PC. The Company is developing a second
VideoCommunicator, the VC200, which is a POTS video telephone with a built-in
LCD display. 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 in the future by adding features which may
include picture quality enhancements, simultaneous remote and self-view picture
display, Internet browsing, caller identification ("caller ID") and movie
playback.
Utilize Direct Marketing Model for VideoCommunicators. The Company plans
to sell its VideoCommunicators through a direct marketing channel, utilizing a
combination of advertising, toll-free telemarketing and direct mail supported by
co-marketing arrangements with third parties and resale through the retail
channel. The direct marketing approach generally allows more rapid establishment
of brand recognition and introduction of new products, and enables competitive
pricing and better management of working capital. The Company intends to
continue to sell its video compression semiconductor and software products to
OEMs and distributors through its existing sales and marketing force.
Drive Price/Performance Improvements. Price/performance improvements in
end-user systems are important to expanding the consumer video conferencing
market. By enhancing its proprietary semiconductor and software technologies,
the Company intends to improve the price/performance of its consumer video
phones by integrating a number of essential system functions onto future
versions of its video compression semiconductors. The Company also intends to
utilize off-the-shelf components when appropriate and to work closely with its
key suppliers to achieve cost and performance advantages.
PRODUCTS
The Company develops, markets and sells a variety of video compression
semiconductors and related software and reference boards. The Company is
currently developing a family of non-PC based VideoCommunicators, which
incorporate the Company's proprietary semiconductor, software and systems
technologies. The Company from time to time enters into licensing and
development arrangements with other corporations which are designed to promote
the design, development, manufacture and sale of the Company's products. Such
arrangements may enable these corporations to use this technology to produce
products that compete directly with the Company's VideoCommunicator products.
See "Business -- Licensing and Development Arrangements" and "Risk
Factors -- Competition."
VideoCommunicator Systems
The Company's initial VideoCommunicator, the VC100 currently under
development, connects to a television and standard touch-tone telephone and adds
video to an otherwise normal telephone call, without the need for a PC. The
Company plans to introduce the VC100 in early 1997 targeted at consumer markets.
The VC100 is based primarily upon the Company's existing technology and is
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. The VC100 is designed to communicate with full
duplex audio and video rates of up to 12 frames per second. The VC100, which is
based on the Company's Low bit-rate Videophone Processor ("LVP") semiconductor
and proprietary software, includes an integrated digital camera and a V.34/V.80
modem and displays video in either full or quarter screen format, as well as
self-view mode. The VC100 is controlled through the touch-tone keypad of the
user's telephone and menu driven instructions that appear on the television
screen.
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The Company is developing a second VideoCommunicator, the VC200, which is a
non-PC based POTS video phone with a built-in LCD display. 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 which may include picture quality enhancements, simultaneous
remote and self-view display, Internet browsing, caller ID and movie playback.
See "Business -- Research and Development."
Moreover, because the Company's video compression semiconductor and related
software business has not provided, and is not expected to provide, sufficient
revenues to profitably operate the Company, the Company believes that its future
profitability will be largely dependent on the success of its VideoCommunicator
business. Although the Company has a functioning VC100 prototype, the Company
must satisfy additional technical and other milestones in order to commercially
introduce the VC100 in early 1997. Technical milestones include debugging the
current VC100 prototype design, receiving necessary domestic and international
regulatory approvals and completing reliability testing. The Company recently
began development of a prototype for the VC200, with numerous technical and
other milestones remaining before commercial introduction is possible. See "Risk
Factors -- Dependence on Future VideoCommunicator Revenues."
Video Compression Semiconductors
The Company's video compression semiconductors are based on the Company's
proprietary architecture, which is protected in part by various patents and
trade secret protections. See "Business -- Intellectual Property." This
architecture combines, on a single chip, a custom RISC microprocessor, a high
performance DSP core, specialized video processing circuitry, static RAM memory
and proprietary software, which together perform the core processing functions
required by video conferencing and other digital video applications.
The table below describes the Company's video compression semiconductors
and their applications:
- ------------------------
- -------------------------------------
<TABLE>
<S> <C> <C>
- ---------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION APPLICATIONS
- ----------------------------------------------------------------------------------------------------------
Video Communications H.320 compression semiconductor - PC ISDN video conferencing add-in boards
Processor("VCP") for ISDN video conferencing - ISDN group video conferencing systems
systems
- ----------------------------------------------------------------------------------------------------------
Low bit-rate H.324 compression semiconductor - Consumer video telephones for POTS
Videophone for POTS video conferencing - PC video phone add-in boards for POTS
Processor("LVP") systems
- ----------------------------------------------------------------------------------------------------------
Multimedia Encoding Compression semiconductor for - Cameras with embedded compression
Processor("MEP") video capture and encoding - Video capture PC add-in boards
systems
- ----------------------------------------------------------------------------------------------------------
Video to PCI Interface chip which connects the - PC (POTS or ISDN) video conferencing boards
Interface VCP/LVP/MEP devices to the PCI
Chip("VPIC") bus
- ----------------------------------------------------------------------------------------------------------
</TABLE>
VCP -- Video Communications Processor. The Company's VCP is an integrated
video compression semiconductor, which allows OEMs to develop video conferencing
systems based on the H.320 standard for ISDN video conferencing. 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 24 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 higher frame rates, thus providing for 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 video phones 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
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<PAGE> 33
12 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 television or a LCD display. The LVP
can also be designed into PC video phone add-in boards. The LVP is the core
compression semiconductor inside the Company's VC100 and VC200 products
currently under development.
MEP -- Multimedia Encoding Processor. The MEP is designed 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.
VPIC -- Video to PCI Interface Chip. The VPIC is a companion semiconductor
to the Company's video compression 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 compression semiconductors.
The Company is currently designing a future generation of its video
compression semiconductors and related software. To date, the Company has
focused its semiconductor research and development efforts principally on
development of the successor to the VCP compression semiconductor and the
related software. See "Business -- Research and Development."
Application Software
The Company's semiconductors are sold with its proprietary application
specific software, which addresses 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
compression semiconductors. 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 non-exclusive
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
The Company provides a range of printed circuit boards as reference boards
to its customers which serve as examples for targeted applications. Each
reference board 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 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 DVC5, which is designed for H.320 systems, and the
DVC8, which is designed for H.324 systems.
TECHNOLOGY
The Company has developed the following video conferencing technologies:
Semiconductor Architecture
The Company's video compression semiconductors share a common architectural
foundation. This architecture has been specifically tailored to video
conferencing applications which must simultaneously compress and transmit video
and audio data from one side of a video call while receiving and decompressing
video and audio data from the remote side. This architecture integrates two core
processors running in parallel: a 33 million instructions per second ("MIPS")
32-bit RISC microprocessor and a 128-bit Single Instruction Multiple Data
("SIMD") DSP. The Company's video compression semiconductors currently in
production are manufactured using 0.5 micron, 3-layer metal complementary metal
oxide semiconductor ("CMOS") process technology. Follow-on versions are being
designed using 0.35 micron process technology.
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The Company's RISC processor core uses a proprietary instruction set
specifically designed for video conferencing applications. 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 second processor is a proprietary DSP core. This DSP core is a 2 BOPS
(billion operations per second) SIMD processor which implements the
computationally intensive video and audio processing routines. Variable length
32 and 64 bit microcode instructions of the DSP core provide the flexibility to
improve algorithm performance, enhance video and audio quality and maintain
compliance with changing digital video standards. Unlike many competing
semiconductors which use hardwired building blocks to implement each step in the
compression/decompression (codec) process, the Company's DSP core uses microcode
software routines to implement the fundamental processing steps which form the
basis of H.320, H.323 and H.324 standards-based video conferencing systems, thus
allowing upgrades through changes in software only.
In addition to the RISC and DSP cores, all of the Company's video
compression semiconductors share a common set of video processing capabilities
which are fundamental to enhancing video quality. Digital video inputs directly
into the chip and passes through a series of digital filters designed to resize,
re-color and remove noise from the images in preparation for compression. These
semiconductors also incorporate proprietary interlacing and resizing filters at
the output stage.
Application Software Development
The Company's proprietary application specific software, sold with the
Company's semiconductor products, addresses the unique system requirements of
the various international video telephony standards. This software is a
combination of microcode assembly (for the DSP core) and compiled C code (for
the RISC core). By refining its software, the Company can enhance picture
quality, address new standards and add significant user features. In addition,
several of the Company's customers have licensed source code to which they use
to add proprietary features, custom interfaces and, in some cases, algorithm
improvements. See "Business -- Licensing and Development Arrangements."
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 achieves this result. The flexibility of
the Company's video compression semiconductor architecture allows the Company to
apply its core algorithm expertise to develop products for a variety of video
conferencing applications. The Company's algorithm expertise enables the
following:
- Video Coding Efficiency and Video Quality. By improving its proprietary
motion search algorithms and optional coding modes which are tuned to the
capabilities of the Company's semiconductor architecture, the Company is
able to enhance video quality for H.32x video conferencing applications.
- Integrated Control of Real-Time Systems. Video conferencing systems are
inherently complex due to the convergence of video, audio and control
information. The Company's proprietary semiconductor architecture and
interrupt-driven control firmware manage these varying data streams in
concert thereby reducing the complexity of the external system design.
- Proprietary Rate Buffer Control. The real-time management of video and
audio buffer occupancy has a significant effect on the performance of
video conferencing systems, especially at low bit-rates. The Company has
developed a suite of proprietary adaptive rate-buffer control algorithms
which dynamically controls the occupancy rate of these buffers and allows
for efficient use of available network bandwidth.
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<PAGE> 35
SALES AND MARKETING
The Company markets its semiconductors through its own direct sales force
as well as through distributors. 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 September 30,
1996, the Company employed 17 persons in sales and marketing. These persons
provide direct account support for OEM and distributor customers of the
Company's semiconductors. The Company's sales and marketing personnel typically
provide support to such OEM customers through sales literature, periodic
training, customer symposia, pre-sales support and joint sales calls. As of
September 30, 1996, the Company marketed its video compression semiconductors
through one distributor in the United States and seven distributors in Europe
and the Pacific Rim. For the year ended March 31, 1996 and the six months ended
September 30, 1996, sales by the Company to distributors accounted for
approximately 18% and 29% of total revenues, respectively, with one distributor,
ASCII Corporation, accounting for 7% and 9.5% of total revenues, respectively.
See "Business -- Licensing and Development Arrangements" for a discussion of
certain licensing and development arrangements (including an arrangement
pursuant to which Kyushu Matsushi Electric Co., Ltd. has licensed all of the
Company's technology underlying the Company's VideoCommunicators currently under
development). Although the Company has received certain revenues from these
licensing and development arrangements in the past, there can be no assurance
that the Company will receive any revenues from these arrangements in the
future.
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 editors of trade
journals.
The Company plans to sell its VideoCommunicators through a direct marketing
effort, utilizing a combination of advertising, toll-free telemarketing and
direct mail supported by co-marketing arrangements with third parties and resale
through the retail channel. The direct marketing approach generally allows more
rapid establishment of brand recognition and introduction of new products and
enables competitive pricing and better management of working capital. The
Company intends to continue to sell its video compression semiconductor and
software products to OEMs and distributors through its existing sales and
marketing force.
In recent years, the Company has been a provider of video compression
semiconductors to OEMs of video conferencing systems. As such, the Company has
not marketed commercial quantities of consumer products such as its
VideoCommunicators. In order to achieve significant market penetration and brand
awareness for its VideoCommunicators, the Company must expand its sales and
marketing efforts and develop direct consumer marketing capabilities. There can
be no assurance that the Company will be able to expand its sales and marketing
efforts or develop direct consumer marketing capabilities or that the Company
will be able to achieve significant market penetration with its
VideoCommunicators. Failure of the Company to successfully expand its sales and
marketing efforts, or to develop direct consumer marketing capabilities or to
generate significant sales of the VC100 would have a material adverse effect on
the Company's business and operating results. See "Risk Factors -- No History of
Direct Consumer Marketing," "Risk Factors -- Management of Growth," "Risk
Factors -- Potential Fluctuations in Future Operating Results" and "Risk
Factors -- Uncertainty of Market Acceptance; Limits of Existing Technology."
MARKETS AND CUSTOMERS
The Company provides highly integrated, proprietary semiconductors and
associated software sold primarily to OEMs of corporate video conferencing
systems. The Company sells its VCP semiconductors and related software and
reference designs primarily to OEMs designing ISDN office video conferencing
systems that use the H.320 standard, including PictureTel, Siemens, Sony,
VideoServer, VCON and Vtel. The Company has sold limited quantities of its LVP
semiconductors and related software and reference board designs to OEMs
designing POTS video conferencing systems for the consumer market using the
H.324 standard, including Sony and an affiliate of Matsushita. To address new
opportunities, the Company is expanding its product lines by developing a family
of non-PC based VideoCommunicators for consumer
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customers. The Company plans to introduce the VC100 in early 1997 with sales
targeted at the consumer market. See "Business -- Products" and
"Business -- Licensing and Development Arrangements" for a discussion of the
development status of the VC100, the VC200 and the successor products to the
Company's video compression semiconductors and certain related licensing and
development arrangements (including an arrangement pursuant to which Kyushu
Matsushi Electric Co., Ltd. has licensed all of the Company's technology
underlying the Company's VideoCommunicators currently under development).
Although the Company has received certain revenues from these licensing and
development arrangements in the past, there can be no assurance that the Company
will receive any revenues from these arrangements in the future.
Historically, a significant portion of the Company's sales has been to
relatively few customers, although the composition of these customers has varied
consistently. Product revenues from the Company's ten largest customers, in the
years ended March 31, 1994, 1995 and 1996 and the six months ended September 30,
1996 accounted for approximately 55%, 44%, 39% and 53%, respectively, of its
total revenues. During these periods, excluding one company paying certain
non-recurring licensing fees in fiscal 1996, the Company had only three
customers that accounted for 10% or more of total revenues: IBM (during the year
ended March 31, 1994), Compression Labs (during the year ended March 31, 1995)
and an affiliate of Matsushita (during the six months ended September 30, 1996).
Moreover, the Company has recently been, and will continue in the foreseeable
future to be, substantially dependent on the video conferencing industry. The
loss of, or any reduction in orders from, a significant customer, or any
reduction in demand for the Company's video compression semiconductors
(particularly prior to significant VideoCommunicator revenues) or any general
decline in the market for video conferencing products, could have a material
adverse effect on the Company's business and operating results. See "Risk
Factors -- Dependence on Key Customers" and "Risk Factors -- Product
Concentration; Potential Loss of Semiconductor Sales; Dependence on Video
Conferencing Industry."
MANUFACTURING
The Company uses independent foundries to fabricate, assemble and test its
video compression semiconductors. The Company does not have long-term purchase
agreements with its semiconductor foundries, and purchases semiconductor wafers
pursuant to purchase orders. Therefore these foundries are generally not
obligated to supply products to the Company for any specific period, in any
specific quantity or at any specific price. The Company secures assembly and
test services on a purchase order basis as well.
The Company has not yet manufactured commercial quantities of any consumer
system product such as the VC100. The Company plans to outsource the manufacture
of its VideoCommunicators to subcontract manufacturers. The Company anticipates
that these subcontract manufacturers will procure components from their
suppliers and perform assembly and testing of the Company's VideoCommunicators
on a turnkey basis. There can be no assurance that the Company will be able to
reliably manufacture the VC100 or its other VideoCommunicators in volumes, on
cost effective basis or in a timely manner. See "Risk Factors -- Lack of
Experience in Manufacturing Consumer Video Telephony Products."
The Company's reliance on subcontract foundries and system subcontract
manufacturers, its manufacture of semiconductors, its purchase of components
from third parties and its reliance of foreign subcontract manufacturers involve
a number of risks. There can be no assurance that certain risks associated with
these practices and activities will not have a material adverse effect on the
Company's business and operating results. See "Risk Factors -- Dependence on
Third Party Manufacturers; Component Availability" and "Risk
Factors -- International Operations."
RESEARCH AND DEVELOPMENT
As of September 30, 1996, the Company had 38 employees engaged in research
and development. Research and development expenses in years ended March 31,
1994, 1995 and 1996 and the six months ended September 30, 1996 were $6.5
million, $8.1 million, $7.7 million and $4.0 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.
34
<PAGE> 37
The Company's current and future research and development efforts relating
primarily to video compression semiconductors have and will continue to focus on
the Company's next generation of these products. Areas of emphasis will include
an enhanced version of its video compression 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 VC100, the Company's
initial VideoCommunicator, will focus on picture quality enhancements,
simultaneous remote and self-view display, Internet browsing, caller ID and
movie playback. To expand its family of VideoCommunicators, the Company's
research and development efforts will focus on developing products in new form
factors and products that are designed to comply with emerging video telephony
standards.
Although the Company is a developer of video compression semiconductors and
systems, the Company was previously involved in several other businesses which
have since been discontinued. Prior product lines that were discontinued include
math co-processors and MPEG semiconductors, discontinued in June 1995 and
September 1996, respectively. Prior development efforts that were discontinued
include Intel compatible x86 microprocessors and graphics semiconductors,
discontinued in June 1995 and during the quarter ended September 30, 1994,
respectively. The Company has discontinued its products and efforts in these
areas in part because of rapid changes in the personal computer marketplace and
severe price reduction for certain of these components.
The video compression semiconductor and video conferencing 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, take advantage of
technological advancements and changes and respond to new customer requirements
in a timely manner. The Company's success in designing, developing,
manufacturing and selling such products will depend on a variety of factors. In
addition, the development of the Company's VideoCommunicators is at an early
stage and, as a result, the Company must achieve numerous significant milestones
and overcome substantial risks in order to successfully introduce its
VideoCommunicators. There can be no assurance that the VC100 or VC200 or other
VideoCommunicators can be successfully developed, introduced to the market or
achieve market acceptance. The Company has in the past experienced delays in the
development of new products and the enhancement of existing products, and such
delays may 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, 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 "Risk Factors -- Rapid
Technological Change; Dependence on New Product Introduction" and "Risk
Factors -- Dependence on Future VideoCommunicator Revenues."
LICENSING AND DEVELOPMENT ARRANGEMENTS
The Company from time to time enters into licensing and development
arrangements with other corporations that are designed to promote the design,
development, manufacture and sale of the Company's products. Such arrangements
may enable these corporations to use the Company's technology to produce
products that compete directly with the Company's VideoCommunicators. See "Risk
Factors -- Competition." The most significant license is with Kyushu Matsushita
Electric Co., Ltd. ("KME"). This 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 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
35
<PAGE> 38
substantially all of the technology underlying the Company's VideoCommunicators
currently under development. 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.
In addition to the above technology and licensing arrangements intended to
promote the Company's products, in the past the Company has entered into certain
other technology licensing arrangements in connection with the discontinuation
of certain products or development efforts. See "Business -- Research and
Development."
In the year ended March 31, 1996 and the six months ended September 30,
1996, total technology licensing revenues (all of which were non-recurring) were
$8.1 million and $1.8 million, respectively. During the years ended March 31,
1994 and 1995, the Company generated no technology licensing revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Although a number of the Company's current technology licensing
arrangements (including the license arrangement with KME described above) may
result in future payments to the Company, the Company has no way to determine
the amount of such payments, if any, as their receipt by the Company is
dependent upon many factors (such as successful product development and
introduction by the licensee) largely outside of the Company's control.
In connection with the Company's receipt of 75% of the common stock of
VidUs, Inc., the Company provided VidUs, Inc. with a royalty free license to
certain technology. See "Certain Transactions."
COMPETITION
The Company competes with independent manufacturers of video compression
semiconductors and, after the planned introduction of its VideoCommunicators,
will compete with manufacturers of video conferencing 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 its planned 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 the following segments:
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. Many of these potential competitors sell
television and telephone products into which they may integrate video
conferencing systems, thereby eliminating a consumer's need to purchase a
separate video conferencing system, such as the VC100.
Personal computer system and software manufacturers. Potential customers
for the Company's VideoCommunicators may elect instead to buy PCs equipped
with video conferencing capabilities. As a result, the Company may face
competition from Intel; PC system manufacturers such as Apple, Compaq, IBM
and Sony; PC software suppliers such as Microsoft and Netscape; and PC
add-on component suppliers.
Existing manufacturers of video conferencing equipment. Manufacturers of
more expensive corporate video conferencing systems may enter the market
for lower cost consumer video conferencing products. Potential competitors
include Compression Labs, PictureTel, Sony and Vtel.
Emerging suppliers of "Internet appliances." Potential customers for the
Company's Video Communicators 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 recently been announced or introduced by companies such as Philips and
Sony.
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<PAGE> 39
The principal competitive factors in the market for video compression
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 direct competitors in this market,
including Lucent Technologies and Texas Instruments. Certain of the Company's
competitors for video compression semiconductors maintain their own
semiconductor foundries and may therefore benefit from certain capacity, cost
and technical advantages.
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. A number 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.
A number of companies have licensed portions of the Company's technology
(including an affiliate of Matsushita which has licensed substantially all of
the Company's technology underlying the Company's VideoCommunicators currently
under development) and, therefore, may be able to use this technology to produce
products that compete directly with the Company's VideoCommunicators. See
"Business -- Licensing and Development Arrangements."
INTELLECTUAL PROPERTY
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 laws, which afford only limited protection. There can
be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. The Company also relies in part on patent
law to protect its intellectual property in the United States and abroad. The
Company currently holds three United States patents, including patents relating
to video compression and memory architecture technology, and has 11 United
States patent applications pending. The Company has a number of foreign patent
applications pending. There can be no assurance that any patent, trademark or
copyright owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. Thus,
effective intellectual property protection may be unavailable or limited in
certain foreign countries. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad will be
adequate or that competition 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. 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. In addition, as is common in its industry, the
Company has from time to time received notification from other companies of
intellectual property rights held by those companies upon which the Company's
products may infringe. For example, the Company recently received an allegation
of infringement from Elk Industries, Inc. 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 could be required to seek licenses from other companies or to refrain from
using, manufacturing or selling certain products or using certain processes.
