<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 December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 333-15627
8X8, INC.
Delaware 77-0142404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 Mission College Blvd.
Santa Clara, CA 95054
(408) 727-1885
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of January
5, 1999 was 15,295,977.
The exhibit index begins on page 26.
<PAGE> 2
8X8, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
-----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1998 and March 31, 1998...............................................1
Condensed Consolidated Statements of Operations for the three and nine months ended
December 31, 1998 and 1997..........................................................2
Condensed Consolidated Statements of Cash Flows for the nine months
ended December 31, 1998 and 1997....................................................3
Notes to Unaudited Condensed Consolidated Financial Statements........................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................6
PART II- OTHER INFORMATION
Item 5. Other Information...........................................................25
Item 6. Exhibits and Reports on Form 8-K............................................25
Signatures...........................................................................25
</TABLE>
i
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments ................ $ 17,064 $ 26,737
Accounts receivable, net ............... 6,771 4,527
Inventory .............................. 10,729 12,758
Prepaid expenses and other assets ...... 852 876
-------- --------
Total current assets ................. 35,416 44,898
Property and equipment, net .............. 2,165 1,370
Deposits and other assets ................ 85 161
-------- --------
$ 37,666 $ 46,429
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................... $ 2,636 $ 2,625
Accrued compensation ................... 1,790 1,445
Accrued warranty ....................... 1,237 1,461
Deferred revenue ....................... 3,483 2,447
Other accrued liabilities .............. 1,810 1,923
-------- --------
Total current liabilities ............ 10,956 9,901
-------- --------
Minority interest ........................ -- 85
-------- --------
Stockholders' equity:
Common stock ........................... 15 15
Additional paid-in capital ............. 48,012 47,785
Notes receivable from stockholders ..... (286) (893)
Deferred compensation .................. (281) (744)
Unrealized loss on investments ......... (231) (45)
Accumulated deficit .................... (20,519) (9,675)
-------- --------
Total stockholders' equity ........... 26,710 36,443
-------- --------
$ 37,666 $ 46,429
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE> 4
8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Product revenues ...................... $ 7,611 $ 12,325 $ 22,497 $ 25,381
License and other revenues ............ 2,468 2,813 3,685 12,266
-------- -------- -------- --------
Total revenues ........................ 10,079 15,138 26,182 37,647
Cost of product revenues .............. 5,621 6,475 15,865 13,006
Cost of license and other revenues .... 9 404 68 954
-------- -------- -------- --------
Gross profit .......................... 4,449 8,259 10,249 23,687
-------- -------- -------- --------
Operating expenses:
Research and development ............ 2,512 3,284 7,877 9,479
Selling, general and administrative . 5,409 5,358 14,061 12,658
-------- -------- -------- --------
Total operating expenses .... 7,921 8,642 21,938 22,137
-------- -------- -------- --------
Income (loss) from operations ......... (3,472) (383) (11,689) 1,550
Other income, net ..................... 249 515 845 1,095
-------- -------- -------- --------
Income(loss)before(benefit)provision
for income taxes ..................... (3,223) 132 (10,844) 2,645
(Benefit) provision for income taxes .. -- -- -- (1,000)
-------- -------- -------- --------
Net income (loss) ..................... $ (3,223) $ 132 $(10,844) $ 3,645
======== ======== ======== ========
Net income (loss) per share:
Basic ............................... $ (0.21) $ 0.01 $ (0.73) $ 0.32
Diluted ............................. $ (0.21) $ 0.01 $ (0.73) $ 0.25
======== ======== ======== ========
Shares used in per share calculations:
Basic ............................... 15,105 14,274 14,945 11,250
Diluted ............................. 15,105 16,723 14,945 14,800
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
<TABLE>
<CAPTION>
Nine months ended
December 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................... $(10,844) $ 3,645
Charges to net income (loss) not
affecting cash ............................ 821 1,978
Net effect of changes
in current and other assets
and current liabilities ................... 940 (5,340)
-------- --------
Net cash (used in) provided by
operating activities ................... (9,083) 283
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ......... (1,473) (722)
Short-term investments-trading
activity, net ............................. 60 2
Purchases of common stock from
minority shareholders in subsidiary ....... (85) --
-------- --------
Net cash used in investing
activities ............................. (1,498) (720)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of
common stock, net ......................... 489 24,776
Repayment of notes receivable from
stockholders .............................. 479 126
-------- --------
Net cash provided by financing
activities ............................. 968 24,902
-------- --------
Net (decrease) increase in cash and
cash equivalents ............................ (9,613) 24,465
Cash and cash equivalents at the
beginning of the period ..................... 26,677 8,722
-------- --------
Cash and cash equivalents at the
end of the period ........................... $ 17,064 $ 33,187
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
8X8, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
The Company designs, manufactures, and markets videophones for use by the
consumer and business market. The Company also designs, develops and markets
highly integrated proprietary multimedia communication semiconductors and
associated software for videophones and other multimedia communication products.
2. BASIS OF PRESENTATION
The Company's fiscal year ends on the last Thursday on or before March 31.
The three and nine month periods ended December 31, 1998 included 14 weeks and
40 weeks of operations, respectively. The three and nine month periods ended
December 25, 1997 included 13 weeks and 39 weeks of operations, respectively.
For purposes of these condensed consolidated financial statements, the Company
has indicated its fiscal year as ending on March 31 and its interim periods as
ending on December 31.
The accompanying interim condensed consolidated financial statements are
unaudited and have been prepared on substantially the same basis as the
Company's annual financial statements for the year ended March 31, 1998. In the
opinion of management, these financial statements reflect all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the periods presented. These financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
March 31, 1998, including notes thereto, included in the Company's Annual Report
on Form 10-K.
The results of operations for the interim periods included in these
financial statements are not necessarily indicative of the results to be
expected for any future period or the entire fiscal year.
3. BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
(in thousands) December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Inventories:
Raw materials $ 2,680 $ 3,864
Work-in-process 3,491 5,337
Finished goods 4,558 3,557
------- -------
$10,729 $12,758
======= =======
</TABLE>
4. NET INCOME (LOSS) PER SHARE
All prior years' data in this report have been restated to reflect the
adoption of Statement of Financial Accounting Standards No. 128 (FAS 128). FAS
128 requires a reconciliation of the numerators and denominators of the basic
and diluted per share calculations. There were no adjustments to the numerators
for any period presented.
