<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 June 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 July 15,
1998 was 15,375,405.
The exhibit index begins on page 24
<PAGE> 2
8X8, INC.
INDEX
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1998 and March 31, 1998.............1
Condensed Consolidated Statements of Operations for the three months
ended June 30, 1998 and 1997........................................................2
Condensed Consolidated Statements of Cash Flows for the three months
ended June 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 4. Submission of Matters to a Vote of Security Holders.........................22
Item 6. Exhibits and Reports on Form 8-K............................................22
Signatures.......................................................................... 23
</TABLE>
i
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term investments...... $22,377 $26,737
Accounts receivable, net............................... 4,330 4,527
Inventory.............................................. 14,224 12,758
Prepaid expenses and other assets...................... 750 876
------- -------
Total current assets................................. 41,681 44,898
Property and equipment, net.............................. 1,275 1,370
Deposits and other assets................................ 161 161
------- -------
$43,117 $46,429
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 1,791 $ 2,625
Accrued compensation................................... 1,650 1,445
Accrued warranty....................................... 1,364 1,461
Deferred revenue....................................... 2,929 2,447
Other accrued liabilities.............................. 2,109 1,923
------- ------
Total current liabilities............................ 9,843 9,901
------- ------
Minority interest........................................ 60 85
------- ------
Stockholders' equity:
Common stock........................................... 15 15
Additional paid-in capital............................. 47,794 47,785
Notes receivable from stockholders..................... (405) (893)
Deferred compensation.................................. (515) (744)
Unrealized loss on investments......................... (29) (45)
Accumulated deficit.................................... (13,646) (9,675)
-------- ------
Total stockholders' equity........................... 33,214 36,443
-------- ------
$43,117 $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
June 30,
---------------------
1998 1997
------ ------
<S> <C> <C>
Product revenues.......................................... $ 6,511 $ 4,953
License and other revenues................................ 589 6,662
------- -------
Total revenues............................................ 7,100 11,615
Cost of product revenues.................................. 4,390 2,544
------- -------
Gross profit.............................................. 2,710 9,071
------- -------
Operating expenses:
Research and development.............................. 2,612 3,213
Selling, general & administrative..................... 4,362 3,540
------- -------
Total operating expenses........................ 6,974 6,753
------- -------
(Loss) income from operations............................. (4,264) 2,318
Other income, net......................................... 293 100
------- -------
(Loss) income before provision (benefit)
for income taxes......................................... (3,971) 2,418
Provision (benefit) for income taxes...................... -- (1,000)
------- -------
Net (loss) income......................................... $(3,971) $ 3,418
======= =======
Net (loss) income per share:
Basic................................................... $ (0.27) $ 0.59
Diluted................................................. $ (0.27) $ 0.29
Shares used in per share calculations:
Basic................................................... 14,792 5,794
Diluted................................................. 14,792 11,587
</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>
Three months ended
June 30,
---------------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income...................................... $ (3,971) $ 3,418
Charges to net (loss) income not
affecting cash........................................ 346 1,049
Net effect of changes
in current and other assets
and current liabilities............................... (1,201) (56)
------- -------
Net cash (used in) provided by
operating activities............................... (4,826) 4,411
------- -------
Cash flows from investing activities:
Purchase of property and equipment..................... (135) (210)
Short-term investments-trading
activity, net......................................... 60 2
------- -------
Net cash used in investing
activities......................................... (75) (208)
------- -------
Cash flows from financing activities:
Proceeds from issuance of
common stock.......................................... 131 23
Repayment of notes receivable from
stockholders.......................................... 470 --
------- -------
Net cash provided by financing
activities...................................... 601 23
------- -------
Net (decrease) increase in cash and
cash equivalents......................................... (4,300) 4,226
Cash and cash equivalents at the
beginning of the period.................................. 26,677 8,722
------- -------
Cash and cash equivalents at the
end of the period........................................ $22,377 $12,948
======= =======
</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
8x8, Inc. (the "Company" or "8x8") was incorporated in California in
February 1987. In December 1996, the Company was reincorporated in Delaware and
exchanged each share of each series of stock of the predecessor company for one
share of each corresponding series of stock of the Delaware successor. These
financial statements have been prepared giving effect to the reincorporation for
all periods presented.