Although holders of patents and other
37
<PAGE> 40
intellectual property rights often offer licenses to their patents or other
intellectual property rights, no assurance can be given that licenses would be
offered to the Company, that the terms of any offered license would be
acceptable to the Company or that failure to obtain a license would not have a
material adverse effect on the Company's business and operating results.
The Company relies upon certain software licensed from third parties. There
can be no assurance that the software licensed by the Company will continue to
provide competitive features and functionality or that licenses for software
currently utilized by the Company or other software which the Company may seek
to license in the future will be available to the Company on commercially
reasonable terms or at all. The loss of, or inability to maintain, existing
licenses could result in shipment delays or reductions until equivalent software
or suitable alternative products could be developed, identified, licensed and
integrated, and the inability to license key new software that may be developed,
on commercially reasonable terms, would have a material adverse effect on the
Company's business and operating results.
EMPLOYEES
As of September 30, 1996, the Company employed a total of 81 people,
including 16 in manufacturing operations, 38 in research and development, 17 in
sales and marketing and 10 in general and administrative capacities. The Company
also employs a number of temporary employees and consultants on a contract
basis. None of the Company's employees is represented by a labor union with
respect to his or her employment by the Company. The Company has not experienced
any work stoppages and considers its relations with its employees to be good.
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, and 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
"Risk Factors -- Management of Growth" and "Risk Factors -- Dependence on Key
Personnel."
FACILITIES
The Company's principal operations are located in an approximately 61,767
square foot facility in Santa Clara, California. A portion of this facility has
been subleased. This lease expires in December 1997, and the Company has an
option to extend the lease for a period of up to 5 years. The Company also
leases 2,267 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.
LEGAL PROCEEDINGS
The IRS is currently conducting an examination of the Company's federal
income tax return for the fiscal year ended March 31, 1992. In August 1995, the
IRS asserted a deficiency against the Company for the taxable year 1992 of
approximately $1.4 million for accumulated earnings taxes, together with a
penalty 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 has not made any payments under
this assessment. On October 30, 1995, in accordance with IRS procedures, the
Company formally protested this assessment. The Company has not received an
official response from the IRS to this protest. The outcome of this matter
cannot be predicted. In the event that the IRS prevails, the Company will have
to make cash payments for the amount of the deficiency, penalty and accrued
interest. However, any adverse outcome of this assessment is not likely to
impact the Company's tax position on this matter for any other fiscal year. In
addition, the IRS has requested information related to the Company's federal tax
returns for the year ended March 31, 1995. The IRS has disclosed to the Company
that the purpose of this request was to gain information regarding the economic
circumstances underlying the Company's loss for the year ended March 31, 1995.
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<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of the date of this Prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ---- -----------------------------------------------------------
<S> <C> <C>
Joe Parkinson(1)............ 51 Chief Executive Officer and Chairman of the Board
Y.W. Sing................... 42 Vice Chairman of the Board
Sandra L. Abbott............ 49 Chief Financial Officer, Vice President, Finance
David Harper................ 49 Vice President, European Operations
Bryan R. Martin............. 28 Chief Technical Officer and Vice President, Engineering
Chris McNiffe............... 35 Vice President, Marketing and Sales
Michael Noonen.............. 33 Vice President, Business Development
Samuel Wang................. 47 Vice President, Process Technology and Director
Bernd Girod................. 38 Director
Richard M. Chang(1)......... 56 Director
Sada Chidambaram(2)......... 51 Director
Akifumi Goto(1)............. 53 Director
Thomas L. Humphrey(2)....... 58 Director
William Tai(2).............. 34 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Joe Parkinson has served as Chief Executive Officer and Chairman of the
Board of the Company since June 1995. From October 1994 to June 1995, Mr.
Parkinson served as a consultant to Micron Technology, Inc. ("Micron"), a
manufacturer of semiconductor memory products, personal computers and circuit
board assemblies. From October 1985 to October 1994, he served as Chairman of
the Board and Chief Executive Officer of Micron, and from July 1980 to October
1985 he served as President of Micron. Mr. Parkinson is a director of Ultratech
Stepper, Inc. Mr. Parkinson received a B.A. from Columbia College, a J.D. from
Tulane University and a L.L.M. in Taxation from New York University.
Dr. Y.W. Sing co-founded the Company in April 1987 and served as Vice
President of Engineering until December 1989. From December 1989 to July 1995,
he served as the Company's Executive Vice President, and in July 1995 became the
Company's Vice Chairman of the Board. For six years prior to 1987, Dr. Sing
worked for Weitek Corporation, a semiconductor manufacturer, where he served as
senior technical manager. From 1979 to 1981, Dr. Sing was a member of the
technical staff at the Hewlett-Packard Company. Dr. Sing holds a B.S. from
National Taiwan University and a M.S. and Ph.D. in Electrical Engineering from
the University of California at Berkeley.
Sandra L. Abbott joined the Company as Controller in April 1991, and was
promoted to Chief Financial Officer and Vice President, Finance in June 1995.
From February 1990 to March 1991, Ms. Abbott served as Controller for InfoChip
Systems, Inc, a semiconductor manufacturer. Prior to 1990, Ms. Abbott held
Controller positions at MRP, Inc. (a subsidiary of U.S. West), Free-Flow
Packaging, Inc. and Weitek Corporation. Ms. Abbott received a B.A. from
University California, Riverside and a M.B.A. from Santa Clara University.
David Harper joined the Company in May 1990 and was promoted to Vice
President, European Operations in March 1991. From 1988 to 1990, Mr. Harper was
Chief Executive Officer of Dialog Semiconductor, a European ASIC manufacturer.
Prior to 1988, Mr. Harper held various sales management positions at GEC Plessey
Semiconductor, LSI Logic Corp. and General Electric Company. Mr. Harper received
a B.S. in Electrical Engineering from the University of Manchester Institute of
Science and Technology.
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<PAGE> 42
Bryan R. Martin was promoted to Chief Technical Officer and Vice President,
Engineering of the Company in August 1995. Mr. Martin served as Video Project
Manager of the Company from April 1995 to August 1995, and as an integrated
circuit designer for the Company from April 1990 to August 1995. Mr. Martin
received a B.S. and a M.S. in Electrical Engineering from Stanford University.
Chris McNiffe has served as Vice President, Marketing and Sales for the
Company since July 1995. From June 1992 to July 1995, Mr. McNiffe held various
sales & marketing management positions at the Company. From July 1986 to June
1992, Mr. McNiffe held a position as sales manager at NCR Corporation, a
computer products and services provider. From 1982 to 1986, Mr. McNiffe was a
design engineer at RCA Corporation. Mr. McNiffe received a B.S. in Electrical
Engineering from Rutgers University.
Michael Noonen has served as Vice President, Business Development for the
Company since May 1996. From February 1996 to the present, he has also served as
Chief Executive Officer of VidUs, Inc., a subsidiary of the Company engaged in
the design of integrated camera and video compression solutions. From July 1992
to April 1995, Mr. Noonen held various sales management positions at the
Company. From August 1990 to July 1992, Mr. Noonen served as an Area Sales
Manager for NCR Corporation, a computer products and services provider. Prior to
1992, Mr. Noonen was a field application engineer for Seattle Silicon
Corporation, a software developer. Mr. Noonen received a B.S. in Electrical
Engineering from Colorado State University.
Dr. Samuel Wang has served as Vice President, Process Technology and a
director of the Company since October 1995. From 1984 to October 1995, Mr. Wang
served as Executive Vice President and a director of ICT Inc., a manufacturer of
programmable logic devices. From 1981 to 1983 Mr. Wang was a Senior Engineering
Manager at National Semiconductor Corporation, and from 1978 to 1980 he was a
staff engineer at Intel Corporation. Mr. Wang received a B.S. in Physics from
the National Tsing Hua University, Taiwan, and a M.S. and Ph.D. in Solid State
Electronics from Princeton University.
Dr. Bernd Girod has served as a director of Company since November 1996.
Dr. Girod has been a Chaired Professor of Electrical
Engineering/Telecommunications at the University of Enlangen-Nuremberg in
Germany since October 1993. In May 1993, he co-founded Vivo Software, Inc., a
developer of video compression software, and has served as Chief Scientist since
then. From June 1990 to September 1993, Dr. Girod was Professor of Computer
Graphics and Technical Director of the Academy of Media Arts in Cologne,
Germany, jointly appointed with the Computer Science Section of Cologne
University. From January 1988 to May 1990, he was employed at the Massachusetts
Institute of Technology, first as a Visiting Scientist and then as an Assistant
Professor with the Media Laboratory. Dr. Girod received a M.S. in Electrical
Engineering from the Georgia Institute of Technology and a Doctoral degree
(Dr.-Ing.) from the University of Hannover, Germany.
Dr. Richard M. Chang has been a director of the Company since February
1987. He has served in various marketing and manufacturing management positions
at Hewlett-Packard Company, an electronics component and system manufacturer,
since 1970. Dr. Chang received a B.S. in Physics from the California Institute
of Technology and a Ph.D. in Applied Physics from Stanford University.
Sada Chidambaram has been a director of the Company since December 1995. He
has also been a director of ASCII Corporation ("ASCII") and has served as
President of ASCII of America, Inc., a subsidiary of ASCII, since February 1988.
ASCII, based in Tokyo, Japan, publishes software and computer magazines and
manufactures and distributes specialized semiconductors and solutions. Mr.
Chidambaram also serves on the Board of Directors of several privately held
companies. Mr. Chidambaram received a B.S. in Chemistry from Loyola University
and a M.S. in Chemical Engineering from the Tokyo Institute of Technology.
Akifumi Goto has been a director of the Company since September 1996. He
has served as President and Chief Executive Officer of Sanyo Semiconductor
Corporation ("Sanyo"), a semiconductor manufacturer, since February 1993. From
February 1983 to January 1993, Mr. Goto served as Executive Vice President of
Sanyo. Mr. Goto received a B.S. in Electrical Engineering from Tamagawa
University and a M.B.A. from Santa Clara University.
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<PAGE> 43
Dr. Thomas L. Humphrey has been a director of the Company since November
1995. He has served as a Director, Corporate Business Development of National
Semiconductor Corporation, a semiconductor manufacturer, since January 1992.
From January 1991 to January 1992, Dr. Humphrey was an independent consultant.
Dr. Humphrey received a B.S. from University of California, Los Angeles and a
M.S. and Ph.D. in Electrical Engineering from Stanford University.
William Tai has been a director of the Company since April 1994. Mr. Tai
has served as a General Partner of the Walden Group of Venture Capital Funds, a
venture capital firm, since September 1991. From August 1987 to September 1991,
Mr. Tai served as Vice President of Alex. Brown & Sons Incorporated. Mr. Tai is
also a director of Network Peripherals, Inc. and Award Software International,
Inc. Mr. Tai received a B.S. in Electrical Engineering from the University of
Illinois and a M.B.A. from Harvard Business School.
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee makes recommendations to the Board concerning the
compensation for the Company's officers and directors and the administration of
the Company's 1992 Stock Option Plan, Key Personnel Plan, 1996 Stock Plan, 1996
Director Option Plan and 1996 Employee Stock Purchase Plan. The Audit Committee
reviews the Company's financial controls, evaluates the scope of the annual
audit, reviews audit results, consults with management and the Company's
independent auditors prior to the presentation of financial statements to
stockholders and, as appropriate, initiates inquiries into aspects of the
Company's financial affairs.
DIRECTOR COMPENSATION
Directors receive no cash remuneration for serving on the Board of
Directors, although, in the future, directors will be reimbursed for reasonable
expenses incurred by them in attending Board and Committee meetings upon
approval of such reimbursement by the Board of Directors. Directors are eligible
to receive stock options under the Company's 1992 Stock Option Plan, Key
Personnel Plan and 1996 Stock Plan. Effective upon the closing of this Offering,
the Company has adopted the 1996 Director Option Plan and, in the future,
non-employee directors will be eligible to receive stock options under this
plan. See "Management -- Compensation Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Parkinson, Chang and Goto. No member of the Compensation Committee or
executive officer of the Company has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the fullest extent permitted by the Delaware General
Corporation Law (the "Delaware Law"). Under the Delaware Law, a director's
liability to a company or its stockholders may not be limited with respect to
(i) any breach of his duty of loyalty to the company or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) unlawful payments or dividends or unlawful stock
repurchases or redemptions or (iv) transactions from which the director derived
an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted under the Delaware Law. The Company has also entered into
agreements to indemnify its directors and executive officers. The Company's
Bylaws also permit it to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions,
regardless of whether the Delaware Law would permit indemnification.
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<PAGE> 44
There is no pending litigation or proceeding involving any director,
officer, employee or agent of the Company where indemnification will be required
or permitted. The Company is not aware of any pending or threatened litigation
or proceeding that might result in a claim for such indemnification.
EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to the Company
in all capacities during the fiscal year ended March 31, 1996 by (i) the
Company's Chief Executive Officer, (ii) the Company's next four most highly
compensated executive officers whose salary and bonus for such fiscal year
exceeded $100,000 and who served as executive officers of the Company at March
31, 1996 and (iii) one additional individual for whom disclosure would have been
provided pursuant to (ii) above but for the fact that the individual was not
serving as an executive officer of the Company on March 31, 1996 (collectively,
the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) ($)(1) OPTIONS(#) SATION($)
- ------------------------------------ --------- -------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Joe Parkinson, Chairman and Chief
Executive Officer................. 115,384(2) 4,580 -- 600,000(3) --
Y. W. Sing, Vice Chairman........... 163,590 4,700 55,046(4) 115,000 --
Sandra L. Abbott, Chief Financial
Officer........................... 114,647 4,700 -- 65,000 --
David Harper, Vice President,
European Operations............... 97,491 47,115 22,992(5) 25,000 49,389(6)
Chris McNiffe, Vice President,
Marketing and Sales............... 150,157 4,700 -- 100,000 --
Michael Noonen, Vice President,
Business Development.............. 107,750 105,800 -- -- --
</TABLE>
- ---------------
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus for such officer.
(2) Represents compensation for a partial year, as Mr. Parkinson joined the
Company in June 1995. Mr. Parkinson's annualized salary during this period
was $150,000.
(3) Options representing 100,000 of these securities were canceled in June 1996.
(4) Represents one time payout of accrued paid time off.
(5) Represents the incremental cost to the Company of the use of a Company car.
(6) Represents contributions by the Company to a plan which provides for
payments to Mr. Harper during his retirement.
42
<PAGE> 45
Option Grants and Holdings
The following table provides information with respect to stock option
grants to each of the Named Executive Officers during the fiscal year ended
March 31, 1996:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
-------------------------------------------------------------- STOCK
NUMBER OF PERCENT OF PRICE APPRECIATION
SECURITIES TOTAL FOR
UNDERLYING OPTIONS GRANTED OPTION TERM(1)
OPTIONS TO EMPLOYEES IN EXERCISE OR EXPIRATION ------------------
NAME GRANTED(#) FISCAL YEAR BASE PRICE ($/SH.) DATE 5%($) 10%($)
- -------------------------- ---------- --------------- ------------------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Joe Parkinson............. 500,000(2) 16.8% $.50(3) 06/15/05 $69,070 $152,628
Joe Parkinson............. 100,000(4) 3.4% $.50(3) 11/20/05 $13,814 $ 30,526
Y.W. Sing................. 115,000(5) 3.9% $.50(3) 01/01/05 $15,886 $ 35,104
Sandra L. Abbott.......... 65,000(6) 2.1% $.50(3) 07/10/05 $ 8,979 $ 19,842
David Harper.............. 25,000(6) 0.8% $.50(3) 07/10/05 $ 3,453 $ 7,631
Chris McNiffe............. 100,000(6) 3.4% $.50(3) 07/10/05 $13,814 $ 30,526
</TABLE>
- ---------------
(1) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial performance of the Company, overall
market conditions and the option holders' continued employment through the
vesting period.
(2) The options were granted under the Key Personnel Plan and vest at a rate of
1/3 of the shares at the end of one year and 1/24 of the remaining shares at
the end of each month thereafter, subject to continued service as an
employee, consultant or director. The term of each option is ten years. The
exercise price of each option granted is equal to the fair market value of
the Common Stock of the Company on the date of grant. See
"Management -- Compensation Plans."
(3) These options were originally priced at $2.50 per share and were cancelled
and reissued at $0.50 in June 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
(4) The options were granted under the Key Personnel Plan and vest upon the
effectiveness of the Company's initial public offering. The term of each
option is ten years. The exercise price of each option granted is equal to
the fair market value of the Common Stock of the Company on the date of
grant. See "Management -- Compensation Plans." The options were canceled in
June 1996.
(5) The options were granted under the Key Personnel Plan and vest at a rate of
1/24 of the shares at the end of each month, subject to continued service as
an employee, consultant or director. The term of each option is ten years.
The exercise price of each option granted is equal to the fair market value
of the Common Stock of the Company on the date of grant. See
"Management -- Compensation Plans."
(6) The options were granted under the Key Personnel Plan and vest at a rate of
1/48 of the shares at the end of each month, subject to continued service as
an employee, consultant or director. The term of each option is ten years.
The exercise price of each option granted is equal to the fair market value
of the Common Stock of the Company on the date of grant. See
"Management -- Compensation Plans."
In June 1996, the Company granted options to purchase shares of the
Company's Common Stock at an exercise price of $0.50 per share to the following
executive officers: (i) Joe Parkinson received two grants of stock options to
purchase 250,000 shares each, for an aggregate of 500,000 shares; and (ii) Y.W.
Sing, Sandra L. Abbott, David Harper, Bryan R. Martin, Chris McNiffe, Michael
Noonen and Samuel Wang each received options to purchase 57,400 shares.
43
<PAGE> 46
One of the above-mentioned options received by Mr. Parkinson to purchase
250,000 shares of the Company's Common Stock shall vest on June 24, 2000;
provided, however, that vesting shall be accelerated in the event of an initial
public offering or a change of control (defined as the acquisition by an entity
or individual and any related parties of at least 35% of the Company's fully
diluted Common Stock) as follows: (i) all of Mr. Parkinson's 250,000 shares
shall vest on December 31, 1996 in the event of an initial public offering or a
change of control occurring on or before December 31, 1996, which initial public
offering or change of control results in a price per share of the Company's
Common Stock of at least $11.00; (ii) 100,000 and 150,000 of Mr. Parkinson's
shares shall vest on December 31, 1996 and June 24, 2000, respectively, in the
event of an initial public offering or change of control occurring on or before
December 31, 1996, which results in a price per share of the Company's Common
Stock of at least $6.00 and under $11.00; (iii) 100,000 and 150,000 of Mr.
Parkinson's shares shall vest on March 31, 1997 and June 24, 2000, respectively,
in the event of an initial public offering or change of control occurring
between December 31, 1996 and March 31, 1997, which results in a price per share
of the Company's Common Stock of at least $11.00; and (iv) 60,000 and 190,000 of
Mr. Parkinson's shares shall vest on March 31, 1997 and June 24, 2000,
respectively, in the event of an initial public offering or change of control
occurring between December 31, 1996 and March 31, 1997, which results in a price
per share of the Company's Common Stock of at least $6.00 and under $11.00.
The following table provides information with respect to the value of stock
options held as of March 31, 1996 by each of the Named Executive Officers. There
were no stock option exercises by such individuals during the year ended March
31, 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END(#)(1) AT FISCAL YEAR END($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Joe Parkinson(2).......................... 0 600,000(4) $ 0.00 $ 0.00
Y.W. Sing (2)............................. 165,416 69,584 $ 0.00 $ 0.00
Sandra L. Abbott(2)....................... 10,833 54,167 $ 0.00 $ 0.00
David Harper(3)........................... 34,667 5,333 $ 52,000.50 $7,999.50
David Harper(2)........................... 4,167 20,833 $ 0.00 $ 0.00
Chris McNiffe(2).......................... 29,626 89,374 $ 0.00 $ 0.00
Michael Noonen(2)......................... 12,500 5,500 $ 0.00 $ 0.00
</TABLE>
- ---------------
(1) In June 1996, these options to purchase Common Stock were cancelled and
reissued at $.50 per share. The new options became immediately exercisable
subject to right of repurchase in favor of the Company, which expires
ratably through June 24, 2000.
(2) Calculated by determining the difference between the fair market value of
the Common Stock as of March 28, 1996 ($2.50) and the exercise price of the
underlying options as of March 28, 1996 ($2.50).
(3) Calculated by determining the difference between the fair market value of
the Common Stock as of March 28, 1996 ($2.50) and the exercise price of the
underlying options as of March 28, 1996 ($1.00).
(4) Options representing 100,000 of these securities were canceled in June 1996.
COMPENSATION PLANS
1992 Stock Option Plan
The Company's 1992 Stock Option Plan (the "1992 Plan") was adopted in
January 1992. The 1992 Plan provides for the grant to employees of the Company
(including officers and employee directors) of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for the grant of nonstatutory stock options to employees and
consultants of the Company. The 1992 Plan is administered by the Board of
Directors or a Committee of the Board of Directors (the "Administrator"), which
selects the optionees, determines the number of shares to be subject to each
option
44
<PAGE> 47
and determines the exercise price of each option. The 1992 Plan authorizes the
issuance of up to 2,000,000 shares of Common Stock. As of September 30, 1996,
234,636 shares had been issued under the 1992 Plan, options for 1,382,075 shares
were outstanding and 383,289 shares remained available for future grants. The
exercise price of all incentive stock options granted under the 1992 Plan must
be at least equal to the fair market value per share of the Common Stock on the
date of grant. The exercise price of all nonstatutory stock options granted
under the 1992 Plan is determined by the Administrator. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of stock of the Company, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the grant
date and the maximum term of the option must not exceed five years. The term of
all other options granted under the 1992 Plan may not exceed ten years.
In the event of a merger of the Company with or into another corporation,
the 1992 Plan requires that each outstanding option be assumed or an equivalent
option substituted by such successor corporation or a parent or subsidiary of
such successor corporation. If the successor corporation refuses to assume or
substitute for the options, the optionee will have the right to exercise the
option as to all or a portion of the stock subject thereto, including shares
which would not otherwise be exercisable. Unless terminated sooner, the 1992
Plan will terminate ten years from its effective date. The Board has authority
to amend or terminate the 1992 Plan, provided no such action would impair the
rights of the holder of any outstanding options without the written consent of
such holder.
