<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-15627
8X8, INC.
Delaware 77-0142404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 Mission College Blvd.
Santa Clara, CA 95054
(408) 727-1885
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of October
16, 1998 was 15,281,651.
The exhibit index begins on page 25.
<PAGE> 2
8X8, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1998 and March 31, 1998..............................................1
Condensed Consolidated Statements of Operations for the three and six
months ended September 30, 1998 and 1997...........................................2
Condensed Consolidated Statements of Cash Flows for the six months
ended September 30, 1998 and 1997...................................................3
Notes to Unaudited Condensed Consolidated Financial Statements........................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................6
PART II- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................24
Signatures...........................................................................24
</TABLE>
i
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments .................... $ 18,366 $ 26,737
Accounts receivable, net ................... 3,874 4,527
Inventory .................................. 13,311 12,758
Prepaid expenses and other assets .......... 1,374 876
-------- --------
Total current assets ..................... 36,925 44,898
Property and equipment, net .................. 1,857 1,370
Deposits and other assets .................... 111 161
-------- --------
$ 38,893 $ 46,429
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 2,001 $ 2,625
Accrued compensation ....................... 1,516 1,445
Accrued warranty ........................... 1,324 1,461
Deferred revenue ........................... 2,176 2,447
Other accrued liabilities .................. 1,911 1,923
-------- --------
Total current liabilities ................ 8,928 9,901
-------- --------
Minority interest ............................ -- 85
-------- --------
Stockholders' equity:
Common stock ............................... 15 15
Additional paid-in capital ................. 48,034 47,785
Notes receivable from stockholders ......... (290) (893)
Deferred compensation ...................... (391) (744)
Unrealized loss on investments ............. (107) (45)
Accumulated deficit ........................ (17,296) (9,675)
-------- --------
Total stockholders' equity ............... 29,965 36,443
-------- --------
$ 38,893 $ 46,429
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Product revenues ...................................... $ 8,375 $ 8,103 $ 14,886 $ 13,056
License and other revenues ............................ 628 2,791 1,217 9,453
-------- -------- -------- --------
Total revenues ........................................ 9,003 10,894 16,103 22,509
Cost of product revenues .............................. 5,863 3,987 10,253 6,531
Cost of license and other revenues .................... 50 550 50 550
-------- -------- -------- --------
Gross profit .......................................... 3,090 6,357 5,800 15,428
-------- -------- -------- --------
Operating expenses:
Research and development ............................ 2,753 2,982 5,365 6,195
Selling, general and administrative ................. 4,290 3,760 8,652 7,300
-------- -------- -------- --------
Total operating expenses .................... 7,043 6,742 14,017 13,495
-------- -------- -------- --------
Income (loss) from operations ......................... (3,953) (385) (8,217) 1,933
Other income, net ..................................... 303 480 596 580
-------- -------- -------- --------
Income(loss)before(benefit)provision
for income taxes ..................................... (3,650) 95 $ (7,621) 2,513
(Benefit) provision for income taxes .................. -- -- -- (1,000)
-------- -------- -------- --------
Net income (loss) ..................................... $ (3,650) $ 95 $ (7,621) $ 3,513
======== ======== ======== ========
Net income (loss) per share:
Basic ............................................... $ (0.24) $ 0.01 $ (0.51) $ 0.36
Diluted ............................................. $ (0.24) $ 0.01 $ (0.51) $ 0.25
======== ======== ======== ========
Shares used in per share calculations:
Basic ............................................... 14,939 13,682 14,866 9,738
Diluted ............................................. 14,939 16,090 14,866 13,839
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Six months ended
September 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................... $ (7,621) $ 3,513
Charges to net income (loss) not
affecting cash ............................ 637 1,583
Net effect of changes
in current and other assets
and current liabilities ................... (1,321) (1,646)
-------- --------
Net cash (used in) provided by
operating activities ................... (8,305) 3,450
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ......... (934) (518)
Short-term investments-trading
activity, net ............................. 60 2
-------- --------
Net cash used in investing
activities ............................. (874) (516)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of
common stock, net ......................... 478 24,757
Repayment of notes receivable from
stockholders .............................. 475 --
Purchases of common stock from
minority shareholders in subsidiary ....... (85) --
-------- --------
Net cash provided by financing
activities ............................. 868 24,757
-------- --------
Net (decrease) increase in cash and
cash equivalents ............................ (8,331) 27,691
Cash and cash equivalents at the
beginning of the period ..................... 26,677 8,722
-------- --------
Cash and cash equivalents at the
end of the period ........................... $ 18,366 $ 36,413
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
8X8, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
The Company designs, manufactures, and markets videophones for use by the
consumer and business market. The Company also designs, develops and markets
highly integrated proprietary video communication semiconductors and associated
software for videophones and video communication.
2. BASIS OF PRESENTATION
The Company's fiscal year ends on the last Thursday on or before March 31.
The three and six month periods ended September 24, 1998 and September 25, 1997
included 13 weeks and 26 weeks of operations, respectively. For purposes of
these condensed consolidated financial statements, the Company has indicated its
fiscal year as ending on March 31 and its interim periods as ending on September
30.
The accompanying interim condensed consolidated financial statements are
unaudited and have been prepared on substantially the same basis as the
Company's annual financial statements for the year ended March 31, 1998. In the
opinion of management, these financial statements reflect all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the periods presented. These financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
March 31, 1998, including notes thereto, included in the Company's Annual Report
on Form 10-K.
The results of operations for the interim periods included in these
financial statements are not necessarily indicative of the results to be
expected for any future period or the entire fiscal year.
3. BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
(in thousands) September 30, March 31,
1998 1998
------------- ---------
<S> <C> <C>
Inventories:
Raw materials $ 3,232 $ 3,864
Work-in-process 5,826 5,337
Finished goods 4,253 3,557
------- -------
$13,311 $12,758
======= =======
</TABLE>
4. NET INCOME (LOSS) PER SHARE
All prior years' data in this report have been restated to reflect the
adoption of Statement of Financial Accounting Standards No. 128 (FAS 128). FAS
128 requires a reconciliation of the numerators and denominators of the basic
and diluted per share calculations. There were no adjustments to the numerators
for any period presented.
4
<PAGE> 7
The reconciliation of the denominators is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic shares 14,939 13,682 14,866 9,738
Effect of dilutive securities:
Preferred stock -- 166 -- 1,946
Common stock options -- 1,561 -- 1,356
Unvested restricted common stock -- 681 -- 799
------ ------ ------ ------
Diluted shares 14,939 16,090 14,866 13,839
====== ====== ====== ======
</TABLE>
Approximately 3.1 million common stock options and 231,000 unvested
restricted common shares were outstanding at September 30, 1998, but were not
included in the computation of diluted net income (loss) per share because their
impact was anti-dilutive in view of losses incurred by the Company.