The Company designs, manufactures, and markets videophones for use by the
consumer 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 Company's fiscal quarters end on the last Thursday on or before the end of
each calendar quarter. The three month periods ended June 25, 1998 and June 26,
1997, respectively, each included 13 weeks of operations. 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 June 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
to Stockholders.
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.
<TABLE>
<CAPTION>
3. BALANCE SHEET DETAIL
(in thousands) June 30, March 31,
1998 1998
-------- ---------
Inventories:
<S> <C> <C>
Raw materials............................. $ 3,233 $ 3,864
Work-in-process........................... 5,655 5,337
Finished goods............................ 5,336 3,558
------- --------
$14,224 $12,758
======= =======
</TABLE>
4
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4. NET (LOSS) INCOME PER SHARE
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 (FAS 128), "Earnings per Share." FAS 128 requires presentation
of both basic and diluted net (loss) income per share on the face of the
statements of operations for all periods presented. Basic net (loss) income per
share is computed by dividing net (loss) income available to common stockholders
(numerator) by the weighted average number of common shares outstanding during
the period (denominator). Diluted net (loss) income per share is computed using
the weighted average number of common shares and potential common shares
outstanding during the period. Diluted net (loss) income per share is computed
using the weighted average number of common shares and potential common shares
outstanding during the period. Potential common shares result from the assumed
exercise, using the treasury stock method, of outstanding convertible
noncumulative preferred stock (Preferred Stock), common stock options and
unvested restricted common stock having a dilutive effect. All prior years' data
in this report have been restated to reflect the adoption of FAS 128. FAS 128
also requires a reconciliation of the numerators and denominators of the basic
and diluted per share calculations. There were no adjustments to the numerators
for any period presented. The reconciliation of the denominators is as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
------ ------
<S> <C> <C>
Basic shares 14,792 5,794
Effect of dilutive securities:
Preferred Stock -- 3,726
Common stock options -- 940
Unvested restricted common stock -- 1,127
------ ------
Diluted shares 14,792 11,587
====== ======
</TABLE>
The following equity instruments were not included in the computations of
net (loss) income per share because the effect on the calculations would be
anti-dilutive (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
------ ------
<S> <C> <C>
Common stock options 3,095 --
Unvested restricted common stock 532 --
----- ----
Total 3,627 --
===== ====
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (FAS 130), "Reporting Comprehensive Income." Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. The primary difference between net income and
comprehensive income, for the Company, is gains and losses on short-term
investments classified as available-for-sale. Comprehensive income for the
current reporting and comparable period in the prior year is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1998 1997
------ ------
<S> <C> <C>
Comprehensive (loss) income ($3,955) $3,418
======= ======
</TABLE>
5
<PAGE> 8
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 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 ended June 30, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of
an Enterprise and Related Information." FAS 131 revises information regarding
the reporting of certain operating segments for periods beginning after December
15, 1997. The Statement also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
adopt FAS 131 in its fiscal 1999 annual report. The Company has not yet
determined the impact, if any, of adopting this new standard.
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 1 of this Report on Form 10-Q and the audited Consolidated
Financial Statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations for the fiscal year ended March
31, 1998 contained in the Company's Annual Report to Stockholders.
Overview
Since June 1995, the Company has been executing a business strategy
designed to focus the Company's efforts towards video communication. As part of
this strategy, the Company discontinued sales of its MPEG semiconductor product
line and reduced its workforce in the quarter ended June 30, 1996. In the
quarters ended June 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.
6
<PAGE> 9
To address new opportunities, the Company has leveraged its strengths in
semiconductor design and related software to develop and market low-cost video
communication systems (hereinafter referred to as its "VideoCommunicators"). The
Company began shipping the first product in its planned family of
VideoCommunicator products, ViaTV videophone model VC100, in February 1997.