Key Personnel Plan
The Company's Key Personnel Plan (the "Key Personnel Plan") was adopted in
July 1995. The Key Personnel Plan provides for the grant to employees of the
Company (including officers and employee directors) of incentive stock options
within the meaning of Section 422 of the Code, and for the grant of nonstatutory
stock options to employees and consultants of the Company. The Key Personnel
Plan is administered by the Board of Directors or a Committee of the Board of
Directors (the "Administrator"), which selects the optionees, determines the
number of shares to be subject to each option and determines the exercise price
of each option. The Key Personnel Plan authorizes the issuance of up to
2,199,925 shares of Common Stock. As of November 5, 1996, 2,199,925 shares had
been issued under the Key Personnel Plan and no shares remained available for
future grants. The exercise price of all incentive stock options granted under
the Key Personnel Plan must be at least equal to the fair market value of the
Common Stock on the date of grant. The exercise price of all nonstatutory stock
options granted under the Key Personnel Plan is determined by the Administrator.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of the Company, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market value
on the grant date and the maximum term of the option must not exceed five years.
The term of all other options granted under the Key Personnel Plan may not
exceed ten years.
In the event of a merger of the Company with or into another corporation,
the Key Personnel Plan requires that each outstanding option be assumed or an
equivalent option substituted by such successor corporation or a parent or
subsidiary of such successor corporation. If the successor corporation refuses
to assume or substitute for the options, the optionee will have the right to
exercise the option as to all or a portion of the stock subject thereto,
including shares which would not otherwise be exercisable.
1996 Stock Plan
The Company's 1996 Stock Plan (the "1996 Plan") was adopted in June 1996.
The 1996 Plan provides for the grant to employees of the Company (including
officers and employee directors) of incentive stock options within the meaning
of Section 422 of the Code, and for the grant of nonstatutory stock options and
stock purchase rights ("Rights") to employees and consultants of the Company.
The 1996 Plan is administered by the Board of Directors or a Committee of the
Board of Directors (the "Administrator"), which selects the optionees,
determines the number of shares to be subject to each option or Right and
determines the exercise price of each option or Right. The 1996 Plan authorizes
the issuance of up to 1,000,000 shares of Common Stock, to be increased annually
on the first day of each of the Company's fiscal years during the term of the
plan in an amount equal to 5% of the Company's Common Stock issued and
outstanding at the close of business on the last day of the immediately
preceding fiscal year (the "Annual
45
<PAGE> 48
Replenishment"), with only the initial 1,000,000 shares and subsequent annual
increases in an amount equal to the lesser of (i) 1,000,000 shares, or (ii) the
number of shares subject to the Annual Replenishment to be available for
issuance as "incentive stock options" qualified under Section 422 of the Code.
As of September 30, 1996, 247 shares had been issued under the 1996 Plan,
options for 161,712 shares were outstanding and 838,041 shares remained
available for future grants. The exercise price of all incentive stock options
granted under the 1996 Plan must be at least equal to the fair market value of
the Common Stock on the date of grant. The exercise price of all nonstatutory
stock options granted under the 1996 Plan shall be determined by the
Administrator. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of stock of the Company, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date and the maximum term of an incentive
stock option must not exceed five years. The term of all other options granted
under the 1996 Plan may not exceed ten years.
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 1996
Plan requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation or a parent or subsidiary of such
successor corporation. If the successor corporation refuses to assume or
substitute for the options, the optionee will have the right to exercise the
option or Right as to all or a portion of the stock subject thereto, including
shares which would not otherwise be exercisable. Unless terminated sooner, the
1996 Plan will terminate ten years from its effective date. The Board has
authority to amend or terminate the 1996 Plan, provided no such action would
impair the rights of the holder of any outstanding options without the written
consent of such holder.
1996 Director Option Plan
The Company's 1996 Director Option Plan (the "Director Plan") was adopted
in June 1996 and will become effective upon the closing of this Offering. A
total of 150,000 shares of Common Stock has been reserved for issuance under the
Director Plan. The Director Plan provides for the grant of nonstatutory stock
options to all nonemployee directors of the Company ("Outside Directors"). The
grants may be made at the discretion of the Board of Directors or a Committee
appointed by the Board of Directors. In addition, grants will be made pursuant
to an automatic, nondiscretionary grant mechanism. The Director Plan provides
that each Outside Director shall 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 (the "First Option"). Thereafter, each Outside Director shall 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 by the
Company's stockholders at the Company's annual meeting of stockholders or
otherwise (a "Subsequent Option"), if on such date, such Outside Director shall
have served on the Company's Board of Directors for at least six (6) months. The
Director Plan provides that each option shall become exercisable in installments
over a period of four (4) years from the date of grant. The exercise price per
share of all options granted under the Director Plan shall 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.
In the event of the merger or sale of substantially all of the assets of the
Company, all outstanding options shall be assumed or substituted by the
successor corporation, or if they are not assumed or substituted for, they shall
become fully vested and exercisable. If the options are assumed or substituted
for, they shall also become fully exercisable if the director is terminated
other than upon voluntary termination. If not terminated earlier, the Director
Plan will have a term of ten years.
1996 Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted in June 1996 and will become effective upon the closing of this
Offering. A total of 500,000 shares of Common Stock has been reserved for
issuance under the Purchase Plan, to be increased annually on the first day of
each of the Company's fiscal years during the term of the Purchase Plan in an
amount equal to (i) 500,000 shares minus (ii) the number of shares available for
issuance under the Purchase Plan as of such date, all of which share numbers are
subject to adjustment upon changes in capitalization of the Company. The
Purchase Plan, which is intended to qualify under Section 423 of the Code, will
be implemented by an offering commencing on the
46
<PAGE> 49
date of the closing of this Offering and ending on the last business day in the
period ending October 31, 1998. Each twenty-four month offering period will
consist of four purchase periods of approximately six months duration. Employees
are eligible to participate if they are regularly employed by the Company for at
least twenty hours per week and more than five months in any calendar year.
The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 10% of an employee's base
compensation, including commissions but exclusive of bonuses and overtime, at a
price equal to 85% of the fair market value of the Common Stock at the beginning
of each offering period or the end of a six month purchase period, whichever is
lower. 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. In the event that the fair market value of the Company's Common
Stock at the end of any six month purchase period is lower than the fair market
value of the Company's Common Stock at the beginning of the offering period,
Purchase Plan participants will be automatically withdrawn from such offering
period and re-enrolled in the new offering period commencing immediately
thereafter. Unless terminated sooner, the Purchase Plan will terminate ten years
after its effective date. The Board of Directors has authority to amend or
terminate the Purchase Plan provided no such action may adversely affect the
rights of any participant.
Change of Control
In the event of an individual or corporate entity and any related parties
cumulatively acquiring at least 35% of the Company's fully diluted stock (a
"Change of Control"), all stock options or stock subject to repurchase by the
Company held by officers under any stock option plan (except for an option, held
by Joe Parkinson, to purchase 250,000 shares of Common Stock, which option shall
vest under certain other change of control circumstances, see "Certain
Transactions") shall vest immediately without regard to the term of the option.
In addition, in the event of a Change of Control, each officer shall be entitled
to one (1) year severance pay and continuing medical benefits for life after
leaving the Company, provided that such medical benefits shall cease should such
officer accept employment with a competing company.
Profit Sharing Plan
In July 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 the Company's quarterly income before income taxes. The profit sharing
plan is effective beginning in the year ended March 31, 1996 and provides for
payments of up to 15% of the Company's quarterly income before income taxes.
Additionally, the plan provides for payment of certain discretionary bonuses
based on criteria established by management.
47
<PAGE> 50
CERTAIN TRANSACTIONS
In September 1996, the Company sold an aggregate of 363,640 shares of
Series D Preferred Stock to Sanyo Semiconductor Corporation ("Sanyo"), a
manufacturer of semiconductors, at a price of $5.50 per share. Akifumi Goto,
President of Sanyo, became a director of the Company in connection with this
transaction.
In July 1996, certain officers and directors of the Company exercised their
stock options under the Company's Key Personnel Plan pursuant to a restricted
stock purchase agreement. The officers and directors exercised an aggregate of
2,156,800 shares of Common Stock at a purchase price of $0.50 per share by
payment of partial recourse promissory notes. The following officers and
directors exercised shares of Common Stock under the Company's Key Personnel
Plan: 122,400 shares exercised by Sandra Abbott; 122,400 shares exercised by
David Harper; 160,400 shares exercised by Bryan Martin; 176,400 shares exercised
by Chris McNiffe; 125,400 shares exercised by Michael Noonen; 1,000,000 shares
exercised by Joe Parkinson; 292,400 shares exercised by Y.W. Sing; and 157,400
shares exercised by Samuel Wang.
In April 1994, the Company sold an aggregate of 681,820 shares of Series C
Preferred Stock to National Semiconductor Corporation ("NSC"), a semiconductor
manufacturer, at a price of $11.00 per share. In connection with NSC's
investment, Thomas Humphrey, Director, Corporate Business Development of NSC,
became a director of the Company.
In April 1994, the Company entered into various joint development and
supply agreements with NSC, which were terminated by mutual agreement between
the parties in June 1996. As part of this termination, the Company licensed, on
a non-exclusive, royalty free basis, its Intel compatible x86 microprocessor
technology to NSC. During the year ended March 31, 1995, the company recognized
contract revenue and related costs under these agreements of $294,000 and
$229,000, respectively and purchased $868,000 in inventory from NSC.
During the years ended March 31, 1995 and 1996 and September 30, 1996 the
Company's product revenues included $897,000, $2,037,000 and $959,000 in sales
to ASCII Corporation ("ASCII"), or approximately 4.5%, 7.1% and 9.5% of the
Company's revenues, respectively. ASCII acts as a distributor for the Company in
Japan and is party to certain distributor and sales agreements with the Company.
Sada Chidambaram, a director of the Company, is a director of ASCII and the
President of ASCII of America, Inc., a subsidiary of ASCII.
During the years ended March 31, 1994 and 1995, the Company sold $3,258,000
and $795,000, respectively, of product to Mitsui Comtek, one of its
stockholders. Mitsui Comtek is also the guarantor of the Company's office
facilities.
In March 1996, 8x8 entered into an investment agreement (the "Agreement")
with VidUs, Inc. ("VidUs"), a company whose officers include Michael Noonen
("Noonen") and Sandra L. Abbott. VidUs is currently developing technology by
which a camera transfers data to a Universal Serial Bus port using the Company's
MEP semiconductor and reference design video compression capabilities (the
"CompressionCam Concept"). Pursuant to the Agreement, the Company and Noonen own
approximately 75% and 12%, respectively, of the common stock of VidUs. Also in
connection with the Agreement, the Company will own all patents related to the
CompressionCam Concept, but has provided VidUs with a royalty free,
nonexclusive, nonassignable license to make, have made, use and sell products
which incorporate the CompressionCam Concept.
Y.W. Sing, Vice Chairman of the Board and a director of the Company, served
as Chief Executive Officer and beneficial owner of two entities (collectively,
the "Entities") until March 1994. During the year ended March 31, 1994, the
Entities provided various marketing, sales and research and development services
to the Company. In compensation for these services the Entities received, in the
aggregate, $940,000 from the Company. In March 1994, the Company purchased all
assets and assumed all liabilities of the Entities for nominal consideration,
and expensed $50,000 previously paid for an option to acquire all of the capital
stock of one of the Entities.
48
<PAGE> 51
In June 1996, certain officers and directors had their options to buy
Common Stock repriced to $.50 per share through the cancellation of then
existing options and the issuance of new options. The following summarizes the
number of shares repriced, the exercise price per share before such repricing
and persons associated with the repriced shares: Joe Parkinson had 500,000
shares repriced from $2.50 per share; Y.W. Sing had 235,000 shares repriced from
$2.50 per share; Sandra L. Abbott had 65,000 shares repriced from $2.50 per
share; David Harper had 25,000 shares repriced from $2.50 per share, and 40,000
shares repriced from $1.00 per share; Bryan R. Martin had 103,000 shares
repriced from $2.50 per share; Chris McNiffe had 119,000 shares repriced from
$2.50 per share; Michael Noonen had 68,000 shares repriced from $2.50 per share;
Samuel Wang had 100,000 shares repriced from $2.50 per share; and William Tai
had 25,000 shares repriced from $2.50 per share.
In June 1996, the Company granted an option to purchase 250,000 shares of
its Common Stock at an exercise price of $0.50 per share to Joe Parkinson, the
Chairman and Chief Executive Officer of the Company. This option shall vest on
June 24, 2000; provided, however, that vesting shall be accelerated in the event
of an initial public offering or a change of control (defined as the acquisition
by an entity or individual and any related parties of at least 35% of the
Company's fully diluted Common Stock) as follows: (i) all of Mr. Parkinson's
250,000 shares shall vest on December 31, 1996 in the event of an initial public
offering or a change of control occurring on or before December 31, 1996, which
initial public offering or change of control results in a price per share of the
Company's Common Stock of at least $11.00; (ii) 100,000 and 150,000 of Mr.
Parkinson's shares shall vest on December 31, 1996 and June 24, 2000,
respectively, in the event of an initial public offering or change of control
occurring on or before December 31, 1996, which results in a price per share of
the Company's Common Stock of at least $6.00 and under $11.00; (iii) 100,000 and
150,000 of Mr. Parkinson's shares shall vest on March 31, 1997 and June 24,
2000, respectively, in the event of an initial public offering or change of
control occurring between December 31, 1996 and March 31, 1997, which results in
a price per share of the Company's Common Stock of at least $11.00; and (iv)
60,000 and 190,000 of Mr. Parkinson's shares shall vest on March 31, 1997 and
June 24, 2000, respectively, in the event of an initial public offering or
change of control occurring between December 31, 1996 and March 31, 1997, which
results in a price per share of the Company's Common Stock of at least $6.00 and
under $11.00.
In July 1996, the officers of the Company entered into partial recourse
promissory notes in connection with the purchase of the Company's Common Stock
(at a price of $.50 per share) through the exercise of stock options granted
under the Key Personnel Plan. The following summarizes the amount of the
promissory note entered into by each officer and the persons associated with
them: Joe Parkinson, $500,000; Y.W. Sing, $146,200; Sandra L. Abbott, $61,200;
David Harper, $61,200; Bryan R. Martin, $80,200; Chris McNiffe, $88,200; Michael
Noonen, $62,700; and Samuel Wang, $78,700. Each of these promissory notes have
an interest rate of 6.4% per year, and are secured by the shares of the
Company's Common Stock held by such respective officers. Principal and interest
on these promissory notes are due and payable in June 2001.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been otherwise
obtained from unaffiliated third parties. All future transactions, including
loans (if any), between the Company and its officers, directors and principal
stockholders and their affiliates will be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors of the Board of Directors, and will be on terms no less favorable to
the Company than could have been obtained from unaffiliated third parties.
49
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of October 31, 1996, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby and
the automatic conversion of all outstanding shares of Preferred Stock into
Common Stock upon the closing of this Offering, by (i) each person (or group of
affiliated persons) who is known by the Company to own beneficially 5% or more
of the Company's Common Stock, (ii) each of the Company's directors, (iii) each
of the Named Executive Officers and (iv) all directors and officers as a group.
Except as indicated in the footnotes to the table, the persons named in the
table have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to community property laws
where applicable, and the address of each listed stockholder is c/o 8x8, Inc.,
2445 Mission College Boulevard, Santa Clara, CA 95054.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
SHARES(1)(2)
-------------------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Y.W. Sing(3)(4)................................. 1,036,400 9.7% 7.9%
Joe Parkinson(3)(5)............................. 1,000,000 9.3 7.6
National Semiconductor Corporation(6)........... 681,820 6.4 5.2
2900 Semiconductor Drive
Santa Clara, CA 95051
Thomas L. Humphrey(3)(6)........................ 681,820 6.4 5.2
Deby Investments, Ltd.(7)....................... 600,000 5.6 4.5
General Electronics Building FSSTL 96
Sheung Shui, N.T. Hong Kong
Richard M. Chang(3)............................. 453,334 4.2 3.4
Akifumi Goto(3)(8).............................. 363,640 3.4 2.8
Sada Chidambaram(3)(9).......................... 300,000 2.8 2.3
David Harper(10)................................ 222,400 2.1 1.7
Chris McNiffe(11)............................... 176,400 1.6 1.3
Bryan Martin(12)................................ 172,900 1.6 1.3
Samuel Wang(3)(13).............................. 157,400 1.5 1.2
Sandra L. Abbott(14)............................ 153,400 1.4 1.2
Michael Noonen(15).............................. 125,400 1.2 1.0
William Tai(3)(16).............................. 36,667 * *
Bernd Girod(3).................................. -- -- --
All directors and executive officers as a group
(14 persons) (17)............................. 4,879,761 45.6 36.9
</TABLE>
- ---------------
* Less than 1%
(1)Percentage of ownership is based on (i) 10,695,348 shares of Common Stock
outstanding as of October 31, 1996, plus any shares issuable pursuant to
options held, as of October 31, 1996, by the person or class in question
which may be exercised within 60 days of October 31, 1996, and (ii)
13,195,348 shares of Common Stock outstanding after completion of this
Offering, plus any shares issuable pursuant to options held by the person or
class in question which may be exercised within 60 days of October 31, 1996.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) The named person is a director of the Company.
(4) Includes 84,646 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.
(5) Includes 776,042 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.
50
<PAGE> 53
(6) Includes 681,820 shares beneficially held by National Semiconductor
Corporation. Dr. Humphrey is Director, corporate Business Development of
National Semiconductor Corporation.
(7) The beneficial owner of the shares held by Deby Investments, Ltd. is Samuel
Fang.
(8) Includes 363,640 shares beneficially held by Sanyo Semiconductor
Corporation. Mr. Goto is the President and Chief Executive Officer of Sanyo
Semiconductor Corporation.
(9) Includes 300,000 shares owned by ASCII Corporation. Mr. Chidambaram is a
director of ASCII and the President of ASCII of America, Inc., a subsidiary
of ASCII Corporation. Mr. Chidambaram disclaims beneficial ownership of
shares held by ASCII.
(10) Includes 72,853 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.
(11) Includes 127,853 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.
(12) Includes 127,791 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.
(13) Includes 153,812 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.
(14) Includes 99,854 shares that are subject to a right of repurchase in favor
of the Company which expires ratably through June 24, 2000.
(15) Includes 102,853 shares that are subject to a right or repurchase in favor
of the Company which expires ratably through June 24, 2000.
(16) Includes (i) 11,667 shares issuable pursuant to stock options which may be
exercised within 60 days of October 31, 1996, and (ii) 25,000 shares
issuable upon exercise of stock options to purchase the following number of
shares from the persons indicated: Y.W. Sing, 7,000 shares; Chi-Shin Wang,
7,000 shares; Samuel Fang, 7,000 shares; and Richard Chang, 4,000 shares.
(17) Includes (i) 1,545,704 shares that are subject to a right of repurchase in
favor of the Company which expires ratably through June 24, 2000, and (ii)
11,667 shares issuable pursuant to stock options which may be exercised
within 60 days of October 31, 1996.
51
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, par value $0.001 per
share and 5,000,000 shares of Preferred Stock, par value $0.001 per share.
COMMON STOCK
As of September 30, 1996, as adjusted for (i) the sale of 270,913 shares of
Series D Preferred Stock by the Company in October 1996 and (ii) the conversion
of all outstanding shares of Preferred Stock into Common Stock upon the closing
of this Offering, there were 10,695,348 shares of Common Stock outstanding held
of record by approximately 180 stockholders. As of September 30, 1996, there
were options to purchase 1,543,787 shares of Common Stock outstanding. The
holders of Common Stock are entitled to one vote per share on all matters to be
voted on by the stockholders. Subject to preferences that may be applicable to
outstanding shares of Preferred Stock, if any, the holders of Common Stock are
entitled to receive ratably such dividends as may be declared from time to time
by the Board of Directors out of funds legally available therefor. In the event
of the liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior liquidation rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive conversion rights or other
subscription rights. There are no redemption or sinking funds provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be outstanding upon
completion of this Offering will be fully paid and non-assessable.
PREFERRED STOCK
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the Board of Directors has the authority, without further action
by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one
or more series and to fix the designations, powers, preferences, privileges, and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Common Stock. The Board of
Directors, without stockholder approval, can issue Preferred Stock with voting,
conversion or other rights that could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
the Company or make removal of management more difficult. Additionally, the
issuance of Preferred Stock may have the effect of decreasing the market price
of the Common Stock, and may adversely affect the voting and other rights of the
holders of Common Stock. At present, there are no shares of Preferred Stock
outstanding and the Company has no plans to issue any of the Preferred Stock.
See "Risk Factors -- Anti-Takeover Provisions of the Company's Certificate of
Incorporation, Bylaws and Delaware Law."
REGISTRATION RIGHTS
Under the terms of the Amended and Restated Registration Rights Agreement
dated as of September 6, 1996 among the Company and certain holders of its
securities (the "Rights Agreement"), following the closing of this Offering, the
holders of 3,726,373 shares of Common Stock (the "Registrable Securities") will
be entitled to certain rights with respect to the registration of such shares of
Common Stock under the Securities Act. Under the Rights Agreement, if the
Company proposes to register any of its Common Stock under the Securities Act,
certain holders of Registrable Securities are entitled to notice of such
registration and to include their Registrable Securities therein; provided,
among other conditions, that the underwriters have certain rights to limit the
number of shares included in any such registration. Beginning six months after
the closing of this Offering, the holders of at least fifty percent (50%) of the
Registrable Securities have the right to require the Company, on not more than
two occasions, to file a registration statement under the Securities Act in
order to register all or any part of their Registrable Securities, subject to
certain conditions and limitations. The Company may, in certain circumstances,
defer such registration and the underwriters have the right, subject to certain
limitations, to limit the number of shares included in such registrations.
