<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 1997
REGISTRATION NO. 333-15627
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 8 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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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)
------------------------
Copies to:
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LARRY W. SONSINI, ESQ. BROOKS STOUGH, ESQ.
JOHN T. SHERIDAN, ESQ. BRIAN K. BEARD, ESQ.
JEFFREY A. HERBST, ESQ. WILLIAM A. HOLMES, ESQ.
BRETT D. BYERS, ESQ. GUNDERSON DETTMER
CAINE T. MOSS, ESQ. STOUGH VILLENEUVE
WILSON SONSINI GOODRICH FRANKLIN & HACHIGIAN, LLP
& ROSATI, P.C. 155 CONSTITUTION DRIVE
650 PAGE MILL ROAD MENLO PARK, CALIFORNIA 94025
PALO ALTO, CALIFORNIA 94304-1050 (415) 321-2400
(415) 493-9300
</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)
- --------------------------------------------------------------------------------------------------
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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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 MAY 16, 1997
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 6 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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<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Per Share........................................ $ $ $
Total(3)......................................... $ $ $
============================================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $1,300,000.
(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 , 1997.
---------------------------
MONTGOMERY SECURITIES DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1997
<PAGE> 4
LOGO
------------------------
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."
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
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 is leveraging its strengths
in semiconductor design and related software to develop and market video
conferencing systems for the consumer market. The Company began shipping the
VC100 (or "ViaTV"), the first product in its planned family of
VideoCommunicators, to the United States consumer market in February 1997. 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"). Although the Company has no current plan to market the VC100
outside of the United States prior to 1998 at the earliest, the Company intends,
throughout 1997 and thereafter, to explore the requirements for obtaining
foreign regulatory approvals which will be necessary prior to the sale of the
VC100 outside of the United States. There can be no assurance, however, that the
Company will receive any foreign regulatory approvals in a timely manner, if at
all. See "Risk Factors -- Compliance with Regulations and Industry Standards."
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 are based on its proprietary
semiconductor, software and systems technology. The VC100 is designed to be
compliant with the H.324 international standard for video telephony over
standard analog telephone lines (commonly known as plain old telephone service,
or "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 15 frames per second. In addition, the Company is
currently demonstrating a prototype of its second VideoCommunicator, the VC200,
a non-PC based POTS video phone with a built-in liquid crystal display. The
Company sells 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 such as Hewlett-Packard and GTE.
The Company also recently began marketing its VideoCommunicators through retail
channels such as Comexpo, Fry's Electronics and J&R Computer and catalogs such
as Hello Direct, Hammacher Schlemmer, MicroWarehouse and Sharper Image. 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 arrangements pursuant
to which U.S. Robotics Access Corporation ("USR") and Kyushu Matsushita Electric
Co., Ltd. ("KME") have licensed all or substantially all of the Company's
technology underlying its VideoCommunicators). 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. See "Risk Factors -- USR Right of Cancellation." In
addition, USR, KME and other licensees or purchasers of the Company's
technology, video compression
3
<PAGE> 6
semiconductors, software or board designs may use such technology or components
to manufacture and sell products that compete with the Company's
VideoCommunicators.
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 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.
C-Phone, a manufacturer of video conferencing systems, recently began
shipping to consumer electronics stores a product that addresses the home video
conferencing market. The Company expects that additional competitors will enter
this market in the future.
During fiscal years 1993 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 fiscal 1997. In the past, the Company has
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 "Risk Factors -- USR Right of Cancellation"
and "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.
4
<PAGE> 7
THE OFFERING
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Common Stock offered by the Company............. 2,500,000 shares
Common Stock to be outstanding after the 13,216,659 shares(1)
Offering......................................
Use of Proceeds................................. For general corporate purposes including working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... EGHT
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues.......................................... $31,082 $34,401 $19,929 $28,774 $ 19,146
Gross profit............................................ 16,945 14,932 8,025 12,106 7,116
Income (loss) from operations........................... (1,473) 243 (6,527) (4,149) (13,551)
Net loss................................................ (841) (348) (5,881) (3,217) (13,613)
Pro forma net loss per share............................ $ (1.13)
Shares used in pro forma per share calculations......... 12,026
</TABLE>
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<CAPTION>
MARCH 31, 1997
------------------------
ACTUAL AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Working capital..................................................................... $ 4,654 $ 25,101
Total assets........................................................................ 12,727 32,745
Total liabilities................................................................... 6,686 6,686
Stockholders' equity................................................................ 6,041 26,488
</TABLE>
- ---------------
(1) Excludes, as of March 31, 1997, (i) an aggregate of 2,291,150 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 1,102,656 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 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
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended). 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; DEFERRED COMPENSATION
EXPENSE
The Company recorded operating losses of $6.5 million, $4.1 million and
$13.6 million in the years ended March 31, 1995, 1996 and 1997, respectively.
Revenues fluctuated from $19.9 million in fiscal 1995 to $28.8 million in fiscal
1996 to $19.1 million in fiscal 1997. 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. Future losses will likely
occur in the event that the Company's initial VideoCommunicators, particularly
the VC100, do not achieve widespread consumer market acceptance, of which there
can be no assurance.
The Company has recorded deferred compensation expense of $7.3 million
relating to certain stock option grants which were made during the period June
through September 1996. The Company recognized $4.5 million of the deferred
compensation expense during fiscal 1997, and will recognize the remainder over
the related vesting period of the options (which is generally 48 months). The
future compensation charges are subject to reduction for any employee who
terminates employment prior to the expiration of such employee's option vesting
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 6 of Notes to Consolidated Financial Statements.
DEPENDENCE ON FUTURE VIDEOCOMMUNICATOR REVENUES
The Company believes that its business and future profitability will be
largely dependent on widespread market acceptance of its first
VideoCommunicator, the VC100. 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. Although the Company has
no current plan to market the VC100 outside of the United States prior to 1998
at the earliest, the Company intends, throughout 1997 and thereafter, to explore
the requirements for obtaining foreign regulatory approvals which will be
necessary prior to the sale of the VC100 outside of the United States. There can
be no assurance, however, that the Company will receive any foreign regulatory
approvals for the VC100, or any regulatory approvals for its other
VideoCommunicators, in a timely manner, if at all. If the Company does not
receive such approvals 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."
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's future operating results are expected to fluctuate as the
Company proceeds with the development 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
6
<PAGE> 9
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 marketing 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, including the VC100, 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 production 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, receivable collection 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."
COMPETITION
The Company competes with independent manufacturers of video compression
semiconductors and, as a result of the recent introduction of the VC100, its
initial VideoCommunicator, now competes 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
7
<PAGE> 10
change. The competitive factors in the market for the Company's
VideoCommunicators include audio and video quality, phone line connectivity at
high transmission rates, ability to connect and maintain stable connections,
ease of use, price, access to enabling technologies, product design,
time-to-market, adherence to industry standards, interoperability, strength of
distribution channels, customer support, reliability and brand name. The Company
expects intense competition for its VideoCommunicators from 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.
Licensees and purchasers of the Company's VideoCommunicator technology and
components. A number of companies have licensed portions of the Company's
technology, including USR and KME, an affiliate of Matsushita, which have
each licensed all or substantially all of the Company's technology
underlying its VideoCommunicators. Pursuant to the Company's license
agreements with USR and KME, the Company has already received lump sum
payments and will receive additional licensing revenues only in the event
that such parties develop their own semiconductors or products based on the
Company's licensed technology. See "Risk Factors -- USR Right of
Cancellation." In connection with these licensing arrangements, each of USR
and KME may be able to use the licensed technology to manufacture and sell
products that compete with the Company's VideoCommunicators. The Company
may in the future enter into similar license agreements with respect to
substantial portions of its technology. See "Business -- Licensing and
Development Arrangements." In addition, other companies may choose to
manufacture and sell products competitive with the Company's
VideoCommunicators by incorporating video compression semiconductors
purchased from the Company into products that are based on the Company's
video phone reference board designs or other video phone designs.
Purchasers of other companies' video compression semiconductors and
reference designs. Companies may choose to manufacture and sell products
based upon video compression semiconductors manufactured by suppliers other
than the Company or upon reference designs based upon such semiconductors.
Certain of these other suppliers of video compression semiconductors,
including Analog Devices, Chromatic Research, Lucent Technologies, Philips,
Texas Instruments and Winbond Electronics, may have significantly greater
resources than the Company. In order to increase the sale of their video
compression semiconductors, these manufacturers may provide marketing,
financial and other support to the purchasers of these products. One
company has publicly announced that it is developing a video conferencing
product based upon Lucent Technologies' video compression semiconductors
and that it will be making available for sale to third parties a video
phone reference design incorporating Lucent Technologies' semiconductors.
In addition, another company has publicly announced that it is developing a
similar product based on semiconductors from Analog Devices. The Company's
ability to compete depends upon its future success in developing and
manufacturing new generations of processors that integrate additional
functions and reduce costs. Otherwise, competing semiconductor
manufacturers will in the future have competitive advantages in cost, size
and performance which would make systems based on competing semiconductors
preferable to the Company's VideoCommunicators.
Personal computer system and software manufacturers. Potential customers
for the Company's VideoCommunicators may elect instead to buy PCs equipped
with video conferencing capabilities, which are currently available. 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, C-Phone (which is shipping to consumer
electronics stores a product that is competitive with the Company's VC100),
PictureTel, Sony and Vtel.
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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 Microsoft,
Philips and Sony.
C-Phone recently began shipping to consumer electronics stores a product
that addresses the home video conferencing market. The Company expects that
additional competitors will enter this market in the future.
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 competitors in this market
including Analog Devices, Chromatic Research, Lucent Technologies, Philips,
Texas Instruments and Winbond Electronics. 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.
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 symmetrical 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 15 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 standard or
non-standard video methods, 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
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quality and limit the interoperability of POTS based systems, which may inhibit
widespread acceptance of consumer video telephony products.
NO HISTORY OF 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 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 further develop 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 VideoCommunicators. 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 $1.3 million, $9.0 million and $3.9 million
in the years ended March 31, 1995, 1996 and 1997, respectively. There can be no
assurance that the Company will receive revenues from licensing of its
technology in the future.
USR RIGHT OF CANCELLATION
On May 5, 1997, the Company entered into a license agreement with USR
pursuant to which the Company has granted to USR, for an initial license fee
plus certain royalties, a license to make, use and sell systems and products
containing the Company's proprietary technology relating to its
VideoCommunicators and its PC-related video conferencing products. The Company's
license agreement with USR provides that, on or before June 12, 1997, USR may
cancel the agreement and return the technology to the Company for a full refund
of all monies paid to the Company thereunder. See "Business -- Licensing and
Development Arrangements."
PRODUCT CONCENTRATION; POTENTIAL LOSS OF SEMICONDUCTOR SALES; DEPENDENCE ON
VIDEO CONFERENCING INDUSTRY
In the years ended March 31, 1995, 1996 and 1997, sales of video
compression semiconductors and reference design boards accounted for
approximately 38%, 59% and 76%, respectively, of the Company's total revenues.
Pending widespread market acceptance of its VideoCommunicators, sales of video
compression semiconductors will continue to account for a substantial portion 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
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, 1995, 1996 and 1997 accounted for approximately 44%, 39% and
54%, 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 two customers that accounted for 10% or more
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of total revenues: Compression Labs (during the year ended March 31, 1995) and
ASCII, the Company's Japanese distributor (during the year ended March 31,
1997). 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. 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 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 and marketing of the Company's VideoCommunicators will
continue to 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 further develop 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
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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 four United States patents, including
patents relating to video compression and memory architecture technology, and
has 13 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, in 1996, the Company 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.
The Company relies upon certain technology, including hardware and
software, licensed from third parties. There can be no assurance that the
technology licensed by the Company will continue to provide competitive features
and functionality or that licenses for technology currently utilized by the
Company or other technology 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 technology or suitable alternative
products could be developed, identified, licensed and integrated, and the
inability to license key new technology 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 only recently
begun to manufacture consumer video telephony products. To achieve future
profitability, the Company must be able to reliably manufacture its
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
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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 outsources the manufacture of its VideoCommunicators to
subcontract manufacturers. These subcontract manufacturers 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's 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 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. In January 1997, the Company met the criteria
for FCC Class A and Part 68 compliance for industrial sale of the VC100. In
February 1997, the Company met the criteria for FCC Class B and began shipping
the VC100 to consumer customers in the United States. Although the Company has
no current plan to market the VC100 outside of the United States prior to 1998
at the earliest, the Company intends, throughout 1997 and thereafter, to explore
the requirements for obtaining foreign regulatory approvals which will be
necessary prior to the sale of the VC100 outside of the United States. There can
be no assurance, however, that the Company will receive any foreign regulatory
approvals for the VC100, or any regulatory approvals for its other
VideoCommunicators, in a timely manner, if at all. As 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
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regulations and industry standards could delay or interrupt volume production of
VideoCommunicators, which would have a material adverse effect on the Company's
business and operating results.
INTERNATIONAL OPERATIONS
Sales to customers outside of the United States represented 40%, 49% and
54% of the total revenues in the years ended March 31, 1995, 1996 and 1997,
respectively. Although the Company has no current plan to market its
VideoCommunicators outside of the United States prior to 1998 at the earliest,
international sales of the Company's semiconductors may continue to represent a
substantial portion of the Company's 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 marketing, 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."
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
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<PAGE> 17
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 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."
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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
13,216,659 shares of Common Stock. Of the shares outstanding prior to this
Offering, with the exception of 166,083 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, 9,732,898 shares held by current stockholders will be
eligible for sale under Rule 144 or Rule 701. The remaining 817,678 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 March 31, 1997, there were outstanding options to purchase a total of
2,291,150 shares of the Company's Common Stock, all of which are subject to
180-day lock-up agreements. A total of 483,388 shares issuable upon exercise of
such options, as of March 31, 1997, 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."
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 $19.6 million
($22.8 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 fiscal 1998 it will use approximately $8 to $10 million for product
development, $8 to $9 million for marketing and $500,000 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.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1997 (i) on an actual basis, (ii) on a pro forma basis to reflect the
automatic conversion of all outstanding shares of Preferred Stock into Common
Stock upon the closing of this Offering and the filing of the 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>
MARCH 31, 1997
----------------------------------
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, 3,726,373 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, 40,000,000 shares
authorized; actual: 6,990,286 shares issued and
outstanding; pro forma: 10,716,659 shares issued and
outstanding; as adjusted: 13,216,659 shares issued and
outstanding (1)......................................... 7 11 13
Additional paid-in capital................................. 23,291 23,291 43,736
Notes receivable from stockholders......................... (1,078) (1,078) (1,078)
Deferred compensation...................................... (2,781) (2,781) (2,781)
Accumulated deficit........................................ (13,402) (13,402) (13,402)
------- ------- -------
Total stockholders' equity.............................. 6,041 6,041 26,488
------- ------- -------
Total capitalization.................................. $ 6,041 $ 6,041 $ 26,488
======= ======= =======
</TABLE>
- ---------------
(1) Excludes, as of March 31, 1997, (i) an aggregate of 2,291,150 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 1,102,656 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 March 31, 1997,
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock upon the closing of this Offering, was approximately $6.0
million, or $0.56 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 March 31, 1997 would have been $26.5 million, or $2.00 per share.
This represents an immediate increase in pro forma net tangible book value of
$1.44 per share to existing stockholders and an immediate dilution of $7.00 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............. $0.56
Increase per share attributable to new investors................... 1.44
-----
Pro forma net tangible book value per share after this Offering...... 2.00
------
Dilution per share to new investors.................................. $7.00
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997
the differences between the number of shares of Common Stock purchased from the
Company, the total consideration paid or payable and the average price per share
paid or payable 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................ 10,716,659 81.1% $16,075,000 41.7% $ 1.50
New investors........................ 2,500,000 18.9 22,500,000 58.3 9.00
---------- ----- ----------- -----
Total...................... 13,216,659 100.0% $38,575,000 100.0% $ 2.92
========== ===== =========== =====
</TABLE>
The foregoing computations exclude as of March 31, 1997, (i) an aggregate
of 2,291,150 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 1,102,656 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, 1995, 1996 and 1997 and the selected
consolidated balance sheet data as of March 31, 1996 and 1997 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, 1993 and 1994 and the
selected consolidated balance sheet data as of March 31, 1993, 1994 and 1995 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>
YEAR ENDED MARCH 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues................................................ $31,082 $34,401 $19,929 $28,774 $ 19,146
Cost of revenues.............................................. 14,137 19,469 11,904 16,668 12,030
------- ------- ------- ------- -------
Gross profit.................................................. 16,945 14,932 8,025 12,106 7,116
Operating expenses:
Research and development................................... 7,005 6,540 8,107 7,714 10,510
Selling, general and administrative........................ 11,413 8,149 6,445 7,938 10,098
Restructuring costs........................................ -- -- -- 603 59
------- ------- ------- ------- -------
Total operating expenses.............................. 18,418 14,689 14,552 16,255 20,667
------- ------- ------- ------- -------
Income (loss) from operations................................. (1,473) 243 (6,527) (4,149) (13,551)
Other income, net............................................. 282 189 611 952 120
------- ------- ------- ------- -------
Income (loss) before income taxes............................. (1,191) 432 (5,916) (3,197) (13,431)
Provision (benefit) for income taxes.......................... (350) 780 (35) 20 182
------- ------- ------- ------- -------
Net loss...................................................... $ (841) $ (348) $(5,881) $(3,217) $(13,613)
======= ======= ======= ======= =======
Pro forma net loss per share(1)............................... $ (1.13)
=======
Shares used in pro forma per share calculations(1)............ 12,026
=======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................... $10,355 $10,683 $11,983 $ 9,333 $ 4,654
Total assets.................................................. 24,586 21,908 20,644 23,067 12,727
Total liabilities............................................. 11,920 9,579 6,661 11,693 6,686
Total stockholders' equity.................................... 12,666 12,329 13,983 11,374 6,041
</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 pro forma 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, 1993 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 1995, 1996 and 1997, sales of the Company's video compression
semiconductors and reference design boards accounted for 38%, 59% and 76%,
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 is leveraging its strengths in semiconductor design and related software
to develop and market video conferencing systems for the consumer market. The
Company began shipping the VC100 (or "ViaTV"), the first product in its planned
family of VideoCommunicators, to the United States consumer market in February
1997. 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.
Although the Company has no current plan to market the VC100 outside of the
United States prior to 1998 at the earliest, the Company intends, throughout
1997 and thereafter, to explore the requirements for obtaining foreign
regulatory approvals which will be necessary prior to the sale of the VC100
outside of the United States. There can be no assurance, however, that the
Company will receive any foreign regulatory approvals for the VC100, or any
regulatory approvals for its other VideoCommunicators, in a timely manner, if at
all. See "Risk Factors -- Compliance with Regulations and Industry Standards."
The Company is currently demonstrating a prototype of its 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 arrangements pursuant to which USR and KME
have licensed all or substantially all of the Company's technology underlying
its VideoCommunicators). 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. See "Risk Factors -- USR Right of Cancellation." In addition, USR,
KME and other licensees or purchasers of the Company's technology, video
compression semiconductors, software or board designs may use such technology or
components to manufacture and sell products that compete with the Company's
VideoCommunicators.
The Company's future operating results are expected to fluctuate as the
Company proceeds with the development 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 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 sells
its VideoCommunicators through a direct marketing effort utilizing a combination
of advertising, toll-free telemarketing and direct mail supported by
co-marketing
20
<PAGE> 23
arrangements with third parties. The Company also markets its VideoCommunicators
through retail channels and catalogs.
The Company believes that the development and marketing 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, including
the VC100, as well as substantially different cost and pricing structures
related to the manufacture and sale of consumer products.
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>
YEAR ENDED MARCH 31,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Total revenues.................................................... 100.0% 100.0% 100.0%
Cost of revenues.................................................. 59.7 57.9 62.8
----- ----- -----
Gross margin...................................................... 40.3 42.1 37.2
Operating expenses:
Research and development........................................ 40.7 26.8 54.9
Selling, general and administrative............................. 32.3 27.6 52.7
Restructuring costs............................................. -- 2.1 0.3
----- ----- -----
Total operating expenses................................ 73.0 56.5 107.9
----- ----- -----
Loss from operations.............................................. (32.7) (14.4) (70.7)
Other income, net................................................. 3.1 3.3 0.6
----- ----- -----
Loss before provision for income taxes............................ (29.6) (11.1) (70.1)
Provision (benefit) for income taxes.............................. (0.2) 0.1 1.0
----- ----- -----
Net loss.......................................................... (29.4)% (11.2)% (71.1)%
===== ===== =====
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1995, 1996 AND 1997
Total Revenues. Total revenues consist of product sales and the licensing
of technology. Total revenues were $19.9 million, $28.8 million and $19.1
million in fiscal 1995, 1996 and 1997, respectively. Product revenues fluctuated
primarily due to declining sales of the Company's discontinued line of math
co-processors, fluctuating sales of the Company's video conferencing
semiconductors and the discontinuation of MPEG semiconductor sales. The
Company's math co-processor revenues declined from $10.9 million in fiscal 1995
to $2.5 million in fiscal 1996 and to $206,000 in fiscal 1997, while total
revenues from video conferencing semiconductors increased from $7.5 million in
1995 to $13.1 million in fiscal 1996, then declined to $12.6 million in fiscal
1997. MPEG semiconductor revenues declined from $3.8 million in fiscal 1996 to
$2.0 million in fiscal 1997. In September 1996, the Company sold the last of its
MPEG inventory. Accordingly, the Company does not expect to derive any future
product revenue from the sale of MPEG semiconductors. In fiscal 1995, 1996 and
1997, total revenues from technology licensing were $1.3 million, $9.0 million
and $3.9 million, respectively. Of the $9.0 million technology licensing revenue
in fiscal 1996, $6.8 million was derived from one customer. 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 $8.0 million, $12.1 million and $7.1 million, or
40%, 42% and 37% of total revenues, in fiscal 1995, 1996 and 1997, 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.
In fiscal 1997, the significant decline in gross margin relates primarily to
charges associated with the write off of inventories related to the Company's
exit from the MPEG market. In fiscal 1997, the Company sold all of its remaining
MPEG inventory.
21
<PAGE> 24
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 $8.1 million, $7.7 million and $10.5 million, or 41%, 27% and 55%
of total revenues, in fiscal 1995, 1996 and 1997, respectively. A significant
portion of research and development expenses during fiscal 1995 and 1996 was
attributable to the development of products that were subsequently discontinued,
including an Intel compatible x86 microprocessor and graphics and MPEG
semiconductors. During fiscal 1997, research and development expenses were
concentrated on video compression semiconductors and VideoCommunicators.
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 $6.4
million, $7.9 million and $10.1 million, or 32%, 28% and 53% of total revenues,
in fiscal 1995, 1996 and 1997, respectively. 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. In fiscal 1997, selling, general and administrative expenses increased
by $2.2 million due primarily to compensation expense recognized on certain
stock option grants and expenses associated with the Offering. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting for Stock-Based Compensation" and Note 6 of Notes to
Consolidated Financial Statements.
Restructuring Costs. During fiscal 1996, the Company recorded
restructuring charges related to discontinuing certain research and development
activities not related to video conferencing products. These restructuring costs
related primarily to the write off of equipment associated with the discontinued
research and development efforts.
During fiscal 1997, the Company recorded an additional charge for
restructuring its operations by reducing its workforce. As of March 31, 1997,
the Company's restructuring actions were fully completed and there were no
remaining restructuring cost accruals.
Other Income, Net. In fiscal 1995, 1996 and 1997, other income was
$611,000, $952,000 and $120,000, respectively. In fiscal 1995, other income
consisted primarily of interest income. During fiscal 1996, the Company acquired
equity positions in four privately held companies. In fiscal 1996, the Company
realized $727,000 of income by selling the stock of one of these entities. The
Company's investment in each of these entities represents less than 15% of the
outstanding voting stock of these entities and accordingly, the Company has
accounted for these investments on a cost basis. As of March 31, 1997, these
investments have been completely written off.
Income Taxes. In fiscal 1995, 1996 and 1997, the Company was not
profitable and incurred no material income tax expense. The provision for income
taxes for fiscal 1997 primarily represents certain foreign withholding taxes.
At March 31, 1997, the Company had approximately $10.0 million of federal
net operating loss carryforwards and approximately $1.6 million of research and
development tax credit carryforwards available to offset future tax liabilities;
such carryforwards expire beginning in the years 2011 and 2010, respectively.
Under the ownership change limitation provisions of 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 March 31, 1997, the Company had gross deferred tax assets of
approximately $8.8 million. The weight of available evidence indicates that it
is more likely than not that the Company will not be able to realize its
deferred tax assets and thus a full valuation reserve has been recorded at March
31, 1997.
22
<PAGE> 25
QUARTERLY RESULTS
The following tables set forth consolidated statements of operations data
for the eight quarters in the period ended March 31, 1997, 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, DEC. 31, MARCH 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues....................... $ 4,881 $ 7,241 $7,083 $ 9,569 $ 5,703 $ 4,372 $ 4,582 $ 4,489
Cost of revenues..................... 4,184 3,741 3,019 5,724 7,503 1,942 1,283 1,302
------- ------ ------ ------ ------- ------ ------- -------
Gross profit (loss).................. 697 3,500 4,064 3,845 (1,800) 2,430 3,299 3,187
------- ------ ------ ------ ------- ------ ------- -------
Operating expenses:
Research and development........... 2,296 1,701 1,633 2,084 2,421 2,340 3,141 2,608
Selling, general and
administrative................... 1,803 1,575 2,243 2,317 3,247 1,733 2,003 3,115
Restructuring costs................ 603 -- -- -- 59 -- -- --
------- ------ ------ ------ ------- ------ ------- -------
Total operating expenses..... 4,702 3,276 3,876 4,401 5,727 4,073 5,144 5,723
------- ------ ------ ------ ------- ------ ------- -------
Income (loss) from operations........ (4,005) 224 188 (556) (7,527) (1,643) (1,845) (2,536)
Other income (expense), net.......... 152 (72) 233 639 53 74 265 (272)
------- ------ ------ ------ ------- ------ ------- -------
Income (loss) before income taxes.... (3,853) 152 421 83 (7,474) (1,569) (1,580) (2,808)
Provision for income taxes........... -- -- -- (20) (100) (46) -- (36)
------- ------ ------ ------ ------- ------ ------- -------
Net income (loss).................... $(3,853) $ 152 $ 421 $ 63 $(7,574) $(1,615) $(1,580) $(2,844)
======= ====== ====== ====== ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------------------------------------------
QUARTER ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................... 85.7 51.7 42.6 59.8 131.6 44.4 28.0 29.0
----- ----- ----- ----- ----- ----- ----- -----
Gross margin........................ 14.3 48.3 57.4 40.2 (31.6) 55.6 72.0 71.0
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses
Research and development.......... 47.0 23.5 23.0 21.8 42.5 53.5 68.6 58.1
Selling, general and
administrative.................. 36.9 21.7 31.7 24.2 56.9 39.7 43.7 69.4
Restructuring costs............... 12.4 -- -- -- 1.0 -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses.... 96.3 45.2 54.7 46.0 100.4 93.2 112.3 127.5
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations....... (82.0) 3.1 2.7 (5.8) (132.0) (37.6) (40.3) (56.5)
Other income (expense), net......... 3.1 (1.0) 3.3 6.7 0.9 1.7 5.8 (6.1)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes... (78.9) 2.1 6.0 0.9 (131.1) (35.9) (34.5) (62.6)
Provision for income taxes.......... -- -- -- (0.2) (1.7) (1.0) -- (0.8)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)................... (78.9)% 2.1% 6.0% 0.7% (132.8)% (36.9)% (34.5)% (63.4)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's technology licensing activities have contributed to
fluctuations in the Company's quarterly revenues. Technology licensing revenues
for each of the eight quarters in the period ended March 31, 1997, were
$150,000, $2.4 million, $2.9 million, $3.6 million, $1.3 million, $1.0 million,
$650,000 and $843,000, 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 $1.3 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.
