<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-15627
8X8, INC.
<TABLE>
<S> <C>
Delaware 77-0142404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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
November 12, 1999 was 18,525,318.
The exhibit index begins on page 30.
<PAGE> 2
8X8, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1999 and March 31, 1999............................... 1
Condensed Consolidated Statements of Operations
for the three and six months ended September 30, 1999 and 1998...... 2
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1999 and 1998................ 3
Notes to Unaudited Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk............. 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders................... 29
Item 6. Exhibits and Reports on Form 8-K...................................... 30
Signatures..................................................................... 30
</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>
September 30, March 31,
1999 1999
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments ............................. $ 16,527 $ 15,810
Accounts receivable, net .............................. 1,613 5,886
Inventory ............................................. 1,668 3,915
Prepaid expenses and other assets ..................... 1,379 878
-------- --------
Total current assets ................................ 21,187 26,489
Property and equipment, net ............................. 2,239 2,163
Intangibles and other assets ............................ 3,465 57
-------- --------
$ 26,891 $ 28,709
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 1,548 $ 1,917
Accrued compensation .................................. 1,857 1,236
Accrued warranty ...................................... 693 1,043
Deferred revenue ...................................... 1,598 4,089
Other accrued liabilities ............................. 1,577 1,601
-------- --------
Total current liabilities ........................... 7,273 9,886
-------- --------
Stockholders' equity:
Common stock .......................................... 18 15
Additional paid-in capital ............................ 61,971 48,363
Notes receivable from stockholders .................... (245) (266)
Deferred compensation ................................. (51) (197)
Accumulated other comprehensive loss .................. -- (193)
Accumulated deficit ................................... (42,075) (28,899)
-------- --------
Total stockholders' equity .......................... 19,618 18,823
-------- --------
$ 26,891 $ 28,709
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Product revenues ......................... $ 5,214 $ 8,375 $ 10,774 $ 14,886
License and other revenues ............... 1,496 628 1,830 1,217
-------- -------- -------- --------
Total revenues ........................... 6,710 9,003 12,604 16,103
-------- -------- -------- --------
Cost of product revenues ................. 1,388 5,863 4,741 10,253
Cost of license and other revenues ....... 58 50 58 50
-------- -------- -------- --------
Gross profit ............................. 5,264 3,090 7,805 5,800
-------- -------- -------- --------
Operating expenses:
Research and development ............. 2,860 2,753 5,283 5,365
Selling, general and administrative... 3,786 4,290 7,373 8,652
In-process research and development... -- -- 10,100 --
Amortization of intangibles .......... 185 -- 235 --
-------- -------- -------- --------
Total operating expenses ...... 6,831 7,043 22,991 14,017
-------- -------- -------- --------
Loss from operations ..................... (1,567) (3,953) (15,186) (8,217)
Other income, net ........................ 195 303 2,076 596
-------- -------- -------- --------
Loss before provision for income taxes.... (1,372) (3,650) (13,110) (7,621)
Provision for income taxes ............... 66 -- 66 --
-------- -------- -------- --------
Net loss ................................. $ (1,438) $ (3,650) $(13,176) $ (7,621)
======== ======== ======== ========
Net loss per share:
Basic .................................. $ (0.08) $ (0.24) $ (0.77) $ (0.51)
Diluted ................................ $ (0.08) $ (0.24) $ (0.77) $ (0.51)
Shares used in per share calculations:
Basic .................................. 17,886 14,939 17,074 14,866
Diluted ................................ 17,886 14,939 17,074 14,866
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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8x8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Six months ended
September 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(13,176) $ (7,621)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ...................... 819 446
Amortization of deferred compensation .............. 70 191
Purchased in-process research and development ...... 10,100 --
Gain on sale of investments, net ................... (1,687) --
Net effect of changes in current and other assets
and current liabilities ................................ 3,012 (1,321)
-------- --------
Net cash used in operating activities ............... (862) (8,305)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment .................... (627) (934)
Proceeds from sale of nonmarketable equity investment .. 1,880 --
Cash paid for acquisitions, net ........................ (120) --
Purchases of common stock from minority interest
in subsidiary ...................................... -- (85)
Short-term investments-trading activity, net ........... -- 60
-------- --------
Net cash provided by (used in) investing activities.. 1,133 (959)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ................. 448 478
Loans to stockholders .................................. (76) --
Repayment of notes receivable from stockholders ........ 74 475
-------- --------
Net cash provided by financing activities .......... 446 953
-------- --------
Net increase (decrease) in cash and cash equivalents ...... 717 (8,311)
Cash and cash equivalents at the beginning of the period .. 15,810 26,677
-------- --------
Cash and cash equivalents at the end of the period ........ $ 16,527 $ 18,366
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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8X8, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
8x8, Inc. ("We" or "8x8") was incorporated in California in February 1987.
In December 1996, 8x8 was reincorporated in Delaware.
We develop, manufacture and market telecommunication equipment and software
focused on multimedia Internet protocol (IP) applications. Our products are
highly integrated, leverage our proprietary technology and are comprised of
multimedia communication semiconductors, multimedia compression algorithms,
network protocols and embedded system design. Our products are used in
applications including voice-over-IP, videoconferencing and video monitoring. We
currently market our products mainly to original equipment manufacturers (OEMs),
and also to distributors, dealers and end users for our video monitoring system
products.
In an effort to expand the available market for our multimedia
communication products, we began developing low-cost consumer videophones and
marketing these products to consumers under the ViaTV brand name in 1997.
However in the fourth quarter of fiscal 1999, we determined that a combination
of factors including the high cost of maintaining a consumer distribution
channel, the slower than expected growth rate of the consumer videophone market,
and the low gross margins typical of a consumer electronics product made it
unlikely that the consumer videophone business would be profitable in the
foreseeable future. Therefore, we announced in April 1999 that we would cease
production of the ViaTV product line and withdraw from our distribution channels
over the subsequent several quarters. We do not expect to be able to generate
revenues from our other products to compensate for the loss of ViaTV revenues
for at least the next twelve months, if at all. If we cannot adequately
compensate for lower revenues with decreased manufacturing overhead expenses and
with lower operating expenses, it could have a material adverse effect on our
business and operating results.
2. BASIS OF PRESENTATION
Our fiscal year ends on the last Thursday on or before March 31. Fiscal
2000 will be a 53 week year, while fiscal 1999 was a 52 week year. Our fiscal
quarters end on the last Thursday on or before the end of each calendar quarter.
The three and six month periods ended September 30, 1999 included 14 weeks and
27 weeks of operations, respectively. The three and six month periods ended
September 24, 1998 included 13 weeks and 26 weeks of operations, respectively.
For purposes of these condensed consolidated financial statements, we have
indicated our fiscal year as ending on March 31 and our interim periods as
ending on September 30.
The accompanying interim condensed consolidated financial statements are
unaudited and have been prepared on substantially the same basis as our annual
financial statements for the
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year ended March 31, 1999. In our opinion, these financial statements reflect
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation of our financial position, results of
operations and cash flows for the periods presented. These financial statements
should be read in conjunction with our audited financial statements for the year
ended March 31, 1999, including notes thereto, included in our fiscal 1999
Annual Report on Form 10-K.
The results of operations for the interim periods included in these
financial statements are not necessarily indicative of the results to be
expected for any future period or the entire fiscal year.
