<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 December 31, 1997
[_] 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 (IRS 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 January
20, 1998 was 15,038,391.
The Exhibit Index begins on page 22.
<PAGE> 2
i
8X8, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets at December 31, 1997
and March 31, 1997 ...................................... 1
Condensed Consolidated Statements of Operations for the
three and nine months ended December 31, 1997 and 1996 .. 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1997 and 1996 ............ 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 2. Changes in Securities and Use of Proceeds ....... 21
Item 5. Other Information ............................... 21
Item 6. Exhibits and Reports on Form 8-K ................ 21
Signature ................................................ 21
</TABLE>
i
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments ..................... $ 33,187 $ 8,724
Accounts receivable, net .................... 4,569 1,012
Inventory ................................... 8,766 1,178
Prepaid expenses and other assets ........... 1,007 354
-------- --------
Total current assets ...................... 47,529 11,268
Property and equipment, net ................... 1,377 1,344
Deposits and other assets ..................... 161 115
-------- --------
$ 49,067 $ 12,727
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 4,855 $ 1,379
Accrued compensation ........................ 1,688 926
Accrued warranty ............................ 1,494 1,603
Deferred revenue ............................ 2,817 363
Other accrued liabilities ................... 2,264 2,343
-------- --------
Total current liabilities ................. 13,118 6,614
-------- --------
Minority interest ............................. 103 72
-------- --------
Stockholders' equity:
Convertible noncumulative preferred stock ... - 4
Common stock ................................ 15 7
Additional paid-in capital .................. 47,704 23,291
Notes receivable from stockholders .......... (930) (1,078)
Deferred compensation ....................... (1,186) (2,781)
Accumulated deficit ......................... (9,757) (13,402)
-------- -------
Total stockholders' equity................ 35,846 6,041
-------- -------
$ 49,067 $ 12,727
======== ========
</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 Nine months ended
December 31, December 31,
---------------- ------------------
1997 1996 1997 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
Product revenues...................... $12,325 $ 3,932 $25,381 $ 11,646
License and other revenues............ 2,813 650 12,266 3,011
------- ------- ------- --------
Total revenues........................ 15,138 4,582 37,647 14,657
Cost of product revenues.............. 6,475 1,283 13,006 10,728
Cost of license and other revenues.... 404 - 954 -
------- ------- ------- --------
Gross profit.......................... 8,259 3,299 23,687 3,929
------- ------- ------- --------
Operating expenses:
Research and development............ 3,284 3,141 9,479 7,886
Selling, general and administrative. 5,358 2,003 12,658 7,058
------- ------- ------- --------
Total operating expenses.... 8,642 5,144 22,137 14,944
------- ------- ------- --------
Income (loss) from operations......... (383) (1,845) 1,550 (11,015)
Other income, net..................... 515 265 1,095 392
------- ------- ------- --------
Income (loss) before (benefit)
provision for income taxes........... 132 (1,580) 2,645 (10,623)
(Benefit) provision for income taxes.. - - (1,000) 146
------- ------- ------- --------
Net income (loss) .................... $ 132 $(1,580) $ 3,645 $(10,769)
======= ======= ======= ========
Basic earnings per share.............. $ 0.01
=======
Weighted average number of
common shares........................ 14,985
=======
Pro forma basic earnings (loss)
per share............................ $ (0.15) $ 0.27 $ (1.12)
======= ======= ========
Pro forma weighted average number of
common shares........................ 10,653 13,442 9,583
======= ======= ========
Diluted earnings per share............ $ 0.01
=======
Weighted average number of common and
common equivalent shares............. 16,850
=======
Pro forma diluted earnings
(loss) per share..................... $ (0.13) $ 0.24 $ (0.91)
======= ======= ========
Pro forma weighted average number of
common and common equivalent shares.. 12,246 15,093 11,863
======= ======= ========
</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>
Nine months ended
December 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................ $ 3,645 $(10,769)
Charges to net income (loss) not
affecting cash .............................. 1,978 4,674
Net effect of changes in current and
other assets and current liabilities ........ (5,340) 3,213
------- -------
Net cash provided by (used in)
operating activities .................. 283 (2,882)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ........... (722) (590)
Sales of short-term investments, net ......... 2 5,202
------- -------
Net cash (used in) provided by
investing activities .................. (720) 4,612
------- -------
Cash flows from financing activities:
Proceeds from issuance of convertible
noncumulative preferred stock, net........... - 3,765
Proceeds from issuance of common stock, net... 24,776 22
Repayment of notes receivable from stockholders 126 -
Proceeds from minority interest in
subsidiary................................... - 52
------- -------
Net cash provided by financing
activities............................. 24,902 3,839
------- -------
Net increase in cash and cash equivalents........ 24,465 5,569
Cash and cash equivalents at the beginning of
the period...................................... 8,722 4,652
------- -------
Cash and cash equivalents at the end of
the period...................................... $33,187 $10,221
======= =======
</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 video phones, referred to
herein as its family of VideoCommunicator products, for use by the consumer
market. The Company also designs, develops and markets highly integrated
proprietary video compression semiconductors and associated software for video
phones and video conferencing.