Approximately 138,000 common stock options at a weighted average price of $11.25
were outstanding at September 30, 1997, but were not included in the computation
of diluted net income (loss) per share because their impact was anti-dilutive.
5. RELATED PARTY TRANSACTION
During the quarter ended September 30, 1998, the Company repurchased all
outstanding shares of common stock held by minority shareholders in the
Company's subsidiary, VidUs, Inc. (VidUs), for approximately $85,000 in
conjunction with its merger with the Company in August 1998. All former minority
shareholders of VidUs are employees of the Company.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (FAS 130), "Reporting Comprehensive Income." Comprehensive
income (loss), as defined, includes all changes in equity (net assets) during a
period from non-owner sources. The primary difference between net income (loss)
and comprehensive income (loss), for the Company, is gains and losses on
short-term investments classified as available-for-sale. Comprehensive income
(loss) for the current reporting and comparable period in the prior year is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Comprehensive income (loss) $(3,728) $ 95 $(7,683) $ 3,513
======= ======= ======= =======
</TABLE>
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 (SOP 97-2) which provides
guidance for recognizing revenue on software transactions and supersedes SOP
91-1 "Software Revenue Recognition." In March 1998, the AICPA issued Statement
of Position No. 98-4 (SOP 98-4) "Deferral of the Effective
5
<PAGE> 8
Date of a Provision of SOP 97-2, Software Revenue Recognition." SOP 98-4 defers,
for one year, the application of certain passages in SOP 97-2 which limit what
is considered vendor-specific objective evidence necessary to recognize revenue
for software licenses on multiple-element arrangements when undelivered elements
exist. Additional guidance is expected to be provided prior to adoption of the
deferred provision of SOP 97-2. The Company will determine the impact, if any,
the further guidance will have on current revenue recognition practices when
issued. Adoption of the remaining provisions of SOP 97-2 did not have a material
impact on revenue recognition during the quarter or six months ended September
30, 1998.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131 (FAS 131), "Disclosures
about Segments of an Enterprise and Related Information." FAS 131 revises
information regarding the reporting of certain operating segments for periods
beginning after December 15, 1997. The Statement also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company will adopt FAS 131 in its fiscal 1999 annual report. The
Company has not yet determined the impact, if any, of adopting this new
standard.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities." FAS 133 is effective for fiscal years commencing after June 15,
1999. The Company will comply with the requirements of FAS 133 in fiscal year
2001 and does not expect the adoption of FAS 133 will be material to the
Company's consolidated results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, including but
not limited to those specifically identified as such, that involve risks and
uncertainties. The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future and statements contained within those
sentences followed by an asterisk (i.e., "*"). All forward-looking statements
included in this Report on Form 10-Q are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including, but not limited to, those set forth
below under the heading "Factors That May Affect Future Results" and elsewhere
in this Report on Form 10-Q.
This information should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and notes thereto included in Item I of this
Report on Form 10Q and the audited Consolidated Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Result of Operations for the fiscal year ended March 31, 1998 contained in the
Company's Annual Report on Form 10-K.
Overview
Since June 1995, the Company has been executing a business strategy designed
to focus the
6
<PAGE> 9
Company's efforts towards video communication. In each of the quarters ended
September 30, 1998 and 1997, sales of the Company's video communication products
accounted for 100% of product revenues. In the fiscal years ended March 31, 1998
and 1997, sales of the Company's video communication products accounted for 100%
and 86% of product revenues, respectively.
To address new opportunities, the Company has leveraged its strengths in
semiconductor design and related software to develop and market low-cost video
communication systems (hereinafter referred to as its "VideoCommunicators"). The
Company began shipping the first product in its planned family of
VideoCommunicator products, ViaTV videophone model VC100, in February 1997.
Subsequently, the Company introduced the VC105, an upgraded VC100, and added
three new models, the VC50, VC55 and VC150, to the ViaTV product line. The
Company also introduced versions of its ViaTV videophones designed for European
and Asian markets. In addition, the Company introduced a VideoCommunicator
product targeted specifically towards the surveillance market segment. In August
1998, the Company began shipping the RSM-1500 remote surveillance module, and
subsequently ceased shipment of the VC50 model.
The Company is marketing its VideoCommunicators through retail and
distribution channels, catalogs and original equipment manufacturers (OEMs) as
well as through direct marketing efforts utilizing a combination of advertising,
toll-free telemarketing and direct mail supported by co-marketing arrangements
with third parties. The Company sells its video communication semiconductors and
related software to OEMs and distributors.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Statements of Operations and the notes thereto:
<TABLE>
<CAPTION>
Revenues
Three months ended Six months ended
September 30, September 30,
---------------------------------- -----------------------------------
1998 1997 1998 1997
------------- -------------- -------------- --------------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product revenues $ 8.4 93% $ 8.1 74% $ 14.9 93% $ 13.1 58%
License and other
revenues 0.6 7% 2.8 26% 1.2 7% 9.4 42%
------ --- ------- --- ------- --- ------- ---
Total revenues $ 9.0 100% $ 10.9 100% $ 16.1 100% $ 22.5 100%
====== === ======= === ======= === ======= ===
</TABLE>
Total revenues were $9.0 million and $10.9 million for the second quarters
of fiscal 1999 and 1998, respectively. Total revenues for the second quarter of
fiscal 1999 were divided among video communication semiconductors (39%),
videophone systems (54%) and nonrecurring license and other revenues (7%). In
the second quarter of fiscal 1998, total revenues were divided among video
communication semiconductors (45%), videophone systems (29%) and nonrecurring
license and other revenues (26%).
Product revenues were $8.4 million in the second quarter of fiscal 1999, an
increase of $300,000 from the $8.1 million reported in the second quarter of
fiscal 1998. The increase in product revenues was primarily due to the increase
in unit sales of the Company's VideoCommunicator products, which was partially
offset by a decrease in average selling prices.
License and other revenues consist of technology licenses, including
royalties earned under such licenses, and nonrecurring engineering fees for
services performed by the Company for its
7
<PAGE> 10
customers. License and other revenues were approximately $600,000 in the second
quarter of fiscal 1999, a decrease of approximately $2.2 million from the $2.8
million reported in the second quarter of fiscal 1998. There can be no assurance
that the Company will receive any revenues from licensing or other such
arrangements in the future.* See "Factors That May Affect Future Results--No
Assurance of Future License and Other Revenues" and "Factors That May Affect
Future Results--Dependence on Key Customers."