3. BALANCE SHEET DETAIL
(in thousands)
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
<S> <C> <C>
Inventory:
Raw materials......................... $ 216 $ 952
Work-in-process....................... 679 892
Finished goods........................ 773 2,071
------- -------
$ 1,668 $ 3,915
======= =======
</TABLE>
4. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding during the period (denominator). Diluted net income
(loss) 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
common stock options and unvested restricted common stock having a dilutive
effect. The numerators for each period presented are equal to the reported net
loss. Additionally, due to net losses incurred for all periods presented,
weighted average basic and diluted shares outstanding for the respective three
and six month periods are the same. The following equity instruments were not
included in the computations of net income (loss) per share because the effect
on the calculations would be anti-dilutive (in thousands):
<TABLE>
<CAPTION>
Three and Six Month Periods Ended
September 30,
---------------------------------
1999 1998
----- -----
<S> <C> <C>
Common stock options........................ 3,918 3,073
Unvested restricted common stock............ 620 231
----- -----
Total 4,538 3,304
===== =====
</TABLE>
5
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5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), as defined, includes all changes in equity
(net assets) during a period from non-owner sources. For us, the primary
difference between net income (loss) and comprehensive income (loss) is gains
and losses on short-term investments classified as available-for-sale.
Comprehensive income (loss) for the current reporting and comparable periods in
the prior year is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss, as reported ($1,438) ($3,650) ($13,176) ($7,621)
Unrealized gains (losses) on investments -- (78) 193 (62)
------- ------- -------- -------
Comprehensive loss ($1,438) ($3,728) ($12,983) ($7,683)
======= ======= ======== ========
</TABLE>
6. SEGMENT REPORTING
Due to a change 8x8's organizational structure and enhancements in our
systems for internal reporting during the quarter ended September 30, 1999, we
have determined that we have two reportable segments, Broadband Communications
and Video Monitoring, as defined by Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
Due to limitations in our internal reporting systems, it is not practicable to
disclose results for the segments for either the six month period ended
September 30, 1999 or the three and six month periods ended September 30, 1998.
There are no intersegment revenues between the two reportable segments. Shared
support service functions such as human resources, facilities management and
other infrastructure support and overhead aren't allocated, but rather are
included in the Corporate and Other category. In addition, all activities
associated with our ViaTv product line, which has been discontinued as discussed
in Note 1, have been included in the Corporate and Other category. Special
charges determined to be significant are reported separately in the Condensed
Consolidated Statements of Operations and are not assigned or allocated to the
segments. All other accounting policies are applied consistently to the
segments, where applicable.
<TABLE>
<CAPTION>
Three Month Period Ended
September 30, 1999
--------------------------
(In thousands) Revenues Operating Loss
-------- --------------
<S> <C> <C>
Broadband Communications $4,270 $ 301
Video Monitoring 1,392 (455)
Corporate and Other 1,049 (1,413)
------ -------
Total $6,710 $(1,567)
</TABLE>
The only asset allocated by segment is inventory. Inventory allocated to
the Broadband Communications and Video Monitoring segments at September 30,
1999 was approximately $1.0 million and $634,000, respectively.
7. ACQUISITION OF ODISEI
During the first quarter of fiscal 2000, we acquired Odisei S.A., a
privately held, development stage company based in Sophia Antipolis, France,
that develops IP telephony software. Odisei is developing a scalable, Java-based
software solution for managing voice-over-IP networks. The software will run on
a carrier-grade server located at a telephony service provider's site and will
provide complete voice and data services over T1/E1, xDSL or cable communication
links. The condensed consolidated financial statements reflect the acquisition
of Odisei on May 24, 1999 for approximately 2,868,000 shares of our common
stock. In addition, 8x8 issued approximately 154,000 8x8 options in exchange for
certain Odisei options outstanding. Certain of the shares issued to Odisei
employees are subject to repurchase at a price per share of approximately $1.30
if the employee departs prior to vesting. The purchase price of the acquisition
of approximately $13.5 million, which includes $217,000 of
6
<PAGE> 9
estimated acquisition related costs and $648,000 for the exchange of Odisei
options for our options, was used to acquire the net assets of Odisei. The
purchase price has been allocated to tangible assets acquired and liabilities
assumed based on the book value of Odisei's current assets and liabilities,
which we believe approximates their fair value. In addition, we engaged an
independent appraiser to value the intangible assets, including amounts
allocated to Odisei's in-process research and development. The in-process
research and development relates to Odisei's initial product for which
technological feasibility has not been established and is estimated to be
approximately 60% complete. The fair value of the in-process technology was
based on a discounted cash flow model, similar to the traditional "Income
Approach," which discounts expected future cash flows to present value, net of
tax. In developing cash flow projections, revenues were forecasted based on
relevant factors, including aggregate revenue growth rates for the business as a
whole, characteristics of the potential market for the technology and the
anticipated life of the technology. Projected annual revenues for the in-process
research and development projects were assumed to ramp up initially and decline
significantly at the end of the in-process technology's economic life. Operating
expenses and resulting profit margins were forecasted based on the
characteristics and cash flow generating potential of the acquired in-process
technology. Associated risks include the inherent difficulties and uncertainties
in completing the project and thereby achieving technological feasibility, and
risks related to the impact of potential changes in market conditions and
technology. The resulting estimated net cash flows have been discounted at a
rate of 27%. This discount rate was based on the estimated cost of capital plus
an additional discount for the increased risk associated with in-process
technology. Based on the independent appraisal, the value of the acquired Odisei
in-process research and development, which was expensed in the first quarter of
fiscal 2000, is $10.1 million. The excess of the purchase price over the net
tangible and intangible assets acquired and liabilities assumed has been
allocated to goodwill. Amounts allocated to goodwill and workforce are being
amortized on a straight-line basis over five and three years, respectively. The
allocation of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
In-process research and development $10,100
Workforce 200
Odisei net tangible liabilities (246)
Goodwill 3,431
-------
$13,485
=======
</TABLE>
The consolidated results of 8x8 include the results of the operations of
Odisei from the date of the acquisition. Had the acquisition of Odisei taken
place as of the beginning of the fiscal year, the pro forma net loss of 8x8
would have been substantially the same as that reported for the period.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-1 (SOP 98-1), "Software for Internal
Use," which provides guidance on accounting for the cost of computer software
developed or obtained for internal
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use. We adopted SOP 98-1 in fiscal 2000. The adoption of SOP 98-1 did not have a
material impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." We are required to adopt FAS 133 in fiscal
2001. FAS 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. We do not expect that the adoption of FAS 133 will have a
material impact on our consolidated financial statements.
In December 1998, the AICPA issued Statement of Position 98-9 (SOP 98-9),
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions", which amends SOP 97-2, "Software Revenue Recognition" and
supercedes SOP 98-4. We adopted SOP 98-9 in fiscal 2000. The adoption of SOP
98-9 did not have a material impact on our consolidated results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, including but
not limited to those specifically identified as such, that involve risks and
uncertainties. The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding our expectations, beliefs, estimates, intentions
or strategies regarding the future. All forward-looking statements included in
this Report on Form 10-Q are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. You should not place undue reliance on these forward-looking
statements. Our 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
Since June 1995, we have been executing a business strategy designed to
focus our efforts exclusively on the development, manufacture and marketing of
multimedia communication semiconductors, software and systems. To date, we have
marketed our multimedia communication semiconductors and related technology to
OEMs and distributors, mainly for videoconferencing and videophone applications.
This product line includes the LVP, VCP and VCPex semiconductors.
In an effort to expand the available market for our multimedia
communication products, and to capitalize on our vertically integrated
technology, we began developing low-cost consumer videophones and marketing
these products to consumers under the ViaTV brand name in 1997. The ViaTV
videophone enables phone call participants to both hear and see each other while
communicating over a standard analog telephone line. We shipped our first ViaTV
product in February 1997, and over the next two years introduced several new
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videophone products, expanded our distribution channels in North America, Europe
and Asia, and became a leading manufacturer of consumer videophones. However in
the fourth quarter of fiscal 1999, we determined that a combination of factors
including the high cost of maintaining a consumer distribution channel, the
slower than expected growth rate of the consumer videophone market, and the low
gross margins typical of a consumer electronics product made it unlikely that
the consumer videophone business would be profitable in the foreseeable future.