2. BASIS OF PRESENTATION
The Company's fiscal year ends on the last Thursday on or before March 31.
The Company's fiscal quarters end on the last Thursday on or before the end of
each calendar quarter. The three and nine month periods ended December 25, 1997
and December 26, 1996 included 13 weeks and 39 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 December 31.
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, 1997. 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, 1997, including notes thereto, included in the Company's Registration
Statement on Form S-1, as amended July 2, 1997.
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. INITIAL PUBLIC OFFERING
In the first week of July 1997, the Company completed an initial public
offering of its common stock, selling 4,140,000 shares at $6.50 per share. Net
proceeds to the Company were approximately $24.7 million after deducting related
issuance costs. As of the closing date of the offering, all of the convertible
noncumulative preferred stock outstanding was converted into an aggregate of
3,726,373 shares of common stock.
4. BALANCE SHEET DETAIL
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ---------
<S> <C> <C>
Inventories:
Raw materials......................... $2,778 $ 418
Work-in-process....................... 2,596 613
Finished goods........................ 3,392 147
------- -------
$ 8,766 $ 1,178
======= =======
</TABLE>
4
<PAGE> 7
5. COMPUTATION OF HISTORICAL AND PRO FORMA EARNINGS (LOSS) PER SHARE
In the quarter ended December 31, 1997, the Company has adopted Statement
of Financial Accounting Standards No. 128 (FAS 128), "Earnings Per Share." The
Statement replaces the presentation of primary EPS with a presentation of basic
EPS. Basic EPS excludes common stock equivalents and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Income available to common stockholders is
equivalent to net income (loss) for all periods presented. Diluted EPS is
computed similarly to fully diluted EPS under APB Opinion No. 15. The Statement
also requires dual presentation of basic and diluted EPS on the face of the
financial statements for all periods for which a statement of operations is
presented.
Pro forma basic earnings (loss) per share for the three months ended
December 31, 1996 and the nine months ended December 31, 1997 and 1996,
respectively, is computed by dividing income available to common stockholders by
the sum of the weighted-average number of common shares outstanding for the
period and the weighted average number of convertible preferred shares
oustanding for the period (as each share of preferred stock was converted into
one share of common stock in conjunction with the Company's initial public
offering). Pro forma diluted earnings (loss) per share for the three months
ended December 31, 1996 and the nine months ended December 31, 1997 and 1996,
respectively, is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
consist of convertible preferred stock (using the as-if converted method) and
stock options (using the treasury stock method). Common equivalent shares are
excluded from the computation if their effect is antidilutive, except that,
pursuant to a Securities and Exchange Commission Staff Accounting Bulletin,
shares of common stock, convertible preferred stock (using the as-if converted
method) and common stock options (using the treasury stock method and the
initial public offering price of $6.50) issued from October 1, 1995 to June 30,
1997 have been included in the computations as if they were outstanding for each
period presented.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income." The Statement establishes standards for the reporting of comprehensive
income and its components in a full set of general-purpose financial statements
for periods beginning after December 15, 1997. Comprehensive income as defined
includes all changes in equity (net assets) during a period from nonowner
sources. Reclassification of financial statements for earlier periods for
comparative purposes is required. The Company will adopt FAS 130 in its fiscal
1999 annual report; however, it is not expected to have a significant effect on
the Company's disclosure requirements.
5
<PAGE> 8
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. 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.
Overview
The Company was incorporated in February 1987 in California and
reincorporated in Delaware in December 1996. Since June 1995, the Company has
been executing a business strategy designed to focus the Company's efforts
towards video conferencing. As part of this strategy, the Company discontinued
sales of its MPEG semiconductor product line and reduced its workforce in the
quarter ended June 30, 1996.
In each of the third quarters ended December 31, 1997 and 1996, sales of
the Company's video conferencing products accounted for 100% of product
revenues. For the nine months ended December 31, 1997 and 1996, sales of the
Company's video conferencing products accounted for 100% and 81%, respectively,
of product revenues. In the fiscal years ended March 31, 1997 and 1996, sales of
the Company's video conferencing products accounted for 86% and 65%,
respectively, of product revenues.
To address new video conferencing opportunities, the Company has leveraged
its strengths in semiconductor design and related software to develop and market
video conferencing systems for the consumer market. The Company began shipping
the first product in its planned family of VideoCommunicator products, the ViaTV
(VC100), in February 1997. The VC105, an upgraded VC100, was introduced in
August 1997. The Company added two new models, the VC50 and VC55, to the ViaTV
product line in September 1997. The Company received foreign approvals and began
shipping its ViaTV (VC105e)as designed for European markets in December 1997.