Total revenues were $16.1 million and $22.5 million in the first six months
of fiscal 1999 and 1998, respectively. Total revenues for the first six months
of fiscal 1999 were divided among video communication semiconductors (41%),
videophone systems (51%) and nonrecurring license and other revenues (8%). In
the first six months of fiscal 1998, total revenues were divided among video
communication semiconductors (37%), videophone systems (22%) and nonrecurring
license and other revenues (41%).
Product revenues were $14.9 million in the first six months of fiscal 1999,
an increase of $1.8 million above the $13.1 million reported in the first six
months of fiscal 1998, and represented 93% and 58% of total revenues,
respectively. In the first six months of fiscal 1999 and 1998 license and other
revenues, all of which were nonrecurring, were $1.2 million and $9.4 million,
respectively. In the first six months of fiscal 1998, license and other revenues
included approximately $5.3 million paid by 3Com for a license to substantially
all of the Company's technology underlying its VideoCommunicators. There can be
no assurance that the Company will receive any revenues from such arrangements
in the future.* See "Factors That May Affect Future Results -- No Assurance of
Future License and Other Revenues."
Revenues derived from VideoCommunicator products sold-through by one
distribution customer represented approximately 11% of the Company's total
revenues for the quarter ended September 30, 1998. Revenues derived from two
separate customers represented approximately 15% and 10% of total revenues for
the quarter ended September 30, 1997. No customer represented ten percent (10%)
or more of the Company's total revenues for the six months ended September 30,
1998. Revenues derived from one customer represented approximately 28% of total
revenues for the six months ended September 30, 1997. Dependence on a
significant customer entails certain risks.* See "Factors That May Affect Future
Results--Potential Fluctuations in Operating Results" and "Factors That May
Affect Future Results--Dependence on Key Customers."
Revenues derived from customers outside of the United States as a percentage
of total revenues were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Asia Pacific 31% 40% 27% 28%
Europe 18% 11% 19% 11%
-- -- -- --
Total 49% 51% 46% 39%
== == == ==
</TABLE>
See "Factors That May Affect Future Results--International Operations."
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
8
<PAGE> 11
Cost of Revenues
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
----------------- ----------------
1998 1997 1998 1997
----- ----- ----- -----
(In millions)
<S> <C> <C> <C> <C>
Cost of product revenues $ 5.9 $ 4.0 $10.3 $ 6.5
As a percentage of product revenues 70% 49% 69% 50%
Cost of license and other revenues -- $ 0.5 -- $ 0.5
As a percentage of license
and other revenues 0% 18% 0% 5%
</TABLE>
The cost of product revenues consists of costs associated with
VideoCommunicator components, semiconductor wafer fabrication, VideoCommunicator
and semiconductor assembly and testing performed by third-party vendors and
direct and indirect costs associated with purchasing, scheduling and quality
assurance. Costs of product revenues were $5.9 million and $4.0 million for the
second quarters of fiscal 1999 and 1998, respectively. The cost of product
revenues in the quarter ended September 30, 1998 included increased costs
associated with the increased unit sales of the Company's VideoCommunicator
products, which have a substantially different cost structure from the Company's
semiconductor products.
Cost of license and other revenues in the second quarter of fiscal 1999 and
1998 were approximately $50,000 and $500,000, respectively, and consisted
primarily of personnel and other costs incurred to perform certain development
work under terms of nonrecurring engineering contracts. This development work
was performed by research and development personnel of the Company.
Cost of product revenues were $10.3 million and $6.5 million in the first
six months of fiscal 1999 and 1998, respectively. The cost structure of the
Company's ViaTV product line, the Company's first line of VideoCommunicator
products, is substantially different from the Company's video communication
semiconductor products.
Gross Profit
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
----- ----- ----- ------
(In millions)
<S> <C> <C> <C> <C>
Gross profit $ 3.1 $ 6.4 $ 5.8 $ 15.4
As a percentage
of total revenues 34% 59% 36% 68%
</TABLE>
Gross profit was $3.1 million and $6.4 million in the second quarters of
fiscal 1999 and 1998, respectively. Gross profit from product revenues was $3.1
million and $4.1 million for the second quarters of fiscal 1999 and 1998,
respectively. Gross profit from license and other revenues, all of which was
nonrecurring, was approximately $600,000 and $2.3 million in the second quarters
of fiscal 1999 and 1998, respectively. There can be no assurance that the
Company will receive any revenues from such license and other revenues sources
in the future.* See "Factors That May Affect Future Results--No Assurance of
Future License and Other Revenues."
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
9
<PAGE> 12
Gross profit was $5.8 million and $15.4 million in the first six months of
fiscal of 1999 and 1998, respectively. License and other revenues, net of
associated costs, contributed $1.2 million and $8.8 million to gross profit in
the first six months of fiscal 1999 and 1998, respectively.
Lower product gross profit in the second quarter of fiscal 1999 was due
primarily to decreased average selling prices for both the Company's
VideoCommunicator and video communication semiconductor products. Decreases in
average selling prices were partially offset by increased unit sales and
decreased product costs. While the cost of some components used in the
VideoCommunicator products have decreased, the Company will not be able to
realize the benefit of these or potential future cost reductions, if at all,
until current inventory levels decrease.*
Total gross margin was 34% and 59% in the second quarters of fiscal 1999 and
1998, respectively. The decrease in gross margin is due primarily to the
decrease in license and other revenues, all of which were nonrecurring. In
addition, gross margins were lower due to increased sales of the Company's
VideoCommunicator products which have substantially lower gross margins than the
Company's semiconductor products.
The markets for the Company's VideoCommunicator and semiconductor products
are characterized by falling average selling prices, which could have a material
adverse effect on the Company's future business and operating results if the
Company cannot achieve lower cost of sales and/or higher sales volumes.* The
Company expects that, as a result of competitive pressures and other factors,
gross profit as a percentage of revenue for the Company's semiconductor products
will likely decrease for the foreseeable future.* Gross profit as a percent of
revenue is substantially lower for the sales of VideoCommunicator products than
for sales of the Company's semiconductors. If VideoCommunicator product revenue
continues to grow as a percentage of total product revenue, the Company expects
that gross profit as a percentage of total product revenue will decrease.* See
"Factors That May Affect Future Results--Fluctuations in Operating Results."
Operating Expenses--Research and Development
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
----- ----- ----- ------
(In millions)
<S> <C> <C> <C> <C>
Research and development $ 2.8 $ 3.0 $ 5.4 $ 6.2
As a percentage
of total revenues 31% 28% 34% 28%
</TABLE>
Research and development expenses consist primarily of personnel, system
prototype design and fabrication, mask, prototype wafer and equipment costs
necessary for the Company to conduct its development efforts. Research and
development costs, including software development costs, are expensed as
incurred. During the three and six month periods ended September 30, 1998 and
1997, respectively, research and development expenses were attributable to the
Company's next generation development of its video communication semiconductors
and continued development of its VideoCommunicators.