23
<PAGE> 26
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. Margins improved in the quarter ended December 31,
1996 due primarily to discontinuation of MPEG sales and a fee of $471,000
received from a customer for cancellation of an order.
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. Operating expenses for the quarters ended June 30, 1996,
September 30, 1996, December 31, 1996 and March 31, 1997 were also impacted by
compensation charges taken by the Company for certain stock options repriced and
granted in fiscal 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Accounting for Stock-Based Compensation"
and Note 6 of Notes to Consolidated Financial Statements.
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 development 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 significant
reduction in the market price for the Common Stock. See "Risk
Factors -- Potential Fluctuations in Future Operations Results."
ACCOUNTING FOR STOCK-BASED COMPENSATION
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 costs for the Company's option
plans been determined based on the fair market value of options at their grant
dates as described in FAS 123, the Company's net loss would have been $3.7
million and
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$14.7 million for fiscal 1996 and fiscal 1997, respectively, and the Company's
pro forma net loss per share would have been $1.23 per share for fiscal 1997.
The Company has recorded a deferred compensation expense of $7.3 million
relating to certain stock option grants which were made during the period June
through September 1996. The Company recognized $4.5 million of the deferred
compensation expense during fiscal 1997, and will recognize the remainder over
the related vesting period of the options (which is generally 48 months). The
future compensation charges are subject to reduction for any employee who
terminates employment prior to the expiration of such employee's option vesting
period. See Note 6 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since fiscal 1994, 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 1994 and prior years. At March 31,
1994, the Company had cash, cash equivalents and short term investments of $9.2
million, which decreased to $8.7 million at March 31, 1997. The Company
currently has no bank borrowing arrangements.
The cash used by the Company for operations was $4.1 million, $625,000 and
$4.3 million in fiscal 1995, 1996 and 1997, respectively. Cash used in
operations in fiscal 1995 reflects a net loss of $5.9 million that was partially
offset by noncash items and 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
fiscal 1997 reflects a net loss of $13.6 million that was partially offset by
reductions in inventory and accounts receivable and a non-cash deferred
compensation charge of $4.5 million.
During fiscal 1995, 1996 and 1997, the Company's capital expenditures were
$1.5 million, $1.0 million and $691,000, respectively. These capital
expenditures related primarily to the acquisition of machinery, equipment and
software. At March 31, 1997, the Company did not have any material capital
commitments outstanding.
During fiscal 1995, 1996 and 1997, the Company's financing activities
generated cash of $7.5 million, $608,000 and $3.9 million, respectively,
primarily 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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<PAGE> 28
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 is leveraging its strengths in semiconductor design
and related software to develop and market video conferencing systems for the
consumer market. The Company began shipping the VC100 (or "ViaTV"), the first
product in its planned family of VideoCommunicators, to the United States
consumer market in February 1997. 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. Although the Company has no current plan to
market the VC100 outside of the United States prior to 1998 at the earliest, the
Company intends, throughout 1997 and thereafter, to explore the requirements for
obtaining foreign regulatory approvals which will be necessary prior to the sale
of the VC100 outside of the United States. There can be no assurance, however,
that the Company will receive any foreign regulatory approvals in a timely
manner, if at all. See "Risk Factors -- Compliance with Regulations and Industry
Standards."
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 are based on its proprietary
semiconductor, software and systems technology. The VC100 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 15 frames per second. In addition, the Company is currently
demonstrating a prototype of its second VideoCommunicator, the VC200, a non-PC
based POTS video phone with a built-in liquid crystal display ("LCD"). The
Company sells 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 such as Hewlett-Packard and GTE.
The Company also recently began marketing its VideoCommunicators through retail
channels such as Comexpo, Fry's Electronics and J & R Computer and catalogs such
as Hello Direct, Hammacher Schlemmer, MicroWarehouse and Sharper Image. 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 arrangements pursuant
to which USR and KME have licensed all or substantially all of the Company's
technology underlying its VideoCommunicators). 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. See "Risk Factors -- USR Right of Cancellation." In
addition, USR, KME and other licensees or purchasers of the Company's
technology, video compression semiconductors, software or board designs may use
such technology or components to manufacture and sell products that compete
directly with the Company's VideoCommunicators.
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.
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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 more costly and less available than ubiquitous analog POTS
lines which now offer one-way data transmission rates of up to 56.6 Kbps using
technology such as x2 from USR, but remain limited to rates of up to 33.6 Kbps
for the symmetrical data transmission required by video conferencing. 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 limited to symmetrical data transmission rates of 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 symmetrical 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 and market a family of cost
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<PAGE> 30
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 is leveraging its proprietary semiconductor
and software expertise to develop its non-PC based VideoCommunicators to address
the United States 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 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 VC100, the
Company's initial VideoCommunicator, is targeted at the United States consumer
market and 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 demonstrating a prototype of its 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, Internet browsing, caller identification ("caller ID"),
pan/tilt/zoom and auto-answer.
Utilize Direct Marketing Model for VideoCommunicators. The Company sells
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 such as Hewlett-Packard and GTE.
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 also recently began
marketing its VideoCommunicators through retail channels such as Comexpo, Fry's
Electronics and J&R Computer and catalogs such as Hello Direct, Hammacher
Schlemmer, MicroWarehouse and Sharper Image. 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, including its
recently introduced VC100, 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 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, 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 VC100, targeted at United
States consumer markets, is based primarily upon the Company's existing
technology and is
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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 15 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 modem
and displays video in either full or quarter screen format, as well as
simultaneous remote and 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.
The Company is demonstrating a prototype of its 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, Internet browsing, caller ID, pan/tilt/zoom and auto-answer. 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 no current plan to market the VC100 outside
of the United States prior to 1998 at the earliest, the Company intends,
throughout 1997 and thereafter, to explore the requirements for obtaining
foreign regulatory approvals which will be necessary prior to the sale of the
VC100 outside of the United States. There can be no assurance, however, that the
Company will receive any foreign regulatory approvals in a timely manner, if at
all. See "Risk Factors -- Compliance with Regulations and Industry Standards."
The Company recently began demonstrating a prototype of its VC200, with numerous
technical and other milestones remaining before commercial introduction is
possible. See "Risk Factors -- Dependence on Future VideoCommunicator Revenues
and "Risk Factors -- Rapid Technological Change, Dependence on New Product
Introduction."
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; - LAN video conferencing systems
or H.323 semiconductor for LAN - Internet phone calls
video conferencing systems or
Internet phone calls
- ----------------------------------------------------------------------------------------------------------
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, ISDN or LAN-based) video
Interface VCP/LVP/MEP devices to the PCI conferencing boards
Chip("VPIC") bus
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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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 or on the H.323
standard for LAN video conferencing or Internet phone calls. In recent quarters,
the VCP accounted for the majority of the Company's semiconductor product sales.
The Company's proprietary RISC and DSP technology allows a single VCP
semiconductor to output up to 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 15 frames
per second over a standard POTS telephone line. The LVP can be designed into
systems in a variety of form factors, including non-PC based systems that
utilize a telephone and either 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.
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 and Designs
The Company provides a range of printed circuit boards and designs as
reference boards or reference designs to its customers which serve as examples
for targeted applications. Each reference board and reference design is provided
with schematics, complete documentation, video processor software and
board-level software diagnostics. This allows the customer to leverage the
Company's systems design expertise. These reference boards and reference designs
enable customers to more quickly introduce new products and improve the
Company's technical support capabilities. Examples of the Company's reference
board designs include the DVC5, which is designed for H.320 systems, and the
DVC8, which is designed for H.324 systems. Each of the
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Company's reference boards and reference designs specifies the use of one of the
Company's video compression semiconductors on the board or within the design, as
the case may be.
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.
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 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
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<PAGE> 34
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.
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 March 31, 1997,
the Company employed 22 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 March 31,
1997, the Company marketed its video compression semiconductors through seven
distributors in Europe and the Pacific Rim. For the years ended March 31, 1996
and 1997, sales by the Company to distributors accounted for approximately 18%
and 25% of total revenues, respectively, with one distributor, ASCII
Corporation, accounting for 7% and 13% of total revenues, respectively. See
"Business -- Licensing and Development Arrangements" for a discussion of certain
licensing and development arrangements (including arrangements pursuant to which
USR and KME have licensed substantially all of the Company's technology
underlying the Company's VideoCommunicators). 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. See "Risk Factors -- USR Right of Cancellation." In
addition, USR, KME and other licensees or purchasers of the Company's
technology, video compression semiconductors, software or board designs may use
such technology or components to manufacture and sell products that compete
directly with the Company's VideoCommunicators.
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 sells 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 such as
Hewlett-Packard and GTE. 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 also recently began marketing its VideoCommunicators through retail
channels such as Comexpo, Fry's Electronics and J&R Computer and catalogs such
as Hello Direct, Hammacher Schlemmer, MicroWarehouse and Sharper Image. 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
only recently begun marketing its VideoCommunicators. In order to achieve
significant market penetration and brand awareness for its VideoCommunicators,
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the Company must expand its sales and marketing efforts and further develop
consumer marketing capabilities. There can be no assurance that the Company will
be able to expand its sales and marketing efforts or further develop 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 sufficiently extend
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 -- Potential Fluctuations in Future Operating
Results," "Risk Factors -- Uncertainty of Market Acceptance; Limits of Existing
Technology," "Risk Factors -- No History of Consumer Marketing" and "Risk
Factors -- Management of Growth."
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, such as Sony and KME, 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 the consumer market. The VC100, the
Company's initial VideoCommunicator, began shipping to the United States
consumer market in February 1997 and is based upon the Company's proprietary
semiconductor and software technology. See "Business -- Products" and
"Business -- Licensing and Development Arrangements" for a discussion of the
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 arrangements pursuant to which USR and KME have licensed
all or substantially all of the Company's technology underlying its
VideoCommunicators). 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. See "Risk Factors -- USR Right of Cancellation." In addition, USR,
KME and other licensees or purchasers of the Company's technology, video
compression semiconductors, software or board designs may use such technology or
components to manufacture and sell products that compete directly with the
Company's VideoCommunicators.
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, 1995, 1996 and 1997 accounted for approximately 44%, 39% and
54%, respectively, of its total revenues. During these periods, excluding one
company paying certain non-recurring licensing fees in fiscal 1996, the Company
had only two customers that accounted for 10% or more of total revenues:
Compression Labs (during the year ended March 31, 1995) and ASCII, the Company's
Japanese distributor (during the year ended March 31, 1997). 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 -- Product
Concentration; Potential Loss of Semiconductor Sales; Dependence on Video
Conferencing Industry" and "Risk Factors -- Dependence on Key Customers."
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.
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The Company has only recently begun to manufacture consumer video telephony
products. The Company outsources the manufacture of its VideoCommunicators to
subcontract manufacturers. These subcontract manufacturers 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 its VideoCommunicators in volumes,
on a 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 on 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 March 31, 1997, the Company had 53 employees engaged in research and
development. Research and development expenses in the years ended March 31,
1995, 1996 and 1997 were $8.1 million, $7.7 million and $10.5 million,
respectively. The Company's development of new products and the enhancement of
existing products is essential to its success. Accordingly, the Company
anticipates that research and developments expenses will continue to increase in
the foreseeable future. However, such expenses may fluctuate from quarter to
quarter depending on a wide range of factors, including the status of and
prospects for various development projects.
The Company's current and future research and development efforts relating
primarily to video 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, are directed towards picture quality enhancements,
Internet browsing, caller ID, pan/tilt/zoom and auto-answer. To expand its
family of VideoCommunicators, the Company is developing new form factors and
broadening its video conferencing systems to ISDN and LAN as well as Internet
phone calls.
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 and marketing 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
achieve widespread market acceptance of its VideoCommunicators. There can be no
assurance that VideoCommunicators can be
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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 -- Dependence on
Future VideoCommunicator Revenues" and "Risk Factors -- Rapid Technological
Change; Dependence on New Product Introduction."
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 with the Company's VideoCommunicators. See "Risk
Factors -- Competition." The Company's most significant licenses are with USR
and KME.
On May 5, 1997, the Company entered into a license agreement with USR.
Pursuant to the agreement, which is subject to cancellation by USR on or before
June 12, 1997, the Company has granted to USR, for an initial license fee plus
certain royalties, a license to make, use and sell systems and products
containing the Company's proprietary technology relating to its
VideoCommunicators and its PC-related video conferencing products. See "Risk
Factors -- USR Right of Cancellation." As a result, USR has a license to all of
the Company's technology underlying its VideoCommunicators. USR is prohibited
under the agreement from selling the Company's semiconductors on the open
market. Both parties have also agreed to license to each other any enhancements
to the technology which are developed by either party, unless USR elects to
discontinue sharing at any time or the Company elects to discontinue sharing
(which it may do at any time following June 30, 2000). Any enhancements or other
technology developed by USR cannot be sublicensed by the Company or incorporated
into semiconductors which the Company sells on the open market in component
form, but can be incorporated into semiconductors that the Company uses in the
VideoComunicators. Pursuant to the Company's agreement with USR, the Company is
prohibited, until May 5, 1998, from licensing the technology to others, except
in limited circumstances.
The KME agreement provides to KME, for a license fee previously paid in
full to the Company, all of the source code and object code of the H.324
software for 8x8's LVP semiconductor product and related development software,
as well as certain board schematics (the "H.324 Technology"), and grants KME a
perpetual, nonexclusive, nonassignable worldwide license to make, use or sell
products with the H.324 Technology. Under this arrangement, KME also has a
nonassignable option, upon payment of additional consideration, to obtain the
Company's LVP and VCP semiconductor technology for use only on systems assembled
by KME or its affiliates, which would include any entity controlled directly or
indirectly by Matsushita. As a result, KME has a license to substantially all of
the Company's technology underlying its VideoCommunicators. In addition, KME
must pay to the Company a royalty for any LVP or VCP semiconductor it
manufactures or any product wherein KME uses any part of the LVP or VCP
semiconductor technology. Both parties agree to license to the other party, at
no charge, any enhancements to the H.324 Technology or the LVP or VCP
semiconductor made by either party, until such time as KME decides to
discontinue sharing of enhancements.
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 years ended March 31, 1995, 1996 and 1997, technology licensing
revenues (all of which were non-recurring) were $1.3 million, $9.0 million and
$3.9 million, respectively. 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
arrangements with USR and KME described above)
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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 a majority of the common stock
of VidUs, Inc., the Company provided to VidUs, Inc. a license to certain
technology. See "Certain Transactions."
COMPETITION
The Company competes with independent manufacturers of video compression
semiconductors and, with the introduction of the VC100, its initial
VideoCommunicator, now competes with manufacturers of video conferencing
products targeted at the United States consumer market. The markets for the
Company's products are characterized by intense competition, declining average
selling prices and rapid technological change. The competitive factors in the
market for the Company's VideoCommunicators include audio and video quality,
phone line connectivity at high transmission rates, ability to connect and
maintain stable connections, ease of use, price, access to enabling
technologies, product design, time-to-market, adherence to industry standards,
interoperability, strength of distribution channels, customer support,
reliability and brand name. The Company expects intense competition for its
VideoCommunicators from 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.
Licensees and purchasers of the Company's VideoCommunicator technology and
components. A number of companies have licensed portions of the Company's
technology, including USR and KME, an affiliate of Matsushita, which have
each licensed all or substantially all of the Company's technology
underlying its VideoCommunicators. Pursuant to the Company's license
agreements with USR and KME, the Company has already received lump sum
payments and will receive additional licensing revenues only in the event
that such parties develop their own semiconductors or products based on the
Company's licensed technology. See "Risk Factors -- USR Right of
Cancellation." In connection with these licensing arrangements, each of USR
and KME may be able to use the licensed technology to manufacture and sell
products that compete directly with the Company's VideoCommunicators. The
Company may in the future enter into similar license agreements with
respect to substantial portions of its technology. See
"Business -- Licensing and Development Arrangements." In addition, other
companies may choose to manufacture and sell products competitive with the
Company's VideoCommunicators by incorporating video compression
semiconductors purchased from the Company into products that are based on
the Company's video phone reference board designs or other video phone
designs.
Purchasers of Other Companies' Video Compression Semiconductors and
Reference Designs. Companies may choose to manufacture and sell products
based upon video compression semiconductors manufactured by suppliers other
than the Company or upon reference designs based upon such semiconductors.
Certain of these other suppliers of video compression semiconductors,
including Analog Devices, Chromatic Research, Lucent Technologies, Philips,
Texas Instruments and Winbond Electronics, may have significantly greater
resources than the Company. In order to increase the sale of their video
compression semiconductors, these manufacturers may provide marketing,
financial and other support to the purchasers of these products. One
company has publicly announced that it is developing a video conferencing
product based upon Lucent Technologies' video compression semiconductors
and that it will be making available for sale to third parties a video
phone reference design incorporating Lucent Technologies' semiconductors.
In addition, another company has publicly announced that it is developing a
similar product based on semiconductors from Analog Devices. The Company's
ability to compete depends upon its future success in developing and
manufacturing new generations of processors that integrate additional
functions and reduce costs. Otherwise, competing semiconductor
manufacturers will
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in the future have competitive advantages in cost, size and performance
which would make systems based on competing semiconductors preferable to
the Company's VideoCommunicators.
Personal computer system and software manufacturers. Potential customers
for the Company's VideoCommunicators may elect instead to buy PCs equipped
with video conferencing capabilities, which are currently available. 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, C-Phone (which is shipping to consumer electronic
stores a product that is competitive with the Company's VC100), 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 Microsoft,
Philips and Sony.
C-Phone recently began shipping to consumer electronics stores a product
that addresses the home video conferencing market. The Company expects that
additional competitors will enter this market in the future.
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 competitors in this market,
including Analog Devices, Chromatic Research, Lucent Technologies, Philips,
Texas Instruments and Winbond Electronics. 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.
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 four United States patents, including patents relating
to video compression and memory architecture technology, and has 13 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
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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, in 1996, the Company 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.
The Company relies upon certain technology, including hardware and
software, licensed from third parties. There can be no assurance that the
technology licensed by the Company will continue to provide competitive features
and functionality or that licenses for technology currently utilized by the
Company or other technology 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 technology or suitable alternative
products could be developed, identified, licensed and integrated, and the
inability to license key new technology 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 March 31, 1997, the Company employed a total of 98 people, including
11 in manufacturing operations, 53 in research and development, 22 in sales and
marketing and 12 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 April 1999. 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.
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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 Chairman of the Board and Chief Executive Officer
Keith R. Barraclough........ 31 President and Chief Operating Officer and Director
Paul Voois.................. 30 Executive Vice President and Director
Sandra L. Abbott............ 50 Chief Financial Officer and Vice President, Finance
David Harper................ 50 Vice President, European Operations
Bryan R. Martin............. 29 Chief Technical Officer and Vice President, Engineering
Chris McNiffe............... 35 Vice President, Marketing and Sales
Michael Noonen.............. 34 Vice President, Business Development
Samuel Wang................. 47 Vice President, Manufacturing and Director
Y.W. Sing................... 42 Vice Chairman of the Board
Bernd Girod................. 39 Director
Richard M. Chang(1)......... 56 Director
Sada Chidambaram(2)......... 51 Director
Akifumi Goto(1)............. 53 Director
William Tai(2).............. 34 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Joe Parkinson has served as Chairman of the Board and Chief Executive
Officer 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.
Keith R. Barraclough was promoted to President and Chief Operating Officer
and became a director of the Company in January 1997. From April 1996 to the
present, he has also served as a director of VidUs, Inc. ("VidUs"), a subsidiary
of the Company engaged in the design of integrated camera and video compression
solutions. Mr. Barraclough served as Director of Videophone Development of the
Company from September 1995 to January 1997, and as Strategic Marketing Manager
from January 1995 to September 1995. From April 1993 to January 1995, Mr.
Barraclough served as Manager of Semiconductor Development at Media Vision
Technology, Inc., a manufacturer of multimedia products. From 1988 to April
1993, Mr. Barraclough held a position as engineer at IBM. Mr. Barraclough
received a B.S. in Electrical Engineering from University College, London and a
M.S. in Electrical Engineering from Imperial College, London.
Dr. Paul Voois was promoted to Executive Vice President and became a
director of the Company in January 1997. From April 1996 to the present, he has
also served as a director of VidUs. Dr. Voois served as Manager of Multimedia
Codec Development of the Company from April 1996 to January 1997, as Technical
Lead of the Company's H.324 Development Group from November 1995 to April 1996,
and as a member of the technical staff of the Company from September 1994 to
November 1995. From January 1990 to December 1993, Dr. Voois was a research
assistant in Electrical Engineering at Stanford University. Dr. Voois received a
B.S. in Electrical Engineering from Penn State University, and a M.S. and a
Ph.D. in Electrical Engineering from Stanford University.
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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.
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 and 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 April 1996 to the present, he has also served as
Chief Executive Officer of VidUs. 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, Manufacturing 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. Y.W. Sing has served as a director of the Company since February 1987,
and has served as Vice Chairman of the Board since July 1995. Dr. Sing
co-founded the Company in February 1987 and was 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. In April 1997, Dr. Sing resigned as an employee of the Company but
remains as 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 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.
Dr. Bernd Girod has served as a director of the 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
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<PAGE> 43
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 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.
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 but are 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.
41
<PAGE> 44
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.
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, 1997 by (i) the
Company's Chief Executive Officer and Chief Operating Officer and (ii) the
Company's other four most highly compensated executive officers whose salary and
bonus for such fiscal year exceeded $100,000 and who served as executive
officers of the Company at March 31, 1997 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) ($)(1) OPTIONS(#) SATION($)
- ------------------------------------ --------- -------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Joe Parkinson, Chairman and Chief
Executive Officer................. 150,000 9,322 -- 1,000,000(2) --
Keith R. Barraclough, President and
Chief Operating Officer........... 123,962 120,650 -- 250,000(3) --
Paul Voois, Executive Vice
President......................... 121,191 190,034 -- 250,000(4) --
Samuel Wang, Vice President,
Manufacturing..................... 150,000 150,000 -- 157,400(5) --
Chris McNiffe, Vice President,
Marketing and Sales............... 150,000 150,000 -- 176,400(6) --
Bryan R. Martin, Chief Technical
Officer, and Vice President,
Engineering....................... 130,192 151,675 -- 160,400(7) --
</TABLE>
42
<PAGE> 45
- ---------------
(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) Includes a grant of options for 500,000 shares issued pursuant to a
repricing of options on June 24, 1996 accomplished through the cancellation
of then existing options and the issuance of new options. See "Certain
Transactions."
(3) Includes grants of options for an aggregate of 35,000 shares issued pursuant
to a repricing of options on June 24, 1996 accomplished through the
cancellation of then existing options and the issuance of new options. See
"Certain Transactions."
(4) Includes grants of options for an aggregate of 31,000 shares issued pursuant
to a repricing of options on June 24, 1996 accomplished through the
cancellation of then existing options and the issuance of new options. See
"Certain Transactions."
(5) Includes a grant of options for 100,000 shares issued pursuant to a
repricing of options on June 24, 1996 accomplished through the cancellation
of then existing options and the issuance of new options. See "Certain
Transactions."
(6) Includes grants of options for an aggregate of 119,000 shares issued
pursuant to a repricing of options on June 24, 1996 accomplished through the
cancellation of then existing options and the issuance of new options. See
"Certain Transactions."
(7) Includes grants of options for an aggregate of 103,000 shares issued
pursuant to a repricing of options on June 24, 1996 accomplished through the
cancellation of then existing options and the issuance of new options. See
"Certain Transactions."