The ViaTV products (VC100, VC105, VC105e, VC50 and VC55) connect 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). While
similar to the other ViaTV products described above, the VC50 and VC55 are
additionally designed without a camera and utilize an external camera device
such as a camcorder or digital still camera. In addition to video conferencing
capability, the VC55 includes an Internet web browser. The Company is currently
demonstrating prototypes of additional VideoCommunicators, all of which are
non-PC based video telephones running on standard analog telephone lines (POTS).
The Company first publicly demonstrated its VC150 which incorporates a liquid
crystal display (LCD) into the unit in January 1998. The Company is marketing
its VideoCommunicators through retail channels, catalogs and original equipment
manufacturers (OEMs) as well as through direct marketing efforts utilizing a
combination of advertising, toll-free telemarketing and direct mail supported by
co-marketing arrangements with third parties. The Company sells its video
conferencing semiconductors and related software to OEMs and distributors.
6
<PAGE> 9
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 Nine months ended
December 31, December 31,
(In millions) ---------------------------- -----------------------------
1997 1996 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product revenues $ 12.3 81% $ 3.9 85% $ 25.4 67% $ 11.7 80%
License and other
revenues ....... 2.8 19% 0.7 15% 12.3 33% 3.0 20%
------- --- ------ --- ------- --- ------- ---
Total revenues .. $ 15.1 100% $ 4.6 100% $ 37.7 100% $ 14.7 100%
======= === ====== === ======= === ======= ===
</TABLE>
Total revenues were $15.1 million and $4.6 million in the third quarters of
fiscal 1998 and 1997, respectively. Total revenues for the third quarter of
fiscal 1998 were divided among video conferencing semiconductors (41%), video
phone systems (40%) and nonrecurring license and other revenues (19%). Total
revenues for the third quarter of fiscal 1997 were divided between video
conferencing semiconductors and reference designs (85%) and nonrecurring license
and other revenues (15%).
Product revenues were $12.3 million in the third quarter of fiscal 1998, a
215% increase over the $3.9 million in product revenues reported in the third
quarter of fiscal 1997. The increase in product revenues is due primarily to
sales generated from the Company's VideoCommunicators, which were introduced in
February 1997, combined with an increase in sales of the Company's video
conferencing semiconductors.
License and other revenues, all of which were nonrecurring, were $2.8
million and $650,000 in the third quarters of fiscal 1998 and 1997,
respectively. License and other revenues consist of technology licenses
including royalties required under such licenses, and nonrecurring engineering
charges for work performed by the Company for its customers. In the third
quarter of fiscal 1998, license and other revenues included approximately
$550,000 related to certain development work performed under the terms of a
contract between the Company and one of its customers. 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."
In the quarter ended December 31, 1997, approximately fifty-six percent
(56%) of video phone systems revenues were derived from one OEM customer. This
customer has not placed further product orders with the Company. Accordingly,
OEM video phone systems revenues will be lower in the fourth quarter of fiscal
1998. Failure of the Company to obtain sufficient compensating orders could have
a material adverse effect on the Company's operating results.* See "Factors That
May Affect Future Results - Potential Fluctuations in Operating Results".
Total revenues were $37.7 million and $14.7 million in the first nine
months of fiscal 1998 and 1997, respectively. Product revenues were $25.4
million in the first nine months of fiscal 1998, an increase of $13.7 million
above the $11.7 million reported in the first nine months of fiscal 1997, and
- --------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
That May Affect Future Results" commencing on page 12 for a discussion of
certain factors that could affect future performance.
7
<PAGE> 10
represented 67% and 80% of total revenues, respectively. In the first nine
months of fiscal 1998 and 1997 license and other revenues, all of which were
nonrecurring, were $12.3 million and $3.0 million, respectively. In the first
nine months of fiscal 1998, license and other revenues included approximately
$1.6 million related to certain development work performed under the terms of a
contract between the Company and one of its customers. 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."
Sales to one customer represented approximately 22% and 26% of total
revenues for the quarter and nine months ended December 31, 1997, respectively.
Sales to one customer represented approximately 20% and 13% of total revenues
for the quarter and nine months ended December 31, 1996, respectively. See
"Factors That May Affect Future Results -- Potential Fluctuations in Operating
Results and Dependence on Key Customers."
Sales to customers outside of the United States decreased to 40% of total
revenues in both the quarter and nine months ended December 31, 1997 from 45%
and 57% in the quarter and nine months ended December 31, 1996, respectively.
The Company's sales to Europe represented 18% and 14% of total revenues for
the quarter and nine months ended December 31, 1997, respectively. The Company's
sales to Europe represented 23% of total revenues for both the quarter and nine
months ended December 31, 1996. The Company's sales to the Asia Pacific region
represented 22% and 26% of total revenues for the quarter and nine months ended
December 31, 1997, respectively. The Company's sales to the Asia Pacific region
represented 23% and 34% of total revenues for the quarter and nine months ended
December 31, 1996. See "Factors That May Affect Future Results -- International
Operations."