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
10
<PAGE> 13
Lower research and development expenses during the second quarter and six
months ended September 30, 1998 were due to decreases in profit sharing and
incentive bonuses, non-recurring VideoCommunicator design costs, and costs
associated with materials and tooling used in prototype builds of the Company's
VideoCommunicator products. These decreases were offset by an increase in
headcount and the use of research and development personnel during the quarter
ended September 30, 1997 to perform non-recurring engineering services under a
revenue generating contract. The costs associated with this contract were
included in the cost of license and other revenues. Higher research and
development costs as a percentage of total revenues for both the three and six
month periods ended September 30, 1998 were due to lower revenues as compared to
the comparable periods in the prior fiscal year.
The Company expects to continue to allocate substantial resources to
research and development.* However, future research and development costs may
vary both in absolute dollars and as a percentage of total revenues.* See
"Factors That May Affect Future Results--Rapid Technological Change; Dependence
on New Product Introduction."
Operating Expenses--Selling, General and Administrative
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
---------------- ----------------
1998 1997 1998 1997
---- ----- ---- -----
(In millions)
<S> <C> <C> <C> <C>
Selling, general and administrative $4.3 $ 3.8 $8.6 $ 7.3
As a percentage
of total revenues 48% 35% 53% 32%
</TABLE>
Selling, general and administrative expenses consist primarily of personnel
and related overhead costs for sales, marketing, finance, human resources and
general management. Such costs also include advertising, sales commissions,
trade show and other marketing and promotional expenses. Selling, general and
administrative expenses were $4.3 million and $3.8 million in the second
quarters of fiscal 1999 and 1998, respectively. In the second quarter of fiscal
1999, expenses increased due to costs associated with the marketing, advertising
and promotion of the Company's VideoCommunicator product line and additional
headcount required to support these activities. These increases were partially
offset by decreases in profit sharing and commission expenses. The Company
expects that its sales and marketing expenses may increase as the Company
launches new VideoCommunicator products and promotes its current
VideoCommunicator products.* Therefore, future selling, general and
administrative costs may vary both in absolute dollars and as a percentage of
total revenues.* See "Factors That May Affect Future Results--Potential
Fluctuations in Operating Results."
Selling, general and administrative expenses were $8.6 million and $7.3
million in the first six months of fiscal 1999 and 1998, respectively. While
total expenses increased as a result of the factors listed above, the non-cash
compensation expense recognized on certain stock option
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
11
<PAGE> 14
grants and charged to selling, general and administrative decreased to $85,000
in the first six months of fiscal 1999 from $737,000 in the first six months of
fiscal 1998.
Other Income, Net
Other income, net, consists primarily of interest earned on cash equivalents
and short-term investments. Other income, net was approximately $303,000 for the
three month period ended September 30, 1998 compared to $480,000 for the three
month period ended September 30, 1997. Other income, net was $596,000 for the
six month period ended September 30, 1998 compared to $580,000 for the
comparable period in the prior fiscal year. The decrease in interest income in
the second quarter of fiscal 1999 is due primarily to lower average cash
equivalents and short-term investment balances as compared to the second quarter
of fiscal 1998.
(Benefit) Provision for Income Taxes
There was no tax provision for the three and six month periods ended
September 30, 1998 due to net losses incurred. The tax benefit in the six month
period ended September 30, 1997 resulted from the reversal of approximately $1.0
million of the Company's income tax liability in the first quarter of fiscal
1998 upon notice from the Internal Revenue Service that it had reversed a
previously asserted deficiency related to the taxable year 1992.
Year 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As the Year 2000
approaches, these code fields will need to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20." The
Company is assessing the readiness of its products, internal computer systems,
and third-party equipment and software utilized by the Company for handling Year
2000 issues. Based upon the Company's assessments, all of the Company's products
are Year 2000 compliant. With regard to the Company's internal computer systems,
the Company is currently implementing an enterprise-wide database and
information management system, principally to improve operating efficiencies,
that will also address Year 2000 compliance issues. Though the Company currently
expects to successfully implement this and other internal computer systems and
programming changes necessary to address Year 2000 issues, there can be no
assurance that such implementations will be done within the projected timeframe
or within budget.* See "Factors That May Affect Future Results--Enterprise-Wide
Database Implementation." See also the discussion below regarding the estimated
cost of the enterprise-wide database implementation project. The Company is also
assessing the possible effects on the Company's operations of the Year 2000
readiness of key suppliers, subcontractors and customers. The Company's reliance
on suppliers, subcontractors and customers, and, therefore, on the proper
functioning of their information systems and software, means that failure to
address Year 2000 issues by its suppliers, subcontractors and customers could
have a material adverse impact on the Company's business and operating results.
Liquidity and Capital Resources
Prior to the Company's initial public offering, the Company had satisfied
its liquidity needs principally from proceeds generated from two issuances of
its equity securities and cash
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
12
<PAGE> 15
generated from operations in fiscal 1994 and prior years. As of September 30,
1998, the Company had cash and liquid investments totaling $18.4 million,
representing a decrease of $8.3 million from March 31, 1998. The Company
currently has no bank borrowing arrangements.
Net cash used in operations was $8.3 million during the first six months of
fiscal 1999. Net cash provided by operations was $3.5 million during the first
six months of fiscal 1998. Net cash used in operations in the six month period
ended September 30, 1998 reflected a net loss of $7.6 million, increases of
$553,000 in inventory and $498,000 in prepaid expenses and other assets, and a
$624,000 decrease in accounts payable, offset primarily by a decrease of
$653,000 in accounts receivable, and noncash items. The increase in inventory
during the six months ended September 30, 1998 was due to increases in
VideoCommunicator product inventory held by the Company and inventory balances
held by retailers and distributors. Because the Company does not recognize
revenue on the shipment of its VideoCommunicator products to retailers or
distributors until the products are sold-through by the retailer or distributor,
product inventories at retailers and distributors reflected in the Company's
inventories are expected to increase if the Company succeeds in further
broadening its distribution channels.*
Cash provided by operations in the six month period ended September 30, 1997
reflects net income of $3.5 million, increases of $2.9 million in deferred
revenue, $1.8 million in accounts payable, and noncash items, including a
deferred compensation charge of $1.1 million. Cash used in operations during
this period included a $4.0 million increase in accounts receivable and a $1.5
million increase in inventory.
Net cash used in investing activities in the six months ended September 30,
1998 and 1997, is primarily attributable to capital expenditures of $934,000 and
$518,000, respectively.
