SEC Filing | 8x8, Inc.

1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 1997 REGISTRATION NO. 333-15627 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 8 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 8X8, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 3674 77-0142404 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification No.) Incorporation or Organization)

------------------------ 2445 MISSION COLLEGE BOULEVARD SANTA CLARA, CA 95054 (408) 727-1885 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ JOE PARKINSON CHAIRMAN AND CHIEF EXECUTIVE OFFICER 8X8, INC. 2445 MISSION COLLEGE BOULEVARD SANTA CLARA, CA 95054 (408) 727-1885 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ Copies to: LARRY W. SONSINI, ESQ. BROOKS STOUGH, ESQ. JOHN T. SHERIDAN, ESQ. BRIAN K. BEARD, ESQ. JEFFREY A. HERBST, ESQ. WILLIAM A. HOLMES, ESQ. BRETT D. BYERS, ESQ. GUNDERSON DETTMER CAINE T. MOSS, ESQ. STOUGH VILLENEUVE WILSON SONSINI GOODRICH FRANKLIN & HACHIGIAN, LLP & ROSATI, P.C. 155 CONSTITUTION DRIVE 650 PAGE MILL ROAD MENLO PARK, CALIFORNIA 94025 PALO ALTO, CALIFORNIA 94304-1050 (415) 321-2400 (415) 493-9300

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective If this Form is filed to register additional securities for an offering pursuant to rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE(3) - -------------------------------------------------------------------------------------------------- Common Stock, par value $0.001........................ 2,875,000 shares $10.00 $28,750,000 $8,712.12 ==================================================================================================

(1) Includes up to 375,000 shares of Common Stock which may be purchased by the Underwriters to cover overallotments, if any. (2) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the registration fee. (3) Fee previously paid in connection with original filing on November 6, 1996. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 8X8, INC. CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.... Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................. Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information and Risk Factors...... Prospectus Summary; Risk Factors; Selected Consolidated Financial Data 4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price........... Front Cover Page of Prospectus; Underwriting 6. Dilution.................................. Risk Factors; Dilution 7. Selling Security Holders.................. Not Applicable 8. Plan of Distribution...................... Outside and Inside Front Cover Pages of Prospectus; Underwriting 9. Description of Securities to be Registered................................ Front Cover Page of Prospectus; Prospectus Summary; Capitalization; Description of Capital Stock 10. Interests of Named Experts and Counsel.... Legal Matters 11. Information with Respect to the Registrant................................ Front Cover Page of Prospectus; Prospectus Summary; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Dilution; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders; Description of Capital Stock; Shares Eligible for Future Sale; Legal Matters; Experts; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................... Not Applicable

3 Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED MAY 16, 1997 2,500,000 SHARES LOGO COMMON STOCK All of the 2,500,000 shares of Common Stock offered hereby are being sold by 8x8, Inc. ("8x8" or the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $8.00 and $10.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company's Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "EGHT." THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================
Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) - ------------------------------------------------------------------------------------------------------------ Per Share........................................ $ $ $ Total(3)......................................... $ $ $ ============================================================================================================
(1) See "Underwriting" for information concerning indemnification of the Underwriters and other matters. (2) Before deducting expenses payable by the Company estimated at $1,300,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $ , the Underwriting Discounts and Commissions will total $ and the Proceeds to Company will total $ . See "Underwriting." The shares of Common Stock are offered by the several Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the office of Montgomery Securities on or about , 1997. --------------------------- MONTGOMERY SECURITIES DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION , 1997 4 LOGO ------------------------ The Company intends to furnish its stockholders with annual reports containing financial statements audited by its independent accountants and quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. ------------------------ This Prospectus includes trademarks and trade names of the Company and other corporations. ------------------------ As used in this Prospectus, "8x8" and the "Company" refer to 8x8, Inc. and its subsidiaries, unless the context otherwise indicates. Except as otherwise indicated, the information presented in this Prospectus assumes that (i) the Underwriters' over-allotment option is not exercised, (ii) all outstanding shares of the Company's Preferred Stock are converted into Common Stock upon the closing of this Offering and (iii) the Company has filed an Amended and Restated Certificate of Incorporation immediately after the closing of this Offering to eliminate the Company's currently existing classes of Preferred Stock and authorize undesignated Preferred Stock. See "Capitalization," "Description of Capital Stock" and "Underwriting." ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 5 PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including "Risk Factors" and Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. The discussion in this Prospectus contains forward-looking statements. The outcome of the events described in such forward-looking statements is subject to risks and uncertainties. The Company's actual results may differ materially from those discussed in such forward-looking statements. Factors that may cause or contribute to such differences include those discussed in sections entitled "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. THE COMPANY 8x8, Inc. ("8x8" or the "Company") designs, develops and markets highly integrated, proprietary video compression semiconductors and associated software to original equipment manufacturers ("OEMs") of corporate video conferencing systems. To address new opportunities, the Company is leveraging its strengths in semiconductor design and related software to develop and market video conferencing systems for the consumer market. The Company began shipping the VC100 (or "ViaTV"), the first product in its planned family of VideoCommunicators, to the United States consumer market in February 1997. The VC100 connects to a television set and a standard touch-tone telephone adding video to an otherwise normal telephone call, without the need for a personal computer ("PC"). Although the Company has no current plan to market the VC100 outside of the United States prior to 1998 at the earliest, the Company intends, throughout 1997 and thereafter, to explore the requirements for obtaining foreign regulatory approvals which will be necessary prior to the sale of the VC100 outside of the United States. There can be no assurance, however, that the Company will receive any foreign regulatory approvals in a timely manner, if at all. See "Risk Factors -- Compliance with Regulations and Industry Standards." The Company's video compression semiconductors combine, on a single chip, a reduced instruction set computer ("RISC") microprocessor, a digital signal processor ("DSP"), specialized video processing circuitry, static random access memory ("RAM") and proprietary software to perform the real time compression and decompression ("codec") of video and audio information and establish and maintain network connections in a manner consistent with international standards for video telephony. These semiconductors are designed to provide video conferencing over a broad range of network types including POTS, integrated services digital networks ("ISDN"), local area networks ("LAN") and asymmetric digital subscriber lines ("ADSL"). Customers for the Company's video compression semiconductors include PictureTel, Siemens, Sony, VideoServer, VCON and Vtel. The Company's VideoCommunicators are based on its proprietary semiconductor, software and systems technology. The VC100 is designed to be compliant with the H.324 international standard for video telephony over standard analog telephone lines (commonly known as plain old telephone service, or "POTS") and to be compatible with PC and non-PC based systems that adhere to the H.324 standard. The VC100 is designed to communicate with full duplex audio and video rates of up to 15 frames per second. In addition, the Company is currently demonstrating a prototype of its second VideoCommunicator, the VC200, a non-PC based POTS video phone with a built-in liquid crystal display. The Company sells its VideoCommunicators through a direct marketing effort utilizing a combination of advertising, toll-free telemarketing and direct mail supported by co-marketing arrangements with third parties such as Hewlett-Packard and GTE. The Company also recently began marketing its VideoCommunicators through retail channels such as Comexpo, Fry's Electronics and J&R Computer and catalogs such as Hello Direct, Hammacher Schlemmer, MicroWarehouse and Sharper Image. See "Business -- Products" and "Business -- Licensing and Development Arrangements" for a discussion of the development status of the VC100, the VC200 and the successor products to the Company's video compression semiconductors and certain related licensing and development arrangements (including arrangements pursuant to which U.S. Robotics Access Corporation ("USR") and Kyushu Matsushita Electric Co., Ltd. ("KME") have licensed all or substantially all of the Company's technology underlying its VideoCommunicators). Although the Company has received certain revenues from these licensing and development arrangements in the past, there can be no assurance that the Company will receive any revenues from these arrangements in the future. See "Risk Factors -- USR Right of Cancellation." In addition, USR, KME and other licensees or purchasers of the Company's technology, video compression 3 6 semiconductors, software or board designs may use such technology or components to manufacture and sell products that compete with the Company's VideoCommunicators. The proliferation of video conferencing products is dependent on several factors including network bandwidth, advanced compression technologies and the acceptance of video telephony standards. Increases in available bandwidth improve the data carrying capacity of networks, while improvements in compression technologies utilize a given bandwidth more efficiently. Finally, video telephony standards are key to widespread adoption as they are designed to permit the interoperability between systems offered by different vendors. As a result of recent technological advances and the adoption of the H.324 standard for video telephony over POTS, consumer video phones are being developed by a number of suppliers. These products are being introduced in a variety of product configurations and physical forms (i.e., "form factors"), including those based on telephones and televisions and those based on the PC. An increasing number of PCs are being shipped with pre-installed H.324 compliant software. Significant sales of such H.324 products, if achieved, should increase the usefulness and demand for additional H.324 compliant video phones by providing potential video phone purchasers with other parties to call. C-Phone, a manufacturer of video conferencing systems, recently began shipping to consumer electronics stores a product that addresses the home video conferencing market. The Company expects that additional competitors will enter this market in the future. During fiscal years 1993 through 1995, the Company's revenues were derived primarily from the sale of math co-processors. However, the Company's revenues from math co-processors subsequently declined and revenues from the Company's sale of video compression semiconductors increased, comprising the majority of the Company's total revenues during fiscal 1997. In the past, the Company has also derived revenues from certain licensing transactions. Nonetheless, there can be no assurance that the Company will receive revenues from the licensing of its technology in the future. See "Risk Factors -- USR Right of Cancellation" and "Business -- Licensing and Development Arrangements." Because the Company's video compression semiconductor business has not provided, and is not expected to provide, sufficient revenues to profitably operate the Company, the Company believes that its future profitability will be largely dependent on the success of its VideoCommunicator business. As a result, the Company believes that its historical operating results will not be comparable to, and should not be relied upon as an indication of, future operating results. The Company was incorporated in February 1987 in California under the name Integrated Information Technology, Inc. In April 1996, the Company changed its name to 8x8, Inc. and in December 1996 reincorporated in Delaware. The Company's executive offices are located at 2445 Mission College Boulevard, Santa Clara, CA 95054, and its telephone number is (408) 727-1885. 4 7 THE OFFERING Common Stock offered by the Company............. 2,500,000 shares Common Stock to be outstanding after the 13,216,659 shares(1) Offering...................................... Use of Proceeds................................. For general corporate purposes including working capital. See "Use of Proceeds." Proposed Nasdaq National Market symbol.......... EGHT

SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31, ------------------------------------------------ 1993 1994 1995 1996 1997 ------- ------- ------- ------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues.......................................... $31,082 $34,401 $19,929 $28,774 $ 19,146 Gross profit............................................ 16,945 14,932 8,025 12,106 7,116 Income (loss) from operations........................... (1,473) 243 (6,527) (4,149) (13,551) Net loss................................................ (841) (348) (5,881) (3,217) (13,613) Pro forma net loss per share............................ $ (1.13) Shares used in pro forma per share calculations......... 12,026

MARCH 31, 1997 ------------------------ ACTUAL AS ADJUSTED(2) ------- -------------- CONSOLIDATED BALANCE SHEET DATA: Working capital..................................................................... $ 4,654 $ 25,101 Total assets........................................................................ 12,727 32,745 Total liabilities................................................................... 6,686 6,686 Stockholders' equity................................................................ 6,041 26,488
- --------------- (1) Excludes, as of March 31, 1997, (i) an aggregate of 2,291,150 shares of Common Stock issuable on the exercise of outstanding options granted under the Company's 1992 Stock Option Plan and 1996 Stock Plan and (ii) an aggregate of 1,102,656 shares of Common Stock reserved for issuance under the Company's 1992 Stock Option Plan, 1996 Stock Plan, 1996 Director Option Plan and 1996 Employee Stock Purchase Plan. See "Management -- Compensation Plans" and Note 6 of Notes to Consolidated Financial Statements. (2) Adjusted to reflect the sale of 2,500,000 shares of Common Stock by the Company at an assumed public offering price of $9.00 per share after deducting estimated underwriting discounts and commissions and estimated offering expenses. See "Use of Proceeds" and "Capitalization." 5 8 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION Certain statements contained under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and under "Business," as well as other statements contained in this Prospectus regarding matters that are not historical facts are forward-looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended). Because the outcome of the events described in such forward-looking statements is subject to risks and uncertainties, actual results may differ materially from those expressed in or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those discussed herein under "Risk Factors." The Company undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RISK FACTORS An investment in the shares of Common Stock being offered hereby involves a high degree of risk. In addition to the other information in this Prospectus, the following risk factors should be considered carefully by potential purchasers in evaluating an investment in the Common Stock offered hereby. HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; DEFERRED COMPENSATION EXPENSE The Company recorded operating losses of $6.5 million, $4.1 million and $13.6 million in the years ended March 31, 1995, 1996 and 1997, respectively. Revenues fluctuated from $19.9 million in fiscal 1995 to $28.8 million in fiscal 1996 to $19.1 million in fiscal 1997. In view of the Company's operating losses, there can be no assurance that the Company will either become profitable or sustain profitability on an annual or quarterly basis. Future losses will likely occur in the event that the Company's initial VideoCommunicators, particularly the VC100, do not achieve widespread consumer market acceptance, of which there can be no assurance. The Company has recorded deferred compensation expense of $7.3 million relating to certain stock option grants which were made during the period June through September 1996. The Company recognized $4.5 million of the deferred compensation expense during fiscal 1997, and will recognize the remainder over the related vesting period of the options (which is generally 48 months). The future compensation charges are subject to reduction for any employee who terminates employment prior to the expiration of such employee's option vesting period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 6 of Notes to Consolidated Financial Statements. DEPENDENCE ON FUTURE VIDEOCOMMUNICATOR REVENUES The Company believes that its business and future profitability will be largely dependent on widespread market acceptance of its first VideoCommunicator, the VC100. The Company's video compression semiconductor and related software business has not provided, and is not expected to provide, sufficient revenues to profitably operate the Company. Although the Company has no current plan to market the VC100 outside of the United States prior to 1998 at the earliest, the Company intends, throughout 1997 and thereafter, to explore the requirements for obtaining foreign regulatory approvals which will be necessary prior to the sale of the VC100 outside of the United States. There can be no assurance, however, that the Company will receive any foreign regulatory approvals for the VC100, or any regulatory approvals for its other VideoCommunicators, in a timely manner, if at all. If the Company does not receive such approvals in a timely manner, or if the VC100 product does not achieve sufficient market acceptance, it would have a material adverse effect on the Company's business and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- 8x8 Strategy." POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS The Company's future operating results are expected to fluctuate as the Company proceeds with the development and marketing of its family of non-PC based VideoCommunicators. Moreover, because the Company's video compression semiconductor and related software business has not provided, and is not 6 9 expected to provide, sufficient revenues to profitably operate the Company, the Company believes that its future profitability will be largely dependent on the success of its VideoCommunicator business. As a result, the Company believes that its historical operating results will not be comparable to, and should not be relied upon as an indication of, future operating results. In addition, the Company's operating results have fluctuated significantly and may continue to fluctuate in the future, on an annual and a quarterly basis, as a result of a number of factors, many of which are outside the Company's control, including changes in market demand, the timing of customer orders, competitive market conditions, lengthy sales cycles, 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 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, product pricing, the allocation between international and domestic sales, the percentage of direct sales and sales to distributors, and manufacturing and component costs. The Company may also be required to reduce prices in response to competitive pressure or other factors or increase spending to pursue new market opportunities. Any decline in average selling prices of a particular product which is not offset by a reduction in production costs or by sales of other products with higher gross margins would decrease the Company's overall gross margin and adversely affect the Company's operating results. In particular, in the event that the Company encounters significant price competition in the markets for its products, the Company could be at a significant disadvantage compared to its competitors, many of which have substantially greater resources, and therefore may be better able to withstand an extended period of downward pricing pressure. Moreover, the Company believes that the marketing of its family of VideoCommunicators may adversely impact its gross margins due in part to higher unit costs associated with initial production of its first products, including the VC100, as well as substantially different cost and pricing structures related to the manufacture and sale of consumer products. Variations in timing of sales may cause significant fluctuations in future operating results. In addition, because a significant portion of the Company's business may be derived from orders placed by a limited number of large customers, the timing of such orders can also cause significant fluctuations in the Company's operating results. Anticipated orders from customers may fail to materialize, and delivery schedules may be deferred or canceled for a number of reasons, including changes in specific customer requirements. If sales do not meet the Company's expectations in any given quarter, the adverse impact of the shortfall on the Company's operating results may be magnified by the Company's inability to adjust spending to compensate for the 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 strategic shift towards the production and marketing of VideoCommunicators, such as the VC100, may result in substantially different patterns in operating results. For example, the Company's operating results may be subject to increased seasonality with sales higher during the Company's third fiscal quarter, corresponding to the Christmas shopping season. The Company intends to spend substantial additional amounts on advertising, toll-free marketing and customer support. There can be no assurance as to the amount of such spending or that revenues adequate to justify such spending will result. As a result of its shift to selling VideoCommunicators, the Company may experience different inventory, product return, price protection, receivable collection and warranty cost patterns. 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 Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The Company competes with independent manufacturers of video compression semiconductors and, as a result of the recent introduction of the VC100, its initial VideoCommunicator, now competes with manufacturers of video conferencing products targeted at the consumer market. The markets for the Company's products are characterized by intense competition, declining average selling prices and rapid technological 7 10 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 the following segments: Large consumer electronics manufacturers. The Company will face intense competition from many well known, established suppliers of consumer electronics products, which may include Lucent Technologies, Matsushita Electric Industrial Co., Ltd. ("Matsushita"), Philips, Samsung and Sony. Many of these potential competitors sell television and telephone products into which they may integrate video conferencing systems, thereby eliminating a consumer's need to purchase a separate video conferencing system, such as the VC100. Licensees and purchasers of the Company's VideoCommunicator technology and components. A number of companies have licensed portions of the Company's technology, including USR and KME, an affiliate of Matsushita, which have each licensed all or substantially all of the Company's technology underlying its VideoCommunicators. Pursuant to the Company's license agreements with USR and KME, the Company has already received lump sum payments and will receive additional licensing revenues only in the event that such parties develop their own semiconductors or products based on the Company's licensed technology. See "Risk Factors -- USR Right of Cancellation." In connection with these licensing arrangements, each of USR and KME may be able to use the licensed technology to manufacture and sell products that compete with the Company's VideoCommunicators. The Company may in the future enter into similar license agreements with respect to substantial portions of its technology. See "Business -- Licensing and Development Arrangements." In addition, other companies may choose to manufacture and sell products competitive with the Company's VideoCommunicators by incorporating video compression semiconductors purchased from the Company into products that are based on the Company's video phone reference board designs or other video phone designs. Purchasers of other companies' video compression semiconductors and reference designs. Companies may choose to manufacture and sell products based upon video compression semiconductors manufactured by suppliers other than the Company or upon reference designs based upon such semiconductors. Certain of these other suppliers of video compression semiconductors, including Analog Devices, Chromatic Research, Lucent Technologies, Philips, Texas Instruments and Winbond Electronics, may have significantly greater resources than the Company. In order to increase the sale of their video compression semiconductors, these manufacturers may provide marketing, financial and other support to the purchasers of these products. One company has publicly announced that it is developing a video conferencing product based upon Lucent Technologies' video compression semiconductors and that it will be making available for sale to third parties a video phone reference design incorporating Lucent Technologies' semiconductors. In addition, another company has publicly announced that it is developing a similar product based on semiconductors from Analog Devices. The Company's ability to compete depends upon its future success in developing and manufacturing new generations of processors that integrate additional functions and reduce costs. Otherwise, competing semiconductor manufacturers will in the future have competitive advantages in cost, size and performance which would make systems based on competing semiconductors preferable to the Company's VideoCommunicators. Personal computer system and software manufacturers. Potential customers for the Company's VideoCommunicators may elect instead to buy PCs equipped with video conferencing capabilities, which are currently available. As a result, the Company may face competition from Intel; PC system manufacturers such as Apple, Compaq, IBM and Sony; PC software suppliers such as Microsoft and Netscape; and PC add-on component suppliers. Existing manufacturers of video conferencing equipment. Manufacturers of more expensive corporate video conferencing systems may enter the market for lower cost consumer video conferencing products. Potential competitors include Compression Labs, C-Phone (which is shipping to consumer electronics stores a product that is competitive with the Company's VC100), PictureTel, Sony and Vtel. 8 11 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 recently been announced or introduced by companies such as Microsoft, Philips and Sony. C-Phone recently began shipping to consumer electronics stores a product that addresses the home video conferencing market. The Company expects that additional competitors will enter this market in the future. The principal competitive factors in the market for video compression semiconductors include product definition, product design, system integration, chip size, functionality, time-to-market, adherence to industry standards, price and reliability. The Company has a number of competitors in this market including Analog Devices, Chromatic Research, Lucent Technologies, Philips, Texas Instruments and Winbond Electronics. Certain of the Company's competitors for video compression semiconductors maintain their own semiconductor foundries and may therefore benefit from certain capacity, cost and technical advantages. Many of the Company's current and potential competitors have longer operating histories, are substantially larger, and have greater financial, manufacturing, marketing, technical and other resources. A number also have greater name recognition and a larger installed base of products than the Company. Competition in the Company's markets may result in significant price reductions. As a result of their greater resources, many current and potential competitors may be better able than the Company to initiate and withstand significant price competition or downturns in the economy. There