<TABLE>
<CAPTION>
Cost of Revenues
Three months ended Nine months ended
December 31, December 31,
(In millions) ------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cost of product revenues $ 6.4 $1.3 $ 13.0 $10.7
As a percentage
of product revenues 52% 33% 51% 91%
Cost of license and other revenues $ 0.4 -- $ 1.0 --
As a percentage
of license and other revenues 14% 0% 8% 0%
</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 $6.4 million
and $1.3 million in the third quarters of fiscal 1998 and 1997, respectively.
The cost of product revenues in the quarter ended December 31, 1997 included
costs associated with increased shipments of its VideoCommunicator products,
which the Company began shipping in February 1997, as well as increased
shipments of the Company's video conferencing semiconductor products.
Cost of license and other revenues in the third quarter and nine month
period ended December 31, 1997 was $404,000 and $1.0 million, respectively, and
consisted of personnel and other costs incurred to perform certain development
work under terms of a nonrecurring engineering contract between the
- --------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
That May Affect Future Results" commencing on page 12 for a discussion of
certain factors that could affect future performance.
8
<PAGE> 11
Company and one of its customers. This development work was performed by
research and development personnel of the Company. There were no costs
associated with license and other revenues in the nine month period ended
December 31, 1996. Cost of product revenues were $13.0 million and $10.7 million
in the first nine months of fiscal 1998 and 1997, 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
conferencing semiconductor products and the cost of sales for the ViaTV product
line is generally greater as a percentage of revenues. Further, costs in the
first nine months of fiscal 1998 include startup costs associated with the
ViaTV, which began shipping in volume in fiscal 1998. In the first nine months
of fiscal 1997, costs of product revenues included a $4.0 million charge
associated with the write-off of inventories related to the Company's
discontinuation of the MPEG product line in September 1996. As a result of this
writeoff, costs for the period increased and were equal to 91% of product
revenue.
<TABLE>
<CAPTION>
Gross Profit
Three months ended Nine months ended
December 31, December 31,
(In millions) ------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross profit $8.3 $3.3 $23.7 $4.0
As a percentage
of total revenues 55% 72% 63% 27%
</TABLE>
Gross profit was $8.3 million and $3.3 million in the third quarters of
fiscal 1998 and 1997, respectively. Gross profit from product revenues increased
by 127% and was $5.9 million and $2.6 million in the third quarters of fiscal
1998 and 1997, respectively. The increase in gross profit from product revenues
was due to higher video conferencing semiconductor revenues and sales of the
Company's VideoCommunicator products. The markets for the Company's products are
characterized by falling average selling prices, which could have a material
adverse effect on the Company's future business and operating results if the
Company cannot achieve lower cost of sales and/or higher sales volumes.* In
addition, gross profit as a percent of revenue is generally lower for the sales
of ViaTV products than for sales of the Company's semiconductors. If ViaTV
revenue continues to grow as a percentage of product revenue, the Company
expects that gross profit as a percentage of total product revenue will
decrease.* Gross profit from license and other revenues, all of which were
nonrecurring, less related costs, contributed $2.4 million and $650,000 to gross
profit in the third quarters of fiscal 1998 and 1997, 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."
Gross profit was $23.7 million and $4.0 million in the first nine months of
fiscal of 1998 and 1997, respectively. License and other revenues, net of
associated costs, contributed $11.3 million and $3.0 million to gross profit in
the first nine months of fiscal 1998 and 1997, respectively.
- ------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
That May Affect Future Results" commencing on page 12 for a discussion of
certain factors that could affect future performance.
9
<PAGE> 12
<TABLE>
<CAPTION>
Operating Expenses
Research and Development
Three months ended Nine months ended
December 31, December 31,
(In millions) ------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Research and development $3.3 $ 3.1 $9.5 $ 7.9
As a percentage
of total revenues 22% 67% 25% 54%
</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. Research and development expenses were $3.3 million and $3.1 million
in the third quarters of fiscal 1998 and 1997, respectively. Higher research and
development expenses during the third quarter of fiscal 1998 were due to
increased headcount, increased engineering and prototype expenses associated
with the Company's VideoCommunicator products, and mask and prototype costs
associated with the ongoing development of the Company's next generation video
conferencing semiconductor product. The overall increase in research and
development expenses was partially offset by the use of research and development
personnel to perform nonrecurring engineering services under a revenue
generating contract. The costs associated with this contract are included in the
cost of license and other revenues. 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."
In the first nine months of fiscal 1998 and 1997, research and development
expenses were $9.5 million and $7.9 million, respectively, which is an increase
of $1.6 million. Although total research and development expenses increased as a
result of the factors listed above, the non-cash compensation expense recognized
on certain stock option grants and charged to research and development decreased
to $354,000 in the first nine months of fiscal 1998 from $946,000 in the first
nine months of fiscal 1997.
Selling, General and Administrative
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
(In millions) ------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Selling, general and administrative $5.4 $ 2.0 $12.7 $ 7.1
As a percentage of total revenues 36% 43% 34% 48%
</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 $5.4 million and $2.0 million in the third quarters
of fiscal 1998 and 1997, respectively. Expenses increased due to additional
headcount, higher compensation costs and costs associated with the
- ------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
That May Affect Future Results" commencing on page 12 for a discussion of
certain factors that could affect future performance.