Therefore, we announced in April 1999 that we would cease production of the
ViaTV product line and withdraw from our distribution channels over the
subsequent several quarters. In conjunction with this decision we recorded a
$5.7 million charge associated with the write-off of ViaTV videophone
inventories in the fourth fiscal quarter of 1999. We do not expect to be able to
generate revenues from our other products to compensate for the loss of ViaTV
revenues for at least the next twelve months, if at all. If we cannot adequately
compensate for lower revenues with decreased manufacturing overhead expenses and
with lower operating expenses, it could have a material adverse effect on our
business and operating results.
In June 1998, we entered the market for video monitoring products with our
RSM-1500 Remote Surveillance Module. In August 1999, we announced the RSM-1600
Master Transceiver, an upgraded version of the RSM-1500 module, and the RSM-700
Video/Alarm Expander. The RSM-1500 and RSM-1600 modules enable real-time remote
video monitoring over POTS lines. The target market for video monitoring is
primarily owners of small businesses such as convenience stores and restaurants
who need the ability to view their premises from any remote location in the
world at any time. We currently sell video monitoring products to security
distributors and dealers in North America, and are attempting to expand our
distribution channels into Europe and Asia.
In December 1998, we introduced a new semiconductor product, the Audacity
Internet telephony processor, which combines telephony protocols with audio
compression/decompression algorithms and implements multiple, simultaneous
Internet protocol phone calls on a single integrated circuit. In April 1999, we
announced our Symphony Media Hub, an integrated system product that is based on
the Audacity semiconductor and that connects up to four analog telephone lines
to an IP network. In September 1999, we announced the Audacity-T2 IP Telephone
Processor, an IP phone on a chip. These products reflect our recent efforts to
develop broadband telephony technology. In the three and six month periods ended
September 30, 1999, we realized revenues of approximately $80,000 and $140,000,
respectively, associated with the sale of evaluation units of broadband
telephony systems.
During the first quarter of fiscal 2000, we acquired Odisei S.A., a
privately held, development stage company based in Sophia Antipolis, France,
that develops IP telephony software. Odisei is developing a scalable, Java-based
software solution for managing voice-over-IP networks. The software will run on
a carrier-grade server located at a telephony service provider's site and will
provide complete voice and data services over T1/E1, xDSL or cable communication
links. The condensed consolidated financial statements reflect the acquisition
of Odisei on May 24, 1999 for approximately 2,868,000 shares of our common
stock. In addition, 8x8 issued approximately 154,000 8x8 options in exchange for
certain Odisei options outstanding. Certain of the shares issued to Odisei
employees are subject to
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repurchase at a price per share of approx. $1.30 if the employee departs prior
to vesting. The purchase price of the acquisition of approximately $13.5
million, which includes $217,000 of estimated acquisition related costs and
$648,000 for the exchange of Odisei options for our options, was used to acquire
the net assets of Odisei. The purchase price has been allocated to tangible
assets acquired and liabilities assumed based on the book value of Odisei's
current assets and liabilities, which we believe approximates their fair value.
In addition, we engaged an independent appraiser to value the intangible assets,
including amounts allocated to Odisei's in-process research and development. The
in-process research and development relates to Odisei's initial product for
which technological feasibility has not been established and is estimated to be
approximately 60% complete. The fair value of the in-process technology was
based on a discounted cash flow model, similar to the traditional "Income
Approach," which discounts expected future cash flows to present value, net of
tax. In developing cash flow projections, revenues were forecasted based on
relevant factors, including aggregate revenue growth rates for the business as a
whole, characteristics of the potential market for the technology and the
anticipated life of the technology. Projected annual revenues for the in-process
research and development projects were assumed to ramp up initially and decline
significantly at the end of the in-process technology's economic life. Operating
expenses and resulting profit margins were forecasted based on the
characteristics and cash flow generating potential of the acquired in-process
technology. Associated risks include the inherent difficulties and uncertainties
in completing the project and thereby achieving technological feasibility, and
risks related to the impact of potential changes in market conditions and
technology. The resulting estimated net cash flows have been discounted at a
rate of 27%. This discount rate was based on the estimated cost of capital plus
an additional discount for the increased risk associated with in-process
technology. Based on the independent appraisal, the value of the acquired Odisei
in-process research and development, which was expensed in the first quarter of
fiscal 2000, is $10.1 million. The excess of the purchase price over the net
tangible and intangible assets acquired and liabilities assumed has been
allocated to goodwill. Amounts allocated to goodwill and workforce are being
amortized on a straight-line basis over five and three years, respectively. The
allocation of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
In-process research and development $10,100
Workforce 200
Odisei net tangible liabilities (246)
Goodwill 3,431
-------
$13,485
=======
</TABLE>
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Results of Operations
The following discussion should be read in conjunction with our Condensed
Consolidated Statements of Operations and the notes thereto:
Revenues
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------------- -----------------------------
($ in millions) 1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product revenues:
Multimedia communication
semiconductor $2.7 $3.5 $ 5.3 $ 6.6
Video monitoring 1.4 0.6 2.9 0.9
Consumer videophone 1.0 4.3 2.5 7.4
Broadband telephony 0.1 -- 0.1 --
---- ---- ----- -----
Total product revenues $5.2 78% $8.4 93% $10.8 86% $14.9 93%
License and other revenues 1.5 22% 0.6 7% 1.8 14% 1.2 7%
---- --- ---- --- ----- --- ----- ---
Total revenues $6.7 100% $9.0 100% $12.6 100% $16.1 100%
==== === ==== === ===== === ===== ===
</TABLE>
Total product revenues decreased by $3.2 million in the second quarter of
fiscal 2000 as compared to the second quarter of fiscal 1999, and decreased by
$4.1 million in the first six months of fiscal 2000 as compared to the first six
months of fiscal 1999. The decrease in product revenues is due to a decrease in
both units sold and ASPs for our ViaTV products, due to our exit from the
consumer videophone market, and in unit shipments of our multimedia
communication semiconductor products. These decreases were partially offset by
an increase in sales of our video monitoring systems products.
License and other revenues consist of technology licenses, including
royalties required under such licenses, and nonrecurring engineering fees for
services that we perform for our customers. License and other revenues increased
by $868,000 in the second quarter of fiscal 2000 as compared to the second
quarter of fiscal 1999, and increased by $613,000 in the first six months of
fiscal 2000 as compared to the first six months of fiscal 1999. There can be no
assurance that we will receive any revenues from licensing or other such
arrangements in the future. See "Factors That May Affect Future Results--No
Assurance of Future License and Other Revenues" and "Factors That May Affect
Future Results--Dependence on Key Customers."
No customer represented 10% or more of our total revenues for the quarter
ended September 30, 1999. Revenues derived from ViaTV products sold-through by
one distribution customer represented approximately 11% of our total revenues
for the quarter ended September 30, 1998. No customer represented 10% or more of
our total revenues for the six month periods ended September 30, 1999 and 1998,
respectively.
11
<PAGE> 14
Revenues derived from customers outside of the United States as a
percentage of total revenues were as follows (See "Factors That May Affect
Future Results--International Operations."):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Asia Pacific 21% 31% 19% 27%
Europe 21% 18% 22% 19%
-- -- -- --
Total 42% 49% 41% 46%
== == == ==
</TABLE>
Gross Profit
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ ----------------
($ in millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross profit from product
revenues $3.8 $2.5 $6.1 $4.6
Gross margin 73% 30% 56% 31%
Gross profit from license
and other revenues $1.4 $0.5 $1.7 $1.2
Gross margin 93% 83% 94% 96%
</TABLE>
Product gross margins increased to 73% in the second quarter of fiscal 2000
as compared to 30% in the second quarter of fiscal 1999, and increased to 56% in
the first six months of fiscal 2000 from 31% for the first six months of fiscal
1999. The increase in product gross margins during the three and six month
periods ended September 30, 1999 as compared to the prior year is due to an
increase in higher margin multimedia communication semiconductor and video
monitoring system revenues as a percentage of total revenues and due to
significantly higher gross margins realized on sales of our ViaTV products.