4
<PAGE> 7
The reconciliation of the denominators is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic shares 15,105 14,274 14,945 11,250
Effect of dilutive securities:
Preferred stock
-- -- -- 1,297
Common stock options -- 1,833 -- 1,480
Unvested restricted common stock -- -- 616 773
------ ------ ------ ------
Diluted shares 15,105 16,723 14,945 14,800
====== ====== ====== ======
</TABLE>
Approximately 3,346,000 common stock options and 187,000 unvested restricted
common shares were outstanding at December 31, 1998, but were not included in
the computation of diluted net income (loss) per share because their impact was
anti-dilutive in view of losses incurred by the Company. The number of common
stock options outstanding at December 31, 1997 that were not included in the
computation of diluted net income (loss) per share because their impact was
anti-dilutive was not material.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (FAS130), "Reporting Comprehensive Income." Comprehensive net
income (loss), as defined, includes all changes in equity (net assets) during a
period from non-owner sources. The primary difference between net income (loss)
and comprehensive net income (loss), for the Company, is gains and losses on
short-term investments classified as available-for-sale. Comprehensive net
income (loss) for the current reporting and comparable period in the prior year
is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Comprehensive net income (loss) $ (3,347) $ 132 $(11,030) $ 3,645
======== ======== ======== ========
</TABLE>
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-2 (SOP 97-2) which provides
guidance for recognizing revenue on software transactions and supersedes SOP
91-1 "Software Revenue Recognition." SOP 98-4 deferred, for one year, the
application of certain passages in SOP 97-2 pending further guidance. In
December 1998, the AICPA provided further guidance by issuing SOP 98-9
"Modification of 97-2, Software Revenue Recognition, With Respect to Certain
Transactions." SOP 98-9 amends SOP 97-2 by clarifying vendor-specific objective
evidence necessary to recognize revenue for software licenses on multiple
element arrangements when undelivered elements exist. SOP 98-9 is effective for
fiscal years beginning after March 15, 1999. The Company does not expect the
adoption of SOP 98-9 will be material to the Company's consolidated results of
operations. Adoption of the remaining provisions of SOP 97-2 did not have a
material impact on revenue recognition during the quarter or nine months ended
December 31, 1998.
5
<PAGE> 8
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131 (FAS 131), "Disclosures
about Segments of an Enterprise and Related Information." FAS 131 revises
information regarding the reporting of certain operating segments for periods
beginning after December 15, 1997. The Statement also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The Company will adopt FAS 131 in its fiscal 1999 annual report. The
Company has not yet determined the impact, if any, of adopting this new
standard.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities." FAS 133 is effective for fiscal years commencing after June 15,
1999. The Company will comply with the requirements of FAS 133 in fiscal year
2001 and does not expect the adoption of FAS 133 will be material to the
Company's consolidated results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, including but
not limited to those specifically identified as such, that involve risks and
uncertainties. The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future and statements contained within those
sentences followed by an asterisk (i.e., "*"). All forward-looking statements
included in this Report on Form 10-Q are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including, but not limited to, those set forth
below under the heading "Factors That May Affect Future Results" and elsewhere
in this Report on Form 10-Q.
This information should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and notes thereto included in Item I of this
Report on Form 10-Q and the audited Consolidated Financial Statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal year ended March 31, 1998 contained in the
Company's Annual Report on Form 10-K.
Overview
Since June 1995, the Company has been executing a business strategy designed
to focus the Company's efforts exclusively on the development, manufacture and
marketing of multimedia communication semiconductors, software and systems. In
each of the third quarters ended December 31, 1998 and 1997, sales of the
Company's multimedia communication products accounted for 100% of product
revenues. In the fiscal years ended March 31, 1998 and 1997,
6
<PAGE> 9
sales of the Company's multimedia communication products accounted for 100% and
86% of product revenues, respectively.
The Company markets its line of multimedia communication semiconductors and
related software to OEMs and distributors, mainly for videoconferencing and
videophone applications. This product line includes the LVP, VCP and VCPex
processors.
The Company has leveraged its strengths in semiconductor design and related
software to develop and market low-cost multimedia communication systems,
including its VideoCommunicator products. The Company began shipping the first
product in its planned family of VideoCommunicator products, the ViaTV
videophone model VC100, in February 1997. Subsequently, the Company introduced
the VC105, an upgraded VC100, and added three new models, the VC50, VC55 and
VC150, to the ViaTV product line. The Company also introduced versions of its
ViaTV videophones designed for European and Asian markets. In addition, the
Company introduced a VideoCommunicator product targeted towards the surveillance
market segment. In August 1998, the Company began shipping the RSM-1500 remote
surveillance module, and subsequently ceased shipment of the VC50 model. The
Company has announced the VC110 and VC160, which are upgrades to the VC105 and
VC150, respectively. The Company expects these products to become available in
the first quarter of fiscal 2000.*
The Company markets its VideoCommunicators through retail and distribution
channels, catalogs and original equipment manufacturers (OEMs) as well as
through direct marketing efforts utilizing a combination of advertising,
toll-free telemarketing and direct mail supported by co-marketing arrangements
with third parties.
In December 1998, the Company 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 (IP) phone calls on a single integrated circuit. At the same
time, the Company announced a prototype system called the Packet Gateway cable
adapter, which includes a cable modem and an Audacity processor and enables IP
telephony over cable networks. These products reflect the Company's recent
efforts to develop broadband telephony technology. To date the Company has not
realized any revenue from broadband telephony.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Statements of Operations and the notes thereto:
Revenues
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
--------------------------------------- ---------------------------------------
(In millions)
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product revenues $ 7.6 75% $12.3 81% $22.5 86% $25.4 67%
License and other
revenues 2.5 25% 2.8 19% 3.7 14% 12.3 33%
----- ----- ----- ----- ----- ----- ----- -----
Total revenues $10.1 100% $15.1 100% $26.2 100% $37.7 100%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
7
<PAGE> 10
Total revenues were $10.1 million and $15.1 million for the third quarters
of fiscal 1999 and 1998, respectively. Total revenues for the third quarter of
fiscal 1999 were divided among multimedia communication semiconductors 19%,
videophone systems 56% and nonrecurring license, royalty and other revenue 25%.
In the third quarter of fiscal 1998 total revenues were divided among multimedia
communication semiconductors 40%, videophone systems 41% and nonrecurring
license and other revenue 19%.
Product revenues were $7.6 million in the third quarter of fiscal 1999, a
decrease of $4.7 million from the $12.3 million reported in the third quarter of
fiscal 1998. The decrease in product revenues was primarily due to a decrease in
semiconductor revenues. The decrease in semiconductor revenues is due mainly to
softness in demand from OEM customers, particularly in Asia and Europe, that
manufacture personal videoconferencing systems. In addition, VideoCommunicator
product revenues were higher in the third quarter of fiscal 1998 compared to the
same period of fiscal 1999 because of nonrecurring shipments to one OEM
customer.
License and other revenues consist of technology licenses, including
royalties earned under such licenses, and nonrecurring engineering fees for
services performed by the Company for its customers. License and other revenues
were approximately $2.5 million in the third quarter of fiscal 1999, a decrease
of approximately $300,000 from the $2.8 million reported in the third quarter of
fiscal 1998. There can be no assurance that the Company will receive any
revenues from licensing or other such arrangements in the future.* See "Factors
That May Affect Future Results--No Assurance of Future License and Other
Revenues" and "Factors That May Affect Future Results--Dependence on Key
Customers."