43
<PAGE> 46
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, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------------- 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(3) 18.2% $ 0.50(2) 06/15/05 $157,223 $ 398,435
Joe Parkinson.......... 250,000(4) 9.1% $ 0.50 06/24/06 $ 78,612 $ 169,743
Joe Parkinson.......... 250,000(5) 9.1% $ 0.50 06/24/06 $ 78,612 $ 169,743
Keith R. Barraclough... 20,000(6) 0.7% $ 0.50(2) 06/24/06 $ 6,289 $ 15,937
Keith R. Barraclough... 15,000(7) 0.5% $ 0.50(2) 06/24/06 $ 4,717 $ 11,953
Keith R. Barraclough... 25,000(8) 0.9% $ 5.00 11/21/06 $ 78,612 $ 169,743
Keith R. Barraclough... 170,000(9) 6.2% $ 6.80 01/20/07 $727,002 $1,842,366
Keith R. Barraclough... 20,000(6) 0.7% $ 0.50 06/24/06 $ 6,289 $ 15,937
Paul Voois............. 25,000(6) 0.9% $ 0.50(2) 06/24/06 $ 7,861 $ 16,974
Paul Voois............. 6,000(7) 0.2% $ 0.50(2) 06/24/06 $ 1,887 $ 4,781
Paul Voois............. 20,000(9) 0.7% $ 0.50 06/24/06 $ 6,289 $ 15,937
Paul Voois............. 4,000(9) 0.1% $ 0.50 07/17/06 $ 1,258 $ 3,187
Paul Voois............. 25,000(8) 0.9% $ 5.00 10/21/06 $ 78,612 $ 169,743
Paul Voois............. 170,000(9) 6.2% $ 6.80 01/20/07 $727,002 $1,842,366
Samuel Wang............ 100,000(10) 3.6% $ 0.50(2) 10/16/05 $ 31,445 $ 79,687
Samuel Wang............ 57,400(11) 2.1% $ 0.50 06/24/06 $ 18,049 $ 45,740
Chris McNiffe.......... 100,000(11) 3.6% $ 0.50(2) 07/10/05 $ 31,445 $ 79,687
Chris McNiffe.......... 2,000(11) 0.1% $ 0.50(2) 02/22/04 $ 629 $ 1,594
Chris McNiffe.......... 15,000(12) 0.5% $ 0.50(2) 07/08/02 $ 4,717 $ 11,953
Chris McNiffe.......... 2,000(13) 0.1% $ 0.50(2) 08/05/04 $ 629 $ 1,594
Chris McNiffe.......... 57,400(11) 2.1% $ 0.50 06/24/06 $ 18,049 $ 45,740
Bryan R. Martin........ 100,000(11) 3.6% $ 0.50(2) 08/14/05 $ 31,445 $ 79,687
Bryan R. Martin........ 3,000(11) 0.1% $ 0.50(2) 02/22/04 $ 943 $ 2,391
Bryan R. Martin........ 57,400(11) 2.1% $ 0.50 06/24/06 $ 18,049 $ 45,740
</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) These options were issued pursuant to a repricing of options on June 24,
1996 accomplished through the cancellation of then existing options and the
issuance of new options. See "Certain Transactions."
(3) 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."
44
<PAGE> 47
(4) 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."
(5) The options were granted under the Key Personnel Plan. This option shall
vest at a rate of 1/36 of the shares at the end of each month, commencing in
April 1997; provided, however, that vesting shall be accelerated in full
upon an initial public offering of the Company's Common Stock occurring
prior to December 31, 1997 for which either the initial public offering
price or the highest bid price on the secondary market for the month
thereafter is greater than $6.00 per share. 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" and "Certain Transactions."
(6) The options were granted under the 1992 Stock Option 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."
(7) The options were granted under the 1992 Stock Option Plan and vest at a
rate of 1/4 of the shares at the end of one year and 1/36 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."
(8) The options were granted under the 1992 Stock Option Plan and vest in full
on October 21, 2000, subject to continued service as an employee,
consultant or director. The options vest in full on June 30, 1997 dependent
upon certain milestones reached by Messrs. Barraclough and Voois. 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."
(9) The options were granted under the 1996 Stock 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."
(10) The options were granted under the Key Personnel Plan and vest at a rate of
1/4 of the shares at the end of one year and 1/36 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."
(11) 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."
(12) The options were granted under the Key Personnel Plan and vest at a rate of
1/5 of the shares at the end of one year and 1/48 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."
(13) 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."
45
<PAGE> 48
The following table provides information with respect to option exercises
during the year ended March 31, 1997 and the value of stock options held as of
March 31, 1997 by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR END(#)(1) AT FISCAL YEAR END($)
ACQUIRED FOR VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------ -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joe Parkinson............. 1,000,000 $ 0 -- -- -- --
Keith R. Barraclough(2)... -- -- 18,750 36,250 $ 118,125 $ 228,375
Keith R. Barraclough(3)... -- -- 0 25,000 $ 0 $ 45,000
Keith R. Barraclough(4)... -- -- 7,083 162,917 $ 0 $ 0
Paul Voois(2)............. -- -- 17,126 37,874 $ 107,894 $ 238,606
Paul Voois(3)............. -- -- 0 25,000 $ 0 $ 45,000
Paul Voois(4)............. -- -- 7,083 162,917 $ 0 $ 0
Samuel Wang............... 157,400 $ 0 -- -- -- --
Chris McNiffe............. 176,400 $ 0 -- -- -- --
Bryan R. Martin........... 160,400 $ 0 -- -- -- --
</TABLE>
- ---------------
(1) Calculated by determining the difference between the exercise price of the
Common Stock ($0.50) and the fair market value of the Common Stock on the
date of exercise ($0.50).
(2) Calculated by determining the difference between the fair market value of
the Common Stock as of March 31, 1997 ($6.80) and the exercise price of the
underlying options as of March 31, 1997 ($0.50).
(3) Calculated by determining the difference between the fair market value of
the Common Stock as of March 31, 1997 ($6.80) and the exercise price of the
underlying options as of March 31, 1997 ($5.00).
(4) Calculated by determining the difference between the fair market value of
the Common Stock as of March 31, 1997 ($6.80) and the exercise price of the
underlying options as of March 31, 1997 ($6.80).
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 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 March
31, 1997, 253,892 shares had been issued under the 1992 Plan, options for
1,581,825 shares were outstanding and 164,283 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
46
<PAGE> 49
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 March 31, 1997, 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 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 March 31, 1997, 2,302 shares had
been issued under the 1996 Plan, options for 709,325 shares were outstanding and
288,373 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.
47
<PAGE> 50
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 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
48
<PAGE> 51
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 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.
49
<PAGE> 52
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. During the fiscal year ended March 31, 1997, the Company's product
revenues included $106,000 in sales to Sanyo, and the Company purchased $408,000
in inventory from Sanyo.
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. Also 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. Additionally, the Company subleases to NSC a portion of
its facilities under a month to month sublease arrangement. Proceeds from the
sublease are recorded as a reduction to operating expenses and aggregated
$207,000, $205,000 and $276,000 during the years ended March 31, 1995, 1996 and
1997, respectively.
During the years ended March 31, 1995, 1996 and 1997, the Company's product
revenues included $897,000, $2,037,000 and $2,415,000 in sales to ASCII
Corporation ("ASCII"), or approximately 4.5%, 7.1% and 12.6% of the Company's
revenues, respectively. ASCII, a stockholder of the Company, 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 year ended March 31, 1995, the Company sold $795,000 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 "VidUs
Agreement") with VidUs, Inc. ("VidUs"), a company whose officers include Michael
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 VidUs Agreement, the Company and Mr.
Noonen own approximately 67% and 11%, respectively, of the common stock of
VidUs. Also in connection with the VidUs 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.
In May 1997, the Company entered into a nonbinding letter of intent (the
"U.K. Letter") with 8x8, Ltd., the Company's U.K. subsidiary, and certain
employees of 8x8, Ltd., including David Harper. Pursuant to the U.K. Letter, the
Company and Mr. Harper will own approximately 70% and 11%, respectively, of the
common stock of 8x8, Ltd. The stock will be sold to 8x8, Ltd. employees at book
value, subject to repurchase upon termination of employment prior to an initial
public offering. Also in connection with the U.K. Letter, the Company will
provide 8x8 Ltd. a non-exclusive, royalty-bearing, nonassignable license to
make, have made, use and sell products which incorporate any of the Company's
technology (other than technology obtained from the Company's licensees). In
addition, the U.K. Letter specifies that so long as the Company owns at
50
<PAGE> 53
least 50% of 8x8, Ltd., the Company and 8x8, Ltd. will share all technology
developed or acquired (other than from licensees) by the other party for three
years following the date of the U.K. Letter; provided, however, that any
technology developed by 8x8, Ltd. during such three year term shall be assigned
to the Company. The transactions contemplated by the U.K. Letter are subject to
negotiation of a definitive agreement.
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; Keith R. Barraclough had 35,000 shares
repriced from $2.50 per share; Paul Voois had 31,000 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 options to purchase 500,000 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. The Company has recognized
deferred compensation expense with respect to these options. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 6 of Notes to Consolidated Financial Statements. Of this option, 250,000
shares shall vest, subject to Mr. Parkinson's continued service as an employee,
consultant or director, at a rate of 1/36 of the shares at the end of each
month, commencing in April 1997; provided, however, that vesting shall be
accelerated in full upon an initial public offering of the Company's Common
Stock occurring prior to December 31, 1997 for which either the initial public
offering price or the highest bid price on the secondary market for the month
thereafter is greater than $6.00 per share. The remaining 250,000 shares shall
vest at a rate of 1/48 of the shares at the end of each month, subject to Mr.
Parkinson's continued service as an employee, consultant or director.
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.
51
<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1997, 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% 7.8%
Joe Parkinson(3)(5)............................. 1,000,000 9.3 7.6
National Semiconductor Corporation.............. 681,820 6.4 5.2
2900 Semiconductor Drive
Santa Clara, CA 95051
Deby Investments, Ltd.(6)....................... 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)(7).............................. 363,640 3.4 2.8
Sada Chidambaram(3)(8).......................... 300,000 2.8 2.3
David Harper(9)................................. 222,400 2.1 1.7
Chris McNiffe(10)............................... 176,400 1.6 1.3
Bryan Martin(11)................................ 172,900 1.6 1.3
Samuel Wang(3)(12).............................. 157,400 1.5 1.2
Sandra L. Abbott(13)............................ 153,400 1.4 1.2
Michael Noonen(14).............................. 125,400 1.2 *
William Tai(3)(15).............................. 38,750 * *
Keith Barraclough(3)(16)........................ 35,208 * *
Paul Voois(3)(17)............................... 33,583 * *
Bernd Girod(3)(18).............................. 3,125 * *
All directors and executive officers as a group
(15 persons) (19)............................. 4,271,940 39.5 32.1
</TABLE>
- ---------------
* Less than 1%
(1)Percentage of ownership is based on (i) 10,716,659 shares of Common Stock
outstanding as of March 31, 1997, plus any shares issuable pursuant to
options held, as of March 31, 1997, by the person or class in question which
may be exercised within 60 days of March 31, 1997, and (ii) 13,216,659
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 March 31, 1997.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) The named person is a director of the Company.
(4) In May 1997, the Company exercised its right of repurchase in respect of
46,638 of these shares.
(5) Includes 661,458 shares that were, as of March 31, 1997, subject to a right
of repurchase in favor of the Company which expires ratably through June
24, 2000.
(6) The beneficial owner of the shares held by Deby Investments, Ltd. is Samuel
Fang.
52
<PAGE> 55
(7) Includes 363,640 shares beneficially held by Sanyo Semiconductor
Corporation. Mr. Goto is the President and Chief Executive Officer of Sanyo
Semiconductor Corporation.
(8) 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.
(9) Includes 61,220 shares that were, as of March 31, 1997, subject to a right
of repurchase in favor of the Company which expires ratably through June
24, 2000.
(10) Includes 106,428 shares that were, as of March 31, 1997, subject to a right
of repurchase in favor of the Company which expires ratably through June
24, 2000.
(11) Includes 107,741 shares that were, as of March 31, 1997, subject to a right
of repurchase in favor of the Company which expires ratably through June
24, 2000.
(12) Includes 111,220 shares that were, as of March 31, 1997, subject to a right
of repurchase in favor of the Company which expires ratably through June
24, 2000.
(13) Includes 84,554 shares that were, as of March 31, 1997, subject to a right
of repurchase in favor of the Company which expires ratably through June
24, 2000.
(14) Includes 87,678 shares that were, as of March 31, 1997, subject to a right
or repurchase in favor of the Company which expires ratably through June
24, 2000.
(15) Includes (i) 13,750 shares issuable pursuant to stock options which may be
exercised within 60 days of March 31, 1997, 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.
(16) Includes 35,208 shares issuable pursuant to stock options which may be
exercised within 60 days of March 31, 1997.
(17) Includes 33,583 shares issuable pursuant to stock options which may be
exercised within 60 days of March 31, 1997.
(18) Includes 3,125 shares issuable pursuant to stock options which may be
exercised within 60 days of March 31, 1997.
(19) Includes (i) 1,221,965 shares that were, as of March 31, 1997, subject to a
right of repurchase in favor of the Company which expires ratably through
June 24, 2000, (ii) 46,638 shares that were repurchased by the Company in
May 1997 and (iii) 85,666 shares issuable pursuant to stock options which
may be exercised within 60 days of March 31, 1997.
53
<PAGE> 56
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 March 31, 1997, as adjusted for the conversion of all outstanding
shares of Preferred Stock into Common Stock upon the closing of this Offering,
there were 10,716,659 shares of Common Stock outstanding held of record by
approximately 190 stockholders. As of March 31, 1997, there were options to
purchase 2,291,150 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
54
<PAGE> 57
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."
55
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 13,216,659 shares
of Common Stock outstanding. Of this amount, the 2,500,000 shares offered hereby
and 166,083 shares will be available for immediate sale in the public market as
of the date of this Prospectus. Approximately 9,700,000 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..... 2,666,083 Freely tradeable shares sold in Offering and shares
saleable under Rule 144(k) that are not subject to 180-day
lockup
180 days............... 9,732,898 Lockup released; shares saleable under Rule 144, 144(k) or
701
Thereafter............. 817,678 Restricted securities held for one year or less
</TABLE>
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year 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 two 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 March 31, 1997, the holders of options exercisable into
approximately 483,388 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.
56
<PAGE> 59
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."
57
<PAGE> 60
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."
In connection with this offering, certain Underwriters may engage in
passive market making transactions in the Common Stock on the Nasdaq National
Market immediately prior to the commencement of sales in this offering, in
accordance with Rule 10b-6A under the Securities Exchange Act of 1934, as
amended. Passive market making consists of displaying bids on the Nasdaq
National Market that are limited by the bid prices of independent market makers
and completing purchases in response to order flow at prices limited by such
bids. Net purchases by a passive market maker on each day are limited to a
specified percentage of the
58
<PAGE> 61
passive market maker's average daily trading volume in the Common Stock during a
specified period and must be discontinued for any day in which such limit is
reached. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail and, if commenced, may
be discontinued at any time.
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.
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, beneficially owns 4,550
shares of the Company's Preferred Stock.
EXPERTS
The consolidated financial statements of the Company as of March 31, 1996
and 1997 and for each of the years ended March 31, 1995, 1996 and 1997, 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 Commission a Registration Statement, of
which this Prospectus constitutes a part, under the Securities Act with respect
to the shares of Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information with
respect to the Company and the Common Stock offered hereby. Statements contained
herein concerning the provisions of any documents are not necessarily complete,
and in each instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. The Registration Statement, including exhibits filed
therewith, may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials may be obtained from the Public Reference Section of
the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. Information concerning the Company is also
available for inspection at the offices of the Nasdaq National Market, Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006.
59
<PAGE> 62
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> 63
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, 1996 and 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
May 1, 1997, except for note 4,
which is as of May 15, 1997
F-2
<PAGE> 64
8X8, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
MARCH 31, EQUITY
----------------- MARCH 31,
1996 1997 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 4,652 $ 8,722
Short-term investments................................................. 5,241 2
Accounts receivable, net............................................... 2,884 834
Accounts receivable from related parties............................... 695 178
Inventory.............................................................. 7,270 1,178
Prepaid expenses and other assets...................................... 284 354
------- -------
Total current assets........................................... 21,026 11,268
Property and equipment, net.............................................. 1,526 1,344
Deposits and other assets................................................ 515 115
------- -------
$23,067 $12,727
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 5,581 $ 1,146
Accounts payable to related parties.................................... -- 233
Accrued compensation................................................... 1,779 926
Accrued warranty....................................................... 1,058 1,603
Deferred revenue....................................................... 200 363
Other accrued liabilities.............................................. 1,541 689
Income taxes payable................................................... 1,534 1,654
------- -------
Total current liabilities...................................... 11,693 6,614
------- -------
Commitments and contingencies (Notes 4 and 5)
Minority interest........................................................ -- 72
------- -------
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 noncumulative preferred stock, $0.001 par
value; 1,260,000 shares issued and outstanding actual; none issued
and outstanding pro forma (unaudited).............................. 1 1 $ --
Series B convertible noncumulative preferred stock, $0.001 par
value; 1,100,000 shares issued and outstanding actual; none issued
and outstanding pro forma (unaudited).............................. 1 1 --
Series C convertible noncumulative preferred stock, $0.001 par
value; 681,820 shares issued and outstanding actual; none issued
and outstanding pro forma (unaudited).............................. 1 1 --
Series D convertible noncumulative preferred stock, $0.001 par
value; 684,553 shares issued and outstanding actual; none issued
and outstanding pro forma (unaudited).............................. -- 1 --
Common stock, $0.001 par value; 40,000,000 shares authorized; 4,782,021
and 6,990,286 shares issued and outstanding actual; 10,716,659
shares issued and outstanding pro forma (unaudited)................. 5 7 11
Additional paid-in capital............................................. 11,155 23,291 23,291
Notes receivable from stockholders..................................... -- (1,078) (1,078)
Deferred compensation.................................................. -- (2,781) (2,781)
Retained earnings (accumulated deficit)................................ 211 (13,402) (13,402)
------- ------- -------
Total stockholders' equity..................................... 11,374 6,041 $ 6,041
=======
------- -------
$23,067 $12,727
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 65
8X8, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Product revenues............................................. $16,933 $17,772 $ 12,771
Product revenues from related parties........................ 1,692 2,037 2,521
License revenues............................................. 1,010 7,215 3,854
License revenues from related parties........................ 294 1,750 --
------- ------- -------
Total revenues..................................... 19,929 28,774 19,146
Cost of product revenues..................................... 11,904 16,668 12,030
------- ------- -------
Gross profit................................................. 8,025 12,106 7,116
------- ------- -------
Operating expenses:
Research and development................................... 8,107 7,714 10,510
Selling, general and administrative........................ 6,445 7,938 10,098
Restructuring costs........................................ -- 603 59
------- ------- -------
Total operating expenses........................... 14,552 16,255 20,667
------- ------- -------
Loss from operations......................................... (6,527) (4,149) (13,551)
Other income, net............................................ 611 952 120
------- ------- -------
Loss before income taxes..................................... (5,916) (3,197) (13,431)
Provision (benefit) for income taxes......................... (35) 20 182
------- ------- -------
Net loss..................................................... $(5,881) $(3,217) $(13,613)
======= ======= =======
Pro forma net loss per share (unaudited)..................... $ (1.13)
=======
Shares used in pro forma per share calculations
(unaudited)................................................ 12,026
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 66
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,
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
noncumulative
preferred 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........... -- -- -- -- -- -- -- -- 2,188,265 2 1,095
Issuance of common
stock................ -- -- -- -- -- -- -- -- 20,000 -- 10
Issuance of Series D
convertible
noncumulative
preferred stock...... -- -- -- -- -- -- 684,553 1 -- -- 3,764
Deferred compensation
related to stock
options.............. -- -- -- -- -- -- -- -- -- -- 7,267
Net loss............... -- -- -- -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March 31,
1997................. 1,260,000 $ 1 1,100,000 $ 1 681,820 $ 1 684,553 $ 1 6,990,286 $ 7 $ 23,291
========= ==== ========= ==== ========= ==== ========= ==== ========= ==== =======
<CAPTION>
NOTES RETAINED
RECEIVABLE DEFERRED EARNINGS
FROM COMPEN- (ACCUMULATED
STOCKHOLDERS SATION DEFICIT) TOTAL
------------ -------- ------------ -------
<S> <C> <C> <C> <C>
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
noncumulative
preferred 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) -- -- 19
Issuance of common
stock................ -- -- -- 10
Issuance of Series D
convertible
noncumulative
preferred stock...... -- -- -- 3,765
Deferred compensation
related to stock
options.............. -- (2,781) -- 4,486
Net loss............... -- -- (13,613) (13,613)
------ ------ ------- -------
Balance at March 31,
1997................. $ (1,078) $ (2,781) $(13,402) $ 6,041
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 67
8X8, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (5,881) $ (3,217) $(13,613)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 1,000 775 866
Loss on disposition of capital equipment.............. -- 541 7
Deferred income taxes................................. 1,905 -- --
Amortization of deferred compensation................. -- -- 4,486
Writedown of nonmarketable equity investment.......... -- -- 400
Other................................................. -- -- (5)
Changes in assets and liabilities:
Accounts receivable, net............................ 663 (384) 2,567
Inventory........................................... 3,264 (5,788) 6,092
Income taxes receivable............................. (2,241) 2,241 --
Prepaid expenses and other assets................... 114 175 (70)
Accounts payable.................................... (1,704) 3,827 (4,202)
Accrued compensation................................ 133 575 (853)
Accrued warranty.................................... (641) 1 545
Deferred revenue.................................... 2 (565) 163
Other accrued liabilities........................... (893) 1,174 (852)
Income taxes payable................................ 185 20 120
-------- -------- --------
Net cash used in operating activities............ (4,094) (625) (4,349)
-------- -------- --------
Cash flows from investing activities:
Acquisitions of property and equipment................... (1,492) (1,013) (691)
Proceeds from the sale of equipment...................... 138 -- --
Sales of short-term investments -- available for sale.... 16,681 21,711 5,168
Purchases of short-term investments -- available for
sale.................................................. (27,114) (16,583) --
Sales of short-term investments -- trading............... -- 64 71
Purchase of nonmarketable equity investments............. -- (400) --
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... (11,787) 3,779 4,548
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible noncumulative
preferred stock, net.................................. 7,500 -- 3,765
Proceeds from issuance of common stock, net.............. 35 608 29
Proceeds from minority interest in subsidiary............ -- -- 77
-------- -------- --------
Net cash provided by financing activities........ 7,535 608 3,871
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (8,346) 3,762 4,070
Cash and cash equivalents beginning of the year............ 9,236 890 4,652
-------- -------- --------
Cash and cash equivalents end of the year.................. $ 890 $ 4,652 $ 8,722
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 68
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 designs, develops and
markets highly integrated proprietary video compression semiconductors and
associated software for video phones and video conferencing. The Company also
designs, manufactures, and markets video phones for use by the consumer market.
On December 3, 1996, the Company was reincorporated in Delaware and
exchanged each share of each series of stock of the predecessor company for 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.
FISCAL YEAR
The Company's fiscal year ends on the Thursday closest to March 31. Prior
to fiscal 1996, the Company's fiscal year ended on March 31. For purposes of
these consolidated financial statements, the Company has indicated its fiscal
year as ending on March 31.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly and majority owned subsidiaries. All significant 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. 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.
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, 1996, the Company classified its investments
subject to Statement of Financial Accounting Standards No. 115 (FAS 115) either
as available-for-sale or as trading. At March 31, 1997, the Company classified
its investments subject to FAS 115 as trading. The cost of the Company's
investments is determined based upon specific identification. Investments
classified as available-for-sale are reported at fair value with unrealized
gains and losses, net of
F-7
<PAGE> 69
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
related tax, if any, recorded as a separate component of stockholders' equity.
At March 31, 1996, the Company's investments classified as available-for-sale
were primarily comprised of commercial paper with a maturity of less than 12
months. At March 31, 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 FAS 115 being reported in the statement of
operations. The cost and fair value of investments classified as trading were
not material at March 31, 1996 and 1997. Realized and unrealized gains and
losses were immaterial for the years ended March 31, 1995, 1996 and 1997.
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
F-8
<PAGE> 70
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
subsidiary were $320,000, $479,000, and $429,000 as of March 31, 1995, 1996 and
1997, respectively. The Company does not undertake any foreign currency hedging
activities.
INCOME TAXES
Income taxes are accounted for using the asset and liability approach.
Under the asset and liability approach, a current tax liability or asset is
recognized for the estimated taxes payable or refundable on tax returns for the
current year. A deferred tax liability or asset is recognized for the estimated
future tax effects attributed to temporary differences and 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 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 March 31, 1997 three customers accounted for 16%, 15%,
and 10% of accounts receivable.
ACCOUNTING FOR STOCK-BASED COMPENSATION
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
stock-based compensation plans and requires additional disclosure for those
companies who elect not to adopt the new method of accounting. FAS 123 is
applicable to the Company for fiscal 1997. The Company has elected to continue
to account for employee stock awards in accordance with Accounting Principles
Board Opinion No. 25 and to provide additional disclosures as required by FAS
123.
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 contemplated
by this prospectus ("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 STOCKHOLDERS' EQUITY (UNAUDITED)
If 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.
F-9
<PAGE> 71
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma effect of the above mentioned transactions has been reflected
in the accompanying unaudited pro forma stockholders' equity as of March 31,
1997.
CERTAIN RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with fiscal
1997 presentation.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share". This Statement
is effective for the Company's fiscal year ending March 31, 1998. The Statement
redefines earnings per share under generally accepted accounting principles.
Under the new standard, primary earnings per share is replaced by basic earnings
per share and fully diluted earnings per share is replaced by diluted earnings
per share. The Company does not expect the adoption of this Statement to have a
significant impact on the currently reported loss per share.
NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1996 1997
---------- -------
<S> <C> <C>
Accounts receivable:
Accounts receivable............................................. $ 3,404 $ 1,208
Less: allowance for doubtful accounts........................ (520) (374)
------- -------
$ 2,884 $ 834
======= =======
Inventories:
Raw materials................................................... $ 262 $ 418
Work-in-process................................................. 6,231 613
Finished goods.................................................. 777 147
------- -------
$ 7,270 $ 1,178
======= =======
Property and equipment:
Machinery and computer equipment................................ $ 4,005 $ 3,254
Furniture and fixtures.......................................... 729 671
Licensed software............................................... 1,782 2,137
Leasehold improvements.......................................... 532 554
------- -------
7,048 6,616
Less: accumulated depreciation and amortization................. (5,522) (5,272)
------- -------
$ 1,526 $ 1,344
======= =======
</TABLE>
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES:
During fiscal 1995, the Company issued 681,820 shares of Series C Preferred
Stock to National Semiconductor Corporation ("National") for $11.00 per share
(see Note 6). This transaction resulted in National obtaining a seat on 8x8's
Board of Directors. During fiscal 1995, the Company recognized contract revenue
and related costs of $294,000 and $229,000, respectively, under development
agreements with National. Also, the Company purchased $868,000 in inventory from
National during fiscal 1995. Additionally, the Company subleases to National a
portion of its facilities under a month to month sublease arrangement. Proceeds
from the sublease are recorded as a reduction to operating expenses and
aggregated $207,000, $205,000 and $276,000 during the fiscal years ended March
31, 1995, 1996 and 1997, respectively.
F-10
<PAGE> 72
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the fiscal years ended March 31, 1995, 1996 and 1997, the Company's
product revenues included $897,000, $2,037,000 and $2,415,000, respectively, in
sales to ASCII Corporation ("ASCII") which distributes the Company's products in
Japan and is one of the Company's stockholders. An executive of ASCII is also on
the Company's Board of Directors.
During the fiscal year ended March 31, 1997, the Company's product revenues
included $106,000 in sales to Sanyo Corporation ("Sanyo") which is one of the
Company's stockholders. Additionally, the Company purchased $408,000 in
inventory from Sanyo during fiscal 1997. An executive of Sanyo is also on the
Company's Board of Directors.