10
<PAGE> 13
marketing, advertising and promotion of the Company's VideoCommunicator product
line. The Company expects that its sales and marketing expenses may increase as
the Company launches new VideoCommunicator products and promotes its current
VideoCommunicator products.* Therefore, future selling, general and
administrative costs may vary both in absolute dollars and as a percentage of
total revenues.* See "Factors That May Affect Future Results -- Management of
Growth and Change; Dependence on Key Personnel."
Selling, general and administrative expenses were $12.7 million and $7.1
million in the first nine months of fiscal 1998 and 1997, respectively. While
total expenses increased as a result of the factors listed above, the non-cash
compensation expense recognized on certain stock option grants and charged to
selling, general and administrative decreased to $877,000 in the first nine
months of fiscal 1998 from $2.7 million in the first nine months of fiscal 1997.
Other Income, Net
In the third quarters of fiscal 1998 and 1997, other income, net was
$515,000 and $265,000, respectively, and consisted primarily of interest income.
Interest income in the third quarter of fiscal 1998 included interest earned on
the proceeds from the Company's initial public offering in July 1997.
(Benefit) Provision for Income Taxes
In the first nine months of fiscal 1998 and 1997, income taxes were a
benefit of $1.0 million and an expense of $146,000, respectively. In August
1995, the Internal Revenue Service (IRS) asserted a deficiency against the
Company for the taxable year 1992. The IRS alleged that as of March 31, 1992,
the Company had accumulated earnings beyond the reasonable needs of its
business. The Company contested this assessment. On May 15, 1997, the Company
received a notice from the IRS indicating that the IRS has fully reversed its
assertion of deficiency. As a result, the Company reversed approximately $1.0
million of its income tax liability during the first quarter of fiscal 1998. In
the first nine months of fiscal 1997, the provision for income taxes represents
certain foreign withholding taxes.
Liquidity and Capital Resources
As of December 31, 1997, the Company had cash and liquid investments
totaling $33.2 million, representing a $24.5 million increase in the first nine
months of fiscal 1998. In the first week of July 1997, the Company completed an
initial public offering of its common stock, selling 4,140,000 shares at $6.50
per share. Net proceeds to the Company were approximately $24.7 million after
deducting related issuance costs. Prior to the Company's initial public
offering, the Company had satisfied its liquidity needs principally from
proceeds generated from two issuances of its equity securities after 1994 and
from cash generated from operations in fiscal 1994 and prior years. The Company
currently has no bank borrowing arrangements.
Operations provided $283,000 of net cash during the first nine months of
fiscal 1998, as compared to net cash used in operations of $2.9 million during
the first nine months of fiscal 1997. Cash provided by operations in the first
nine months of fiscal 1998 reflects net income of $3.6 million, increases of
$2.5 million in deferred revenue, $3.5 million in accounts payable, $762,000 in
accrued compensation, and noncash items, including a deferred compensation
charge of $1.3 million. Cash used in operations during this period includes a
$3.6 million increase in accounts receivable, $7.6 million increase in
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
That May Affect Future Results" commencing on page 12 for a discussion of
certain factors that could affect future performance.
11
<PAGE> 14
inventory, and a $653,000 increase in prepaid expenses and other assets. In
addition to increased revenues, the increase in accounts receivable in the first
nine months of fiscal 1998 was partially due to increased ViaTV sales to
customers in the retail channel, which typically negotiate payment terms greater
than 30 days. The increase in inventory in the first nine months of fiscal 1998
was due to increases in both ViaTV inventory held by the Company and inventory
balances held by retailers. Because the Company does not recognize revenue on
the shipment of its VideoCommunicator products to retailers or distributors
until sell-through to the end user, product inventories at retailers and
distributors are reflected in the Company's inventories and are expected to
increase if the Company succeeds in further broadening its distribution
channels.
Cash used in operations in the first nine months of fiscal 1997 reflects a
net loss of $10.8 million, and a decrease in accounts payable of $4.8 million.
Cash used in operations was partially offset by cash provided by decreases in
inventory and accounts receivable of $6.7 million and $2.4 million,
respectively, and a non-cash deferred compensation charge of $4.0 million. Cash
used in investing activities for the first nine months of fiscal 1998 is
primarily attributable to capital expenditures of approximately $722,000. Cash
provided by investing activities for the first nine months of fiscal 1997 is
primarily attributable to net sales of short-term investments of $5.2 million,
offset by capital expenditures of approximately $590,000. At December 31, 1997,
the Company did not have any material capital commitments outstanding.
Cash flows from financing activities in the first nine months of fiscal
1998 and 1997 consisted primarily of $24.7 million in proceeds from the sale of
the Company's common stock in its initial public offering and $3.8 million in
proceeds from the sale of convertible preferred stock, respectively.