Further, the holders of Registrable Securities may require the Company to
register all or any portion of their
52
<PAGE> 55
Registrable Securities on Form S-3, when such form becomes available to the
Company, subject to certain conditions and limitations.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Amended and Restated Certificate of Incorporation provides
that all stockholder actions must be effected at a duly called annual or special
meeting and may not be effected by written consent. The Company's Bylaws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the Board
of Directors, by the chief executive officer of the Company or by stockholders
holding shares in the aggregate entitled to cast not less than 10% of the votes
at such meeting. In addition, the Company's Bylaws establish an advance notice
procedure for stockholder proposals to be brought before an annual meeting of
stockholders, including proposed nomination of persons for election to the
Board. Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of the meeting or brought before the meeting
by or at the direction of the Board of Directors or by a stockholder who was a
stockholder of record on the record date for the meeting, who is entitled to
vote at the meeting and who had delivered timely written notice in proper form
to the Company's Secretary of the stockholder's intention to bring such business
before the meeting.
The foregoing provisions of the Company's Amended and Restated Certificate
of Incorporation and Bylaws are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of the
Company. Such provisions are designed to reduce the vulnerability of the Company
to an unsolicited acquisition proposal and, accordingly, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the Company's
shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
the Company. See "Risk Factors -- Anti-Takeover Provisions of the Company's
Certificate of Incorporation, Bylaws and Delaware Law."
EFFECT OF DELAWARE ANTI-TAKEOVER STATUE
The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from engaging,
under certain circumstances in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the Antitakeover Law, a "business
combination" includes, among other things, a merger or consolidation involving
the Company and the interested stockholder and the sale of more than ten percent
(10%) of the Company's assets. In general, the Antitakeover Law defines an
"interested stockholder" as any entity or person beneficially owning 15% or more
of the outstanding voting stock of the Company and any entity or person
affiliated with or controlling or controlled by such entity or person. A
Delaware corporation may "opt out" of the Antitakeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from amendments approved
by the holders of at least a majority of the Company's outstanding voting
shares. The Company has not "opted out" of the provisions of the Antitakeover
Law. See "Risk Factors -- Antitakeover Provisions of the Company's Certificate
of Incorporation, Bylaws and Delaware Law."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American
Securities Transfer & Trust, Inc. Its telephone number is (303) 234-5300.
LISTING
The Company's Common Stock has been approved for listing on the Nasdaq
National Market under the trading symbol "EGHT."
53
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 13,195,348 shares
of Common Stock outstanding. Of this amount, the 2,500,000 shares offered hereby
and 137,800 shares will be available for immediate sale in the public market as
of the date of this Prospectus. Approximately 9,500,000 additional shares will
be available for sale in the public market following the expiration of the
180-day lockup agreements with the Representatives of the Underwriters or the
Company, subject in some cases to compliance with the volume and other
limitations of Rule 144.
<TABLE>
<CAPTION>
SHARES
DAYS AFTER DATE ELIGIBLE
OF THIS PROSPECTUS FOR SALE COMMENT
- ----------------------- ---------- ----------------------------------------------------------
<S> <C> <C>
Upon Effectiveness..... 2,637,800 Freely tradeable shares sold in Offering and shares
saleable under Rule 144(k) that are not subject to 180-day
lockup
180 days............... 9,501,587 Lockup released; shares saleable under Rule 144, 144(k) or
701
Thereafter............. 1,036,428 Restricted securities held for two years or less
Thereafter............. 19,533 Securities held for two years or less and not subject to
180- day lockup
</TABLE>
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least two years is entitled
to sell within any three-month period commencing 90 days after the date of this
Prospectus a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock (approximately 132,000 shares
immediately after this Offering) or (ii) the average weekly trading volume
during the four calendar weeks preceding such sale, subject to the filing of a
Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale who has beneficially
owned his or her shares for at least three years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to this Offering, there has been no public market for the Common Stock, and
there can be no assurance that a significant public market for the Common Stock
will develop or be sustained after this Offering. Any future sale of substantial
amounts of the Common Stock in the open market may adversely affect the market
price of the Common Stock offered hereby.
The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders have agreed pursuant to the
Underwriting Agreement and other agreements that they will not sell any Common
Stock without the prior consent of Montgomery Securities for a period of 180
days from the date of this Prospectus (the "180-day Lockup Period"), except that
the Company may, without such consent, grant options and sell shares pursuant to
the 1992 Plan, the Key Personnel Plan, the 1996 Plan, the Director Plan and the
Purchase Plan.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register certain shares of Common Stock subject to outstanding
options or reserved for issuance under the 1992 Plan, the Key Personnel Plan,
the 1996 Plan, the Director Plan and the Purchase Plan within 180 days after the
date of this Prospectus, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities Act.
Any employee or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. As of September 30, 1996, the holders of options exercisable into
54
<PAGE> 57
approximately 230,534 shares of Common Stock will be eligible to sell their
shares in reliance upon Rule 701 or pursuant to the Form S-8 upon the expiration
of the 180-day Lockup Period.
In addition, after this Offering, the holders of 3,726,373 shares of Common
Stock will be entitled to certain rights with respect to registration of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
"Description of Capital Stock -- Registration Rights."
55
<PAGE> 58
UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
Montgomery Securities and Donaldson, Lufkin & Jenrette Securities Corporation
(the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock indicated below opposite their respective
names at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain terms and
conditions precedent and that the Underwriters are committed to purchase all of
such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities.....................................................
Donaldson, Lufkin & Jenrette Securities Corporation.......................
---------
Total........................................................... 2,500,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters
initially propose to offer the Common Stock to the public on the terms set forth
on the cover page of this Prospectus. The Underwriters may allow to selected
dealers a concession of not more than $ per share, and the Underwriters
may allow, and any such dealers may reallow, a concession of not more than
$ per share to certain other dealers. After the initial public
offering, the price and concessions and reallowances to dealers may be changed
by the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 375,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 2,500,000 shares to be purchased by
the Underwriters. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The Underwriters may purchase such shares only to cover over-
allotments made in connection with this Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities, under the
Securities Act, or will contribute to payments to the Underwriters may be
required to make in respect thereof.
Each director and officer of the Company and certain of other holders of
Common Stock prior to this Offering, as well as certain other holders of
options, warrants or other rights to purchase Common Stock, have agreed not to
sell, offer to sell, or otherwise dispose of any rights with respect to any
shares of Common Stock, any options or warrants to purchase Common Stock, or any
securities convertible or exchangeable for Common Stock, owned directly by such
holders or with respect to which they have power of disposition for a period of
180 days after the date of this Prospectus without the prior written consent of
Montgomery Securities. Montgomery Securities may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
these lock-up agreements. In addition, the Company has agreed not to sell, offer
to sell, contract to sell or otherwise sell or dispose of any shares of Common
Stock or any rights to acquire Common Stock, other than pursuant to the 1992
Plan, the Key Personnel Plan, the 1996 Plan, the Director Plan and the Purchase
Plan, upon exercise of outstanding options and warrants, for a period of 180
days after the Effective Date without the prior consent of Montgomery
Securities. See "Shares Eligible for Future Sale."
Montgomery Associates 1992, L.P. ("Montgomery Associates"), an affiliate of
Montgomery Securities, purchased 84,545 shares of the Company's Series D
Preferred Stock in an October 1996 financing. Montgomery Associates has agreed
not to sell, transfer, assign, pledge or hypothecate such shares for a period of
one year. The National Association of Securities Dealers has deemed that the
difference between the purchase price of those 84,545 shares and the initial
offering price of the Shares to be additional underwriting compensation.
56
<PAGE> 59
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations among the Company and the Representatives. Among
the factors to be considered in such negotiations will be the history of, and
prospects for, the Company and the industry in which it competes, an assessment
of the Company's management, the present state of the Company's development, the
prospects for future earnings of the Company, the prevailing market conditions
at the time of this Offering, market valuations of publicly traded companies
that the Company and the Representatives believe to be comparable to the
Company, and other factors deemed relevant. See "Risk Factors -- No Prior
Trading Market for Common Stock; Potential Volatility of Stock Price" and "Risk
Factors -- Dilution."
LEGAL MATTERS
The validity of the issuance of shares of Common Stock offered hereby will
be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C.
("WSGR"), Palo Alto, California. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. As of the date of
this Prospectus, Jeffrey D. Saper, a member of WSGR, is an Assistant Secretary
of the Company and beneficially owns 4,550 shares of the Company's Preferred
Stock.
EXPERTS
The consolidated financial statements of the Company as of March 31, 1995
and 1996 and September 30, 1996; for each of the years ended March 31, 1994,
1995 and 1996; and for the six months ended September 30, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of such firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 with respect to the shares of
Common Stock offered hereby, of which this Prospectus forms a part. In
accordance with the rules of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is made
to the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus concerning the provisions of such
documents are necessarily summaries of such documents and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission as an exhibit to the Registration Statement. Copies of
the Registration Statement and the exhibits and schedules thereto may be
inspected, without charge, at the offices of the Commission, or obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.
57
<PAGE> 60
8X8, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
8x8, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
8x8, Inc. and its subsidiaries at March 31, 1995 and 1996 and September 30, 1996
and the results of their operations and their cash flows for each of the three
years in the period ended March 31, 1996 and for the six-month period ended
September 30, 1996, 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
November 1, 1996, except for note 10, which is as of December 3, 1996.
F-2
<PAGE> 62
8X8, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1995 1996 1996
------- ------- -------------- PRO FORMA
SEPTEMBER 30,
1996
--------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 890 $ 4,652 $ 7,373 $ 8,863
Short-term investments.................................. 10,433 5,241 89 89
Accounts receivable, net................................ 2,652 2,951 1,662 1,662
Accounts receivable from related parties................ 543 628 140 140
Inventory............................................... 1,482 7,270 1,211 1,211
Income taxes receivable................................. 2,241 -- -- --
Prepaid expenses and other assets....................... 403 284 288 288
------- ------- ------- -------
Total current assets............................ 18,644 21,026 10,763 12,253
Property and equipment, net............................. 1,829 1,526 1,579 1,579
Deposits and other assets............................... 171 515 514 514
------- ------- ------- -------
$20,644 $23,067 $ 12,856 $ 14,346
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 1,754 $ 5,581 $ 388 $ 388
Accrued compensation.................................... 1,204 1,779 926 926
Accrued warranty........................................ 1,057 1,058 1,234 1,234
Other accrued liabilities............................... 1,132 1,741 953 953
Income taxes payable.................................... 1,514 1,534 1,534 1,534
------- ------- ------- -------
Total current liabilities....................... 6,661 11,693 5,035 5,035
------- ------- ------- -------
Commitments and contingencies (Notes 4 and 5)
Minority interest......................................... -- -- 70 70
------- ------- ------- -------
Stockholders' equity:
Preferred stock $0.001 par value; 5,411,820 shares
authorized actual; 5,000,000 shares authorized pro
forma (unaudited)....................................
Series A convertible preferred noncumulative stock,
$0.001 par value; 1,260,000 shares issued and
outstanding actual; none issued and outstanding pro
forma (unaudited).................................. 1 1 1 --
Series B convertible preferred noncumulative stock,
$0.001 par value; 1,100,000 shares issued and
outstanding actual; none issued and outstanding pro
forma (unaudited).................................. 1 1 1 --
Series C convertible preferred noncumulative stock,
$0.001 par value; 681,820 shares issued and
outstanding actual; none issued and outstanding pro
forma (unaudited).................................. 1 1 1 --
Series D convertible preferred noncumulative stock,
$0.001 par value; 413,640 shares issued and
outstanding actual; none issued and outstanding pro
forma (unaudited).................................. -- -- 1 --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 4,550,721, 4,782,021 and 6,968,975 shares
issued and outstanding actual; 10,695,348 shares
issued and outstanding pro forma (unaudited)......... 5 5 7 11
Additional paid-in capital.............................. 10,547 11,155 14,520 16,010
Notes receivable from stockholders...................... -- -- (1,078) (1,078)
Retained earnings/(accumulated deficit)................. 3,428 211 (5,702) (5,702)
------- ------- ------- -------
Total Stockholders' equity...................... 13,983 11,374 7,751 9,241
------- ------- ------- -------
$20,644 $23,067 $ 12,856 $ 14,346
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 63
8X8, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------- -----------------------
1994 1995 1996 1996
------- ------- ------- 1995 -------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Product revenues....................... $31,143 $17,943 $18,654 $ 9,872 $ 8,323
Product revenues from related
parties.............................. 3,258 1,986 2,037 -- --
Technology license revenues............ -- -- 6,333 500 1,752
Technology license revenues from
related parties...................... -- -- 1,750 1,750 --
------- ------- ------- ------- -------
Total revenues............... 34,401 19,929 28,774 12,122 10,075
Cost of product revenues............... 19,469 11,904 16,668 7,925 9,207
------- ------- ------- ------- -------
Gross profit........................... 14,932 8,025 12,106 4,197 868
------- ------- ------- ------- -------
Operating expenses:
Research and development............. 6,540 8,107 7,714 3,997 3,992
Selling, general and
administrative.................... 8,149 6,445 7,938 3,378 2,711
Restructuring costs.................. -- -- 603 603 59
------- ------- ------- ------- -------
Total operating expenses..... 14,689 14,552 16,255 7,978 6,762
------- ------- ------- ------- -------
Income (loss) from operations.......... 243 (6,527) (4,149) (3,781) (5,894)
Other income, net...................... 189 611 952 80 127
------- ------- ------- ------- -------
Income (loss) before taxes............. 432 (5,916) (3,197) (3,701) (5,767)
Provision (benefit) for income taxes... 780 (35) 20 -- 146
------- ------- ------- ------- -------
Net loss............................... $ (348) $(5,881) $(3,217) $(3,701) $(5,913)
======= ======= ======= ======= =======
Pro forma net loss per share
(unaudited).......................... $ (0.28) $ (0.32) $ (0.50)
======= ======= =======
Shares used in pro forma per share
calculations (unaudited)............. 11,654 11,585 11,800
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 64
8X8, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK
--------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D COMMON STOCK ADDITIONAL
----------------- ----------------- ----------------- ----------------- ----------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1993............... 1,260,000 $ 1 1,100,000 $ 1 -- $ -- -- $ -- 4,579,189 $ 5 $ 3,009
Issuance of common
stock upon exercise
of options......... -- -- -- -- -- -- -- -- 4,983 1 7
Repurchase of common
stock.............. -- -- -- -- -- -- -- -- (40,985) (1) (3)
Payment received on
notes receivable
from
Stockholders....... -- -- -- -- -- -- -- -- -- -- --
Net loss............. -- -- -- -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March 31,
1994............... 1,260,000 1 1,100,000 1 -- -- -- -- 4,543,187 5 3,013
Issuance of common
stock upon exercise
of options......... -- -- -- -- -- -- -- -- 14,199 -- 35
Repurchase of common
stock.............. -- -- -- -- -- -- -- -- (6,665) -- --
Issuance of Series C
convertible
preferred
noncumulative
stock.............. -- -- -- -- 681,820 1 -- -- -- -- 7,499
Net loss............. -- -- -- -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March 31,
1995............... 1,260,000 1 1,100,000 1 681,820 1 -- -- 4,550,721 5 10,547
Issuance of common
stock upon exercise
of options......... -- -- -- -- -- -- -- -- 246,389 1 609
Repurchase of common
stock.............. -- -- -- -- -- -- -- -- (15,089) (1) (1)
Net loss............. -- -- -- -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March 31,
1996............... 1,260,000 1 1,100,000 1 681,820 1 -- -- 4,782,021 5 11,155
Issuance of common
stock upon exercise
of options......... -- -- -- -- -- -- -- -- 2,166,954 2 1,080
Issuance of common
stock.............. -- -- -- -- -- -- -- -- 20,000 -- 10
Issuance of Series D
convertible
preferred
non-cumulative
stock.............. -- -- -- -- -- -- 413,640 1 -- -- 2,275
Net loss............. -- -- -- -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at September
30, 1996........... 1,260,000 $ 1 1,100,000 $ 1 681,820 $ 1 413,640 $ 1 6,968,975 $ 7 $ 14,520
========= ==== ========= ==== ========= ==== ========= ==== ========= ==== =======
<CAPTION>
NOTES
RECEIVABLE
FROM RETAINED
STOCKHOLDERS EARNINGS TOTAL
------------ -------- -------
<S> <C> <C> <C>
Balance at March 31,
1993............... $ (7) $ 9,657 $12,666
Issuance of common
stock upon exercise
of options......... -- -- 8
Repurchase of common
stock.............. -- -- (4)
Payment received on
notes receivable
from
Stockholders....... 7 -- 7
Net loss............. -- (348 ) (348)
------ ------- -------
Balance at March 31,
1994............... -- 9,309 12,329
Issuance of common
stock upon exercise
of options......... -- -- 35
Repurchase of common
stock.............. -- -- --
Issuance of Series C
convertible
preferred
noncumulative
stock.............. -- -- 7,500
Net loss............. -- (5,881 ) (5,881)
------ ------- -------
Balance at March 31,
1995............... -- 3,428 13,983
Issuance of common
stock upon exercise
of options......... -- -- 610
Repurchase of 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......... (1,078) -- 4
Issuance of common
stock.............. -- -- 10
Issuance of Series D
convertible
preferred
non-cumulative
stock.............. -- -- 2,276
Net loss............. -- (5,913 ) (5,913)
------ ------- -------
Balance at September
30, 1996........... $ (1,078) $(5,702 ) $ 7,751
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 65
8X8, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------- ---------------------
1994 1995 1996 1995 1996
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (348) $(5,881) $(3,217) $(3,701) $(5,913)
Adjustments to reconcile net loss to net cash
provided by (used in) operating
activities:
Depreciation and amortization............. 1,091 1,000 775 300 412
Loss on disposition of capital
equipment............................... -- -- 541 541 --
Deferred income taxes..................... 287 1,905 -- -- --
Other..................................... -- -- -- -- 18
Changes in assets and liabilities:
Accounts receivable, net................ 96 663 (384) 577 1,777
Inventory............................... 1,172 3,264 (5,788) 126 6,059
Income taxes receivable................. -- (2,241) 2,241 2,241 --
Prepaid expenses and other assets....... 322 114 175 (635) (3)
Accounts payable........................ (1,389) (1,704) 3,827 100 (5,193)
Accrued compensation.................... 194 133 575 (193) (853)
Accrued warranty........................ (267) (641) 1 (452) 176
Other accrued liabilities............... (1,960) (891) 609 57 (788)
Income taxes payable.................... 1,081 185 20 -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities............... 279 (4,094) (625) (1,039) (4,308)
------- ------- ------- ------- -------
Cash flows from investing activities:
Acquisitions of property and equipment....... (451) (1,492) (1,013) (136) (465)
Proceeds from the sale of equipment.......... -- 138 -- -- --
Sales of short-term investments -- available
for sale.................................. 5,442 16,681 21,711 11,464 5,168
Purchases of short-term
investments -- available for sale......... -- (27,114) (16,583) (9,268) --
Sales of short-term investments -- trading... -- -- 11,216 62 25
Purchases of short-term
investments -- trading.................... -- -- (11,152) (113) (41)
Purchase of other investments................ -- -- (400) -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities............... 4,991 (11,787) 3,779 2,009 4,687
------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred non-cumulative stock, net....... -- 7,500 -- -- 2,276
Proceeds from issuance of common stock,
net....................................... 4 35 608 36 14
Payments received on stockholders' notes
receivable................................ 7 -- -- -- --
Proceeds from minority interest in
subsidiary................................ -- -- -- -- 52
------- ------- ------- ------- -------
Net cash provided by financing
activities......................... 11 7,535 608 36 2,342
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................. 5,281 (8,346) 3,762 1,006 2,721
Cash and cash equivalents beginning of
period....................................... 3,955 9,236 890 890 4,652
------- ------- ------- ------- -------
Cash and cash equivalents end of period........ $ 9,236 $ 890 $ 4,652 $ 1,896 $ 7,373
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 66
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 as Integrated Information Technology, Inc. and formally changed its name to
8x8, Inc. on April 5, 1996. The Company develops, manufactures, and markets
high-performance multimedia processors focusing on highly integrated silicon
compression and decompression devices for video phones and video conferencing.
FISCAL YEAR
The Company's fiscal year ends on the Thursday closest to March 31. Prior
to the fiscal year ended March 28, 1996, the Company's fiscal year ended on
March 31. The six month periods ended September 26 each included 26 weeks of
operations. For purposes of these consolidated financial statements, the Company
has indicated its fiscal year as ending on March 31 and its interim periods as
ending on September 30.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. All significant inter-company
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 equipment manufacturers and other end users
are recognized upon shipment. Technology license revenues are generally
recognized upon the delivery of the licensed technology provided no significant
future obligations exist and collection is probable. Revenues generated by sales
to distributors under agreements allowing certain rights of return are deferred
for financial reporting purposes until the products are sold by the
distributors. Revenues generated by sales to distributors when no rights of
return exist 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.
Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities." The cumulative effect as of April 1, 1994, of
adopting SFAS 115 was immaterial. On March 31, 1996 and September 30, 1996, the
Company classified its investments subject to SFAS 115 either as
available-for-sale or as trading. On March 31, 1995, the Company's investments
were classified as available-for-sale. The cost of the Company's investments are
determined based on 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, 1995 and 1996, the fair value of the Company's investments
classified as available-for-sale approximated cost. The investments classified
as trading are reported at fair value with realized and unrealized gains and
losses from investments subject to SFAS 115 being reported in
F-7
<PAGE> 67
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the statement of operations. At March 31, 1996 and September 30, 1996, the fair
value of the Company's investments classified as trading approximated cost.
Realized and unrealized gains and losses were immaterial for the years ended
March 31, 1995 and 1996 and the six months ended September 30, 1996. 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, 1995 and 1996, the Company's investments were primarily comprised of
commercial paper with a maturity of less than 12 months. The cost and fair value
of investments classified as trading were not material at March 31, 1996 and
September 30, 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 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.