Net cash provided by financing activities in the six months ended September
30, 1998 consisted primarily of net proceeds from the repayment of stockholders'
notes receivable and sales of the Company's common stock upon the exercise of
employee stock options, offset by the repurchase of common stock from minority
shareholders in the Company's VidUs subsidiary in conjunction with its merger
with the Company in August 1998. Cash flows from financing activities in the six
months ended September 30, 1997 consisted primarily of $24.7 million in net
proceeds from sale of the Company's common stock in its initial public offering.
The Company believes that it will be able to fund planned expenditures and
satisfy its cash requirements for at least the next twelve months from cash flow
from operations, if any, and existing cash balances.* The Company believes that
it may require additional financial resources over the next several years for
working capital, research and development, expansion of sales and marketing
resources, and capital expenditures.* Net cash used in operating activities
during the six months ended September 30, 1998 and in the fiscal year ended
March 31, 1998 was approximately $8.3 million and $6.5 million, respectively,
due primarily to cash requirements of the Company's VideoCommunicator product
business. The Company has incurred, and will continue to incur, significant
costs related to the development of VideoCommunicator products, advertising for
its ViaTV products, support of the retail sales channel and growth in ViaTV
inventory. In addition, as discussed above, the Company has entered into a
contract to purchase a
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
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<PAGE> 16
new enterprise-wide database and information management system from a major
software supplier. The Company currently estimates that total expenditures
related to the purchase of the software and incremental hardware requirements,
as well as the cost of implementation and training, will be between $1.5 million
and $1.7 million, of which approximately $900,000 has been incurred as of
September 30, 1998. See "Factors That May Affect Future Results--Enterprise-Wide
Database Implementation. As of September 30, 1998, the Company had approximately
$18.4 million in cash and cash equivalents. However, the Company is operating in
a rapidly changing industry. There can be no assurance that the Company will not
seek to exploit business opportunities that will require it to raise additional
capital from equity or debt sources to finance its growth and capital
requirements.* In particular, the development and marketing of new products
could require a significant commitment of resources, which could in turn require
the Company to obtain additional financing earlier than otherwise expected.
There can be no assurance that the Company will be able to obtain additional
financing as needed on acceptable terms or at all.*
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
14
<PAGE> 17
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be considered in conjunction with the
information in this Report on Form 10-Q.
History of Losses; Uncertainty of Future Profitability
The Company recorded an operating loss of $7.6 million in the first six
months of fiscal 1999. In addition, the Company recorded operating losses in
three of the four quarters in fiscal 1998 and recorded an operating loss of
$13.6 million in the year ended March 31, 1997. The Company would not have been
profitable in fiscal 1998 had it not received nonrecurring license and other
revenues. Revenues fluctuated from $28.8 million in fiscal 1996 to $19.1 million
in fiscal 1997 to $49.8 million in fiscal 1998. In view of the Company's
historical operating losses, there can be no assurance that the Company will be
able to achieve profitability on either an annual or quarterly basis.
No Assurance of Future License and Other Revenues
The Company has in the past received substantial revenues from the licensing
of its technology. License and other revenues, all of which were nonrecurring,
were $1.2 million and $9.5 million for the six month periods ended September 30,
1998 and 1997, respectively, and were $14.5 million and $3.9 million in the
fiscal years ended March 31, 1998 and 1997, respectively. There can be no
assurance that the Company will receive substantial revenues from licensing of
its technology in the future, which could have a material adverse effect on the
Company's business and operating results.
Potential Fluctuations in Future Operating Results
The Company's historical operating results have fluctuated significantly and
will likely continue to fluctuate in the future. On a quarterly and an annual
basis there are a number of factors that may affect the operating results of the
Company, many of which are outside the Company's control. These include, but are
not limited to: changes in market demand, the timing of customer orders,
competitive market conditions, lengthy sales cycles, regulatory approval cycles,
new product introductions by the Company or its competitors, market acceptance
of new or existing products, the cost and availability of components, the mix of
the Company's customer base and sales channels, the mix of products sold, the
management of inventory and the accuracy of the reporting of sell-through by
resellers of the Company's products, the level of international sales, continued
compliance with industry standards and general economic conditions.
The Company's gross margin is affected by a number of factors including,
product mix, the recognition of license and other revenues for which there may
be no or little corresponding cost of revenues, product pricing, the allocation
between international and domestic sales, the percentage of direct sales and
sales to resellers, and manufacturing and component costs. The markets for the
Company's products are characterized by falling average selling prices. The
Company expects that, as a result of competitive pressures and other factors,
gross profit as a percentage of revenue for the Company's semiconductor products
will likely decrease for the foreseeable future. In addition, the gross margins
for the Company's VideoComunicators are, and will continue to be, substantially
lower than the gross margins for its semiconductors. Thus, the
15
<PAGE> 18
growth of the Company's VideoCommunicator business has reduced overall product
gross profit as a percentage of revenue. Continued growth of the Company's
VideoCommunicator business relative to its semiconductor business will result in
a further reduction in product gross profit as a percentage of revenue.
If the Company cannot adequately compensate for falling average selling
prices with lower costs of sales, its gross margins will continue to be reduced
and could result in a material adverse effect on the Company's business and
operating results. In the event that the Company encounters significant price
competition in the markets for its products, the Company could be at a
significant disadvantage compared to its competitors, many of which have
substantially greater resources, and therefore may be better able to withstand
an extended period of downward pricing pressure.
Variations in timing of sales may cause significant fluctuations in future
operating results. In addition, because a significant portion of the Company's
business, including sales of its VideoCommunicator products, may be derived from
orders placed by a limited number of large customers, including OEM customers
and distributors, the timing of such orders can also cause significant
fluctuations in the Company's operating results. For example, 3Com, which
purchased approximately 34% of videophone systems sold by the Company in the
year ended March 31, 1998, has not ordered additional products from the Company
since delivery of its purchases in the quarter ended December 31, 1997. The
Company recognizes revenue when distributors sell product to their customers.
The Company may not be able to anticipate the rate at which distributors will
receive additional orders from their end customers. Anticipated orders from
customers may fail to materialize. Delivery schedules may be deferred or
canceled for a number of reasons, including changes in specific customer
requirements or international economic conditions. The adverse impact of a
shortfall in the Company's revenues may be magnified by the Company's inability
to adjust spending to compensate for such shortfall. Announcements by the
Company or its competitors of new products and technologies could cause
customers to defer purchases of the Company's existing products, which would
also have a material adverse effect on the Company's business and operating
results.
The Company's products have lead times of up to four months, and are built
to forecasts that are necessarily imperfect, particularly given the early stage
of the videophone market. Because of the Company's practice of building its
products to necessarily imprecise forecasts, it is likely that, from time to
time, the Company will have either excess or insufficient product inventory.