As discussed above, we recorded a $5.7 million reserve associated with the
write-off of ViaTV products in the fourth quarter of fiscal 1999 due to our
decision to cease production of the ViaTV product line and withdraw from our
distribution channels. Gross margins on ViaTV product sales during the three and
six month periods ended September 30, 1999 were impacted significantly as we
released excess reserves due to much better than expected ViaTV unit sales and
related selling prices.
Gross profit from license and other revenues increased by approximately
$860,000 in the second quarter of fiscal 2000 as compared to the second quarter
of fiscal 1999, and increased by approximately $605,000 in the first six months
of fiscal 2000 as compared to the first six months of fiscal 1999. There can be
no assurance that we will receive any revenues from such license and other
revenue sources in the future. See "Factors That May Affect Future Results--No
Assurance of Future License and Other Revenues."
The markets for our products are characterized by falling average selling
prices, which could have a material adverse effect on our future business and
operating results if we cannot
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<PAGE> 15
achieve lower cost of sales and/or higher sales volumes. We expect that, as a
result of competitive pressures and other factors, gross profit as a percentage
of revenue for our multimedia communication semiconductor products will likely
decrease for the foreseeable future. Gross profit as a percent of revenue is
substantially lower for the sales of video monitoring systems products than for
sales of our multimedia communication semiconductors. If our systems product
revenues grow as a percentage of total product revenue, we expect that gross
profit as a percentage of total product revenue will decrease. See "Factors That
May Affect Future Results--Fluctuations in Operating Results."
Research and Development Expenses
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ ----------------
($ in millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Research and development $2.9 $2.8 $5.3 $5.4
As a % of total revenues 43% 31% 42% 34%
</TABLE>
Research and development expenses consist primarily of personnel, system
prototype design and fabrication, mask, prototype wafer and equipment costs
necessary for us to conduct our development efforts. Research and development
costs, including software development costs, are expensed as incurred. Research
and development expenses increased by $147,000 in the second quarter of fiscal
2000 as compared to the second quarter of fiscal 1999, and decreased by
approximately $82,000 in the first six months of fiscal 2000 as compared to the
first six months of fiscal 1999. Higher research and development expenses during
the second quarter of fiscal 2000 as compared to the comparable period in the
prior year reflects increased expenses associated with our Odisei subsidiary,
which we acquired in May 1999. These increases were offset primarily by lower
ViaTV product design and prototype costs due to the discontinuation of ViaTV
product development efforts in April 1999.
We expect to continue to allocate substantial resources to research and
development. However, future research and development costs may vary both in
absolute dollars and as a percentage of total revenues. See "Factors That May
Affect Future Results--Rapid Technological Change; Dependence on New Product
Introduction."
Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------ ----------------
($ in millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selling, general and
administrative $3.8 $4.3 $7.4 $8.7
As a % of total revenues 57% 48% 59% 54%
</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
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<PAGE> 16
promotional expenses. Selling, general and administrative expenses decreased by
$504,000 in the second quarter of fiscal 2000 as compared to the second quarter
of fiscal 1999, and decreased by approximately $1.3 million in the first six
months of fiscal 2000 as compared to the first six months of fiscal 1999. These
decreases are due to lower costs associated with the marketing, advertising and
promotion of the ViaTV product line and lower headcount required to support
these activities as we exited from the consumer videophone business. As we
introduce and promote new video monitoring and broadband telephony products, and
attempt to expand distribution channels for such products, 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."
In-process Research and Development and Amortization of Intangibles
As part of the May 1999 acquisition of Odisei, we recorded intangible
assets related to goodwill and workforce that are being amortized on a
straight-line basis over five and three years, respectively. Amortization of
goodwill and workforce charged to operations was $185,000 and $235,000 in the
three and six month periods ended September 30, 1999, respectively. In addition,
we incurred an in-process research and development charge of $10.1 million in
the first quarter of fiscal 2000 related to the acquisition of Odisei.
Other Income, Net
In the second quarters of fiscal 2000 and 1999, other income, net, was
$195,000 and $303,000, respectively, and consisted primary of interest income
earned on our cash equivalents. Other income, net, was $2.1 million for the six
month period ended September 30, 1999 compared to $596,000 for the comparable
period in the prior year. In the first quarter of fiscal 2000, we realized $1.9
million of other income from the sale of a nonmarketable equity investment. In
addition, we earned interest income on our cash equivalents in the first six
months of fiscal 2000 of approximately $414,000 which was partially offset by
losses realized on the sale of certain of our cash equivalent investments.
Provision for Income Taxes
The tax provisions for the three and six month periods ended September 30,
1999 represented certain foreign withholding taxes. There was no tax provision
for the three and six month periods ended September 30, 1998 due to net losses
incurred.
Year 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As the Year 2000
approaches, these code fields will need to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20." We have
inventoried and assessed the readiness of our products, critical internal
computer systems, and third-party equipment and software utilized by 8x8 to
handle Year 2000
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<PAGE> 17
issues. We have not initiated an assessment of our non-critical internal
computer, third-party equipment and software systems. Based upon our
assessments, all of our products are Year 2000 ready. With regard to our
critical internal computer systems, we completed the implementation of an
enterprise-wide database and information management system that is Year 2000
ready during the quarter ended March 31, 1999. The total cost of the system
implementation project was approximately $1.6 million. We do not believe that
the incremental project cost associated with Year 2000 readiness was material as
the feature is included with a system we purchased to satisfy our business
needs. As such, we have not allocated any portion of the total project cost to
the Year 2000 issue.
We have received correspondence from all of our critical sole source
component suppliers and subcontract manufacturers indicating that they are Year
2000 ready. We continue to assess the possible effects on our operations of the
Year 2000 readiness of subcontract manufacturers, component suppliers and other
providers of goods and services to 8x8. We expect that this assessment, as well
as related remediation and contingency planning activities, will be on-going
throughout calendar year 1999. Failure to address Year 2000 issues by our
subcontract manufacturers, component suppliers, and other providers of goods and
services could have a material adverse impact on our business and operating
results. We are also subject to external forces that might generally affect
industry and commerce, such as utility or transportation company Year 2000
compliance failures and related service interruptions. We do not currently have
any information concerning the Year 2000 readiness status of our customers. If
our current or future customers fail to achieve Year 2000 readiness or if they
divert technology expenditures to address Year 2000 readiness problems, our
business could suffer.
The total estimated cost to be incurred by 8x8 regarding the testing of
current products for Year 2000 readiness, and answering and responding to
customer requests related to Year 2000 issues, including both incremental
spending and redeployed resources, is currently not expected to exceed $100,000.
The total cost estimate does not include costs of internal software and hardware
replaced in the normal course of business. In some instances, the installation
schedule of new software and hardware in the normal course of business is being
accelerated to also afford a solution to Year 2000 readiness issues.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. To attempt to mitigate the impact of Year 2000 related risks, we
have developed a contingency plan to address situations that may result if we
are unable to achieve Year 2000 readiness of our critical operations. However,
even if we believe our contingency plans are adequate, some problems may not be
identified or corrected in time to prevent material adverse consequences to 8x8.