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:
<TABLE>
<S> <C>
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
</TABLE>
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 material. Total assets of the
Company's foreign subsidiary were $247,000, $320,000, $479,000, and $335,000 as
of March 31, 1994, 1995 and 1996 and September 30, 1996, respectively. The
Company does not undertake any foreign currency hedging activities.
F-8
<PAGE> 68
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Income taxes are accounted for using the asset and liability approach.
Under the asset and liability approach, a current tax liability or asset is
recognized for the estimated taxes payable or refundable on tax returns for the
current year. A deferred tax liability or asset is recognized for the estimated
future tax effects attributed to temporary differences and carry forwards. The
deferred tax assets are reduced, if necessary, 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, certificates of deposit, U.S. Treasury bonds and commercial paper. The
Company, by policy, limits the amount of credit exposure for cash and cash
equivalents to any one financial institution and to any one debt or equity
instrument. The Company sells its products to original equipment manufacturers
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, 1996 three customers accounted for 26%, 18%
and 11% of accounts receivable. At September 30, 1996 two customers accounted
for 36% and 12% of accounts receivable.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share is computed using the weighted average number
of common and common equivalent shares outstanding during the periods assuming
the conversion of all shares of the Company's Convertible Preferred Stock into
Common Stock which will occur upon the consummation of the offering. Pursuant to
the requirements of the Securities and Exchange Commission, common equivalent
shares relating to preferred stock (using the if-converted method) and stock
options (using the treasury stock method and assuming an initial public offering
price of $9 per share) issued subsequent to September 30, 1995 have been
included in the computations for all periods presented.
Historical net loss per share data has not been presented since such
amounts are not deemed to be meaningful due to the significant change in the
Company's capital structure which will occur in connection with the offering.
PRO FORMA BALANCE SHEET (UNAUDITED)
During October 1996, the Company issued 270,913 shares of Series D
convertible preferred stock and received cash of approximately $1,490,000 (see
Note 10). If the offering contemplated by this prospectus (the "Offering") is
consummated, all shares of convertible preferred stock outstanding at the
closing date will automatically convert into an aggregate of 3,726,373 shares of
Common Stock.
The pro forma effect of the above mentioned transactions has been reflected
in the accompanying unaudited pro forma balance sheet as of September 30, 1996.
INTERIM RESULTS (UNAUDITED)
The accompanying statements of operations and of cash flows for the six
months ended September 30, 1995 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the results for the interim
period. The data disclosed in these notes to consolidated financial statements
related to this period are unaudited.
F-9
<PAGE> 69
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER
----------------- 30,
1995 1996 1996
------- ------- -----------
<S> <C> <C> <C>
Accounts receivable:
Accounts receivable.................................. $ 3,049 $ 3,471 $ 2,108
Less: allowance for doubtful accounts............. (397) (520) (446)
------- ------- -------
$ 2,652 $ 2,951 $ 1,662
======= ======= =======
Inventories:
Raw materials........................................ $ 216 $ 262 $ 140
Work-in-process...................................... 578 6,231 784
Finished goods....................................... 688 777 287
------- ------- -------
$ 1,482 $ 7,270 $ 1,211
======= ======= =======
Property and equipment:
Machinery and computer equipment..................... $ 4,073 $ 4,005 $ 3,751
Furniture and fixtures............................... 703 729 750
Licensed software.................................... 1,521 1,782 2,156
Leasehold improvements............................... 499 532 554
------- ------- -------
6,796 7,048 7,211
Less: accumulated depreciation and amortization...... (4,967) (5,522) (5,632)
------- ------- -------
$ 1,829 $ 1,526 $ 1,579
======= ======= =======
</TABLE>
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES:
During fiscal 1995, the Company issued 681,820 shares of Series C Preferred
Stock to a major semiconductor manufacturer for $11.00 per share (see Note 6).
This transaction resulted in the other company obtaining a seat on 8x8's Board
of Directors. In addition, the Company entered into three agreements with this
company. Two of these agreements involved the joint development and production
of specific products and the third was a supply agreement under which 8x8 had
reserved a specific level of production capacity at the other company's
fabrication facilities and was obligated to make certain minimum purchases on a
monthly basis. All three agreements were terminated by mutual agreement between
the parties in fiscal 1996. The Company recognized, during fiscal 1995, contract
revenue and related costs under these agreements of $294,000 and $229,000,
respectively. Also, the Company purchased $868,000 in inventory from this
stockholder during 1995. Accounts receivable from this stockholder were $252,000
at March 31, 1995.
During the years ended March 31, 1995 and 1996 and the six months ended
September 30, 1996, the Company's product revenues included $897,000, $2,037,000
and $959,000, respectively, in sales to a company which is one of the Company's
stockholders. An executive of this company is also on the Company's Board of
Directors. Accounts receivable from this stockholder aggregated $245,000,
$628,000 and $140,000 at March 31, 1995 and 1996 and September 30, 1996,
respectively.
During the years ended March 31, 1994 and 1995, the Company sold $3,258,000
and $795,000, respectively, of product to one of its stockholders. The
stockholder is also the guarantor of the Company's facility lease (see Note 5).
During fiscal 1994, the Company paid $940,000 to two related entities 100%
owned by a founder and officer of the Company for various marketing, sales and
distribution and research and development activities undertaken on behalf of the
Company. Besides providing certain marketing and research and development
services to 8x8, these entities did not have any other operations or activities.
At March 31, 1994, the Company
F-10
<PAGE> 70
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
purchased all assets and assumed all liabilities of these companies at a nominal
purchase price of $1. The assets acquired and liabilities assumed were not
material to the Company.
During fiscal 1996, the Company licensed certain technologies to a
privately held entity founded by one of 8x8's former officers, in exchange for
$600,000 in cash and 10% ownership of this entity. This entity was subsequently
acquired by another entity and the Company received $727,000 for its 10%
interest. The gain on sale of the stock has been included in other income, net
during fiscal 1996.
During fiscal 1996, the Company licensed certain technologies to a
privately held semiconductor company founded by another of 8x8's former
officers, in exchange for $1,000,000 in cash and 10% ownership in that company.
During fiscal 1996, the Company acquired for cash approximately 14% of the
outstanding voting stock of a privately held company. The Company is accounting
for this investment on the cost method.
In April 1996, the Company and certain of its employees formed VidUs, Inc.
("VidUs"). The Company paid $158,000 for a 75% ownership in VidUs and the
employees paid $52,000 for a 25% ownership. VidUs is engaged in the design of
integrated camera and video compression solutions. VidUs has been consolidated
in the Company's financial statements since inception.
NOTE 4 -- INCOME TAXES:
Income (loss) before income taxes includes $50,000, $62,000, $51,000, and
$31,000 of income of a foreign subsidiary for the fiscal years ended March 31,
1994, 1995 and 1996 and the six months ended September 30, 1996, respectively.
The components of the consolidated provision (benefit) for income taxes
consisted of the following (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED MARCH 31, ENDED
------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Current:
Federal............................... $ 170 $(1,962) $ -- $ --
State................................. 14 -- -- --
Foreign............................... 19 22 20 146
---- ------- --- ----
203 (1,940) 20 146
---- ------- --- ----
Deferred:
Federal............................... (49) 1,905 -- --
State................................. 626 -- -- --
---- ------- --- ----
577 1,905 -- --
---- ------- --- ----
$ 780 $ (35) $ 20 $ 146
==== ======= === ====
</TABLE>
F-11
<PAGE> 71
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER
------------------- 30,
1995 1996 1996
------- ------- -----------
<S> <C> <C> <C>
Deferred revenue................................... $ 324 $ 85 $ 79
Inventory reserves................................. 1,291 1,543 1,102
Section 263A adjustments........................... 61 292 95
Provision for doubtful accounts.................... 168 220 177
Warranty reserve................................... 223 449 488
Research and development........................... 957 1,200 1,270
NOL carry forwards................................. -- 594 3,038
Other.............................................. 331 386 705
------- ------- ---------
3,355 4,769 6,954
Valuation allowance................................ (3,355) (4,769) (6,954)
------- ------- ---------
Total.................................... $ -- $ -- $ --
======= ======= =========
</TABLE>
Based on factors which include the lack of significant history of recent
profits, the fact that the market in which the Company competes is intensely
competitive and characterized by rapidly changing technology, and the lack of
carryback capacity to realize these assets, the weight of 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
September 30, 1996.
At September 30, 1996, the Company had approximately $7,500,000 of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards expire at various dates beginning
2011. In addition, at September 30, 1996, the Company had research and
development credit carryforwards for federal and state tax reporting purposes of
approximately $446,000 and $824,000, respectively, which begin expiring in 2010.
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 September 30, 1996, the net operating loss carry forwards of the
Company were not subject to any material annual limitations.
A reconciliation of the tax provision (benefit) to the amounts computed
using the statutory U.S. federal income tax rate of 34% is as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED MARCH 31, ENDED
--------------------------- SEPTEMBER 30,
1994 1995 1996 1996
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Provision (benefit) at statutory rate......... $ 147 $(2,012) $(1,087) $(1,988)
State income taxes before valuation allowance,
net of federal benefit...................... 24 (328) (177) (143)
Research and development credits.............. (591) (366) (243) (70)
Valuation allowance........................... 1,048 2,307 1,414 2,185
Other......................................... 152 364 113 162
------ ------- ------- -------
Provision (benefit) for income taxes.......... $ 780 $ (35) $ 20 $ 146
====== ======= ======= =======
</TABLE>
The Internal Revenue Service (the "IRS") is currently conducting an
examination of the Company's federal income tax return for the fiscal year ended
March 31, 1992. In August 1995, the IRS asserted a deficiency against the
Company for the taxable year 1992 in the amount of approximately $1,365,000,
together
F-12
<PAGE> 72
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 has not made
any payments under this assessment. On October 30, 1995, in accordance with IRS
procedures, the Company formally protested this assessment. The Company has not
received an official response from the IRS to this protest. The outcome of this
matter cannot be predicted. In the event that the IRS prevails, the Company will
have to make cash payments for the amount of the deficiency, penalty and accrued
interest. However, any adverse outcome of this assessment is not likely to
impact the Company's tax position on this matter for any other fiscal year.
Additionally, the IRS has requested information related to the Company's federal
tax returns for fiscal year 1995. The IRS has disclosed to the Company that the
purpose of this request was to gain information regarding the economic
circumstances underlying the Company's loss for the year ended March 31, 1995.
NOTE 5 -- LEASES AND OTHER COMMITMENTS:
LEASES
The Company leases its facility under a non-cancelable operating lease
agreement. This agreement provides for annual increments of rent in
predetermined amounts, requires the Company to pay property taxes, insurance and
normal maintenance costs and expires in December 1997 with an option to extend
the lease for an additional five-year period. The lease has been partially
guaranteed by a corporate stockholder of the Company.
For accounting purposes, the rent expense for the facility lease is based
on straight-line amortization of the total minimum payments required over the
lease term. Rent expense so recognized before its payment due date amounted to
$265,000, $192,000 and $145,000 at March 31, 1995 and 1996 and September 30,
1996, respectively, and is included in "Other accrued liabilities."
Future minimum lease payments under this non-cancelable operating lease
(inclusive of the aforementioned deferred rent) as of September 30, 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------------
<S> <C>
1997........................................................................ $ 412
1998........................................................................ 612
------
Total minimum payments...................................................... $1,024
======
</TABLE>
Rent expense for all operating leases for the years ended March 31, 1994,
1995 and 1996 and the six months ended September 30, 1996 was $574,000,
$776,000, $767,000 and $356,000, respectively.
OTHER COMMITMENTS
As of March 31, 1996, the Company had an outstanding letter of credit in
the amount of $435,000 which expired on August 15, 1996 and was secured by
certain of the Company's short-term investments.
NOTE 6 -- STOCKHOLDERS' EQUITY:
PREFERRED STOCK
As of September 30, 1996, the Company had issued 3,455,460 shares of
non-cumulative, convertible preferred stock, of which 1,260,000 shares,
1,100,000 shares, 681,820 and 413,640 shares have been designated as Series A,
B, C and D, respectively. The Series A, B, C and D preferred stock were sold for
$0.50, $2.00, $11.00 and $5.50 per share, respectively, representing fair market
value of the stock at the date of issuance, as determined by the Board of
Directors.
F-13
<PAGE> 73
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Each share of preferred stock is convertible into one share of common
stock, subject to adjustment for dilution, and will be automatically converted
into common stock in the event of the closing of an underwritten public offering
of at least $5,000,000. The preferred stock has voting rights equal to common
stock on an as-if converted basis.
Holders of the Series A, B, C and D preferred stock are entitled to receive
noncumulative dividends at a rate of $0.05, $0.20, $1.10 and $0.55 per share per
annum, respectively, when and as declared by the Board of Directors, prior to
payment of dividends on common stock.
In the event of liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, holders of the Series A, B, C and D preferred
stock shall be entitled to receive $0.50, $2.00, $11.00 and $5.50 per share,
respectively, plus any declared but unpaid dividends, prior to any distribution
to the holders of common stock. To date, no dividends have been declared.
The Company has reserved 3,455,460 shares of its common stock for issuance
upon conversion of the outstanding preferred stock.
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 years ended March 31, 1994, 1995 and 1996, unvested
shares aggregating 40,985, 6,665 and 15,089, respectively, were repurchased at
prices ranging from $0.10 to $0.40 per share. In January 1992, on termination,
all unissued shares under the 1987 Plan were canceled. At September 30, 1996,
all shares of common stock purchased under the 1987 Plan were fully vested.
F-14
<PAGE> 74
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 common stock reserved for issuance under
the 1992 Plan to 2,000,000 shares. The 1992 Plan provides for granting incentive
and non-statutory stock options to employees at prices equal to the fair market
value of stock at the grant dates as determined by the Company's Board of
Directors. Options generally vest over periods ranging from two to four years.
Vesting for certain options accelerates, if certain predefined milestones are
met. The following is a summary of the activity under the 1992 Stock Option Plan
during the fiscal years ended March 31, 1994, 1995 and 1996 and the six months
ended September 30, 1996:
<TABLE>
<CAPTION>
OPTIONS SHARES SUBJECT EXERCISE
AVAILABLE TO OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- -------------- ------------
<S> <C> <C> <C>
Balance at March 31, 1993....................... 381,167 616,550 $1.00-$2.50
Granted......................................... (226,800) 226,800 $2.50
Exercised....................................... -- (4,983) $1.00-$2.50
Returned to plan................................ 51,017 (51,017) $1.00-$2.50
----------- ----------- -----------
Balance at March 31, 1994....................... 205,384 787,350 $1.00-$2.50
Increase in options available for grant......... 1,000,000 --
Granted......................................... (423,367) 423,367 $2.50
Exercised....................................... -- (14,199) $2.50
Returned to plan................................ 98,168 (98,168) $1.00-$2.50
----------- ----------- -----------
Balance at March 31, 1995....................... 880,185 1,098,350 $1.00-$2.50
Granted......................................... (1,422,550) 1,422,550 $2.50
Exercised....................................... -- (203,264) $1.00-$2.50
Returned to plan................................ 861,879 (861,879) $1.00-$2.50
----------- ----------- -----------
Balance at March 31, 1996....................... 319,514 1,455,757 $1.00-$2.50
Granted......................................... (1,662,112) 1,662,112 $0.50-$2.50
Exercised....................................... -- (9,907) $0.50-$2.50
Returned to plan................................ 1,725,887 (1,725,887) $0.50-$2.50
----------- ----------- -----------
Balance at September 30, 1996................... 383,289 1,382,075 $0.50
=========== =========== ===========
Options exercisable at September 30, 1996....... -- 223,114 $0.50
</TABLE>
F-15
<PAGE> 75
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
KEY PERSONNEL OPTION PLAN
In July 1995, the Board of Directors adopted the Key Personnel Option Plan
(the Key Personnel Plan) and reserved 2,000,000 shares of the Company's common
stock for issuance under this plan. The 1995 Key Personnel Plan provides for
granting incentive and non-statutory stock options to Officers of the Company at
prices equal to fair market value of stock at the grant dates as determined by
the Company's Board of Directors. Options generally vest over periods ranging
from two to four years. Vesting for certain options accelerates if certain
predefined milestones are met. The following is a summary of the activity under
the Key Personnel Stock Option Plan since inception:
<TABLE>
<CAPTION>
OPTIONS SHARES SUBJECT EXERCISE
AVAILABLE TO OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- -------------- ------------
<S> <C> <C> <C>
Adoption of plan................................ 2,000,000 -- $2.50
Granted......................................... (1,551,000) 1,551,000 $2.50
Exercised....................................... -- (43,125) $2.50
Returned to plan................................ 402,875 (402,875) $2.50
---------- ---------- -----------
Balance at March 31, 1996....................... 851,875 1,105,000 $2.50
Increase in options available for grant......... 200,000 -- $0.50
Granted......................................... (2,206,800) 2,206,800 $0.50-$2.50
Exercised....................................... -- (2,156,800) $0.50
Returned to plan................................ 1,155,000 (1,155,000) $2.50
---------- ---------- -----------
Balance at September 30, 1996................... 75 -- --
========== ========== ===========
</TABLE>
During the six months ended September 30, 1996, options to purchase
2,156,800 shares were exercised for partial recourse notes. At September 30,
1996, approximately 1,516,000 shares issued under this plan were not vested.
In June 1996, in connection with restructuring of the Company's operations,
the Board of Directors approved a proposal under which employees could elect to
cancel their options in exchange for grants of new options with exercise price
of $0.50, which was the fair value of the Company's common stock at that time.
The Company has obtained an independent appraisal to support the June 1996 fair
market value determination of $0.50 by the Board of Directors. Options for the
purchase of approximately 2,467,000, shares of the 1992 Plan and the Key
Personnel Plan were canceled in exchange for newly issued options to purchase an
equal number of shares.
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.
This amount is to be increased annually on the first day of each of the
Company's fiscal years commencing November 1, 1997 in an amount equal to 5% of
the Company's common stock issued and outstanding at the end of the immediately
preceding fiscal year subject to certain maximum limitations. 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
F-16
<PAGE> 76
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company's Board of Directors. Options generally vest over a period of not
more than five years. The following is a summary of the activity of the 1996
Plan during the six months ended September 30, 1996:
<TABLE>
<CAPTION>
SHARES EXERCISE
OPTIONS SUBJECT PRICE
AVAILABLE TO OPTIONS PER
FOR GRANT OUTSTANDING SHARE
--------- ----------- --------
<S> <C> <C> <C>
Adoption of plan................................ 1,000,000 -- --
Granted......................................... (171,150) 171,150 $0.50
Exercised....................................... -- (247) $0.50
Returned to plan................................ 9,191 (9,191) $0.50
--------- ------- -----
Balance at September 30, 1996................... 838,041 161,712 $0.50
========= ======= =====
Options exercisable at September 30, 1996....... -- 7,420 $0.50
</TABLE>
1996 DIRECTOR OPTION PLAN
The Company's 1996 Director Option Plan (the Director Plan) was adopted in
June 1996 and will become effective upon the closing of an initial public
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
(Outside Directors). The Director Plan provides that each Outside Director shall
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 shall 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 shall have served on the
Company's Board of Directors for at least six months. The Director Plan provides
that each option shall 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 shall 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.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Stock Purchase Plan (the Purchase Plan) was adopted in
June 1996 and will become effective upon the closing of an initial public
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.
The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 10% of an employee's base
compensation, including commissions, bonuses and overtime, at a price equal to
85% of the fair market value of the common stock at the beginning of each
offering period or the end of a six month purchase period, whichever is lower.
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.
CERTAIN PRO FORMA DISCLOSURES
The Company accounts for its employee stock option plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
F-17
<PAGE> 77
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Compensation" which established a fair value based method of accounting for
employee stock option plans. Had compensation cost for the Company's option
plans been determined based on the fair value at the grant dates, as prescribed
in FAS 123, the Company's net loss and pro forma net loss per share would have
been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
1996 1996
----------- -------------
<S> <C> <C>
Net loss:
As reported............................................. $(3,217,000) $ (5,913,000)
Pro forma............................................... (3,517,000) (6,248,000)
Pro forma net loss per share:
As reported............................................. $ (0.28) $ (0.50)
Adjusted pro forma...................................... (0.30) (0.52)
</TABLE>
For the purposes of above noted FAS 123 pro forma disclosures the fair
value of each option grant has been estimated on the date of grant using the
minimum value method with the following assumptions used for grants during the
applicable period: dividend yield of 0.0% for both periods: risk-free interest
rates of 5.1% to 6.7% for options granted during the year ended March 31, 1996
and 5.7% to 6.5% for options granted during the six months ended September 30,
1996; and a weighted average expected option term of five years for both
periods.
Because the determination of the fair value of all options granted after
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding paragraph and, because
additional option grants are expected to be made each year, the above pro forma
disclosures are not representative of pro forma effects on reported net loss for
future years.
NOTE 7 -- EMPLOYEE BENEFITS PLANS:
401(K) SAVINGS PLAN
In April 1991, the Company adopted a 401(k) savings plan ("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 with the Company matching participants'
contributions up to $300 per employee per year at a dollar for dollar rate of
the employee contribution. The Company matching vests over 3 years. To date, the
Company's contributions have not been material.
PROFIT SHARING PLAN
In July 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 is
effective beginning in fiscal 1996 and provides for payments of up to 15% of
total quarterly income before income taxes. Additionally the plan provides for
payment of certain discretionary bonuses based on criterion established by
management. Charges related to this plan were not material for the fiscal year
ended March 31, 1996 or the six months ended September 30, 1996.
NOTE 8 -- GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION:
The Company's export sales to Europe represented 21%, 26%, 17% and 23% of
total revenues in fiscal years 1994, 1995, 1996 and the six months ended
September 30, 1996. The Company's export sales to the Asia Pacific region
represented less than 10% of total revenues in 1994, 14% of total revenues in
1995, 32% of total revenues in 1996, and 39% of total revenues in the six months
ended September 30, 1996.