Total revenues were $26.2 million and $37.7 million in the first nine months
of fiscal 1999 and 1998, respectively. Total revenues for the first nine months
of fiscal 1999 were divided among multimedia communication semiconductors 33%;
videophone systems 53%; and nonrecurring license and other revenues 14%. In the
first nine months of fiscal 1998, total revenues were divided among multimedia
communication semiconductors 39%; videophone systems 29%; and nonrecurring
license and other revenues 32%.
Product revenues were $22.5 million in the first nine months of fiscal 1999,
a decrease of $2.9 million from the $25.4 million reported in the first nine
months of fiscal 1998. In the first nine months of fiscal 1999 and 1998 license
and other revenues, all of which were nonrecurring, were $3.7 million and $12.3
million, respectively. In the first nine months of fiscal 1998, license and
other revenues included approximately $5.3 million paid by 3Com for a license to
substantially all of the Company's technology underlying its VideoCommunicators.
There can be no assurance that the Company will receive any revenues from such
arrangements in the future.* See "Factors That May Affect Future Results -- No
Assurance of Future License and Other Revenues."
In the third quarter of fiscal 1999, revenues derived from one customer
represented approximately 14% of the Company's total revenues. In the third
quarter of fiscal 1998, revenues derived from one customer represented
approximately 22% of total revenues. No customer represented ten percent (10%)
or more of the Company's total revenues for the nine months ended December 31,
1998. Revenues derived from one customer represented approximately 26% of total
revenues for the first nine months of fiscal 1998. Dependence on any significant
customer or customers entails certain risks
8
<PAGE> 11
Revenues derived from customers outside of the United States as a percentage
of total revenues were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Asia Pacific 21% 22% 24% 26%
Europe 13% 18% 17% 14%
---- ---- ---- ----
Total 34% 40% 41% 40%
==== ==== ==== ====
</TABLE>
See "Factors That May Affect Future Results--International Operations."
Cost of Revenues
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------- -----------------------
(In millions)
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cost of product revenues $ 5.6 $ 6.4 $ 15.9 $ 13.0
As a percentage of product revenues 74% 52% 71% 51%
Cost of license and other revenues $ -- $ 0.4 $ 0.1 $ 1.0
As a percentage of license
and other revenues 0% 14% 3% 8%
</TABLE>
The cost of product revenues consists of costs associated with
VideoCommunicator components, semiconductor wafer fabrication, VideoCommunicator
and semiconductor assembly and testing performed by third-party vendors and
direct and indirect costs associated with purchasing, scheduling and quality
assurance. Costs of product revenues were $5.6 million and $6.4 million for the
third quarters of fiscal 1999 and 1998, respectively.
Cost of license and other revenues in the third quarter of fiscal 1999 and
1998 were approximately $9,000 and $404,000, respectively. Cost of license and
other revenues in the third quarter of fiscal 1998 consisted primarily of
personnel and other costs incurred to perform certain development work under
terms of nonrecurring engineering contracts. This development work was performed
by research and development personnel of the Company.
Cost of product revenues were $15.9 million and $13.0 million in the first
nine months of fiscal 1999 and 1998, respectively. The cost structure of the
Company's ViaTV product line, the Company's first line of VideoCommunicator
products, is substantially different from the Company's multimedia communication
semiconductor products. The Company expects the costs of product revenues to
continue to increase as a percentage of product revenues if the
VideoCommunicator revenues continue to increase as a percent of product
revenues.
9
<PAGE> 12
Gross Profit
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------- -----------------------
(In millions)
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross profit $ 4.4 $ 8.3 $ 10.2 $ 23.7
As a percentage
of total revenues 44% 55% 39% 63%
</TABLE>
Gross profit was $4.4 million and $8.3 million in the third quarters of
fiscal 1999 and 1998, respectively. Gross profit from product revenues was $2.0
million and $5.9 million for the third quarters of fiscal 1999 and 1998,
respectively. Gross profit from license and other revenues, all of which was
nonrecurring, was approximately $2.5 million and $2.4 million in the third
quarters of fiscal 1999 and 1998, respectively. There can be no assurance that
the Company will receive any revenues from such license and other revenues
sources in the future.* See "Factors That May Affect Future Results--No
Assurance of Future License and Other Revenues."
Gross profit was $10.2 million and $23.7 million in the first nine months of
fiscal of 1999 and 1998, respectively. License and other revenues, net of
associated costs, contributed $3.6 million and $11.3 million to gross profit in
the first nine months of fiscal 1999 and 1998, respectively.
Lower gross profit in the third quarter of fiscal 1999 was primarily due to
the decrease in semiconductor revenues. The gross profit for the Company's
VideoCommunicator products decreased due to declining average selling prices,
but this decrease was partially offset by lower product costs and higher
volumes.
Total gross margin was 44% and 55% in the third quarters of fiscal 1999 and
1998, respectively. Lower gross margin in the third quarter of fiscal 1999 was
primarily due to the decrease in semiconductor revenues as a percentage of total
revenues. In addition, gross margins were lower due to increased sales of the
Company's VideoCommunicator products which have substantially lower gross
margins than the Company's semiconductor products.
In the first nine months of fiscal 1999, semiconductor revenues have
decreased compared to the same periods in fiscal 1998. Since gross profit as a
percent of revenue is substantially lower for the sales of VideoCommunicator
products than for sales of the Company's semiconductors, if VideoCommunicator
product revenue continues to grow as a percentage of total product revenue, the
Company expects that gross profit as a percentage of total product revenue will
decrease.* See "Factors That May Affect Future Results--Fluctuations in
Operating Results." In addition, the markets for the Company's VideoCommunicator
and semiconductor products are characterized by falling average selling prices,
which could have a material adverse effect on the Company's future business and
operating results if the Company cannot achieve lower cost of sales and/or
higher sales volumes.*
10
<PAGE> 13
Operating Expenses--Research and Development
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------- -----------------------
(In millions)
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Research and development $ 2.5 $ 3.3 $ 7.9 $ 9.5
As a percentage
of total revenues 25% 22% 30% 25%
</TABLE>
Research and development expenses consist primarily of personnel, system
prototype design and fabrication, mask, prototype wafer and equipment costs
necessary for the Company to conduct its development efforts. Research and
development costs, including software development costs, are expensed as
incurred. During the three and nine month periods ended December 31, 1998 and
1997, respectively, research and development expenses were primarily
attributable to the Company's next generation development of its multimedia
communication semiconductors and continued development of its
VideoCommunicators.
Lower research and development expenses during the third quarter and nine
months ended December 31, 1998 were due to decreases in profit sharing and
incentive bonuses, non-recurring VideoCommunicator design costs, and costs
associated with materials and tooling used in prototype builds of the Company's
VideoCommunicator products. During the quarter and nine months ended December
31, 1997 research and development costs would have been higher, except that
certain research and development personnel performed non-recurring engineering
services under a revenue-generating contract. The costs associated with this
contract were included in the cost of license and other revenues. Higher
research and development costs as a percentage of total revenues for both the
three and nine month periods ended December 31, 1998 were due to lower revenues
as compared to the comparable periods in the prior fiscal year.