Additionally, if we fail to satisfactorily resolve Year 2000 issues in a timely
manner, we could be exposed to claims by third parties. Some industry analysts
have predicted significant litigation regarding Year 2000 readiness issues,
however, because of the unprecedented nature of such litigation, it is uncertain
whether or to what extent we may be affected by it.
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<PAGE> 18
Liquidity and Capital Resources
As of September 30, 1999, we had cash and liquid investments totaling $16.5
million, representing an increase of $717,000 from March 31, 1999. We currently
have no bank borrowing arrangements.
Cash used in operations of $862,000 in the first six months of fiscal 2000
is primarily attributable to the net loss of $13.2 million, decreases in
deferred revenue and accounts payable of $2.5 million and $410,000,
respectively, and a net gain resulting from the sale of investments of $1.7
million. Cash used in operations was partially offset by decreases in accounts
receivable, net, and inventory of $4.3 million and $2.2 million, respectively,
an increase in accrued compensation of $286,000, and noncash items, including a
charge for purchased in-process research and development of $10.1 million and
depreciation and amortization of $819,000. Cash used by operations in the first
six months of fiscal 1999 reflected a net loss of $7.6 million, increases of
$553,000 in inventory and $498,000 in prepaid expenses and other assets and a
$624,000 decrease in accounts payable, offset primarily by a decrease of
$653,000 in accounts receivable, and noncash items.
Cash provided by investing activities in the six month period ended
September 30, 1999 is primarily attributable to proceeds from the sale of a
nonmarketable equity investment of $1.9 million, offset by capital expenditures
of $627,000 and net cash paid of $120,000 related to the acquisition of Odisei.
Cash used in investing activities in the six month period ended September 30,
1998 is primarily attributable to capital expenditures of $934,000 and the
repurchase of common stock from minority shareholders of a subsidiary of 8x8 in
conjunction with its merger with 8x8 in August 1998.
Cash provided by financing activities in the six month periods ended
September 30, 1999 and 1998 consisted primarily of proceeds from the repayment
of stockholders' notes receivable and net proceeds from sales of our common
stock upon the exercise of employee stock options.
We will need to raise additional capital to support our anticipated growth, and
failure to do so in a timely manner may cause us to delay our plans for growth.
We believe that we will be able to fund planned expenditures and satisfy
our cash requirements for at least the next twelve months from cash flow from
operations, if any, and existing cash balances. As of September 30, 1999, we had
approximately $16.5 million in cash and cash equivalents. However, we currently
estimate that we will be required to raise additional financing at some point
over the next twelve months and if we are unable to do so, our growth may be
limited. We may also seek to exploit business opportunities that will require
additional capital from equity or debt sources in order to finance 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 us to obtain additional financing earlier than otherwise expected.
We may not be able to obtain additional financing as needed on acceptable terms
or at all which would force us to delay our plans for growth and implementation
of our strategy.
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<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial market risk includes risks associated with international
operations and related foreign currencies. We derive a significant portion of
our revenues from customers in Europe and Asia. In order to reduce the risk from
fluctuation in foreign exchange rates, the vast majority of our sales are
denominated in U.S. dollars. In addition, all of our arrangements with our
semiconductor foundry and assembly vendors, and with subcontract manufacturers
for our video monitoring systems, are denominated in U.S. dollars. We have
subsidiaries in Europe, and as such we are exposed to market risk from changes
in exchange rates. The Company has not entered into any currency hedging
activities. To date, the exposure to the Company related to exchange rate
volatility has not been significant, however, there can be no assurance that
there will not be a material impact in the future.
Factors That May Affect Future Results
The following factors should be considered in conjunction with the
information in this Report on Form 10-Q.
We have a history of losses and we are uncertain as to our future profitability.
We recorded an operating loss of $15.2 million in the six month period
ended September 30, 1999. In addition, we recorded operating losses for the year
ended March 31, 1999 and in three of the four quarters in fiscal 1998. We would
not have been profitable in fiscal 1998 had we not received nonrecurring license
and other revenues. Revenues fluctuated from $19.1 million in fiscal 1997 to
$49.8 million in fiscal 1998 to $31.7 million in fiscal 1999. In view of our
historical operating losses, we cannot be certain that we will be able to
achieve profitability on either an annual or quarterly basis.
Our operating results may decline from previous periods if we are unable to
secure future license and other sources of revenues.
In the past, we have received substantial revenues from licensing of
technology. License and other revenues, all of which were nonrecurring, were
$1.8 million and $1.2 million for the six month periods ended September 30, 1999
and 1998, respectively, and were $5.5 million and $14.5 million in the fiscal
years ended March 31, 1999 and 1998, respectively. If we do not receive
additional revenues from licensing of our technology in the future, our
operating results may decline from previous periods.
We have discontinued our ViaTV product line and if we cannot lower expenses and
sell remaining inventory, our operating results may decline.
We announced in April 1999 that we would cease production of our ViaTV
product line and withdraw from our distribution channels over the next several
quarters. In the second quarter and six months ended September 30, 1999, ViaTV
product revenues represented 16% and 20% of total product revenues,
respectively. For the years ended March 31, 1999 and 1998, ViaTV revenues
represented 49% and 38% of product revenues, respectively. With the
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<PAGE> 20
discontinuation of production, it is not clear how much, if any, revenue we will
be able to generate from selling our existing inventories of ViaTVs. We do not
expect to be able to generate revenues from our other products to compensate for
the loss of ViaTV revenues for at least the next twelve months, if at all. If we
cannot adequately compensate for lower revenues with decreased manufacturing
overhead expenses and with lower operating expenses, it could have a material
adverse effect on our business and operating results.
Our operating results historically have been subject to increased
seasonality with sales higher during our third fiscal quarter, corresponding to
the Christmas shopping season. Our discontinuation of ViaTV products may result
in substantially different patterns in operating results.
The growth of our business and future profitability depends on future broadband
telephony revenue.
We believe that our business and future profitability will be largely
dependent on widespread market acceptance of our broadband telephony products.
Neither our multimedia communications semiconductor business nor our video
monitoring business have provided, nor are they expected to provide, sufficient
revenues to profitably operate our business. To date, we have not sold any
significant quantities of broadband telephony products. If we are not able to
generate revenue selling into the broadband telephony market, it would have a
material adverse effect on our business and operating results.
The growth of our business depends on the growth of the IP telephony market.
Success of our broadband telephony product strategy assumes that there will
be future demand for IP telephony systems. In order for the IP telephony market
to continue to grow, several things need to occur. Telephone service providers
must continue to invest in the deployment of high speed broadband networks to
residential and commercial customers. IP networks must improve quality of
service for real-time communications, managing effects such as packet jitter,
packet loss and unreliable bandwidth, so that toll-quality service can be
provided. IP telephony equipment must achieve the five-nines reliability that
users of the public switched telephone network have come to expect from their
telephone service. IP telephony service providers must offer cost and feature
benefits to their customers that are sufficient to cause the customers to switch
away from traditional telephony service providers. If any or all of these
factors fail to occur our business will not grow.
Our future operating results may not follow past trends due to many factors and
any of these could cause our stock price to fall.
Our historical operating results have fluctuated significantly and will
likely continue to fluctuate in the future, and a decline in our operating
results could cause our stock price to fall. On an annual and a quarterly basis
there are a number of factors that may affect our operating results, many of
which are outside our control. These include, but are not limited to:
o changes in market demand;
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<PAGE> 21
o the timing of customer orders;
o competitive market conditions;
o lengthy sales cycles, regulatory approval cycles;
o new product introductions by us or our competitors;
o market acceptance of new or existing products;
o the cost and availability of components;
o the mix of our customer base and sales channels;
o the mix of products sold;
o the management of inventory;
o the level of international sales;
o continued compliance with industry standards; and
o general economic conditions.