During the year ended March 31, 1995, the Company sold $795,000 of product
to Mitsui Comtek Corporation, which is one of the Company's stockholders.
During fiscal 1996, the Company licensed certain technologies to VideoCore
Technology ("VideoCore"), a company founded by one of 8x8's former officers, in
exchange for $600,000 in cash and a 10% equity interest in VideoCore. This
license agreement also provided for potential future license fees and royalty
fees payable to the Company. VideoCore was subsequently acquired by another
entity.
During fiscal 1996, the Company licensed certain technologies to Enable
Semiconductor, a company founded by another of 8x8's former officers, in
exchange for $1,000,000 in cash and a 10% equity interest in that company.
During fiscal 1997, the Company and certain of its employees, but not
including its Chief Executive Officer or its Chief Financial Officer, formed
VidUs, Inc. ("VidUs"). The Company owns 67% of VidUs and the Company's employees
own the remaining 33%. 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:
Loss before income taxes includes $62,000, $51,000, and $74,000 of income
of a foreign subsidiary for the fiscal years ended March 31, 1995, 1996 and
1997, respectively. The components of the consolidated provision (benefit) for
income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $(1,962) $ -- $ --
State............................................... -- -- --
Foreign............................................. 22 20 182
---- ------- ---
(1,940) 20 182
---- ------- ---
Deferred:
Federal............................................. 1,905 -- --
State............................................... -- -- --
---- ------- ---
1,905 -- --
---- ------- ---
$ (35) $ 20 $ 182
==== ======= ===
</TABLE>
F-11
<PAGE> 73
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Deferred revenue................................................. $ 85 $ 64
Inventory reserves............................................... 1,543 833
Section 263A adjustments......................................... 292 99
Allowance for doubtful accounts.................................. 220 148
Warranty reserve................................................. 449 634
Research and development credit carryforwards.................... 1,200 1,573
Net operating loss carryforwards................................. 594 3,780
Other............................................................ 386 1,650
------- -------
4,769 8,781
Valuation allowance.............................................. (4,769) (8,781)
------- -------
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
March 31, 1997.
At March 31, 1997, the Company had approximately $10,000,000 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 March 31, 1997, the Company had research and development
credit carryforwards for federal and state tax reporting purposes of
approximately $1,573,000 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.
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>
YEARS ENDED MARCH 31,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C> <C>
Provision (benefit) at statutory rate.......... $(2,012) $(1,087) $(4,567)
State income taxes before valuation allowance,
net of federal benefit....................... (328) (177) (344)
Research and development credits............... (366) (243) (373)
Valuation allowance............................ 2,307 1,414 4,012
Non-deductible compensation.................... -- -- 1,525
Other.......................................... 364 113 (71)
------ ------- -------
Provision (benefit) for income taxes........... $ (35) $ 20 $ 182
====== ======= =======
</TABLE>
In August 1995, the Internal Revenue Service (the "IRS") asserted a
deficiency against the Company for the taxable year 1992 in the amount of
approximately $1,365,000, together with a penalty in the amount of approximately
$273,000 plus accrued interest. The IRS alleged that as of March 31, 1992, the
Company had accumulated earnings beyond the reasonable needs of the Company's
business. The Company did not make any payments and in accordance with IRS
procedures formally protested this assessment on October 30, 1995.
F-12
<PAGE> 74
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On May 15, 1997 the Company received a notice from the IRS dated May 7, 1997
indicating that the IRS has fully reversed its August 1995 notice of deficiency.
NOTE 5 -- LEASE COMMITMENTS:
The Company leases its facility under a non-cancelable operating lease
agreement expiring in April 1999. This agreement provides for annual increments
of rent in predetermined amounts and requires the Company to pay property taxes,
insurance and normal maintenance costs.
Future minimum lease payments under this non-cancelable operating lease as
of March 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
---------------------------------------------------------------------------
<S> <C>
1998....................................................................... $ 981
1999....................................................................... 1,299
2000....................................................................... 103
------
Total minimum payments..................................................... $2,383
======
</TABLE>
Rent expense for all operating leases for the years ended March 31, 1995,
1996 and 1997 was $776,000, $767,000 and $717,000, respectively.
NOTE 6 -- STOCKHOLDERS' EQUITY:
PREFERRED STOCK
As of March 31, 1997 the Company had issued 3,726,373 shares of convertible
noncumulative preferred stock, of which 1,260,000 shares, 1,100,000 shares,
681,820 and 684,553 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.
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 3,726,373 shares of its common stock for issuance
upon conversion of the outstanding preferred stock.
On October 21, 1996 the Company's Board of Directors approved that
effective upon the closing of the Offering, the Company will be authorized to
issue five million shares of undesignated preferred stock. The
F-13
<PAGE> 75
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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, 1995 and 1996, unvested shares
aggregating 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 March 31, 1997, all shares of
common stock purchased under the 1987 Plan were fully vested.
1992 STOCK OPTION PLAN
In January 1992, the Board of Directors adopted the 1992 Stock Option Plan
("the 1992 Plan") and reserved 1,000,000 shares of the Company's common stock
for issuance under this plan. In August 1994, the Board of Directors authorized
an increase in the number of shares of the Company's common stock reserved for
issuance under the 1992 Plan to 2,000,000 shares. The 1992 Plan provides for
granting incentive and nonstatutory stock options to employees at prices equal
to the fair market value of the stock at the grant dates 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.
KEY PERSONNEL PLAN
In July 1995, the Board of Directors adopted the Key Personnel Plan and
reserved 2,000,000 shares of the Company's common stock for issuance under this
plan. In June 1996, the Board of Directors authorized an increase in the number
of shares of the Company's common stock reserved for issuance under the Key
Personnel Plan to 2,200,000 shares. The Key Personnel Plan provides for granting
incentive and nonstatutory stock options to officers of the Company at prices
equal to the fair market value of the stock at the grant dates 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.
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 the Company's Board of Directors. Options generally vest over a
period of not more than five years.
1996 DIRECTOR OPTION PLAN
The Company's 1996 Director Option Plan ("the Director Plan") was adopted
in June 1996 and will become effective upon the closing of the Offering. A total
of 150,000 shares of common stock have been reserved for issuance under the
Director Plan. The Director Plan provides for the grant of nonstatutory stock
options to certain nonemployee directors of the Company ("the Outside
Directors"). The Director Plan provides that each Outside Director 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
F-14
<PAGE> 76
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Option activity under the Company's various currently effective stock
option plans is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS SHARES SUBJECT EXERCISE
AVAILABLE TO OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- --------------- ----------
<S> <C> <C> <C>
Balance at March 31, 1994.............................. 205,384 787,350 $2.31
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) $2.27
--------- ------- -----
Balance at March 31, 1995.............................. 880,185 1,098,350 $2.38
Increase in options available for grant................ 2,000,000 -- --
Granted................................................ (2,973,550) 2,973,550 $2.50
Exercised.............................................. -- (246,389) $2.48
Returned to plan....................................... 1,264,754 (1,264,754) $2.49
--------- ------- -----
Balance at March 31, 1996.............................. 1,171,389 2,560,757 $2.46
Increase in options available for grant................ 1,200,000 -- --
Granted................................................ (4,947,462) 4,947,462 $1.68
Exercised.............................................. -- (2,188,265) $0.50
Cancellation of options available for grant............ (75) -- --
Returned to plan....................................... 3,028,804 (3,028,804) $2.32
--------- ------- -----
Balance at March 31, 1997.............................. 452,656 2,291,150 $2.83
--------- ------- -----
Options exercisable at March 31, 1997.................. -- 483,388 $0.74
</TABLE>
The weighted average fair value of options granted during the year ended
March 31, 1996 and 1997 as computed under the Black-Scholes option pricing model
was $0.60 and $0.40, respectively. Significant option groups outstanding at
March 31, 1997 and related weighted average exercise price and contractual life
information are as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS
- ------------------------------------------- EXERCISABLE
WEIGHTED --------------
NUMBER AVERAGE NUMBER
OUTSTANDING AT CONTRACTUAL EXERCISABLE AT
EXERCISE MARCH 31, LIFE MARCH 31,
PRICE 1997 (YEARS) 1997
- -------- -------------- ----------- --------------
<S> <C> <C> <C>
$ 0.50 1,431,000 8.59 464,801
$ 5.00 75,200 9.63 --
$ 6.80 784,950 9.81 18,587
--------- -------
2,291,150 483,388
========= =======
</TABLE>
F-15
<PAGE> 77
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended March 31, 1997, options to purchase 2,156,800 shares
under the Key Personnel Plan were exercised for partial recourse notes. At March
31, 1997, approximately 1,295,994 shares issued under this plan were not vested
and are subject to repurchase at their original issuance price of $0.50 if the
employee departs prior to vesting.
In June 1996, the Board of Directors approved a proposal under which
employees elected to cancel approximately 2,467,000 options in exchange for
grants of new options with an exercise price equal to the then current fair
market value as determined by the Board of Directors.
In conjunction with the Offering, the Company has recorded a deferred
compensation charge of approximately $7,267,000 with respect to the options
repriced and certain additional options granted in fiscal 1997. The Company
recognized $4,486,000 of said amount as compensation expense in the fiscal year
ended March 31, 1997. The Company will recognize the balance of this deferred
compensation over the related vesting period of the options (which is generally
48 months). The balance of this deferred compensation is subject to reduction
for any employee who terminates employment prior to the expiration of such
employee's option vesting period.
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 the Offering. Under the
Purchase Plan a total of 500,000 shares of common stock have been reserved for
issuance to participating employees who meet eligibility requirements.
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 stock plans in accordance with the provisions
of Accounting Principles Board Opinion No. 25. Had compensation cost for the
Company's stock plans been determined based on the fair value of options at
their grant dates, as prescribed in FAS 123, the Company's net loss would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1996 1997
----------- ------------
<S> <C> <C>
Net loss:
As reported.................................... $(3,217,000) $(13,613,000)
Pro forma as adjusted.......................... (3,685,000) (14,744,000)
Pro forma net loss per share:
As reported.................................... $ (1.13)
As adjusted.................................... (1.23)
</TABLE>
For the purposes of the 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 and volatility of 0.0% for both years,
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 year ended
March 31, 1997 and a weighted average expected option term of five years for
both years.
F-16
<PAGE> 78
8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- EMPLOYEE BENEFITS PLANS:
401(K) SAVINGS PLAN
In April 1991, the Company adopted a 401(k) savings plan (the "Savings
Plan") covering substantially all of its U.S. employees. Under the Savings Plan,
eligible employees may contribute up to the maximum allowed by the IRS from
their compensation to the Savings Plan 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. Charges related to this plan were
not material for the fiscal years ended March 31, 1996 or 1997.
NOTE 8 -- GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION:
The Company's export sales to Europe represented 26%, 17% and 21% of total
revenues in fiscal years 1995, 1996 and 1997, respectively. The Company's export
sales to the Asia Pacific region represented 14%, 32% and 33% of total revenues
in fiscal years 1995, 1996 and 1997, respectively.
Product sales to one customer accounted for 13% of the Company's total
revenues for the fiscal year ended March 31, 1995. During the fiscal year ended
March 31, 1996, product sales to no customer accounted for 10% or more of the
Company's total revenues. During the fiscal year ended March 31, 1997, product
sales to one customer accounted for 13% of the Company's total revenues. During
the fiscal years ended March 31, 1995 and 1997, license revenues from no
customer accounted for 10% or more of the Company's total revenues. License
revenues from one customer accounted for approximately 24% of the Company's
total revenues for the year ended March 31, 1996.
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 March 31, 1997, the Company's restructuring actions were fully completed and
there were no remaining 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.
F-17
<PAGE> 79
APPENDIX -- DESCRIPTION OF GRAPHICS
OUTSIDE FRONT COVER
Graphic: 8x8, Inc. logo.
INSIDE FRONT COVER
Graphic: 8x8, Inc. logo.
GATE FOLD
The graphic heading reads "Silicon, software and systems for video
conferencing." Underneath this heading, and to the left, there is a picture of
the VC100, the first product in the Company's planned family of
VideoCommunicators. 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 high
performance 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 the text at the top of the page are four pictures
demonstrating the use of the Company's VideoCommunicator product.
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."
In the bottom right hand corner of the gate fold is the 8x8, Inc. logo.
INSIDE BACK COVER
In the middle of the page is a picture of a prototype of the Company's
VC200 Product (desktop phone with LCD display). Underneath the picture is the
following text: "VC200 PROTOTYPE." In the bottom right hand corner of the inside
back cover is the 8x8, Inc. logo.
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.......................... 6
Use of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 26
Management............................ 40
Certain Transactions.................. 50
Principal Stockholders................ 52
Description of Capital Stock.......... 54
Shares Eligible for Future Sale....... 56
Underwriting.......................... 58
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 59
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
Until , 1997 (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
, 1997
======================================================
<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............................................................... 175,000
Legal Fees and Expenses................................................ 275,000
Accounting Fees and Expenses........................................... 250,000
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.......................................................... 170,413
--------
Total........................................................ $1,300,000
========
</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 December 31, 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 December 12, 1996, the Registrant sold an
aggregate of 635 shares of Common Stock at a price of $0.50 per share for an
aggregate purchase price of $317.50 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; 42 shares to Richard Williams; 250 shares to
Susan Velasquez; and 138 shares to Bernadette Romero.
7. Between August 24, 1996 and December 17, 1996, the Registrant sold an
aggregate of 16,574 shares of Common Stock at a price of $0.50 per share for an
aggregate purchase price of $8,287 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 3,603 shares to Carl Fong; 750 shares to Shannon
Rhoades; 542 shares to Susan Velasquez; 2,375 shares to Art Rawers; 275 shares
to Bernadette Romero; and 2,800 shares to Chun-Chau Lin.
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.
11. Between February 1997 and March 1997, the Registrant sold an aggregate
of 10,914 shares of Common Stock at a price of $0.50 per share for an aggregate
purchase price of $5,457 to the following stockholders pursuant to the exercise
of options granted under the Registrant's 1992 Stock Option Plan: 5,468 shares
to Yeou C. (Sidney) Yen; 1,029 shares to Lina El-Tabech; and 4,417 shares to
Minna W. Yen.
12. Between February 1997 and March 1997, the Registrant sold an aggregate
of 1,667 shares of Common Stock at a price of $0.50 per share for an aggregate
purchase price of $833.50 to Yeou C. (Sidney) Yen pursuant to the exercise of
options granted under the Registrant's 1996 Stock Plan.
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, 7, 11 and 12 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
II-2
<PAGE> 83
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.
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.
10.18* License Agreement dated as of May 5, 1997 by and between U.S.
Robotics Access Corporation and the Registrant.
11.1 Computation Regarding Earnings Per Share.
21.1+ Subsidiaries of Registrant.
</TABLE>
II-3
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ ---------------------------------------------------------------------
<S> <C>
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 and Amendment No.
8).
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 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. 8 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 May 16, 1997.
8x8, Inc.
By: /s/ JOE PARKINSON
------------------------------------
Joe Parkinson,
Chairman and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each of Keith R. Barraclough and
Paul Voois hereby constitutes and appoints Joe Parkinson and Sandra L. Abbott
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Registration
Statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended.
Pursuant to the requirements of the Securities Exchange Act of 1933, this
Amendment No. 8 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 May 16, 1997
- ------------------------------------- Executive Officer (Principal
Joe Parkinson Executive Officer)
* Vice Chairman of the Board May 16, 1997
- -------------------------------------
Y.W. Sing
/s/ KEITH R. BARRACLOUGH President, Chief Operating Officer May 16, 1997
- ------------------------------------- and Director
Keith R. Barraclough
/s/ PAUL VOOIS Executive Vice President and May 16, 1997
- ------------------------------------- Director
Paul Voois
* Chief Financial Officer and Vice May 16, 1997
- ------------------------------------- President, Finance (Principal
Sandra L. Abbott Financial and Accounting Officer)
* Vice President, Process Technology May 16, 1997
- ------------------------------------- and Director
Samuel Wang
* Director May 16, 1997
- -------------------------------------
Bernd Girod
* Director May 16, 1997
- -------------------------------------
Richard Chang
</TABLE>
II-5
<PAGE> 86
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ---------------------------------- ------------------
<S> <C> <C>
* Director May 16, 1997
- -------------------------------------
Sada Chidambaram
* Director May 16, 1997
- -------------------------------------
Akifumi Goto
* Director May 16, 1997
- -------------------------------------
William Tai
*By: /s/ JOE PARKINSON
--------------------------------
Joe Parkinson (Attorney-in-Fact)
</TABLE>
II-6
<PAGE> 87
8X8 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, 1995................................ $676 $ -- $ 279 $397
March 31, 1996................................ 397 234 111 520
March 31, 1997................................ 520 -- 146 374
</TABLE>
S-1
<PAGE> 88
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.
10.18* License Agreement dated as of May 5, 1997 by and between U.S.
Robotics Access Corporation and the Registrant.
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 and Amendment
No. 8).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment requested as to certain portions of this exhibit.
+ Previously filed.
<PAGE> 1
EXHIBIT 10.8
1. PARTIES: THIS LEASE, is entered into on this _____ day of June,
1990, between SOBRATO INTERESTS, a California Limited Partnership, and
INTEGRATED INFORMATION TECHNOLOGY, INC., a California Corporation, hereinafter
called respectively Landlord and Tenant.
2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from
Landlord those certain Premises with the appurtenances, situated in the City of
Santa Clara, County of Santa Clara, State of California, and more particularly
described as follows, to-wit:
A part of that certain real property commonly known and
designated 2441 Mission College Boulevard of 100,272 square
feet ("Building") consisting of a part of the first floor
totaling 42,450 square feet as outlined in red on Exhibit "A";
in a complex comprised of four buildings (including the
Building) totaling 419,357 square feet ("Project").
3. USE: Tenant shall use the Premises only for the following purposes
and shall not change the use of the Premises without the prior written consent
of Landlord: Office, research, development, testing, light manufacturing,
ancillary warehouse, and related legal uses.
4. TERM AND RENTAL: The term shall be for eighty-four (84) months,
commencing, as adjusted pursuant to paragraph 7, on the first day of October,
1990 ("Commencement Date"), and ending as adjusted pursuant to Paragraph 7 on
the thirtieth day of September 1997 at the effective rent of $0.94 per square
foot for a total rent or sum of Three Million Three Hundred Fifty-one Thousand
Eight Hundred Fifty-Two and No/100 Dollars ($3,351,852.00), payable, without
deduction or offset, in monthly installments of:
10/1/90-9/30/91 $16,980.00 per month $203,760.00 $0.40/sq.ft.
10/1/91-9/20/92 $35,233.50 per month $422,802.00 $0.83/sq.ft.
10/1/92-9/30/93 $40,327.50 per month $483,930.00 $0.95/sq.ft.
10/1/93-9/30/94 $42,874.50 per month $514,494.00 $1.01/sq.ft.
10/1/94-9/30/95 $45,421.50 per month $545,059.00 $1.07/sq.ft.
10/1/95-9/30/96 $47,968.40 per month $575,622.00 $1.13/sq.ft.
10/1/96-9/30/97 $50,515.50 per month $606,196.00 $1.19/sq.ft.
due on or before the full day of each calendar month during the term hereof.
Said rental shall be paid in lawful money of the United States of America,
without offset or deduction, and shall be paid to Landlord at such place or
places as may be designated from time to time by Landlord. Rent for any period
less than a calendar month shall be a pro rata portion of the monthly
installment.
Concurrently with Tenant's execution of this Lease, Tenant shall pay to
Landlord the sum of Sixteen Thousand Nine Hundred Eighty and No/100 Dollars
($16,980.00) as prepaid rent for the first month of the term.
<PAGE> 2
4.(a) Tenant shall be allowed to use the Premises prior to
October 1, 1990, at the rate to cover the utility charges only.
5. SECURITY DEPOSIT: Concurrently with Tenant's execution of this
Lease, Tenant his deposited with Landlord the sum of Thirty-Five Thousand Two
Hundred Thirty-Three and 50/100 Dollars ($35,233.50) as a security deposit. If
Tenant defaults with respect to any provisions of this lease, including but not
limited to the provisions relating to payment of rent or other charges, Landlord
may, to the extent reasonably necessary to remedy Tenant's default, use all or
any part of said deposit for the payment of rent or other charges in default or
the payment of any other payment of any other amount which Landlord may spend or
become obligated to spend by reason of Tenant's default or to compensate
Landlord for any other loss or damage which Landlord may suffer by reason of
Tenant's default. If any portion of said deposit is so used or applied, Tenant
shall, within ten (10) days after written demand therefor, deposit cash with
Landlord in an amount sufficient to restore said deposit to the full amount
hereinabove stated and shall pay to Landlord such other sums as shall be
necessary to reimburse Landlord for any sums paid by Landlord. Said deposit
shall be returned to Tenant within thirty (30) days after the expiration of the
term hereof less any amount deducted in accordance with this paragraph, together
with Landlord's written notice itemizing the amounts and purposes for such
retention. In the event of termination of Landlord's interest in this Lease,
Landlord shall transfer said deposit to Landlord's successor in interest.
In addition to the cash security deposit provided above, Tenant shall
provide Landlord a lease guarantee ("Lease Guarantee"), in the initial amount of
Five Hundred Thousand and No/100 Dollars ($500,000.00). The Lease Guarantee
shall be delivered to Landlord promptly after Lease execution.
Upon the occurrence of any default by Tenant as defined in paragraph 24
of this Lease, Landlord shall be entitled to draw upon the Lease Guarantee to
the extent necessary to cure such default. The Lease Guarantee shall be
irrevocable, and shall be conditioned solely upon Landlord's certifying to the
issuer thereof that a default exists under this Lease. Such Lease Guarantee
shall provide for a schedule of reduction in the following amounts:
10/1/91-9/30/92 $425,000.00
10/1/92-9/30/93 $350,000.00
10/1/93-9/30/94 $275,000.00
10/1/94-9/30/95 $200,000.00
10/1/95-9/30/96 $125,000.00
10/1/96-9/30/97 $ 50,000.00
6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant
to Landlord of rent and other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
administrative, processing, accounting charges, and late charges, which may be
imposed on Landlord by the terms of any contract, revolving credit, mortgage or
trust deed covering the Premises. Accordingly, if any installment of rent or any
other sum due from Tenant shall not be received by Landlord or Landlord's
designee within ten (10) days after such amount shall be due,
-2-
<PAGE> 3
Tenant shall pay to Landlord a late charge equal to five (5%) percent of such
overdue amount which shall be due and payable with the payment then delinquent.
The parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Landlord will incur by reason of late payment by Tenant.
Acceptance of such late charge by Landlord shall in no event constitute a waiver
of Tenant's default with respect to such overdue amount, nor prevent Landlord
from exercising any of the other rights and remedies granted hereunder. In the
event that a late charge is payable hereunder, whether or not collected, for
three (3) consecutive installments of rent, then rent shall automatically become
due and payable quarterly in advance, rather than monthly, notwithstanding any
provision of this Lease to the contrary.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
7. CONSTRUCTION AND POSSESSION: The Tenant Improvements shall be
constructed by independent contractors to be employed by and under the
supervision of Landlord, as general contractor, in accordance with plans
prepared by Dennis Kobza and Associates, to be attached as Exhibit "B" ("Working
Drawings"). Landlord shall construct the Tenant Improvements in accordance with
all existing applicable municipal, local, state and federal laws, statutes,
rules, regulations and ordinances.
Landlord shall be responsible for and shall pay the cost of the Tenant
Improvements up to the amount of Four Hundred Eighty-Eight Thousand Four Hundred
Five and No/100 Dollars ($488,405.00) ("Tenant Improvement Allowance"). In the
event the cost of Tenant Improvements is less than the Tenant Improvement
Allowance, the monthly rental under the f case shall be reduced at the rate of
Fifteen Dollars ($15.00) per month for each One Thousand Dollars ($1,000.00) of
the Tenant Improvement Allowance not used. The cost of the Tenant Improvements
including fit-up of special areas shall include a fee of eight and one half
percent (8.5%) to cover all Landlord's Costs and Expenses including but riot
limited to: a field superintendent temporary on-site facilities; home office
administration, supervision, and coordination; financing fees, and construction
interest Landlord hereby guarantees that, under no circumstance, will the
expense for Tenant Improvements exceed the said allowance without Tenant's prior
approval Tenant shall have the right to approve the budget of the Tenant
Improvements prior to the Landlord's contracting for the improvements. If the
cost of the Tenant improvements exceed the Tenant Improvement Allowance by
virtue of Tenant's written approval, Tenant shall pay for such excess costs in
cash within thirty (30) days after Landlord has provided Tenant with evidence
that Landlord's progress payments to subcontractors has exceeded said Tenant
Improvement budget. All costs for Tenant Improvements shall be fully documented
to and verified by Tenant. Anything to the contrary in the foregoing
notwithstanding, Landlord shall provide Tenant with a list of contractors to
whom Landlord proposes to let the contract for the Tenant Improvements to be
constructed by Landlord hereunder. Tenant shall promptly notify Landlord of any
reasonable objections to the use of any such contractor and shall also provide
Landlord with the name of any contractor Tenant desires to have an opportunity
to bid on the contract to construct the Tenant Improvements. Landlord will
consult with Tenant in the final selection of a contractor and the letting of
any contract to construct the Tenant Improvements. Tenant shall not unreasonably
object to the selection of a contractor chosen by Landlord or the terms of the
contract for the construction of the Tenant Improvements agreed to by Landlord.
-3-
<PAGE> 4
Tenant, at Tenants expense, to supply Landlord with preliminary
improvement information ("Preliminary Information") including one line drawings
of Tenants wall layout electrical and air conditioning requirements by July 7,
1990. Based on this information, Landlord shall prepare the final working
drawings ("Working Drawings") which shall be approved by both Landlord and
Tenant In the event (i) Tenant fails to provide the Preliminary Information by
July 7, 1990 or, (ii) Tenant makes any changes to the Working Drawings which
cause Landlord's construction schedule to be delayed, the Commencement Date
shall occur one (1) day in advance of Substantial Completion as defined below
for each day of delay. If the delay is not caused by Tenant and is to be more
than three (3) months after the originally scheduled date, Landlord shall notify
the Tenant not later than the original schedule date and the Tenant shall have
the right to terminate this Lease at Tenants option. In all events, Landlord
shall provide Tenant will a minimum of two (2) weeks prior written notice of the
Commencement Date of the Lease.