The Company expects to continue to allocate substantial resources to
research and development.* However, future research and development costs may
vary both in absolute dollars and as a percentage of total revenues.* See
"Factors That May Affect Future Results--Rapid Technological Change; Dependence
on New Product Introduction."
Operating Expenses--Selling, General and Administrative
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------- -----------------------
(In millions)
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Selling, general and administrative $ 5.4 $ 5.4 $ 14.1 $ 12.7
As a percentage
of total revenues 53% 36% 54% 34%
</TABLE>
11
<PAGE> 14
Selling, general and administrative expenses consist primarily of personnel
and related overhead costs for sales, marketing, finance, human resources and
general management. Such costs also include advertising, sales commissions,
trade show and other marketing and promotional expenses. Selling, general and
administrative expenses were $5.4 million in each of the third quarters of
fiscal 1999 and 1998, respectively. In the third quarter of fiscal 1999,
expenses increased due to costs associated with the marketing, advertising and
promotion of the Company's VideoCommunicator product line and additional
headcount required to support these activities. These increases were offset by
decreases in profit sharing and incentive bonuses, and commission expenses. The
Company expects that its sales and marketing expenses may increase as the
Company launches new VideoCommunicator products and promotes its current
VideoCommunicator products.* Therefore, future selling, general and
administrative costs may vary both in absolute dollars and as a percentage of
total revenues.* See "Factors That May Affect Future Results--Potential
Fluctuations in Operating Results."
Selling, general and administrative expenses were $14.1 million and $12.7
million in the first nine months of fiscal 1999 and 1998, respectively. While
total expenses increased as a result of the factors listed above, the non-cash
compensation expense recognized on certain stock option grants and charged to
selling, general and administrative expenses decreased to $64,000 in the first
nine months of fiscal 1999 from $354,000 in the first nine months of fiscal
1998.
Other Income, Net
Other income, net, consists primarily of interest earned on cash equivalents
and short-term investments. Other income, net was approximately $249,000 for the
three month period ended December 31, 1998 compared to $515,000 for the three
month period ended December 31, 1997. Other income, net was $845,000 for the
nine month period ended December 31, 1998 compared to $1.1 million for the
comparable period in the prior fiscal year. The decrease in interest income in
the third quarter of fiscal 1999 is due primarily to lower average cash
equivalents and short-term investment balances as compared to the third quarter
of fiscal 1998.
(Benefit) Provision for Income Taxes
There was no tax provision for the three and nine month periods ended
December 31, 1998 due to net losses incurred. The tax benefit in the nine month
period ended December 31, 1997 resulted from the reversal of approximately $1.0
million of the Company's income tax liability in the first quarter of fiscal
1998 upon notice from the Internal Revenue Service that it had reversed a
previously asserted deficiency related to the taxable year 1992.
Year 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As the Year 2000
approaches, these code fields will need to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20." The
Company is assessing the readiness of its products, internal computer systems,
and third-party equipment and software utilized by the Company for handling Year
2000 issues. Based upon the Company's assessments, all of the Company's products
are Year 2000 compliant. With regard to the Company's internal computer systems,
the Company is currently implementing an enterprise-wide database and
information management system. The Company has not allocated any portion of the
total project cost to the Year 2000 issue. While the Company continues to
monitor its system implementation costs, the Company does not believe the
incremental project cost associated with Year 2000 compliance to be material, as
this feature is included with software purchased by the Company to satisfy its
business needs. Though the Company currently expects to successfully implement
this and other internal computer systems and programming changes necessary to
address Year 2000 issues, there can be no assurance that such implementations
will be done within the projected timeframe or within budget.* See "Factors That
May Affect Future Results--Enterprise-Wide Database Implementation." See also
the discussion below regarding the estimated cost of the enterprise-wide
database implementation project.
The Company is also assessing the possible effects on the Company's
operations of the Year 2000 readiness of key suppliers, subcontractors and
customers. The Company expects that this assessment, as well as related
remediation and contingency planning activities, will be on-going throughout
calendar year 1999. The Company's reliance on suppliers, subcontractors and
customers, and, therefore, on the proper functioning of their information
systems and software, means that failure to address Year 2000 issues by its
suppliers, subcontractors and customers could have a material adverse impact on
the Company's business and operating results.
The total estimated cost to be incurred by the Company regarding the
testing of current products for Year 2000 compliance, 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
compliance issues.
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
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Liquidity and Capital Resources
Prior to the Company's initial public offering, the Company had satisfied
its liquidity needs principally from proceeds generated from two issuances of
its equity securities and cash generated from operations in fiscal 1994 and
prior years. As of December 31, 1998, the Company had cash and liquid
investments totaling $17.1 million, representing a decrease of $9.6 million from
March 31, 1998. The Company currently has no bank borrowing arrangements.
Net cash used in operations was $9.1 million during the first nine months of
fiscal 1999. Net cash provided by operations was $283,000 during the first nine
months of fiscal 1998. Net cash used in operations in the nine month period
ended December 31, 1998 reflected a net loss of $10.8 million, an increase of
$2.2 million in accounts receivable, and a $224,000 decrease in accrued
warranty, offset primarily by a decrease of $2.0 million in inventory, increases
of $1.0 million in deferred revenue and $345,000 in accrued compensation and
$821,000 of noncash items. The decrease in inventory during the nine months
ended December 31, 1998 was due to decreases in VideoCommunicator product
inventory held by the Company and inventory balances held by retailers and
distributors. The Company does not recognize revenue on the shipment of its
VideoCommunicator products to retailers or distributors until the products are
sold-through by the retailer or distributor. If the Company broadens its
distribution channels, inventories at retailers and distributors, which are
reflected in the Company's inventories, are expected to increase.*
Net cash used in investing activities in the nine months ended December 31,
1998 is primarily attributable to capital expenditures of $1.5 million and the
repurchase of common stock from minority shareholders in the Company's VidUs
subsidiary in conjunction with its merger with the Company in August 1998.
Net cash provided by financing activities in the nine months ended
December 31, 1998 consisted primarily of net proceeds from the repayment of
stockholders' notes receivable and sales of the Company's common stock upon the
exercise of employee stock options.