can be no assurance that the Company will be able to continue to compete effectively, and any failure to do so would have a material adverse effect on the Company's business and operating results. UNCERTAINTY OF MARKET ACCEPTANCE; LIMITS OF EXISTING TECHNOLOGY Previous efforts to sell consumer video phones have been unsuccessful and there can be no assurance that the market for such products will develop. The Company has no reliable data to suggest that there will be significant customer demand for such products, including the Company's VideoCommunicators. For such products to achieve widespread consumer acceptance, the installed base must reach a critical mass. Failure of the market for consumer video telephony to develop or achieve critical mass would have a material adverse effect on the Company's business and operating results. In addition, the data carrying capacity of standard analog phone lines is limited. Currently, modems used for the symmetrical transmission of data over standard analog phone lines are limited to data transfer rates of up to 33.6 kilobits per second ("Kbps"). Using such modems, the Company's VC100 may initially be capable of delivering video data at rates only up to 15 frames per second. This compares to 30 frames per second provided by television, 24 frames per second provided by movies and 24 or more frames per second provided by ISDN video teleconferencing. At rates less than approximately 24 frames per second, the human eye can detect degradation of video quality. Further, POTS infrastructure varies widely in configuration and integrity, which can result in decreased rates of transmission and difficulties in establishing and maintaining connections. Actual or perceived technical difficulties related to the H.324 standard on POTS could have a material adverse effect on the Company's business and results of operations. See "Business -- Sales and Marketing." DEPENDENCE ON H.324 STANDARD FOR VIDEO TELEPHONY The H.324 standard has only recently received industry endorsement as an international protocol for video telephony using POTS. The Company believes that adherence to this standard is an important factor in the development of this marketplace and, if the H.324 standard is not widely implemented in the industry, different vendors' products will not be compatible, which may deter or delay growth in the market and reduce the demand for consumer video telephony products. However, the emergence of industry standards may also lower barriers to entry and result in increased competition. There can be no assurance that the H.324 standard will not change or be supplanted by other standard or non-standard video methods, which could render the Company's H.324 compliant products uncompetitive. There can be no assurance that, even with the H.324 standard in place, a market for video telephony products compatible with H.324 will develop. Further, the implementation of the H.324 standard by different manufacturers may vary. Such variation could degrade the 9 12 quality and limit the interoperability of POTS based systems, which may inhibit widespread acceptance of consumer video telephony products. NO HISTORY OF CONSUMER MARKETING In recent years, the Company has been a provider of video compression semiconductors to OEMs of video conferencing systems. Accordingly, the Company has had no prior experience in marketing commercial quantities of consumer products such as its VideoCommunicators. In order to achieve significant market penetration and brand awareness for its VideoCommunicators, the Company must expand its sales and marketing efforts and further develop consumer marketing capabilities. There can be no assurance that the Company will be successful in these areas or that the Company will be able to achieve significant market penetration with its VideoCommunicators. See "Business -- Sales and Marketing." POTENTIAL REDUCTION IN LICENSING REVENUES The Company has in the past received substantial revenues from licensing of technology. Licensing revenues were $1.3 million, $9.0 million and $3.9 million in the years ended March 31, 1995, 1996 and 1997, respectively. There can be no assurance that the Company will receive revenues from licensing of its technology in the future. USR RIGHT OF CANCELLATION On May 5, 1997, the Company entered into a license agreement with USR pursuant to which the Company has granted to USR, for an initial license fee plus certain royalties, a license to make, use and sell systems and products containing the Company's proprietary technology relating to its VideoCommunicators and its PC-related video conferencing products. The Company's license agreement with USR provides that, on or before June 12, 1997, USR may cancel the agreement and return the technology to the Company for a full refund of all monies paid to the Company thereunder. See "Business -- Licensing and Development Arrangements." PRODUCT CONCENTRATION; POTENTIAL LOSS OF SEMICONDUCTOR SALES; DEPENDENCE ON VIDEO CONFERENCING INDUSTRY In the years ended March 31, 1995, 1996 and 1997, sales of video compression semiconductors and reference design boards accounted for approximately 38%, 59% and 76%, respectively, of the Company's total revenues. Pending widespread market acceptance of its VideoCommunicators, sales of video compression semiconductors will continue to account for a substantial portion of total revenues. Moreover, successful introduction of VideoCommunicators may adversely affect sales of semiconductors to the Company's existing customers that currently, or may in the future, sell products that compete with the Company's VideoCommunicators. Sales of the Company's existing compression semiconductors and VideoCommunicators are also dependent on the video conferencing industry. Thus, regardless of the success or failure of its VideoCommunicators, the Company will continue to be substantially dependent on the video conferencing industry. Any reduction in the demand for the Company's video compression semiconductors (particularly prior to significant VideoCommunicator revenues) or any general decline in the market for video conferencing products could have a material adverse effect on the Company's business, and operating results. See "Business -- Sales and Marketing" and "Business -- Competition." DEPENDENCE ON KEY CUSTOMERS Historically, a significant portion of the Company's sales has been to relatively few customers, although the composition of these customers has varied. Product revenues from the Company's ten largest customers, in the years ended March 31, 1995, 1996 and 1997 accounted for approximately 44%, 39% and 54%, respectively, of its total revenues. During these periods, excluding one company paying certain non-recurring licensing fees during the year ended March 31, 1996, the Company had only two customers that accounted for 10% or more 10 13 of total revenues: Compression Labs (during the year ended March 31, 1995) and ASCII, the Company's Japanese distributor (during the year ended March 31, 1997). Sales of video compression semiconductors to relatively few customers may continue to account for a significant portion of its total revenues. Substantially all the Company's sales have been made, and are expected to be made, on a purchase order basis. None of the Company's customers has entered into a long-term agreement requiring it to purchase the Company's products. The loss of, or any reduction in orders from, significant customers could have a material adverse effect on the Company's business and operating results. See "Business -- Sales and Marketing." RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT INTRODUCTION The video compression semiconductor and video conferencing markets are characterized by rapid changes in customer requirements, frequent introductions of new and enhanced products, and continuing and rapid technological advancement. To compete successfully, the Company must continue to design, develop, manufacture and sell new and enhanced products that provide increasingly higher levels of performance and reliability, take advantage of technological advancements and changes and respond to new customer requirements. The Company's success in designing, developing, manufacturing and selling such products will depend on a variety of factors, including the identification of market demand for new products, product selection, timely implementation of product design and development, product performance, cost-effectiveness of products under development, effective manufacturing processes and the success of promotional efforts. The Company is currently a developer and supplier of video compression semiconductors which it has sold since 1991. The Company was previously involved in several other businesses which have since been discontinued. Prior product lines that were discontinued include math co-processors and Motions Picture Expert Group ("MPEG") semiconductors, discontinued in June 1995 and September 1996, respectively. Prior development efforts that were discontinued include Intel compatible x86 microprocessors and graphics semiconductors, discontinued in June 1995 and during the quarter ended September 30, 1994, respectively. The Company discontinued its products and efforts in these areas in part because of rapid changes in the personal computer marketplace and severe price competition for certain of these components. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company plans to introduce additional VideoCommunicators and video compression semiconductors. There can be no assurance that these or any future products will be successfully developed or introduced to the market. The Company has in the past experienced delays in the development of new products and the enhancement of existing products, and such delays may occur in the future. If the Company is unable, due to resource constraints or technological or other reasons, to develop and introduce new or enhanced products in a timely manner, or if such new or enhanced products do not achieve sufficient market acceptance, it would have a material adverse effect on the Company's business and operating results. See "Business -- Research and Development." MANAGEMENT OF GROWTH 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. The Company's ability to manage any future growth effectively will require it to attract, train, motivate and manage new employees successfully, to effectively integrate new employees into its operations and to continue to improve its operational, financial and management systems. In particular, the Company intends to hire additional research and development personnel and to further develop consumer marketing capabilities by increasing the size of its domestic and international sales and marketing staff. The Company's failure to manage its growth effectively could have a material adverse effect on the Company's business and operating results. See "Business -- 8x8 Strategy." 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 11 14 other written materials under trade secret and copyright laws, which afford only limited protection. There can be no assurance that the steps taken by the Company will prevent misappropriation of its technology. The Company also relies in part on patent law to protect its intellectual property in the United States and abroad. The Company currently holds four United States patents, including patents relating to video compression and memory architecture technology, and has 13 United States patent applications pending. The Company has a number of foreign patent applications pending. There can be no assurance that any patent, trademark or copyright owned by the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with the scope of the claims sought by the Company, if at all. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. Thus, effective intellectual property protection may be unavailable or limited in certain foreign countries. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop technologies that are similar or superior to the Company's technology, duplicate the Company's technology or design around any patent of the Company. Moreover, litigation may be necessary in the future to enforce the Company's intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of management time and resources and could have a material adverse effect on the Company's business and operating results. There has been substantial litigation in the semiconductor, electronics and related industries regarding intellectual property rights, and there can be no assurance that third parties will not claim infringement by the Company of their intellectual property rights. In addition, as is common in its industry, the Company has from time to time received notification from other companies of intellectual property rights held by those companies upon which the Company's products may infringe. For example, in 1996, the Company received an allegation of infringement from Elk Industries, Inc. 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 could be required to seek licenses from other companies or to refrain from using, manufacturing or selling certain products or using certain processes. Although holders of patents and other intellectual property rights often offer licenses to their patents or other intellectual property rights, no assurance can be given that licenses would be offered to the Company, that the terms of any offered license would be acceptable to the Company or that failure to obtain a license would not 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. There can be no assurance that the technology licensed by the Company will continue to provide competitive features and functionality or that licenses for technology currently utilized by the Company or other technology which the Company may seek to license in the future will be available to the Company on commercially reasonable terms or at all. The loss of, or inability to maintain, existing licenses could result in shipment delays or reductions until equivalent technology or suitable alternative products could be developed, identified, licensed and integrated, and the inability to license key new technology that may be developed, on commercially reasonable terms, would have a material adverse effect on the Company's business and operating results. LACK OF EXPERIENCE IN MANUFACTURING CONSUMER VIDEO TELEPHONY PRODUCTS The Company is a fabless semiconductor manufacturer and has only recently begun to manufacture consumer video telephony products. To achieve future profitability, the Company must be able to reliably manufacture its VideoCommunicators directly or through third party subcontract manufacturers, in commercial quantities, on a cost effective basis and in a timely manner, of which there can be no assurance. In view of the Company's lack of manufacturing experience, there can be no assurance that unforeseen technical or other difficulties will not arise which could interfere with the manufacture thereof or prevent, or create delays in, marketing these products. Any delay in the manufacture of the VideoCommunicators, quality control 12 15 problems, or inability to produce such products in commercial quantities or on a cost effective basis could have a material adverse effect on the Company's business and operating results. DEPENDENCE ON THIRD PARTY MANUFACTURERS; COMPONENT AVAILABILITY The Company uses independent foundries to fabricate, assemble and test its video compression semiconductors. The Company does not have long-term purchase agreements with its semiconductor foundries, and purchases semiconductor wafers pursuant to purchase orders. Therefore these foundries are generally not obligated to supply products to the Company for any specific period, in any specific quantity or at any specific price. The Company secures assembly and test services on a purchase order basis as well. The Company outsources the manufacture of its VideoCommunicators to subcontract manufacturers. These subcontract manufacturers procure components from their suppliers and perform assembly and testing of the Company's VideoCommunicators on a turnkey basis. There can be no assurance that the Company's contract manufacturers will be able to reliably manufacture the Company's products in volumes, on a cost effective basis or in a timely manner. The Company's reliance on independent semiconductor foundries and subcontract manufacturers involves a number of risks, including the lack of direct control over the manufacturing process, the absence or unavailability of adequate capacity, the unavailability of, or interruption in access to, certain process technologies (particularly in the case of semiconductors) and reduced control over delivery schedules, quality control, manufacturing yields and costs. In the event that the Company's foundries and subcontract manufacturers are unable or unwilling to continue to manufacture the Company's products in required volumes, on a cost effective basis, in a timely manner or at all, the Company will have to secure additional foundry or manufacturing capacity. Available semiconductor foundry and manufacturing capacity at times has been limited. Even if such additional capacity is available at commercially acceptable terms, the qualification process could be lengthy and could create delays in product shipments. Certain components necessary for the manufacture of the Company's products are obtained from a single supplier or a limited group of suppliers. These include a digital camera, modem chips, certain application specific integrated circuits ("ASICs") and other semiconductor components. The Company does not maintain any long-term agreements with any of its suppliers of components. Because the purchase of certain key components may involve long lead times, in the event of unanticipated increases in demand for the Company's products, the Company could be unable to manufacture certain products in a quantity sufficient to meet end user demand. A shortage of any key component could have a material adverse effect on the Company's business and operating results. These risks and the related difficulties that the Company may experience due to its reliance on independent semiconductor foundries, subcontract manufacturers and component suppliers could have a material adverse effect on the Company's business and operating results. COMPLIANCE WITH REGULATIONS AND INDUSTRY STANDARDS The Company must comply with certain rules and regulations of the Federal Communications Commission ("FCC") regarding electromagnetic radiation and standards established by Underwriters Laboratories, Inc., as well as similar regulations and standards applicable in other countries. The Company's VideoCommunicators must comply with these regulations and standards as a prerequisite to commercial sales. In January 1997, the Company met the criteria for FCC Class A and Part 68 compliance for industrial sale of the VC100. In February 1997, the Company met the criteria for FCC Class B and began shipping the VC100 to consumer customers in the United States. Although the Company has no current plan to market the VC100 outside of the United States prior to 1998 at the earliest, the Company intends, throughout 1997 and thereafter, to explore the requirements for obtaining foreign regulatory approvals which will be necessary prior to the sale of the VC100 outside of the United States. There can be no assurance, however, that the Company will receive any foreign regulatory approvals for the VC100, or any regulatory approvals for its other VideoCommunicators, in a timely manner, if at all. As regulations and standards evolve, the Company may be required to modify its existing products or develop and support new versions of its products. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving government 13 16 regulations and industry standards could delay or interrupt volume production of VideoCommunicators, which would have a material adverse effect on the Company's business and operating results. INTERNATIONAL OPERATIONS Sales to customers outside of the United States represented 40%, 49% and 54% of the total revenues in the years ended March 31, 1995, 1996 and 1997, respectively. Although the Company has no current plan to market its VideoCommunicators outside of the United States prior to 1998 at the earliest, international sales of the Company's semiconductors may continue to represent a substantial portion of the Company's total 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 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. While international sales are typically denominated in U.S. dollars, fluctuations in currency exchange rates could cause the Company's products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Payment cycles for international customers may be longer than those for customers in the United States. 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. See "Business -- Sales and Marketing" and "Business -- Manufacturing." NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS While the Company expects that the proceeds from this Offering, its existing cash balances and the amounts, if any, generated from operations will be sufficient to meet its cash requirements for at least the next 12 months, the Company is operating in a rapidly changing industry. There can be no assurance that the Company will not seek to exploit business opportunities that will require it to raise additional capital from equity or debt sources to finance its growth and capital requirements. In particular, the development and marketing of new products could require a significant commitment of resources, which could in turn require the Company to obtain additional financing earlier than otherwise expected. There can be no assurance that the Company will be able to raise such capital on acceptable terms, if at all. If the Company is unable to obtain such additional capital, the Company may be required to reduce the scope of its planned product development and marketing, which could have a material adverse effect on the Company's business and operating results. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY PERSONNEL The Company is highly dependent on the continued service of, and on its ability to attract and retain, qualified technical, marketing, sales and managerial personnel. The competition for such personnel is intense, particularly in Silicon Valley, where the Company's principal office is located, and the loss of any of such persons, as well as the failure to recruit additional key technical and sales personnel in a timely manner, would have a material adverse effect on the Company's business and operating results. There can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its business. The Company currently does not have employment contracts with any of its employees and does not maintain key person life insurance policies on any of its employees. See "Business -- Employees" and "Management." ANTI-TAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW Certain provisions of the Company's Certificate of Incorporation and Bylaws, as in effect upon the closing of this Offering, may have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that 14 17 certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions eliminate the right of the stockholders to act by written consent without a meeting, eliminate cumulative voting by stockholders in the election of directors and specify procedures for director nominations by stockholders and submission of other proposals for consideration at stockholder meetings. In addition, the Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The Company has no present plans to issue shares of Preferred Stock. Certain provisions of Delaware law applicable to the Company could also delay or make more difficult a merger, tender offer or proxy contest involving the Company, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless certain conditions are met. Additionally, the issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, may discourage bids for the Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of, and the voting and other rights of the holders of, the Common Stock. Such provisions could have the effect of delaying, deferring or preventing a change in control of the Company, including without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of the Company's Common Stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. See "Description of Capital Stock -- Preferred Stock," "Description of Capital Stock -- Anti-Takeover of Provisions of Certificate of Incorporation and Bylaws" and "Description of Capital Stock -- Effect of Delaware Antitakeover Statute." NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE Prior to this Offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop or be sustained after this Offering. The initial public offering price will be determined through negotiations between the Company and the representatives of the Underwriters based on several factors and may not be indicative of the market price of the Common Stock after this Offering. See "Underwriting." The market price of the shares of Common Stock is likely to be highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's operating results, announcements of technical innovations, new products or new contracts by the Company, its competitors or their customers, governmental regulatory action, developments with respect to patents or proprietary rights, general market conditions, changes in financial estimates by securities analysts and other factors, certain of which could be unrelated to, or outside the control of, the Company. The stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stocks of technology companies and that have often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has been initiated against the issuing company. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business and operating results. Any settlement or adverse determination in such litigation would also subject the Company to significant liability, which would have a material adverse effect on the Company's business and financial condition. DILUTION Purchasers of the Common Stock offered hereby will suffer immediate and substantial dilution in the net tangible book value of the Common Stock from the initial public offering price. To the extent outstanding options to purchase the Company's Common Stock are exercised, there will be further dilution. See "Dilution." 15 18 SHARES ELIGIBLE FOR FUTURE SALE Sale of substantial amounts of shares in the public market or the prospect of such sales could adversely affect the market price of the Company's Common Stock. Upon completion of this Offering, the Company will have outstanding 13,216,659 shares of Common Stock. Of the shares outstanding prior to this Offering, with the exception of 166,083 shares which will be immediately eligible for sale under Rule 144 promulgated pursuant to the Securities Act, all shares of Common Stock held by current stockholders are subject to lock-up agreements under which the holders of such shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of Montgomery Securities. After the 180-day period, 9,732,898 shares held by current stockholders will be eligible for sale under Rule 144 or Rule 701. The remaining 817,678 shares held by existing stockholders will become eligible for sale from time to time in the future under Rule 144 or Rule 701. In addition, the Company intends to file a registration statement under the Securities Act, upon the effectiveness of this Offering or shortly thereafter, covering the sale of shares of Common Stock reserved for issuance under its Key Personnel Plan, 1992 Stock Option Plan, 1996 Stock Plan, 1996 Employee Stock Purchase Plan and 1996 Director Option Plan. As of March 31, 1997, there were outstanding options to purchase a total of 2,291,150 shares of the Company's Common Stock, all of which are subject to 180-day lock-up agreements. A total of 483,388 shares issuable upon exercise of such options, as of March 31, 1997, will be eligible for sale into the public market 180 days after the date of this Prospectus. See "Management -- Compensation Plans," "Shares Eligible for Future Sale" and "Underwriting." Certain existing stockholders holding approximately 3,726,373 shares of Common Stock, are also entitled to registration rights with respect to their shares of Common Stock. See "Description of Capital Stock -- Registration Rights." USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,500,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $9.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses, are estimated to be $19.6 million ($22.8 million if the Underwriters' over-allotment option is exercised in full). Of the net proceeds of the Offering, the Company expects that through the end of fiscal 1998 it will use approximately $8 to $10 million for product development, $8 to $9 million for marketing and $500,000 for capital equipment, with the balance being used for working capital and other purposes. A portion of the net proceeds may also be used for investments in or acquisitions of complementary businesses, products or technologies, although no such transactions are currently under negotiation. Pending such uses, the Company plans to invest the net proceeds in short-term, interest-bearing, investment grade securities. DIVIDEND POLICY The Company has never declared or paid cash dividends on its capital stock. The Company currently does not anticipate paying any cash dividends on its capital stock in the foreseeable future. 16 19 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1997 (i) on an actual basis, (ii) on a pro forma basis to reflect the automatic conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this Offering and the filing of the Amended and Restated Certificate of Incorporation immediately after the closing of the Offering to eliminate the Company's currently existing classes of Preferred Stock and authorize undesignated Preferred Stock and (iii) as adjusted to reflect the receipt by the Company of the net proceeds from the sale of the 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $9.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses.