Subsequently, the Company introduced the VC105, an upgraded VC100, and added
three new models, the VC50, VC55 and VC150, to the ViaTV product line. The
Company also has introduced versions of its ViaTV videophones designed for
European and Asian markets. In June 1998, the Company announced the RSM-1500
remote surveillance module, a VideoCommunicator designed specifically for the
security and surveillance market.
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:
Revenues
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------
(In millions) 1998 1997
------------- ------------
<S> <C> <C> <C> <C>
Product revenues $ 6.5 92% $4.9 42%
License and other revenues 0.6 8% 6.7 58%
------ ---- ----- ----
$ 7.1 100% $11.6 100%
===== ==== ===== ====
</TABLE>
Total revenues were $7.1 million and $11.6 million for the first quarters
of fiscal 1999 and 1998, respectively. Total revenues for the first quarter of
fiscal 1999 were divided among video communication semiconductors (44%),
videophone systems (48%) and nonrecurring license and other revenues (8%). In
the first quarter of fiscal 1998, total revenues were divided among video
communication semiconductors (28%), videophone systems (14%) and nonrecurring
license and other revenues (58%).
Product revenues were $6.5 million in the first quarter of fiscal 1999, an
increase of $1.6 million above the $4.9 million reported in the first quarter of
fiscal 1998. The increase in product revenues was primarily due to the increase
in unit sales of the Company's ViaTV 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 customers. License and other revenues
were $589,000 in the first quarter of fiscal 1999, a decrease of approximately
$6.1 million from the $6.7 million reported in the first quarter of fiscal 1998.
In the first quarter of fiscal 1998, license and other revenues included
approximately $5.3
7
<PAGE> 10
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 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."
No customer represented ten percent (10%) or more of the Company's total
revenues for the quarter ended June 30, 1998. Product sales and license and
other revenues derived from 3Com represented approximately 45% of total revenues
for the quarter ended June 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--Potential Fluctuations in Operating Results--Dependence on Key
Customers."
The Company's sales to Europe represented 20% and 11% of total revenues for
the first quarters of fiscal 1999 and 1998, respectively. The Company's sales to
the Asia Pacific region represented 22% and 18% of total revenues for the first
quarters of fiscal 1999 and 1998, respectively. See "Factors That May Affect
Future Results--International Operations."
Cost of Revenues
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
(In millions) 1998 1997
---------------------------
<S> <C> <C>
Cost of product revenues $4.4 $2.5
As a percentage of product revenues 68% 51%
</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 $4.4 million and $2.5 million for the
first quarters of fiscal 1999 and 1998, respectively. The cost of product
revenues in the quarter ended June 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. The cost of product revenues in the quarter ended June 30, 1997
included start-up costs associated with the initial production of the Company's
first ViaTV product, the VC100.
There were no costs associated with license and other revenues in the first
quarters of fiscal 1999 and 1998, respectively.
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
(In millions) 1998 1997
---------------------------
<S> <C> <C>
Gross profit $2.7 $9.1
As a percentage of total revenues 38% 78%
</TABLE>
Gross profit was $2.7 million and $9.1 million in the first quarters of
fiscal 1999 and 1998, respectively. Gross profit from product revenues was $2.1
million and $2.4 million for the first quarters of fiscal 1999 and 1998,
respectively. Gross profit from license and other revenues, 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 13 for a discussion of certain factors that could affect future
performance.
8
<PAGE> 11
of which was nonrecurring was $589,000 and $6.7 million in the first 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."
Lower product gross profit in the first 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 until current
inventory levels decrease.*
Total gross margin was 38% and 78% in the first 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 ViaTV
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 June 30,
---------------------------
(In millions) 1998 1997
---------------------------
<S> <C> <C>
Research and development $ 2.6 $ 3.2
As a percentage of total revenues 37% 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. Research and development expenses were $2.6 million and $3.2 million
for the first quarters of fiscal 1999 and 1998, respectively. Lower research and
development expenses during the first quarter of fiscal 1999 were due to
decreases in profit sharing, incentive bonuses and nonrecurring
VideoCommunicator product design costs, offset by an increase in headcount and
in costs associated with materials and tooling used in prototype builds of the
Company's VideoCommunicator products.