This risk is heightened because of the need for and presence of significant
VideoCommunicator inventory in retail distribution. Further, because retailers
and other distributors may have significant quantities of VideoCommunicator
inventory on hand and generally have contractual rights to price protection if
the Company decreases the selling price, in the event of a significant price
decrease, the Company's cost of such inventory may exceed the Company's actual
selling price. Excess inventory levels will subject the Company to the risk of
inventory obsolescence and the risk that the Company's selling prices may drop
below the Company's inventory costs, while insufficient levels of inventory may
negatively affect relations with customers. Any of these factors could have a
material adverse effect on the Company's operating results and business.
The Company's introduction of VideoCommunicators has resulted in
substantially different patterns in operating results. For example, during
fiscal 1998, the Company's operating results were subject to increased
seasonality with sales higher during the Company's third fiscal quarter,
corresponding to the Christmas shopping season. In addition, the Company is
spending
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<PAGE> 19
substantial additional amounts on advertising, support of the retail channel,
toll-free marketing and customer support. There can be no assurance that
revenues adequate to justify such spending will result. The Company's shift to
sale of VideoCommunicators has resulted in higher levels of product inventory
and product returns, the necessity of granting price protection to resellers,
more lengthy receivable collection cycles and higher warranty costs, which may
have a material adverse effect on the Company's business and operating results.
As a result of these and other factors, it is likely that in some future
period the Company's operating results will be below the expectations of
securities analysts or investors, which would likely result in a significant
reduction in the market price for the Company's common stock.
Dependence on Key Customers
Historically, a significant portion of the Company's sales has been to
relatively few customers, although the composition of these customers has
varied. Revenues from the Company's ten largest customers in the second quarter
and six months ended September 30, 1998 accounted for approximately 51% and 45%
of total revenues, respectively. For both of the fiscal years ended March 31,
1998 and 1997, revenues from the Company's ten largest customers accounted for
approximately 61% of total revenues. Revenues derived from one customer
represented approximately 11% of the Company's total revenues for the quarter
ended September 30, 1998. No customer represented ten percent (10%) or more of
the Company's total revenues for the six months ended September 30, 1998. During
each of the last two fiscal years the Company had one customer that accounted
for ten percent or more of total revenues. 3Com accounted for 20% of total
revenues during the year ended March 31, 1998; ASCII, the Company's former
distributor in Japan, accounted for 13% of total revenues during the year ended
March 31, 1997. Substantially all the Company's product sales have been made,
and are expected to be made, on a purchase order basis. None of the Company's
customers has entered into a long-term agreement requiring it to purchase the
Company's products. Further, all of the Company's license and other revenues are
nonrecurring. 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.
International Operations
Sales to customers outside of the United States represented 49% and 46% of
the Company's total revenues for the second quarter and the six months ended
September 30, 1998. Sales to customers outside of the United States represented
47% and 54% of total revenues in the fiscal years ended March 31, 1998 and 1997,
respectively. Specifically, sales to customers in the Asia Pacific region
represented 31% and 27% of the Company's total revenues in the second quarter
and the six months ended September 30, 1998. Sales to customers in Europe
represented 18% and 19% of the Company's total revenues in the second quarter
and the six months ended September 30, 1998. Sales to customers in the Asia
Pacific region represented 25% and 33% and in the fiscal years ended March 31,
1998 and 1997, respectively, while sales to customers in Europe represented 22%
and 21% of the Company's total revenues for the same periods, respectively.
International sales of the Company's semiconductors will continue to
represent a substantial portion of the Company's product revenues for the
foreseeable future. In addition, substantially all of the Company's current
products are, and substantially all of the Company's future products will be,
manufactured, assembled and tested by independent third parties in foreign
countries.
17
<PAGE> 20
International sales and manufacturing are subject to a number of risks,
including general economic conditions in regions such as Asia, changes in
foreign government regulations and telecommunications standards, export license
requirements, tariffs and taxes, other trade barriers, fluctuations in currency
exchange rates, difficulty in collecting accounts receivable and difficulty in
staffing and managing foreign operations. The Company is also subject to
geopolitical risks, such as political, social and economic instability,
potential hostilities and changes in diplomatic and trade relationships, in
connection with its international operations. A significant decline in demand
from foreign markets, such as may result from the current economic conditions in
the Asia Pacific region, could have a material adverse effect on the Company's
business and operating results.
Competition
The Company competes with both independent manufacturers of video
communication semiconductors and with the introduction of its VideoCommunicator
products now competes with manufacturers of video communication products
targeted at the consumer market. The markets for the Company's products are
characterized by intense competition, declining average selling prices and rapid
technological change.
The competitive factors in the market for the Company's VideoCommunicators
include audio and video quality, phone line connectivity at high transmission
rates, ability to connect and maintain stable connections, ease of use, price,
access to enabling technologies, product design, time-to-market, adherence to
industry standards, interoperability, strength of distribution channels,
customer support, reliability and brand name. The Company expects intense
competition for its VideoCommunicators from:
o 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
communication systems, thereby eliminating a consumer's need to purchase
a separate video communication system, such as the Company's ViaTV
product.
o Personal computer system and software manufacturers. Potential customers
for the Company's VideoCommunicators may elect instead to buy PCs
equipped with video communication capabilities, which are currently
available. As a result, the Company faces or may face competition from
Intel; PC system manufacturers such as Apple, Compaq, Dell, IBM and
Sony; PC software suppliers such as Microsoft and Netscape; and PC
add-on component suppliers such as 3Com.
o Existing manufacturers of corporate video communication equipment.
Manufacturers of more expensive corporate video communication systems
have continually reduced the cost of their products and may enter the
market for lower cost consumer video communication products. Potential
competitors include PictureTel, Polycom, Sony, Tandberg, VCON and Vtel.
o 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.
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<PAGE> 21
Consumer products for television-based internet access have been
announced or introduced by companies such as Microsoft, Philips and
Sony.
C-Phone, Leadtek and Truedox are among the companies selling low cost
videophones. Many other companies have announced the development of low cost
videophones. The Company expects that additional companies will introduce
products that compete with the VideoCommunicators in the future. Certain
manufacturers or potential manufacturers of low cost videophones have licensed
or purchased, or may license or purchase, the Company's technology and
semiconductors in order to do so. KME and 3Com in particular have licensed
substantially all of the technology underlying the VideoCommunicators, and may
use such technology to introduce products that compete with the
VideoCommunicators. Each of Leadtek and Truedox license the Company's technology
and purchase the Company's video communication semiconductors. The Company
aggressively licenses its semiconductor, software and systems technology and
sells its semiconductor and system products to third parties. Thus, it is likely
that additional OEM customers of the Company will become competitors with
respect to the Company's VideoCommunicator business. Other competitors may
purchase video communication semiconductor and related technology from other
suppliers.