MARCH 31, 1997 ---------------------------------- AS ACTUAL PRO FORMA ADJUSTED ------- --------- -------- (IN THOUSANDS) Long-term debt, including current portion.................... $ -- $ -- $ -- Stockholders' equity: Preferred Stock, par value $0.001 per share; actual: 5,411,820 shares authorized, 3,726,373 shares issued and outstanding; pro forma and as adjusted: 5,000,000 shares authorized, no shares issued or outstanding............. 4 -- -- Common Stock, par value $0.001 per share, 40,000,000 shares authorized; actual: 6,990,286 shares issued and outstanding; pro forma: 10,716,659 shares issued and outstanding; as adjusted: 13,216,659 shares issued and outstanding (1)......................................... 7 11 13 Additional paid-in capital................................. 23,291 23,291 43,736 Notes receivable from stockholders......................... (1,078) (1,078) (1,078) Deferred compensation...................................... (2,781) (2,781) (2,781) Accumulated deficit........................................ (13,402) (13,402) (13,402) ------- ------- ------- Total stockholders' equity.............................. 6,041 6,041 26,488 ------- ------- ------- Total capitalization.................................. $ 6,041 $ 6,041 $ 26,488 ======= ======= =======
- --------------- (1) Excludes, as of March 31, 1997, (i) an aggregate of 2,291,150 shares of Common Stock issuable on the exercise of outstanding options granted under the Company's 1992 Stock Option Plan and 1996 Stock Plan and (ii) an aggregate of 1,102,656 shares of Common Stock reserved for issuance under the Company's 1992 Stock Option Plan, 1996 Stock Plan, 1996 Director Option Plan and 1996 Employee Stock Purchase Plan. See "Management -- Compensation Plans." 17 20 DILUTION The pro forma net tangible book value of the Company at March 31, 1997, giving effect to the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this Offering, was approximately $6.0 million, or $0.56 per share of Common Stock. "Pro forma net tangible book value" per share represents the amount of total tangible assets of the Company less total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the sale by the Company of 2,500,000 shares of Common Stock offered hereby (and after deducting the estimated underwriting discounts and commissions and estimated offering expenses) at an assumed initial public offering price of $9.00 per share, the pro forma net tangible book value of the Company at March 31, 1997 would have been $26.5 million, or $2.00 per share. This represents an immediate increase in pro forma net tangible book value of $1.44 per share to existing stockholders and an immediate dilution of $7.00 per share to new investors purchasing in this Offering. The following table illustrates this per share dilution: Assumed initial public offering price................................ $9.00 Pro forma net tangible book value before this Offering............. $0.56 Increase per share attributable to new investors................... 1.44 ----- Pro forma net tangible book value per share after this Offering...... 2.00 ------ Dilution per share to new investors.................................. $7.00 ======

The following table summarizes, on a pro forma basis as of March 31, 1997 the differences between the number of shares of Common Stock purchased from the Company, the total consideration paid or payable and the average price per share paid or payable by the Company's existing stockholders and the new investors in this Offering with respect to the 2,500,000 shares of Common Stock to be sold by the Company. The calculations in this table with respect to shares of Common Stock to be purchased by new investors in this Offering reflect an assumed initial public offering price of $9.00 per share:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing stockholders................ 10,716,659 81.1% $16,075,000 41.7% $ 1.50 New investors........................ 2,500,000 18.9 22,500,000 58.3 9.00 ---------- ----- ----------- ----- Total...................... 13,216,659 100.0% $38,575,000 100.0% $ 2.92 ========== ===== =========== =====
The foregoing computations exclude as of March 31, 1997, (i) an aggregate of 2,291,150 shares of Common Stock issuable on the exercise of outstanding options granted under the Company's 1992 Stock Option Plan and 1996 Stock Plan and (ii) an aggregate of 1,102,656 shares of Common Stock reserved for issuance under the Company's 1992 Stock Option Plan, 1996 Stock Plan, 1996 Director Option Plan and 1996 Employee Stock Purchase Plan. See "Management -- Compensation Plans." 18 21 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statement of operations data presented below for each of the years ended March 31, 1995, 1996 and 1997 and the selected consolidated balance sheet data as of March 31, 1996 and 1997 are derived from, and are qualified by reference to, the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. The selected consolidated statement of operations data for the years ended March 31, 1993 and 1994 and the selected consolidated balance sheet data as of March 31, 1993, 1994 and 1995 are derived from the audited historical financial statements of the Company, which are not included herein. The Company's future operating results are expected to fluctuate as the Company proceeds with the development, introduction and marketing of its family of VideoCommunicators. Moreover, because the Company's video compression semiconductor and related software business has not provided, and is not expected to provide, sufficient revenues to profitably operate the Company, the Company believes that its future profitability will be largely dependent on the success of its VideoCommunicator business. As a result, the Company believes that its historical operating results will not be comparable to, and should not be relied upon as an indication of, future operating results. The data set forth below are qualified in their entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
YEAR ENDED MARCH 31, ------------------------------------------------ 1993 1994 1995 1996 1997 ------- ------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues................................................ $31,082 $34,401 $19,929 $28,774 $ 19,146 Cost of revenues.............................................. 14,137 19,469 11,904 16,668 12,030 ------- ------- ------- ------- ------- Gross profit.................................................. 16,945 14,932 8,025 12,106 7,116 Operating expenses: Research and development................................... 7,005 6,540 8,107 7,714 10,510 Selling, general and administrative........................ 11,413 8,149 6,445 7,938 10,098 Restructuring costs........................................ -- -- -- 603 59 ------- ------- ------- ------- ------- Total operating expenses.............................. 18,418 14,689 14,552 16,255 20,667 ------- ------- ------- ------- ------- Income (loss) from operations................................. (1,473) 243 (6,527) (4,149) (13,551) Other income, net............................................. 282 189 611 952 120 ------- ------- ------- ------- ------- Income (loss) before income taxes............................. (1,191) 432 (5,916) (3,197) (13,431) Provision (benefit) for income taxes.......................... (350) 780 (35) 20 182 ------- ------- ------- ------- ------- Net loss...................................................... $ (841) $ (348) $(5,881) $(3,217) $(13,613) ======= ======= ======= ======= ======= Pro forma net loss per share(1)............................... $ (1.13) ======= Shares used in pro forma per share calculations(1)............ 12,026 =======

MARCH 31, ------------------------------------------------ 1993 1994 1995 1996 1997 ------- ------- ------- ------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital............................................... $10,355 $10,683 $11,983 $ 9,333 $ 4,654 Total assets.................................................. 24,586 21,908 20,644 23,067 12,727 Total liabilities............................................. 11,920 9,579 6,661 11,693 6,686 Total stockholders' equity.................................... 12,666 12,329 13,983 11,374 6,041
- --------------- (1) See Note 1 of the Notes to the Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute pro forma per share amounts. 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was incorporated in February 1987 in California and reincorporated in Delaware in December 1996. The Company initially developed and sold math co-processors compatible with systems based on Intel's microprocessors. During the years ended March 31, 1993 through 1995, the Company's revenues were derived primarily from the sale of math co-processors. As Intel's microprocessors eliminated the need for a separate math co-processor, the Company's revenues from math co-processors declined. In 1990, the Company began development of semiconductors and related software for the video conferencing and digital video playback markets. In fiscal 1995, 1996 and 1997, sales of the Company's video compression semiconductors and reference design boards accounted for 38%, 59% and 76%, respectively, of total revenues. Since June 1995, the Company has been executing a new business strategy designed to discontinue efforts unrelated to video conferencing. As part of this strategy, the Company discontinued its efforts to develop Intel compatible x86 microprocessors in June 1995, reduced its workforce in May 1996 and sold its remaining MPEG inventory in September 1996. To address new opportunities, the Company is leveraging its strengths in semiconductor design and related software to develop and market video conferencing systems for the consumer market. The Company began shipping the VC100 (or "ViaTV"), the first product in its planned family of VideoCommunicators, to the United States consumer market in February 1997. The VC100 connects to a television set and a standard touch-tone telephone adding video to an otherwise normal telephone call, without the need for a PC. Although the Company has no current plan to market the VC100 outside of the United States prior to 1998 at the earliest, the Company intends, throughout 1997 and thereafter, to explore the requirements for obtaining foreign regulatory approvals which will be necessary prior to the sale of the VC100 outside of the United States. There can be no assurance, however, that the Company will receive any foreign regulatory approvals for the VC100, or any regulatory approvals for its other VideoCommunicators, in a timely manner, if at all. See "Risk Factors -- Compliance with Regulations and Industry Standards." The Company is currently demonstrating a prototype of its second VideoCommunicator, the VC200, a non-PC based POTS video telephone with a built-in liquid crystal display. See "Business -- Products" and "Business -- Licensing and Development Arrangements" for a discussion of the development status of the VC100, the VC200 and the successor products to the Company's video compression semiconductors and certain related licensing and development arrangements (including arrangements pursuant to which USR and KME have licensed all or substantially all of the Company's technology underlying its VideoCommunicators). Although the Company has received certain revenues from these licensing and development arrangements in the past, there can be no assurance that the Company will receive any revenues from these arrangements in the future. See "Risk Factors -- USR Right of Cancellation." In addition, USR, KME and other licensees or purchasers of the Company's technology, video compression semiconductors, software or board designs may use such technology or components to manufacture and sell products that compete with the Company's VideoCommunicators. The Company's future operating results are expected to fluctuate as the Company proceeds with the development and marketing of its VideoCommunicators. Moreover, because the Company's video compression semiconductor and related software business has not provided, and is not expected to provide, sufficient revenues to profitably operate the Company, the Company believes that its future profitability will be largely dependent on the success of its VideoCommunicator business. As a result, the Company believes that its historical operating results will not be comparable to, and should not be relied upon as an indication of, future operating results. The successful development and marketing of the Company's VideoCommunicators are subject to a number of substantial risks and contingent on the achievement of numerous significant milestones, many of which are beyond the control of the Company. See "Risk Factors." Historically, the Company has sold its video compression semiconductors and related software to video conferencing OEMs and distributors. The Company sells its VideoCommunicators through a direct marketing effort utilizing a combination of advertising, toll-free telemarketing and direct mail supported by co-marketing 20 23 arrangements with third parties. The Company also markets its VideoCommunicators through retail channels and catalogs. The Company believes that the development and marketing of its family of VideoCommunicators may adversely impact its gross margins due in part to higher unit costs associated with initial production of its first products, including the VC100, as well as substantially different cost and pricing structures related to the manufacture and sale of consumer products. RESULTS OF OPERATIONS The following table sets forth certain items from the Company's consolidated statement of operations as a percentage of total revenues for the periods indicated. The data set forth below should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
YEAR ENDED MARCH 31, ------------------------- 1995 1996 1997 ----- ----- ----- Total revenues.................................................... 100.0% 100.0% 100.0% Cost of revenues.................................................. 59.7 57.9 62.8 ----- ----- ----- Gross margin...................................................... 40.3 42.1 37.2 Operating expenses: Research and development........................................ 40.7 26.8 54.9 Selling, general and administrative............................. 32.3 27.6 52.7 Restructuring costs............................................. -- 2.1 0.3 ----- ----- ----- Total operating expenses................................ 73.0 56.5 107.9 ----- ----- ----- Loss from operations.............................................. (32.7) (14.4) (70.7) Other income, net................................................. 3.1 3.3 0.6 ----- ----- ----- Loss before provision for income taxes............................ (29.6) (11.1) (70.1) Provision (benefit) for income taxes.............................. (0.2) 0.1 1.0 ----- ----- ----- Net loss.......................................................... (29.4)% (11.2)% (71.1)% ===== ===== =====
FISCAL YEARS ENDED MARCH 31, 1995, 1996 AND 1997 Total Revenues. Total revenues consist of product sales and the licensing of technology. Total revenues were $19.9 million, $28.8 million and $19.1 million in fiscal 1995, 1996 and 1997, respectively. Product revenues fluctuated primarily due to declining sales of the Company's discontinued line of math co-processors, fluctuating sales of the Company's video conferencing semiconductors and the discontinuation of MPEG semiconductor sales. The Company's math co-processor revenues declined from $10.9 million in fiscal 1995 to $2.5 million in fiscal 1996 and to $206,000 in fiscal 1997, while total revenues from video conferencing semiconductors increased from $7.5 million in 1995 to $13.1 million in fiscal 1996, then declined to $12.6 million in fiscal 1997. MPEG semiconductor revenues declined from $3.8 million in fiscal 1996 to $2.0 million in fiscal 1997. In September 1996, the Company sold the last of its MPEG inventory. Accordingly, the Company does not expect to derive any future product revenue from the sale of MPEG semiconductors. In fiscal 1995, 1996 and 1997, total revenues from technology licensing were $1.3 million, $9.0 million and $3.9 million, respectively. Of the $9.0 million technology licensing revenue in fiscal 1996, $6.8 million was derived from one customer. See "Business -- Licensing and Development Arrangements." Gross Profit. The cost of revenues consists of costs associated with wafer fabrication, assembly and testing performed by third-party vendors and direct and indirect costs associated with purchasing, scheduling and quality assurance. The Company's gross profit was $8.0 million, $12.1 million and $7.1 million, or 40%, 42% and 37% of total revenues, in fiscal 1995, 1996 and 1997, respectively. The gross profit for fiscal 1996 was favorably impacted by technology licensing revenues and adversely impacted by negative margin from sales of MPEG products. In fiscal 1997, the significant decline in gross margin relates primarily to charges associated with the write off of inventories related to the Company's exit from the MPEG market. In fiscal 1997, the Company sold all of its remaining MPEG inventory. 21 24 Research and Development. Research and development expenses consist primarily of personnel, mask and equipment costs necessary for the Company to conduct its development efforts. Research and development costs, including software development costs, are expensed as incurred. Research and development expenses were $8.1 million, $7.7 million and $10.5 million, or 41%, 27% and 55% of total revenues, in fiscal 1995, 1996 and 1997, respectively. A significant portion of research and development expenses during fiscal 1995 and 1996 was attributable to the development of products that were subsequently discontinued, including an Intel compatible x86 microprocessor and graphics and MPEG semiconductors. During fiscal 1997, research and development expenses were concentrated on video compression semiconductors and VideoCommunicators. Selling, General and Administrative. 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 shows and other marketing and promotional expenses. Selling, general and administrative expenses were $6.4 million, $7.9 million and $10.1 million, or 32%, 28% and 53% of total revenues, in fiscal 1995, 1996 and 1997, respectively. Selling, general and administrative expenses increased by $1.5 million in fiscal 1996 primarily due to higher compensation expenses and, to a lesser extent, higher legal and bad debt expenses. In fiscal 1997, selling, general and administrative expenses increased by $2.2 million due primarily to compensation expense recognized on certain stock option grants and expenses associated with the Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Accounting for Stock-Based Compensation" and Note 6 of Notes to Consolidated Financial Statements. Restructuring Costs. During fiscal 1996, the Company recorded restructuring charges related to discontinuing certain research and development activities not related to video conferencing products. These restructuring costs related primarily to the write off of equipment associated with the discontinued research and development efforts. During fiscal 1997, the Company recorded an additional charge for restructuring its operations by reducing its workforce. As of March 31, 1997, the Company's restructuring actions were fully completed and there were no remaining restructuring cost accruals. Other Income, Net. In fiscal 1995, 1996 and 1997, other income was $611,000, $952,000 and $120,000, respectively. In fiscal 1995, other income consisted primarily of interest income. During fiscal 1996, the Company acquired equity positions in four privately held companies. In fiscal 1996, the Company realized $727,000 of income by selling the stock of one of these entities. The Company's investment in each of these entities represents less than 15% of the outstanding voting stock of these entities and accordingly, the Company has accounted for these investments on a cost basis. As of March 31, 1997, these investments have been completely written off. Income Taxes. In fiscal 1995, 1996 and 1997, the Company was not profitable and incurred no material income tax expense. The provision for income taxes for fiscal 1997 primarily represents certain foreign withholding taxes. At March 31, 1997, the Company had approximately $10.0 million of federal net operating loss carryforwards and approximately $1.6 million of research and development tax credit carryforwards available to offset future tax liabilities; such carryforwards expire beginning in the years 2011 and 2010, respectively. Under the ownership change limitation provisions of the Internal Revenue Code of 1986, as amended, the amount of, and benefit from, the net operating losses and credit carryforwards may be impaired or limited in certain circumstances. At March 31, 1997, the Company had gross deferred tax assets of approximately $8.8 million. The weight of available evidence indicates that it is more likely than not that the Company will not be able to realize its deferred tax assets and thus a full valuation reserve has been recorded at March 31, 1997. 22 25 QUARTERLY RESULTS The following tables set forth consolidated statements of operations data for the eight quarters in the period ended March 31, 1997, both in dollar amounts and as percentages of total revenues. The data set forth has been derived from unaudited consolidated financial statements of the Company and has been prepared on the same basis as the audited financial statements, and in the opinion of management, includes all normal recurring adjustments that the Company considers necessary for a fair presentation of the results of the interim periods and should be read in conjunction with the Consolidated Financial Statements and Notes thereto. The operating results for any quarter are not necessarily indicative of results for future quarters. Further, because of the Company's planned reliance on its VideoCommunicators, the Company's historical operating results will not be comparable to, and should not be relied upon as an indication of, future operating results.
QUARTER ENDED ----------------------------------------------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1995 1995 1995 1996 1996 1996 1996 1997 -------- --------- -------- --------- -------- --------- -------- --------- (IN THOUSANDS) Total revenues....................... $ 4,881 $ 7,241 $7,083 $ 9,569 $ 5,703 $ 4,372 $ 4,582 $ 4,489 Cost of revenues..................... 4,184 3,741 3,019 5,724 7,503 1,942 1,283 1,302 ------- ------ ------ ------ ------- ------ ------- ------- Gross profit (loss).................. 697 3,500 4,064 3,845 (1,800) 2,430 3,299 3,187 ------- ------ ------ ------ ------- ------ ------- ------- Operating expenses: Research and development........... 2,296 1,701 1,633 2,084 2,421 2,340 3,141 2,608 Selling, general and administrative................... 1,803 1,575 2,243 2,317 3,247 1,733 2,003 3,115 Restructuring costs................ 603 -- -- -- 59 -- -- -- ------- ------ ------ ------ ------- ------ ------- ------- Total operating expenses..... 4,702 3,276 3,876 4,401 5,727 4,073 5,144 5,723 ------- ------ ------ ------ ------- ------ ------- ------- Income (loss) from operations........ (4,005) 224 188 (556) (7,527) (1,643) (1,845) (2,536) Other income (expense), net.......... 152 (72) 233 639 53 74 265 (272) ------- ------ ------ ------ ------- ------ ------- ------- Income (loss) before income taxes.... (3,853) 152 421 83 (7,474) (1,569) (1,580) (2,808) Provision for income taxes........... -- -- -- (20) (100) (46) -- (36) ------- ------ ------ ------ ------- ------ ------- ------- Net income (loss).................... $(3,853) $ 152 $ 421 $ 63 $(7,574) $(1,615) $(1,580) $(2,844) ======= ====== ====== ====== ======= ====== ======= =======

AS A PERCENTAGE OF TOTAL REVENUES ----------------------------------------------------------------------------------------- QUARTER ENDED ----------------------------------------------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1995 1995 1995 1996 1996 1996 1996 1997 -------- --------- -------- --------- -------- --------- -------- --------- Total revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues.................... 85.7 51.7 42.6 59.8 131.6 44.4 28.0 29.0 ----- ----- ----- ----- ----- ----- ----- ----- Gross margin........................ 14.3 48.3 57.4 40.2 (31.6) 55.6 72.0 71.0 ----- ----- ----- ----- ----- ----- ----- ----- Operating expenses Research and development.......... 47.0 23.5 23.0 21.8 42.5 53.5 68.6 58.1 Selling, general and administrative.................. 36.9 21.7 31.7 24.2 56.9 39.7 43.7 69.4 Restructuring costs............... 12.4 -- -- -- 1.0 -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses.... 96.3 45.2 54.7 46.0 100.4 93.2 112.3 127.5 ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations....... (82.0) 3.1 2.7 (5.8) (132.0) (37.6) (40.3) (56.5) Other income (expense), net......... 3.1 (1.0) 3.3 6.7 0.9 1.7 5.8 (6.1) ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before income taxes... (78.9) 2.1 6.0 0.9 (131.1) (35.9) (34.5) (62.6) Provision for income taxes.......... -- -- -- (0.2) (1.7) (1.0) -- (0.8) ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)................... (78.9)% 2.1% 6.0% 0.7% (132.8)% (36.9)% (34.5)% (63.4)% ===== ===== ===== ===== ===== ===== ===== =====
The Company's technology licensing activities have contributed to fluctuations in the Company's quarterly revenues. Technology licensing revenues for each of the eight quarters in the period ended March 31, 1997, were $150,000, $2.4 million, $2.9 million, $3.6 million, $1.3 million, $1.0 million, $650,000 and $843,000, respectively. In addition, revenues have fluctuated as the Company has introduced new or enhanced versions of its video compression semiconductors and as earlier products approached the end of their life cycle. In the quarter ended March 31, 1996, the Company realized both significant technology licensing revenues and "end of life" revenues related to the Company's prior generation of video compression semiconductors. In contrast, the quarter ended June 30, 1996 reflects licensing revenues of only $1.3 million and insignificant revenues related to these discontinued products. In general, favorable gross margin fluctuations in the quarters ended September 30, 1995 and December 31, 1995 reflect the impact of technology license revenues, which have no material associated costs. 23 26 However, in the quarter ended June 30, 1996 the unfavorable gross margin fluctuation was due primarily to a $4.0 million charge for inventories related to the Company's MPEG inventory. In September 1996, the Company sold its remaining MPEG inventory. Margins improved in the quarter ended December 31, 1996 due primarily to discontinuation of MPEG sales and a fee of $471,000 received from a customer for cancellation of an order. Operating expenses have fluctuated as the Company discontinued its efforts to develop an Intel compatible x86 microprocessor in the quarter ended June 30, 1995, reduced its workforce in the quarter ended June 30, 1996 and has focused its efforts on developing its video compression semiconductors and its VideoCommunicators. Operating expenses for the quarters ended June 30, 1996, September 30, 1996, December 31, 1996 and March 31, 1997 were also impacted by compensation charges taken by the Company for certain stock options repriced and granted in fiscal 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Accounting for Stock-Based Compensation" and Note 6 of Notes to Consolidated Financial Statements. The Company's operating results have fluctuated significantly and may continue to fluctuate in the future, on an annual and a quarterly basis, as a result of a number of factors, many of which are outside the Company's control, including changes in market demand, the timing of customer orders, competitive market conditions, lengthy sales cycles, 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 level of international sales, continued compliance with industry standards and general economic conditions. Variations in timing of sales can cause significant fluctuations in future operating results. In addition, because a significant portion of the Company's business may be derived from orders placed by a limited number of large customers, the timing of such orders can also cause significant fluctuations in the Company's operating results. Anticipated orders from customers may fail to materialize, and delivery schedules may be deferred or canceled for a number of reasons, including changes in specific customer requirements. If sales do not meet the Company's expectations in any given quarter, the adverse impact of the shortfall on the Company's operating results may be magnified by the Company's inability to adjust spending to compensate for the 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 strategic shift towards the development and marketing of VideoCommunicators such as the VC100 may result in substantially different patterns in operating results. For example, the Company's operating results may be subject to more heightened seasonality with sales higher during the Company's third fiscal quarter, corresponding to the Christmas shopping season. The Company intends to spend substantial additional amounts on advertising, toll-free marketing and customer support. There can be no assurance as to the amount of such spending or that revenues adequate to justify such spending will result. As a result of its shift to selling VideoCommunicators, the Company may experience different inventory, product return, price protection and warranty cost patterns. 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 Common Stock. See "Risk Factors -- Potential Fluctuations in Future Operations Results." ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for its employee stock option plans in accordance with the provisions of Accounting Principles Board Opinion No. 25. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation," which established a fair value based method of accounting for employee stock option plans. Had compensation costs for the Company's option plans been determined based on the fair market value of options at their grant dates as described in FAS 123, the Company's net loss would have been $3.7 million and 24 27 $14.7 million for fiscal 1996 and fiscal 1997, respectively, and the Company's pro forma net loss per share would have been $1.23 per share for fiscal 1997. The Company has recorded a deferred compensation expense of $7.3 million relating to certain stock option grants which were made during the period June through September 1996. The Company recognized $4.5 million of the deferred compensation expense during fiscal 1997, and will recognize the remainder over the related vesting period of the options (which is generally 48 months). The future compensation charges are subject to reduction for any employee who terminates employment prior to the expiration of such employee's option vesting period. See Note 6 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Since fiscal 1994, the Company has 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. At March 31, 1994, the Company had cash, cash equivalents and short term investments of $9.2 million, which decreased to $8.7 million at March 31, 1997. The Company currently has no bank borrowing arrangements. The cash used by the Company for operations was $4.1 million, $625,000 and $4.3 million in fiscal 1995, 1996 and 1997, respectively. Cash used in operations in fiscal 1995 reflects a net loss of $5.9 million that was partially offset by noncash items and cash generated by changes in working capital. Cash used in operations in fiscal 1996 reflects a net loss of $3.2 million that was substantially offset by changes in working capital. Cash used in operations in fiscal 1997 reflects a net loss of $13.6 million that was partially offset by reductions in inventory and accounts receivable and a non-cash deferred compensation charge of $4.5 million. During fiscal 1995, 1996 and 1997, the Company's capital expenditures were $1.5 million, $1.0 million and $691,000, respectively. These capital expenditures related primarily to the acquisition of machinery, equipment and software. At March 31, 1997, the Company did not have any material capital commitments outstanding. During fiscal 1995, 1996 and 1997, the Company's financing activities generated cash of $7.5 million, $608,000 and $3.9 million, respectively, primarily from the sale of the Company's equity securities. The Company expects that the anticipated net proceeds of this Offering, its existing cash resources, and the amounts, if any, generated from operations, will be sufficient to meet the Company's cash requirements for at least the next 12 months. However, the Company is operating in a rapidly changing industry. There can be no assurance that the Company will not seek to exploit business opportunities that will require it to raise additional capital from equity or debt sources to finance its growth and capital requirements. There can be no assurance that the Company will be able to raise such capital on acceptable terms, if at all. See "Risk Factors -- Need for Additional Capital to Finance Growth and Capital Requirements." 