* 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 13 for a discussion of certain factors that could affect future
performance.
9
<PAGE> 12
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 June 30,
---------------------------
(In millions) 1998 1997
---------------------------
<S> <C> <C>
Selling, general and administrative $4.4 $3.5
As a percentage of total revenues 62% 30%
</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 $4.4 million and $3.5 million in the first quarters
of fiscal 1999 and 1998, respectively. In the first 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."
Other Income, Net
In the first quarters of fiscal 1999 and 1998, other income, net, was
$293,000 and $100,000, respectively, and consisted primarily of interest income
from the Company's short-term cash investments.
Provision (Benefit) for Income Taxes
In the first quarter of fiscal 1999, the Company did not record a provision
for income taxes due to the net operating loss incurred during the period. In
August 1995, the Internal Revenue Service (IRS) asserted a deficiency against
the Company for the taxable year 1992. The IRS alleged that as of March 31,
1992, the Company had accumulated earnings beyond the reasonable needs of its
business. The Company contested this assessment. On May 15, 1997, the Company
received a notice from the IRS indicating that the IRS fully reversed its
assertion of deficiency. As a result, the Company reversed approximately $1.0
million of its income tax liability during the first quarter of fiscal 1998.
* 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 13 for a discussion of certain factors that could affect future
performance.
10
<PAGE> 13
Year 2000
Computer systems may experience problems handling dates beyond the year
1999 because many computer programs use only two digits to identify a year in a
date field. The Company is assessing the readiness of its internal computer
systems, products, and third-party equipment and software utilized by the
Company for handling year 2000 issues. In part to address year 2000 issues with
certain of the Company's internal computer systems, the Company is currently
implementing an enterprise-wide database and information management system that
is year 2000 compliant. Though the Company currently expects to successfully
implement this and other internal computer systems and programming changes
necessary to address these 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 generated from operations in fiscal 1994 and
prior years. As of June 30, 1998, the company had cash and liquid investments
totaling $22.4 million, representing a decrease of $4.3 million from March 31,
1998. The Company currently has no bank borrowing arrangements.
Net cash used in operations was $4.8 million during the first quarter of
fiscal 1999. Net cash provided by operations was $4.4 million during the first
quarter of fiscal 1998. Net cash used in operations in the quarter ended June
30, 1998 reflected a net loss of $4.0 million, a $1.5 million increase in
inventory, and a $834,000 decrease in accounts payable, offset primarily by
increases of $482,000 in deferred revenue, $225,000 in other accrued
liabilities, and $205,000 in accrued compensation. The increase in inventory
during the quarter ended June 30, 1998 was due to increases in VideoCommunicator
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 distributor or retailer, 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.* In addition, deferred revenue is expected to increase if the Company
succeeds in further broadening its distribution channels and introducing
additional products into its distribution channels.* Cash provided by operations
in the first quarter of fiscal 1998 reflects net income of $3.4 million, noncash
items, including a deferred compensation charge of $700,000, and an increase in
accrued compensation related primarily to profit sharing and performance based
bonuses, offset by an increase in accounts receivable and a decrease to income
taxes payable.
Net cash used in investing activities in the quarters ended June 30, 1998
and 1997, is primarily attributable to capital expenditures of $135,000 and
$210,000, respectively.
* 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 13 for a discussion of certain factors that could affect future
performance.
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Net cash provided by financing activities in the quarter ended June 30,
1998 consisted primarily of net proceeds from the repayment of stockholders'
notes receivable and net proceeds from sales of the Company's common stock upon
the exercise of employee stock options.
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 in the first quarter ended June 30, 1998 and in the
fiscal year ended March 31, 1998 was approximately $4.8 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 to the development of ViaTV products, advertising for
its ViaTV products, support of the retail sales channel and growth in ViaTV
inventory. In addition, as discussed above the Company had entered into a
contract to purchase a new enterprise-wide database and information management
system from a major software supplier as of June 30, 1998. The Company
currently estimates that expenditures over the next twelve months 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 to $1.7
million. See "Factors That May Affect Future Results--Enterprise-Wide Database
Implementation." 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 June 30, 1998, the Company had approximately $22.4 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 13 for a discussion of certain factors that could affect future
performance.