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
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<PAGE> 16
The Company believes that it will be able to fund planned expenditures and
satisfy its cash requirements for at least the next twelve months from cash flow
from operations, if any, and existing cash balances.* The Company believes that
it may require additional financial resources over the next several years for
working capital, research and development, expansion of sales and marketing
resources, and capital expenditures.* Net cash used in operating activities
during the nine months ended December 31, 1998 and in the fiscal year ended
March 31, 1998 was approximately $9.1 million and $6.5 million, respectively,
due primarily to cash requirements of the Company's VideoCommunicator product
business. The Company has incurred, and will continue to incur, significant
costs related to the development of VideoCommunicator products, advertising for
its ViaTV products, support of the retail sales channel and growth in ViaTV
inventory. In addition, the Company has entered into a contract to purchase a
new enterprise-wide database and information management system from a major
software supplier. The Company currently estimates that total expenditures
related to the purchase of the software and incremental hardware requirements,
as well as the cost of implementation and training, will be between $1.6 million
and $1.8 million, of which approximately $1.3 million has been incurred as of
December 31, 1998. See "Factors That May Affect Future Results--Enterprise-Wide
Database Implementation. As of December 31, 1998, the Company had approximately
$17.1 million in cash and cash equivalents. However, the Company is operating in
a rapidly changing industry. There can be no assurance that the Company will not
seek to exploit business opportunities that will require it to raise additional
capital from equity or debt sources to finance its growth and capital
requirements. In particular, the development and marketing of new products could
require a significant commitment of resources, which could in turn require the
Company to obtain additional financing earlier than otherwise expected. There
can be no assurance that the Company will be able to obtain additional financing
as needed on acceptable terms or at all.
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that 8x8's actual future performance will meet 8x8's
current expectations. See "Factors That May Affect Future Results" commencing on
page 15 for a discussion of certain factors that could affect future
performance.
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<PAGE> 17
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be considered in conjunction with the
information in this Report on Form 10-Q.
History of Losses; Uncertainty of Future Profitability
The Company recorded an operating loss of $11.7 million in the first nine
months of fiscal 1999. In addition, the Company recorded operating losses in
three of the four quarters in fiscal 1998 and recorded an operating loss of
$13.6 million in the year ended March 31, 1997. The Company would not have been
profitable in fiscal 1998 had it not received nonrecurring license and other
revenues. Revenues fluctuated from $28.8 million in fiscal 1996 to $19.1 million
in fiscal 1997 to $49.8 million in fiscal 1998 and were $26.2 million in the
first nine months of fiscal 1999. In view of the Company's historical operating
losses, there can be no assurance that the Company will be able to achieve
profitability on either an annual or quarterly basis.
No Assurance of Future License and Other Revenues
The Company has in the past received substantial revenues from the licensing
of its technology. License and other revenues, all of which were nonrecurring,
were $3.7 million and $12.3 million for the nine month periods ended December
31, 1998 and 1997, respectively, and were $14.5 million and $3.9 million in the
fiscal years ended March 31, 1998 and 1997, respectively. There can be no
assurance that the Company will receive substantial revenues from licensing of
its technology in the future, which could have a material adverse effect on the
Company's business and operating results.
Potential Fluctuations in Future Operating Results
The Company's historical operating results have fluctuated significantly and
will likely continue to fluctuate in the future. On a quarterly and an annual
basis there are a number of factors that may affect the operating results of the
Company, many of which are outside the Company's control. These include, but are
not limited to: changes in market demand, the timing of customer orders,
competitive market conditions, lengthy sales cycles, regulatory approval cycles,
new product introductions by the Company or its competitors, market acceptance
of new or existing products, the cost and availability of components, the mix of
the Company's customer base and sales channels, the mix of products sold, the
management of inventory and the accuracy of the reporting of sell-through by
resellers of the Company's products, the level of international sales, continued
compliance with industry standards and general economic conditions.
The Company's gross margin is affected by a number of factors including,
product mix, the recognition of license and other revenues for which there may
be no or little corresponding cost of revenues, product pricing, the allocation
between international and domestic sales, the percentage of direct sales and
sales to resellers, and manufacturing and component costs. The markets for the
Company's products are characterized by falling average selling prices. The
Company expects that, as a result of competitive pressures and other factors,
gross profit as a percentage of revenue for the Company's semiconductor products
will likely decrease for the foreseeable future. In addition, the gross margins
for the Company's VideoCommunicators are, and will continue to be, substantially
lower than the gross margins for its semiconductors. Thus, the
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<PAGE> 18
growth of the Company's VideoCommunicator business has reduced overall product
gross profit as a percentage of revenue. For example, total gross margin was 44%
and 55% in the third quarters of fiscal 1999 and 1998, respectively due to
continued growth of the Company's VideoCommunicator business relative to its
semiconductor business.
If the Company cannot adequately compensate for falling average selling
prices with lower costs of sales, its gross margins will continue to be reduced
and could result in a material adverse effect on the Company's business and
operating results. In the event that the Company encounters significant price
competition in the markets for its products, the Company could be at a
significant disadvantage compared to its competitors, many of which have
substantially greater resources, and therefore may be better able to withstand
an extended period of downward pricing pressure.
Variations in timing of sales may cause significant fluctuations in future
operating results. In addition, because a significant portion of the Company's
business, including sales of its VideoCommunicator products, may be derived from
orders placed by a limited number of large customers, including OEM customers
and distributors, the timing of such orders can also cause significant
fluctuations in the Company's operating results. For example, 3Com, which
purchased approximately 34% of videophone systems sold by the Company in the
year ended March 31, 1998, has not ordered additional products from the Company
since delivery of its purchases in the quarter ended December 31, 1997. Also,
one customer which represented approximately 20% of semiconductor revenues in
fiscal 1998 has not placed significant semiconductor orders with the Company in
fiscal 1999. The Company recognizes revenue when distributors sell product to
their customers. The Company may not be able to anticipate the rate at which
distributors will receive additional orders from their end customers.
Anticipated orders from customers may fail to materialize. Delivery schedules
may be deferred or canceled for a number of reasons, including changes in
specific customer requirements or international economic conditions. The adverse
impact of a shortfall in the Company's revenues may be magnified by the
Company's inability to adjust spending to compensate for such shortfall.
Announcements by the Company or its competitors of new products and technologies
could cause customers to defer purchases of the Company's existing products,
which would also have a material adverse effect on the Company's business and
operating results.
The Company's products have lead times of up to four months, and are built
to forecasts that are necessarily imperfect, particularly given the early stage
of the videophone market. Because of the Company's practice of building its
products to necessarily imprecise forecasts, it is likely that, from time to
time, the Company will have either excess or insufficient product inventory.
This risk is heightened because of the need for and presence of significant
VideoCommunicator inventory in retail distribution. As the Company introduces
new products or upgrades to current products, the Company's retailers or
distributors may decide to return to the Company inventory which they determine
they cannot sell. Further, because retailers and other distributors may have
significant quantities of VideoCommunicator inventory on hand and generally have
contractual rights to price protection if the Company decreases the selling
price, in the event of a significant price decrease, the Company's cost of such
inventory may exceed the Company's actual selling price. Excess inventory levels
will subject the Company to the risk of inventory obsolescence and the risk that
the Company's selling prices may drop below the Company's inventory costs, while
insufficient levels of inventory may negatively affect relations with customers.
Any of
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<PAGE> 19
these factors could have a material adverse effect on the Company's operating
results and business.