The Company believes its existing cash balances, and funds, if any,
generated from operations, will be sufficient to meet the Company's capital and
operating requirements for the next twelve 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. 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.
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 operating losses of $383,000 in the third quarter of
fiscal 1998 and $13.6 million, $4.1 million and $6.5 million in the years ended
March 31, 1997, 1996 and 1995, respectively. The Company would not have been
profitable in the first nine months of fiscal 1998 had it not received
nonrecurring license and other revenues. 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 historical operating losses, there can be no assurance
that the Company will be able to sustain profitability on either an annual or
quarterly basis. Future losses will likely occur in the
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
That May Affect Future Results" commencing on page 12 for a discussion of
certain factors that could affect future performance.
12
<PAGE> 15
event that the Company's initial VideoCommunicators do not achieve widespread
consumer market acceptance, of which there can be no assurance.
No Assurance of Future License and Other Revenues
The Company has in the past received substantial revenues from licensing of
technology. Licenses and other revenues, all of which were nonrecurring, were
$12.3 million and $3.0 million for the nine month periods ended December 31,
1997 and 1996, respectively. License and other revenues were $3.9 million, $9.0
million and $1.3 million in the fiscal years ended March 31, 1997, 1996 and
1995, respectively. There can be no assurance that the Company will receive
revenues from licensing of its technology in the future, which could have a
material adverse effect on the Company's business and operating results.
Potential Fluctuations in Future Operating Results
The Company's future operating results are expected to fluctuate as the
Company proceeds with the development and marketing of its family of
VideoCommunicators. 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, 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 corresponding cost of revenues, 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 to increase spending to pursue new market opportunities. Any decline in the
average selling price of a particular product that 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 the production of system level products, including the current ViaTV
models, as well as substantially different cost and pricing structures related
to the manufacture and sale of consumer products. The markets for the Company's
products are characterized by falling average selling prices. If the Company
cannot adequately compensate for such falling average selling prices
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
That May Affect Future Results" commencing on page 12 for a discussion of
certain factors that could affect future performance.
13
<PAGE> 16
with lower costs of sales and/or higher volumes, there may be a material adverse
effect on the Company's business and operating results.
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 but not limited
to OEM 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. 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.
Certain of the Company's licensees, including 3Com and KME, may choose to
purchase system level VideoCommunicators to label under their own brand name,
may choose to purchase video conferencing semiconductors and pay a system level
royalty, may choose to produce both a system level product and the
semiconductors incorporated therein and pay only royalties, or may not make any
purchases from the Company. Sales to one such licensee totaled approximately
fifty-six percent (56%) of video phone systems sold by the Company in the
quarter ended December 31, 1997. This licensee has not placed orders with the
Company for additional ViaTVs. Accordingly, revenue from OEM systems sales will
be lower in the fourth quarter of fiscal 1998.
Any change in the ordering patterns of such licensees, who were major
customers of the Company during the first nine months of fiscal 1998, may have a
substantial impact on business and operating results of the Company. Moreover,
the failure of such licensees to continue to purchase substantial quantities of
VideoCommunicators or to produce their own system level products in such a
manner to produce significant royalty or semiconductor income for the Company,
of which there can be no assurance, may 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 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.
- ---------------
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. See "Factors
That May Affect Future Results" commencing on page 12 for a discussion of
certain factors that could affect future performance.
14
<PAGE> 17
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. Product revenues from the Company's ten largest customers in the third
quarter and the nine months ended December 31, 1997, and in the years ended
March 31, 1997, 1996 and 1995 accounted for approximately 55%, 34%, 54%, 39% and
44%, respectively, 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.
Competition
The Company competes with independent manufacturers of video compression
semiconductors and, as a result of the introduction of the its VideoCommunicator
product line, 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 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. In addition
to these factors, the Company's ability to compete depends upon its future
success in developing and manufacturing new generations of video compression
semiconductors that integrate additional functions and reduce costs. Otherwise,
competing semiconductor manufacturers may in the future have competitive
advantages in cost, size and performance which could make systems based on
competing semiconductors preferable to the Company's VideoCommunicators. The
Company expects intense competition for its VideoCommunicators from:
Large consumer electronics manufacturers. The Company will face intense
competition from many well known, established suppliers of consumer
electronics products, which may include Lucent Technologies, Matsushita
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 Company's ViaTV product line.
Licensees and purchasers of the Company's VideoCommunicator technology and
components. A number of companies have licensed portions of the Company's
technology, including 3Com and KME, an affiliate of Matsushita, which have
each licensed all or substantially all of the Company's technology
underlying its VideoCommunicators. The Company may in the future enter into
similar license agreements with respect to substantial portions of its
technology. In addition, the Company has sold ViaTVs to its licensees for
resale under such licensee's own brand name. Further, other companies have
chosen or 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
15
<PAGE> 18
designs. For example, Leadtek, which is currently both a licensee of
certain of the Company's technology and a purchaser of the Company's video
compression semiconductors is shipping a product that is directly
competitive with the Company's ViaTV to consumer electronics stores.