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<PAGE> 15
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 $4.3 million in the first quarter
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
sustain profitability on either an annual or quarterly basis.
No Assurance of Future License and Other Revenues
The Company has in the past received substantial revenues from licensing of
its technology. License and other revenues, all of which were nonrecurring, were
$589,000 and $6.7 million for the three month periods ended June 31, 1998 and
1997, respectively, and were $14.5 million, $3.9 million and $9.0 million in the
fiscal years ended March 31, 1998, 1997 and 1996, respectively. There can be no
assurance that the Company will receive revenues from licensing of its
technology in the future, which could have a material adverse effect on the
Company's business and operating results.
Potential Fluctuations in Future Operating Results
The Company's historical operating results have fluctuated significantly
and will likely continue to fluctuate in the future. On 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
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<PAGE> 16
growth of the Company's VideoCommunicator business has reduced overall product
gross profit as a percentage of revenue. Continued growth of the Company's
VideoCommunicator business relative to its semiconductor business will result in
a further reduction in product gross profit as a percentage of revenue.
If the Company cannot adequately compensate for falling average selling
prices with lower costs of sales, its gross margins will be reduced and there
may be a material adverse effect on the Company's business and operating
results. In the event that the Company encounters significant price competition
in the markets for its products, the Company could be at a significant
disadvantage compared to its competitors, many of which have substantially
greater resources, and therefore may be better able to withstand an extended
period of downward pricing pressure.
Variations in timing of sales may cause significant fluctuations in future
operating results. In addition, because a significant portion of the Company's
business, including sales of its VideoCommunicator products, may be derived from
orders placed by a limited number of large customers, including OEM customers,
the timing of such orders can also cause significant fluctuations in the
Company's operating results. For example, 3Com, which purchased approximately
34% of videophone systems sold by the Company in the year ended March 31, 1998,
has not ordered additional products from the Company since delivery of its
purchases in the quarter ended December 31, 1998. The Company has received no
indication that 3Com will place additional orders. 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 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
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<PAGE> 17
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 first quarter
ended June 30, 1998 accounted for approximately 49% of total revenues. In the
years ended March 31, 1998, 1997 and 1996 revenues from the Company's ten
largest customers accounted for approximately 49%, 61%, 61% and 65%,
respectively, of total revenues. No customer represented ten percent (10%) or
more of the Company's total revenues for the quarter ended June 30, 1998.
However, during each of the last three 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; and ESS Technology accounted for 24% of total revenues
during the year ended March 31, 1996. Substantially all the Company's product
sales have been made, and are expected to be made, on a purchase order basis.
None of the Company's customers has entered into a long-term agreement requiring
it to purchase the Company's products. Further, all of the Company's license and
other revenues are nonrecurring.
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. The Company does face
competition from 3Com. Many of these potential competitors sell
television and telephone products into which they may integrate video
communication systems, thereby eliminating a consumer's need to
purchase a separate video communication system, such as the Company's
ViaTV product.
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
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<PAGE> 18
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.
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. Consumer products for
television-based internet access have been announced or introduced by
companies such as Microsoft, Philips and Sony.
C-Phone, Leadtek, 3Com and Truedox are among the companies selling low cost
videophones. Many other companies have announced the development of low cost
videophones. The Company expects that additional companies will introduce
products that compete with the VideoCommunicators in the future. Certain
manufacturers or potential manufacturers of low cost videophones have licensed
or purchased, or may license or purchase, the Company's technology and
semiconductors in order to do so. KME and 3Com in particular have licensed
substantially all of the technology underlying the VideoCommunicators, and may
use such technology to introduce products that compete with the
VideoCommunicators. Each of Leadtek and Truedox license the Company's technology
and purchase the Company's video communication semiconductors. The Company
aggressively licenses its semiconductor, software and systems technology and
sells its semiconductor and system products to third parties. Thus, it is likely
that additional of the Company's OEM customers will become competitors with
respect to the Company's VideoCommunicator business. Other competitors may
purchase video communication semiconductor and related technology from other
suppliers.