The Company's introduction of VideoCommunicators has resulted in
substantially different patterns in operating results. For example, during
fiscal 1999 and 1998, the Company's operating results were subject to increased
seasonality with sales higher during the Company's third fiscal quarter,
corresponding to the Christmas shopping season. In addition, the Company is
spending substantial additional amounts on advertising, support of the retail
channel, toll-free marketing and customer support. There can be no assurance
that revenues adequate to justify such spending will result. The Company's shift
to sale of VideoCommunicators has resulted in higher levels of product inventory
and product returns, the necessity of granting price protection to resellers,
more lengthy receivable collection cycles and higher warranty costs, which may
have a material adverse effect on the Company's business and operating results.
As a result of these and other factors, it is likely that in some future
period the Company's operating results will be below the expectations of
securities analysts or investors, which would likely result in a significant
reduction in the market price for the Company's common stock.
Dependence on Key Customers
Historically, a significant portion of the Company's sales has been to
relatively few customers, although the composition of these customers has
varied. Revenues from the Company's ten largest customers in the third quarter
and nine months ended December 31, 1998 accounted for approximately 51% and 44%
of total revenues, respectively. For both of the fiscal years ended March 31,
1998 and 1997, revenues from the Company's ten largest customers accounted for
approximately 61% of total revenues. Revenues derived from one customer
represented approximately 14% of the Company's total revenues for the quarter
ended December 31, 1998. No customer represented ten percent (10%) or more of
the Company's total revenues for the nine months ended December 31, 1998. During
each of the last two fiscal years the Company had one customer that accounted
for ten percent or more of total revenues. 3Com accounted for 20% of total
revenues during the year ended March 31, 1998; ASCII, the Company's former
distributor in Japan, accounted for 13% of total revenues during the year ended
March 31, 1997. Substantially all the Company's product sales have been made,
and are expected to be made, on a purchase order basis. None of the Company's
customers has entered into a long-term agreement requiring it to purchase the
Company's products. Further, all of the Company's license and other revenues are
nonrecurring. The loss of, or any reduction in orders from, significant
customers could have a material adverse effect on the Company's business and
operating results.
International Operations
Sales to customers outside of the United States represented 34% and 41% of
the Company's total revenues for the third quarter and the nine months ended
December 31, 1998. Sales to customers outside of the United States represented
47% and 54% of total revenues in the fiscal years ended March 31, 1998 and 1997,
respectively. Specifically, sales to customers in the Asia Pacific region
represented 21% and 24% of the Company's total revenues in the third quarter and
the nine months ended December 31, 1998. Sales to customers in Europe
represented 13% and 17% of the Company's total revenues in the third quarter and
the nine months ended December 31, 1998. Sales to customers in the Asia Pacific
region represented 25% and 33% of the
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<PAGE> 20
Company's revenues in the fiscal years ended March 31, 1998 and 1997,
respectively, while sales to customers in Europe represented 22% and 21% of the
Company's total revenues for the same periods, respectively.
International sales of the Company's semiconductors will continue to
represent a substantial portion of the Company's product revenues for the
foreseeable future. In addition, substantially all of the Company's current
products are, and substantially all of the Company's future products will be,
manufactured, assembled and tested by independent third parties in foreign
countries. International sales and manufacturing are subject to a number of
risks, including general economic conditions in regions such as Asia, changes in
foreign government regulations and telecommunications standards, export license
requirements, tariffs and taxes, other trade barriers, fluctuations in currency
exchange rates, difficulty in collecting accounts receivable and difficulty in
staffing and managing foreign operations. The Company is also subject to
geopolitical risks, such as political, social and economic instability,
potential hostilities and changes in diplomatic and trade relationships, in
connection with its international operations. A significant decline in demand
from foreign markets, such as may result from the current economic conditions in
the Asia Pacific region, could have a material adverse effect on the Company's
business and operating results.
Competition
The Company competes with both independent manufacturers of multimedia
communication semiconductors and with the introduction of its VideoCommunicator
products now competes with manufacturers of multimedia communication products
targeted at the consumer market. The markets for the Company's products are
characterized by intense competition, declining average selling prices and rapid
technological change.
The competitive factors in the market for the Company's VideoCommunicators
include audio and video quality, phone line connectivity at high transmission
rates, ability to connect and maintain stable connections, ease of use, price,
access to enabling technologies, product design, time-to-market, adherence to
industry standards, interoperability, strength of distribution channels,
customer support, reliability and brand name. The Company expects intense
competition for its VideoCommunicators from:
- Large consumer electronics manufacturers. The Company will face intense
competition from many well known, established suppliers of consumer
electronics products, which may include Lucent Technologies, Matsushita,
Philips, Samsung and Sony. Many of these potential competitors sell
television and telephone products into which they may integrate
multimedia communication systems, thereby eliminating a consumer's need
to purchase a separate multimedia communication system, such as the
Company's ViaTV product.
- Personal computer system and software manufacturers. Potential customers
for the Company's VideoCommunicators may elect instead to buy PCs
equipped with multimedia communication capabilities, which are currently
available. As a result, the Company faces or may face competition from
Intel; PC system manufacturers such as Apple, Compaq, Dell, IBM and
Sony; PC software suppliers such as Microsoft and Netscape; and PC
add-on component suppliers such as 3Com.
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<PAGE> 21
- Existing manufacturers of corporate videoconferencing equipment.
Manufacturers of more expensive corporate videoconferencing systems have
continually reduced the cost of their products and may enter the market
for lower cost consumer multimedia communication products. Potential
competitors include PictureTel, Polycom, Sony, Tandberg, VCON and Vtel.
- Emerging suppliers of internet appliances. Potential customers for the
Company's VideoCommunicators may elect instead to buy standalone
internet access terminals which may provide some or all of the
functionality of the Company's products. Consumer products for
television-based internet access have been announced or introduced by
companies such as Microsoft, Philips and Sony.
C-Phone, Leadtek and Truedox are among the companies selling low cost
videophones. Many other companies have announced the development of low cost
videophones. The Company expects that additional companies will introduce
products that compete with the VideoCommunicators in the future. Certain
manufacturers or potential manufacturers of low cost videophones have licensed
or purchased, or may license or purchase, the Company's technology and
semiconductors in order to do so. KME and 3Com in particular have licensed
substantially all of the technology underlying the VideoCommunicators, and may
use such technology to introduce products that compete with the
VideoCommunicators. Each of Leadtek and Truedox license the Company's technology
and purchase the Company's multimedia communication semiconductors. The Company
aggressively licenses its semiconductor, software and systems technology and
sells its semiconductor and system products to third parties. Thus, it is likely
that additional OEM customers of the Company will become competitors with
respect to the Company's VideoCommunicator business. Other competitors may
purchase multimedia communication semiconductor and related technology from
other suppliers.
The principal competitive factors in the market for multimedia communication
semiconductors include product definition, product design, system integration,
chip size, functionality, time-to-market, adherence to industry standards, price
and reliability. The Company has a number of competitors in this market
including Analog Devices, AudioCodes, DSP Group, Lucent Technologies, Motorola,
NeoParadigm Labs, Philips, Texas Instruments and Winbond Electronics. Potential
competitors include ESS Technology and Rockwell Semiconductor Systems. Certain
of the Company's competitors for multimedia communication semiconductors
maintain their own semiconductor foundries and may therefore benefit from
certain capacity, cost and technical advantages. In addition, the presence of
the Company in the multimedia communication systems business may result in
certain customers or potential customers perceiving the Company as a competitor
or potential competitor, which may be used by other semiconductor manufacturers
to their advantage.