Our 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 our products
are characterized by falling average selling prices. We expect that, as a result
of competitive pressures and other factors, gross profit as a percentage of
revenue for our semiconductor products will likely decrease for the foreseeable
future. The market for IP telephony semiconductors is likely to be a high volume
market characterized by commodity pricing. We will not be able to generate
average selling prices or gross margins for our broadband telephony
semiconductors similar to those that we have historically commanded for our
videoconferencing semiconductors. In addition, the gross margins for our video
monitoring and broadband systems products are, and will likely continue to be,
substantially lower than the gross margins for our semiconductors. In the likely
event that we encounter significant price competition in the markets for our
products, we could be at a significant disadvantage compared to our 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 our business
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 our 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 our revenues may be
magnified by our inability to adjust spending to compensate for such shortfall.
Announcements by us or our competitors of new products and technologies could
cause customers to defer purchases of our existing products, which would also
have a material adverse effect on our business and operating results.
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<PAGE> 22
As a result of these and other factors, it is likely that in some future
period our 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 our common stock.
We may not be able to manage our inventory levels effectively which may lead to
inventory obsolescence which would force us to lower our prices.
Our products have lead times of up to several months, and are built to
forecasts that are necessarily imprecise. Because of our practice of building
our products to necessarily imprecise forecasts, it is likely that, from time to
time, we will have either excess or insufficient product inventory. For example,
we had significant inventory quantities of ViaTV products, both on hand and at
our retail distributors when we discontinued production in April 1999. In the
fourth quarter ended March 31, 1999, cost of product revenues included a $5.7
million charge associated with the write off of inventories related to our
decision to cease production of our ViaTV product line. Excess inventory levels
would subject us to the risk of inventory obsolescence and the risk that our
selling prices may drop below our inventory costs, while insufficient levels of
inventory may negatively affect relations with customers. Any of these factors
could have a material adverse effect on our operating results and business.
We will need to raise additional capital to support our growth, and failure to
do so in a timely manner may cause us to delay our plans for growth.
We believe that we will be able to fund planned expenditures and satisfy
our cash requirements for at least the next twelve months from cash flow from
operations, if any, and existing cash balances. As of September 30, 1999, we had
approximately $16.5 million in cash and cash equivalents. However, we currently
estimate that we will be required to raise additional financing at some point
over the next twelve months and if we are unable to do so, our growth may be
limited. We may also seek to exploit business opportunities that will require
additional capital from equity or debt sources in order to finance 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 us to obtain additional financing earlier than otherwise expected.
We may not be able to obtain additional financing as needed on acceptable terms
or at all which would force us to delay our plans for growth and implementation
of our strategy.
We depend on purchase orders from key customers and failure to receive
significant purchase orders in the future would cause a decline in our operating
results.
Historically, a significant portion of our sales have been to relatively
few customers, although the composition of these customers has varied. Revenues
from our ten largest customers for the second quarter and six months ended
September 30, 1999 accounted for approximately 49% and 45%, respectively, of
total revenues. Revenues from our ten largest customers for the fiscal years
ended March 31, 1999 and 1998 accounted for 40% and 61%, respectively, of total
revenues. 3Com accounted for 20% of total revenues during the year ended March
31, 1998. Substantially all of our product sales have been made, and are
expected to continue to be made, on a purchase order basis. None of our
customers has entered into a
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<PAGE> 23
long-term agreement requiring it to purchase our products. In the future, we
will need to gain purchase orders for our products to earn additional revenue.
Further, all of our license and other revenues are nonrecurring.
Technical and quality difficulties could impede market acceptance of our video
monitoring products which would limit our growth.
Due to bandwidth constraints, our video monitoring products transmit video
over a plain old telephone system, which is known as POTS, at a frame rate and
resolution that are significantly less than the frame rate and resolution of
standard closed circuit TV monitors. Furthermore, our video monitoring products
transmit audio over a POTS line with a fidelity that is often less than toll
quality and that degrades in the presence of background noise. The POTS
infrastructure varies widely in configuration and integrity, can degrade, make
unreliable or even eliminate the digital connections between our video
monitoring products. The security industry demands a high degree of quality,
robustness and reliability of its products. Actual or perceived technical
difficulties or insufficient video or audio quality could cause our existing
customers to forego future purchases or cause potential customers to seek
alternative solutions, either of which would limit the growth of our business.
Competition
We compete with both manufacturers of digital signal processing
semiconductors and gateway products developed for the growing VoIP marketplace.
We also compete with manufacturers of multimedia communication semiconductors
and systems. The markets for our products are characterized by intense
competition, declining average selling prices and rapid technological change.
Broadband Telephony and Videoconferencing Semiconductors
The principal competitive factors in the market for broadband telephony and
videoconferencing semiconductors include product definition, product design,
system integration, chip size, functionality, time-to-market, adherence to
industry standards, price and reliability. We have a number of competitors in
this market including Analog Devices, Audio Codes, Broadcom Corporation,
Conexent, DSP Group, Lucent Technologies, Motorola, Inc., Neo Paradigm Labs,
Philips Electronics, Texas Instruments, Inc. and Winbond Electronics. Certain of
our competitors for broadband telephony and videoconferencing semiconductors
maintain their own semiconductor foundries and may therefore benefit from
certain capacity, cost and technical advantages.
Principle competitive factors in the market for VoIP gateway products
include product definition, product design, system integration, system
functionality, time-to-market, interoperability with common network equipment,
adherence to industry standards, price and reliability. Currently there are a
large number of system suppliers offering carrier-class gateway products such as
Ascend Communications, Inc., Cisco Systems, Inc., Clarent Corporation, Nokia
Corporation, Nortel Networks, Nuera Communications, Inc., VocalTec
Communications, and Lucent Technologies. At this time there is limited
competition in the residential and small office VoIP gateway market. We expect,
however, that this market will
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<PAGE> 24
be characterized by intense competition, declining average selling price and
rapid technology change. In addition, our presence in the VoIP systems business
may result in certain customers or potential customers perceiving us as a
competitor or potential competitor, which may be used by other semiconductor
manufacturers to their advantage.
Video Monitoring Products
The competitive factors in the market for our video monitoring products
include audio and video quality, acceptable phone line 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. We expect intense competition for our video
monitoring products. Competition is expected from:
o Large security equipment manufacturers. We may face intense
competition for our video monitoring products from many well known,
established suppliers of security equipment, such as Pelco, and Ultrek
Electronics Limited who have continually reduced the cost of their
products and may enter the market for lower cost video communication
products.
o Personal computer system and software manufacturers. Potential
customers for our RSM-1500 products may elect instead to buy PCs
pre-equipped with video communication software capabilities or a
third-party software application for use on a PC. As a result, we face
or may face competition from Intel, and PC software suppliers such as
Microsoft, Netscape, Javelin and Prism.
ADVIS, C-Phone Corporation, Leadtek Research, Inc., Truedox Technology
Corporation and Video Communication Systems GmbH are among the companies selling
low-cost products targeted specifically at the video monitoring marketplace. We
expect that additional companies will introduce products that compete with our
video monitoring products in the future. Certain manufacturers or potential
manufacturers of low-cost videophones have licensed or purchased, or may license
or purchase, our technology and semiconductors in order to do so. KME and 3Com
in particular have licensed substantially all of the technology underlying our
ViaTV products, and may use such technology to introduce products that compete
with our video monitoring products. Each of Leadtek Research, Inc. and Truedox
Technology Corporation license our technology and purchase our multimedia
communication semiconductors. We aggressively license our semiconductor,
software and systems technology and sell our semiconductor and system products
to third parties. Thus, it is likely that other OEM customers will become
competitors with respect to our video monitoring products business. Other
competitors may purchase multimedia communication semiconductors and related
technology from other suppliers.