The principal competitive factors in the market for video communication
semiconductors include product definition, product design, system integration,
chip size, functionality, time-to-market, adherence to industry standards, price
and reliability. The Company has a number of competitors in this market
including Analog Devices, Chromatic Research, Lucent Technologies, Motorola,
Philips, Texas Instruments and Winbond Electronics. Potential competitors
include ESS Technology 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
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<PAGE> 19
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 videophones have been unsuccessful and
there can be no assurance that the market for such products will develop. The
current installed base of H.324 compliant videophones, which are compatible with
the Company's ViaTV videophones, is quite limited, providing few parties for a
purchaser of a single videophone to call. In addition, many consumers may not
wish to be seen during a telephone call. The Company has no reliable data to
suggest that there will be significant customer demand for such products,
including the Company's VideoCommunicators and products offered by certain of
the Company's OEM customers.
The Company's current ViaTV product line as well as products made by the
Company's OEM customers for use on POTS, is not capable of delivering video data
at rates of 24 frames per second. Below this data rate, the human eye can detect
degradation of video quality. Further, POTS infrastructure varies widely in
configuration and integrity, which can result in decreased rates of transmission
and difficulties in establishing and maintaining connections. Actual or
perceived technical difficulties or insufficient video quality related to video
communication on POTS could impede market acceptance and have a material adverse
effect on the Company's business and results of operations.
Rapid Technological Change; Dependence on New Product Introduction
The video communication semiconductor and video communication markets are
characterized by rapid changes in customer requirements, frequent introductions
of new and enhanced products, and continuing and rapid technological
advancement. To compete successfully, the Company must continue to design,
develop, manufacture and sell new and enhanced products that provide
increasingly higher levels of performance and reliability and lower cost, take
advantage of technological advancements and changes, and respond to new customer
requirements. The Company's success in designing, developing, manufacturing and
selling such products will depend on a variety of factors, including the
identification of market demand for new products, product selection, timely
implementation of product design and development, product performance,
cost-effectiveness of products under development, effective manufacturing
processes and the success of promotional efforts.
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.
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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 five 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.
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, Flash Electronics in Fremont, California and Vtech Communications in
Hong Kong, while its semiconductor manufacturers
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include Taiwan Semiconductor Manufacturing Corporation and United Micro
Electronics Corporation in Taiwan. The Company also relies on Amkor Electronics
in South Korea for packaging and testing of its semiconductors. The Company does
not have long term purchase agreements with its subcontract manufacturers or its
component suppliers. There can be no assurance that the Company's contract
manufacturers will be able or willing to reliably manufacture the Company's
products, or that the Company's component suppliers will be able or willing to
reliably supply components for the Company's products, in volumes, on a cost
effective basis or in a timely manner. The Company may experience difficulties
due to its reliance on independent subcontract manufacturers, semiconductor
foundries and component suppliers that could have a material adverse effect on
the Company's business and operating results.
In addition, from time to time the Company may issue non-cancelable
purchase orders to its third-party manufacturers for raw materials used in its
VideoCommunicator products to ensure availability for long lead-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.
International Operations
Sales to customers outside of the United States represented 42% of total
revenues in the quarter ended June 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 22%, 25%, and 33% of the
Company's total revenues in the first quarter ended June 30, 1998 and in the
fiscal years ended March 31, 1998 and 1997, respectively, while sales to
customers in Europe represented 20%, 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. 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
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in staffing and managing foreign operations. The Company is also subject to
geopolitical risks, such as political, social and economic instability,
potential hostilities and changes in diplomatic and trade relationships, in
connection with its international operations. A significant decline in demand
from foreign markets, such as may result from the current economic conditions in
the Asia Pacific region, could have a material adverse effect on the Company's
business and operating results.