The Company's reliance on developing vertically integrated technology,
comprising systems, circuit boards, software and semiconductors, places a
significant strain on the Company and its research and development resources.
Competitors that focus on one aspect of technology, such as systems or
semiconductors, may have a considerable advantage over the Company. In addition,
many of the Company's current and potential competitors have longer operating
histories, are substantially larger, and have greater financial, manufacturing,
marketing, technical and other resources. Many also have greater name
recognition and a larger installed base of products than the Company.
Competition in the Company's markets may result in significant price reductions.
As a result of their greater resources, many current and potential competitors
may be better able
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than the Company to initiate and withstand significant price competition or
downturns in the economy. There can be no assurance that the Company will be
able to continue to compete effectively, and any failure to do so would have a
material adverse effect on the Company's business and operating results.
Need for Additional Capital
The Company believes that it will be able to fund planned expenditures and
satisfy its cash requirements for at least the next twelve months from cash flow
from operations, if any, and existing cash balances. The Company believes that
it may require additional financial resources over the next several years for
working capital, research and development, expansion of sales and marketing
resources, and capital expenditures. Net cash used in operating activities
during the nine months ended December 31, 1998 and in the fiscal year ended
March 31, 1998 was approximately $9.1 million and $6.5 million, respectively,
due primarily to cash requirements of the Company's VideoCommunicator business.
The Company has incurred and will continue to incur, significant costs related
on the development of VideoCommunicator products, advertising for its ViaTV
products, support of the retail sales channel and growth in ViaTV inventory. The
Company believes that it will be able to fund planned expenditures and satisfy
its cash requirements for at least the next twelve months from cash flow from
operations, if any, and existing cash balances. As of December 31, 1998, the
Company had approximately $17.1 million in cash and cash equivalents. However,
the Company is operating in a rapidly changing industry. There can be no
assurance that the Company will not seek to exploit business opportunities that
will require it to raise additional capital from equity or debt sources to
finance its growth and capital requirements. In particular, the development and
marketing of new products could require a significant commitment of resources,
which could in turn require the Company to obtain additional financing earlier
than otherwise expected. There can be no assurance that the Company will be able
to obtain additional financing as needed on acceptable terms or at all.
Uncertainty of VideoCommunicator Market Acceptance; Limits of Existing
Technology
Previous efforts to sell consumer videophones have been unsuccessful and
there can be no assurance that the market for such products will develop. The
current installed base of H.324 compliant videophones, which are compatible with
the Company's ViaTV videophones, is quite limited, providing few parties for a
purchaser of a single videophone to call. In addition, many consumers may not
wish to be seen during a telephone call. The Company has no reliable data to
suggest that there will be significant customer demand for such products,
including the Company's VideoCommunicators and products offered by certain of
the Company's OEM customers.
The Company's current VideoCommunicator product line as well as products
made by the Company's OEM customers for use on POTS, is not capable of
delivering video data at rates of 24 frames per second. Below this data rate,
the human eye can detect degradation of video quality. Further, POTS
infrastructure varies widely in configuration and integrity, which can result in
decreased rates of transmission and difficulties in establishing and maintaining
connections. Actual or perceived technical difficulties or insufficient video
quality related to multimedia communication on POTS could impede market
acceptance and have a material adverse effect on the Company's business and
results of operations.
Uncertainty of Revenues from Broadband Telephony Market
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The Company has committed, and intends to continue to commit, a
significant amount of financial and personnel resources to the development,
manufacturing and marketing of its broadband telephony products, such as the
Audacity internet telephony processor and the Packet Gateway adapter. As of
December 31, 1998, broadband telephony products have not contributed to the
Company's revenue. Furthermore, the Company does not have significant backlog
for future sales of these products. The Company faces severe competition and
rapidly changing technology in the broadband telephony market. It is likely that
the Company will need to invest significant additional resources to compete in
this market, and there can be no assurance that such investment will result in
significant revenues.
Rapid Technological Change; Dependence on New Product Introduction
The multimedia communication semiconductor and multimedia communication
markets are characterized by rapid changes in customer requirements, frequent
introductions of new and enhanced products, and continuing and rapid
technological advancement. In order to compete in these markets, the Company
must continue to design, develop, manufacture and sell new and enhanced products
that provide increasingly higher levels of performance and reliability and lower
cost, take advantage of technological advancements and changes, and respond to
new customer requirements. The Company's success in designing, developing,
manufacturing and selling such products will depend on a variety of factors,
including the identification of market demand for new products, product
selection, timely implementation of product design and development, product
performance, cost-effectiveness of products under development, effective
manufacturing processes and the success of promotional efforts.
The Company plans to introduce additional VideoCommunicators and multimedia
communication semiconductors. The development of new products or enhancements to
existing products involves technical and other risks, which the Company may not
fully understand. In addition, new product introductions or enhancements to
products may decrease demand for existing products resulting in higher than
expected product returns and/or excess inventory of existing products. The
Company has in the past experienced delays in the development of new products
and the enhancement of existing products, and such delays will likely occur in
the future.
If the Company is unable, due to resource constraints or technological or
other reasons, to develop and introduce new or enhanced products in a timely
manner, if such new or enhanced products do not achieve sufficient market
acceptance or if such new product introductions decrease demand for existing
products, it would have a material adverse effect on the Company's business and
operating results.
Dependence on Proprietary Technology; Reliance on Third Party Licenses
The Company relies in part on trademark, copyright and trade secret law to
protect its intellectual property in the United States and abroad. The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright law, which afford only limited protection. The
Company also relies in part on patent law to protect its intellectual property
in the United States and abroad. The Company currently holds seven United States
patents, including patents relating to video compression and memory architecture
technology, and has a number of United States and foreign patent applications
pending. There can be no assurance that any such patent applications will result
in an issued patent. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad (where
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<PAGE> 24
effective intellectual property protection be may unavailable or limited) will
be adequate or that competitors will not independently develop technologies that
are similar or superior to the Company's technology, duplicate the Company's
technology or design around any patent of the Company. The Company has in the
past licensed and in the future expects to continuing licensing its technology
to others, many of whom are located or may be located abroad. There are no
assurances that such licensees will protect the Company's technology from
misappropriation. Moreover, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement
or invalidity. Such litigation could result in substantial costs and diversion
of management time and resources and could have a material adverse effect on the
Company's business and operating results.