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. Certain
companies have publicly announced that that they are developing consumer
video conferencing products based upon video compression semiconductors
manufactured by suppliers other than the Company. In addition, one company
has announced that it will be making available for sale to third parties a
video phone reference design incorporating Lucent Technologies'
semiconductors. The Company's ability to compete depends upon its future
success in developing and manufacturing new generations of video
compression semiconductors that integrate additional functions and reduce
costs. Otherwise, competing semiconductor manufacturers may in the future
have competitive advantages in cost, size and performance which could 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 faces or 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 C-Phone (which is shipping to consumer electronics stores a product
that is competitive with the Company's ViaTV), 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 been announced or introduced by companies such as Microsoft, Philips
and Sony.
C-Phone, Leadtek, and 3Com are shipping products to consumer electronics
stores and other resellers that are competitive with the Company's ViaTV product
line. Leadtek and 3Com are currently licensees of certain of the Company's
technology; they have also purchased ViaTV products and/or the Company's video
compression semiconductors. The Company expects that others have introduced or
will introduce products that compete with the Company's VideoCommunicators 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
16
<PAGE> 19
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. The
Company's current ViaTV product line 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 related to video conferencing 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 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 plans to introduce additional VideoCommunicators and video
compression 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 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, 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.
17
<PAGE> 20
Dependence on Proprietary Technology; Reliance on Third Party Licenses
The Company relies in part on trademark, copyright and trade secret law to
protect its intellectual property in the United States and abroad. The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright law, which afford only limited protection. The
Company also relies in part on patent law to protect its intellectual property
in the United States and abroad. The Company currently holds four United States
patents, including patents relating to video compression and memory architecture
technology, and has a number of United States and foreign patent applications
pending. There can be no assurance that any such patent applications will result
in an issued patent. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad (where
effective intellectual property protection 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. 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. If the Company were found to be infringing on the
intellectual property rights of any third party, the Company could be subject to
liabilities for such infringement, which could be material, and the Company
could be required to refrain from using, manufacturing or selling certain
products or using certain processes, either of which could have a material
adverse effect on the Company's business and operating results.
The Company relies upon certain technology, including hardware and
software, licensed from third parties. The loss of, or inability to maintain,
existing licenses could have a material adverse effect on the Company's business
and operating results.
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 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 which 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.
18
<PAGE> 21
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 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.
International Operations
Sales to customers outside of the United States represented 40% of the
Company's total revenues for both the third quarter and the nine months ended
December 31, 1997 and 54%, 49% and 40% of total revenues in the fiscal years
ended March 31, 1997, 1996 and 1995, respectively. Specifically, sales to
customers in the Asia Pacific region represented 22% and 26% of the Company's
total revenues for the third quarter and the nine months ended December 31,
1997, respectively.
International sales of the Company's semiconductors will continue to
represent a substantial portion of the Company's product revenues for the
foreseeable future. In addition, substantially all of the Company's current
products are, and substantially all of the Company's future products will be,
manufactured, assembled and tested by independent third parties in foreign
countries. International sales and manufacturing are subject to a number of
risks, including general economic conditions in regions such as Asia, changes in
foreign government regulations and telecommunications standards, export license
requirements, tariffs and taxes, other trade barriers, fluctuations in currency
exchange rates, difficulty in collecting accounts receivable and difficulty in
staffing and managing foreign operations. The Company is also subject to
geopolitical risks, such as political, social and economic instability,
potential hostilities and changes in diplomatic and trade relationships, in
connection with its international operations. A significant decline in demand
from foreign markets, such as may result from the current economic conditions in
the Asia Pacific region, could have a material adverse effect on the Company's
business and operating results.
Management of Growth and Change; Dependence on Key Personnel
The development and marketing of the Company's VideoCommunicators will
continue to place a significant strain on the Company's limited personnel,
management and other resources, particularly in light of the Company's limited
experience in developing, manufacturing, marketing and selling consumer
products. The Company's ability to manage any future growth effectively will
require it to successfully attract, train, motivate, retain and manage
employees, particularly key engineering and managerial personnel, to effectively
integrate new employees into its operations and to continue to improve its
operational, financial and management systems. The Company's failure to manage
its growth and changes in its business effectively and to attract and retain key
personnel could have a material adverse effect on the Company's business and
operating results.
Further, the Company is highly dependent on the continued service of, and
on its ability to attract and retain, qualified technical, marketing, sales and
managerial personnel. The competition for such personnel is intense, 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.
19
<PAGE> 22
Product Concentration; Potential Loss of Semiconductor Sales; Dependence on
Video Conferencing Industry
Sales of video compression semiconductors and reference design boards
accounted for approximately 41% and 39% of the Company's total revenues for the
third quarter and the nine months ended December 31, 1997 and 76%, 59%, 38% of
total revenues in the fiscal years ended March 31, 1997, 1996 and 1995,
respectively. 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. Any
reduction in the demand for the Company's video compression semiconductors,
particularly prior to substantial 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.