The principal competitive factors in the market for video communication
semiconductors include product definition, product design, system integration,
chip size, functionality, time-to-market, adherence to industry standards, price
and reliability. The Company has a number of competitors in this market
including Analog Devices, Chromatic Research, Lucent Technologies, Motorola,
Philips, Texas Instruments and Winbond Electronics. Potential competitors
include ESS Technology and Rockwell Semiconductor Systems. Certain of the
Company's competitors for video communication semiconductors maintain their own
semiconductor foundries and may therefore benefit from certain capacity, cost
and technical advantages. In addition, the presence of the Company in the video
communication systems business may result in certain customers or potential
customers perceiving the Company as a competitor or potential competitor, which
may be used by other semiconductor manufacturers to their advantage.
The Company's reliance on developing vertically integrated technology,
comprising systems, circuit boards, software and semiconductors, places a
significant strain on the Company and its research and development resources.
Competitors that focus on one aspect of technology, such as systems or
semiconductors, may have a considerable advantage over the Company. In addition,
many of the Company's current and potential competitors have longer operating
histories, are substantially larger, and have greater financial, manufacturing,
marketing, technical and other resources. Many also have greater name
recognition and a larger installed base of products than the Company.
Competition in the Company's markets may result in significant price reductions.
As a result of their greater resources, many current and potential competitors
may be better able than the Company to initiate and withstand significant price
competition or downturns in the economy. There can be no assurance that the
Company will be able to continue to compete effectively, and any failure to do
so would have a material adverse effect on the Company's business and operating
results.
Need for Additional Capital
The Company believes that it will be able to fund planned expenditures and
satisfy its cash requirements for at least the next twelve months from cash flow
from operations, if any, and existing cash balances. The Company believes that
it may require additional financial resources over the next several years for
working capital, research and development, expansion of sales and
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<PAGE> 22
marketing resources, and capital expenditures. Net cash used in operating
activities during the six months ended September 30, 1998 and in the fiscal year
ended March 31, 1998 was approximately $8.3 million and $6.5 million,
respectively, due primarily to cash requirements of the Company's
VideoCommunicator business. The Company has incurred and will continue to incur,
significant costs related on the development of VideoCommunicator products,
advertising for its ViaTV products, support of the retail sales channel and
growth in ViaTV inventory. The Company believes that it will be able to fund
planned expenditures and satisfy its cash requirements for at least the next
twelve months from cash flow from operations, if any, and existing cash
balances. As of September 30, 1998, the Company had approximately $8.4 million
in cash and cash equivalents. However, the Company is operating in a rapidly
changing industry. There can be no assurance that the Company will not seek to
exploit business opportunities that will require it to raise additional capital
from equity or debt sources to finance its growth and capital requirements. In
particular, the development and marketing of new products could require a
significant commitment of resources, which could in turn require the Company to
obtain additional financing earlier than otherwise expected. There can be no
assurance that the Company will be able to obtain additional financing as needed
on acceptable terms or at all.
Uncertainty of Market Acceptance; Limits of Existing Technology
Previous efforts to sell consumer videophones have been unsuccessful and
there can be no assurance that the market for such products will develop. The
current installed base of H.324 compliant videophones, which are compatible with
the Company's ViaTV videophones, is quite limited, providing few parties for a
purchaser of a single videophone to call. In addition, many consumers may not
wish to be seen during a telephone call. The Company has no reliable data to
suggest that there will be significant customer demand for such products,
including the Company's VideoCommunicators and products offered by certain of
the Company's OEM customers.
The Company's current VideoCommunicator product line as well as products
made by the Company's OEM customers for use on POTS, is not capable of
delivering video data at rates of 24 frames per second. Below this data rate,
the human eye can detect degradation of video quality. Further, POTS
infrastructure varies widely in configuration and integrity, which can result in
decreased rates of transmission and difficulties in establishing and maintaining
connections. Actual or perceived technical difficulties or insufficient video
quality related to video communication on POTS could impede market acceptance
and have a material adverse effect on the Company's business and results of
operations.
Rapid Technological Change; Dependence on New Product Introduction
The video communication semiconductor and video communication markets are
characterized by rapid changes in customer requirements, frequent introductions
of new and enhanced products, and continuing and rapid technological
advancement. To compete successfully, the Company must continue to design,
develop, manufacture and sell new and enhanced products that provide
increasingly higher levels of performance and reliability and lower cost, take
advantage of technological advancements and changes, and respond to new customer
requirements. The Company's success in designing, developing, manufacturing and
selling such products will depend on a variety of factors, including the
identification of market demand for new products, product selection, timely
implementation of product design and development, product performance,
cost-effectiveness of products under development, effective manufacturing
processes and the success of promotional efforts.
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<PAGE> 23
The Company plans to introduce additional VideoCommunicators and video
communication semiconductors. The development of new products or enhancements to
existing products involves technical and other risks, which the Company may not
fully understand. In addition, new product introductions or enhancements to
products may decrease demand for existing products resulting in higher than
expected product returns and/or excess inventory of existing products. The
Company has in the past experienced delays in the development of new products
and the enhancement of existing products, and such delays will likely occur in
the future.
If the Company is unable, due to resource constraints or technological or
other reasons, to develop and introduce new or enhanced products in a timely
manner, if such new or enhanced products do not achieve sufficient market
acceptance or if such new product introductions decrease demand for existing
products, it would have a material adverse effect on the Company's business and
operating results.
Dependence on Proprietary Technology; Reliance on Third Party Licenses
The Company relies in part on trademark, copyright and trade secret law to
protect its intellectual property in the United States and abroad. The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright law, which afford only limited protection. The
Company also relies in part on patent law to protect its intellectual property
in the United States and abroad. The Company currently holds seven United States
patents, including patents relating to video compression and memory architecture
technology, and has a number of United States and foreign patent applications
pending. There can be no assurance that any such patent applications will result
in an issued patent. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad (where
effective intellectual property protection be may unavailable or limited) will
be adequate or that competitors will not independently develop technologies that
are similar or superior to the Company's technology, duplicate the Company's
technology or design around any patent of the Company. The Company has in the
past licensed and in the future expects to continuing licensing its technology
to others, many of whom are located or may be located abroad. There are no
assurances that such licensees will protect the Company's technology from
misappropriation. Moreover, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement
or invalidity. Such litigation could result in substantial costs and diversion
of management time and resources and could have a material adverse effect on the
Company's business and operating results.