25 28 BUSINESS 8x8, Inc. designs, develops and markets highly integrated, proprietary video compression semiconductors and associated software to original equipment manufacturers ("OEMs") of corporate video conferencing systems. To address new opportunities, the Company is leveraging its strengths in semiconductor design and related software to develop and market video conferencing systems for the consumer market. The Company began shipping the VC100 (or "ViaTV"), the first product in its planned family of VideoCommunicators, to the United States consumer market in February 1997. The VC100 connects to a television set and a standard touch-tone telephone adding video to an otherwise normal telephone call, without the need for a PC. Although the Company has no current plan to market the VC100 outside of the United States prior to 1998 at the earliest, the Company intends, throughout 1997 and thereafter, to explore the requirements for obtaining foreign regulatory approvals which will be necessary prior to the sale of the VC100 outside of the United States. There can be no assurance, however, that the Company will receive any foreign regulatory approvals in a timely manner, if at all. See "Risk Factors -- Compliance with Regulations and Industry Standards." The Company's video compression semiconductors combine, on a single chip, a reduced instruction set computer ("RISC") microprocessor, a digital signal processor ("DSP"), specialized video processing circuitry, static random access memory ("RAM") and proprietary software to perform the real time compression and decompression ("codec")of video and audio information and establish and maintain network connections in a manner consistent with international standards for video telephony. These semiconductors are designed to provide video conferencing over a broad range of network types including standard analog telephone lines (commonly known as plain old telephone service or "POTS"), integrated services digital networks ("ISDN"), local area networks ("LAN") and asymmetric digital subscriber lines ("ADSL"). Customers for the Company's video compression semiconductors include PictureTel, Siemens, Sony, VideoServer, VCON and Vtel. The Company's VideoCommunicators are based on its proprietary semiconductor, software and systems technology. The VC100 is designed to be compliant with the H.324 international standard for video telephony over POTS and to be compatible with PC and non-PC based systems that adhere to the H.324 standard. The VC100 is designed to communicate with full duplex audio and video rates of up to 15 frames per second. In addition, the Company is currently demonstrating a prototype of its second VideoCommunicator, the VC200, a non-PC based POTS video phone with a built-in liquid crystal display ("LCD"). The Company sells its VideoCommunicators through a direct marketing effort utilizing a combination of advertising, toll-free telemarketing and direct mail supported by co-marketing arrangements with third parties such as Hewlett-Packard and GTE. The Company also recently began marketing its VideoCommunicators through retail channels such as Comexpo, Fry's Electronics and J & R Computer and catalogs such as Hello Direct, Hammacher Schlemmer, MicroWarehouse and Sharper Image. See "Business -- Products" and "Business -- Licensing and Development Arrangements" for a discussion of the development status of the VC100, the VC200 and the successor products to the Company's video compression semiconductors and certain related licensing and development arrangements (including arrangements pursuant to which USR and KME have licensed all or substantially all of the Company's technology underlying its VideoCommunicators). Although the Company has received certain revenues from these licensing and development arrangements in the past, there can be no assurance that the Company will receive any revenues from these arrangements in the future. See "Risk Factors -- USR Right of Cancellation." In addition, USR, KME and other licensees or purchasers of the Company's technology, video compression semiconductors, software or board designs may use such technology or components to manufacture and sell products that compete directly with the Company's VideoCommunicators. INDUSTRY BACKGROUND The proliferation of video conferencing products is dependent on several factors including network bandwidth, advanced compression technologies and the acceptance of video telephony standards. Increases in available bandwidth improve the data carrying capacity of networks, while improvements in compression technologies utilize a given bandwidth more efficiently. Finally, video telephony standards are key to widespread adoption as they are designed to permit the interoperability between systems offered by different vendors. 26 29 Since the first video conferencing products were introduced in the late 1970's, users have faced a tradeoff between the cost and availability of network bandwidth and the quality of video images which can be transmitted over the network. High capacity connections, such as T1/E1 (1.5/2.0 megabits per second ("Mbps")) and ISDN (128 kilobits per second ("Kbps")), provide greater bandwidth but are significantly more costly and less available than ubiquitous analog POTS lines which now offer one-way data transmission rates of up to 56.6 Kbps using technology such as x2 from USR, but remain limited to rates of up to 33.6 Kbps for the symmetrical data transmission required by video conferencing. The challenge faced by developers of video conferencing systems has been to provide the best possible image quality through the efficient compression of video and audio data for transmission over available network bandwidth. The proliferation of video communications equipment has been influenced by the adoption of international video telephony standards which, if complied with, will permit interoperability between systems offered by different vendors. To date, nearly all video conferencing products have been targeted at corporate users with access to high bandwidth connections such as T1/E1 and ISDN. However, the vast majority of consumers continue to have limited access to bandwidth beyond that provided by standard analog POTS lines. The Company believes that significant demand exists for inexpensive video phone products that would allow users to transmit video images with audio over normal telephone lines. Several factors are contributing to the viability of consumer video phones, including: - Improved Bandwidth. A number of technologies have been deployed or are under development which aim to increase the bandwidth available from existing copper telephone lines. These include faster POTS modems (currently limited to symmetrical data transmission rates of up to 33.6 Kbps) and residential ISDN and ADSL service. - Advanced Compression Techniques. The quality of transmitted video images is a function of network bandwidth and the sophistication of the hardware and software used to compress and decompress the data. Because video images contain a large amount of information, video conferencing systems must compress the video and audio data to fit the available network bandwidth while attempting to maintain the quality and synchronization of audio and video. For example, a normal television signal contains 90 Mbps of information, which must be compressed by a factor of approximately 2,700 to 1 to permit symmetrical transmission over POTS at 33.6 Kbps. By using sophisticated compression algorithms and advanced DSP semiconductors, video conferencing system manufacturers can achieve improved video quality. - Adoption of Industry-Wide Standards. Increased usage of video conferencing in the corporate market has been facilitated by the adoption of the H.320 standard, which defined the video telephony protocols used by systems connected over ISDN. The adoption of H.320 enabled interoperability between systems from different vendors, encouraged new market entrants, and contributed to significantly lower system pricing and an increased installed base. The Company believes that the H.320 standard expanded the market for business video conferencing systems over ISDN. Similarly, the H.324 standard for video telephony over POTS may result in expanded home use of video phones. Other standards, such as H.323, are being developed for communications over packet-based networks, such as LANs. As a result of the above technological advances and the adoption of the H.324 standard, low cost consumer POTS video phones are being developed by a number of suppliers. These products may be introduced in a variety of product configurations and physical forms (i.e., "form factors"), including those based on telephones and using a television for display, such as the VC100, or using an LCD for display, such as the VC200, and those based on the PC. An increasing number of PCs are being shipped with pre-installed H.324 compliant software. Significant sales of such H.324 products, if achieved, should increase the usefulness of and demand for additional H.324 compliant video phones by providing potential video phone purchasers with other parties to call. 8X8 STRATEGY The Company's strategy is to leverage its expertise in video compression semiconductors, software and system design and its understanding of video telephony standards to develop and market a family of cost 27 30 effective VideoCommunicators for the consumer video conferencing market. Key elements of the Company's strategy include: Leverage Proprietary Technology. The Company provides highly integrated video compression semiconductors and related software to manufacturers of video conferencing systems. The Company is leveraging its proprietary semiconductor and software expertise to develop its non-PC based VideoCommunicators to address the United States consumer market. In addition, the Company intends to develop future generations of highly integrated semiconductor and software products for use in video conferencing systems developed both by the Company and its OEM customers. The Company's ongoing development efforts are targeted at reducing overall system costs continuously improving video and audio quality at varying bandwidths and ensuring compliance with emerging video telephony standards to encourage proliferation of its products. Broaden and Enhance VideoCommunicator Family. The Company intends to develop a variety of consumer video conferencing products. The VC100, the Company's initial VideoCommunicator, is targeted at the United States consumer market and is based upon the Company's proprietary semiconductor and software technology. The VC100 connects to a television and standard touch-tone telephone and adds video to an otherwise normal telephone call, without the need for a PC. The Company is demonstrating a prototype of its second VideoCommunicator, the VC200, which is a POTS video telephone with a built-in LCD display. The Company plans to extend its VideoCommunicator product line in the future by developing products in new form factors and products that are designed to comply with emerging video telephony standards. The Company further intends to differentiate its products in the future by adding features which may include picture quality enhancements, Internet browsing, caller identification ("caller ID"), pan/tilt/zoom and auto-answer. Utilize Direct Marketing Model for VideoCommunicators. The Company sells its VideoCommunicators through a direct marketing channel, utilizing a combination of advertising, toll-free telemarketing and direct mail supported by co-marketing arrangements with third parties such as Hewlett-Packard and GTE. The direct marketing approach generally allows more rapid establishment of brand recognition and introduction of new products, and enables competitive pricing and better management of working capital. The Company also recently began marketing its VideoCommunicators through retail channels such as Comexpo, Fry's Electronics and J&R Computer and catalogs such as Hello Direct, Hammacher Schlemmer, MicroWarehouse and Sharper Image. The Company intends to continue to sell its video compression semiconductor and software products to OEMs and distributors through its existing sales and marketing force. Drive Price/Performance Improvements. Price/performance improvements in end-user systems are important to expanding the consumer video conferencing market. By enhancing its proprietary semiconductor and software technologies, the Company intends to improve the price/performance of its consumer video phones by integrating a number of essential system functions onto future versions of its video compression semiconductors. The Company also intends to utilize off-the-shelf components when appropriate and to work closely with its key suppliers to achieve cost and performance advantages. PRODUCTS The Company develops, markets and sells a variety of video compression semiconductors and related software and reference boards. The Company is currently developing a family of non-PC based VideoCommunicators, including its recently introduced VC100, which incorporate the Company's proprietary semiconductor, software and systems technologies. The Company from time to time enters into licensing and development arrangements with other corporations which are designed to promote the design, development, manufacture and sale of the Company's products. Such arrangements may enable these corporations to use this technology to produce products that compete with the Company's VideoCommunicator products. See "Business -- Licensing and Development Arrangements" and "Risk Factors -- Competition." VideoCommunicator Systems The Company's initial VideoCommunicator, the VC100, connects to a television and standard touch-tone telephone and adds video to an otherwise normal telephone call, without the need for a PC. The VC100, targeted at United States consumer markets, is based primarily upon the Company's existing technology and is 28 31 designed to be compliant with the H.324 international standard for video telephony over POTS and to be compatible with PC and non-PC based systems that adhere to the H.324 standard. The VC100 is designed to communicate with full duplex audio and video rates of up to 15 frames per second. The VC100, which is based on the Company's Low bit-rate Videophone Processor ("LVP") semiconductor and proprietary software, includes an integrated digital camera and a V.34 modem and displays video in either full or quarter screen format, as well as simultaneous remote and self-view mode. The VC100 is controlled through the touch-tone keypad of the user's telephone and menu driven instructions that appear on the television screen. The Company is demonstrating a prototype of its second VideoCommunicator, the VC200, which is a non-PC based POTS video phone with a built-in LCD display. The Company plans to extend its VideoCommunicator product line in the future by developing products in new form factors and products that are designed to comply with emerging video telephony standards. The Company further intends to differentiate its products by adding features which may include picture quality enhancements, Internet browsing, caller ID, pan/tilt/zoom and auto-answer. See "Business -- Research and Development." Moreover, because the Company's video compression semiconductor and related software business has not provided, and is not expected to provide, sufficient revenues to profitably operate the Company, the Company believes that its future profitability will be largely dependent on the success of its VideoCommunicator business. Although the Company has no current plan to market the VC100 outside of the United States prior to 1998 at the earliest, the Company intends, throughout 1997 and thereafter, to explore the requirements for obtaining foreign regulatory approvals which will be necessary prior to the sale of the VC100 outside of the United States. There can be no assurance, however, that the Company will receive any foreign regulatory approvals in a timely manner, if at all. See "Risk Factors -- Compliance with Regulations and Industry Standards." The Company recently began demonstrating a prototype of its VC200, with numerous technical and other milestones remaining before commercial introduction is possible. See "Risk Factors -- Dependence on Future VideoCommunicator Revenues and "Risk Factors -- Rapid Technological Change, Dependence on New Product Introduction." Video Compression Semiconductors The Company's video compression semiconductors are based on the Company's proprietary architecture, which is protected in part by various patents and trade secret protections. See "Business -- Intellectual Property." This architecture combines, on a single chip, a custom RISC microprocessor, a high performance DSP core, specialized video processing circuitry, static RAM memory and proprietary software, which together perform the core processing functions required by video conferencing and other digital video applications. The table below describes the Company's video compression semiconductors and their applications: - ---------------------------------------------------------------------------------------------------------- PRODUCT DESCRIPTION APPLICATIONS - ---------------------------------------------------------------------------------------------------------- Video Communications H.320 compression semiconductor - PC ISDN video conferencing add-in boards Processor("VCP") for ISDN video conferencing - ISDN group video conferencing systems systems; - LAN video conferencing systems or H.323 semiconductor for LAN - Internet phone calls video conferencing systems or Internet phone calls - ---------------------------------------------------------------------------------------------------------- Low bit-rate H.324 compression semiconductor - Consumer video telephones for POTS Videophone for POTS video conferencing - PC video phone add-in boards for POTS Processor("LVP") systems - ---------------------------------------------------------------------------------------------------------- Multimedia Encoding Compression semiconductor for - Cameras with embedded compression Processor("MEP") video capture and encoding - Video capture PC add-in boards systems - ---------------------------------------------------------------------------------------------------------- Video to PCI Interface chip which connects the - PC (POTS, ISDN or LAN-based) video Interface VCP/LVP/MEP devices to the PCI conferencing boards Chip("VPIC") bus - ----------------------------------------------------------------------------------------------------------

29 32 VCP -- Video Communications Processor. The Company's VCP is an integrated video compression semiconductor, which allows OEMs to develop video conferencing systems based on the H.320 standard for ISDN video conferencing or on the H.323 standard for LAN video conferencing or Internet phone calls. In recent quarters, the VCP accounted for the majority of the Company's semiconductor product sales. The Company's proprietary RISC and DSP technology allows a single VCP semiconductor to output up to 24 frames per second of H.320 based video over an ISDN line. The VCP includes video processing circuitry that compresses and decompresses video images. Systems designed using multiple VCPs are capable of providing higher frame rates, thus providing for video quality approaching that of a television. The VCP can reside on PC add-in cards or non-PC based corporate conference room systems. LVP -- Low bit-rate Videophone Processor. The LVP semiconductor is designed to support H.324 based video phones using standard POTS phone lines. Systems based on the LVP benefit from the same RISC and DSP technology found in the Company's VCP product, and are designed to deliver video at up to 15 frames per second over a standard POTS telephone line. The LVP can be designed into systems in a variety of form factors, including non-PC based systems that utilize a telephone and either television or a LCD display. The LVP can also be designed into PC video phone add-in boards. The LVP is the core compression semiconductor inside the Company's VC100 and VC200 products. MEP -- Multimedia Encoding Processor. The MEP is designed for multimedia compression applications which require high processing power to compress high bandwidth digital video, such as cameras with embedded compression, PC add-in boards for video capture and editing and CD-ROM title development. VPIC -- Video to PCI Interface Chip. The VPIC is a companion semiconductor to the Company's video compression semiconductors. The VPIC provides a direct interface between the Company's compression semiconductors and the high speed PCI expansion bus found in PCs. By providing a direct path into the PC's graphic display memory, the VPIC allows PC board designers to improve the performance and quality of their designs based on the Company's compression semiconductors. The Company is currently designing a future generation of its video compression semiconductors and related software. To date, the Company has focused its semiconductor research and development efforts principally on development of the successor to the VCP compression semiconductor and the related software. See "Business -- Research and Development." Application Software The Company's semiconductors are sold with its proprietary application specific software, which addresses the unique system requirements of various international video telephony standards. This software, which is a combination of microcode assembly and C firmware, enables the Company's proprietary semiconductor architecture to implement multiple compression standards such as H.320, H.323, H.324 and MPEG. In many cases, by enhancing its application software, the Company can improve the quality of transmitted video images, address emerging standards and add user features to its existing video compression semiconductors. The Company supplies an Application Programmers Interface ("API") with its software to allow limited customization through an external microprocessor or host controller. The Company also sells non-exclusive licenses for the source code for its software to customers who wish to modify the software by adding their own features and controls. Development kits are also licensed to customers allowing them to write, compile and develop software for the Company's proprietary semiconductor architecture. Reference Boards and Designs The Company provides a range of printed circuit boards and designs as reference boards or reference designs to its customers which serve as examples for targeted applications. Each reference board and reference design is provided with schematics, complete documentation, video processor software and board-level software diagnostics. This allows the customer to leverage the Company's systems design expertise. These reference boards and reference designs enable customers to more quickly introduce new products and improve the Company's technical support capabilities. Examples of the Company's reference board designs include the DVC5, which is designed for H.320 systems, and the DVC8, which is designed for H.324 systems. Each of the 30 33 Company's reference boards and reference designs specifies the use of one of the Company's video compression semiconductors on the board or within the design, as the case may be. TECHNOLOGY The Company has developed the following video conferencing technologies: Semiconductor Architecture The Company's video compression semiconductors share a common architectural foundation. This architecture has been specifically tailored to video conferencing applications which must simultaneously compress and transmit video and audio data from one side of a video call while receiving and decompressing video and audio data from the remote side. This architecture integrates two core processors running in parallel: a 33 million instructions per second ("MIPS") 32-bit RISC microprocessor and a 128-bit Single Instruction Multiple Data ("SIMD") DSP. The Company's video compression semiconductors currently in production are manufactured using 0.5 micron, 3-layer metal complementary metal oxide semiconductor ("CMOS") process technology. Follow-on versions are being designed using 0.35 micron process technology. The Company's RISC processor core uses a proprietary instruction set specifically designed for video conferencing applications. The RISC core controls the overall chip operation and manages the input/output interface through a variety of specialized ports which connect the chip directly to external host, audio and network subsystems. This core is programmable in the C programming language and allows customers to add their own features and functionality to the device software provided by the Company. The second processor is a proprietary DSP core. This DSP core is a 2 BOPS (billion operations per second) SIMD processor which implements the computationally intensive video and audio processing routines. Variable length 32 and 64 bit microcode instructions of the DSP core provide the flexibility to improve algorithm performance, enhance video and audio quality and maintain compliance with changing digital video standards. Unlike many competing semiconductors which use hardwired building blocks to implement each step in the compression/decompression (codec) process, the Company's DSP core uses microcode software routines to implement the fundamental processing steps which form the basis of H.320, H.323 and H.324 standards-based video conferencing systems, thus allowing upgrades through changes in software only. In addition to the RISC and DSP cores, all of the Company's video compression semiconductors share a common set of video processing capabilities which are fundamental to enhancing video quality. Digital video inputs directly into the chip and passes through a series of digital filters designed to resize, re-color and remove noise from the images in preparation for compression. These semiconductors also incorporate proprietary interlacing and resizing filters at the output stage. Application Software Development The Company's proprietary application specific software, sold with the Company's semiconductor products, addresses the unique system requirements of the various international video telephony standards. This software is a combination of microcode assembly (for the DSP core) and compiled C code (for the RISC core). By refining its software, the Company can enhance picture quality, address new standards and add significant user features. In addition, several of the Company's customers have licensed source code to which they add proprietary features, custom interfaces and, in some cases, algorithm improvements. See "Business -- Licensing and Development Arrangements." Algorithm Expertise The Company has devoted significant resources to develop video and audio codec algorithms to meet international video telephony standards. While the H.32x standards clearly specify the syntax requirements of a standards-compliant decoder, and thus what constitutes a valid H.32x bitstream, they do not specify the methods by which an H.32x encoder achieves this result. The flexibility of the Company's video compression 31 34 semiconductor architecture allows the Company to apply its core algorithm expertise to develop products for a variety of video conferencing applications. The Company's algorithm expertise enables the following: - Video Coding Efficiency and Video Quality. By improving its proprietary motion search algorithms and optional coding modes which are tuned to the capabilities of the Company's semiconductor architecture, the Company is able to enhance video quality for H.32x video conferencing applications. - Integrated Control of Real-Time Systems. Video conferencing systems are inherently complex due to the convergence of video, audio and control information. The Company's proprietary semiconductor architecture and interrupt-driven control firmware manage these varying data streams in concert thereby reducing the complexity of the external system design. - Proprietary Rate Buffer Control. The real-time management of video and audio buffer occupancy has a significant effect on the performance of video conferencing systems, especially at low bit-rates. The Company has developed a suite of proprietary adaptive rate-buffer control algorithms which dynamically controls the occupancy rate of these buffers and allows for efficient use of available network bandwidth. SALES AND MARKETING The Company markets its semiconductors through its own direct sales force as well as through distributors. The Company's direct sales force supports domestic and international sales and operates from the Company's headquarters in Santa Clara, California and a European office in London. As of March 31, 1997, the Company employed 22 persons in sales and marketing. These persons provide direct account support for OEM and distributor customers of the Company's semiconductors. The Company's sales and marketing personnel typically provide support to such OEM customers through sales literature, periodic training, customer symposia, pre-sales support and joint sales calls. As of March 31, 1997, the Company marketed its video compression semiconductors through seven distributors in Europe and the Pacific Rim. For the years ended March 31, 1996 and 1997, sales by the Company to distributors accounted for approximately 18% and 25% of total revenues, respectively, with one distributor, ASCII Corporation, accounting for 7% and 13% of total revenues, respectively. See "Business -- Licensing and Development Arrangements" for a discussion of certain licensing and development arrangements (including arrangements pursuant to which USR and KME have licensed substantially all of the Company's technology underlying the Company's VideoCommunicators). Although the Company has received certain revenues from these licensing and development arrangements in the past, there can be no assurance that the Company will receive any revenues from these arrangements in the future. See "Risk Factors -- USR Right of Cancellation." In addition, USR, KME and other licensees or purchasers of the Company's technology, video compression semiconductors, software or board designs may use such technology or components to manufacture and sell products that compete directly with the Company's VideoCommunicators. The Company utilizes several marketing programs to support the sale and distribution of its products, including participation in industry trade shows and conferences. The Company also publishes technical articles, distributes sales and product literature and has an active public relations plan to encourage coverage of the Company's products and technology by editors of trade journals. The Company sells its VideoCommunicators through a direct marketing effort, utilizing a combination of advertising, toll-free telemarketing and direct mail supported by co-marketing arrangements with third parties such as Hewlett-Packard and GTE. The direct marketing approach generally allows more rapid establishment of brand recognition and introduction of new products and enables competitive pricing and better management of working capital. The Company also recently began marketing its VideoCommunicators through retail channels such as Comexpo, Fry's Electronics and J&R Computer and catalogs such as Hello Direct, Hammacher Schlemmer, MicroWarehouse and Sharper Image. The Company intends to continue to sell its video compression semiconductor and software products to OEMs and distributors through its existing sales and marketing force. In recent years, the Company has been a provider of video compression semiconductors to OEMs of video conferencing systems. As such, the Company has only recently begun marketing its VideoCommunicators. In order to achieve significant market penetration and brand awareness for its VideoCommunicators, 32 35 the Company must expand its sales and marketing efforts and further develop consumer marketing capabilities. There can be no assurance that the Company will be able to expand its sales and marketing efforts or further develop consumer marketing capabilities or that the Company will be able to achieve significant market penetration with its VideoCommunicators. Failure of the Company to successfully expand its sales and marketing efforts, or to sufficiently extend consumer marketing capabilities or to generate significant sales of the VC100 would have a material adverse effect on the Company's business and operating results. See "Risk Factors -- Potential Fluctuations in Future Operating Results," "Risk Factors -- Uncertainty of Market Acceptance; Limits of Existing Technology," "Risk Factors -- No History of Consumer Marketing" and "Risk Factors -- Management of Growth." MARKETS AND CUSTOMERS The Company provides highly integrated, proprietary semiconductors and associated software sold primarily to OEMs of corporate video conferencing systems. The Company sells its VCP semiconductors and related software and reference designs primarily to OEMs designing ISDN office video conferencing systems that use the H.320 standard, including PictureTel, Siemens, Sony, VideoServer, VCON and Vtel. The Company has sold limited quantities of its LVP semiconductors and related software and reference board designs to OEMs designing POTS video conferencing systems for the consumer market using the H.324 standard, such as Sony and KME, an affiliate of Matsushita. To address new opportunities, the Company is expanding its product lines by developing a family of non-PC based VideoCommunicators for the consumer market. The VC100, the Company's initial VideoCommunicator, began shipping to the United States consumer market in February 1997 and is based upon the Company's proprietary semiconductor and software technology. See "Business -- Products" and "Business -- Licensing and Development Arrangements" for a discussion of the status of the VC100, the VC200 and the successor products to the Company's video compression semiconductors and certain related licensing and development arrangements (including arrangements pursuant to which USR and KME have licensed all or substantially all of the Company's technology underlying its VideoCommunicators). Although the Company has received certain revenues from these licensing and development arrangements in the past, there can be no assurance that the Company will receive any revenues from these arrangements in the future. See "Risk Factors -- USR Right of Cancellation." In addition, USR, KME and other licensees or purchasers of the Company's technology, video compression semiconductors, software or board designs may use such technology or components to manufacture and sell products that compete directly with the Company's VideoCommunicators. Historically, a significant portion of the Company's sales has been to relatively few customers, although the composition of these customers has varied. Product revenues from the Company's ten largest customers in the years ended March 31, 1995, 1996 and 1997 accounted for approximately 44%, 39% and 54%, respectively, of its total revenues. During these periods, excluding one company paying certain non-recurring licensing fees in fiscal 1996, the Company had only two customers that accounted for 10% or more of total revenues: Compression Labs (during the year ended March 31, 1995) and ASCII, the Company's Japanese distributor (during the year ended March 31, 1997). Moreover, the Company has recently been, and will continue in the foreseeable future to be, substantially dependent