Potential Volatility of Stock Price
The market price of the shares of common stock has been and 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 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 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.
Shares Eligible for Future Sale
After the Company's public initial public offering in July 1997, the
majority of the outstanding shares of the Company's common stock were subject to
lock-up agreements under which the holders of such shares agreed not to sell or
otherwise dispose of such shares without the consent of Montgomery Securities,
the lead managing underwriter for the Company's initial public offering. On
October 27, 1997, one third of the shares subject to lock-up agreements were
released from such agreements. On November 6, 1997, substantially all remaining
shares of the Company's common stock subject to lock-up agreements became
eligible for sale into the public market. The continuing sale of part or all of
such shares in the public market could have an adverse effect on the trading
price of the Company's common stock.
20
<PAGE> 23
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
<TABLE>
<CAPTION>
<S> <C>
Net offering proceeds: $24,699,163
Use of net offering proceeds:
Purchase of machinery and equipment (1) $ 512,000
Product development (1)(2) 5,826,000
Sales, marketing and administration (1)(2) 7,089,000
Officer compensation 1,611,000
Working capital (1)(2) 9,661,163
----------
$24,699,163
</TABLE>
(1) Does not include any direct or indirect payments to directors, officers,
general partners of the issuer or their associates; to persons owning ten (10)
percent or more of any class of equity securities of the issuer; or to
affiliates of the issuer.
(2) This amount represents a reasonable estimate.
ITEM 5. OTHER INFORMATION
The Company's 1998 Annual Meeting of Stockholders will be held at 2 p.m.
Pacific Standard Time on June 15, 1998 at the Company's principal executive
offices at 2445 Mission College Blvd., Santa Clara, California.
The Company announced on January 19, 1997 that Joe Parkinson resigned as
Chairman, Chief Executive Officer and Director. On the same date, Paul Voois,
formerly the Company's Executive Vice President and Director, was appointed
Chairman and CEO, and each of Bryan Martin, Vice President of Engineering and
Chief Technical Officer, and Chris McNiffe, Vice President of Sales and
Marketing, were appointed to the Company's Board of Directors. Mr. Parkinson
will remain with the Company on a temporary basis as a part-time employee to
assist with the transition.
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
December 31, 1997.
SIGNATURE
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: January 23, 1998
8X8, INC.
By: /s/ SANDRA L. ABBOTT
--------------------
Sandra L. Abbott
Chief Financial Officer and
Vice President of Finance
(Principal Financial and Accounting Officer)
21
<PAGE> 24
EXHIBIT INDEX
8X8, INC.
EXHIBIT
NUMBER EXHIBIT TITLE
11.1 Calculation of Historical and Pro forma Earnings (Loss) Per Share
27.1 Financial Data Schedule
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.
22
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF HISTORICAL AND PRO FORMA EARNINGS (LOSS) PER SHARE
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------ -------------------
1997 1996 1997 1996
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss) .................. $ 132 $(1,580) $ 3,645 $(10,769)
======= ======== ======= ========
Basic earnings per share............ $ 0.01
=======
Historical weighted average number of
common shares:
Common stock..................... 14,985
=======
Pro forma basic earnings(loss)
per share.......................... $ (0.15) $ 0.27 $ (1.12)
======= ======= ========
Pro forma weighted average number of
common shares:
Preferred stock................. 3,681 1,298 3,355
Common stock.................... 6,972 12,144 6,228
------- ------- --------
10,653 13,442 9,583
======= ======= ========
Diluted earnings per share.......... $0.01
======
Historical weighted average number of
common and common equivalent shares:
Common stock...................... 14,985
Common stock options.............. 1,865
------
16,850
======
Pro forma diluted earnings (loss)
per share.......................... $ (0.13) $ 0.24 $ (0.91)
======= ======= ========
Pro forma weighted average number of
common and common equivalent shares:
Preferred stock................... 3,681 1,297 3,355
Common stock...................... 6,972 12,144 6,228
Common stock options.............. 1,593 1,652 2,280
------- ------- --------
12,246 15,093 11,863
======= ======= ========
</TABLE>
23
<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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,187
<SECURITIES> 0
<RECEIVABLES> 4,569<F1>
<ALLOWANCES> 0
<INVENTORY> 8,766
<CURRENT-ASSETS> 47,529
<PP&E> 7,195
<DEPRECIATION> (5,818)
<TOTAL-ASSETS> 49,067
<CURRENT-LIABILITIES> 13,118
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 35,831
<TOTAL-LIABILITY-AND-EQUITY> 49,067
<SALES> 37,647
<TOTAL-REVENUES> 37,647
<CGS> 13,960
<TOTAL-COSTS> 13,960
<OTHER-EXPENSES> 22,137
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,645
<INCOME-TAX> (1,000)
<INCOME-CONTINUING> 3,645
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,645
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.24
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCE, CONSISTENT WITH THE BALANCE SHEET PRESENTATION.
</FN>
</TABLE>