F-18
<PAGE> 78
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Product sales to two different customers accounted for approximately 23%
and 13%, of the Company's total revenues for the years ended March 31, 1994 and
1995, respectively. During the year ended March 31, 1996 and the six months
ended September 30, 1996 product sales to no customer accounted for 10% or more
of the Company's total revenues. License revenues from two different customers
accounted for approximately 24% and 10% of the Company's total revenues for the
year ended March 31, 1996 and the six months ended September 30, 1996,
respectively.
NOTE 9 -- RESTRUCTURING COSTS AND INVENTORY CHARGES:
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 fiscal 1997, the Company recorded an additional charge for
restructuring its operations by reducing its workforce by approximately 25%. As
of September 30, 1996, the Company's restructuring actions were fully completed
and there were no outstanding restructuring cost accruals.
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.
NOTE 10 -- SUBSEQUENT EVENTS:
During October 1996, the Company issued an additional 270,913 shares of
Series D Preferred Stock for cash proceeds of approximately $1,490,000.
DELAWARE REINCORPORATION
On December 3, 1996, the Company was reincorporated in Delaware and
exchanged each series of stock of the predecessor company into 1 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.
On October 21, 1996 the Company's Board of Directors approved that
effective upon the closing of the initial public offering, the Company will be
authorized to issue five million shares of undesignated Preferred Stock, and the
Board of Directors will have the authority to issue the undesignated Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof.
F-19
<PAGE> 79
APPENDIX -- DESCRIPTION OF GRAPHICS
OUTSIDE FRONT COVER
Graphic: 8x8, Inc. logo.
INSIDE FRONT COVER
The graphic heading reads "Silicon, software and systems for video
conferencing." Underneath this heading, and to the left, there is a picture of a
prototype of the Company's VideoCommunicator product, the VC100, currently under
development. To the right of this picture is the following text: "8x8 is
developing a family of VideoCommunicator products. The initial
VideoCommunicator, the VC100, is compliant with the H.324 standard for POTS
video telephony and connects to a television and touch-tone phone to add video
to an otherwise normal telephone call." Underneath the heading, and to the
right, there is a picture of the Company's VCP and LVP semiconductor products.
To the left of this picture is the following text: "8x8's video compression
semiconductors combine, on a single chip, a RISC microprocessor, a digital
signal processor, specialized video processing circuitry, static RAM memory and
proprietary software to perform the real time compression and decompression of
video and audio information and establish and maintain network connections in a
manner consistent with international standards for video telephony." Underneath
this picture on the left are two pictures demonstrating the use of the Company's
planned VideoCommunicator product, the VC100 with a man at one location and a
man and woman at the other location. Underneath the picture on the right are two
pictures demonstrating the use of video conferencing products.
Underneath these four pictures is the following text: "8x8, Inc. designs,
develops and markets highly integrated, proprietary video compression
semiconductors and associated software to manufacturers of corporate video
conferencing systems. To address new opportunities, the Company intends to
leverage its strengths in semiconductor design and related software by
introducing video conferencing systems for the consumer market."
OUTSIDE BACK COVER
Graphic: 8x8, Inc. logo.
<PAGE> 80
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations in connection with this Offering
other than those contained in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any of the Underwriters. This Prospectus does not constitute
an offer to sell or a solicitation of any offer to buy any securities other than
the shares of Common Stock to which it relates or an offer to, or a solicitation
of, any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company or that information contained herein is
correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 26
Management............................ 38
Certain Transactions.................. 47
Principal Stockholders................ 49
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 53
Underwriting.......................... 55
Legal Matters......................... 56
Experts............................... 56
Additional Information................ 56
Index to Financial Statements......... F-1
</TABLE>
Until , 199 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,500,000 SHARES
LOGO
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
MONTGOMERY SECURITIES
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
the Common Stock being registered hereby. All amounts are estimates except the
SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY
REGISTRANT
------------
<S> <C>
SEC Registration Fee................................................... $ 8,712
NASD Filing Fee........................................................ 3,375
Nasdaq National Market Application Fee................................. 50,000
Printing............................................................... 125,000
Legal Fees and Expenses................................................ 275,000
Accounting Fees and Expenses........................................... 180,000
Blue Sky Fees and Expenses............................................. 10,000
Director and Officer Liability Insurance............................... 350,000
Custodial Fees......................................................... 2,500
Transfer Agent and Registrar Fees...................................... 5,000
Miscellaneous.......................................................... 40,413
--------
Total........................................................ $1,050,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article Ten of the Registrant's Certificate
of Incorporation (Exhibit 3.1 hereto) and Article VI of the Registrant's Bylaws
(Exhibit 3.3 hereto) provide for indemnification of the Registrant's directors,
officers, employees and other agents to the maximum extent permitted by Delaware
Law. In addition, the Registrant has entered into Indemnification Agreements
(Exhibit 10.1 hereto) with its officers and directors. The Underwriting
Agreement (Exhibit 1.1) also provides for crossindemnification among the Company
and the Underwriters with respect to certain matters, including matters arising
under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September 30, 1993, the Registrant has issued and sold the following
unregistered securities:
1. Between March 3, 1994 and June 26, 1996, the Registrant sold an
aggregate of 214,921 shares of Common Stock at a price of $2.50 per share for an
aggregate purchase price of $537,302.50 to the following stockholders pursuant
to the exercise of an option granted under the Registrant's 1992 Stock Option
Plan: 183 shares to Maria Balicka; 150 shares to Yu-Chuan Liu; 83 shares to
Aaron Emigh; 600 shares to Amit Gulati; 8,000 shares to David Laws; 125 shares
to Kathleen Hassett; 441 shares to Norman Duong; 600 shares to Leslie Jan; 4,200
shares to Faisal Khan; 200 shares to Laura Stansfield; 1,900 shares to Xiaolin
(Richard) Tang; 177 shares to Henry Hao-jan Tung; 538 shares to Deborah Rudd;
867 shares to Chiao-er Allisa Lee; 1,642 shares to Dong Ha Lim; 1,300 shares to
Clyde Wright; 980 shares to Wen-Huei Adam Wang; 90,000 shares to Chi-Shin Wang;
1,042 shares to Duat Hoang Tran; 50 shares to Manu Gulati; 20,000 shares to Mark
Birman; 4,000 shares to Brett Coon; 68,333 shares to Richard Johnson; 850 shares
to Hay-Pang Stephen Leung; 600 shares to Ekman Tsang; 418 shares to Joanna Liu;
1,000 shares to Dawn Wang; 2,925 shares to
II-1
<PAGE> 82
Arijanto Soemedi; 2,042 shares to Sehat Sutardja; 100 shares to Peter Kong; and
1,575 shares to Robin Chirico.
2. Between February 24, 1994 and November 21, 1995, the Registrant sold an
aggregate of 12,100 shares of Common Stock at a price of $1.00 per share for an
aggregate purchase price of $12,100 to the following stockholders pursuant to
the exercise of an option granted under the Registrant's 1992 Stock Option Plan:
2,500 shares to Sydney Lee; 5,200 shares to Sergio Golombek; and 4,400 shares to
Ramah Sutardja.
3. In November 1995, the Registrant sold 43,125 shares of Common Stock at a
price of $2.50 per share for an aggregate purchase price of $107,812.50 to
Chi-Shin Wang pursuant to the exercise of an option granted under the
Registrant's Key Personnel Plan.
4. In May 1994, the Registrant sold 681,820 shares of Series C Preferred
Stock to National Semiconductor Corporation at a purchase price of $7,500,020.
5. In July 1996, the Registrant sold an aggregate of 2,156,800 shares to
the following officers and directors at an aggregate purchase price of
$1,078,400: 122,400 shares to Sandra L. Abbott; 122,400 shares to David Harper;
160,400 shares to Bryan Martin; 176,400 shares to Chris McNiffe; 125,400 shares
to Michael Noonen; 1,000,000 shares to Joe Parkinson; 292,400 shares to Y.W.
Sing; and 157,400 shares to Samuel Wang.
6. Between August 24, 1996 and September 13, 1996, the Registrant sold an
aggregate of 247 shares of Common Stock at a price of $0.50 per share for an
aggregate purchase price of $123.50 to the following stockholders pursuant to
the exercise of an option granted under the Registrant's 1996 Stock Option Plan:
205 shares to Scott Shengwei Zhang; and 42 shares to Richard Williams.
7. Between August 24, 1996 and September 28, 1996, the Registrant sold an
aggregate of 8,232 shares of Common Stock at a price of $0.50 per share for an
aggregate purchase price of $4,116 to the following stockholders pursuant to the
exercise of an option granted under the Registrant's 1992 Stock Option Plan:
3,271 shares to Scott Shengwei Zhang; 958 shares to Richard Williams; 2,000
shares to Rong-Xiang Ni; and 2,003 shares to Carl Fong.
8. In September 1996, the Registrant sold an aggregate of 413,640 shares of
Series D Preferred Stock to the following investors at an aggregate purchase
price of $2,275,020: 363,640 shares to Sanyo Semiconductor Corporation; and
50,000 shares to Guy Hecker.
9. In September 1996, the Registrant issued 20,000 shares of Common Stock
to Daniel Helman at a value of $0.50 per share for an aggregate value of
$10,000. The Registrant issued to Mr. Helman such shares in connection with
services provided to the Registrant.
10. In October 1996, the Registrant sold an aggregate of 270,913 shares of
Series D Preferred Stock to the following investors at an aggregate purchase
price of $1,490,021.50: 84,545 shares to Montgomery Associates 1992, L.P.;
10,364 shares to G. Farman-Farmaian; 100,000 shares to Bexley Enterprises;
26,000 shares to Alidad Farman Farma; 4,550 shares to Jeffrey D. Saper; and
45,454 shares to John Price.
There was no underwriter involved in connection with any transaction set
forth above. The issuances of the securities set forth in paragraph 1, 2, 3, 5,
6 and 7 of this Item 15 were deemed to be exempt from registration under the
Securities Act in reliance upon Rule 701 promulgated thereunder. The other
issuances set forth in this Item 15 were deemed to be exempt from registration
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder as a transaction by an issuer not involving a public offering.
In all of such transactions, the recipients of securities represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and appropriate legends
were affixed to the securities issued.
II-2
<PAGE> 83
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ---------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1+ Certificate of Incorporation of Registrant.
3.2+ Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.3+ Bylaws of Registrant.
5.1+ Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation.
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.
10.10+ Promissory Note between Joe Parkinson and Registrant dated June 29,
1996.
10.11+ Promissory Note between Y.W. Sing and Registrant dated June 29, 1996.
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.
11.1+ Computation Regarding Earnings Per Share.
21.1+ Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (see page II-5 of initial filing).
27.1+ Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment requested as to certain portions of this exhibit.
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this
II-3
<PAGE> 84
Registration Statement or otherwise, the Registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of this prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing, as specified in the Underwriting Agreement, certificates in such
denomination and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registrant's Registration Statement
on its behalf by the undersigned, thereunto duly authorized, in the City of
Santa Clara, State of California, on December 18, 1996.
8X8, INC.
By: /s/ JOE PARKINSON
------------------------------------
Joe Parkinson,
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Amendment No. 4 to the Registrant's Registration Statement has been signed by
the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- --------------------------------- ------------------
<S> <C> <C>
*/s/ JOE PARKINSON Chairman of the Board and Chief December 18, 1996
- ------------------------------------- Executive Officer (Principal
Joe Parkinson Executive Officer)
*/s/ Y.W. SING Vice Chairman of the Board December 18, 1996
- -------------------------------------
Y.W. Sing
*/s/ SANDRA L. ABBOTT Chief Financial Officer and Vice December 18, 1996
- ------------------------------------- President, Finance (Principal
Sandra L. Abbott Financial and Accounting Officer)
*/s/ SAMUEL WANG Vice President, Process December 18, 1996
- ------------------------------------- Technology and Director
Samuel Wang
*/s/ BERND GIROD Director December 18, 1996
- -------------------------------------
Bernd Girod
*/s/ RICHARD CHANG Director December 18, 1996
- -------------------------------------
Richard Chang
*/s/ SADA CHIDAMBARAM Director December 18, 1996
- -------------------------------------
Sada Chidambaram
*/s/ AKIFUMI GOTO Director December 18, 1996
- -------------------------------------
Akifumi Goto
*/s/ THOMAS HUMPHREY Director December 18, 1996
- -------------------------------------
Thomas Humphrey
*/s/ WILLIAM TAI Director December 18, 1996
- -------------------------------------
William Tai
*By: /s/ JOE PARKINSON
--------------------------------
Joe Parkinson (Attorney-in-Fact)
</TABLE>
II-5
<PAGE> 86
8 X 8 INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS WRITE-OFFS/
BALANCE AT CHARGED TO RECOVERIES OF BALANCE AT
BEGINNING COSTS AND UNCOLLECTIBLE END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS PERIOD
- ---------------------------------------------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
March 31, 1994................................ $681 $137 $ 142 $676
March 31, 1995................................ $676 -- $ 279 $397
March 31, 1996................................ $397 $234 $ 111 $520
September 30, 1996............................ $520 -- $ 74 $446
</TABLE>
S-1
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1+ Certificate of Incorporation of Registrant.
3.2+ Form of Amended and Restated Certificate of Incorporation of
Registrant.
3.3+ Bylaws of Registrant.
5.1+ Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional
Corporation.
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.
10.10+ Promissory Note between Joe Parkinson and Registrant dated June
29, 1996.
10.11+ Promissory Note between Y.W. Sing and Registrant dated June 29,
1996.
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.
11.1+ Computation Regarding Earnings Per Share.
21.1+ Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
23.2+ Consent of Counsel (included in Exhibit 5.1).
24.1+ Power of Attorney (see page II-5 of initial filing).
27.1+ Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment requested as to certain portions of this exhibit.
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
2,500,000 Shares
8X8, INC.
Common Stock
UNDERWRITING AGREEMENT
December __, 1996
MONTGOMERY SECURITIES
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. 8x8, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell 2,500,000 shares of its authorized but unissued
Common Stock (the "Common Stock") to the several underwriters named in Schedule
A annexed hereto (the "Underwriters"), for whom you are acting as
Representatives. Said aggregate of 2,500,000 shares are herein called the "Firm
Common Shares." In addition, the Company proposes to grant to the Underwriters
an option to purchase up to 375,000 additional shares of Common Stock (the
"Optional Common Shares"), as provided in Section 4 hereof. The Firm Common
Shares and, to the extent such option is exercised, the Optional Common Shares
are hereinafter collectively referred to as the "Common Shares."
You have advised the Company that the Underwriters propose to make a public
offering of their respective portions of the Common Shares on the effective date
of the registration statement hereinafter referred to, or as soon thereafter as
in your judgment is advisable.
The Company hereby confirms its agreements with respect to the purchase of
the Common Shares by the Underwriters as follows:
SECTION 2. Representations and Warranties of the Company. The Company
hereby represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. ________) with
respect to the Common Shares has been prepared by the Company in conformity with
the requirements of the
<PAGE> 2
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission. The Company
has prepared and has filed or proposes to file prior to the effective date of
such registration statement an amendment or amendments to such registration
statement, which amendment or amendments have been or will be similarly
prepared. There have been delivered to you two signed copies of such
registration statement and amendments, together with two copies of each exhibit
filed therewith. Conformed copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for each of
the Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and Regulations
or (iii) a term sheet (the "Term Sheet") as described in and in accordance with
Rule 434 and 424(b) of the Rules and Regulations. As filed, the final
prospectus, if one is used, or the Term Sheet and Preliminary Prospectus, if a
final prospectus is not used, shall include all Rule 430A Information and,
except to the extent that you shall agree in writing to a modification, shall be
in all substantive respects in the form furnished to you prior to the date and
time that this Agreement was executed and delivered by the parties hereto, or,
to the extent not completed at such date and time, shall contain only such
specific additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company shall have previously advised you
in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean such
registration statement at the time such registration statement becomes effective
and, in the event any post-effective amendment thereto becomes effective prior
to the First Closing Date (as hereinafter defined), shall also mean such
registration statement as so amended; provided, however, that such term shall
also include (i) all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes effective
as provided by Rule 430A of the Rules and Regulations and (ii) any registration
statement filed pursuant to 462(b) of the Rules and Regulations relating to the
Common Shares. The term "Preliminary Prospectus" shall mean any preliminary
prospectus referred to in the preceding paragraph and any preliminary prospectus
included in the Registration Statement at the time it becomes effective that
omits Rule 430A Information. The term "Prospectus" as used in this Agreement
shall mean either (i) the prospectus relating to the Common Shares in the form
in which it is first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations or, (ii) if a Term Sheet is not used and no filing
pursuant to Rule 424(b) of the Rules and Regulations is required, shall mean the
form of final prospectus included in the Registration Statement at the time such
registration statement becomes effective or (iii) if a Term Sheet is used, the
Term Sheet in the form in which it is first filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations, together with the Preliminary
Prospectus included in the Registration Statement at the time it becomes
effective. The term "Rule 430A Information" means information with respect to
the Common Shares and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A of the
Rules and Regulations.
2
<PAGE> 3
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects to the requirements of the Act
and the Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement becomes
effective, and at all times subsequent thereto up to and including each Closing
Date hereinafter mentioned, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, will contain all material statements and
information required to be included therein by the Act and the Rules and
Regulations and will in all material respects conform to the requirements of the
Act and the Rules and Regulations, and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this subsection
2(b) shall be applicable to information contained in or omitted from any
Preliminary Prospectus, the Registration Statement, the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter,
directly or through the Representatives, specifically for use in the preparation
thereof.
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 21.1 to the Registration Statement. The Company
and each of its subsidiaries have been duly incorporated and are validly
existing as corporations in good standing under the laws of their respective
jurisdictions of incorporation, with full power and authority (corporate and
other) to own and lease their properties and conduct their respective businesses
as described in the Prospectus; the Company owns all of the outstanding capital
stock of its subsidiaries free and clear of all claims, liens, charges and
encumbrances; the Company and each of its subsidiaries are in possession of and
operating in compliance with all authorizations, licenses, permits, consents,
certificates and orders material to the conduct of their respective businesses,
all of which are valid and in full force and effect; the Company and each of its
subsidiaries are duly qualified to do business and in good standing as foreign
corporations in each jurisdiction in which the ownership or leasing of
properties or the conduct of their respective businesses requires such
qualification, except for jurisdictions in which the failure to so qualify would
not have a material adverse effect upon the Company or the subsidiary; and no
proceeding has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and authority or
qualification.
(d) The Company has authorized and outstanding capital stock
as set forth under the heading "Capitalization" in the Prospectus; the issued
and outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and conform to the description thereof contained in the Prospectus.
All issued and outstanding shares of capital stock of each subsidiary of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable. Except as disclosed in or contemplated by the Prospectus and the
financial statements of the Company, and the related notes thereto, included in
the Prospectus, neither the
3
<PAGE> 4
Company nor any subsidiary has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or purchase
exist with respect to the issuance and sale of the Common Shares by the Company
pursuant to this Agreement. No stockholder of the Company has any right which
has not been waived to require the Company to register the sale of any shares
owned by such stockholder under the Act in the public offering contemplated by
this Agreement. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the issuance and sale of
the Common Shares to be sold by the Company as contemplated herein.
(f) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company in accordance with its
terms. The making and performance of this Agreement by the Company and the
consummation of the transactions herein contemplated will not violate any
provisions of the certificate of incorporation or bylaws, or other
organizational documents, of the Company or any of its subsidiaries, and will
not conflict with, result in the breach or violation of, or constitute, either
by itself or upon notice or the passage of time or both, a default under any
agreement, mortgage, deed of trust, lease, franchise, license, indenture, permit
or other instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of its respective
properties may be bound or affected, any statute or any authorization, judgment,
decree, order, rule or regulation of any court or any regulatory body,
administrative agency or other governmental body applicable to the Company or
any of its subsidiaries or any of its respective properties. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the execution
and delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement, except for compliance with the Act, the Blue Sky
laws applicable to the public offering of the Common Shares by the several
Underwriters and the clearance of such offering with the National Association of
Securities Dealers, Inc. (the "NASD").
(g) Price Waterhouse LLP, who have expressed their opinion
with respect to the financial statements and schedules filed with the Commission
as a part of the Registration Statement and included in the Prospectus and in
the Registration Statement, are independent accountants as required by the Act
and the Rules and Regulations.
4
<PAGE> 5
(h) The financial statements and schedules of the Company, and
the related notes thereto, included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
respective dates of such financial statements and schedules, and the results of
operations and changes in financial position of the Company for the respective
periods covered thereby. Such statements, schedules and related notes have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis as certified by the independent accountants named in
subsection 2(g). No other financial statements or schedules are required to be
included in the Registration Statement. The selected financial data set forth in
the Prospectus under the captions "Capitalization" and "Selected Financial Data"
fairly present the information set forth therein on the basis stated in the
Registration Statement.
(i) Except as disclosed in the Prospectus, and except as to
defaults which individually or in the aggregate would not be material to the
Company, neither the Company nor any of its subsidiaries is in violation or
default of any provision of its certificate of incorporation or bylaws, or other
organizational documents, or is in breach of or default with respect to any
provision of any agreement, judgment, decree, order, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which it is
a party or by which it or any of its properties are bound; and there does not
exist any state of facts which constitutes an event of default on the part of
the Company or any such subsidiary as defined in such documents or which, with
notice or lapse of time or both, would constitute such an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations that have not
been described or filed as required. The contracts so described in the
Prospectus are accurate and complete; all such contracts are in full force and
effect on the date hereof; and neither the Company nor any of its subsidiaries,
nor to the best of the Company's knowledge, any other party is in breach of or
default under any of such contracts.