There has been substantial litigation in the semiconductor, electronics and
related industries regarding intellectual property rights, and there can be no
assurance that third parties will not claim infringement by the Company of their
intellectual property rights. The Company's broad range of technology, including
systems, digital and analog circuits, software and semiconductors, increases the
likelihood that third parties may claim infringement by the Company of their
intellectual property rights. If the Company were found to be infringing on the
intellectual property rights of any third party, the Company could be subject to
liabilities for such infringement, which could be material, and the Company
could be required to refrain from using, manufacturing or selling certain
products or using certain processes, either of which could have a material
adverse effect on the Company's business and operating results.
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<PAGE> 24
The Company relies upon certain technology, including hardware and software,
licensed from third parties. The loss of, or inability to maintain, existing
licenses could have a material adverse effect on the Company's business and
operating results.
Dependence on Third Party Manufacturers and Component Suppliers
The Company outsources the manufacture of its VideoCommunicators and
semiconductors to subcontract manufacturers and independent foundries. The
Company's VideoCommunicator subcontract manufacturers include EFA Corporation in
Taiwan and Flash Electronics in Fremont, California, while its semiconductor
manufacturers include Taiwan Semiconductor Manufacturing Corporation and United
Micro Electronics Corporation in Taiwan. The Company also relies on Anam/Amkor
Electronics Corporation in South Korea for packaging and testing of its
semiconductors. The Company does not have long-term purchase agreements with its
subcontract manufacturers or its component suppliers. There can be no assurance
that the Company's contract manufacturers will be able or willing to reliably
manufacture the Company's products, or that the Company's component suppliers
will be able or willing to reliably supply components for the Company's
products, in volumes, on a cost effective basis or in a timely manner. The
Company may experience difficulties due to its reliance on independent
subcontract manufacturers, semiconductor foundries and component suppliers that
could have a material adverse effect on the Company's business and operating
results.
In addition, from time to time the Company may issue non-cancelable purchase
orders to its third-party manufacturers for raw materials used in its
VideoCommunicator products to ensure availability for long lead-time items or to
take advantage of favorable pricing terms. If the Company should experience
decreased demand for its VideoCommunicator products, the Company would still be
required to take delivery of and make payment for such raw materials. In the
event of a significant decrease in VideoCommunicator product demand, such
purchase commitments could have a material adverse effect on the Company's
business and operating results. The Company's reliance on foreign subcontract
manufacturers involves a number of risks. See "Factors That May Affect Future
Results--International Operations."
Compliance with Regulations and Industry Standards
The Company must comply with certain rules and regulations of the Federal
Communications Commission regarding electromagnetic radiation and standards
established by Underwriters Laboratories as well as similar regulations and
standards applicable in other countries. The failure of the Company's products
to comply, or delays in compliance, with the various existing and evolving
government regulations and industry standards could delay or interrupt volume
production of VideoCommunicators, which would have a material adverse effect on
the Company's business and operating results.
Management of Growth and Change; Dependence on Key Personnel
The development and marketing of the Company's VideoCommunicators will
continue to place a significant strain on the Company's limited personnel,
management and other resources, particularly in light of the Company's limited
experience in developing, manufacturing, marketing and selling consumer
products. The Company's ability to manage any future growth effectively will
require it to successfully attract, train, motivate, retain and manage
employees, particularly key engineering and managerial personnel, to effectively
integrate new employees into its operations and to continue to improve its
operational, financial and management systems.
22
<PAGE> 25
The Company's failure to manage its growth and changes in its business
effectively and to attract and retain key personnel could have a material
adverse effect on the Company's business and operating results.
Further, the Company is highly dependent on the continued service of and its
ability to attract and retain qualified technical, marketing, sales and
managerial personnel. The competition for such personnel is intense,
particularly in the San Francisco Bay area where the Company is located. The
loss of any such person or the failure to recruit additional key technical and
sales personnel in a timely manner would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business. The Company currently does not
have employment contracts with any of its employees and does not maintain key
person life insurance policies on any of its employees.
Product Concentration; Dependence on Video Communication Industry
Sales of video communication products accounted for approximately 100%, 100%
and 86% of total product revenues for the six months ended September 30, 1998
and in the fiscal years ended March 31, 1998 and 1997, respectively. Any general
decline in the market for video communication products could have a material
adverse effect on the Company's business and operating results.
Enterprise-Wide Database
The company is currently engaged in a major project to upgrade its
enterprise-wide database and information management systems, based principally
on software from a major software supplier. In recent years, some fabless
semiconductor and system-level product companies undertaking major systems
transitions have experienced significant business disruption as a result of
unexpected delays in the implementation of these projects. There can be no
assurance that the Company's project will be completed within the projected
timeframe or within budget.
Potential Volatility of Stock Price
The market price of the shares of the Company's common stock has been and is
likely to be highly volatile. It may be significantly affected by factors such
as: actual or anticipated fluctuations in the Company's operating results;
announcements of technical innovations; loss of key personnel; new products or
new contracts by the Company, its competitors or their customers; governmental
regulatory action; developments with respect to patents or proprietary rights,
general market conditions, changes in financial estimates by securities analysts
and other factors which could be unrelated to, or outside the control of, the
Company. The stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices for
the common stocks of technology companies and that have often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's common
stock. In the past, following periods of volatility in the market price of a
Company's securities, securities class action litigation has often been
initiated against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business and operating results. Any settlement or adverse
determination in such litigation would also subject the Company to significant
liability, which would have a material adverse effect on the Company's business
and financial condition.
23
<PAGE> 26
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) No reports on Form 8-K were filed during the three month period ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized:
Date: October 21, 1998
8X8, INC.
By: /s/ SANDRA L. ABBOTT
--------------------------------------------
Sandra L. Abbott
Chief Financial Officer and
Vice President of Finance
(Principal Financial and Accounting Officer)
25
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
27.1+ Financial Data Schedule.
</TABLE>
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Condensed Consolidated
Financial Statements or notes thereto.
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 8X8, INC.'S CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED CONSOLIDATED BALANCE SHEETS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,366
<SECURITIES> 0
<RECEIVABLES> 3,874<F1>
<ALLOWANCES> 0
<INVENTORY> 13,311
<CURRENT-ASSETS> 36,925
<PP&E> 8,255
<DEPRECIATION> (6,398)
<TOTAL-ASSETS> 38,893
<CURRENT-LIABILITIES> 8,928
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 29,950
<TOTAL-LIABILITY-AND-EQUITY> 38,893
<SALES> 16,103
<TOTAL-REVENUES> 16,103
<CGS> 10,303
<TOTAL-COSTS> 10,303
<OTHER-EXPENSES> 14,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,621)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,621)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,621)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCE, CONSISTENT WITH THE BALANCE SHEET PRESENTATION.
</FN>
</TABLE>