on the video conferencing industry. The loss of, or any reduction in orders from, a significant customer, or any reduction in demand for the Company's video compression semiconductors (particularly prior to significant VideoCommunicator revenues) or any general decline in the market for video conferencing products, could have a material adverse effect on the Company's business and operating results. See "Risk Factors -- Product Concentration; Potential Loss of Semiconductor Sales; Dependence on Video Conferencing Industry" and "Risk Factors -- Dependence on Key Customers." MANUFACTURING The Company uses independent foundries to fabricate, assemble and test its video compression semiconductors. The Company does not have long-term purchase agreements with its semiconductor foundries, and purchases semiconductor wafers pursuant to purchase orders. Therefore these foundries are generally not obligated to supply products to the Company for any specific period, in any specific quantity or at any specific price. The Company secures assembly and test services on a purchase order basis as well. 33 36 The Company has only recently begun to manufacture consumer video telephony products. The Company outsources the manufacture of its VideoCommunicators to subcontract manufacturers. These subcontract manufacturers procure components from their suppliers and perform assembly and testing of the Company's VideoCommunicators on a turnkey basis. There can be no assurance that the Company will be able to reliably manufacture its VideoCommunicators in volumes, on a cost effective basis or in a timely manner. See "Risk Factors -- Lack of Experience in Manufacturing Consumer Video Telephony Products." The Company's reliance on subcontract foundries and system subcontract manufacturers, its manufacture of semiconductors, its purchase of components from third parties and its reliance on foreign subcontract manufacturers involve a number of risks. There can be no assurance that certain risks associated with these practices and activities will not have a material adverse effect on the Company's business and operating results. See "Risk Factors -- Dependence on Third Party Manufacturers; Component Availability" and "Risk Factors -- International Operations." RESEARCH AND DEVELOPMENT As of March 31, 1997, the Company had 53 employees engaged in research and development. Research and development expenses in the years ended March 31, 1995, 1996 and 1997 were $8.1 million, $7.7 million and $10.5 million, respectively. The Company's development of new products and the enhancement of existing products is essential to its success. Accordingly, the Company anticipates that research and developments expenses will continue to increase in the foreseeable future. However, such expenses may fluctuate from quarter to quarter depending on a wide range of factors, including the status of and prospects for various development projects. The Company's current and future research and development efforts relating primarily to video compression semiconductors have and will continue to focus on the Company's next generation of these products. Areas of emphasis will include an enhanced version of its video compression semiconductor architecture intended to provide higher performance, enhanced functionality and further integration of certain essential system functions. This integration is designed to permit improved system price/performance. Future software developments may focus on emerging video telephony standards, picture quality enhancements and additional features supporting both the Company's systems products and its OEM customer products. Research and development efforts relating to the VC100, the Company's initial VideoCommunicator, are directed towards picture quality enhancements, Internet browsing, caller ID, pan/tilt/zoom and auto-answer. To expand its family of VideoCommunicators, the Company is developing new form factors and broadening its video conferencing systems to ISDN and LAN as well as Internet phone calls. Although the Company is a developer of video compression semiconductors and systems, the Company was previously involved in several other businesses which have since been discontinued. Prior product lines that were discontinued include math co-processors and MPEG semiconductors, discontinued in June 1995 and September 1996, respectively. Prior development efforts that were discontinued include Intel compatible x86 microprocessors and graphics semiconductors, discontinued in June 1995 and during the quarter ended September 30, 1994, respectively. The Company has discontinued its products and efforts in these areas in part because of rapid changes in the personal computer marketplace and severe price reduction for certain of these components. The video compression semiconductor and video conferencing markets are characterized by rapid changes in customer requirements, frequent introductions of new and enhanced products, and continuing and rapid technological advancement. To compete successfully, the Company must continue to design, develop, manufacture and sell new and enhanced products that provide increasingly higher levels of performance and reliability, take advantage of technological advancements and changes and respond to new customer requirements in a timely manner. The Company's success in designing, developing, manufacturing and selling such products will depend on a variety of factors. In addition, the development and marketing of the Company's VideoCommunicators is at an early stage and, as a result, the Company must achieve numerous significant milestones and overcome substantial risks in order to successfully achieve widespread market acceptance of its VideoCommunicators. There can be no assurance that VideoCommunicators can be 34 37 successfully developed, introduced to the market or achieve market acceptance. The Company has in the past experienced delays in the development of new products and the enhancement of existing products, and such delays may occur in the future. If the Company is unable, due to resource constraints or technological or other reasons, to develop and introduce new or enhanced products in a timely manner, or if such new or enhanced products do not achieve sufficient market acceptance, it would have a material adverse effect on the Company's business and operating results. See "Risk Factors -- Dependence on Future VideoCommunicator Revenues" and "Risk Factors -- Rapid Technological Change; Dependence on New Product Introduction." LICENSING AND DEVELOPMENT ARRANGEMENTS The Company from time to time enters into licensing and development arrangements with other corporations that are designed to promote the design, development, manufacture and sale of the Company's products. Such arrangements may enable these corporations to use the Company's technology to produce products that compete with the Company's VideoCommunicators. See "Risk Factors -- Competition." The Company's most significant licenses are with USR and KME. On May 5, 1997, the Company entered into a license agreement with USR. Pursuant to the agreement, which is subject to cancellation by USR on or before June 12, 1997, the Company has granted to USR, for an initial license fee plus certain royalties, a license to make, use and sell systems and products containing the Company's proprietary technology relating to its VideoCommunicators and its PC-related video conferencing products. See "Risk Factors -- USR Right of Cancellation." As a result, USR has a license to all of the Company's technology underlying its VideoCommunicators. USR is prohibited under the agreement from selling the Company's semiconductors on the open market. Both parties have also agreed to license to each other any enhancements to the technology which are developed by either party, unless USR elects to discontinue sharing at any time or the Company elects to discontinue sharing (which it may do at any time following June 30, 2000). Any enhancements or other technology developed by USR cannot be sublicensed by the Company or incorporated into semiconductors which the Company sells on the open market in component form, but can be incorporated into semiconductors that the Company uses in the VideoComunicators. Pursuant to the Company's agreement with USR, the Company is prohibited, until May 5, 1998, from licensing the technology to others, except in limited circumstances. The KME agreement provides to KME, for a license fee previously paid in full to the Company, all of the source code and object code of the H.324 software for 8x8's LVP semiconductor product and related development software, as well as certain board schematics (the "H.324 Technology"), and grants KME a perpetual, nonexclusive, nonassignable worldwide license to make, use or sell products with the H.324 Technology. Under this arrangement, KME also has a nonassignable option, upon payment of additional consideration, to obtain the Company's LVP and VCP semiconductor technology for use only on systems assembled by KME or its affiliates, which would include any entity controlled directly or indirectly by Matsushita. As a result, KME has a license to substantially all of the Company's technology underlying its VideoCommunicators. In addition, KME must pay to the Company a royalty for any LVP or VCP semiconductor it manufactures or any product wherein KME uses any part of the LVP or VCP semiconductor technology. Both parties agree to license to the other party, at no charge, any enhancements to the H.324 Technology or the LVP or VCP semiconductor made by either party, until such time as KME decides to discontinue sharing of enhancements. In addition to the above technology and licensing arrangements intended to promote the Company's products, in the past the Company has entered into certain other technology licensing arrangements in connection with the discontinuation of certain products or development efforts. See "Business -- Research and Development." In the years ended March 31, 1995, 1996 and 1997, technology licensing revenues (all of which were non-recurring) were $1.3 million, $9.0 million and $3.9 million, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although a number of the Company's current technology licensing arrangements (including the license arrangements with USR and KME described above) 35 38 may result in future payments to the Company, the Company has no way to determine the amount of such payments, if any, as their receipt by the Company is dependent upon many factors (such as successful product development and introduction by the licensee) largely outside of the Company's control. In connection with the Company's receipt of a majority of the common stock of VidUs, Inc., the Company provided to VidUs, Inc. a license to certain technology. See "Certain Transactions." COMPETITION The Company competes with independent manufacturers of video compression semiconductors and, with the introduction of the VC100, its initial VideoCommunicator, now competes with manufacturers of video conferencing products targeted at the United States 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 the following segments: Large consumer electronics manufacturers. The Company will face intense competition from many well known, established suppliers of consumer electronics products, which may include Lucent Technologies, Matsushita, Philips, Samsung and Sony. Many of these potential competitors sell television and telephone products into which they may integrate video conferencing systems, thereby eliminating a consumer's need to purchase a separate video conferencing system, such as the VC100. Licensees and purchasers of the Company's VideoCommunicator technology and components. A number of companies have licensed portions of the Company's technology, including USR and KME, an affiliate of Matsushita, which have each licensed all or substantially all of the Company's technology underlying its VideoCommunicators. Pursuant to the Company's license agreements with USR and KME, the Company has already received lump sum payments and will receive additional licensing revenues only in the event that such parties develop their own semiconductors or products based on the Company's licensed technology. See "Risk Factors -- USR Right of Cancellation." In connection with these licensing arrangements, each of USR and KME may be able to use the licensed technology to manufacture and sell products that compete directly with the Company's VideoCommunicators. The Company may in the future enter into similar license agreements with respect to substantial portions of its technology. See "Business -- Licensing and Development Arrangements." In addition, other companies may choose to manufacture and sell products competitive with the Company's VideoCommunicators by incorporating video compression semiconductors purchased from the Company into products that are based on the Company's video phone reference board designs or other video phone designs. Purchasers of Other Companies' Video Compression Semiconductors and Reference Designs. Companies may choose to manufacture and sell products based upon video compression semiconductors manufactured by suppliers other than the Company or upon reference designs based upon such semiconductors. Certain of these other suppliers of video compression semiconductors, including Analog Devices, Chromatic Research, Lucent Technologies, Philips, Texas Instruments and Winbond Electronics, may have significantly greater resources than the Company. In order to increase the sale of their video compression semiconductors, these manufacturers may provide marketing, financial and other support to the purchasers of these products. One company has publicly announced that it is developing a video conferencing product based upon Lucent Technologies' video compression semiconductors and that it will be making available for sale to third parties a video phone reference design incorporating Lucent Technologies' semiconductors. In addition, another company has publicly announced that it is developing a similar product based on semiconductors from Analog Devices. The Company's ability to compete depends upon its future success in developing and manufacturing new generations of processors that integrate additional functions and reduce costs. Otherwise, competing semiconductor manufacturers will 36 39 in the future have competitive advantages in cost, size and performance which would make systems based on competing semiconductors preferable to the Company's VideoCommunicators. Personal computer system and software manufacturers. Potential customers for the Company's VideoCommunicators may elect instead to buy PCs equipped with video conferencing capabilities, which are currently available. As a result, the Company may face competition from Intel; PC system manufacturers such as Apple, Compaq, IBM and Sony; PC software suppliers such as Microsoft and Netscape; and PC add-on component suppliers. Existing manufacturers of video conferencing equipment. Manufacturers of more expensive corporate video conferencing systems may enter the market for lower cost consumer video conferencing products. Potential competitors include Compression Labs, C-Phone (which is shipping to consumer electronic stores a product that is competitive with the Company's VC100), PictureTel, Sony and Vtel. Emerging suppliers of "Internet appliances." Potential customers for the Company's VideoCommunicators may elect instead to buy standalone internet access terminals which may provide some or all of the functionality of the Company's products. Consumer products for television-based Internet access have recently been announced or introduced by companies such as Microsoft, Philips and Sony. C-Phone recently began shipping to consumer electronics stores a product that addresses the home video conferencing market. The Company expects that additional competitors will enter this market in the future. The principal competitive factors in the market for video compression semiconductors include product definition, product design, system integration, chip size, functionality, time-to-market, adherence to industry standards, price and reliability. The Company has a number of competitors in this market, including Analog Devices, Chromatic Research, Lucent Technologies, Philips, Texas Instruments and Winbond Electronics. Certain of the Company's competitors for video compression semiconductors maintain their own semiconductor foundries and may therefore benefit from certain capacity, cost and technical advantages. Many of the Company's current and potential competitors have longer operating histories, are substantially larger, and have greater financial, manufacturing, marketing, technical and other resources. A number also have greater name recognition and a larger installed base of products than the Company. Competition in the Company's markets may result in significant price reductions. As a result of their greater resources, many current and potential competitors may be better able than the Company to initiate and withstand significant price competition or downturns in the economy. There can be no assurance that the Company will be able to continue to compete effectively, and any failure to do so would have a material adverse effect on the Company's business and operating results. INTELLECTUAL PROPERTY 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 laws, which afford only limited protection. There can be no assurance that the steps taken by the Company will prevent misappropriation of its technology. The Company also relies in part on patent law to protect its intellectual property in the United States and abroad. The Company currently holds four United States patents, including patents relating to video compression and memory architecture technology, and has 13 United States patent applications pending. The Company has a number of foreign patent applications pending. There can be no assurance that any patent, trademark or copyright owned by the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be issued with the scope of the claims sought by the Company, if at all. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. Thus, effective intellectual property protection may be unavailable or limited in certain foreign countries. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competition will not independently develop technologies that are similar or superior to the Company's technology, duplicate the Company's technology or 37 40 design around any patent of the Company. Moreover, litigation may be necessary in the future to enforce the Company's intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of management time and resources and could have a material adverse effect on the Company's business and operating results. There has been substantial litigation in the semiconductor, electronics and related industries regarding intellectual property rights, and there can be no assurance that third parties will not claim infringement by the Company of their intellectual property rights. In addition, as is common in its industry, the Company has from time to time received notification from other companies of intellectual property rights held by those companies upon which the Company's products may infringe. For example, in 1996, the Company received an allegation of infringement from Elk Industries, Inc. 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 could be required to seek licenses from other companies or to refrain from using, manufacturing or selling certain products or using certain processes. Although holders of patents and other intellectual property rights often offer licenses to their patents or other intellectual property rights, no assurance can be given that licenses would be offered to the Company, that the terms of any offered license would be acceptable to the Company or that failure to obtain a license would not 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. There can be no assurance that the technology licensed by the Company will continue to provide competitive features and functionality or that licenses for technology currently utilized by the Company or other technology which the Company may seek to license in the future will be available to the Company on commercially reasonable terms or at all. The loss of, or inability to maintain, existing licenses could result in shipment delays or reductions until equivalent technology or suitable alternative products could be developed, identified, licensed and integrated, and the inability to license key new technology that may be developed, on commercially reasonable terms, would have a material adverse effect on the Company's business and operating results. EMPLOYEES As of March 31, 1997, the Company employed a total of 98 people, including 11 in manufacturing operations, 53 in research and development, 22 in sales and marketing and 12 in general and administrative capacities. The Company also employs a number of temporary employees and consultants on a contract basis. None of the Company's employees is represented by a labor union with respect to his or her employment by the Company. The Company has not experienced any work stoppages and considers its relations with its employees to be good. The Company's future success will depend, in part, upon its ability to attract and retain qualified personnel. Competition for qualified personnel in the electronics and communications industries is intense, and there can be no assurance that the Company will be successful in retaining its key employees or that it will be able to attract skilled personnel as the Company grows. See "Risk Factors -- Management of Growth" and "Risk Factors -- Dependence on Key Personnel." FACILITIES The Company's principal operations are located in an approximately 61,767 square foot facility in Santa Clara, California. A portion of this facility has been subleased. This lease expires in April 1999. The Company also leases 2,267 square feet in London, England. This lease expires in January 1999 and the Company has no option to extend the lease. The Company's existing facilities are adequate to meet its current needs. 38 41 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the executive officers and directors of the Company as of the date of this Prospectus:
NAME AGE POSITION - ---------------------------- ---- ----------------------------------------------------------- Joe Parkinson(1)............ 51 Chairman of the Board and Chief Executive Officer Keith R. Barraclough........ 31 President and Chief Operating Officer and Director Paul Voois.................. 30 Executive Vice President and Director Sandra L. Abbott............ 50 Chief Financial Officer and Vice President, Finance David Harper................ 50 Vice President, European Operations Bryan R. Martin............. 29 Chief Technical Officer and Vice President, Engineering Chris McNiffe............... 35 Vice President, Marketing and Sales Michael Noonen.............. 34 Vice President, Business Development Samuel Wang................. 47 Vice President, Manufacturing and Director Y.W. Sing................... 42 Vice Chairman of the Board Bernd Girod................. 39 Director Richard M. Chang(1)......... 56 Director Sada Chidambaram(2)......... 51 Director Akifumi Goto(1)............. 53 Director William Tai(2).............. 34 Director
- --------------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. Joe Parkinson has served as Chairman of the Board and Chief Executive Officer of the Company since June 1995. From October 1994 to June 1995, Mr. Parkinson served as a consultant to Micron Technology, Inc. ("Micron"), a manufacturer of semiconductor memory products, personal computers and circuit board assemblies. From October 1985 to October 1994, he served as Chairman of the Board and Chief Executive Officer of Micron, and from July 1980 to October 1985 he served as President of Micron. Mr. Parkinson is a director of Ultratech Stepper, Inc. Mr. Parkinson received a B.A. from Columbia College, a J.D. from Tulane University and a L.L.M. in Taxation from New York University. Keith R. Barraclough was promoted to President and Chief Operating Officer and became a director of the Company in January 1997. From April 1996 to the present, he has also served as a director of VidUs, Inc. ("VidUs"), a subsidiary of the Company engaged in the design of integrated camera and video compression solutions. Mr. Barraclough served as Director of Videophone Development of the Company from September 1995 to January 1997, and as Strategic Marketing Manager from January 1995 to September 1995. From April 1993 to January 1995, Mr. Barraclough served as Manager of Semiconductor Development at Media Vision Technology, Inc., a manufacturer of multimedia products. From 1988 to April 1993, Mr. Barraclough held a position as engineer at IBM. Mr. Barraclough received a B.S. in Electrical Engineering from University College, London and a M.S. in Electrical Engineering from Imperial College, London. Dr. Paul Voois was promoted to Executive Vice President and became a director of the Company in January 1997. From April 1996 to the present, he has also served as a director of VidUs. Dr. Voois served as Manager of Multimedia Codec Development of the Company from April 1996 to January 1997, as Technical Lead of the Company's H.324 Development Group from November 1995 to April 1996, and as a member of the technical staff of the Company from September 1994 to November 1995. From January 1990 to December 1993, Dr. Voois was a research assistant in Electrical Engineering at Stanford University. Dr. Voois received a B.S. in Electrical Engineering from Penn State University, and a M.S. and a Ph.D. in Electrical Engineering from Stanford University. 39 42 Sandra L. Abbott joined the Company as Controller in April 1991, and was promoted to Chief Financial Officer and Vice President, Finance in June 1995. From February 1990 to March 1991, Ms. Abbott served as Controller for InfoChip Systems, Inc, a semiconductor manufacturer. Prior to 1990, Ms. Abbott held Controller positions at MRP, Inc. (a subsidiary of U.S. West), Free-Flow Packaging, Inc. and Weitek Corporation. Ms. Abbott received a B.A. from University California, Riverside and a M.B.A. from Santa Clara University. David Harper joined the Company in May 1990 and was promoted to Vice President, European Operations in March 1991. From 1988 to 1990, Mr. Harper was Chief Executive Officer of Dialog Semiconductor, a European ASIC manufacturer. Prior to 1988, Mr. Harper held various sales management positions at GEC Plessey Semiconductor, LSI Logic Corp. and General Electric Company. Mr. Harper received a B.S. in Electrical Engineering from the University of Manchester Institute of Science and Technology. Bryan R. Martin was promoted to Chief Technical Officer and Vice President, Engineering of the Company in August 1995. Mr. Martin served as Video Project Manager of the Company from April 1995 to August 1995, and as an integrated circuit designer for the Company from April 1990 to August 1995. Mr. Martin received a B.S. and a M.S. in Electrical Engineering from Stanford University. Chris McNiffe has served as Vice President, Marketing and Sales for the Company since July 1995. From June 1992 to July 1995, Mr. McNiffe held various sales and marketing management positions at the Company. From July 1986 to June 1992, Mr. McNiffe held a position as sales manager at NCR Corporation, a computer products and services provider. From 1982 to 1986, Mr. McNiffe was a design engineer at RCA Corporation. Mr. McNiffe received a B.S. in Electrical Engineering from Rutgers University. Michael Noonen has served as Vice President, Business Development for the Company since May 1996. From April 1996 to the present, he has also served as Chief Executive Officer of VidUs. From July 1992 to April 1995, Mr. Noonen held various sales management positions at the Company. From August 1990 to July 1992, Mr. Noonen served as an Area Sales Manager for NCR Corporation, a computer products and services provider. Prior to 1992, Mr. Noonen was a field application engineer for Seattle Silicon Corporation, a software developer. Mr. Noonen received a B.S. in Electrical Engineering from Colorado State University. Dr. Samuel Wang has served as Vice President, Manufacturing and a director of the Company since October 1995. From 1984 to October 1995, Mr. Wang served as Executive Vice President and a director of ICT Inc., a manufacturer of programmable logic devices. From 1981 to 1983 Mr. Wang was a Senior Engineering Manager at National Semiconductor Corporation, and from 1978 to 1980 he was a staff engineer at Intel Corporation. Mr. Wang received a B.S. in Physics from the National Tsing Hua University, Taiwan, and a M.S. and Ph.D. in Solid State Electronics from Princeton University. Dr. Y.W. Sing has served as a director of the Company since February 1987, and has served as Vice Chairman of the Board since July 1995. Dr. Sing co-founded the Company in February 1987 and was Vice President of Engineering until December 1989. From December 1989 to July 1995, he served as the Company's Executive Vice President, and in July 1995 became the Company's Vice Chairman of the Board. In April 1997, Dr. Sing resigned as an employee of the Company but remains as Vice Chairman of the Board. For six years prior to 1987, Dr. Sing worked for Weitek Corporation, a semiconductor manufacturer, where he served as senior technical manager. From 1979 to 1981, Dr. Sing was a member of the technical staff at Hewlett-Packard Company. Dr. Sing holds a B.S. from National Taiwan University and a M.S. and Ph.D. in Electrical Engineering from the University of California at Berkeley. Dr. Bernd Girod has served as a director of the Company since November 1996. Dr. Girod has been a Chaired Professor of Electrical Engineering/Telecommunications at the University of Enlangen-Nuremberg in Germany since October 1993. In May 1993, he co-founded Vivo Software, Inc., a developer of video compression software, and has served as Chief Scientist since then. From June 1990 to September 1993, Dr. Girod was Professor of Computer Graphics and Technical Director of the Academy of Media Arts in Cologne, Germany, jointly appointed with the Computer Science Section of Cologne University. From January 1988 to May 1990, he was employed at the Massachusetts Institute of Technology, first as a Visiting 40 43 Scientist and then as an Assistant Professor with the Media Laboratory. Dr. Girod received a M.S. in Electrical Engineering from the Georgia Institute of Technology and a Doctoral degree from the University of Hannover, Germany. Dr. Richard M. Chang has been a director of the Company since February 1987. He has served in various marketing and manufacturing management positions at Hewlett-Packard Company, an electronics component and system manufacturer, since 1970. Dr. Chang received a B.S. in Physics from the California Institute of Technology and a Ph.D. in Applied Physics from Stanford University. Sada Chidambaram has been a director of the Company since December 1995. He has also been a director of ASCII Corporation ("ASCII") and has served as President of ASCII of America, Inc., a subsidiary of ASCII, since February 1988. ASCII, based in Tokyo, Japan, publishes software and computer magazines and manufactures and distributes specialized semiconductors and solutions. Mr. Chidambaram also serves on the Board of Directors of several privately held companies. Mr. Chidambaram received a B.S. in Chemistry from Loyola University and a M.S. in Chemical Engineering from the Tokyo Institute of Technology. Akifumi Goto has been a director of the Company since September 1996. He has served as President and Chief Executive Officer of Sanyo Semiconductor Corporation ("Sanyo"), a semiconductor manufacturer, since February 1993. From February 1983 to January 1993, Mr. Goto served as Executive Vice President of Sanyo. Mr. Goto received a B.S. in Electrical Engineering from Tamagawa University and a M.B.A. from Santa Clara University. William Tai has been a director of the Company since April 1994. Mr. Tai has served as a General Partner of the Walden Group of Venture Capital Funds, a venture capital firm, since September 1991. From August 1987 to September 1991, Mr. Tai served as Vice President of Alex. Brown & Sons Incorporated. Mr. Tai is also a director of Network Peripherals, Inc. and Award Software International, Inc. Mr. Tai received a B.S. in Electrical Engineering from the University of Illinois and a M.B.A. from Harvard Business School. BOARD COMMITTEES The Board of Directors has a Compensation Committee and an Audit Committee. The Compensation Committee makes recommendations to the Board concerning the compensation for the Company's officers and directors and the administration of the Company's 1992 Stock Option Plan, Key Personnel Plan, 1996 Stock Plan, 1996 Director Option Plan and 1996 Employee Stock Purchase Plan. The Audit Committee reviews the Company's financial controls, evaluates the scope of the annual audit, reviews audit results, consults with management and the Company's independent auditors prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of the Company's financial affairs. DIRECTOR COMPENSATION Directors receive no cash remuneration for serving on the Board of Directors but are reimbursed for reasonable expenses incurred by them in attending Board and Committee meetings upon approval of such reimbursement by the Board of Directors. Directors are eligible to receive stock options under the Company's 1992 Stock Option Plan, Key Personnel Plan and 1996 Stock Plan. Effective upon the closing of this Offering, the Company has adopted the 1996 Director Option Plan and, in the future, non-employee directors will be eligible to receive stock options under this plan. See "Management -- Compensation Plans." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors currently consists of Messrs. Parkinson, Chang and Goto. No member of the Compensation Committee or executive officer of the Company has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity. 41 44 LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Amended and Restated Certificate of Incorporation limits the liability of directors to the fullest extent permitted by the Delaware General Corporation Law (the "Delaware Law"). Under the Delaware Law, a director's liability to a company or its stockholders may not be limited with respect to (i) any breach of his duty of loyalty to the company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful payments or dividends or unlawful stock repurchases or redemptions or (iv) transactions from which the director derived an improper personal benefit. The Company's Bylaws provide that the Company shall indemnify its officers and directors and may indemnify its employees and other agents to the fullest extent permitted under the Delaware Law. The Company has also entered into agreements to indemnify its directors and executive officers. The Company's Bylaws also permit it to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions, regardless of whether the Delaware Law would permit indemnification. There is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any pending or threatened litigation or proceeding that might result in a claim for such indemnification. EXECUTIVE COMPENSATION The following table sets forth in summary form information concerning the compensation awarded to, earned by, or paid for services rendered to the Company in all capacities during the fiscal year ended March 31, 1997 by (i) the Company's Chief Executive Officer and Chief Operating Officer and (ii) the Company's other four most highly compensated executive officers whose salary and bonus for such fiscal year exceeded $100,000 and who served as executive officers of the Company at March 31, 1997 (collectively, the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------- ------------ OTHER ANNUAL SECURITIES ALL OTHER COMPENSATION UNDERLYING COMPEN- NAME AND PRINCIPAL POSITION SALARY($) BONUS($) ($)(1) OPTIONS(#) SATION($) - ------------------------------------ --------- -------- ------------ ------------ --------- Joe Parkinson, Chairman and Chief Executive Officer................. 150,000 9,322 -- 1,000,000(2) -- Keith R. Barraclough, President and Chief Operating Officer........... 123,962 120,650 -- 250,000(3) -- Paul Voois, Executive Vice President......................... 121,191 190,034 -- 250,000(4) -- Samuel Wang, Vice President, Manufacturing..................... 150,000 150,000 -- 157,400(5) -- Chris McNiffe, Vice President, Marketing and Sales............... 150,000 150,000 -- 176,400(6) -- Bryan R. Martin, Chief Technical Officer, and Vice President, Engineering....................... 130,192 151,675 -- 160,400(7) --