Our reliance on developing vertically integrated technology, comprising
systems, circuit boards, software and semiconductors, places a significant
strain on us and on our research and development resources. Competitors that
focus on one aspect of technology, such as systems or semiconductors, may have a
considerable advantage. In addition, many of our current and potential
competitors have longer operating histories, are substantially larger, and have
greater financial, manufacturing, marketing, technical and other resources. Many
of our competitors
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also have greater name recognition and a larger installed base of products.
Competition in our markets may result in significant price reductions. As a
result of their greater resources, many current and potential competitors may be
better able to initiate and withstand significant price competition or downturns
in the economy. There can be no assurance that we will be able to continue to
compete effectively, and any failure to do so would have a material adverse
effect on our business and operating results.
Our markets are subject to rapid technological change and we depend on new
product introduction in order to maintain and grow our business.
IP telephony and video monitoring are emerging markets and are
characterized by rapid changes in customer requirements, frequent introductions
of new and enhanced products, and continuing and rapid technological
advancement. To compete successfully, we 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. Our success in designing, developing, manufacturing and selling
such products will depend on a variety of factors, including:
o the identification of market demand for new products;
o product selection;
o timely implementation of product design and development;
o product performance;
o cost-effectiveness of products under development;
o effective manufacturing processes; and
o the success of promotional efforts.
We have in the past experienced delays in the development of new products
and the enhancement of existing products, and such delays will likely occur in
the future. If we are 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 our operating results would decline and our business would not grow.
If we do not develop and maintain successful partnerships for broadband
telephony products, we may not be able to successfully market our solutions.
We are entering into new market areas and our success is partly dependent
on our ability to forge new marketing and engineering partnerships. IP telephony
communications systems are extremely complex and no single company possesses all
the required technology components needed to build a complete end to end
solution. Partnerships will be required to augment our development programs and
to assist us in marketing complete solutions to our customer base. We may not be
able to develop such partnerships in the course of our product development. Even
if we do establish the necessary partnerships, we may not be able to adequately
capitalize on these partnerships to aid in the success of our business.
23
<PAGE> 26
Inability to protect our proprietary technology or infringement by us of a third
party's proprietary technology would disrupt our business.
We rely in part on trademark, copyright and trade secret law to protect our
intellectual property in the United States and abroad. We seek to protect our
software, documentation and other written materials under trade secret and
copyright law, which afford only limited protection. We also rely in part on
patent law to protect our intellectual property in the United States and abroad.
We currently hold thirteen United States patents, including patents relating to
programmable integrated circuit architectures, telephone control arrangements,
software structures and memory architecture technology, and have a number of
United States and foreign patent applications pending. We cannot predict whether
such patent applications will result in an issued patent. We may not be able to
protect our proprietary rights in the United States or abroad (where effective
intellectual property protection may be unavailable or limited) and competitors
may independently develop technologies that are similar or superior to our
technology, duplicate our technology or design around any patent of ours. We
have in the past licensed and in the future expect to continue licensing our
technology to others, many of whom are located or may be located abroad. There
are no assurances that such licensees will protect our technology from
misappropriation. Moreover, litigation may be necessary in the future to enforce
our 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 our
business and operating results.
There has been substantial litigation in the semiconductor, electronics and
related industries regarding intellectual property rights, and from time to time
third parties may claim infringement by us of their intellectual property
rights. Our broad range of technology, including systems, digital and analog
circuits, software and semiconductors, increases the likelihood that third
parties may claim infringement by us of their intellectual property rights. If
we were found to be infringing on the intellectual property rights of any third
party, we could be subject to liabilities for such infringement, which could be
material, and we 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 our business and operating results. From time to
time, we have received, and may continue to receive in the future, notices of
claims of infringement, misappropriation or misuse of other parties' proprietary
rights. There can be no assurance that we will prevail in these discussions and
actions, or that other actions alleging infringement by the Company of
third-party patents will not be asserted or prosecuted against the Company.
We rely on 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 our business and operating results.
24
<PAGE> 27
The failure of IP networks to meet the reliability and quality standards
required for voice communications would render our products obsolete.
Circuit-switched networks such as the public switched telephone network
feature a very high reliability, with a guaranteed quality of service. The
common standard for reliability of carrier-grade real-time voice communications
is 99.999%, meaning that the network can be down for only a few minutes per
year. In addition, such networks have imperceptible delay and consistently
satisfactory audio quality. Emerging broadband IP networks such as LANs, WANs
and the Internet, or emerging last mile technologies such as cable, DSL and
wireless local loop will not be used for telephony unless such networks and
technologies can provide reliability and quality consistent with these
standards.
Our products must comply with industry standards and FCC regulations, and
changes may require us to modify existing products.
In addition to reliability and quality standards, the market acceptance of
telephony over broadband IP networks is dependent upon the adoption of industry
standards so that products from multiple manufacturers are able to communicate
with each other. Broadband telephony products rely heavily on standards such as
H.323, SGCP, MGCP, and H.GCP to interoperate with other vendors' equipment.
There is currently a lack of agreement among industry leaders about which
standard should be used for a particular application, and about the definition
of the standards themselves. Furthermore, the industry has had difficulty
achieving true multivendor interoperability for highly complex standards such as
H.323. We also must comply with certain rules and regulations of the Federal
Communications Commission regarding electromagnetic radiation and safety
standards established by Underwriters Laboratories as well as similar
regulations and standards applicable in other countries. Standards are
continuously being modified and replaced. As standards evolve, we may be
required to modify our existing products or develop and support new versions of
our products. The failure of our products to comply, or delays in compliance,
with various existing and evolving industry standards could delay or interrupt
volume production of our broadband telephony products, which would have a
material adverse effect on our business and operating results.
Future regulation or legislation could restrict our business or increase our
cost of doing business.
At present there are few laws or regulations that specifically address
access to or commerce on the Internet, including broadband IP telephony. We are
unable to predict the impact, if any, that future legislation, legal decisions
or regulations concerning the Internet may have on our business, financial
condition and results of operations. Regulation may be targeted towards, among
other things, assessing access or settlement charges, imposing tariffs or
imposing regulations based on encryption concerns or the characteristics and
quality of products and services, which could restrict our business or increase
our cost of doing business. The increasing growth of the broadband IP telephony
market and popularity of broadband IP telephony products and services heighten
the risk that governments will seek to regulate broadband IP telephony and the
Internet. In addition, large, established telecommunications
25
<PAGE> 28
companies may devote substantial lobbying efforts to influence the regulation of
the broadband IP telephony market, which may be contrary to our interests.
We may transition to smaller geometry process technologies and higher levels of
design integration which could disrupt our business.
We continuously evaluate the benefits, on an integrated circuit,
product-by-product basis, of migrating to smaller geometry process technologies
in order to reduce costs. We have commenced migration of certain future products
to smaller geometry processes. We believe that the transition of our products to
increasingly smaller geometries will be important for us to remain competitive.
We have in the past experienced difficulty in migrating to new manufacturing
processes, which has resulted and could continue to result in reduced yields,
delays in product deliveries and increased expense levels. Moreover, we are
dependent on relationships with our foundries and their partners to migrate to
smaller geometry processes successfully. If any such transition is substantially
delayed or inefficiently implemented we may experience delays in product
introductions and incur increased expenses. As smaller geometry processes become
more prevalent, we expect to integrate greater levels of functionality as well
as customer and third-party intellectual property into our products. Some of
this intellectual property includes analog components for which we have little
or no experience or in-house expertise. We cannot predict whether higher levels
of design integration or the use of third-party intellectual property will
adversely affect our ability to deliver new integrated products on a timely
basis, or at all.