There has been substantial litigation in the semiconductor, electronics and
related industries regarding intellectual property rights, and there can be no
assurance that third parties will not claim infringement by the Company of their
intellectual property rights. The Company's broad range of technology, including
systems, digital and analog circuits, software and semiconductors, increases the
likelihood that third parties may claim infringement by the Company of their
intellectual property rights. If the Company were found to be infringing on the
intellectual property rights of any third party, the Company could be subject to
liabilities for such infringement, which could be material, and the Company
could be required to refrain from using, manufacturing or selling certain
products or using certain processes, either of which could have a material
adverse effect on the Company's business and operating results.
The Company relies upon certain technology, including hardware and software,
licensed from third parties. The loss of, or inability to maintain, existing
licenses could have a material adverse effect on the Company's business and
operating results.
Dependence on Third Party Manufacturers and Component Suppliers
The Company outsources the manufacture of its VideoCommunicators and
semiconductors to subcontract manufacturers and independent foundries. The
Company's VideoCommunicator subcontract manufacturers include EFA Corporation in
Taiwan and Flash Electronics in Fremont, California, while its semiconductor
manufacturers include Taiwan Semiconductor Manufacturing Corporation and United
Micro Electronics Corporation in Taiwan. The Company also relies on Anam/Amkor
Electronics Corporation in South Korea for packaging and testing of its
semiconductors. The Company does not have long-term purchase agreements with its
subcontract manufacturers or its component suppliers. There can be no assurance
that the Company's contract manufacturers will be able or willing to reliably
manufacture the Company's products, or that the Company's component suppliers
will be able or willing to reliably supply components for the Company's
products, in volumes, on a cost effective basis or in a timely manner. The
Company may experience difficulties due to its reliance on independent
subcontract manufacturers, semiconductor foundries and component suppliers that
could have a material adverse effect on the Company's business and operating
results.
In addition, from time to time the Company may issue non-cancelable purchase
orders to its third-party manufacturers for raw materials used in its
VideoCommunicator products to ensure availability for long lead-time items or to
take advantage of favorable pricing terms. If the Company should experience
decreased demand for its VideoCommunicator products, the Company would still be
required to take delivery of and make payment for such raw materials. In the
event
22
<PAGE> 25
of a significant decrease in VideoCommunicator product demand, such purchase
commitments could have a material adverse effect on the Company's business and
operating results. The Company's reliance on foreign subcontract manufacturers
involves a number of risks. See "Factors That May Affect Future
Results--International Operations."
Compliance with Regulations and Industry Standards
The Company must comply with certain rules and regulations of the Federal
Communications Commission regarding electromagnetic radiation and standards
established by Underwriters Laboratories as well as similar regulations and
standards applicable in other countries. The failure of the Company's products
to comply, or delays in compliance, with the various existing and evolving
government regulations and industry standards could delay or interrupt volume
production of VideoCommunicators, which would have a material adverse effect on
the Company's business and operating results.
Management of Growth and Change; Dependence on Key Personnel
The development and marketing of the Company's VideoCommunicators will
continue to place a significant strain on the Company's limited personnel,
management and other resources, particularly in light of the Company's limited
experience in developing, manufacturing, marketing and selling consumer
products. The Company's ability to manage any future growth effectively will
require it to successfully attract, train, motivate, retain and manage
employees, particularly key engineering and managerial personnel, to effectively
integrate new employees into its operations and to continue to improve its
operational, financial and management systems. The Company's failure to manage
its growth and changes in its business effectively and to attract and retain key
personnel could have a material adverse effect on the Company's business and
operating results.
Further, the Company is highly dependent on the continued service of and its
ability to attract and retain qualified technical, marketing, sales and
managerial personnel. The competition for such personnel is intense,
particularly in the San Francisco Bay area where the Company is located. The
loss of any such person or the failure to recruit additional key technical and
sales personnel in a timely manner would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business. The Company currently does not
have employment contracts with any of its employees and does not maintain key
person life insurance policies on any of its employees.
Product Concentration; Dependence on Multimedia Communication Industry
Sales of multimedia communication products accounted for approximately 100%,
100% and 86% of total product revenues for the nine months ended December 31,
1998 and in the fiscal years ended March 31, 1998 and 1997, respectively. Any
general decline in the market for multimedia communication products could have a
material adverse effect on the Company's business and operating results.
Enterprise-Wide Database
The company is currently engaged in a major project to upgrade its
enterprise-wide database and information management systems, based principally
on software from a major software
23
<PAGE> 26
supplier. In recent years, some fabless semiconductor and system-level product
companies undertaking major systems transitions have experienced significant
business disruption as a result of unexpected delays in the implementation of
these projects. There can be no assurance that the Company's project will be
completed within the projected timeframe or within budget.
Potential Volatility of Stock Price
The market price of the shares of the Company's common stock has been and is
likely to be highly volatile. It may be significantly affected by factors such
as: actual or anticipated fluctuations in the Company's operating results;
announcements of technical innovations; loss of key personnel; new products or
new contracts by the Company, its competitors or their customers; governmental
regulatory action; developments with respect to patents or proprietary rights,
general market conditions, changes in financial estimates by securities analysts
and other factors which could be unrelated to, or outside the control of, the
Company. The stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices for
the common stocks of technology companies and that have often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the market price of the Company's common
stock. In the past, following periods of volatility in the market price of a
Company's securities, securities class action litigation has often been
initiated against the issuing company. There can be no assurance that such
litigation will not occur in the future with respect to the Company. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business and operating results. Any settlement or adverse
determination in such litigation would also subject the Company to significant
liability, which would have a material adverse effect on the Company's business
and financial condition.
24
<PAGE> 27
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company's 1999 Annual Meeting of Stockholders will be held at 2 p.m. Pacific
Standard Time on June 21, 1999 at the Company's principal executive offices at
2445 Mission College Blvd., Santa Clara, California.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) No reports on Form 8-K were filed during the three month period ended
December 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized:
Date: January 27, 1999
----------------
8X8, INC.
By: /s/ SANDRA L. ABBOTT
------------------------------------
Sandra L. Abbott
Chief Financial Officer and
Vice President of Finance
(Principal Financial and Accounting
Officer)
25
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
<S> <C>
27.1+ Financial Data Schedule.
</TABLE>
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Condensed Consolidated
Financial Statements or notes thereto.
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from 8x8, Inc.'s Condensed
Consolidated Statements of Operations and Condensed Consolidated Balance Sheets
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,064
<SECURITIES> 0
<RECEIVABLES> 6,771<F1>
<ALLOWANCES> 0
<INVENTORY> 10,729
<CURRENT-ASSETS> 35,416
<PP&E> 8,779
<DEPRECIATION> (6,614)
<TOTAL-ASSETS> 37,666
<CURRENT-LIABILITIES> 10,956
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 26,695
<TOTAL-LIABILITY-AND-EQUITY> 37,666
<SALES> 26,182
<TOTAL-REVENUES> 26,182
<CGS> 15,933
<TOTAL-COSTS> 15,933
<OTHER-EXPENSES> 21,938
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,844)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,844)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,844)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.73)
<FN>
<F1>Item shown net of allowance, consistent with the balance sheet presentation.
</FN>
</TABLE>