42 45 - --------------- (1) Excludes perquisites and other personal benefits which for each Named Executive Officer did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus for such officer. (2) Includes a grant of options for 500,000 shares issued pursuant to a repricing of options on June 24, 1996 accomplished through the cancellation of then existing options and the issuance of new options. See "Certain Transactions." (3) Includes grants of options for an aggregate of 35,000 shares issued pursuant to a repricing of options on June 24, 1996 accomplished through the cancellation of then existing options and the issuance of new options. See "Certain Transactions." (4) Includes grants of options for an aggregate of 31,000 shares issued pursuant to a repricing of options on June 24, 1996 accomplished through the cancellation of then existing options and the issuance of new options. See "Certain Transactions." (5) Includes a grant of options for 100,000 shares issued pursuant to a repricing of options on June 24, 1996 accomplished through the cancellation of then existing options and the issuance of new options. See "Certain Transactions." (6) Includes grants of options for an aggregate of 119,000 shares issued pursuant to a repricing of options on June 24, 1996 accomplished through the cancellation of then existing options and the issuance of new options. See "Certain Transactions." (7) Includes grants of options for an aggregate of 103,000 shares issued pursuant to a repricing of options on June 24, 1996 accomplished through the cancellation of then existing options and the issuance of new options. See "Certain Transactions." 43 46 Option Grants and Holdings The following table provides information with respect to stock option grants to each of the Named Executive Officers during the fiscal year ended March 31, 1997: OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED -------------------------------------------------------------- ANNUAL RATES OF STOCK NUMBER OF PERCENT OF PRICE APPRECIATION SECURITIES TOTAL FOR UNDERLYING OPTIONS GRANTED OPTION TERM(1) OPTIONS TO EMPLOYEES IN EXERCISE OR EXPIRATION --------------------- NAME GRANTED(#) FISCAL YEAR BASE PRICE ($/SH.) DATE 5%($) 10%($) - ----------------------- ---------- --------------- ------------------ ---------- -------- ---------- Joe Parkinson.......... 500,000(3) 18.2% $ 0.50(2) 06/15/05 $157,223 $ 398,435 Joe Parkinson.......... 250,000(4) 9.1% $ 0.50 06/24/06 $ 78,612 $ 169,743 Joe Parkinson.......... 250,000(5) 9.1% $ 0.50 06/24/06 $ 78,612 $ 169,743 Keith R. Barraclough... 20,000(6) 0.7% $ 0.50(2) 06/24/06 $ 6,289 $ 15,937 Keith R. Barraclough... 15,000(7) 0.5% $ 0.50(2) 06/24/06 $ 4,717 $ 11,953 Keith R. Barraclough... 25,000(8) 0.9% $ 5.00 11/21/06 $ 78,612 $ 169,743 Keith R. Barraclough... 170,000(9) 6.2% $ 6.80 01/20/07 $727,002 $1,842,366 Keith R. Barraclough... 20,000(6) 0.7% $ 0.50 06/24/06 $ 6,289 $ 15,937 Paul Voois............. 25,000(6) 0.9% $ 0.50(2) 06/24/06 $ 7,861 $ 16,974 Paul Voois............. 6,000(7) 0.2% $ 0.50(2) 06/24/06 $ 1,887 $ 4,781 Paul Voois............. 20,000(9) 0.7% $ 0.50 06/24/06 $ 6,289 $ 15,937 Paul Voois............. 4,000(9) 0.1% $ 0.50 07/17/06 $ 1,258 $ 3,187 Paul Voois............. 25,000(8) 0.9% $ 5.00 10/21/06 $ 78,612 $ 169,743 Paul Voois............. 170,000(9) 6.2% $ 6.80 01/20/07 $727,002 $1,842,366 Samuel Wang............ 100,000(10) 3.6% $ 0.50(2) 10/16/05 $ 31,445 $ 79,687 Samuel Wang............ 57,400(11) 2.1% $ 0.50 06/24/06 $ 18,049 $ 45,740 Chris McNiffe.......... 100,000(11) 3.6% $ 0.50(2) 07/10/05 $ 31,445 $ 79,687 Chris McNiffe.......... 2,000(11) 0.1% $ 0.50(2) 02/22/04 $ 629 $ 1,594 Chris McNiffe.......... 15,000(12) 0.5% $ 0.50(2) 07/08/02 $ 4,717 $ 11,953 Chris McNiffe.......... 2,000(13) 0.1% $ 0.50(2) 08/05/04 $ 629 $ 1,594 Chris McNiffe.......... 57,400(11) 2.1% $ 0.50 06/24/06 $ 18,049 $ 45,740 Bryan R. Martin........ 100,000(11) 3.6% $ 0.50(2) 08/14/05 $ 31,445 $ 79,687 Bryan R. Martin........ 3,000(11) 0.1% $ 0.50(2) 02/22/04 $ 943 $ 2,391 Bryan R. Martin........ 57,400(11) 2.1% $ 0.50 06/24/06 $ 18,049 $ 45,740
- --------------- (1) Potential gains are net of the exercise price but before taxes associated with the exercise. The 5% and 10% assumed annual rates of compounded stock appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. Actual gains, if any, on stock option exercises are dependent on the future financial performance of the Company, overall market conditions and the option holders' continued employment through the vesting period. (2) These options were issued pursuant to a repricing of options on June 24, 1996 accomplished through the cancellation of then existing options and the issuance of new options. See "Certain Transactions." (3) The options were granted under the Key Personnel Plan and vest at a rate of 1/3 of the shares at the end of one year and 1/24 of the remaining shares at the end of each month thereafter, subject to continued service as an employee, consultant or director. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans." 44 47 (4) The options were granted under the Key Personnel Plan and vest at a rate of 1/48 of the shares at the end of each month, subject to continued service as an employee, consultant or director. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans." (5) The options were granted under the Key Personnel Plan. This option shall vest at a rate of 1/36 of the shares at the end of each month, commencing in April 1997; provided, however, that vesting shall be accelerated in full upon an initial public offering of the Company's Common Stock occurring prior to December 31, 1997 for which either the initial public offering price or the highest bid price on the secondary market for the month thereafter is greater than $6.00 per share. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans" and "Certain Transactions." (6) The options were granted under the 1992 Stock Option Plan and vest at a rate of 1/48 of the shares at the end of each month, subject to continued service as an employee, consultant or director. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans." (7) The options were granted under the 1992 Stock Option Plan and vest at a rate of 1/4 of the shares at the end of one year and 1/36 of the remaining shares at the end of each month thereafter, subject to continued service as an employee, consultant or director. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans." (8) The options were granted under the 1992 Stock Option Plan and vest in full on October 21, 2000, subject to continued service as an employee, consultant or director. The options vest in full on June 30, 1997 dependent upon certain milestones reached by Messrs. Barraclough and Voois. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans." (9) The options were granted under the 1996 Stock Plan and vest at a rate of 1/48 of the shares at the end of each month, subject to continued service as an employee, consultant or director. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans." (10) The options were granted under the Key Personnel Plan and vest at a rate of 1/4 of the shares at the end of one year and 1/36 of the remaining shares at the end of each month thereafter, subject to continued service as an employee, consultant or director. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans." (11) The options were granted under the Key Personnel Plan and vest at a rate of 1/48 of the shares at the end of each month, subject to continued service as an employee, consultant or director. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans." (12) The options were granted under the Key Personnel Plan and vest at a rate of 1/5 of the shares at the end of one year and 1/48 of the remaining shares at the end of each month thereafter, subject to continued service as an employee, consultant or director. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the company on the date of grant. See "Management -- Compensation Plans." (13) The options were granted under the Key Personnel Plan and vest at a rate of 1/24 of the shares at the end of each month, subject to continued service as an employee, consultant or director. The term of each option is ten years. The exercise price of each option granted is equal to the fair market value of the Common Stock of the Company on the date of grant. See "Management -- Compensation Plans." 45 48 The following table provides information with respect to option exercises during the year ended March 31, 1997 and the value of stock options held as of March 31, 1997 by each of the Named Executive Officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS SHARES AT FISCAL YEAR END(#)(1) AT FISCAL YEAR END($) ACQUIRED FOR VALUE --------------------------- --------------------------- NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------- ------------ -------------- ----------- ------------- ----------- ------------- Joe Parkinson............. 1,000,000 $ 0 -- -- -- -- Keith R. Barraclough(2)... -- -- 18,750 36,250 $ 118,125 $ 228,375 Keith R. Barraclough(3)... -- -- 0 25,000 $ 0 $ 45,000 Keith R. Barraclough(4)... -- -- 7,083 162,917 $ 0 $ 0 Paul Voois(2)............. -- -- 17,126 37,874 $ 107,894 $ 238,606 Paul Voois(3)............. -- -- 0 25,000 $ 0 $ 45,000 Paul Voois(4)............. -- -- 7,083 162,917 $ 0 $ 0 Samuel Wang............... 157,400 $ 0 -- -- -- -- Chris McNiffe............. 176,400 $ 0 -- -- -- -- Bryan R. Martin........... 160,400 $ 0 -- -- -- --
- --------------- (1) Calculated by determining the difference between the exercise price of the Common Stock ($0.50) and the fair market value of the Common Stock on the date of exercise ($0.50). (2) Calculated by determining the difference between the fair market value of the Common Stock as of March 31, 1997 ($6.80) and the exercise price of the underlying options as of March 31, 1997 ($0.50). (3) Calculated by determining the difference between the fair market value of the Common Stock as of March 31, 1997 ($6.80) and the exercise price of the underlying options as of March 31, 1997 ($5.00). (4) Calculated by determining the difference between the fair market value of the Common Stock as of March 31, 1997 ($6.80) and the exercise price of the underlying options as of March 31, 1997 ($6.80). COMPENSATION PLANS 1992 Stock Option Plan The Company's 1992 Stock Option Plan (the "1992 Plan") was adopted in January 1992. The 1992 Plan provides for the grant to employees of the Company (including officers and employee directors) of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and for the grant of nonstatutory stock options to employees and consultants of the Company. The 1992 Plan is administered by the Board of Directors or a Committee of the Board of Directors (the "Administrator"), which selects the optionees, determines the number of shares to be subject to each option and determines the exercise price of each option. The 1992 Plan authorizes the issuance of up to 2,000,000 shares of Common Stock. As of March 31, 1997, 253,892 shares had been issued under the 1992 Plan, options for 1,581,825 shares were outstanding and 164,283 shares remained available for future grants. The exercise price of all incentive stock options granted under the 1992 Plan must be at least equal to the fair market value per share of the Common Stock on the date of grant. The exercise price of all nonstatutory stock options granted under the 1992 Plan is determined by the Administrator. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of the option must not exceed five years. The term of all other options granted under the 1992 Plan may not exceed ten years. In the event of a merger of the Company with or into another corporation, the 1992 Plan requires that each outstanding option be assumed or an equivalent option substituted by such successor corporation or a 46 49 parent or subsidiary of such successor corporation. If the successor corporation refuses to assume or substitute for the options, the optionee will have the right to exercise the option as to all or a portion of the stock subject thereto, including shares which would not otherwise be exercisable. Unless terminated sooner, the 1992 Plan will terminate ten years from its effective date. The Board has authority to amend or terminate the 1992 Plan, provided no such action would impair the rights of the holder of any outstanding options without the written consent of such holder. Key Personnel Plan The Company's Key Personnel Plan (the "Key Personnel Plan") was adopted in July 1995. The Key Personnel Plan provides for the grant to employees of the Company (including officers and employee directors) of incentive stock options within the meaning of Section 422 of the Code, and for the grant of nonstatutory stock options to employees and consultants of the Company. The Key Personnel Plan is administered by the Board of Directors or a Committee of the Board of Directors (the "Administrator"), which selects the optionees, determines the number of shares to be subject to each option and determines the exercise price of each option. The Key Personnel Plan authorizes the issuance of up to 2,199,925 shares of Common Stock. As of March 31, 1997, 2,199,925 shares had been issued under the Key Personnel Plan and no shares remained available for future grants. The exercise price of all incentive stock options granted under the Key Personnel Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of all nonstatutory stock options granted under the Key Personnel Plan is determined by the Administrator. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of the option must not exceed five years. The term of all other options granted under the Key Personnel Plan may not exceed ten years. In the event of a merger of the Company with or into another corporation, the Key Personnel Plan requires that each outstanding option be assumed or an equivalent option substituted by such successor corporation or a parent or subsidiary of such successor corporation. If the successor corporation refuses to assume or substitute for the options, the optionee will have the right to exercise the option as to all or a portion of the stock subject thereto, including shares which would not otherwise be exercisable. 1996 Stock Plan The Company's 1996 Stock Plan (the "1996 Plan") was adopted in June 1996. The 1996 Plan provides for the grant to employees of the Company (including officers and employee directors) of incentive stock options within the meaning of Section 422 of the Code, and for the grant of nonstatutory stock options and stock purchase rights ("Rights") to employees and consultants of the Company. The 1996 Plan is administered by the Board of Directors or a Committee of the Board of Directors (the "Administrator"), which selects the optionees, determines the number of shares to be subject to each option or Right and determines the exercise price of each option or Right. The 1996 Plan authorizes the issuance of up to 1,000,000 shares of Common Stock, to be increased annually on the first day of each of the Company's fiscal years during the term of the plan in an amount equal to 5% of the Company's Common Stock issued and outstanding at the close of business on the last day of the immediately preceding fiscal year (the "Annual Replenishment"), with only the initial 1,000,000 shares and subsequent annual increases in an amount equal to the lesser of (i) 1,000,000 shares, or (ii) the number of shares subject to the Annual Replenishment to be available for issuance as "incentive stock options" qualified under Section 422 of the Code. As of March 31, 1997, 2,302 shares had been issued under the 1996 Plan, options for 709,325 shares were outstanding and 288,373 shares remained available for future grants. The exercise price of all incentive stock options granted under the 1996 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of all nonstatutory stock options granted under the 1996 Plan shall be determined by the Administrator. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of an incentive stock option must not exceed five years. The term of all other options granted under the 1996 Plan may not exceed ten years. 47 50 In the event of a merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company, the 1996 Plan requires that each outstanding option be assumed or an equivalent option substituted by the successor corporation or a parent or subsidiary of such successor corporation. If the successor corporation refuses to assume or substitute for the options, the optionee will have the right to exercise the option or Right as to all or a portion of the stock subject thereto, including shares which would not otherwise be exercisable. Unless terminated sooner, the 1996 Plan will terminate ten years from its effective date. The Board has authority to amend or terminate the 1996 Plan, provided no such action would impair the rights of the holder of any outstanding options without the written consent of such holder. 1996 Director Option Plan The Company's 1996 Director Option Plan (the "Director Plan") was adopted in June 1996 and will become effective upon the closing of this Offering. A total of 150,000 shares of Common Stock has been reserved for issuance under the Director Plan. The Director Plan provides for the grant of nonstatutory stock options to all nonemployee directors of the Company ("Outside Directors"). The grants may be made at the discretion of the Board of Directors or a Committee appointed by the Board of Directors. In addition, grants will be made pursuant to an automatic, nondiscretionary grant mechanism. The Director Plan provides that each Outside Director shall be granted a nonstatutory stock option to purchase 16,000 shares of Common Stock on the date upon which such person first becomes an Outside Director or, if later, on the effective date of the Director Plan (the "First Option"). Thereafter, each Outside Director shall be automatically granted an option to purchase 4,000 shares of Common Stock on the date such Outside Director is reelected to the Board of Directors by the Company's stockholders at the Company's annual meeting of stockholders or otherwise (a "Subsequent Option"), if on such date, such Outside Director shall have served on the Company's Board of Directors for at least six (6) months. The Director Plan provides that each option shall become exercisable in installments over a period of four (4) years from the date of grant. The exercise price per share of all options granted under the Director Plan shall be equal to the fair market value of a share of the Company's Common Stock on the date of grant. Options granted to Outside Directors under the Director Plan have a ten year term, or shorter upon termination of an Outside Director's status as a director. In the event of the merger or sale of substantially all of the assets of the Company, all outstanding options shall be assumed or substituted by the successor corporation, or if they are not assumed or substituted for, they shall become fully vested and exercisable. If the options are assumed or substituted for, they shall also become fully exercisable if the director is terminated other than upon voluntary termination. If not terminated earlier, the Director Plan will have a term of ten years. 1996 Employee Stock Purchase Plan The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted in June 1996 and will become effective upon the closing of this Offering. A total of 500,000 shares of Common Stock has been reserved for issuance under the Purchase Plan, to be increased annually on the first day of each of the Company's fiscal years during the term of the Purchase Plan in an amount equal to (i) 500,000 shares minus (ii) the number of shares available for issuance under the Purchase Plan as of such date, all of which share numbers are subject to adjustment upon changes in capitalization of the Company. The Purchase Plan, which is intended to qualify under Section 423 of the Code, will be implemented by an offering commencing on the date of the closing of this Offering and ending on the last business day in the period ending October 31, 1998. Each twenty-four month offering period will consist of four purchase periods of approximately six months duration. Employees are eligible to participate if they are regularly employed by the Company for at least twenty hours per week and more than five months in any calendar year. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 10% of an employee's base compensation, including commissions but exclusive of bonuses and overtime, at a price equal to 85% of the fair market value of the Common Stock at the beginning of each offering period or the end of a six month purchase period, whichever is lower. In the event of a merger of the Company with or into another corporation, or the sale of all or substantially all of the assets of the Company, the Purchase Plan provides that a new exercise date shall be set for each option under the plan, which exercise date shall occur before the date of the merger or asset sale. In the event that the fair market value of the Company's Common Stock at the end of any six month purchase period is lower than the fair 48 51 market value of the Company's Common Stock at the beginning of the offering period, Purchase Plan participants will be automatically withdrawn from such offering period and re-enrolled in the new offering period commencing immediately thereafter. Unless terminated sooner, the Purchase Plan will terminate ten years after its effective date. The Board of Directors has authority to amend or terminate the Purchase Plan provided no such action may adversely affect the rights of any participant. Change of Control In the event of an individual or corporate entity and any related parties cumulatively acquiring at least 35% of the Company's fully diluted stock (a "Change of Control"), all stock options or stock subject to repurchase by the Company held by officers under any stock option plan shall vest immediately without regard to the term of the option. In addition, in the event of a Change of Control, each officer shall be entitled to one (1) year severance pay and continuing medical benefits for life after leaving the Company, provided that such medical benefits shall cease should such officer accept employment with a competing company. Profit Sharing Plan In July 1995, the Company's Board of Directors approved a profit sharing plan which provides for additional compensation to all employees of the Company based on the Company's quarterly income before income taxes. The profit sharing plan is effective beginning in the year ended March 31, 1996 and provides for payments of up to 15% of the Company's quarterly income before income taxes. Additionally, the plan provides for payment of certain discretionary bonuses based on criteria established by management. 49 52 CERTAIN TRANSACTIONS In September 1996, the Company sold an aggregate of 363,640 shares of Series D Preferred Stock to Sanyo Semiconductor Corporation ("Sanyo"), a manufacturer of semiconductors, at a price of $5.50 per share. Akifumi Goto, President of Sanyo, became a director of the Company in connection with this transaction. During the fiscal year ended March 31, 1997, the Company's product revenues included $106,000 in sales to Sanyo, and the Company purchased $408,000 in inventory from Sanyo. In July 1996, certain officers and directors of the Company exercised their stock options under the Company's Key Personnel Plan pursuant to a restricted stock purchase agreement. The officers and directors exercised an aggregate of 2,156,800 shares of Common Stock at a purchase price of $0.50 per share by payment of partial recourse promissory notes. The following officers and directors exercised shares of Common Stock under the Company's Key Personnel Plan: 122,400 shares exercised by Sandra Abbott; 122,400 shares exercised by David Harper; 160,400 shares exercised by Bryan Martin; 176,400 shares exercised by Chris McNiffe; 125,400 shares exercised by Michael Noonen; 1,000,000 shares exercised by Joe Parkinson; 292,400 shares exercised by Y.W. Sing; and 157,400 shares exercised by Samuel Wang. In April 1994, the Company sold an aggregate of 681,820 shares of Series C Preferred Stock to National Semiconductor Corporation ("NSC"), a semiconductor manufacturer, at a price of $11.00 per share. Also in April 1994, the Company entered into various joint development and supply agreements with NSC, which were terminated by mutual agreement between the parties in June 1996. As part of this termination, the Company licensed, on a non-exclusive, royalty free basis, its Intel compatible x86 microprocessor technology to NSC. During the year ended March 31, 1995, the company recognized contract revenue and related costs under these agreements of $294,000 and $229,000, respectively and purchased $868,000 in inventory from NSC. Additionally, the Company subleases to NSC a portion of its facilities under a month to month sublease arrangement. Proceeds from the sublease are recorded as a reduction to operating expenses and aggregated $207,000, $205,000 and $276,000 during the years ended March 31, 1995, 1996 and 1997, respectively. During the years ended March 31, 1995, 1996 and 1997, the Company's product revenues included $897,000, $2,037,000 and $2,415,000 in sales to ASCII Corporation ("ASCII"), or approximately 4.5%, 7.1% and 12.6% of the Company's revenues, respectively. ASCII, a stockholder of the Company, acts as a distributor for the Company in Japan and is party to certain distributor and sales agreements with the Company. Sada Chidambaram, a director of the Company, is a director of ASCII and the President of ASCII of America, Inc., a subsidiary of ASCII. During the year ended March 31, 1995, the Company sold $795,000 of product to Mitsui Comtek, one of its stockholders. Mitsui Comtek is also the guarantor of the Company's office facilities. In March 1996, 8x8 entered into an investment agreement (the "VidUs Agreement") with VidUs, Inc. ("VidUs"), a company whose officers include Michael Noonen and Sandra L. Abbott. VidUs is currently developing technology by which a camera transfers data to a Universal Serial Bus port using the Company's MEP semiconductor and reference design video compression capabilities (the "CompressionCam Concept"). Pursuant to the VidUs Agreement, the Company and Mr. Noonen own approximately 67% and 11%, respectively, of the common stock of VidUs. Also in connection with the VidUs Agreement, the Company will own all patents related to the CompressionCam Concept, but has provided VidUs with a royalty free, nonexclusive, nonassignable license to make, have made, use and sell products which incorporate the CompressionCam Concept. In May 1997, the Company entered into a nonbinding letter of intent (the "U.K. Letter") with 8x8, Ltd., the Company's U.K. subsidiary, and certain employees of 8x8, Ltd., including David Harper. Pursuant to the U.K. Letter, the Company and Mr. Harper will own approximately 70% and 11%, respectively, of the common stock of 8x8, Ltd. The stock will be sold to 8x8, Ltd. employees at book value, subject to repurchase upon termination of employment prior to an initial public offering. Also in connection with the U.K. Letter, the Company will provide 8x8 Ltd. a non-exclusive, royalty-bearing, nonassignable license to make, have made, use and sell products which incorporate any of the Company's technology (other than technology obtained from the Company's licensees). In addition, the U.K. Letter specifies that so long as the Company owns at 50 53 least 50% of 8x8, Ltd., the Company and 8x8, Ltd. will share all technology developed or acquired (other than from licensees) by the other party for three years following the date of the U.K. Letter; provided, however, that any technology developed by 8x8, Ltd. during such three year term shall be assigned to the Company. The transactions contemplated by the U.K. Letter are subject to negotiation of a definitive agreement. In June 1996, certain officers and directors had their options to buy Common Stock repriced to $.50 per share through the cancellation of then existing options and the issuance of new options. The following summarizes the number of shares repriced, the exercise price per share before such repricing and persons associated with the repriced shares: Joe Parkinson had 500,000 shares repriced from $2.50 per share; Keith R. Barraclough had 35,000 shares repriced from $2.50 per share; Paul Voois had 31,000 shares repriced from $2.50 per share; Y.W. Sing had 235,000 shares repriced from $2.50 per share; Sandra L. Abbott had 65,000 shares repriced from $2.50 per share; David Harper had 25,000 shares repriced from $2.50 per share, and 40,000 shares repriced from $1.00 per share; Bryan R. Martin had 103,000 shares repriced from $2.50 per share; Chris McNiffe had 119,000 shares repriced from $2.50 per share; Michael Noonen had 68,000 shares repriced from $2.50 per share; Samuel Wang had 100,000 shares repriced from $2.50 per share; and William Tai had 25,000 shares repriced from $2.50 per share. In June 1996, the Company granted options to purchase 500,000 shares of its Common Stock at an exercise price of $0.50 per share to Joe Parkinson, the Chairman and Chief Executive Officer of the Company. The Company has recognized deferred compensation expense with respect to these options. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 6 of Notes to Consolidated Financial Statements. Of this option, 250,000 shares shall vest, subject to Mr. Parkinson's continued service as an employee, consultant or director, at a rate of 1/36 of the shares at the end of each month, commencing in April 1997; provided, however, that vesting shall be accelerated in full upon an initial public offering of the Company's Common Stock occurring prior to December 31, 1997 for which either the initial public offering price or the highest bid price on the secondary market for the month thereafter is greater than $6.00 per share. The remaining 250,000 shares shall vest at a rate of 1/48 of the shares at the end of each month, subject to Mr. Parkinson's continued service as an employee, consultant or director. In July 1996, the officers of the Company entered into partial recourse promissory notes in connection with the purchase of the Company's Common Stock (at a price of $.50 per share) through the exercise of stock options granted under the Key Personnel Plan. The following summarizes the amount of the promissory note entered into by each officer and the persons associated with them: Joe Parkinson, $500,000; Y.W. Sing, $146,200; Sandra L. Abbott, $61,200; David Harper, $61,200; Bryan R. Martin, $80,200; Chris McNiffe, $88,200; Michael Noonen, $62,700; and Samuel Wang, $78,700. Each of these promissory notes have an interest rate of 6.4% per year, and are secured by the shares of the Company's Common Stock held by such respective officers. Principal and interest on these promissory notes are due and payable in June 2001. The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been otherwise obtained from unaffiliated third parties. All future transactions, including loans (if any), between the Company and its officers, directors and principal stockholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors of the Board of Directors, and will be on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. 51 54 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of March 31, 1997, and as adjusted to reflect the sale of the shares of Common Stock offered hereby and the automatic conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this Offering, by (i) each person (or group of affiliated persons) who is known by the Company to own beneficially 5% or more of the Company's Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers and (iv) all directors and officers as a group. Except as indicated in the footnotes to the table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable, and the address of each listed stockholder is c/o 8x8, Inc., 2445 Mission College Boulevard, Santa Clara, CA 95054.