If Landlord, for any reason whatsoever, cannot deliver possession of
the said Premises to Tenant at the commencement of the said term, as
hereinbefore specified,; and if Tenant has not terminated this Lease, Tenant
shall be entitled to one(1) free day of rent for every day of delay. In that
event the Commencement Date and termination date of the Lease and all other
dates affected thereby in that event the Commencement Date and termination date
of the Lease and all other dates affected thereby in that event the Commencement
Date and termination date of the Lease and all other dates affected thereby
shall be revised to conform to the date of Landlord's delivery of possession.
The term of the Lease shall not commence until substantial completion of the
Premises occurs. "Substantial Completion" shall mean that: (i) all necessary
governmental approvals, permits, consents, and certificates have been obtained
by or for Landlord for the lawful construction by Landlord, and occupancy by
Tenant, or said Premises, excluding work attributable to any special fit-up
requested or required by Tenant, (ii) all of the Premises interior fully meet
all of the Working Drawings, excluding Tenant's special fit-up, (iii) all of the
Premises exterior substantially meets the applicable Working Drawings, including
paved parking areas, and (iv) said interior is in a "broom clean" finished
condition. If necessary, Landlord reserves the right to post a bond for the
uncompleted portion of the landscaping.
8. ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: By
entry hereunder, Tenant accepts the Premises as being in good and sanitary
order, condition and repair and accepts the Building and the other improvements
in their present condition, except for a"punch list" delivered by Tenant to
Landlord within five (5) business days after Tenant's entry onto the Premises.
The Tenant agrees on the last day of the term hereof, or on the sooner
termination of this Lease, to surrender the Premises unto Landlord in good
condition and repair, reasonable wear and tear excepted. "Good condition" shall
mean that the interior walls of all office and warehouse areas, the floors of
all office and warehouse areas, all suspended ceilings and any carpeting will be
cleaned to the same condition as existed at the commencement of the Lease,
normal wear and tear excepted. Tenant shall ascertain from Landlord within
thirty (30) days before the end of the term of this Lease whether Landlord
desires to have the Premises or any part or parts thereof restored to their
condition as of the commencement of this Lease or to cause Tenant to surrender
all alterations, additions, and improvements in place to Landlord. If Landlord
shall so desire, then Tenant shall remove such alterations, additions, and
improvements as Landlord may require and shall repair and
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restore said Premises or such part or parts thereof before the termination of
this Lease at Tenants sole cost and expense. Tenant on or before the end of the
term or sooner termination of this Lease, shall remove all his or its personal
property and trade fixtures from the Premises, and all property not so removed
shall be deemed to be abandoned by Tenant. If the Premises are not surrendered
at the end of the term or sooner termination of this Lease, Tenant shall
indemnify Landlord against loss or liability resulting from delay by Tenant in
so surrendering the Premises including, without limitation, any claims made by
any succeeding tenant founded on such delay.
9. USES PROHIBITED: Tenant shall not commit or suffer to be committed
any waste upon the said Premises, or any nuisance, or other act or thing which
may disturb the quiet enjoyment of any other tenant in or around the Buildings
in which the Premises may be located or allow any sale by auction upon the
Premises, or allow the Premises to be used for any unlawful or objectionable
purpose, or place any loads upon the floor, walls, or ceiling which endanger the
structure, or use any machinery or apparatus which will in any abnormal manner
vibrate or shake the Premises or the Building of which it is a part, or place
any harmful liquids, waste materials, or hazardous materials in the drainage
system of, or upon or in the soils surrounding the Building. No materials,
supplies, equipment, finished products or semi-finished products, raw materials
or articles of any nature or any waste materials, refuse, scrap or debris shall
be stored upon or permitted to remain on any portion of the Premises outside of
the Building proper without Landlord's prior approval, which approval may be
withheld in its sole discretion.
10. ALTERATIONS AND ADDITIONS: Tenant shall not make, or suffer to be
made, any major alteration or addition to the said Premises, or any part
thereof, without the written consent of Landlord first had and obtained, which
consent will not be unreasonably withheld or delayed, based upon Tenants
delivering to Landlord the proposed architectural and structural plans for all
such alterations; any addition or alteration to the said Premises except movable
furniture and trade fixtures, shall become at once a part of the realty and
belong to Landlord unless otherwise agreed between Landlord and Tenant.
Alterations and additions which are not to be deemed as trade fixtures shall
include heating, lighting, electrical systems, air conditioning, partitioning,
carpeting, or any other installation which has become an integral part of the
Premises. After having obtained Landlord's consent, Tenant agrees that it will
not proceed to make such alterations or additions, until three (3) days from the
receipt of such consent, in order that Landlord may post appropriate notices to
avoid any liability to contractors or material suppliers for payment for
Tenant's improvements. Tenant will at all times permit such notices to be posted
and to remain posted until the completion of work. Tenant acknowledges
Landlord's right to and hereby consents to construction of additional Buildings
and improvements in the Building, on the Land where the Building is situated, in
the Project and on adjacent land owned by Landlord subject; always, to
recalculation of Tenants Allocable share of Costs as set forth below. Anything
to the contrary in the foregoing notwithstanding, Tenant shall have the right to
make improvements or alterations to the Premises upon notice to Landlord if such
alterations or improvements do not cause any major alteration to the appearance
of the Building or any material alteration in the electrical, heating, air
conditioning, ventilation or plumbing systems of the Building and, in any case,
cost less than Twenty-Five Thousand and No/100 Dollars ($25,000.00).
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11. LANDLORD'S AND TENANT'S OBLIGATIONS REGARDING COMMON AREA COSTS:
Tenant agrees to reimburse Landlord for the reasonable expenses resulting from
Landlords payment of Common Area Costs as defined in paragraph 1.1(a) incurred
by Landlord because the cost is not directly allocable to or payable by a single
tenant in the Building or the Project. Tenant agrees to pay Tenants Allocable
Share as defined in paragraph 1.1.(b) of the Common Area Costs, as additional
rental, within thirty (30) days of written invoice from Landlord.
11.(A) COMMON AREA COSTS: For purposes of calculating Tenants
Allocable Share of Building and of Project Costs, the term "Common Area Costs"
shall mean all costs and expenses of the nature hereinafter described which am
incurred in connection with ownership and operation of the Building or the
Project in which the Premises are located, as the case may be not directly
allocable to or payable by a single tenant in the Building or the Project,
together with such additional facilities as may be determined by Landlord to be
reasonably desirable or necessary to the ownership and operation of the Building
and/or Project. Common Area Costs shall not include any capital expenditures,
except to the extent such expenditures benefit the occupants of the Project,
Building, and Tenant during the term of the Lease and are amortized over the
useful life of the property acquired or constructed as a result of such
expenditure. All costs and expenses shall be determined in accordance with
generally accepted accounting principles which shall be consistently applied
(with accruals appropriate to Landlord's business), including but not limited
to, the following:
(i) Common area utilities, including water and power,
heating, lighting, air-conditioning, ventilating and Building
utilities to the extent not separately metered and are not in
an area separately rented out and are the located only in a
common area;
(ii) All common area maintenance and service
agreements for the Building or the Project and the equipment
therein including, without limitation, common area janitorial
services, alarm and security services, exterior window
cleaning, and maintenance of the sidewalks, landscaping,
waterscape, roof membrane, parking areas, driveways, service
areas, mechanical rooms, elevators, and the building exterior,
(iii) All insurance premiums and costs, including
without limitation, the premiums and cost of fire, casualty
and liability coverage and rental abatement and earthquake (if
commercially available) insurance applicable to the Building
or Project;
(iv) Repairs, replacements and general maintenance
(excluding repairs and general maintenance paid by proceeds of
insurance or by Tenant or other third parties, and repairs or
alterations attributable solely to tenants of the Building or
Project other than Tenant). This also includes the repairs and
maintenance for the area which is common to the Premises and
the floor above the Premises such as roof membrane and
exterior walls, sidewalks, etc.;
(v) All real estate taxes, special assessment service
payments in lieu of taxes, excises, transit charges, housing
fund assessment, levies, fees or charges and including any
substitutes or additions thereto which may occur during the
Term (and
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Renewal Terms, if any) of this lease which are assessed, or
imposed by any public authority upon the Building or Project,
the act of entering this Lease, the occupancy by Tenant, the
rent provided for in this Term and including real estate tax
increases due to a sale or transfer of the Building or the
Project, in which the Premises are located, as such taxes are
levied or appear on the City and County tax bills and
assessment rolls. Nothing in the foregoing shall be construed
to require Tenant to pay any taxes or other fees of the sort
usually denominated as general income taxes by any federal,
state, county or city governmental unit.
(vi) At a sum equal to eight and one-half percent
(8.5%) of all the above operating costs to reimburse Landlord
for its supervisory, managerial, administration and collection
services therewith.
This shall be a Net Lease and the Rental shall be paid to Landlord
absolutely net of all costs and expenses. The provision for payment of Common
Area Costs by mews of periodic payment of Tenants Allocable Share of Building
and/or Project Costs are intended to pass on to Tenant and reimburse Landlord
for all costs of operating and managing the Building and/or Project.
11.(B) TENANT'S ALLOCABLE SHARE: For purposes of prorating
Common Area Costs which Tenant shall pay, Tenant's Allocable Share of Building
Costs is computed by multiplying the total Common Area Costs for services shared
by the Building by a fraction, the numerator of which is the rentable square
footage of the Building (excluding common areas). Tenant's Allocable Share of
Project Costs shall be computed on a shared service by service basis, by
multiplying the total Common Area Costs for services shared by the Building and
one or more buildings in the Project by a fraction, the numerator of which is
the rentable square footage of the Buildings in the Project which share the
services. It is understood and agreed by Landlord and Tenant that Tenant's
Allocable Share of Building Costs is 42.33% and of Project Costs is 10.12%. For
all tax-related expenses, tenant's allocable share shall be 17.19% of the Parcel
cost.
It is understood and agreed that Tenant's obligation to share in Common
Area Costs shall be adjusted to reflect the commencement and termination dates
of the Lease Term and are subject to recalculation in the event of expansion of
the Building or Project.
12. MAINTENANCE OF PREMISES: Except as provided in paragraph 11 Tenant
shall at its sole cost, keep and maintain, repair and replace, said Premises and
appurtenances and every part hereof. including but not limited to, exterior
walls, roof, glazing, sidewalks, parking plumbing, electrical and HVAC systems
excluding those areas that have been designated as Common Areas in Paragraph
11.(a); and all the Tenant Interior Improvements in good and sanitary order,
condition, and repair, ordinary wear and tear excepted. Tenant shall provide
Landlord with a copy of a service contract between Tenant and a licensed
air-conditioning and heating contractor which contract shall provide for
maintenance of all air conditioning and heating equipment with reasonable
routine intervals at the Premises. Tenant shall pay the cost of all
air-conditioning and heating equipment repairs or replacements which are either
excluded from such service contract or any existing equipment warranties. Tenant
shall be responsible for the preventive maintenance of the
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membrane of the roof, which responsibility shall be deemed properly discharged
if (i) Tenant contracts with a licensed roof contractor who is reasonably
satisfactory to both Tenant and Landlord, at Tenant's sole cost, to inspect the
roof membrane at least every six months, with the first inspection due the sixth
(6th) month after the Commencement Date, and (ii) Tenant performs, at Tenant's
sole cost, all preventive maintenance recommendations made by such contractor
within a reasonable time after such recommendations are made. Such preventive
maintenance might include acts such as clearing storm gutters and drains,
removing debris from the roof membrane, trimming trees overhanging the roof
membrane, applying coating materials to seal roof penetrations, repairing
blisters and other routine measures. Tenant shall provide to Landlord a copy of
such preventive maintenance contract and paid invoices for the recommended work.
All vinyl wall surfaces and floor tile are to be maintained in an as good a
condition as when Tenant took possession free of holes, gouges, or defacements.
Tenant agrees to limit attachments to vinyl wall surfaces exclusively to
V-joints. Landlord shall, at Landlords cost and expense, maintain and repair the
exterior walls of the Building, the roof structure of the building, the
structural components of the Building, except to the extent such repair and
maintenance is the responsibility of Tenant under this Lease or some other
provision of this Lease may excuse Landlord's performance form such duties on
account of casualty or similar cause, and the Common Areas of the complex of
which the Building is a part.
13. HAZARD INSURANCE: Tenant shall not use, or permit said Premises, or
any part thereof, to be used for any purpose other than that for which the said
Premises are hereby leased; and no use shall be made or permitted to be made of
the said Premises, nor acts done, which will cause an increase in premiums or a
cancellation of any insurance policy covering said Building, or any part
thereof, nor shall Tenant sell or permit to be kept, used or sold, in or about
said Premises, any article which may be prohibited by the standard form of fire
insurance policies. Tenant shall, at its sole cost and expense, comply with any
and all requirements, pertaining to said Premises, of any insurance organization
or company, necessary for the maintenance of reasonable fire and public
liability insurance, covering said Building and appurtenances. The Landlord
agrees to purchase and keep in force fire, earthquake (if commercially available
and/or required by Landlord's Lender), and extended coverage insurance covering
the Premises in amounts not to exceed the actual insurable value of the
Building, including the Premises, as determined by Landlord's insurance
company's appraisers.
In addition, Tenant agrees to insure its personal property, additions,
alterations, and improvements for their full replacement value (without
depreciation) and to obtain workers compensation and public liability and
property damage insurance for occurrences within the Premises of $5,000,000.00
combined single limit for bodily injury and property damage. Tenant shall name
Landlord as an additional insured, shall deliver a copy of the policies and
renewal certificates to Landlord. All such policies shall provide for thirty
(30) days' prior written notice to Landlord of any cancellation or termination.
Notwithstanding the above, Landlord retains the right to have Tenant provide
other forms of insurance which may be reasonably required to cover future risks
customarily insured against by reasonably prudent businesses in Tenant's
industry located in the Santa Clara-San Jose area.
Landlord and Tenant hereby waive any rights each may have against the
other on account of any loss or damage occasioned to the Landlord or the Tenant
as the case may be, or to the Premises
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<PAGE> 9
or its contents, and which my arise from any risk covered by their respective
insurance policies, as set forth above. The parties shall obtain from their
respective insurance companies a waiver of any right of subrogation which said
insurance company may have against the Landlord or the Tenant, as the case may
be.
14. TAXES: Tenant shall be liable for all taxes levied against personal
property and/or business fixtures, and agrees to pay, as additional rental,
all real estate taxes and special assessment installments levied on the
Premises, upon the occupancy of the Premises and including any substitute or
additional charges which may be imposed during, or applicable to the Lease term
including real estate tax increases due to a sale or other transfer of the
Premises, as they appear on the City and County tax bills during the Lease term
and as they become due. It is understood and agreed that Tenant's obligation
under this paragraph will be prorated to reflect the commencement and
termination dates of this Lease. If Tenant's Allocable Share of Taxes (based on
square footage) is not consistent with the method used by the (county Tax
Assessor, Landlord shall allocate based on the County's formula In any time
during the term of this Lease a tax, excise on rents, business license tax, or
any other tax, however described, is levied or assessed against Landlord, as a
substitute or addition in whole or in part for taxes assessed or imposed on land
or Buildings, Tenant shall pay and discharge his program share of such or excise
on rents or other tax before it becomes delinquent, except that this provision
is not intended to cover net income taxes, inheritance, gift or estate tax
imposed upon the Landlord.
15. UTILITIES: Except as provided in paragraph 11, Tenant shall pay
directly to the providing utility all water, gas, heat, light, power, telephone
and other utilities supplied to the Premises.
16. WAIVER OF LIABILITY: Failure by Landlord to perform any defined
services, or any cessation thereof, when such failure is caused by accident,
breakage, repairs, strikes, lockout or other labor disturbances or labor
disputes of any character, or by any other cause, similar or dissimilar, beyond
the reasonable control of Landlord, shall not render Landlord liable in any
respect for damages to either person or property, nor be construed as an
eviction of Tenant, nor relieve Tenant from fulfillment of any covenant or
agreement hereof. Should any of the equipment or machinery utilized in supplying
the services listed herein break down, or for any cause cease to function
property, upon receipt of written notice from Tenant of any deficiency or
failure of any defined Services, Landlord shall use reasonable diligence to
repair the same promptly, but Tenant shall have no right to terminate this
Lease, and shall have no claim for rebate of rent or damages, on account of any
interruptions in service occasioned thereby or resulting therefrom. Tenant
waives the provisions of California Civil Code Sections 1941 and 1942 concerning
the Landlord's obligation of tenantabilty and Tenant's right to make repairs and
deduct the cost of such repairs from the rent. Landlord shall not be liable for
a loss of or injury to property, however occurring, through or in connection
with or incidental to furnishing or its failure to furnish any of the foregoing
except if such loss is due to Landlord's own intentional acts or omissions.
17. ABANDONMENT: Tenant shall not vacate or abandon the Premises at any
time during the term without Landlords approval; and if Tenant shall abandon,
vacate or surrender said
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<PAGE> 10
Premises or be dispossessed by process of law, or otherwise, any personal
property belonging to Tenant and left on the Premises shall be deemed to be
abandoned at the option of Landlord, except such property as may be mortgaged to
Landlord.
18. FREE FROM LIENS: Tenant shall keep the Premises and the Building in
which the Premises are situated, free from any liens arising out of any work
performed, materials furnished, or obligations incurred by Tenant.
19. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at its sole
cost and expense, comply with all of the requirements of all Municipal, State
and Federal authorities now in force, or which may hereafter be in force,
pertaining to the said Premises, and shall faithfully observe in the use of the
Promises all Municipal ordinances and State and Federal statutes now in force or
which may hereafter be in force. The judgement of any court of competent
jurisdiction, or the admission of Tenant in any action or proceeding against
Tenant, whether Landlord be a party thereto or not, that Tenant has violated any
such ordinance or statute in the use of the Premises, shall be conclusive of
that fact as between Landlord and Tenant.
20. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: Without the prior written
consent of Landlord, Tenant shall not bring, allow, use or permit upon the
Premises, or generate or create at or emit or dispose from the Premises any
chemicals, toxic or hazardous gaseous, liquid or solid or waste, including
without limitation, material or substance having characteristics of
ignitability, corrosivity, reactivity, or extraction procedure toxicity or
substances or materials which are listed on any of the Environmental Protection
Agency's lists of hazardous wastes or which are identified in Sections 66680
through 66685 of Title 22 of the California Administrative Code as the same may
be amended from time to time. Tenant shall comply, at its sole cost, with all
laws pertaining to, and shall indemnify and hold Landlord harmless from any
claims, liabilities, costs or expenses incurred or suffered by Landlord arising
from such bringing, allowing, using, permitting, generating, creating, or
emitting or disposing of any such material & Tenant's indemnification and hold
harmless obligations include, without limitation, (i) claims, liability, costs
or expenses resulting from or based upon administrative, judicial (civil or
criminal) or other action, legal or equitable, brought by any private or public
person under common law or under the Comprehensive Environmental Response,
Compensation and Liability, Act of 1980 ("RCRA") or any other Federal, State,
County or Municipal law, ordinance or regulation, (ii) claims, liabilities,
costs or expenses pertaining to the cleanup or containment of wastes, the
identification of the pollutants in the waste, the identification of scope of
any environmental contamination, the removal of pollutants from soils, riverbeds
or aquifers, the provision of an alternative public drinking water source, or
the long term monitoring of ground water and surface waters, and (iii) all costs
of defending such claims. Landlord shall, however, be responsible for damages
directly caused by its own intentional acts and omissions and all costs and
expenses, including reasonable attorney's fees, incurred in defending claims
based upon them. In order to obtain consent, Tenant shall deliver to Landlord
its written proposal describing the toxic material to be brought onto the
Premises, measures to be taken for storage and disposal thereof, safety measures
to be employed to prevent pollution of the air, grand, surface and ground water.
Landlord's approval may be withheld in its reasonable judgement. Tenant further
agrees to properly close the facility with regard to hazardous materials and
obtain a Closure
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Certificate from the local administering agency. Landlord represents and
warrants that it knows of no claim, and knows of no basis of any claim by any
governmental agency or other person that the Premises, the Building or the land
under them are put of any toxic waste site, nuisance or are otherwise
environmentally harmful. Landlord represents and warrants that it has taken no
action of its own and knows of no action or omission of anyone else or of any
condition of the, Premises, the Building, or the land and complex of which the
Premises and the Building are a part, that could lead to such a claim in the
future.
21. INDEMNITY: As a material part of the consideration to be rendered
to Landlord, Tenant hereby waives all claims against Landlord for damages to
goods, wares and merchandise, and all other personal property in, upon or about
said Premises and for injuries to persons in or about said Premises, from any
cause arising at any time, and Tenant will hold Landlord exempt and harmless
from any damage or injury to any person, or to the goods, ware and merchandise
and all other personal property of any person, arising form the use of the
Premises by Tenant, or from the failure of Tenant to keep the Premises in good
condition and repair, as herein provided. Further, in the event Landlord is made
party to any litigation due to the acts or omission of Tenant, Tenant will
indemnify and hold Landlord harmless from any such claim or liability including
Landlord's costs and expenses and reasonable attorney's fees incurred in
defending such claims.
22. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be
placed, in, upon or about the said Premises any unusual or extraordinary sips,
or any sips except temporary signs or small signs not approved by the city or
other governing authority. The Tenant will not place, or permit to be placed.
upon the Premises, any signs, advertisements or notices without the written
consent of the Landlord as to type, size, design, lettering, coloring and
location, and such consent will not be unreasonably withheld. Landlord grants
the right to Tenant, subject to approval by the City of Santa Clara to install
an electrically lighted sip on the panel at the southwest corner of the Building
facing Mission College Boulevard. Any sign so placed on the Premises shall be so
placed upon the understanding and agreement that Tenant will remove same at the
termination of the tenancy herein created and repair any damage or injury to the
Premises caused thereby, and if not so removed by Tenant then Landlord may have
same so removed at Tenant's expense.
23. ATTORNEY'S FEES: In case suit should be brought for the possession
of the Premises, for the recovery of any sum due hereunder, or because of the
breach of any other covenant herein, the losing party shall pay to the
prevailing party a reasonable attorney's fee as part of its costs which shall be
deemed to have accrued on the commencement of such action and shall be
enforceable whether or not such action is prosecuted to judgement
24. TENANT'S DEFAULT: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: a) Any failure
by Tenant to pay the rental or to make any other payment request to be made by
Tenant hereunder, where such failure continues for ten (10) days after written
notice thereof by Landlord to Tenant; b) The abandonment or vacation of the
Premises by Tenant without Landlord's approval; c) A failure by Tenant to
observe and perform any other provision of this Lease to be observed or
performed by Tenant, where such failure continues for thirty (30) days after
written notice thereof by Landlord to Tenant; provided, however,
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that if the nature of such default is such that the same cannot reasonably be
cured within such thirty (30) day period Tenant shall not be deemed to be in
default if Tenant shall within such period commence such cure and thereafter
diligently prosecute the same to completion; d) The making by Tenant of any
general assignment for the benefit of creditors; the filing by or against Tenant
of a petition to have Tenant adjudged a bankrupt or of a petition for
reorganization or arrangement under any law relating to bankruptcy (unless, in
the case of a petition for reorganization or arrangement under any law relating
to bankruptcy (unless, in the case of a petition filed against Tenant, the same
is dismissed after the filing); the appointment of a trustee or receiver to take
possession of substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease, where possession is not restored to Tenant
within sixty (60) days; or the attachment execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within sixty (60)
days. The notice requirements set forth herein are in lieu of and not in
addition to the notices required by California Code of Civil Procedure Section
1161.
24.(a) REMEDIES: In the event of any such default by Tenant
then in addition to any other remedies available to Landlord at law or in
equity, Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such intention to
terminate. In the event that Landlord shall elect to so terminate this Lease
then Landlord may recover from Tenant: a) the worth at the time of award of any
unpaid rent which had been earned at the time of such termination; plus b) the
worth at the time of award of the amount by which the unpaid rent would have
been earned after termination until the time of award exceeds the amount of such
rental loss Tenant proves could have been reasonably avoided; plus c) the worth
at the time of award of the amount by which the unpaid rent for the balance of
the term after the time of award exceeds the amount of such rental loss that
Tenant proves could be reasonably avoided; plus d) any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's failure
to perform his obligation sunder this Lease or which In the ordinary course of
things would be likely to result therefrom, and e) at Landlord's election, such
other amounts in addition to or in lieu of the foregoing as may be permitted
from time to time by applicable California law. The term "rent", as used herein,
shall be deemed to be and to mean the minimum monthly installments of rent and
all other sums required to be paid by Tenant pursuant to the terms of this
Lease, all other such sums being deemed to be additional rental due hereunder.
As used in (a) and (b) above, the "worth at the time of award" is computed by
allowing interest at the rate of the discount rate of the Federal Reserve Bank
of San Francisco plus five (5%) percent per annum. As used in (c) above, the
"worth at the time of award" is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one (1%) percent.
24.(b) RIGHT TO RE-ENTER: In the vent of any such default by
Tenant, Landlord shall also have the right, with or without terminating this
Lease, to re-enter the Premises and remove all persons and property from the
Premises; such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant.
24.(c) ABANDONMENT: In the event of the vacation or
abandonment of the Premises by Tenant or in the event that Landlord shall elect
to re-enter as provided in paragraph 24.(b) above or shall take possession of
the Premises pursuant to legal proceeding or pursuant to any notice
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provided by law, then if Landlord does not elect to terminate this Lease as
provided in paragraph 24.(a) above, then the provisions of California Civil Code
Section 1951.4, as amended from time to time, shall apply and Landlord may from
time to time, without terminating this Lease, either recover all rental as it
becomes due or relet the Premises or any part thereof for such term or terms and
at such rental or rentals and upon such other terms and conditions as Landlord
in its sole discretion may deem advisable with the right to make alterations and
repairs to the Premises. In the event that Landlord shall elect to so relet,
then rentals received by Landlord form such reletting shall be applied: first,
to the payment of any indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any cost of such reletting; third, to the
payment of the cost of any alterations and repairs to the Premises; fourth, to
the payment of rent due and unpaid hereunder; and the residue, if any, shall be
held by Landlord and applied in payment of future rent as the same may become
due and payable hereunder. Should that portion of such rentals received from
such reletting during any month, which is applied by the payment of rent
hereunder, be less than the rent payable during that month by Tenant hereunder,
then Tenant shall pay such deficiency to Landlord immediately upon demand
therefor by Landlord. Such deficiency shall be calculated and paid monthly.