Management of Growth and Change; Dependence on Key Personnel
The development and marketing of the Company's VideoCommunicators will
continue to place a significant strain on the Company's limited personnel,
management and other resources, particularly in light of the Company's limited
experience in developing, manufacturing, marketing and selling consumer
products. The Company's ability to manage any future growth effectively will
require it to successfully attract, train, motivate, retain and manage
employees, particularly key engineering and managerial personnel, to effectively
integrate new employees into its operations and to continue to improve its
operational, financial and management systems. The Company's failure to manage
its growth and changes in its business effectively and to attract and retain key
personnel could have a material adverse effect on the Company's business and
operating results.
Further, the Company is highly dependent on the continued service of and
its ability to attract and retain qualified technical, marketing, sales and
managerial personnel. The competition for such personnel is intense,
particularly in the San Francisco Bay area where the Company is located. The
loss of any such person or the failure to recruit additional key technical and
sales personnel in a timely manner would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business. The Company currently does not
have employment contracts with any of its employees and does not maintain key
person life insurance policies on any of its employees.
Product Concentration; Dependence on Video Communication Industry
Sales of video communication products accounted for approximately 100%,
100%, and 86% of total product revenues in the quarter ended June 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 Implementation
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 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
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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.
Need for Additional Capital
The Company believes that it may require additional financial resources
over the next several years for working capital, research and development,
expansion of sales and marketing resources, and capital expenditures. Net cash
used in operating activities in the first quarter ended June 30, 1998 and in the
fiscal year ended March 31, 1998 was approximately $4.8 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 ViaTV products, advertising for
its ViaTV products, support of the retail sales channel and growth in ViaTV
inventory. The Company believes that it will be able to fund planned
expenditures and satisfy its cash requirements for at least the next twelve
months from cash flow from operations, if any, and existing cash balances. As of
June 30, 1998, the Company had approximately $22.4 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.
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PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Stockholders was held on June 15, 1998
at the Company's principal executive offices in Santa Clara, California. At the
meeting, 11,325,578 shares were present in person or by proxy.
(a) Election of Directors. Each person elected as a Director will serve until
the next annual meeting of stockholders or until such person's successor is
elected and qualified. The following nominees for Director were elected:
<TABLE>
<CAPTION>
Name of Nominee Votes Cast For Votes Withheld
- -------------------------------------------------------------------------------
<S> <C> <C>
Dr. Paul Voois 11,295,692 29,886
Keith R. Barraclough 11,295,692 29,886
Dr. Bernd Girod 11,294,792 30,786
Akifumi Goto 11,294,792 30,786
Ret. Maj. Gen. Guy L. Hecker 11,292,492 33,086
Bryan R. Martin 11,295,692 29,886
Chris McNiffe 11,264,069 61,509
William Tai 11,247,892 77,686
Dr. Samual Wang 11,294,492 31,086
</TABLE>
(b) Ratification of Independent Auditors. The ratification and appointment of
Price Waterhouse LLP as independent public accountants of the Company for
fiscal 1999 was approved by the stockholders with 11,291,159 voting in
favor, 18,769 voting against and 15,650 abstaining.
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 June
30, 1998.
22
<PAGE> 25
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: July 22, 1998.
8X8, INC.
By: /s/ SANDRA L. ABBOTT
---------------------
Sandra L. Abbott
Chief Financial Officer and
Vice President of Finance
(Principal Financial and
Accounting Officer)
23
<PAGE> 26
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.
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 22,377
<SECURITIES> 0
<RECEIVABLES> 4,330<F1>
<ALLOWANCES> 0
<INVENTORY> 14,224
<CURRENT-ASSETS> 41,681
<PP&E> 7,509
<DEPRECIATION> (6,234)
<TOTAL-ASSETS> 43,177
<CURRENT-LIABILITIES> 9,843
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 33,199
<TOTAL-LIABILITY-AND-EQUITY> 43,177
<SALES> 7,100
<TOTAL-REVENUES> 7,100
<CGS> 4,390
<TOTAL-COSTS> 4,390
<OTHER-EXPENSES> 6,974
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,971)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,971)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,971)
<EPS-PRIMARY> (0.27)<F2>
<EPS-DILUTED> (0.27)
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCE, CONSISTENT WITH THE BALANCE SHEET PRESENTATION
<F2>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
</FN>
</TABLE>