PERCENTAGE OF TOTAL SHARES(1)(2) ------------------------------- NUMBER OF SHARES BEFORE AFTER NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING - ------------------------------------------------ ------------------ -------- -------- Y.W. Sing(3)(4)................................. 1,036,400 9.7% 7.8% Joe Parkinson(3)(5)............................. 1,000,000 9.3 7.6 National Semiconductor Corporation.............. 681,820 6.4 5.2 2900 Semiconductor Drive Santa Clara, CA 95051 Deby Investments, Ltd.(6)....................... 600,000 5.6 4.5 General Electronics Building FSSTL 96 Sheung Shui, N.T. Hong Kong Richard M. Chang(3)............................. 453,334 4.2 3.4 Akifumi Goto(3)(7).............................. 363,640 3.4 2.8 Sada Chidambaram(3)(8).......................... 300,000 2.8 2.3 David Harper(9)................................. 222,400 2.1 1.7 Chris McNiffe(10)............................... 176,400 1.6 1.3 Bryan Martin(11)................................ 172,900 1.6 1.3 Samuel Wang(3)(12).............................. 157,400 1.5 1.2 Sandra L. Abbott(13)............................ 153,400 1.4 1.2 Michael Noonen(14).............................. 125,400 1.2 * William Tai(3)(15).............................. 38,750 * * Keith Barraclough(3)(16)........................ 35,208 * * Paul Voois(3)(17)............................... 33,583 * * Bernd Girod(3)(18).............................. 3,125 * * All directors and executive officers as a group (15 persons) (19)............................. 4,271,940 39.5 32.1
- --------------- * Less than 1% (1)Percentage of ownership is based on (i) 10,716,659 shares of Common Stock outstanding as of March 31, 1997, plus any shares issuable pursuant to options held, as of March 31, 1997, by the person or class in question which may be exercised within 60 days of March 31, 1997, and (ii) 13,216,659 shares of Common Stock outstanding after completion of this Offering, plus any shares issuable pursuant to options held by the person or class in question which may be exercised within 60 days of March 31, 1997. (2) Assumes no exercise of the Underwriters' over-allotment option. (3) The named person is a director of the Company. (4) In May 1997, the Company exercised its right of repurchase in respect of 46,638 of these shares. (5) Includes 661,458 shares that were, as of March 31, 1997, subject to a right of repurchase in favor of the Company which expires ratably through June 24, 2000. (6) The beneficial owner of the shares held by Deby Investments, Ltd. is Samuel Fang. 52 55 (7) Includes 363,640 shares beneficially held by Sanyo Semiconductor Corporation. Mr. Goto is the President and Chief Executive Officer of Sanyo Semiconductor Corporation. (8) Includes 300,000 shares owned by ASCII Corporation. Mr. Chidambaram is a director of ASCII and the President of ASCII of America, Inc., a subsidiary of ASCII Corporation. Mr. Chidambaram disclaims beneficial ownership of shares held by ASCII. (9) Includes 61,220 shares that were, as of March 31, 1997, subject to a right of repurchase in favor of the Company which expires ratably through June 24, 2000. (10) Includes 106,428 shares that were, as of March 31, 1997, subject to a right of repurchase in favor of the Company which expires ratably through June 24, 2000. (11) Includes 107,741 shares that were, as of March 31, 1997, subject to a right of repurchase in favor of the Company which expires ratably through June 24, 2000. (12) Includes 111,220 shares that were, as of March 31, 1997, subject to a right of repurchase in favor of the Company which expires ratably through June 24, 2000. (13) Includes 84,554 shares that were, as of March 31, 1997, subject to a right of repurchase in favor of the Company which expires ratably through June 24, 2000. (14) Includes 87,678 shares that were, as of March 31, 1997, subject to a right or repurchase in favor of the Company which expires ratably through June 24, 2000. (15) Includes (i) 13,750 shares issuable pursuant to stock options which may be exercised within 60 days of March 31, 1997, and (ii) 25,000 shares issuable upon exercise of stock options to purchase the following number of shares from the persons indicated: Y.W. Sing, 7,000 shares; Chi-Shin Wang, 7,000 shares; Samuel Fang, 7,000 shares; and Richard Chang, 4,000 shares. (16) Includes 35,208 shares issuable pursuant to stock options which may be exercised within 60 days of March 31, 1997. (17) Includes 33,583 shares issuable pursuant to stock options which may be exercised within 60 days of March 31, 1997. (18) Includes 3,125 shares issuable pursuant to stock options which may be exercised within 60 days of March 31, 1997. (19) Includes (i) 1,221,965 shares that were, as of March 31, 1997, subject to a right of repurchase in favor of the Company which expires ratably through June 24, 2000, (ii) 46,638 shares that were repurchased by the Company in May 1997 and (iii) 85,666 shares issuable pursuant to stock options which may be exercised within 60 days of March 31, 1997. 53 56 DESCRIPTION OF CAPITAL STOCK Upon the closing of this Offering, the authorized capital stock of the Company will consist of 40,000,000 shares of Common Stock, par value $0.001 per share and 5,000,000 shares of Preferred Stock, par value $0.001 per share. COMMON STOCK As of March 31, 1997, as adjusted for the conversion of all outstanding shares of Preferred Stock into Common Stock upon the closing of this Offering, there were 10,716,659 shares of Common Stock outstanding held of record by approximately 190 stockholders. As of March 31, 1997, there were options to purchase 2,291,150 shares of Common Stock outstanding. The holders of Common Stock are entitled to one vote per share on all matters to be voted on by the stockholders. Subject to preferences that may be applicable to outstanding shares of Preferred Stock, if any, the holders of Common Stock are entitled to receive ratably such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior liquidation rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive conversion rights or other subscription rights. There are no redemption or sinking funds provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable, and the shares of Common Stock to be outstanding upon completion of this Offering will be fully paid and non-assessable. PREFERRED STOCK Pursuant to the Company's Amended and Restated Certificate of Incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the Common Stock. The Board of Directors, without stockholder approval, can issue Preferred Stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of Common Stock. Preferred Stock could thus be issued quickly with terms calculated to delay or prevent a change in control of the Company or make removal of management more difficult. Additionally, the issuance of Preferred Stock may have the effect of decreasing the market price of the Common Stock, and may adversely affect the voting and other rights of the holders of Common Stock. At present, there are no shares of Preferred Stock outstanding and the Company has no plans to issue any of the Preferred Stock. See "Risk Factors -- Anti-Takeover Provisions of the Company's Certificate of Incorporation, Bylaws and Delaware Law." REGISTRATION RIGHTS Under the terms of the Amended and Restated Registration Rights Agreement dated as of September 6, 1996 among the Company and certain holders of its securities (the "Rights Agreement"), following the closing of this Offering, the holders of 3,726,373 shares of Common Stock (the "Registrable Securities") will be entitled to certain rights with respect to the registration of such shares of Common Stock under the Securities Act. Under the Rights Agreement, if the Company proposes to register any of its Common Stock under the Securities Act, certain holders of Registrable Securities are entitled to notice of such registration and to include their Registrable Securities therein; provided, among other conditions, that the underwriters have certain rights to limit the number of shares included in any such registration. Beginning six months after the closing of this Offering, the holders of at least fifty percent (50%) of the Registrable Securities have the right to require the Company, on not more than two occasions, to file a registration statement under the Securities Act in order to register all or any part of their Registrable Securities, subject to certain conditions and limitations. The Company may, in certain circumstances, defer such registration and the underwriters have the right, subject to certain limitations, to limit the number of shares included in such registrations. Further, the holders of Registrable Securities may require the Company to register all or any portion of their 54 57 Registrable Securities on Form S-3, when such form becomes available to the Company, subject to certain conditions and limitations. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS The Company's Amended and Restated Certificate of Incorporation provides that all stockholder actions must be effected at a duly called annual or special meeting and may not be effected by written consent. The Company's Bylaws provide that, except as otherwise required by law, special meetings of the stockholders can only be called pursuant to a resolution adopted by a majority of the Board of Directors, by the chief executive officer of the Company or by stockholders holding shares in the aggregate entitled to cast not less than 10% of the votes at such meeting. In addition, the Company's Bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nomination of persons for election to the Board. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of the meeting or brought before the meeting by or at the direction of the Board of Directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who had delivered timely written notice in proper form to the Company's Secretary of the stockholder's intention to bring such business before the meeting. The foregoing provisions of the Company's Amended and Restated Certificate of Incorporation and Bylaws are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions which may involve an actual or threatened change of control of the Company. Such provisions are designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal and, accordingly, could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions are also intended to discourage certain tactics that may be used in proxy fights but could, however, have the effect of discouraging others from making tender offers for the Company's shares and, consequently, may also inhibit fluctuations in the market price of the Company's shares that could result from actual or rumored takeover attempts. These provisions may also have the effect of preventing changes in the management of the Company. See "Risk Factors -- Anti-Takeover Provisions of the Company's Certificate of Incorporation, Bylaws and Delaware Law." EFFECT OF DELAWARE ANTI-TAKEOVER STATUE The Company is subject to Section 203 of the Delaware General Corporation Law (the "Antitakeover Law"), which regulates corporate acquisitions. The Antitakeover Law prevents certain Delaware corporations, including those whose securities are listed for trading on the Nasdaq National Market, from engaging, under certain circumstances in a "business combination" with any "interested stockholder" for three years following the date that such stockholder became an interested stockholder. For purposes of the Antitakeover Law, a "business combination" includes, among other things, a merger or consolidation involving the Company and the interested stockholder and the sale of more than ten percent (10%) of the Company's assets. In general, the Antitakeover Law defines an "interested stockholder" as any entity or person beneficially owning 15% or more of the outstanding voting stock of the Company and any entity or person affiliated with or controlling or controlled by such entity or person. A Delaware corporation may "opt out" of the Antitakeover Law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from amendments approved by the holders of at least a majority of the Company's outstanding voting shares. The Company has not "opted out" of the provisions of the Antitakeover Law. See "Risk Factors -- Antitakeover Provisions of the Company's Certificate of Incorporation, Bylaws and Delaware Law." TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is American Securities Transfer & Trust, Inc. Its telephone number is (303) 234-5300. LISTING The Company's Common Stock has been approved for listing on the Nasdaq National Market under the trading symbol "EGHT." 55 58 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 13,216,659 shares of Common Stock outstanding. Of this amount, the 2,500,000 shares offered hereby and 166,083 shares will be available for immediate sale in the public market as of the date of this Prospectus. Approximately 9,700,000 additional shares will be available for sale in the public market following the expiration of the 180-day lockup agreements with the Representatives of the Underwriters or the Company, subject in some cases to compliance with the volume and other limitations of Rule 144.
SHARES DAYS AFTER DATE ELIGIBLE OF THIS PROSPECTUS FOR SALE COMMENT - ----------------------- ---------- ---------------------------------------------------------- Upon Effectiveness..... 2,666,083 Freely tradeable shares sold in Offering and shares saleable under Rule 144(k) that are not subject to 180-day lockup 180 days............... 9,732,898 Lockup released; shares saleable under Rule 144, 144(k) or 701 Thereafter............. 817,678 Restricted securities held for one year or less
In general, under Rule 144 a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year is entitled to sell within any three-month period commencing 90 days after the date of this Prospectus a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 132,000 shares immediately after this Offering) or (ii) the average weekly trading volume during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale who has beneficially owned his or her shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. Persons deemed to be affiliates must always sell pursuant to Rule 144, even after the applicable holding periods have been satisfied. The Company is unable to estimate the number of shares that will be sold under Rule 144, as this will depend on the market price for the Common Stock of the Company, the personal circumstances of the sellers and other factors. Prior to this Offering, there has been no public market for the Common Stock, and there can be no assurance that a significant public market for the Common Stock will develop or be sustained after this Offering. Any future sale of substantial amounts of the Common Stock in the open market may adversely affect the market price of the Common Stock offered hereby. The Company, its directors, executive officers, stockholders with registration rights and certain other stockholders have agreed pursuant to the Underwriting Agreement and other agreements that they will not sell any Common Stock without the prior consent of Montgomery Securities for a period of 180 days from the date of this Prospectus (the "180-day Lockup Period"), except that the Company may, without such consent, grant options and sell shares pursuant to the 1992 Plan, the Key Personnel Plan, the 1996 Plan, the Director Plan and the Purchase Plan. The Company intends to file a registration statement on Form S-8 under the Securities Act to register certain shares of Common Stock subject to outstanding options or reserved for issuance under the 1992 Plan, the Key Personnel Plan, the 1996 Plan, the Director Plan and the Purchase Plan within 180 days after the date of this Prospectus, thus permitting the resale of such shares by nonaffiliates in the public market without restriction under the Securities Act. Any employee or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits nonaffiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this Prospectus. As of March 31, 1997, the holders of options exercisable into approximately 483,388 shares of Common Stock will be eligible to sell their shares in reliance upon Rule 701 or pursuant to the Form S-8 upon the expiration of the 180-day Lockup Period. 56 59 In addition, after this Offering, the holders of 3,726,373 shares of Common Stock will be entitled to certain rights with respect to registration of such shares under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchased by affiliates of the Company) immediately upon the effectiveness of such registration. See "Description of Capital Stock -- Registration Rights." 57 60 UNDERWRITING The underwriters named below (the "Underwriters"), represented by Montgomery Securities and Donaldson, Lufkin & Jenrette Securities Corporation (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain terms and conditions precedent and that the Underwriters are committed to purchase all of such shares, if any are purchased.