Tenant shall also pay to Landlord, as soon as ascertained, any costs and
expenses incurred by Landlord in such reletting or in making such alterations
and repairs not covered by the rentals received from such reletting.
24(d) NO TERMINATION: No re-entry or taking possession of the
Premises by Landlord pursuant to 24.(b) or 24.(c) of this Article 24 shall be
construed as an election to terminate this Lease unless a written notice of such
intention be given to Tenant or unless the termination thereof be decreed by a
court of competent jurisdiction. Notwithstanding any reletting without
termination by Landlord because of any default by Tenant, Landlord may at any
time after such reletting elect to terminate this Lease for any such default.
25. SURRENDER OF LEASE: The voluntary or other surrender of this Lease
by Tenant, or a mutual cancellation thereof, shall not automatically effect a
merger of the Lease with Landlord's ownership of the Building and Premises.
Instead, at the option of Landlord, Tenant's surrender may terminate all or any
existing sublease or subtenancies, or may operate as an assignment to Landlord
of any or all such subleases or subtenancies, thereby creating a direct
Landlord-Tenant relationship between Landlord and any subtenants.
26. HABITUAL DEFAULT: Notwithstanding anything to the contrary
contained in paragraph 24, 24 (a) (b) (c) and (d), the parties hereto agree that
if the Tenant shall have defaulted in the performance of any (but not
necessarily the same) material term or condition of this Lease for three or more
times during any twelve month period during the term hereof, then such conduct
shall at the election of the Landlord, represent a separate event of default
which cannot be cured by the Tenant. Tenant acknowledges that the purpose of
this provision is to prevent repetitive defaults by the Tenant under the Lease,
which work a hardship upon the Landlord, and deprive the Landlord of the timely
performance by the Tenant hereunder.
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27. LANDLORD'S DEFAULT: In the event of Landlords failure to perform
any of its covenants or agreements under this Term, Tenant shall give Landlord
written notice of such failure and shall give Landlord the reasonable
opportunity not more than thirty (30) days to cure such failure prior to any
claim for breech or for damages resulting from such failure Tenant shall also
have the right to deduct the cost to cure from the Rent in the event Landlord
has not cured its default within the time period provided above.
28. NOTICES: All notices required to be given under this Lease shall be
sent by U.S. mail return receipt requested, or by personal delivery addressed to
the party to be notified at the address for such party specified in paragraph 1
of this Lease, or to such other place as the party to be notified may from time
to time designate by at least fifteen (15) days notice to the notifying party.
29. ENTRY BY LANDLORD: Tenant shall permit Landlord and his agents to
enter into and upon said Premises at all reasonable times subject to the
permission and any security regulations of Tenant for the purpose of inspecting
the same or for the purpose of maintaining the Premises or the Building in which
said Premises are situated, or for the purpose of making repairs, alterations or
additions to any other portion of said Building or for the purpose of renting
additional buildings) and improvements in the Building, on the land where the
Building is situated, in the Project, or on adjacent land owned by Landlord,
including the erection and maintenance of such scaffolding, canopies, fences and
props as may be required and Tenant shall be entitled to a reasonable Rent
abatement when said interruption occurs; and Tenant shall permit Landlord and
his agents, at any time within ninety (90) days prior to the expiration of this
Lease, to place upon said Premises any "For Sale" or "to lease" signs and
exhibit the Premises to prospective tenants at reasonable hours.
30. DESTRUCTION OF PREMISES: In the event of a partial destruction of
the Premises by an insured casualty during the said term from any cause,
Landlord shall forthwith repair the same, provided such repairs can be made
within one hundred eighty (180) days, including receipt of all necessary
governmental approvals, under the laws and regulations of State, Federal, County
or Municipal authorities, but such partial destruction shall in no way annul or
void this Lease, except that Tenant shall be entitled to a proportionate
reduction of rent while such repairs are being made, such proportionate
reduction to be based upon the extent to which the making of such repairs shall
interfere with the business carried on by Tenant in the said Premises in the
mmnable judgement of Landlord. If such repairs cannot be made in one hundred
eighty (180) days, Tenant, or Landlord may, at their option, terminate this
Lease. For purposes of this paragraph 'partial destruction" shall mean
destruction to the extent of one-third (1/3) of the Replacement Cost of the
Premises including the Replacement Cost of Tenant's Interior Improvements paid
for by Landlord, or less. In the event the Premises are more than partially
destroyed, Landlord may elect to terminate this Lease or may proceed with
repairs, this Lease continuing in full force and the rent to be proportionately
reduced as aforesaid provided, however, that if such repairs are to take more
than one-hundred eighty (180) days, Tenant may elect to terminate the Lease. In
respect to any partial destruction which Landlord is obligated to repair or may
elect to repair under the terms of this paragraph, the provision of Section
1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of
the State of California are waived by Tenant. When a partial destruction of the
Premises by an uninsured casualty, Landlord agrees to repair the damage at its
own cost up to Two Hundred Fifty Thousand and No/100
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Dollars ($250,000.00) for Tenant's portion of the Building. If such damage can
not be repaired within one hundred eighty (180) days and within the specified
cost, the Landlord or Tenant may then terminate this Lease.
In the event that the Building in which the Premises may be situated be
destroyed to the extent of not less than 33-1/3% of the replacement cost
thereof, Landlord may elect to terminate this Lease, whether the Premises be
inured or not. A total destruction of the Building in which the said Premises
may be situated shall terminate this Lease at the option of Landlord or Tenant.
In all events Landlord shall not be required to restore additions, alterations
or improvements made by Tenant or replace Tenant's fixtures or personal
property.
31. ASSIGNMENT OR SUBLEASE: In the event Tenant desires to assign this
Lease or any interest including, without limitation, a pledge, mortgage or other
hypothecation, or sublet the Premises or any part thereof, Tenant shall deliver
to landlord executed counterparts of any such agreement and of all ancillary
agreements with the proposed assignee or subtenant, financial statements, and
any additional information as reasonably required to determine whether it will
consent to the proposed assignment/subtenant, proposed use of the Premises,
rental rate and current financial statement; and upon request to Tenant,
Landlord shall be given additional information as reasonably required to
determine whether it will consent to the proposed assignment or sublease.
Landlord shall then have a period of ten (10) business days following receipt of
such notice within which to notify Tenant in writing that Landlord elects (i) to
terminate this Lease as to the space so affected as of the date so specified by
Tenant in which event Tenant will be relieved of all further obligations
hereunder as to such space, (ii) to permit Tenant to assign or sublet such space
to the named assign subtenant on the terms and conditions set forth in the
notice. If Landlord should fail to notify Tenant in writing of such election
within said ten (10) business days period, Landlord shall be deemed to have
elected option (ii) above. Any rent or other economic consideration realized by
Tenant under any such sublease and assignment in excess of the Base Rental and
Additional Rental payable hereunder (including an allocation of the purchase
price attributable to Tenant's Leasehold interest in the event of a sale of the
Tenant's business), after the net unamortized cost of the Tenant Extra
Improvements for which Tenant has itself paid, and reasonable subletting and
assignment costs, shall be delivered and paid fifty percent (50%) to Landlord
and fifty percent (50%) to Tenant. Tenant's obligation to pay over Landlord's
portion of the consideration shall constitute an obligation for additional rent
hereunder. The above provisions relating to Landlord's right to terminate the
lease and relating to the allocation of bonus rent are independently negotiated
terms of the Lease, constitute a material inducement for the Landlord to enter
into the Lease, and are agreed as between the parties to be commercially
reasonable. No assignment or subletting by Tenant shall relive Tenant of any
obligation under this Lease. Any assignment or subletting which conflicts with
the provisions hereof shall be void.
If Landlord exercises its option to terminate this Lease in part in the event
Tenant desires to sublet or assign part of the Premises, then (a) this Lease
shall end and expire, with respect to such part of the Premises, on the date
upon which the proposed sublease was to commence, and (b) from and after such
date, the amount and Tenants allocable share of all other costs and charges
shall be adjusted,
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based upon the proportion that the rental area of the Premises remaining bears
to the total rentable area of the Premises.
If Landlord does not exercise its option to terminate this Lease, Landlord's
consent (which must be in writing and in form reasonably satisfactory to
Landlord) to the proposed assignment or sublease shall not be unreasonably
withheld or delayed, provided and upon condition that:
(a) In Landlord's reasonable judgement, the proposed assignee
or subtenant is engaged in such a business, and the Premises, or the relevant
part thereof, will be used in such a manner, that: (i) is limited to the use
expressly permitted under this Lease; and (ii) will not violate any negative
covenant as to use contained in any other lease of space in the Building;
(b) The proposed assignee or subtenant is a company with
sufficient financial worth and management ability similar to that of the Tenant
at the commencement of the Lease to undertake the responsibility involved, and
Landlord has been furnished with reasonable proof thereof or the Tenant takes
responsibility for the proposed assignee or subtenant in the case of default of
the said subtenant or assignee;
(c) Neither (i) the proposed assignee or subtenant nor (ii)
any person that, directly or indirectly, controls, is controlled by, or is under
common control with, the proposed assignee or subtenant or any person who
controls the proposed assignee or subtenant, is then an occupant of any part of
the Building or Project of which the Premises are part;
(d) The proposed sublease shall be in form reasonably
satisfactory to Landlord;
(e) There shall not be more than two (2) subtenants of the
Premises at any one time;
(f) Tenant shall reimburse Landlord on demand for any costs
that may be incurred by Landlord in connection with said assignment or sublease,
including the costs of making investigations as to the acceptability of the
proposed assignee or subtenant and legal costs incurred in connection with the
granting of any requested consent in no case to be greater than One Thousand and
No/100 Dollars ($1,000.00); and
(g) Tenant shall not have: (i) advertised or publicized in any
way the availability of the Premises without prior notice to, and approval by,
Landlord.
Any assignment or transfer shall be made only if and shall not be effective
until the assignee shall execute, acknowledge and deliver to Landlord an
agreement, in form and substance satisfactory to Landlord, whereby the assignee
shall assume all of the obligations of this Lease on the part of Tenant to be
performed or observed and shall be subject to all of the covenants, agreements,
terms, provisions and conditions contained in this Lease. Notwithstanding any
such sublease or assignment and the acceptance of rent or additional rent by
Landlord from any subtenant or assignee, Tenant shall and will remain fully
liable for the payment of the rent and additional rent due, and to become due
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hereunder, for the performance of all of the covenants, agreements, terms,
provisions and conditions contained in this Lease. Notwithstanding any such
sublease or assignment and the acceptance of rent or additional rent by Landlord
from any subtenant or assignee, Tenant shall and will remain fully liable for
the payment of the rent and additional rent due, and to become due hereunder,
for the performance of all of the covenants, agreements, terms, provisions and
conditions contained in this Lease on the part of Tenant to be performed and for
all acts and omissions of any license, subtenant, assignee or any other person
claiming under or through any subtenant that shall be in violation of any of the
obligations of this Lease, and any such violation shall be deemed to be a
violation by Tenant. Tenant shall further indemnify, defend and hold Landlord
harmless from and against any and all losses, liabilities, damages, costs and
expenses (including reasonable attorney fees) resulting from any claims that may
be made against Landlord by the proposed assignee or subtenant or by any real
estate brokers or other persons claiming a commission or similar compensation in
connection with the proposed assignment or sublease.
In the event of Tenant's default, Tenant hereby assigns all rents due from any
assignment or subletting to Landlord as security for performance of its
obligations under this Lease and Landlord may collect such rents as Tenants
Attorney-in-Fact, except that Tenant may collect such rents unless a default
occurs as described in Paragraph 24 above. The termination of this Lease due to
Tenant's default shall not automatically terminate any assignment or sublease
then in existence. At the election of Landlord, the assignee or subtenant shall
attorney to Landlord and Landlord shall undertake the obligations of the Tenant
under the sublease or assignment; provided the Landlord shall not be liable for
prepaid rent security deposits or other defaults of the Tenant to the subtenant
or assignee.
If Tenant is a corporation or partnership, all the above provisions shall apply
to a transfer (by one or more transfers) of a majority of the stock of the
corporation or the majority of ownership or control of the partnership, as if
such transfer were an assignment of this Lease; but said provisions shall not
apply to transactions with a corporation or partnership that controls, is
controlled by, or is under common control with Tenant, provided that, in any of
such events: (i) the successor to Tenant has a net worth, computed in accordance
with generally accepted accounting principles, at least equal to the greater of
(x) the net worth of Tenant immediately prior to such transfer or (y) the net
worth of Tenant herein named on the date of this Lease; and (ii) proof
satisfactory to Landlord of such net worth shall have been delivered to Landlord
at least ten (10) days prior to the effective date of any such transaction.
32. CONDEMNATION: If any part of the Premises shall be taken for any
public or quasi public use, under any statute or by right of eminent domain or
private purchase in lieu thereof, and a part thereof remains which is
susceptible of occupation hereunder, this Lease shall as to the part so taken,
terminate as of the date title shall vest in the condemn or purchaser, and the
rent payable hereunder shall be adjusted so that the Tenant shall be required to
pay for the remainder of the term only such portion of such rent as the value of
the part remaining after such taking bears to the value of the entire Premises
prior to such taking, but in such event Landlord or Tenant shall have the option
to terminate this Lease as of the date when title to the part so taken vests in
the condemnor or purchaser. If all of the premises, or such part of be taken so
that there does not remain a portion susceptible for occupation hereunder, this
Lease shall thereupon terminate. If a part or all of the
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Premises be taken, all compensation awarded upon such taking shall go to the
Landlord and the Tenant shall have no claim thereto but Landlord shall cooperate
with Tenant to recover compensation for damage to or taking of any alterations,
additions or improvements made by Tenant. Tenant hereby waives the provisions of
California Code of Civil Procedures Section 1265.130.
33. EFFECTS OF CONVEYANCE: The term "Landlord" as used in this Lease,
means only the owner for the time being of the land and Building, containing the
Premises, so that, in the event of any sale of said land or Building, or in the
event of a master Lease of the Building, the Landlord shall be and hereby is
entirely freed and relieved of all covenants and obligations of the Landlord
hereunder, and it shall be deemed and construed, without further agreement
between the parties and the purchaser at any such sale, or the master tenant of
the Building, that the purchaser or master tenant of the Building has assumed
and agreed to carry out any and all covenants and obligations of the Landlord
hereunder. Landlord shall transfer and deliver Tenant's security deposit, to the
purchaser at any such sale or the master tenant of the Building, and thereupon
the Landlord shall be discharged from any further liability in reference
thereto.
34. SUBORDINATION: In the event Landlord notifies Tenant in writing,
this Lease shall be subordinate to any ground Lease, deed of trust, or other
hypothecation for security now or hereafter placed upon the real property of
which the Premises are a part and to any and all advances made on the security
thereof and to renewals, modifications, replacements and extensions thereof.
Tenant agrees to promptly execute any documents which may be required to
effectuate such subordination. Notwithstanding such subordination, Tenant's
right to quiet possession of the Premises shall not be disturbed if Tenant is
not in default and so long as Tenant shall pay the rent and observe and perform
all of the provisions of this Lease. At the request of any lender, Tenant agrees
to execute and deliver any reasonable modifications of this Lease which do not
materially adversely affect the leasehold or Tenant's rights hereunder.
35. WAIVER: The waiver by Landlord of any breach of any term, covenant
or condition, herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term
covenant or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any breach by
Tenant of any term, covenant or condition of this Lease, other than the failure
of Tenant to pay the particular rental so accepted, regardless of Landlords
knowledge of such preceding breach at the time of acceptance of such rent.
36. HOLDING OVER: Any holding over after the termination or expiration
of the said term, shall be construed to be a hold over tenancy and Tenant shall
pay rent to Landlord at a rate equal to the average of (i) one hundred thirty
percent (130%) of the effective rent of the current term of the Lease, or (ii)
the Fair Market Rental (as defined in paragraph 39). Any holding over shall
otherwise be on the terms and conditions herein specified, except those
provisions relating to the term and any options to extend or renew, which terms
are expressly waived during any hold over. Furthermore, no holding over shall be
deemed or construed to exercise any option to extend or renew this Lease in lieu
of full and timely exercise of any such option as required hereunder.
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37. SUCCESSORS AND ASSIGNS: The covenants and conditions herein
contained shall, subject to the provisions as to assignment, apply to and bind
the heirs, successors, executors, administrators and assigns of all the parties
hereto; and all of the parties hereto shall be jointly and severally liable
hereunder.
38. ESTOPPEL CERTIFICATES: Tenant shall at any time during the term of
this Lease, upon not less than five (5) business days prior written notice from
Landlord, execute and deliver to Landlord a statement in writing certifying that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification) and the date to which the rent and other
charges are paid in advance, if any, and acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or
specifying such defaults if they are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrancer of the
Premises. Tenant's failure to deliver such statement within such time shall be
conclusive upon the Tenant that: (a) this Lease is in full force and effect,
without modification except as may be represented by Landlord; (b) them are not
uncured defaults in Landlord's performance. Tenant also agrees to provide when
available up to three (3) years of audited financial statements within five (5)
days of a request by Landlord for Landlord's use in financing the premises with
commercial lenders. As a condition of Tenant providing such financial
statements, Landlord shall secure the written agreement of any such commercial
lender to use the financial statements only for the purpose of evaluating the
applied for financing and not to disclose the financial statements to any other
person without the prior written consent of Tenant.
39. OPTION TO EXTEND THE TERM: Landlord hereby grants to Tenant, upon
and subject to the terms and conditions set forth in this paragraph, the option
(the "Option") to extend the term of this Lease for an additional term (the
"Option Term"), which Option Term shall be a period of sixty (60) months. The
Option Term shall be exercised, if at all by written notice to Landlord on or
before the date that is three (3) months prior to the expiration date of the
initial term of the Lease. If Tenant exercises the Option. each of the terms,
covenants and conditions of this Lease except this paragraph shall apply during
the Option Term as though the expiration date of the Option Term was the date
originally set forth herein as the expiration date of the initial term provided
that the rent to be paid shall be the Fair Market Rental, as hereinafter
defined, for the Premises for the Option Term. Anything contained herein to the
contrary notwithstanding, if Tenant is in monetary or material non-monetary
default under any of the terms, covenants or conditions of this Lease either at
the time Tenant exercises the Option or at any time thereafter prior to the
commencement date of the Option Term, Landlord shall have, in addition to all of
Landlords other rights and remedies provided in this Lease, the right to
terminate the Option upon notice to Tenant, in which event the expiration date
of this Lease shall be and remain the expiration date of the initial term. As
used herein, the term "Fair Market Rental" for the Premises shall mean the
rental and all other monetary payments that Landlord could obtain during the
Option Term from a third party desiring to lease the Premises for the Option
Term taking into account the age of the Building, the quality of construction of
the Building and the Premises, the services provided under the terms of this
Lease, the rental and other monetary payments, and any escalations and
adjustments thereto (including without limitation Consumer Price Indexing) then
being obtained for new leases of space comparable to the Premises in the
locality of the Building and all other factors that would be relevant to a third
party desiring to lease the Premises
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for the Option Term in determining the rental such party would be willing to pay
therefor. The Lease Guarantee will no longer be required for the Option Term.
If Tenant exercises the Option, Landlord shall send to Tenant a notice setting
forth the Fair Market Rental for the Premises for the Option Term, on or before
the date that is one hundred fifty (150) days prior to the expiration date of
the initial term. If Tenant disputes Landlord's determination of the Fair Market
Rental for the Option Term, Tenant shall within thirty (30) days after the date
of Landlords notice setting forth the Fair Market Rental for the Option Term,
send to Landlord a notice stating that Tenant either (x) elects to terminate its
exercise of the Option, in which event the Option shall lapse and this Lease
shall terminate on the expiration date of the initial term in the manner
provided herein, or (y) disagrees with Landlord's determination of Fair Market
Rental for the Option Term and elects to resolve the disagreement as provided in
paragraph 39(a) below. If Tenant does not send to Landlord a notice as provided
in the previous sentence, Landlord's determination of the Fair Market Rental
shall be the basis for determining the rent to be paid by Tenant hereunder
during the Option Term. If Tenant elects to resolve the disagreements as
provided in paragraph 39(a) below and such procedures shall not have bene
concluded prior to the commencement date of the Option Term, Tenant shall pay
rent to Landlord hereunder adjusted to reflect the Fair Market Rental as
determined by Landlord In the manner provided above. If the amount of Fair
Market Rental as finally determined pursuant to in paragraph 39(a) below is
greater than Landlord's determination, Tenant shall pay to Landlord the
difference between the amount paid by Tenant and the Fair Market Rental as so
determined in paragraph 39(a) below within thirty (30) days after the
determination. If the Fair Market Rental as finally determined in paragraph
39(a) below is less than Landlord's determination, the difference between the
amount paid by Tenant and the Fair Market Rental as so determined in paragraph
39(a) below shall be credited against the next installments of rent due from
Tenant to Landlord hereunder.
39(a) RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET
RENTAL: Any disagreement regarding the Fair Market Rental shall be resolved as
follows:
(i) Within thirty (30) days after Tenant's response
to Landlords notice to Tenant of the Fair Market Rental, Landlord and Tenant
shall meet no less than two (2) times, at a mutually agreeable time and place,
to attempt to resolve any such disagreement.
(ii) If within the thirty (30) day period referred to
in (i) above, Landlord and Tenant can not reach agreement as to the Fair Market
Rental, they shall each select one appraiser to determine the Fair Market
Rental. Each such appraiser shall arrive at a determination of the Fair Market
Rental and submit their conclusions to Landlord and Tenant within thirty (30)
days after the expiration of the thirty (30) day consultation period described
in (i) above.
(iii) If only one appraisal is submitted within the
requisite time period, it shall be deemed to be the Fair Market Rental. If both
appraisals are submitted within such time period, and if the two appraisals so
submitted differ by less than ten percent (10%) of the higher of the two, the
average of the two shall be the Fair Market Rental. If the two appraisals differ
by more than ten percent (10%) of the higher of the two, then the two appraisers
shall immediately select a
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third appraiser who shall within thirty (30) days after his or her selection
make a determination of the Fair Market Rental and submit such determination to
Landlord and Tenant. This third appraisal will then be averaged with the closer
of the two previous appraisals and the result shall be the Fair Market Rental.
(iv) All appraisers specified pursuant to this
paragraph shall be members of the American Institute of Real Estate Appraisers
with not less than ten (10) years experience appraising commercial properties in
the Santa Clara Valley. Each party shall pay the cost of the appraiser selected
by such party and one-half of the cost of the third appraiser plus one-half of
any other incurred in resolving the dispute pursuant to this paragraph.
40. OPTION AND RIGHT OF FIRST OFFERING TO LEASE:
40(a). OPTION TO LEASE: Subject to the rights of any existing
tenants, Landlord hereby grants Tenant an option to lease the space comprising
the balance of the Building of 58,601 square feet ("Expansion Space") upon the
expiration of the existing lease on the Expansion Space. Tenant shall have the
option, which may be exercised by written notice to Landlord at any time within
forty-five (45) days after Tenant's receipt of Landlord's notice, to agree to
lese the Expansion Space at Fair Market Rental determined pursuant to paragraph
39. The lease term for the Expansion Space shall be coterminous with the
expiration of this Lease and shall provide for a five year option to extend at
Fair Market Rental. Notwithstanding the foregoing, in the event Tenant fails to
exercise this option within said forty-five (45) days, Landlord shall have one
hundred eighty (180) days thereafter to lese the Expansion Space at Fair Market
Rental. In the event Landlord fails to lease the Expansion Space within said one
hundred eighty (180) day period, Landlord shall be required to resubmit such
offer to Tenant in accordance with this paragraph 40(a).
40(b) RIGHT OF FIRST OFFERING TO LEASE: Subject to the rights
of any existing tenants and if Tenant does not exercise its option provided in
paragraph 40(a) above, Landlord hereby grants Tenant a right of first offering
to lease the Expansion Space at such time as the Expansion Space again becomes
available for lease. Prior to Landlord offering to lease the Expansion Space to
a third party, Landlord shall first give Tenant prior written notice of such
desire and the terms and other information under which Landlord intends to lease
the Expansion Space. Tenant shall have the option, which may be exercised by
written notice to Landlord at any time within ten (10) business days after
Tenant's receipt of Landlord's notice, to agree to lese the Expansion Space at
the rent and terms of lease specified in the notice. In the event Tenant agrees
to lease the Expansion Space, Landlord shall lease the Expansion Space to Tenant
in accordance with the notice. In the event Tenant fails to exercise Tenant's
option within said ten (10) days, Landlord shall have ninety (90) days
thereafter to lease the Expansion space at the same or higher rent and upon the
same terms of lease as specified in the notice to Tenant. In the event Landlord
fails to lease the Expansion Space to a third party within said ninety (90) day
period or in the event Landlord proposes to lease the Expansion Space to a third
party at a lower rent or on more favorable terms than that proposed to Tenant,
Landlord shall be required to resubmit such offer to Tenant in accordance with
this paragraph 40(b).
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41. OPTIONS: All Options provided Tenant in this Lease are personal and
granted to original Tenant and are not exercisable by any third party should
Tenant assign or sublet all or a portion of its rights under this Lease, unless
Landlord consents to permit exercise of any option by any assignee or subtenant,
in Landlords sole discretion. In the event that Tenant hereunder has any
multiple options to extend this Lease, a later option to extend the Lease cannot
be exercised unless the prior option has been so exercised. Any purchaser of
Tenant's assets, or successor to Tenant by way of merger or other corporate
reorganization shall not be considered a third party if said successor's credit
worthiness and the ability of its management is, in Landlord's reasonable
opinion, equivalent to those of the original Tenant.
42. QUIET ENJOYMENT: Upon Tenant's faithful and timely performance of
all the terms and covenants of the Lease, Tenant shall quietly have and hold the
Premises for the term and any extensions thereof.
43. BROKERS: Tenant represents it has not utilized or contacted a real
estate broker or finder with respect to this Lease other than Grubb & Ellis and
Tenant agrees to indemnify and hold Landlord harmless against any claim, cost,
liability or cause of action asserted by any broker or finder claiming through
Landlord.
44. LANDLORD'S LIABILITY: If tenant should recover a money judgment
against Landlord arising in connection with this Lease, the judgment shall be
satisfied only out of Landlord's interest in the Premises including the
improvements and real property and neither Landlord or any of its partners shall
be liable personally for any deficiency. General partners of Landlord shall be
liable personally for any deficiency if their own intentional acts or omissions
are responsible for the claim upon which the judgment was obtained.