If we discover product defects, we may have product-related liabilities which
may cause us to lose revenues or delay market acceptance of our products.
Products as complex as those offered by us frequently contain errors,
defects and functional limitations when first introduced or as new versions are
released. We have in the past experienced such errors, defects or functional
limitations. We sell products into markets that are extremely demanding of
robust, reliable, fully functional products. Therefore delivery of products with
production defects or reliability, quality or compatibility problems could
significantly delay or hinder market acceptance of such products, which could
damage our credibility with our customers and adversely affect our ability to
retain our existing customers and to attract new customers. Moreover, such
errors, defects or functional limitations could cause problems, interruptions,
delays or a cessation of sales to our customers. Alleviating such problems may
require significant expenditures of capital and resources by us. Despite testing
by us, our suppliers or our customers may find errors, defects or functional
limitations in new products after commencement of commercial production,
resulting in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from our other
development efforts, product repair or replacement costs, claims by our
customers or others against us, or the loss of credibility with our current and
prospective customers.
Manufacturing
We outsource the manufacturing of our semiconductors and our broadband
telephony and video monitoring system products to independent foundries and
subcontract manufacturers, respectively. Our primary semiconductor manufacturer
is Taiwan Semiconductor
26
<PAGE> 29
Manufacturing Corporation. Subcontract manufacturers include EFA Corporation in
Taiwan and Flash Electronics in Fremont, California. We also rely on Amkor/Anam
Electronics in South Korea for packaging and testing of our semiconductors. We
do not have long-term purchase agreements with our subcontract manufacturers or
our component suppliers. There can be no assurance that our subcontract
manufacturers will be able or willing to reliably manufacture our products, or
that our component suppliers will be able or willing to reliably supply
components for our products, in volumes, on a cost effective basis or in a
timely manner. We may experience difficulties due to our reliance on independent
semiconductor foundries, subcontract manufacturers and component suppliers that
could have a material adverse effect on our business and operating results.
In addition, from time to time we may issue non-cancelable purchase orders
to our third-party manufacturers for raw materials used in our video monitoring
or other potential system-level products to ensure availability for long
lead-time items or to take advantage of favorable pricing terms. If we should
experience decreased demand for our video monitoring products or future
system-level products, we would still be required to take delivery of and make
payment for such raw materials. In the event of a significant decrease in system
level product demand, such purchase commitments could have a material adverse
effect on our business and operating results.
We have significant international operations, which subjects us to risks that
could cause our operating results to decline.
Sales to customers outside of the United States represented 41%, 43% and
47% of total revenues in the six months ended September 30, 1999 and the fiscal
years ended March 31, 1999 and 1998, respectively. Specifically, sales to
customers in the Asia Pacific region represented 21%, 26% and 25% of our total
revenues in the six months ended September 30, 1999 for the fiscal years ended
March 31, 1999 and 1998, respectively, while sales to customers in Europe
represented 21%, 17% and 22% of our total revenues for the same periods,
respectively.
International sales of our semiconductors will continue to represent a
substantial portion of our product revenues for the foreseeable future. In
addition, substantially all of our current products are, and substantially all
of our 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. We are 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, which may
result from the current economic conditions in the Asia Pacific region, or for
other reasons could have a material adverse effect on our business and operating
results.
27
<PAGE> 30
We need to expand our management systems and hire and retain key personnel to
support our products.
The development and marketing of our broadband telephony and video
monitoring products will continue to place a significant strain on our limited
personnel, management and other resources. Our ability to manage any future
growth effectively will require us to successfully attract, train, motivate,
retain and manage employees, particularly key engineering and managerial
personnel, to effectively integrate new employees into our operations and to
continue to improve our operational, financial and management systems. Our
failure to manage growth and changes in our business effectively and to attract
and retain key personnel could limit our growth and the success of our products
and business.
Further, we are highly dependent on the continued service of and our
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 we are located. The loss of any
key person or the failure to recruit additional key technical and sales
personnel in a timely manner would have a material adverse effect on our
business and operating results. We currently do not have employment contracts
with any of our employees and we do not maintain key person life insurance
policies on any of our employees.
Our stock price has been volatile and we cannot assure you that our stock price
will not decline.
The market price of the shares of our common stock has been and is likely
to be highly volatile. It may be significantly affected by factors such as:
o actual or anticipated fluctuations in our operating results;
o announcements of technical innovations;
o loss of key personnel;
o new products or new contracts by us, our competitors or their
customers;
o governmental regulatory action;
o 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 our
control.
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 our 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. If our stock price is volatile, we may also be subject to such
litigation. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would disrupt business and could
cause a decline in our operating results.
28
<PAGE> 31
Any settlement or adverse determination in such litigation would also subject us
to significant liability.
PART II - OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
On March 2, 1999, we were informed that the Lemelson Foundation Partnership
(Lemelson) filed a lawsuit in the United States District Court in Phoenix,
Arizona on February 26, 1999, against 8x8 and eighty-seven other United States
semiconductor and electronics companies for alleged infringement of patent
rights claimed to be owned by Lemelson. In the first quarter of fiscal 2000, we
entered into a license agreement with Lemelson in which Lemelson agreed to
settle all outstanding claims raised in its lawsuit against 8x8. Pursuant to the
license agreement, 8x8 received a license to certain of Lemelson's technology
and will be subject to certain royalty obligations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Stockholders was held on July 15, 1999
at the Company's principal executive offices in Santa Clara, California. At the
meeting, 12,696,136 shares, which represents approximately 82% of the
outstanding votable 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 12,552,888 143,248
Keith R. Barraclough 12,552,738 143,398
Dr. Bernd Girod 12,552,738 143,398
Ret. Maj. Gen. Guy L. Hecker 12,552,738 143,398
William Tai 12,552,388 143,748
</TABLE>
(b) Ratification of Independent Auditors. The ratification and appointment
of PricewaterhouseCoopers LLP as independent public accountants of the Company
for fiscal 2000 was approved by the stockholders with 12,663,239 voting in
favor, 16,919 voting against and 15,978 abstaining.
29
<PAGE> 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) Reports on Form 8-K.
On June 7, 1999 and amended on August 9, 1999, we filed a Current Report
on Form 8-K reporting the completion of our agreement to acquire Odisei pursuant
to which Odisei became a wholly-owned subsidiary of 8x8.
On November 9, 1999, we filed a Current Report on Form 8-K reporting that
we announced the appointment of Lee Camp and Joseph Markee to our Board of
Directors effective October 21, 1999.
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: November 15, 1999.
8X8, INC.
By: /s/ DAVID STOLL
---------------------------------------------
David M. Stoll
Acting Chief Financial Officer and
Vice President of Finance
(Principal Financial and Accounting Officer)
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.
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 8X8, INC.'S CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED CONSOLIDATED BALANCE SHEETS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,527
<SECURITIES> 0
<RECEIVABLES> 1,613<F1>
<ALLOWANCES> 0
<INVENTORY> 1,668
<CURRENT-ASSETS> 21,187
<PP&E> 9,690
<DEPRECIATION> (7,451)
<TOTAL-ASSETS> 26,891
<CURRENT-LIABILITIES> 8,928
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 19,600
<TOTAL-LIABILITY-AND-EQUITY> 26,891
<SALES> 12,604
<TOTAL-REVENUES> 12,604
<CGS> 4,799
<TOTAL-COSTS> 4,799
<OTHER-EXPENSES> 22,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,110)
<INCOME-TAX> 66
<INCOME-CONTINUING> (13,176)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,176)
<EPS-BASIC> (0.77)
<EPS-DILUTED> (0.77)
<FN>
<F1>ITEM SHOWN NET OF ALLOWANCE, CONSISTENT WITH THE BALANCE SHEET PRESENTATION.
</FN>
</TABLE>