(k) There are no legal or governmental actions, suits or
proceedings pending or threatened to which the Company or any of its
subsidiaries is or may be a party or of which property owned or leased by the
Company or any of its subsidiaries is or may be the subject, or related to
environmental or discrimination matters, which actions, suits or proceedings
might, individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material adverse
change in the condition (financial or otherwise), properties, business, results
of operations or prospects of the Company and its subsidiaries; and no labor
disturbance by the employees of the Company or any of its subsidiaries exists or
is imminent which might be expected to affect adversely such condition,
properties, business, results of operations or prospects. Neither the Company
nor any of its subsidiaries is a party or subject to the provisions of any
material injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and
marketable title to all the properties and assets reflected as owned in the
financial statements hereinabove described (or elsewhere in the Prospectus),
subject to no lien, mortgage, pledge, charge or encumbrance of any kind except
(i) those, if any, reflected in such financial statements (or elsewhere in the
Prospectus),
5
<PAGE> 6
or (ii) those which are not material in amount and do not adversely
affect the use made and proposed to be made of such property by the Company and
its subsidiaries. The Company or the applicable subsidiary holds its leased
properties under valid and binding leases, with such exceptions as are not
materially significant in relation to the business of the Company. The Company
owns or leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
(m) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as described in
or specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or written
agreement or other transaction that is not in the ordinary course of business or
which could result in a material reduction in the future earnings of the Company
and its subsidiaries; (ii) the Company and its subsidiaries have not sustained
any material loss or interference with their respective businesses or properties
from fire, flood, windstorm, accident or other calamity, whether or not covered
by insurance; (iii) the Company has not paid or declared any dividends or other
distributions with respect to its capital stock and the Company and its
subsidiaries are not in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the capital
stock (other than upon the sale of the Common Shares hereunder and upon the
exercise of options described in the Registration Statement) or indebtedness
material to the Company and its subsidiaries (other than in the ordinary course
of business); and (v) there has not been any material adverse change in the
condition (financial or otherwise), business, properties, results of operations
or prospects of the Company and its subsidiaries.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks, trade
names, patent rights, mask works, copyrights, trade secret and know-how rights,
other intellectual property rights, licenses, approvals and governmental
authorizations to conduct their businesses as now conducted; the expiration of
any trademarks, trade names, patent rights, mask works, copyrights, trade secret
and know-how rights, other intellectual property rights, licenses, approvals or
governmental authorizations would not have a material adverse effect on the
condition (financial or otherwise), business, results of operations or prospects
of the Company or its subsidiaries; and the Company has no knowledge of any
material infringement by it or its subsidiaries of trademark, trade name rights,
patent rights, mask works, copyrights, trade secret and know-how rights, other
intellectual property rights, licenses, or other similar rights of others, and
there is no claim being made or threatened against the Company or its
subsidiaries regarding trademark, trade name, patent, mask work, copyright,
trade secret and know-how rights, other intellectual property rights, license,
or other infringement and, to the knowledge of the Company, there is no basis
for any such claim.
(o) The Company has not been advised, and has no reason to
believe, that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which it is conducting business, including, without limitation, all
applicable local, state and federal environmental laws and regulations; except
where failure to be so in compliance would not materially adversely affect the
condition (financial or otherwise), business, results of operations or prospects
of the Company and its subsidiaries.
6
<PAGE> 7
(p) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the Company
or its subsidiaries.
(q) The Company is not an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(r) The Company has not distributed and will not distribute
prior to the First Closing Date any offering material in connection with the
offering and sale of the Common Shares other than the Prospectus, the
Registration Statement and the other materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintain
insurance of the types and in the amounts generally deemed adequate for its
business, including, but not limited to, insurance covering real and personal
property owned or leased by the Company and its subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect.
(t) Neither the Company nor any of its subsidiaries has at any
time during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(v) All material transactions during the Company's current or
last three (3) fiscal years between the Company and the officers, directors and
5% stockholders of the Company have been accurately disclosed in the Prospectus
to the extent required; and the terms of each such transaction are in all
material respects fair to the Company and no less favorable to the Company than
the terms that could have been obtained from unrelated parties.
(w) The Company has not incurred any liability for a fee,
commission, or other compensation on account of the employment of a broker or
finder in connection with the transactions contemplated by this Agreement other
than as contemplated hereby.
(x) The Company has obtained the Agreement of each of its
officers, directors and stockholders not to sell, contract to sell, grant any
options to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock or securities convertible into, or exercisable or exchangeable for
Common Stock or other rights to purchase Common Stock of the Company for a
period of 180 days after the effective date of the Registration Statement
without the prior written consent of Montgomery Securities.
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<PAGE> 8
(y) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability of assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(z) Each current and/or former employee, officer and
consultant of the Company has executed a proprietary information agreement in
the form or forms that have been delivered to counsel for the Underwriters.
SECTION 3. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information set forth (i) on the cover page of the
Prospectus with respect to price, underwriting discounts and commissions and
terms of offering and (ii) under "Underwriting" in the Prospectus was furnished
to the Company by and on behalf of the Underwriters for use in connection with
the preparation of the Registration Statement and the Prospectus and is correct
in all material respects. The Representatives represent and warrant that they
have been authorized by each of the other Underwriters as the Representatives to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
SECTION 4. Purchase, Sale and Delivery of Common Shares. On the basis
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell to the Underwriters the number of the Firm Common Shares described below in
Schedule A. The Underwriters agree, severally and not jointly, to purchase from
the Company the number of Firm Common Shares described below. The purchase price
per share to be paid by the several Underwriters to the Company shall be $_____
per share.
The obligation of each Underwriter to the Company shall be to purchase from the
Company that number of full shares that (as nearly as practicable, as determined
by you) bears to _______________ the same proportion as the number of shares set
forth opposite the name of such Underwriter in Schedule A hereto bears to the
total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased by the
Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed upon by the Company and the Representatives) at such time
and date, not later than the third (or, if the Firm Common Shares are priced, as
contemplated by Rule 15c6-1(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after 4:30 p.m. Washington D.C. time, the fourth)
full business day following the first date that any of the Common Shares are
released by you for sale to the public, as you shall designate by at least 48
hours prior notice to the Company (the "First Closing Date"); provided, however,
that if the Prospectus is at any time prior to the First Closing Date
recirculated
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<PAGE> 9
to the public, the First Closing Date shall occur upon the later of the third or
fourth, as the case may be, full business day following the first date that any
of the Common Shares are released by you for sale to the public or the date that
is 48 hours after the date that the Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by or on
behalf of the Company to you, for the respective accounts of the Underwriters
against payment by you, for the accounts of the several Underwriters, of the
purchase price therefor by a wire transfer of federal funds to an account
designated by the Company. The certificates for the Firm Common Shares shall be
registered in such names and denominations as you shall have requested at least
two full business days prior to the First Closing Date, and shall be made
available for checking and packaging on the business day preceding the First
Closing Date at a location in New York, New York, as may be designated by you.
Time shall be of the essence, and delivery at the time and place specified in
this Agreement is a further condition to the obligations of the Underwriters.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 375,000 Optional Common Shares
at the purchase price per share to be paid for the Firm Common Shares, for use
solely in covering any over-allotments made by you for the account of the
Underwriters in the sale and distribution of the Firm Common Shares. The option
granted hereunder may be exercised at any time (but not more than once) within
30 days after the first date that any of the Common Shares are released by you
for sale to the public, upon notice by you to the Company setting forth the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, the names and denominations in which the certificates for
such shares are to be registered and the time and place at which such
certificates will be delivered. Such time of delivery (which may not be earlier
than the First Closing Date), being herein referred to as the "Second Closing
Date," shall be determined by you, but if at any time other than the First
Closing Date shall not be earlier than three nor later than five full business
days after delivery of such notice of exercise. The number of Optional Common
Shares to be purchased by each Underwriter shall be determined by multiplying
the number of Optional Common Shares to be sold by the Company pursuant to such
notice of exercise by a fraction, the numerator of which is the number of Firm
Common Shares to be purchased by such Underwriter as set forth opposite its name
in Schedule A and the denominator of which is 375,000 (subject to such
adjustments to eliminate any fractional share purchases as you in your
discretion may make). Certificates for the Optional Common Shares will be made
available for checking and packaging on the business day preceding the Second
Closing Date at a location in New York, New York, as may be designated by you.
The manner of payment for and delivery of the Optional Common Shares shall be
the same as for the Firm Common Shares purchased from the Company as specified
in the two preceding paragraphs. At any time before lapse of the option, you may
cancel such option by giving written notice of such cancellation to the Company.
If the option is canceled or expires unexercised in whole or in part, the
Company will deregister under the Act the number of Option Shares as to which
the option has not been exercised.
You have advised the Company that each Underwriter has authorized you to accept
delivery of its Common Shares, to make payment and to receipt therefor. You,
individually and not as the
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<PAGE> 10
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose to make a
public offering of their respective portions of the Common Shares as soon after
the effective date of the Registration Statement as in the judgment of the
Representatives is advisable and at the public offering price set forth on the
cover page of and on the terms set forth in the final prospectus, if one is
used, or on the first page of the Term Sheet, if one is used.
SECTION 5. Covenants of the Company. The Company covenants and agrees that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective, and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible moment. The Company will not file any
amendment or supplement to the Registration Statement (either before or after it
becomes effective), any Preliminary Prospectus or the Prospectus of which you
have not been furnished with a copy a reasonable time prior to such filing or to
which you reasonably object or which is not in compliance with the Act and the
Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or the Prospectus that in your judgment may be necessary or advisable
to enable the several Underwriters to continue the distribution of the Common
Shares and will use its best efforts to cause the same to become effective as
promptly as possible. The Company will fully and completely comply with the
provisions of Rule 430A of the Rules and Regulations with respect to information
omitted from the Registration Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the Common
Shares is required to be delivered under the Act any event occurs, as a result
of which the Prospectus, including any amendments or
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<PAGE> 11
supplements, would include an untrue statement of a material fact, or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, or if it is necessary at any time to amend
the Prospectus, including any amendments or supplements, to comply with the Act
or the Rules and Regulations, the Company will promptly advise you thereof and
will promptly prepare and file with the Commission, at its own expense, an
amendment or supplement that will correct such statement or omission or an
amendment or supplement which will effect such compliance and will use its best
efforts to cause the same to become effective as soon as possible; and, in case
any Underwriter is required to deliver a prospectus after such nine-month
period, the Company upon request, but at the expense of such Underwriter, will
promptly prepare such amendment or amendments to the Registration Statement and
such Prospectus or Prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after
the end of the first quarter ending after one year following the "effective date
of the Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security holders
an earnings statement (which need not be audited) covering a period of 12
consecutive months beginning after the effective date of the Registration
Statement that will satisfy the provisions of the last paragraph of Section
11(a) of the Act and the relevant Rules and Regulations (including, at the
option of the Company, Rule 158).
(e) During such period as a prospectus is required by law to
be delivered in connection with sales by an Underwriter or dealer, the Company,
at its expense, but only for the nine-month period referred to in Section
10(a)(3) of the Act, will furnish to you or mail to your order copies of the
Registration Statement, the Prospectus, the Preliminary Prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such quantities as you may request, for the purposes
contemplated by the Act and the relevant Rules and Regulations.
(f) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives at any time when delivery of a Prospectus
is required under the Act, as many copies of the Prospectus in final form, or as
thereafter supplemented, as the Representatives may reasonably request. The
Company will deliver to the Representatives at or before the First Closing Date
four signed copies of the Registration Statement and all amendments thereto
including all exhibits filed therewith, and will deliver to the Representatives
such number of copies of the Registration Statement, including documents
incorporated by reference therein, but without exhibits, and of all amendments
thereto, as the Representatives may reasonably request. Prior to the filing
thereof with the Commission, the Company will submit to you, for your
information, a copy of any post-effective amendment to the Registration
Statement and any supplement to the Prospectus or any amended prospectus
proposed to be filed.
(g) The Company shall cooperate with you and your counsel in
order to qualify or register the Common Shares for sale under (or obtain
exemptions from the application of) the Blue Sky laws of such jurisdictions as
you designate, will comply with such laws and will continue
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<PAGE> 12
such qualifications, registrations and exemptions in effect so long as
reasonably required for the distribution of the Common Shares. The Company shall
not be required to qualify as a foreign corporation or to file a general consent
to service of process in any such jurisdiction where it is not presently
qualified or where it would be subject to taxation as a foreign corporation. The
Company will advise you promptly of the suspension of the qualification or
registration of (or any such exemption relating to) the Common Shares for
offering, sale or trading in any jurisdiction or any initiation or threat of any
proceeding for any such purpose, and in the event of the issuance of any order
suspending such qualification, registration or exemption, the Company, with your
cooperation, will use its best efforts to obtain the withdrawal thereof. The
Company will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications in
effect for so long a period as the Representatives may reasonably request for
distribution of the Common Shares.
(h) During the period of five (5) years hereafter, the Company
will furnish to the Representatives and, upon request of the Representatives, to
each of the other Underwriters: (i) as soon as practicable after the end of each
fiscal year, copies of the Annual Report of the Company containing the balance
sheet of the Company as of the close of such fiscal year and statements of
income, stockholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement, Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other
report filed by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or communication
of the Company mailed generally to holders of its Common Stock.
(i) During the period of 180 days after the first date that
any of the Common Shares are released by you for sale to the public, without the
prior written consent of Montgomery Securities (which consent may be withheld at
the sole discretion of Montgomery Securities), the Company will not, other than
(i) the Common Shares to be sold to the Underwriters pursuant to this Agreement
and (ii) shares of Common Stock issued, or issuable upon the exercise of options
granted, to employees or directors of, or consultants to, the Company (provided
that any such shares of Common Stock issued or issuable upon the exercise of
options are not transferable until after the expiration of such 180-day period)
issue, offer, sell, grant options to purchase or otherwise dispose of any of the
Company's equity securities or any other securities convertible into or
exchangeable with its Common Stock or other equity security, or file any
registration statement with the Commission other than registration statements on
Form S-8. For purposes of this paragraph (i), a sale, offer or other disposition
shall be deemed to include any sale of Common Stock to the public in reliance on
Rule 144A.
(j) The Company will apply the net proceeds of the sale of the
Common Shares sold by it substantially in accordance with its statements under
the caption "Use of Proceeds" in the Prospectus and will file such reports with
the Commission with respect to its sale of the Common Shares and the application
of the proceeds therefrom as may be required by Rule 463 under the Act. The
Company will invest such proceeds pending their use in such a manner that, upon
completion of such investment, the Company will not be an "investment company"
as defined in the Investment Company Act of 1940, as amended.
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<PAGE> 13
(k) The Company will use its best efforts to qualify or
register its Common Stock for sale in non-issuer transactions under (or obtain
exemptions from the application of) the Blue Sky laws of the State of California
(and thereby permit market making transactions and secondary trading in the
Company's Common Stock in California), will comply with such Blue Sky laws and
will continue such qualifications, registrations and exemptions in effect for a
period of five (5) years after the date hereof.
(l) The Company will use its best efforts to designate the
Common Stock for quotation as a national market system security on the Nasdaq
National Market.
(m) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(n) The Company will file Form SR in conformity with the
requirements of the Act and the Rules and Regulations.
(o) The Company will not file a Form S-8 registration
statement until ninety (90) days after the date of the final prospectus filed
pursuant to Rule 424(b) of the Rules and Regulations.
(p) The Company will inform the Florida Department of Banking
and Finance at any time prior to the consummation of the distribution of the
Securities by the Underwriters if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba. Such
information will be provided within 90 days after the commencement thereof or
after a change occurs with respect to previously reported information.
(q) The Company will use its best efforts to do and perform
all things required or necessary to be done and performed under this Agreement
by the Company prior to the First Closing Date or the Second Closing Date, as
the case may be, and to satisfy all conditions precedent to the delivery of the
Common Shares.
(r) The Company will use its best efforts to cause all
directors, officers, and other beneficial owners of shares of Common Stock to
agree with Montgomery Securities that without the prior written consent of
Montgomery Securities (which consent may be withheld at the sole discretion of
Montgomery Securities), each of such holders will not, directly or indirectly,
sell, offer, contract to sell, make any short sale, pledge or otherwise dispose
of any shares of Common Stock (or interest therein or right thereto) that such
person, directly or indirectly, beneficially owns or may in the future
beneficially own for a period of 180 days following the commencement of the
public offering of the Firm Common Shares by the Underwriters. A person shall be
deemed to beneficially own shares of Common Stock that are issuable upon the
exercise of options, warrants or other rights to acquire Common Stock on or
before 180 days following the commencement of the public offering of the Common
Shares by the Underwriters.
(s) If at any time during the 25-day period after the
Registration Statement becomes effective any rumor, publication or event
relating to or affecting the Company and the
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<PAGE> 14
Subsidiary shall occur as a result of which in your opinion the market price for
the Common Shares has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after written notice from you
advising the Company to the effect set forth above, consult in good faith with
you concerning the preparation and dissemination of a press release or other
public statement, reasonably satisfactory to you, responding to or commenting on
such rumor, publication or event.
You, on behalf of the Underwriters, may, in your sole
discretion, waive in writing the performance by the Company of any one or more
of the foregoing covenants or extend the time for their performance.
SECTION 6. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company agrees to pay all costs, fees and expenses incurred in
connection with the performance of its obligations hereunder and in connection
with the transactions contemplated hereby, including without limiting the
generality of the foregoing, (i) all expenses incident to the issuance and
delivery of the Common Shares (including all printing and engraving costs), (ii)
all fees and expenses of the registrar and transfer agent of the Common Stock,
(iii) all necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel and the Company's independent accountants, (v)
all costs and expenses incurred in connection with the preparation, printing,
filing, shipping and distribution of the Registration Statement, each
Preliminary Prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Agreement Among Underwriters, the Selected Dealers Agreement, the
Underwriters' Questionnaire, the Underwriters' Power of Attorney and the Blue
Sky memorandum, (vi) all filing fees, attorneys' fees and expenses incurred by
the Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the Blue Sky laws, (vii) the
filing fee of, and all fees and expenses (including any attorneys' fees)
incurred by the Company or the Underwriters incident to securing any required
approval from, the National Association of Securities Dealers, Inc., and (viii)
all other fees, costs and expenses referred to in Item 13 of the Registration
Statement. Except as provided in this Section 6, Section 8 and Section 10
hereof, the Underwriters shall pay all of their own expenses, including the fees
and disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws and the Blue Sky memorandum
referred to above).
SECTION 7. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company herein set forth as of the date hereof and
as of the First Closing Date or the Second Closing Date, as the case may be, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
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<PAGE> 15
(a) The Registration Statement shall have become effective not
later than 5:00 P.M. (or, in the case of a registration statement filed pursuant
to Rule 462(b) of the Rules and Regulations relating to the Common Shares, not
later than 10 P.M.), Washington, D.C. Time, on the date of this Agreement, or at
such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company or you, shall be contemplated by the Commission; and any request of
the Commission for inclusion of additional information in the Registration
Statement, or otherwise, shall have been complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as
of which information is given in the Registration Statement and Prospectus, (i)
there shall not have been any change in the capital stock other than pursuant to
the exercise of outstanding options disclosed in the Prospectus of the Company
or any of its subsidiaries or any material change in the indebtedness (other
than in the ordinary course of business) of the Company or any of its
subsidiaries, (ii) except as set forth or contemplated by the Registration
Statement or the Prospectus, no verbal or written agreement or other transaction
shall have been entered into by the Company or any of its subsidiaries, which is
not in the ordinary course of business or which could result in a material
reduction in the future earnings of the Company and its subsidiaries, (iii) no
loss or damage (whether or not insured) to the property of the Company or any of
its subsidiaries shall have been sustained which materially and adversely
affects the condition (financial or otherwise), business, results of operations
or prospects of the Company and its subsidiaries, (iv) no legal or governmental
action, suit or proceeding affecting the Company or any of its subsidiaries
which is material to the Company and its subsidiaries or which affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened, and (v) there shall not have been any material change
in the condition (financial or otherwise), business, management, results of
operations or prospects of the Company and its subsidiaries that makes it
impractical or inadvisable in the judgment of the Representatives to proceed
with the public offering or purchase the Common Shares as contemplated hereby.
(c) There shall have been furnished to you, as Representatives
of the Underwriters, on each Closing Date, in form and substance satisfactory to
you, except as otherwise expressly provided below:
(i) An opinion of Wilson, Sonsini, Goodrich & Rosati,
P.C., counsel for the Company, addressed to the Underwriters and dated the First
Closing Date, or the Second Closing Date, as the case may be, to the effect
that:
(1) Each of the Company and its subsidiaries has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, is duly qualified to do
business as a foreign corporation and is in good standing in all other
jurisdictions where the ownership or leasing of properties or the conduct of its
15
<PAGE> 16
business requires such qualification, except for jurisdictions in which the
failure to so qualify would not have a material adverse effect on the Company
and its subsidiaries, and has full corporate power and authority to own its
properties and conduct its business as described in the Registration Statement;
(2) The authorized, issued and outstanding capital
stock of the Company is as set forth under the caption "Capitalization" in the
Prospectus; all necessary and proper corporate proceedings have been taken in
order to authorize validly such authorized Common Stock; all outstanding shares
of capital stock (including the Firm Common Shares and any Optional Common
Shares) have been duly and validly issued, are fully paid and nonassessable,
have been issued in compliance with federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase any securities and conform to the description thereof
contained in the Prospectus; without limiting the foregoing, there are no
preemptive or other rights to subscribe for or purchase any of the Common Shares
to be sold by the Company hereunder;
(3) All of the issued and outstanding shares of the
Company's subsidiaries have been duly and validly authorized and issued, are
fully paid and nonassessable and are owned beneficially by the Company free and
clear of all liens, encumbrances, equities, claims, security interests, voting
trusts or other defects of title whatsoever;
(4) The certificates evidencing the Common Shares to
be delivered hereunder are in due and proper form under California and Delaware
corporate law, and when duly countersigned by the Company's transfer agent and
registrar, and delivered to you or upon your order against payment of the agreed
consideration therefor in accordance with the provisions of this Agreement, the
Common Shares represented thereby will be duly authorized and validly issued,
fully paid and nonassessable, will not have been issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities and will conform in all respects to the description thereof contained
in the Prospectus;
(5) except as disclosed in or specifically
contemplated by the Prospectus, there are no outstanding options, warrants or
other rights calling for the issuance of, and no commitments, plans or
arrangements to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of the Company;
(6) (a) The Registration Statement has become
effective under the Act, and no stop order suspending the effectiveness of the
Registration Statement or preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been instituted or are pending or
contemplated by the Commission; any required filing of the Prospectus and any
supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been
made in the manner and within the time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and
each amendment or supplement thereto (except for the financial statements and
schedules included therein as to which such counsel need express no opinion)
comply as to form in all material
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<PAGE> 17
respects with the requirements of the Act or the Exchange Act, as applicable,
and the applicable Rules and Regulations;
(c) The statements under the captions "Business --
[Licensing Arrangements]," "Management," "Certain Transactions," "Description of
Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus and Items
14 and 15 of Part II of the Registration Statement, insofar as such statements
constitute a summary of documents referred to therein or matters of law, fairly
summarize in all material respects the information called for with respect to
such documents and matters.