45. AUTHORITY OF PARTIES:
45(a) CORPORATE AUTHORITY: If Tenant is a corporation, each
individual executing this Lease on behalf of said corporation represents and
warrants that he is duly authorized to execute and deliver this Lease on behalf
of said corporation, in accordance with a duly adopted resolution of the Board
of Directors of said corporation or in accordance with the bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
45(b) LIMITED PARTNERSHIPS: If the Landlord herein is a
limited partnership, it is understood and agreed that any claim by Tenant on
Landlord shall be limited to the assets of the limited partnership. And
furthermore, Tenant expressly waives any and all rights to proceed against the
individual partners or the officers, directors or shareholders of any corporate
partner, except to the extent of their interest in said limited partnership.
46. TRANSPORTATION DEMAND MANAGEMENT REQUIREMENTS: Should a government
agency or municipality require Landlord to institute TDM (Transportation Demand
Management) facilities and/or program, Tenant hereby agrees that the cost of IDM
imposed facilities required on the Premises, including but not limited w
employee showers, lockers, cafeteria, or
-22-
<PAGE> 23
lunchroom facilities, shall be included as Tenant Improvement Costs and any
ongoing costs or expenses associated with a TDM program such as an on-site TDM
coordinator, which are required for premises and not provided by Tenant shall be
provided by Landlord with such costs being included as Additional Rent and
reimbursed to Landlord by Tenant.
47. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are
cumulative and not alternative to the extent permitted by law and are in
addition to all other rights and remedies in law and in equity.
If any term or provision of this Lease is held unenforceable or invalid by a
court of competent jurisdiction. the remainder of the term shall not be
invalidated thereby but shall be enforceable in accordance with its terms,
omitting the invalid or unenforceable term.
This Lease shall be governed by and construed in accordance with California law.
Tenant shall not permit or condone any nuisance or distance of any kind on the
Premises which annoys or disturbs Landlord, or other occupants of the Building.
All sums due hereunder, including rent and additional rent, if not paid when
due, shall bear interest at a reasonable rate under California law accruing from
the date due until the date paid to Landlord.
Time is of the essence hereunder.
The headings or titles to the paragraphs of this Lease am not a part of this
Lease and shall have no effect upon the construction or interpretation of any
part thereof nor shall any phrases in capital letters have any increased
emphasis. This instrument contains all of the ingredients and conditions made
between the parties hereto and may not be modified orally or in any other manner
than by an agreement in writing signed by all of the parties hereto or their
respective successors in interest.
If Tenant fails to perform any obligation required under this Lease or by law or
governmental regulation, Landlord in its sole discretion may with ten (10)
business days notice perform such obligation, in which event Tenant shall pay
Landlord as additional rent all sums paid by Landlord in connection with such
substitute performance within ten (10) business days following Landlord's
written notice for such payment. Any delinquent sum shall bear interest at a
reasonable lawful contract rate to be charged under California law.
All monetary sums due from Tenant to Landlord under this Lease shall be deemed
to be rent.
Tenant acknowledges that neither Landlord or its affiliates or agents have made
any agreements, representations, warranties or promises with respect to the
demised Premises or the Building of which they are a part, or with respect to
present or future rents, expenses, operations, tenancies or any other matter.
Except as herein expressly set forth, Tenant relied on no statement of Landlord
or its agents for that purpose.
-23-
<PAGE> 24
48. ARBITRATION: It is the express intention of the parties that any
claim or controversy of any land arising out of or relating in any way to this
Agreement shall be resolved only by submission to binding arbitration in
accordance with the then prevailing American Arbitration rules with the
following modifications:
(a) The Parties will attempt to agree upon one arbitrator: in
the event that they cannot so agree, them shall be three (3) arbitrators, one
appointed in writing by each of the parties within five (5) days after either
party gives notice to the other of failure to agree on a single arbitrator, and
a third arbitrator shall be chosen within ten (10) days by the two (2)
arbitrators appointed by the parties. Should either party refuse or neglect to
name the arbitrator to be appointed by it within said five (5) days, such party
shall be conclusively presumed to have waived its right to appoint such
arbitrator, the arbitrator named by the other party may appoint the third
arbitrator, and such two arbitrators may proceed with determination of the
dispute. Should the two (2) arbitrators to be appointed by the parties fail to
choose a third arbitrator within said ten (10) days, the Arbitration Association
shall name the third arbitrator on the request of either party.
(b) Arbitration shall take place in the County of Santa Clara,
California.
(c) Notwithstanding any provision to the contrary in the
applicable law or in the rules of the American Arbitration Association, the
arbitrators shall have authority to award injunctive relief, specific
performance, and damages for lost profits, as well as punitive and consequential
damages of any nature, in addition to awarding actual damages, the cost of the
arbitration and reasonable attorney's fees.
(d) Pursuant to California Code of Civil Procedure l283.1(b),
the Parties agree that the provisions of 1283.05 are hereby incorporated into,
made a part of and are applicable to this Agreement to arbitrate solely for the
purpose of obtaining the production of documents.
(e) To the extent not covered by the arbitrator's award, the
cost of the arbitration shall be shared equally by the parties.
(f) Any award rendered by the arbitrator may be entered for
enforcement, if necessary, in any court of competent jurisdiction, the party
against whom enforcement is sought bearing the costs and expenses, including
-24-
<PAGE> 25
IN WITNESS WHEREOF, Landlord and Tenant have executed these presents,
the day and year first above written.
LANDLORD: TENANT:
SOBRATO INTEREST INTEGRATED INFORMATION
a California Limited Partnership TECHNOLOGY, INC.
a California Corporation
BY: __________________________ BY: ______________________
ITS: Managing General Partner ITS: President
-25-
<PAGE> 26
LANDLORD'S CONSENT TO ALTERATIONS AND
IMPROVEMENTS
Premises: 2445 Mission College Boulevard, Santa Clara, CA
Landlord: Sobrato Interests
Tenant: 8 x 8
Lease Agreement Dated: July 3, 1990
Pursuant to Paragraph 4 of the Lease Agreement between the Parties, by
signature below, Landlord consents to the construction by Tenant of the
alterations and improvements proposed in accordance with the following
description:
Install a Fiber Optic cable for 8 x 8, Inc.: This will require Brooks
Fiber Communications to place 45 feet of 4" conduit rising on the rear of
building 2445 at the telephone/equipment room. The conduit win start from the
outside at column D1 and penetrate into the telephone room. The 4" conduit will
rise approximately 10 feet on the building exterior wall and terminate in a
weatherproof NEMA enclosure and then enter the building.
This consent is expressly conditioned upon Tenant's acknowledgment of
and timely and faithful performance as follows:
1. Landlord's consent to the plans and specifications is an
accommodation to Tenant only, and Landlord shall have no liability or
responsibility, either express or implied, for the completeness or suitability
of the plans and specifications for their intended purpose.
2. Tenant shall construct the improved alterations and improvements in
accordance with all existing applicable municipal, local, state and federal
laws, statutes, rules, regulations and ordinances.
3. Tenant will not commence construction until it has obtained validly
issued and fully paid permits for the contemplated work.
4. Tenant will obtain Landlord's prior written consent to substantial
and material changes in the nature or scope of the work.
5. Tenant will indemnify and hold Landlord harmless from any loss,
cost, damage or expense of any kind or nature resulting from the work,
including, without limitation, any loss or damage as result of defective work
from any cause; any damage or injury to persons or property, including any
damage to the structure or adjacent improvements; claims of workmen, suppliers
and/or professional consultants, including mechanics lien claims; and any cost
or expense incurred by Landlord in defense of, repair of or payment of such
claims, including its reasonable attorneys' fees. Upon written demand from
Landlord, Tenant shall immediately pay to Landlord any such cost or
<PAGE> 27
expense incurred by Landlord, and such obligation shall be a claim for
"additional rent" due from Tenant under the terms of the Lease Agreement.
6. If applicable, Tenant covenants and agrees it will not interfere
with the use or occupancy of the premises by other tenants, or their licensees
or invitees, and will not disturb their quiet enjoyment of the premises and
appurtenant amenities, including access to parking, etc.
7. Tenant agrees to post and insure continued posting of the statutory
Notice of Non responsibility of Landlord prior to commencement of any of the
work.
8. On or before the expiration of the term or sooner termination of the
Lease, Tenant shall remove all of its personal property, trade fixtures and any
alterations and improvements constructed hereunder from the premises unless the
Landlord shall notify Tenant in writing of any exception to this obligation and
all property not so removed shall be deemed abandoned by Tenant. Any damage or
destruction caused by Tenant's removal of such items shall be repaired and paid
for at Tenant's sole cost and expenses.
9. Tenant agrees to provide Lessor with half size (15" X 21") vellums
of the as-built floor, electrical and mechanical plans describing the entire
Premises within 2 weeks of completion of all alterations and improvements that
properly reflect all of the demised premises in its revised state.
Landlord: Sobrato Interests
By: _________________________
Date: _______________________
Tenant: 8 x 8, Inc.
By: _________________________
Date: _______________________
-2-
<PAGE> 28
LANDLORD'S CONSENT TO ALTERATIONS AND IMPROVEMENTS
PREMISES: 2445 Mission College Boulevard
LANDLORD: Sobrato Interests, a California Limited Partnership
TENANT: Integrated Information Technology, Inc.
LEASE AGREEMENT DATED: July 3, 1990
Pursuant to Paragraph 10 of the Lease Agreement between the Parties, by
signature below, Landlord consents to the construction by Tenant of a wall
mounted sign at 2445 Mission College Boulevard proposed in accordance with the
specifications submitted to Landlord dated February 22, 1991:
This consent is expressly conditioned upon Tenant's acknowledgment of
and timely and faithful performance as follows:
1. Landlord's consent to the plans and specifications is an
accommodation to Tenant only, and Landlord shall have no liability or
responsibility, either express or implied, for the completeness or suitability
of the plans and specifications for their intended purpose.
2. Tenant shall construct the improved alterations and improvements in
accordance with all existing applicable municipal, local, state and federal
laws, statutes, rules, regulations and ordinances.
3. Tenant will not commence construction until it has obtained validly
issued and fully paid permits for the contemplated work.
4. Tenant will obtain Landlord's prior written consent to substantial
and material changes in the nature or scope of the work.
5. Tenant will indemnify and hold Landlord harmless from any loss,
cost, damage or expense of any kind or nature resulting from the work,
including, without limitation, any loss or damage as result of defective work
from any cause; any damage or injury to persons or property, including any
damage to the structure or adjacent improvements; claim of workmen, suppliers
and/or professional consultants, including mechanics lien claims; and any cost
or expense incurred by Landlord in defense of, repair of or payment of such
claims, including its reasonable attorneys' fees. Upon written demand from
Landlord, Tenant shall immediately pay to Landlord any such cost or expense
incurred by Landlord, and such obligation shall be a claim for "additional rent"
due from Tenant under the terms of the Lease Agreement.
6. If applicable, Tenant covenants and agrees it will not interfere
with the use or occupancy of the premises by other tenants, or their licensees
or invitees, and will not disturb their quiet enjoyment of the premises and
appurtenant amenities, including access to parking, etc.
<PAGE> 29
7. Tenant agrees to post and insure continued posting of the statutory
Notice of Nonresponsibility of Landlord prior to commencement of any of the
work.
8. On or before the expiration of the term or sooner termination of the
Lease, Tenant shall remove all of its personal property, trade fixtures and any
alterations and improvements consumed hereunder from the premises unless the
Landlord shall notify Tenant in writing of any exception to this obligation and
all property not so removed shall be deemed abandoned by Tenant. Any damage or
destruction caused by Tenants removal of such items shall be repaired and paid
for at Tenant's sole cost and expenses.
LANDLORD:
Sobrato Interests,
a California Limited Partnership
By: _________________________
Date: _______________________
TENANT:
Integrated Information Technology, Inc.
By: _________________________
Date: _______________________
-2-
<PAGE> 30
FIRST AMENDMENT TO LEASE
This Amendment is made this 31st day of March 1991 by and between
SOBRATO INTERESTS, a California Limited Partnership having an address at 10600
N. DeAnza Blvd., Suite 200, Cupertino, California 95014 ("Landlord") and
INTEGRATED INFORMATION TECHNOLOGY, INC., a California corporation ("Tenant").
WITNESSETH
WHEREAS Landlord and Tenant entered into a lease ("Lease") dated July
3, 1990 for the premises ("Premises") located at 2441 Mission College Boulevard,
Santa Clara, California; and
WHEREAS effective ]December 15, 1990, Landlord and Tenant wish to
modify the Lease to document the Commencement Date; and
WHEREAS Landlord and Tenant wish to modify the address of the Premises
to 2445 Mission College Boulevard, Santa Clara, California; and
WHEREAS Landlord and Tenant wish to modify the square footage, adjust
Tenant's Allocable Share of the Common Area Costs and adjust the rent schedule
of the Premises to reflect the elimination of 63 square feet by the toilet room
constructed for Stanford Telecommunications' cafeteria.
NOW, THEREFORE, in order to effect the intent of the parties as set
forth above and for good and valuable consideration exchanged between the
parties, the Lease is amended effective December 15, 1990 as follows:
1. The Lease Commencement Date shall be December 15, 1990 and the Lease
shall expire on December 14, 1997.
2. The address of the Premises shall be changed to 2445 Mission College
Boulevard and the square footage of the Premises shall be reduced to 42,387
square feet.
3. The revised rent schedule, total shall be $3,346,877.52, paid in
monthly installments as follows:
12/15/90-12/14/91 $16,954.80 $203,457.60 $0.40/sq.ft.
12/15/91-12/14/92 $35,181.21 $422,174.52 $0.83/sq.ft.
12/15/92-12/14193 $40,267.65 $483,211.80 $0.95/sq.ft.
12/15/93-12/14/94 $42,810.87 $513,730.44 $1.01/sq.ft.
12/15/94-12/14/95 $45,354.09 $544,249.08 $1.07/sq.ft.
12/15/95-12/14/96 $47,897.31 $574,767.72 $1.13/sq.ft.
12/15/96-12/14/97 $50,440.53 $605,286.36 $1.19/sq.ft.
<PAGE> 31
4. Tenant's Allocable Share of Building Costs shall be changed to
42.27%, Share of Project Costs to 10.11%, and for all tax-related expenses, to
17.89%.
5. Except as hereby amended, the Lease and all of the terms, covenants
and conditions thereof are ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have set their hands to this
Amendment as of the day and date first above written.
LANDLORD TENANT
Sobrato Interests Integrated Information Technology, Inc.,
a California limited partnership a California corporation
By: ______________________________ By: _______________________________
Its: General Partner Its: Vice President
-2-
<PAGE> 32
SECOND AMENDMENT TO LEASE
This second amendment to lease ("Amendment") is made this 22nd day of
March, 1994 by and between Sobrato Interests, a California Limited Partnership
having an address at 10600 N. DeAnza Blvd., Suite 200, Cupertino, California
95014 ("Landlord") and Integrated Information Technology, Inc., a California
Corporation having its principal place of business at 2445 Mission
College Boulevard, Santa Clara, California ("Tenant").
WITNESSETH
WHEREAS Landlord and Tenant entered into a lease dated July 3, 1990 and
a First Amendment to Lease dated March 31, 1991 (collectively the "Lease") for
the premises ("Premises") located on the first floor of 2441-45 Mission College
Boulevard, Santa Clara, California; and
WHEREAS effective July 6, 1993, Landlord and Tenant wish to modify the
Lease to reflect the Tenant's lease of certain space within the Building
totaling an additional 13,568 rentable square feet on the first and second
floors ("Expansion Space") and the first floor cafeteria area ("Cafeteria") of
2,933 square feet as more particularly outlined in red on Exhibit "A-1 & A-2"
attached hereto.
NOW, THEREFORE, in order to effect the intent of the parties as set
forth above and for good and valuable consideration exchanged between the
parties, the Lease is amended as follows:
1. Beginning on August 8, 1993 and continuing through the expiration of
the Lease on December 14, 1997 the Premises shall be increased to include the
Cafeteria resulting in a total square footage leased by tenant of 45,320 square
feet and the monthly rent due from Tenant shall increase at that time by
$3,000.00 to $43,267.65.
2. Beginning on April 1, 1994 or sixty (60) days following the
termination of the existing lease with Xerox for the Expansion Space, whichever
is later, and continuing through the expiration of the Lease on December 14,
1997 the Premises shall be increased to include Expansion Space resulting in a
total square footage leased by Tenant of 58,888 square feet and the monthly rent
shall increase by $11,125.76 at that time to $56,936.63.
3. The rent schedule specified in the First Amendment to Lease shall be
modified as follows:
04/01/94-12/14/94 $56,936.63 per month
12/15/94-12/14/95 $59,479.85 per month
12/15/95-12/14/96 $62,023.07 per month
12/15/96-12/14/97 $64,566.29 per month
4. Within five (5) days of the date of this Amendment Tenant shall
deposit $15,766.50 as an additional security deposit to provide a total security
deposit of $51,000.00.
<PAGE> 33
5. Tenant's Allocable Share of Building Costs for costs allocable to
the entire Building shall be equal to 58.73%, Share of Building Costs for costs
allocable to the second floor only shall be equal to 24.56%, Share of Project
Costs shall be equal to 14.04% and Share of tax related costs (shared with 2451
Mission) shall be equal to 24.85%. Tenant shall not be responsible for its
pro-rata share of utilities until Tenant occupies any portion of the Expansion
Space.
6. No tenant improvement allowance shall be provided by Landlord for
the Cafeteria or the Expansion Space.
7. Tenant agrees to allow access to the Cafeteria to SynOptics
Communication and Xerox ("SynOptics") on the same basis as it is provided to
Tenant's employees through December 31, 1993. In the event, SynOptics or Xerox
utilizes the Cafeteria, the rent paid by Tenant for the Cafeteria during such
period of shared use shall be reduced to an amount equal to $3,000 times a
fraction, the numerator of which is the headcount of Tenant, the denominator of
which is the headcount of Tenant plus the headcount of SynOptics and Xerox
within the Project.
8. Article 7 (Construction) and Article 40 (Option and Right of First
Offering) are deleted.
9. Landlord shall install, at its expense, one door in the northwest
corner of the Expansion Space and shall reconfigure the first floor loading area
as shown on Exhibit "A-1 & A-2".
10. Tenant shall have the right to utilize the freight elevator within
the SynOptics' or Xerox space one or two times monthly with prior written notice
to, and accompaniment by, SynOptics or Xerox. In addition Tenant shall have the
right to utilize the passenger elevator at the Xerox lobby as necessary to
accommodate handicapped persons pursuant to ADA and other applicable
regulations.
11. This Amendment shall replace that certain Second Amendment to Lease
executed by the parties dated September 23,1993.
12. All defined terms shall have the same meanings as in the Lease,
except as otherwise stated in this Amendment.
13. Except as hereby amended, the Lease and all of the terms, covenants
and conditions thereof shall remain unmodified and in full force and effect. In
the event of any conflict or inconsistency between the terms and provisions of
this Amendment and the terms and provisions of the Lease, the terms and
provisions of this Amendment shall prevail.
-2-
<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have set their hands to this
Amendment as of the day and date first above written.
LANDLORD TENANT
Sobrato Interests, Integrated Information Technology, Inc.,
a California Limited Partnership a California Corporation
By: ______________________________ By: _____________________________________
Its: General Partner Its: Chief Operating Officer
-3-
<PAGE> 35
BUILDING FOOTAGE ANALYSIS (SQ. FT.)
<TABLE>
<CAPTION>
XEROX
ITT SYNOPTICS COMMON
------ --------- ------
<S> <C> <C> <C> <C>
FIRST FLOOR 45,115 1,053 192
795 1,018
------ ----- -----
TOTALS 45,910 + 2,071 192 = 48,173
PRORATED 182 8 0
TOTAL 46,094 2,079 0 = 48,173
SECOND FLOOR 11,716 36,578 3,615 = 52,099
190
------ ------ -----
TOTALS 11,906 + 36,578 + 3,615 = 52,099
PRORATED 888 2,727 0
TOTAL 12,794 + 39,305 0 = 52,099
-------------------------------------------------------------
TOTALS 58,888 + 41,384 + 0 = 100,272
</TABLE>
-4-
<PAGE> 36
[XEROX/SYNOPTICS SQUARE FOOTAGE MAP]
<PAGE> 37
[XEROX/SYNOPTICS SQUARE FOOTAGE MAP]
<PAGE> 38
THIRD AMENDMENT TO LEASE
This third amendment to lease ("Amendment") is made this 18th day of
December, 1995 by and between Sobrato Interests, a California Limited
partnership having an address at 10600 N. DeAnza Blvd., Suite 200, Cupertino,
California 95014 ("Landlord") and Integrated Information Technology, Inc., a
California corporation having its principal place of business at 2445 Mission
College Boulevard, Santa Clara, California ("Tenant").
WITNESSETH
WHEREAS Landlord and Tenant entered into a lease dated July 3, 1990 a
First Amendment to Lease dated March 31, 1991 and a Second Amendment to Lease
dated March 22, 1994 (collectively the "Lease") for the premises ("Premises")
located on the first and second floors of 2441-2445 Mission College Boulevard,
Santa Clara, California; and
WHEREAS effective October 25, 1995, Landlord and Tenant wish to clarify
the language in the Lease regarding the payment of common area expenses for the
second floor space leased to Tenant ("Expansion Space");
NOW, THEREFORE, in order to effect the intent of the parties as set
forth above and for good and valuable consideration exchanged between the
parties, the Lease is amended as follows:
1. Beginning on May 14, 1994, the date the Expansion Space was added to
the Premises, Tenant agrees to reimburse Landlord for common area operating
expenses related to Tenants occupancy of the Expansion Space, on a monthly basis
as provided herein. Tenants allocable share of such costs shall be twenty-four
percent (24%). The foregoing electric allocable shares shall be subject to
further adjustment in the event (i) the meter configuration is modified so the
meters no longer service just the second floor or (ii) if either tenant on the
second floor disproportionately utilizes the utility services.
2. The parties estimate that Tenants allocable share of costs for
common area operating expenses associated with the Expansion Space for 1994 and
1995 will be equal to the following:
Electric, Water - $12,000 x 24% $2,880.00
HVAC Monthly Maint. (11,906 sf x $.007 psf) $83.00
Janitorial Common Area $72.00
HVAC Common Area (3,615 sf x $.007 x 24%) $6.00
------------
Total $3,041.00
In addition, 24% of all costs and expenses for repairs to the Common Areas and
building systems (which are not included in the above costs and cannot be
determined at this time) shall be paid by Tenant to Landlord promptly when due.
<PAGE> 39
Within thirty (30) days following the end of each calendar year,
Landlord shall provide Tenant an accounting reconciling the amount paid by
Tenant against the amount owed by Tenant based on the actual costs for the year.
Any amount due from one party to the other shall be paid within ten (10) days of
such determination.
3. All defined terms shall have the same meanings as in the Lease,
except as otherwise stated in this Amendment.
4. Except as hereby amended, the Lease and all of the terms, covenants
and conditions thereof shall remain unmodified and in full force and effect. In
the event of any conflict or inconsistency between the terms and provisions of
this Amendment and the terms and provisions of the Lease, the terms and
provisions of this Amendment shall prevail.
IN WITNESS WHEREOF, the parties hereto have set their hands to this
Amendment as of the day and date first above written.
LANDLORD TENANT
Sobrato Interests, Integrated Information Technology, Inc.,
a California Limited Partnership a California Corporation
By: ______________________________ By: _____________________________________
Its: General Partner Its: Vice President, Finance
-2-
<PAGE> 40
I.I.T. XEROX CHGS
I.I.T.
<TABLE>
<CAPTION>
TENANT: 442TR 2445 MISSION COLLEGE
DATE XEROX CHARGES MARK-UP 8.5% AMOUNT
<S> <C> <C> <C> <C> <C>
5/15/94-8/31/94 $10,822.63 + $919.92 = $11,742.55
9/1/94-11/30/94 $9,123.00 + $775.46 = $9,898.46
12/1/94-4/30/94 $15,205.00 $1,292.43 = $16,497.43
----------
TOTALS $35,150.63 $2,987.80 $38,138.43
----------
</TABLE>
-1-
<PAGE> 41
EXHIBIT "A"
PREMISES
[FLOOR PLAN]
FEATURES
- - Prestigious location adjacent to Marriott Hotel, two blocks from City
of Santa Clara's Convention Center, Techmart, and Light Rail Terminus.
- - Dock high loading facilities.
- - Surrounded by lush landscaping and waterscape
- - 296 Parking spaces [3.6/1000 SF]
- - 225 Tons of HVAC, 4000 Amps at 277/480v
- - All Ground Floor Space
- - Use of full service cafeteria - No Rental to be Paid.
- - Cafeteria to be relocated at landlord's expense to the northeast corner
of the building and Exhibit to be revised accordingly
18
<PAGE> 42
EXHIBIT "B"
WORKING DRAWINGS
19
<PAGE> 43
FOURTH AMENDMENT TO LEASE
This fourth amendment to lease ("Fourth Amendment") is made this _____
day of March, 1997 by and between Sobrato Interests, a California limited
partnership having an address at 10600 North De Anza Boulevard, Suite 200,
Cupertino, California 95014 ("Landlord") and 8x8, Inc., a Delaware corporation
("Tenant"), which changed its name in April 1996 from Integrated Information
Technology, Inc. ("IIT").
WITNESSETH
WHEREAS Landlord and IIT entered into a lease dated July 3, 1990, a
lease amendment dated March 31, 1991, a second amendment dated March 22, 1994,
and a third amendment dated December 18, 1995, (collectively the "Lease") for
the premises located at 2445 Mission College Boulevard, California ("Premises");
and
WHEREAS effective April 1, 1997, Landlord and Tenant wish to modify the
Lease to (i) change the expiration date of the Lease, (ii) specify the monthly
rent due during the extended Lease term, and (iii) modify the provisions of
Lease paragraph 39 regarding Tenant's Option to Extend the Lease;
NOW, THEREFORE, in order to effect the intent of the parties as set
forth above and for good and valuable consideration exchanged between the
parties, the Lease is amended effective April 1, 1997 as follows:
1. The expiration date of the Lease is changed from December 14, 1997
to April 30, 1999.
2. Monthly rent for the period from December 15, 1997 through April 30,
1999 is One Hundred Three Thousand Fifty Four and No/100 Dollars ($103,054.00),
which represents 95% of current fair market value for the Premises. The parties
acknowledge that the 5% discount reflects the fact that (i) Tenant is already
occupying and using the Premises in its existing condition and (ii) Landlord is
not incurring any costs or commissions associated with this Fourth Amendment.