(d) To such counsel's knowledge, there are no
franchises, leases, contracts, agreements or documents of a character required
to be disclosed in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not disclosed or filed, as
required, and such franchises, leases, contracts, agreements and documents as
are summarized in the Registration Statement or Prospectus are fairly summarized
in all material respects; and
(e) To the best of such counsel's knowledge, there are
no legal or governmental actions, suits or proceedings pending or threatened
against the Company which are required to be described in the Prospectus which
are not described as required.
(7) The Company has full right, power and authority to
enter into this Agreement and to sell and deliver the Common Shares to be sold
by it to the several Underwriters; this Agreement has been duly and validly
authorized by all necessary corporate action by the Company, has been duly and
validly executed and delivered by and on behalf of the Company, and is a valid
and binding agreement of the Company in accordance with its terms, except as
enforceability may be limited by general equitable principles, bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors' rights
generally and except as to those provisions relating to indemnity or
contribution for liabilities arising under the Act as to which no opinion need
be expressed; and no approval, authorization, order, consent, registration,
filing, qualification, license or permit of or with any court, regulatory,
administrative or other governmental body is required for the execution and
delivery of this Agreement by the Company or the consummation of the
transactions contemplated by this Agreement, except such as have been obtained
and are in full force and effect under the Act and such as may be required under
applicable Blue Sky laws in connection with the purchase and distribution of the
Common Shares by the Underwriters and the clearance of such offering with the
NASD;
(8) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with,
result in the breach of, or constitute, either by itself or upon notice or the
passage of time or both, a default under, any agreement, mortgage, deed of
trust, lease, franchise, license, indenture, permit or other instrument known to
such counsel to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of its or their property may
be bound or affected that is material to the Company and its subsidiaries, or
violate any of the provisions of the certificate of incorporation or bylaws, or
other organizational documents, of the Company or any of its
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<PAGE> 18
subsidiaries or, so far as is known to such counsel, violate any statute,
judgment, decree, order, rule or regulation of any court or governmental body
having jurisdiction over the Company or any of its subsidiaries or any of its or
their property;
(9) Neither the Company nor any subsidiary is in violation
of its certificate of incorporation or bylaws, or other organizational
documents, or to such counsel's knowledge, in breach of or default with respect
to any provision of any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such counsel to which
the Company or any such subsidiary is a party or by which it or any of its
properties may be bound or affected, except where such default would not
materially adversely affect the Company and its subsidiaries; and, to such
counsel's knowledge, the Company and its subsidiaries are in compliance with all
laws, rules, regulations, judgments, decrees, orders and statutes of any court
or jurisdiction to which they are subject, except where noncompliance would not
materially adversely affect the Company and its subsidiaries;
(10) To such counsel's knowledge, no holders of securities
of the Company have rights that have not been waived to the registration of
shares of Common Stock or other securities, because of the filing of the
Registration Statement by the Company or the offering contemplated hereby;
(11) No transfer taxes are required to be paid in
connection with the sale and delivery of the Common Shares to the Underwriters
hereunder.
(12) To such counsel's knowledge, the Company is not an
"investment company" as defined in the 1940 Act.
In rendering such opinion, such counsel may rely as to matters of
local law, on opinions of local counsel, and as to matters of fact, on
certificates of officers of the Company and of governmental officials, in which
case their opinion is to state that they are so doing and that the Underwriters
are justified in relying on such opinions or certificates and copies of said
opinions or certificates are to be attached to the opinion. Such counsel shall
also include a statement to the effect that nothing has come to such counsel's
attention that would lead such counsel to believe that either at the effective
date of the Registration Statement or at the applicable Closing Date the
Registration Statement or the Prospectus, or any such amendment or supplement,
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading;
(ii) You shall have received on the Closing Date an opinion of
Merchant, Gould, Smith, Edell, Welter & Schmidt, P.A. intellectual property
counsel for the Company, dated the Closing Date, to the effect that
(1) Such counsel represents the Company in certain matters
relating to intellectual property, including patents, trade secrets and certain
trademark matters;
(2) Such counsel is familiar with the technology used by
the Company in its business and the manner of its use and has read the portions
of the Registration Statement and
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<PAGE> 19
the Prospectus entitled "Risk Factor -- Dependence on Proprietary Technology;
Reliance on Third Party Licenses" and "Business -- Intellectual Property"
(collectively, the "Intellectual Property Portion");
(3) The Intellectual Property Portion contains accurate
descriptions of the Company's patent applications, issued and allowed patents,
and patents licensed to the Company and fairly summarizes the legal matters,
documents and proceedings relating thereto;
(4) Such counsel has reviewed the Company's patent
applications filed in the U.S. and outside the U.S. (the "Applications"), which
Applications are described in the Intellectual Property Portion, and based upon
such review, a review of the prior art references made known to counsel and
discussions with Company scientific personnel, such counsel is aware of no valid
United States or foreign patent that is or would be infringed by the activities
of the Company in the manufacture, licensing, use or sale of any proposed
product or process, as described in the Registration Statement or the Prospectus
or made or used according to the Applications;
(5) The Applications have been property prepared and filed
on behalf of the Company, and are being diligently pursued by the Company; the
inventions described in the Applications are assigned or licensed to the
Company; to such counsel's knowledge, except for patents where the Company has
obtained a field of use license, no other entity or individual has any right or
claim in any of the inventions, Applications or any patent to be issued
therefrom, and in such counsel's opinion each of the Applications discloses
patentable subject matter;
(6) Such counsel is aware of no pending or threatened
judicial or governmental proceeding relating to patents to which the Company is
a party or of which any property of the Company is subject and such counsel is
not aware of any pending or threatened action, suit or claim by others that the
Company is infringing or otherwise violating any patent rights of others, nor is
such counsel aware of any rights of third parties to any of the Company's
inventions described in the Applications, issued, approved or licensed patents
which could reasonably be expected to materially affect the ability of the
Company to conduct its business as described in the Registration Statement and
the Prospectus; and
(7) Such counsel has no reason to believe that the
information contained in the Intellectual Property Portion of the Registration
Statement or the Prospectus at the time it became effective contained any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein not misleading or that, at the Closing Date, the
information contained in the Intellectual Property Portion of the Prospectus
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading."
(iii) Such opinion or opinions of Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, counsel for the Underwriters dated
the First Closing Date or the Second Closing Date, as the case may be, with
respect to the incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the validity of
the Common Shares, the Registration Statement and the Prospectus and other
related matters as you may reasonably require, and the Company shall have
furnished to such counsel such
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<PAGE> 20
documents and shall have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such matters.
In connection with such opinions, such counsel may rely on representations or
certificates of officers of the Company and governmental officials.
(iv) A certificate of the Company executed by the Chairman of
the Board or President and the chief financial or accounting officer of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, to the effect that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of the date of this
Agreement and as of the First Closing Date or the Second Closing Date, as the
case may be, and the Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied on or prior to such
Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus filed as a
part of the Registration Statement or any amendment thereto; no stop order
suspending the effectiveness of the Registration Statement has been issued; and
to the best of the knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated under the Act;
(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus; in his opinion
and to the best of his knowledge, the Registration Statement and the Prospectus
and any amendments or supplements thereto contain all statements required to be
stated therein regarding the Company and its subsidiaries; and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction or event has
occurred which should have been set forth in an amendment to the Registration
Statement or in a supplement to or amendment of any prospectus which has not
been disclosed in such a supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and except as disclosed
in or contemplated by the Prospectus, there has not been any material adverse
change or a development involving a material adverse change in the condition
(financial or otherwise), business, properties, results of operations,
management or prospects of the Company and its subsidiaries; and no legal or
governmental action, suit or proceeding is pending or threatened against the
Company or any of its subsidiaries which is material to the Company and its
subsidiaries, whether or not arising from transactions in the ordinary course of
business, or which may adversely affect the transactions contemplated by this
Agreement; since such dates and except as so disclosed, neither the Company nor
any of its subsidiaries has entered into any verbal or written agreement or
other transaction which is not in the ordinary course of business or which could
result in a material reduction in the future earnings of the Company or incurred
any material liability or obligation, direct, contingent or indirect, made
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<PAGE> 21
any change in its capital stock, made any material change in its short-term debt
or funded debt or repurchased or otherwise acquired any of the Company's capital
stock; and the Company has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to stockholders of
record on a date prior to the First Closing Date or Second Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except as disclosed
in or contemplated by the Prospectus, the Company and its subsidiaries have not
sustained a material loss or damage by strike, fire, flood, windstorm, accident
or other calamity (whether or not insured).
(v) On the date before this Agreement is executed and also
on the First Closing Date and the Second Closing Date letters addressed to you,
as Representatives of the Underwriters, from Price Waterhouse LLP, independent
accountants, the first ones to be dated the day before the date of this
Agreement, the second ones to be dated the First Closing Date and the third ones
(in the event of a Second Closing) to be dated the Second Closing Date, in form
and substance satisfactory to you.
(vi) On or before the First Closing Date, letters from each
holder of the Company's Common Stock and each director and officer of the
Company, in form and substance satisfactory to you, confirming that for a period
of 180 days after the first date that any of the Common Shares are released by
you for sale to the public, such person will not directly or indirectly sell or
offer to sell or otherwise dispose of any shares of Common Stock or any right to
acquire such shares without the prior written consent of Montgomery Securities
(which consent may be withheld at the sole discretion of Montgomery Securities).
All such opinions, certificates, letters and documents shall be in compliance
with the provisions hereof only if they are satisfactory to you and to Gunderson
Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the
Underwriters. The Company shall furnish you with such manually signed or
conformed copies of such opinions, certificates, letters and documents as you
request. Any certificate signed by any officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the
statements made therein.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification by you as Representatives to the
Company without liability on the part of any Underwriter or the Company except
for the expenses to be paid or reimbursed by the Company pursuant to Sections 6
and 8 hereof and except to the extent provided in Section 10 hereof.
SECTION 8. Reimbursement of Underwriters' Expenses. Notwithstanding any
other provisions hereof, if this Agreement shall be terminated by you pursuant
to Section 7, or if the sale to the Underwriters of the Common Shares at the
First Closing is not consummated because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse you and the other Underwriters
upon demand for all out-of-pocket expenses that shall have been reasonably
incurred
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by you and them in connection with the proposed purchase and the sale of the
Common Shares, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, telegraph charges and telephone
charges relating directly to the offering contemplated by the Prospectus. Any
such termination shall be without liability of any party to any other party
except that the provisions of this Section, Section 6 and Section 10 shall at
all times be effective and shall apply.
SECTION 9. Effectiveness of Registration Statement. You and the
Company will use your and its best efforts to cause the Registration Statement
to become effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
SECTION 10. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of the Act against any losses, claims, damages,
liabilities or expenses, joint or several, to which such Underwriter or such
controlling person may become subject, under the Act, the Exchange Act, or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected with
the written consent of the Company), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state in any of them a
material fact required to be stated therein or necessary to make the statements
in any of them not misleading, or arise out of or are based in whole or in part
on any inaccuracy in the representations and warranties of the Company contained
herein or any failure of the Company to perform its obligations hereunder or
under law; and will reimburse each Underwriter and each such controlling person
for any legal and other expenses as such expenses are reasonably incurred by
such Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 3 hereof. In addition
to its other obligations under this Section 10(a), the Company agrees that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, or any inaccuracy in the
representations and warranties of the Company herein or failure to perform its
obligations hereunder, all as described in this Section 10(a), it will reimburse
each Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse each Underwriter for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is
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so held to have been improper, each Underwriter shall promptly return it to the
Company together with interest, compounded daily, determined on the basis of the
prime rate (or other commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America NT&SA, San Francisco,
California (the "Prime Rate"). Any such interim reimbursement payments that are
not made to an Underwriter within 30 days of a request for reimbursement, shall
bear interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have.
(b) Each Underwriter will severally indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Act, against any losses, claims, damages, liabilities or
expenses to which the Company, or any such director, officer or controlling
person may become subject, under the Act, the Exchange Act, or other federal or
state statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 3
hereof; and will reimburse the Company, or any such director, officer or
controlling person for any legal and other expense reasonably incurred by the
Company, or any such director, officer or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action. In addition to its other obligations under
this Section 10(b), each Underwriter severally agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 10(b) which relates to
information furnished to the Company pursuant to Section 3 hereof, it will
reimburse the Company (and, to the extent applicable, each officer, director,
controlling person) on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director, controlling person) for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company (and, to the
extent applicable, each officer, director, controlling person) shall promptly
return it to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This
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indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
such counsel in connection with the assumption of legal defenses in accordance
with the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more than
one separate counsel, approved by the Representatives in the case of paragraph
10(a), representing the indemnified parties who are parties to such action or
(ii) the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, in each of which
cases the fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) If the indemnification provided for in this Section 10 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
10(a), 10(b), or 10(c) in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of any losses, claims, damages, liabilities or expenses referred to herein (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Underwriters from the offering of the Common Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
or inaccuracies in the representations and warranties herein that resulted in
such losses,
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<PAGE> 25
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The respective relative benefits received by the
Company and the Underwriters shall be deemed to be in the same proportion, in
the case of the Company as the total price paid to the Company for the Common
Shares sold by it to the Underwriters (net of underwriting commissions but
before deducting expenses), bears to the proposed price to the public set forth
on cover of the Prospectus and in the case of the Underwriters as the
underwriting commissions received by them bears to the proposed price to the
public set forth on cover of the Prospectus. The relative fault of the Company
and the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact or the inaccurate or the
alleged inaccurate representation and/or warranty relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in subparagraph 10(c) of
this Section 10, any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim. The
provisions set forth in subparagraph 10(c) of this Section 10 with respect to
notice of commencement of any action shall apply if a claim for contribution is
to be made under this subparagraph 10(d); provided, however, that no additional
notice shall be required with respect to any action for which notice has been
given under subparagraph 10(c) for purposes of indemnification. The Company and
the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 10 were determined solely by pro rata allocation (even
if the Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable considerations
referred to in the immediately preceding paragraph. Notwithstanding the
provisions of this Section 10, no Underwriter shall be required to contribute
any amount in excess of the amount of the total underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 10 are several in proportion to their respective underwriting
commitments and not joint.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections 10(a)
and 10(b) hereof, including the amounts of any requested reimbursement payments
and the method of determining such amounts, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 10(a) and 10(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 10(a) and 10(b) hereof.
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(f) The Company will not, without the prior written consent of
each of the Underwriters, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
SECTION 11. Default of Underwriters. It shall be a condition to this
Agreement and the obligation of the Company to sell and deliver the Common
Shares hereunder, and of each Underwriter to purchase the Common Shares in the
manner as described herein, that, except as hereinafter in this paragraph
provided, each of the Underwriters shall purchase and pay for all the Common
Shares agreed to be purchased by such Underwriter hereunder upon Tender to the
Representatives of all such shares in accordance with the terms hereof. If any
Underwriter or Underwriters default in their obligations to purchase Common
Shares hereunder on either the First or Second Closing Date and the aggregate
number of Common Shares which such defaulting Underwriter or Underwriters agreed
but failed to purchase on such Closing Date does not exceed 10% of the total
number of Common Shares which the Underwriters are obligated to purchase on such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Common
Shares which such defaulting Underwriters agreed but failed to purchase on such
Closing Date. If any Underwriter or Underwriters so default and the aggregate
number of Common Shares with respect to which such default occurs is more than
the above percentage and arrangements satisfactory to the Representatives and
the Company for the purchase of such Common Shares by other persons are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company except
for the expenses to be paid by the Company pursuant to Section 6 hereof and
except to the extent provided in Section 10 hereof.
In the event that Common Shares to which a default relates are to be purchased
by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than three business days
in order that the necessary changes in the Registration Statement, Prospectus
and any other documents, as well as any other arrangements, may be effected. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 12. Effective Date. This Agreement shall become effective
immediately as to Sections 6, 8, 10, 13 and 14 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
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<PAGE> 27
or by release of any of the Common Shares for sale to the public. For the
purposes of this Section 12, the Common Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising Underwriters that the Common Shares are released for public offering,
or (ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 13. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice
to you or by you by notice to the Company at any time prior to the time this
Agreement shall become effective as to all its provisions, and any such
termination shall be without liability on the part of the Company to any
Underwriter (except for the expenses to be paid or reimbursed by the Company
pursuant to Sections 6 and 8 hereof and except to the extent provided in Section
10 hereof) or of any Underwriter to the Company (except to the extent provided
in Section 10 hereof).
(b) This Agreement may also be terminated by you prior to the
First Closing Date by notice to the Company (i) if additional material
governmental restrictions, not in force and effect on the date hereof, shall
have been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York Stock Exchange or
on the American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
Exchange or in the over the counter market by the NASD, or a general banking
moratorium shall have been established by federal, New York or California
authorities, (ii) if an outbreak of major hostilities or other national or
international calamity involving the United States or any substantial change in
political, financial or economic conditions involving the United States shall
have occurred or shall have accelerated or escalated to such an extent, as, in
the judgment of the Representatives, to affect materially and adversely the
market for securities generally, (iii) if any material and adverse event shall
have occurred or shall exist which makes untrue or incorrect in any material
respect any statement or information contained in the Registration Statement or
Prospectus or which is not reflected in the Registration Statement or Prospectus
but should be reflected therein in order to make the statements or information
contained therein not misleading in any material respect, or (iv) if there shall
be any action, suit or proceeding pending or threatened, or there shall have
been any development or prospective development involving the business or
properties or securities of the Company or any of its subsidiaries or the
transactions contemplated by this Agreement, which, in the reasonable judgment
of the Representatives, materially and adversely affects the market for
securities generally. Any termination pursuant to this subsection 13(b) shall
without liability on the part of any Underwriter to the Company or on the part
of the Company to any Underwriter (except for expenses to be paid or reimbursed
by the Company pursuant to Sections 6 and 8 hereof and except to the extent
provided in Section 10 hereof).
(c) This Agreement shall also terminate at 5:00 P.M.,
California time, on the tenth full business day after the Registration Statement
shall have become effective if the initial public offering price of the Common
Shares shall not then as yet have been determined as provided
27
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in Section 4 hereof. Any termination pursuant to this subsection 13(c) shall
without liability on the part of any Underwriter to the Company or on the part
of the Company to any Underwriter (except for expenses to be paid or reimbursed
the Company pursuant to Sections 6 and 8 hereof and except to the extent
provided in Section 10 hereof.)
SECTION 14. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 15. Notices. All communications hereunder shall be in writing
and, if sent to the Representatives shall be mailed, delivered or faxed and
confirmed to you at 600 Montgomery Street, San Francisco, California 94111,
Attention: Clark L. Gerhardt, with a copy to Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP, 600 Hansen Way, Second Floor, Palo Alto, California
94304, Attention: Brooks Stough; and if sent to the Company shall be mailed,
delivered or faxed and confirmed to the Company at 8x8, Inc., 2445 Mission
College Blvd., Santa Clara, California 95054, Attention: Joe Parkinson, with a
copy to Wilson, Sonsini, Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto,
California 94304, Attention: Jeffrey D. Saper. The Company or you may change the
address for receipt of communications hereunder by giving notice to the others.
SECTION 16. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 11 hereof, and to the benefit of the officers and directors
and controlling persons referred to in Section 10, and in each case their
respective successors, personal representatives and assigns, and no other person
will have any right or obligation hereunder. No such assignment shall relieve
any party of its obligations hereunder. The term "successors" shall not include
any purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 17. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with all dealings
hereunder, and any action under or in respect of this Agreement taken by you
jointly or by Montgomery Securities, as Representatives, will be binding upon
all the Underwriters.
SECTION 18. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
28
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SECTION 19. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of California.
SECTION 20. General. This Agreement constitutes the entire agreement of
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the singular
and the plural include one another. The section headings in this Agreement are
for the convenience of the parties only and will not affect the construction or
interpretation of this Agreement. This Agreement may be amended or modified, and
the observance of any term of this Agreement may be waived, only by a writing
signed by the Company and you.
29
<PAGE> 30
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed copies hereof, whereupon it will
become a binding agreement between the Company and the several Underwriters
including you, all in accordance with its terms.
Very truly yours,
8x8, Inc.
By: ___________________________________
Joe Parkinson, Chairman and CEO
The foregoing Underwriting Agreement is
hereby confirmed and accepted by us in
San Francisco, California as of the date
first above written.
MONTGOMERY SECURITIES
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
Acting as Representatives of the several
Underwriters named in the attached
Schedule A.
By MONTGOMERY SECURITIES
By:_____________________________________
Managing Director
<PAGE> 31
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Montgomery Securities............................................
Donaldson, Lufkin & Jenrette Securities Corporation..............
---------
TOTAL................................. 2,500,000
=========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated November 1, 1996,
except as to the reincorporation described in Note 10 which is as of December
3, 1996, relating to the consolidated financial statements of 8x8, Inc., which
appears in such Prospectus. We also consent to the application of such report
to the Financial Statement Schedule for the three years ended March 31, 1996
and the six months ended September 30, 1996 listed under Item 16(b) of this
Registration Statement when such schedule is read in conjunction with the
consolidated financial statements referred to in our report. The audits
referred to in such report also included this schedule. We also consent to the
reference to us under the heading "Experts" in such prospectus.
PRICE WATERHOUSE LLP
San Jose, California
December 18, 1996