3. The first two sentences of Lease paragraph 39 are deleted and
replaced by the following:
Landlord hereby grants to Tenant, upon and subject to the
terms and conditions set forth in this paragraph 39 and the
terms of paragraph 4 of the Fourth Amendment, the option
("Option") to extend the term of this Lease for an additional
term ("Option Term"), which Option Term shall be for a period
of forty-eight (48) months. The Option Term shall be
exercised, if at all, by written notice to Landlord on or
before December 5, 1998.
4. Tenant's ability to exercise its option to extend the Lease is
expressly conditioned upon (i) the election by the tenant in balance of the
Building ("the Other Tenant") not to lease the Premises, and (ii) the Other
Tenant's election to exercise its option to extend its lease for the remaining
portion of the Building, which elections are required to be made by the Other
Tenant on or before December 1, 1998. Further, in the event the Other Tenant
does not exercise its option to extend its lease on the
-1-
<PAGE> 44
remaining portion of the Building, instead of Tenant having an option to extend
the lease for the Premises, Tenant shall only have an option to extend the lease
on the entire Building.
5. All defined terms shall have the same meanings as in the Lease,
except as otherwise stated in this Fourth Amendment.
6. Except as hereby amended, the Lease and all the terms, covenants and
conditions thereof shall remain unmodified and in full force and effect. In the
event of any conflict or inconsistency between the terms and provisions of this
Fourth Amendment and the terms and provisions of the Lease, the terms and
provisions of this Fourth Amendment shall prevail.
IN WITNESS WHEREOF, the parties hereto have set their hands to this
Fourth Amendment as of the day and date first above written.
LANDLORD TENANT
Sobrato Interests, 8x8, Inc.,
a California limited partnership a Delaware corporation
By: By:
------------------------------ ------------------------------
Its: General Partner Its:
----------------------------
-2-
<PAGE> 1
EXHIBIT 10.18
TECHNOLOGY LICENSE AGREEMENT
This Agreement is made between U.S. ROBOTICS ACCESS CORP., a Delaware
corporation, with principal offices at 8100 North McCormick Boulevard, Skokie,
IL 60076-2999, (herein called "USR"); and 8x8, INC., a Delaware corporation,
with principal offices at 2445 Mission College Blvd., Santa Clara, CA 94027
(herein called "8x8"), effective the 5th day of May, 1997 (the "Effective
Date"). The parties include any affiliate of a party; an "affiliate" is
defined as the parent company of a party and any company that is controlled
directly or indirectly by that party or its parent company through more than
fifty percent (50%) ownership, provided such affiliate agrees to be bound by
this agreement.
WHEREAS, 8x8, a developer and a supplier of videoconferencing
products, intends to license certain technology to USR according to these terms
and conditions; and
WHEREAS, USR, a developer and a supplier of modems, certain
information access products and other products, intends to license certain
technology to 8x8 according to these terms and conditions:
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained hereinafter, 8x8 and USR agree as follows:
1. LICENSES.
(a) Licensed Technology. The license from 8x8 to USR
covers:
. the technology that 8x8 has relating to
videoconferencing in a standalone format (i.e. in a
system that is not directly connected to a personal
computer), and thus includes what 8x8 calls its
"videocommunicators," i.e. ViaTV, LCD Phone and
variations on them (such as the Truedox design that
was also displayed during 8x8's presentation on
January 21, 1997), which are herein called the "VC";
VCP chip and current variations relevant to
videoconferencing like LVP, which are herein called
the "VCP";
. any source and object code related to
videoconferencing 8x8 has that will work in the VC,
including H.320, H.323, H.324, and MPEG (other than
on MPP or MPPex, as excluded below) and related
controls of the standalone system, such as the
controls from the telephone keypad, herein called the
"VC Code";
. any technology 8x8 has developed for direct
connection to the personal computer, such as DVC6 or
the Vidus CompressionCam and related technology
(demonstrated to USR by Sanyo, based on its
nonexclusive license of technology from 8x8's
subsidiary, Vidus, Inc.)
. all development tools applicable to the "Licensed
Technology" that 8x8 can provide to USR without
violating copyright or license agreements.
<PAGE> 2
All of the technology described above is herein collectively
called "Licensed Technology."
Excluded from the Licensed Technology is:
. the web browser technology developed by 8x8 with
PlanetWeb, Inc.
. the audio code 8x8 licensed from Signal Processing
Associates ("SPA")
. the modem technology licensed from ELSA GmbH [though
8x8 will use its best efforts to persuade each of
those parties (at the request of USR) to make
available such technology to USR on the same terms
and conditions as such technology is available to 8x8
(in which case thereafter USR will share enhancements
to technology with 8x8 as provided below for the
duration that the parties are sharing enhancements)].
Also excluded from the Licensed Technology is:
. the MPP and MPPex (licensed exclusively to ESS
Technology, Inc. for MPEG and CD Players), and
related MPEG code and software to the extent used on
MPP and MPPex; except that USR can use the MPEG on
the VCP.
The Licensed Technology is as it exists on the Effective Date
in written and electronic documents, including schematics, data base tapes,
software, source and object code for delivery to USR, and, except for the
foregoing, does not include delivery of any physical products; provided,
however, future modifications and enhancements to the Licensed Technology
pursuant to this Agreement shall become part of the "Licensed Technology."
(b) Grant: 8x8 will immediately deliver to USR the
Licensed Technology and hereby grants to USR a nonexclusive (except as set
forth in Section 4 hereof), nonassignable (except as allowed under Section 14
hereof) world-wide license to use the Licensed Technology and to make, have
made, use, market and sell products containing or embodying such Licensed
Technology, and enhancements as described below, including rights under any 8x8
patents or copyrights relevant thereto (including after-acquired rights).
USR is free to use and market the Licensed Technology as
follows:
. Sell systems (what 8x8 calls its
"videocommunicators," i.e., ViaTV, LCD Phone and
variations on them) for itself (USR) or to Original
Equipment Manufacturers under their brand names
("OEMs"), including selling systems without casing
for incorporation into other manufacturers products
such as television sets.
. Sell direct computer products (such as DVC6 and
Compression Cam) for itself (USR) or to Original
Equipment Manufacturers under their brand names
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<PAGE> 3
("OEMs"), including selling systems for incorporation
into other manufacturers products.
. Sell "daughter" cards or partial boards as subsystems
for another manufacturer's video solution.
USR is free to use the 8x8 H.323 stack and the H.245 and H.223
code for incorporation into its own products of all types.
(c) Consideration: In consideration therefor, USR will
pay 8x8 [*] immediately on execution of this Agreement.
(d) Royalty: On any system that USR sells that
incorporates any Licensed Technology (excluding USR products in which the only
use of the Licensed Technology is the incorporation of the 8x8 H.323 stack, the
H.245 code or the H.223 code), USR agrees to pay 8x8 the following royalties:
<TABLE>
<CAPTION>
CUMULATIVE NUMBER OF SYSTEMS SOLD BY USR UNDER THIS
AGREEMENT ROYALTY PER SYSTEM OWED 8x8 ON THOSE SYSTEMS
<S> <C>
1 - 20,000 [*]
20,001 - 40,000 [*]
40,001 - 60,000 [*]
60,001 - 80,000 [*]
80,001 - 100,000 [*]
100,001 - 120,000 [*]
120,001 - 140,000 [*]
140,001 - 160,000 [*]
160,001 - 180,000 [*]
180,001 - 200,000 [*]
200,001 - 220,000 [*]
>220,000 [*]
</TABLE>
If USR elects to manufacture the VCP, then for each such chip
incorporated into a system and sold (or sold on the open market as permitted
herein if the option is exercised), USR agrees to pay 8x8 the following
royalties:
____________________________________________________
[*] Confidential treatment requested.
-3-
<PAGE> 4
<TABLE>
<CAPTION>
CUMULATIVE NUMBER OF CHIPS SOLD BY USR UNDER THIS
AGREEMENT ROYALTY/CHIP OWED 8x8 ON THOSE CHIPS
<S> <C>
1 - 20,000 [*]
20,001 - 40,000 [*]
40,001 - 60,000 [*]
60,001 - 80,000 [*]
80,001 - 100,000 [*]
100,001 - 120,000 [*]
120,001 - 140,000 [*]
140,001 - 160,000 [*]
160,001 - 180,000 [*]
180,001 - 200,000 [*]
200,001 - 220,000 [*]
>220,000 [*]
</TABLE>
Provided, however that the chip royalty will be
proportionately reduced by the die area on the chip attributable exclusively to
enhancements by USR. Also, the [*] royalty on the chip is not due on any chip
purchased by USR from 8x8.
If USR uses the 8x8 H.323 stack, the H.245 code or the H.223
code on some system other than 8x8's chip USR agrees to pay 8x8 a royalty of
[*] per port (or end user customer); provided further, that USR does not owe
such [*] royalty if the H.323 stack, the H.245 code or the H.223 code is
developed independently of 8x8's technology in good faith ("clean room"
environment) and used on systems independent of 8x8's chip; and provided
further, that with this exception, the VC Code may only be used on the VCP
subject to royalty above.
Such royalty will be paid within 45 days of the end of each
USR fiscal quarter. Royalties shall not be due, and if already paid shall be
credited to USR, for systems and chips sold by USR but returned by the
purchaser. 8x8 is entitled to audit the records of USR through 8x8's auditor,
provided that (a) such audit shall occur no more than once per year, and (b)
such auditor (i) shall be acceptable to USR and (ii) shall have executed an
appropriate nondisclosure agreement. If such an audit discloses a deficiency
in the royalty paid of greater than five percent (5%), then USR will pay the
reasonable cost of such audit plus interest on the deficiency from the time due
until paid of twelve percent (12%) simple interest per annum.
USR will give 8x8 in the report each quarter a good faith
estimate of the number of systems that were for direct computer products (DVC6
or CompressionCam).
(e) Grant back from USR: USR will provide 8x8 theUSR
technical and other confidential and proprietary information that USR
determines is necessary or useful for 8x8 to improve
____________________________________________________
[*] Confidential treatment requested.
-4-
<PAGE> 5
the modem and speakerphone functionality for the video communicator
(hereinafter "USR Information") and USR hereby grants to 8x8 a paid up,
royalty-free, nonexclusive, nonassignable world-wide license to use the USR
Information to make, have made, use or sell products incorporating the USR
Information; provided, however, (i) such products shall include 8x8's
videophone technology only, and not direct computer products such as DVC6 or
CompressionCam; (ii) 8x8 shall use the USR information only for its own branded
system products, and shall not sublicense or otherwise disclose the USR
information to third parties for use in their products or for any other reason;
and (iii) such improvements shall be included in the Licensed Technology and
thereby licensed to USR for incorporation into USR's products. Notwithstanding
the foregoing, in the event USR sells one or more of its products to OEMs, then
8x8 shall thereafter have the right to sell its own similar products to OEMs.
Upon determining that it will sell its product(s) to OEMs, USR shall give 8x8
notice of that decision.
(f) Source Code: All source code licensed hereunder,
whether from 8x8 to USR or from USR to 8x8, shall, in addition to the terms and
conditions of this Agreement, be subject to the terms of the Source Code
License in the form of Exhibit A attached hereto.
2. LICENSING OF ENHANCEMENTS.
Each party agrees [*] to license to the other party any enhancements
it makes to the Licensed Technology. (Such enhancements created by 8x8 shall
then become Licensed Technology.) Such enhancements shall be delivered
promptly upon their development, until USR discontinues the licensing of such
enhancements by both parties by providing notice to 8x8 (but enhancements
delivered by either party up to the date of such notice shall continue to be
licensed); provided, however, that (a) 8x8 will in any event deliver the first
taped out version of the VCPex, and (b) USR will in any event deliver to 8x8
the initial enhancements it makes to the VCP, VCPex, or VC relating to modem
and speakerphone technology, including porting V.34 to 8x8's chip. (All such
enhancements by USR are hereinafter called "USR Enhancements.") Such
deliveries by 8x8 and USR, along with related development tools (to the extent
delivery can be done without paying a fee to third parties or violating other
agreements) will be in the same form and completeness as similar prior
deliveries by 8x8 of Licensed Technology, and with engineering support as
provided below. Nothing herein entitles USR to receive enhancements developed
by other licensees of 8x8, and nothing herein entitles 8x8 to sublicense,
distribute or otherwise disclose USR's enhancements to other licensees of 8x8;
provided further that 8x8 will limit production of chips with USR Enhancements
to incorporation on finished systems produced (made or have made) and sold or
leased by 8x8, and in no event will 8x8 sell or otherwise make available on the
open market such components in component form or on printed circuit boards for
incorporation into the systems of others; and thus, the chip that 8x8 sells on
the open market to its other chip customers will have deleted from it any USR
Enhancements. After June 30, 2000, either party may elect to terminate sharing
of enhancements developed after date of such termination.
____________________________________________________
[*] Confidential treatment requested.
-5-
<PAGE> 6
3. ENGINEERING SUPPORT.
8x8 will provide engineering support to USR, for all Licensed
Technology, including all such technology initially delivered to USR and all
enhancements. Such engineering support shall be sufficient to enable USR
quickly to implement the Licensed Technology and enhancements for demonstration
purposes and to enable USR to achieve its objectives of volume shipments as
soon as possible. USR shall provide comparable engineering support to 8x8 for
the USR Enhancements. [*] If the receiving party asks the delivering party at
any time for engineers or others to travel to the receiving party's location to
support the technology delivery, and the other party agrees to do so, receiving
party will pay the reasonable costs associated therewith, including the
traveling party's labor costs for such personnel as well as travel (coach class
on the airplane), meals and lodging.
4. EXCLUSIVITY.
8x8 agrees that for a period of one year beginning on the Effective
Date hereof it will not grant to any third party any licenses to use the
Licensed Technology, or any portion thereof, or to make, have made, use, market
or sell products with such Licensed Technology, or any portion thereof,
provided 8x8 may still deliver to its customers object code with chips and
reference designs for boards; 8x8 may deliver to its customers example source
code needed by customers for integration of 8x8's chips into customer products,
including PC driver code and microprocessor controller code for controlling VCP
applications (including changing display size, logo, trademark, menu, options
and features); 8x8 can honor currently outstanding licenses; and 8x8 can sell
to OEMs its system level products (whether partial boards, complete boards or
partial or complete systems branded as the customer desires) for resale in that
form or incorporated in other systems (like TV) as the customer desires. None
of the delivery of source or object code to customers shall include USR
Information other than as allowed in section 1(c).
5. VCP PRICING.
8x8 agrees to sell VCP chips to USR (as enhanced with enhancements
that become part of the Licensed Technology as described above) at a price [*].
USR is entitled to audit the records of 8x8 through USR's auditor, solely to
verify 8x8 pricing, provided that (a) such audit shall occur no more than once
per year, and (b) such auditor (i) shall be acceptable to 8x8 and (ii) shall
have executed an appropriate nondisclosure agreement. If such an audit
discloses a pricing discrepancy unfavorable to USR of greater than five percent
(5%), then 8x8 will pay the reasonable costs of such audit plus interest on the
discrepancy of twelve percent (12%) simple interest per annum.
6. WARRANTIES
(a) 8x8 warrants that (i) all portions of the Licensed
Technology owned by third party licensors of 8x8, if any, are provided to USR
hereunder pursuant to appropriate authority of those third
____________________________________________________
[*] Confidential treatment requested.
-6-
<PAGE> 7
parties, and (ii) 8x8 owns all rights in and to all other portions of the
Licensed Technology, free of any liens, claims, encumbrances or other
restrictions that would impair USR's rights under this Agreement. The
foregoing warranties exclude any warranty that the Licensed Technology does not
infringe the intellectual property rights of any third party. However, 8x8
warrants that to the best of its knowledge the Licensed Technology does not
infringe the intellectual property rights of any third party.
(b) 8x8 warrants that the Licensed Technology shall be
free of material defects and shall function in conformance with its published
documentation and other specifications customarily provided to 8x8's licensors
for a period of thirty (30) days from the date of delivery of the Licensed
Technology. During such thirty-day period, USR may return the Licensed
Technology to 8x8 for a full refund of all moneys paid to 8x8 hereunder if USR
is not satisfied with the Licensed Technology.
(c) 8x8 represents and warrants that as of the effective
date of this agreement it has received no notice that the Licensed Technology
infringes any patent, copyright, trade secret or other intellectual property
right (collectively "Intellectual Property Rights") of any third party, though
8x8 has incorporated a patent license from DSP Group and is considering
negotiating licenses of patents possibly applicable to G.723 (and USR would
need to consider negotiating similar licenses for its benefit). 8x8 will
immediately advise USR of any such notice received by 8x8 in the future as it
applies to Licensed Technology, and whether the enhancement was done by 8x8 or
USR; likewise, USR will notify 8x8 of any notice USR receives where there is a
claim that applies to Licensed Technology, and whether the enhancement was done
by 8x8 or USR. Each party bears the risk that some party claims or sues it
with respect to alleged infringement of intellectual property rights of others;
provided that the other party will cooperate in such litigation to the extent
it can be helpful in defending against such claims of other third parties.
(d) EXCEPT AS SET FORTH IN SECTIONS 6(a), (b) AND (c)
ABOVE, NEITHER PARTY MAKES ANY WARRANTIES, EXPRESS OR IMPLIED, AS TO THE
QUALITY, PATENTS OR COPYRIGHTS OF ANYTHING DELIVERED HEREUNDER AND
ENHANCEMENTS, EXCEPT AS SPECIFIED IN THIS AGREEMENT. EACH PARTY MAKES NO
INDEMNITY IN THE EVENT THAT THE OTHER PARTY IS SUED FOR ANYTHING RELATED TO THE
LICENSED TECHNOLOGY OR ENHANCEMENTS HEREUNDER EXCEPT AS SPECIFIED IN THIS
AGREEMENT, BUT EACH PARTY WILL COOPERATE IN THE EVENT OF SUCH LITIGATION TO
ASSIST THE OTHER PARTY TO DEFEND SUCH LITIGATION. THE PARTIES SPECIFICALLY
DISCLAIM LIABILITY FOR CONSEQUENTIAL DAMAGES.
7. CONFIDENTIAL INFORMATION. The parties will keep confidential
any information provided to it by the other party that is proprietary to the
other party and marked confidential; provided such information shall not be
considered proprietary once it is in the public domain by no fault of the other
party. Such confidentiality will be maintained by the other party with the
same care that such party would use for its own confidential information, but
in any event with reasonable care.
-7-
<PAGE> 8
8. RECRUITING. Until such time as the parties cease to share
enhancements, each party agrees not to directly solicit the employment, either
temporary, full time or consultancy, of any person after the effective date who
was employed by the other party within one year of the date of such potential
hiring.
9. COMPLETE AGREEMENT. This is a complete agreement binding upon
the parties, their heirs, successors and assigns. It may only be modified in
writing signed by officers of both parties.
10. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Delaware, excluding its choice-of-law provisions.
11. PUBLIC STATEMENTS. The parties agree immediately to publish a
joint press release stating that Licensee has licensed 8x8's videoconferencing
technology, and 8x8 endorses USR's "x2" and related technologies. Further,
either party is free to file with the SEC any document required to be filed
there on advice of counsel (redacted in a form advised by counsel). Other
public statements and press releases related to this licensing agreement are
subject to approval in advance by both parties; neither party shall use the
name of the other party without advance approval.
12. INDEPENDENT CONTRACTORS. The parties are independent
contractors, and nothing herein shall be deemed to create any agency, joint
venture or partnership relationship between them. Neither party shall have the
right to bind the other to any obligation, nor have the right to incur any
liability on behalf of the other.
13. FORCE MAJEURE. Neither party shall be liable to the other for
delay or failure to perform if and to the extent such delay or failure to
perform is due to causes beyond the reasonable control of the party affected.
14. ASSIGNMENT. Neither party shall assign this Agreement or its
rights hereunder without the prior written consent of the other party, except
to an affiliate of that party; provided, however, in the event of a change in
control of one party through a merger, consolidation or other business
combination or acquisition by or with a person or entity a material portion of
whose business is the sale or licensing of products that are competitive with
products of the other party, the other party shall have the right to terminate
the licenses granted by both parties hereunder. Notwithstanding the foregoing,
8x8 agrees that USR's parent company's merger transaction with 3COM, as
previously announced to the public, does not give rise to any such termination
right of 8x8.
15. NON-WAIVER. No course of dealing or failure of either party
to enforce strictly any term, right, obligation or provision of this Agreement
shall be construed as a waiver of such provision.
16. SEVERABILITY. If any provision of this Agreement shall be
held invalid or unenforceable, such provision shall be deemed deleted from the
Agreement and replaced by a valid and enforceable provision that achieves, as
much as possible, the same purpose, and the remaining provisions of the
Agreement shall continue in full force and effect.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Agreement.
U.S. ROBOTICS ACCESS CORP. 8x8, INC.
By: /s/ Michael S. Seedman By: /s/ Joe Parkinson
---------------------------------- ---------------------------------
Name: Seedman Name: Joe Parkinson
-------------------------------- -------------------------------
Title: SVP-GM Title: Chairman
------------------------------- ------------------------------
Date: May 12, 1997 Date: May 5, 1997
-------------------------------- -------------------------------
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<PAGE> 10
EXHIBIT A
SOURCE CODE LICENSE
This Source Code License ("License") is effective this _____ day of
____________, 19__, by and between ___________________________ ("Licensor") and
___________________________ ("Licensee"). This License is an addendum to the
Technology License Agreement between the parties dated _______________
("Agreement"), and all Source Code licensed hereunder is subject to all terms
and conditions of that Agreement as well as those terms and conditions set
forth below. In the event of any conflict or inconsistency between the
Agreement and this License, this License shall take precedence.
1. License Grant. Licensor grants to Licensee, and Licensee
accepts, a license to use internally and copy the Source Code described in
Exhibit I attached hereto solely for the purpose of developing the products
described in the Agreement.
2. Restrictions.
2.1 Licensee may make a reasonable number of copies of
the Source Code solely for its own internal use under the terms of this
License, provided that all legal notices set forth on the Source Code are
reproduced on such copies.
2.2 Licensee shall limit access to the Source Code to
those of its employees who have a need to know for the purpose of enabling
Licensee to perform under this License and the Agreement. Licensee shall
ensure that all of its employees given access to the Source Code shall be bound
by Licensee's standard confidentiality agreement, copies of which may be
requested by Licensor upon demand, and which shall contain nondisclosure and
usage restrictions consistent with those set forth herein.
2.3 Except in furtherance of the license granted above,
Licensee shall not (i) modify, alter or prepare derivative works based on the
Source Code or (ii) engage in or cause the reverse engineering, disassembly or
decompilation or similar manipulation of the Source Code. Further, Licensee
acknowledges that it shall not lend, sell, assign, sublicense, lease,
hypothecate, disclose, disseminate or otherwise transfer the Source Code to any
third party in any media or permit any third party to use, execute, reverse
engineer, disassemble, decompile or engage in any similar manipulation of the
Source Code or any part thereof.
2.4 Notwithstanding the earlier termination of this
License, the obligations of this section shall remain in effect until such time
as the Source Code becomes publicly known, through no act or failure to act on
Licensee's part.
3. Ownership of Source Code. Source Code and all copies, in
whole or in part, and all additional materials provided therewith, as described
in Exhibit I, are and shall remain the property of Licensor. This Agreement
grants no rights other than those set forth herein.
<PAGE> 11
4. Export Control. Both parties recognize that an export license
must be obtained before the Source Code can be exported and will make all
reasonable efforts to obtain such license. Licensee will not transfer any
technical information that it receives from Licensor or products made using
such information to any country prohibited from obtaining such data by the U.S.
Department of Commerce Export Administration Regulations without first
obtaining a validated export license, and Licensee will otherwise comply with
all export control laws and regulations of the United States.
5. General. This Agreement shall be governed by the laws of the
State of Delaware. This License and the Agreement collectively comprise the
complete and exclusive agreement between the parties relating to this subject
matter and no amendments shall be effective unless in a writing signed by both
parties.
LICENSOR: LICENSEE:
By:__________________________________ By:_________________________________
Name:________________________________ Name:_______________________________
Title:_______________________________ Title:______________________________
Date:________________________________ Date:_______________________________
-2-
<PAGE> 12
EXHIBIT I
TO
SOURCE CODE LICENSE
Source Code to be provided by Licensor:
Additional materials to be provided by Licensor:
<PAGE> 1
EXHIBIT 11.1
8x8, Inc.
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
March 31,
1997
----
<S> <C>
Net loss $(13,613)
--------
Reconciliation of weighted average number of
shares outstanding to amount used in proforma
loss per share computation:
Weighted average number of shares
outstanding 7,824
Additional shares included in accordance
with requirements of the Securities and
Exchange Commission under Staff
Accounting Bulletin 83 4,202
------
Weighted average number of shares
outstanding as adjusted 12,026
======
Proforma net loss per share $(1.13)
=======
</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 May 1, 1997, except for
note 4, which is as of May 15, 1997 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, 1997 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
May 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1997
<PERIOD-START> APR-01-1995 APR-01-1996
<PERIOD-END> MAR-31-1996 MAR-31-1997
<CASH> 4,652 8,722
<SECURITIES> 5,241 2
<RECEIVABLES> 4,099 1,386
<ALLOWANCES> 520 374
<INVENTORY> 7,270 1,178
<CURRENT-ASSETS> 21,026 11,268
<PP&E> 7,048 6,616
<DEPRECIATION> 5,522 5,272
<TOTAL-ASSETS> 23,067 12,727
<CURRENT-LIABILITIES> 11,693 6,614
<BONDS> 0 0
0 0
3 4
<COMMON> 5 7
<OTHER-SE> 11,366 6,030
<TOTAL-LIABILITY-AND-EQUITY> 23,067 12,727
<SALES> 28,774 19,146
<TOTAL-REVENUES> 28,774 19,146
<CGS> 16,668 12,030
<TOTAL-COSTS> 16,255 20,667
<OTHER-EXPENSES> (952) (120)
<LOSS-PROVISION> 313 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (3,197) (13,431)
<INCOME-TAX> 20 182
<INCOME-CONTINUING> (3,217) (13,613)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,217) (13,613)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0<F1> (1.13)<F1>
<FN>
<F1>Proforma net loss per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period 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 SEC, common equivalent shares relating to preferred
stock (using the if-converted method) and stock options (using the treasury
stock method when assuming an initial public offering price of $9 per share)
issued subsequent to September 30, 1995, have been included in the computation
for all periods presented.
</FN>
</TABLE>