NUMBER OF UNDERWRITER SHARES -------------------------------------------------------------------------- --------- Montgomery Securities..................................................... Donaldson, Lufkin & Jenrette Securities Corporation....................... --------- Total........................................................... 2,500,000 =========
The Representatives have advised the Company that the Underwriters initially propose to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow, and any such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the initial public offering, the price and concessions and reallowances to dealers may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 375,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial 2,500,000 shares to be purchased by the Underwriters. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over- allotments made in connection with this Offering. The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including civil liabilities, under the Securities Act, or will contribute to payments to the Underwriters may be required to make in respect thereof. Each director and officer of the Company and certain of other holders of Common Stock prior to this Offering, as well as certain other holders of options, warrants or other rights to purchase Common Stock, have agreed not to sell, offer to sell, or otherwise dispose of any rights with respect to any shares of Common Stock, any options or warrants to purchase Common Stock, or any securities convertible or exchangeable for Common Stock, owned directly by such holders or with respect to which they have power of disposition for a period of 180 days after the date of this Prospectus without the prior written consent of Montgomery Securities. Montgomery Securities may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. In addition, the Company has agreed not to sell, offer to sell, contract to sell or otherwise sell or dispose of any shares of Common Stock or any rights to acquire Common Stock, other than pursuant to the 1992 Plan, the Key Personnel Plan, the 1996 Plan, the Director Plan and the Purchase Plan, upon exercise of outstanding options and warrants, for a period of 180 days after the Effective Date without the prior consent of Montgomery Securities. See "Shares Eligible for Future Sale." In connection with this offering, certain Underwriters may engage in passive market making transactions in the Common Stock on the Nasdaq National Market immediately prior to the commencement of sales in this offering, in accordance with Rule 10b-6A under the Securities Exchange Act of 1934, as amended. Passive market making consists of displaying bids on the Nasdaq National Market that are limited by the bid prices of independent market makers and completing purchases in response to order flow at prices limited by such bids. Net purchases by a passive market maker on each day are limited to a specified percentage of the 58 61 passive market maker's average daily trading volume in the Common Stock during a specified period and must be discontinued for any day in which such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. Montgomery Associates 1992, L.P. ("Montgomery Associates"), an affiliate of Montgomery Securities, purchased 84,545 shares of the Company's Series D Preferred Stock in an October 1996 financing. Montgomery Associates has agreed not to sell, transfer, assign, pledge or hypothecate such shares for a period of one year. The National Association of Securities Dealers has deemed that the difference between the purchase price of those 84,545 shares and the initial offering price of the Shares to be additional underwriting compensation. Prior to the Offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price will be determined through negotiations among the Company and the Representatives. Among the factors to be considered in such negotiations will be the history of, and prospects for, the Company and the industry in which it competes, an assessment of the Company's management, the present state of the Company's development, the prospects for future earnings of the Company, the prevailing market conditions at the time of this Offering, market valuations of publicly traded companies that the Company and the Representatives believe to be comparable to the Company, and other factors deemed relevant. See "Risk Factors -- No Prior Trading Market for Common Stock; Potential Volatility of Stock Price" and "Risk Factors -- Dilution." LEGAL MATTERS The validity of the issuance of shares of Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C. ("WSGR"), Palo Alto, California. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. As of the date of this Prospectus, Jeffrey D. Saper, a member of WSGR, beneficially owns 4,550 shares of the Company's Preferred Stock. EXPERTS The consolidated financial statements of the Company as of March 31, 1996 and 1997 and for each of the years ended March 31, 1995, 1996 and 1997, included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of such firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement, of which this Prospectus constitutes a part, under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement and the exhibits thereto for further information with respect to the Company and the Common Stock offered hereby. Statements contained herein concerning the provisions of any documents are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such reference. The Registration Statement, including exhibits filed therewith, may be inspected without charge at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. Information concerning the Company is also available for inspection at the offices of the Nasdaq National Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. 59 62 8X8, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants..................................................... F-2 Consolidated Balance Sheets........................................................... F-3 Consolidated Statements of Operations................................................. F-4 Consolidated Statements of Stockholders' Equity....................................... F-5 Consolidated Statements of Cash Flows................................................. F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 63 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of 8x8, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of 8x8, Inc. and its subsidiaries at March 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California May 1, 1997, except for note 4, which is as of May 15, 1997 F-2 64 8X8, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRO FORMA STOCKHOLDERS' MARCH 31, EQUITY ----------------- MARCH 31, 1996 1997 1997 ------- ------- ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.............................................. $ 4,652 $ 8,722 Short-term investments................................................. 5,241 2 Accounts receivable, net............................................... 2,884 834 Accounts receivable from related parties............................... 695 178 Inventory.............................................................. 7,270 1,178 Prepaid expenses and other assets...................................... 284 354 ------- ------- Total current assets........................................... 21,026 11,268 Property and equipment, net.............................................. 1,526 1,344 Deposits and other assets................................................ 515 115 ------- ------- $23,067 $12,727 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................................................... $ 5,581 $ 1,146 Accounts payable to related parties.................................... -- 233 Accrued compensation................................................... 1,779 926 Accrued warranty....................................................... 1,058 1,603 Deferred revenue....................................................... 200 363 Other accrued liabilities.............................................. 1,541 689 Income taxes payable................................................... 1,534 1,654 ------- ------- Total current liabilities...................................... 11,693 6,614 ------- ------- Commitments and contingencies (Notes 4 and 5) Minority interest........................................................ -- 72 ------- ------- Stockholders' equity: Preferred stock, $0.001 par value; 5,411,820 shares authorized actual; 5,000,000 shares authorized pro forma (unaudited)................... Series A convertible noncumulative preferred stock, $0.001 par value; 1,260,000 shares issued and outstanding actual; none issued and outstanding pro forma (unaudited).............................. 1 1 $ -- Series B convertible noncumulative preferred stock, $0.001 par value; 1,100,000 shares issued and outstanding actual; none issued and outstanding pro forma (unaudited).............................. 1 1 -- Series C convertible noncumulative preferred stock, $0.001 par value; 681,820 shares issued and outstanding actual; none issued and outstanding pro forma (unaudited).............................. 1 1 -- Series D convertible noncumulative preferred stock, $0.001 par value; 684,553 shares issued and outstanding actual; none issued and outstanding pro forma (unaudited).............................. -- 1 -- Common stock, $0.001 par value; 40,000,000 shares authorized; 4,782,021 and 6,990,286 shares issued and outstanding actual; 10,716,659 shares issued and outstanding pro forma (unaudited)................. 5 7 11 Additional paid-in capital............................................. 11,155 23,291 23,291 Notes receivable from stockholders..................................... -- (1,078) (1,078) Deferred compensation.................................................. -- (2,781) (2,781) Retained earnings (accumulated deficit)................................ 211 (13,402) (13,402) ------- ------- ------- Total stockholders' equity..................................... 11,374 6,041 $ 6,041 ======= ------- ------- $23,067 $12,727 ======= =======
The accompanying notes are an integral part of these financial statements. F-3 65 8X8, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31, -------------------------------- 1995 1996 1997 ------- ------- -------- Product revenues............................................. $16,933 $17,772 $ 12,771 Product revenues from related parties........................ 1,692 2,037 2,521 License revenues............................................. 1,010 7,215 3,854 License revenues from related parties........................ 294 1,750 -- ------- ------- ------- Total revenues..................................... 19,929 28,774 19,146 Cost of product revenues..................................... 11,904 16,668 12,030 ------- ------- ------- Gross profit................................................. 8,025 12,106 7,116 ------- ------- ------- Operating expenses: Research and development................................... 8,107 7,714 10,510 Selling, general and administrative........................ 6,445 7,938 10,098 Restructuring costs........................................ -- 603 59 ------- ------- ------- Total operating expenses........................... 14,552 16,255 20,667 ------- ------- ------- Loss from operations......................................... (6,527) (4,149) (13,551) Other income, net............................................ 611 952 120 ------- ------- ------- Loss before income taxes..................................... (5,916) (3,197) (13,431) Provision (benefit) for income taxes......................... (35) 20 182 ------- ------- ------- Net loss..................................................... $(5,881) $(3,217) $(13,613) ======= ======= ======= Pro forma net loss per share (unaudited)..................... $ (1.13) ======= Shares used in pro forma per share calculations (unaudited)................................................ 12,026 =======
The accompanying notes are an integral part of these financial statements. F-4 66 8X8, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK -------------------------------------------------------------------------- SERIES A SERIES B SERIES C SERIES D COMMON STOCK ADDITIONAL ----------------- ----------------- ----------------- ----------------- ----------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------- Balance at March 31, 1994................. 1,260,000 $ 1 1,100,000 $ 1 -- $ -- -- $ -- 4,543,187 $ 5 $ 3,013 Issuance of common stock upon exercise of options........... -- -- -- -- -- -- -- -- 14,199 -- 35 Repurchase of common stock................ -- -- -- -- -- -- -- -- (6,665) -- -- Issuance of Series C convertible noncumulative preferred stock...... -- -- -- -- 681,820 1 -- -- -- -- 7,499 Net loss............... -- -- -- -- -- -- -- -- -- -- -- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- ------- Balance at March 31, 1995................. 1,260,000 1 1,100,000 1 681,820 1 -- -- 4,550,721 5 10,547 Issuance of common stock upon exercise of options........... -- -- -- -- -- -- -- -- 246,389 1 609 Repurchase of common stock................ -- -- -- -- -- -- -- -- (15,089) (1) (1) Net loss............... -- -- -- -- -- -- -- -- -- -- -- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- ------- Balance at March 31, 1996................. 1,260,000 1 1,100,000 1 681,820 1 -- -- 4,782,021 5 11,155 Issuance of common stock upon exercise of options........... -- -- -- -- -- -- -- -- 2,188,265 2 1,095 Issuance of common stock................ -- -- -- -- -- -- -- -- 20,000 -- 10 Issuance of Series D convertible noncumulative preferred stock...... -- -- -- -- -- -- 684,553 1 -- -- 3,764 Deferred compensation related to stock options.............. -- -- -- -- -- -- -- -- -- -- 7,267 Net loss............... -- -- -- -- -- -- -- -- -- -- -- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- ------- Balance at March 31, 1997................. 1,260,000 $ 1 1,100,000 $ 1 681,820 $ 1 684,553 $ 1 6,990,286 $ 7 $ 23,291 ========= ==== ========= ==== ========= ==== ========= ==== ========= ==== ======= NOTES RETAINED RECEIVABLE DEFERRED EARNINGS FROM COMPEN- (ACCUMULATED STOCKHOLDERS SATION DEFICIT) TOTAL ------------ -------- ------------ ------- Balance at March 31, 1994................. $ -- $ -- $ 9,309 $12,329 Issuance of common stock upon exercise of options........... -- -- -- 35 Repurchase of common stock................ -- -- -- -- Issuance of Series C convertible noncumulative preferred stock...... -- -- -- 7,500 Net loss............... -- -- (5,881) (5,881) ------ ------ ------- ------- Balance at March 31, 1995................. -- -- 3,428 13,983 Issuance of common stock upon exercise of options........... -- -- -- 610 Repurchase of common stock................ -- -- -- (2) Net loss............... -- -- (3,217) (3,217) ------ ------ ------- ------- Balance at March 31, 1996................. -- -- 211 11,374 Issuance of common stock upon exercise of options........... (1,078) -- -- 19 Issuance of common stock................ -- -- -- 10 Issuance of Series D convertible noncumulative preferred stock...... -- -- -- 3,765 Deferred compensation related to stock options.............. -- (2,781) -- 4,486 Net loss............... -- -- (13,613) (13,613) ------ ------ ------- ------- Balance at March 31, 1997................. $ (1,078) $ (2,781) $(13,402) $ 6,041 ====== ====== ======= =======
The accompanying notes are an integral part of these financial statements. F-5 67 8X8, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED MARCH 31, ---------------------------------- 1995 1996 1997 -------- -------- -------- Cash flows from operating activities: Net loss................................................. $ (5,881) $ (3,217) $(13,613) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................... 1,000 775 866 Loss on disposition of capital equipment.............. -- 541 7 Deferred income taxes................................. 1,905 -- -- Amortization of deferred compensation................. -- -- 4,486 Writedown of nonmarketable equity investment.......... -- -- 400 Other................................................. -- -- (5) Changes in assets and liabilities: Accounts receivable, net............................ 663 (384) 2,567 Inventory........................................... 3,264 (5,788) 6,092 Income taxes receivable............................. (2,241) 2,241 -- Prepaid expenses and other assets................... 114 175 (70) Accounts payable.................................... (1,704) 3,827 (4,202) Accrued compensation................................ 133 575 (853) Accrued warranty.................................... (641) 1 545 Deferred revenue.................................... 2 (565) 163 Other accrued liabilities........................... (893) 1,174 (852) Income taxes payable................................ 185 20 120 -------- -------- -------- Net cash used in operating activities............ (4,094) (625) (4,349) -------- -------- -------- Cash flows from investing activities: Acquisitions of property and equipment................... (1,492) (1,013) (691) Proceeds from the sale of equipment...................... 138 -- -- Sales of short-term investments -- available for sale.... 16,681 21,711 5,168 Purchases of short-term investments -- available for sale.................................................. (27,114) (16,583) -- Sales of short-term investments -- trading............... -- 64 71 Purchase of nonmarketable equity investments............. -- (400) -- -------- -------- -------- Net cash provided by (used in) investing activities..................................... (11,787) 3,779 4,548 -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of convertible noncumulative preferred stock, net.................................. 7,500 -- 3,765 Proceeds from issuance of common stock, net.............. 35 608 29 Proceeds from minority interest in subsidiary............ -- -- 77 -------- -------- -------- Net cash provided by financing activities........ 7,535 608 3,871 -------- -------- -------- Net increase (decrease) in cash and cash equivalents....... (8,346) 3,762 4,070 Cash and cash equivalents beginning of the year............ 9,236 890 4,652 -------- -------- -------- Cash and cash equivalents end of the year.................. $ 890 $ 4,652 $ 8,722 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-6 68 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: THE COMPANY 8x8, Inc. (the "Company" or "8x8") was incorporated in California in February 1987 as Integrated Information Technology, Inc. and formally changed its name to 8x8, Inc. on April 5, 1996. The Company designs, develops and markets highly integrated proprietary video compression semiconductors and associated software for video phones and video conferencing. The Company also designs, manufactures, and markets video phones for use by the consumer market. On December 3, 1996, the Company was reincorporated in Delaware and exchanged each share of each series of stock of the predecessor company for 1 share of each corresponding series of stock of the Delaware successor. These financial statements have been prepared giving effect to the reincorporation for all periods presented. FISCAL YEAR The Company's fiscal year ends on the Thursday closest to March 31. Prior to fiscal 1996, the Company's fiscal year ended on March 31. For purposes of these consolidated financial statements, the Company has indicated its fiscal year as ending on March 31. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Revenues from product sales to equipment manufacturers and other end users are recognized upon shipment. License revenues are generally recognized upon the delivery of the licensed technology provided no significant future obligations exist and collection is probable. Revenues generated by sales to distributors under agreements allowing certain rights of return are deferred for financial reporting purposes until the products are sold by the distributors. Revenues generated by sales to distributors when no rights of return exist are recognized upon shipment. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates the classification at each reporting date. At March 31, 1996, the Company classified its investments subject to Statement of Financial Accounting Standards No. 115 (FAS 115) either as available-for-sale or as trading. At March 31, 1997, the Company classified its investments subject to FAS 115 as trading. The cost of the Company's investments is determined based upon specific identification. Investments classified as available-for-sale are reported at fair value with unrealized gains and losses, net of F-7 69 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) related tax, if any, recorded as a separate component of stockholders' equity. At March 31, 1996, the Company's investments classified as available-for-sale were primarily comprised of commercial paper with a maturity of less than 12 months. At March 31, 1996, the fair value of the Company's investments classified as available-for-sale approximated cost. The investments classified as trading are reported at fair value with realized and unrealized gains and losses from investments subject to FAS 115 being reported in the statement of operations. The cost and fair value of investments classified as trading were not material at March 31, 1996 and 1997. Realized and unrealized gains and losses were immaterial for the years ended March 31, 1995, 1996 and 1997. INVENTORY Inventory is stated at the lower of standard cost, which approximates actual cost, using the first-in, first-out method or market. NONMARKETABLE EQUITY INVESTMENTS Nonmarketable equity investments of less than 20% of the investee's outstanding voting stock are accounted for on the cost method, because the Company does not have an ability to significantly influence the operating and financial policies of the investees. Loss resulting from impairment in the value of investments which is other than a temporary decline is recorded in the period in which such loss occurs. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method, based upon the shorter of the estimated useful lives, ranging from three to five years, or the lease term of the respective assets as follows: Machinery and computer equipment.......... 3 years Furniture and fixtures.................... 5 years Licensed software......................... 3 years Leasehold improvements.................... shorter of lease term or useful life of the asset

WARRANTY EXPENSE The Company provides for the estimated cost which may be incurred under its product warranties upon revenue recognition. RESEARCH AND SOFTWARE DEVELOPMENT COSTS Research and development costs are charged to operations as incurred. Software development costs incurred prior to the establishment of technological feasibility are included in research and development and are expensed as incurred. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the product are capitalized, if material. To date, all software development costs have been expensed as incurred. FOREIGN CURRENCY TRANSLATION The U.S. dollar is the functional currency of the Company's foreign subsidiary. Exchange gains and losses resulting from transactions denominated in currencies other than the U.S. dollar are included in the results of operations for the year. To date, such amounts have not been material. Total assets of the Company's foreign F-8 70 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) subsidiary were $320,000, $479,000, and $429,000 as of March 31, 1995, 1996 and 1997, respectively. The Company does not undertake any foreign currency hedging activities. INCOME TAXES Income taxes are accounted for using the asset and liability approach. Under the asset and liability approach, a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributed to temporary differences and carry forwards. The deferred tax assets are reduced, if necessary, by the amount of benefits that, based on available evidence, are not expected to be realized. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and trade accounts receivable. The Company places its cash, cash equivalents and short-term investments primarily in market rate accounts, certificates of deposit, U.S. Treasury bonds and commercial paper. The Company sells its products to original equipment manufacturers and distributors throughout the world. The Company performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for uncollectible accounts receivable based upon the expected collectibility of all accounts receivable. At March 31, 1996 three customers accounted for 26%, 18% and 11% of accounts receivable. At March 31, 1997 three customers accounted for 16%, 15%, and 10% of accounts receivable. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation" which established a fair value based method of accounting for stock-based compensation plans and requires additional disclosure for those companies who elect not to adopt the new method of accounting. FAS 123 is applicable to the Company for fiscal 1997. The Company has elected to continue to account for employee stock awards in accordance with Accounting Principles Board Opinion No. 25 and to provide additional disclosures as required by FAS 123. PRO FORMA NET LOSS PER SHARE (UNAUDITED) Pro forma net loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the periods assuming the conversion of all shares of the Company's Convertible Preferred Stock into Common Stock which will occur upon the consummation of the offering contemplated by this prospectus ("the Offering"). Pursuant to the requirements of the Securities and Exchange Commission, common equivalent shares relating to preferred stock (using the if-converted method) and stock options (using the treasury stock method and assuming an initial public offering price of $9 per share) issued subsequent to September 30, 1995 have been included in the computations for all periods presented. Historical net loss per share data has not been presented since such amounts are not deemed to be meaningful due to the significant change in the Company's capital structure which will occur in connection with the Offering. PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED) If the Offering is consummated, all shares of convertible preferred stock outstanding at the closing date will automatically convert into an aggregate of 3,726,373 shares of Common Stock. F-9 71 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The pro forma effect of the above mentioned transactions has been reflected in the accompanying unaudited pro forma stockholders' equity as of March 31, 1997. CERTAIN RECLASSIFICATIONS Certain prior year balances have been reclassified to conform with fiscal 1997 presentation. RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share". This Statement is effective for the Company's fiscal year ending March 31, 1998. The Statement redefines earnings per share under generally accepted accounting principles. Under the new standard, primary earnings per share is replaced by basic earnings per share and fully diluted earnings per share is replaced by diluted earnings per share. The Company does not expect the adoption of this Statement to have a significant impact on the currently reported loss per share. NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
MARCH 31, -------------------- 1996 1997 ---------- ------- Accounts receivable: Accounts receivable............................................. $ 3,404 $ 1,208 Less: allowance for doubtful accounts........................ (520) (374) ------- ------- $ 2,884 $ 834 ======= ======= Inventories: Raw materials................................................... $ 262 $ 418 Work-in-process................................................. 6,231 613 Finished goods.................................................. 777 147 ------- ------- $ 7,270 $ 1,178 ======= ======= Property and equipment: Machinery and computer equipment................................ $ 4,005 $ 3,254 Furniture and fixtures.......................................... 729 671 Licensed software............................................... 1,782 2,137 Leasehold improvements.......................................... 532 554 ------- ------- 7,048 6,616 Less: accumulated depreciation and amortization................. (5,522) (5,272) ------- ------- $ 1,526 $ 1,344 ======= =======
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES: During fiscal 1995, the Company issued 681,820 shares of Series C Preferred Stock to National Semiconductor Corporation ("National") for $11.00 per share (see Note 6). This transaction resulted in National obtaining a seat on 8x8's Board of Directors. During fiscal 1995, the Company recognized contract revenue and related costs of $294,000 and $229,000, respectively, under development agreements with National. Also, the Company purchased $868,000 in inventory from National during fiscal 1995. Additionally, the Company subleases to National a portion of its facilities under a month to month sublease arrangement. Proceeds from the sublease are recorded as a reduction to operating expenses and aggregated $207,000, $205,000 and $276,000 during the fiscal years ended March 31, 1995, 1996 and 1997, respectively. F-10 72 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the fiscal years ended March 31, 1995, 1996 and 1997, the Company's product revenues included $897,000, $2,037,000 and $2,415,000, respectively, in sales to ASCII Corporation ("ASCII") which distributes the Company's products in Japan and is one of the Company's stockholders. An executive of ASCII is also on the Company's Board of Directors. During the fiscal year ended March 31, 1997, the Company's product revenues included $106,000 in sales to Sanyo Corporation ("Sanyo") which is one of the Company's stockholders. Additionally, the Company purchased $408,000 in inventory from Sanyo during fiscal 1997. An executive of Sanyo is also on the Company's Board of Directors. During the year ended March 31, 1995, the Company sold $795,000 of product to Mitsui Comtek Corporation, which is one of the Company's stockholders. During fiscal 1996, the Company licensed certain technologies to VideoCore Technology ("VideoCore"), a company founded by one of 8x8's former officers, in exchange for $600,000 in cash and a 10% equity interest in VideoCore. This license agreement also provided for potential future license fees and royalty fees payable to the Company. VideoCore was subsequently acquired by another entity. During fiscal 1996, the Company licensed certain technologies to Enable Semiconductor, a company founded by another of 8x8's former officers, in exchange for $1,000,000 in cash and a 10% equity interest in that company. During fiscal 1997, the Company and certain of its employees, but not including its Chief Executive Officer or its Chief Financial Officer, formed VidUs, Inc. ("VidUs"). The Company owns 67% of VidUs and the Company's employees own the remaining 33%. VidUs is engaged in the design of integrated camera and video compression solutions. VidUs has been consolidated in the Company's financial statements since inception. NOTE 4 -- INCOME TAXES: Loss before income taxes includes $62,000, $51,000, and $74,000 of income of a foreign subsidiary for the fiscal years ended March 31, 1995, 1996 and 1997, respectively. The components of the consolidated provision (benefit) for income taxes consisted of the following (in thousands):
YEARS ENDED MARCH 31, ------------------------------- 1995 1996 1997 ------- ------- ------- Current: Federal............................................. $(1,962) $ -- $ -- State............................................... -- -- -- Foreign............................................. 22 20 182 ---- ------- --- (1,940) 20 182 ---- ------- --- Deferred: Federal............................................. 1,905 -- -- State............................................... -- -- -- ---- ------- --- 1,905 -- -- ---- ------- --- $ (35) $ 20 $ 182 ==== ======= ===
F-11 73 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred tax assets are comprised of the following (in thousands):
MARCH 31, ------------------- 1996 1997 ------- ------- Deferred revenue................................................. $ 85 $ 64 Inventory reserves............................................... 1,543 833 Section 263A adjustments......................................... 292 99 Allowance for doubtful accounts.................................. 220 148 Warranty reserve................................................. 449 634 Research and development credit carryforwards.................... 1,200 1,573 Net operating loss carryforwards................................. 594 3,780 Other............................................................ 386 1,650 ------- ------- 4,769 8,781 Valuation allowance.............................................. (4,769) (8,781) ------- ------- Total.................................................. $ -- $ -- ======= =======
Based on factors which include the lack of significant history of recent profits, the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology, and the lack of carryback capacity to realize these assets, the weight of available evidence indicates that it is more likely than not that it will not be able to realize its deferred tax assets and thus a full valuation allowance has been recorded at March 31, 1997. At March 31, 1997, the Company had approximately $10,000,000 of federal net operating loss carryforwards for tax reporting purposes available to offset future taxable income; such carryforwards expire at various dates beginning 2011. In addition, at March 31, 1997, the Company had research and development credit carryforwards for federal and state tax reporting purposes of approximately $1,573,000 which begin expiring in 2010. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating losses and credits that can be carried forward may be impaired or limited in certain circumstances. Events which may cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50% over a three year period. A reconciliation of the tax provision (benefit) to the amounts computed using the statutory U.S. federal income tax rate of 34% is as follows (in thousands):
YEARS ENDED MARCH 31, --------------------------- 1995 1996 1997 ------- ------- ------- Provision (benefit) at statutory rate.......... $(2,012) $(1,087) $(4,567) State income taxes before valuation allowance, net of federal benefit....................... (328) (177) (344) Research and development credits............... (366) (243) (373) Valuation allowance............................ 2,307 1,414 4,012 Non-deductible compensation.................... -- -- 1,525 Other.......................................... 364 113 (71) ------ ------- ------- Provision (benefit) for income taxes........... $ (35) $ 20 $ 182 ====== ======= =======
In August 1995, the Internal Revenue Service (the "IRS") asserted a deficiency against the Company for the taxable year 1992 in the amount of approximately $1,365,000, together with a penalty in the amount of approximately $273,000 plus accrued interest. The IRS alleged that as of March 31, 1992, the Company had accumulated earnings beyond the reasonable needs of the Company's business. The Company did not make any payments and in accordance with IRS procedures formally protested this assessment on October 30, 1995. F-12 74 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On May 15, 1997 the Company received a notice from the IRS dated May 7, 1997 indicating that the IRS has fully reversed its August 1995 notice of deficiency. NOTE 5 -- LEASE COMMITMENTS: The Company leases its facility under a non-cancelable operating lease agreement expiring in April 1999. This agreement provides for annual increments of rent in predetermined amounts and requires the Company to pay property taxes, insurance and normal maintenance costs. Future minimum lease payments under this non-cancelable operating lease as of March 31, 1997 are as follows (in thousands):
YEAR ENDING MARCH 31, --------------------------------------------------------------------------- 1998....................................................................... $ 981 1999....................................................................... 1,299 2000....................................................................... 103 ------ Total minimum payments..................................................... $2,383 ======
Rent expense for all operating leases for the years ended March 31, 1995, 1996 and 1997 was $776,000, $767,000 and $717,000, respectively. NOTE 6 -- STOCKHOLDERS' EQUITY: PREFERRED STOCK As of March 31, 1997 the Company had issued 3,726,373 shares of convertible noncumulative preferred stock, of which 1,260,000 shares, 1,100,000 shares, 681,820 and 684,553 shares have been designated as Series A, B, C and D, respectively. The Series A, B, C and D preferred stock were sold for $0.50, $2.00, $11.00 and $5.50 per share, respectively, representing fair market value of the stock at the date of issuance, as determined by the Board of Directors. Each share of preferred stock is convertible into one share of common stock, subject to adjustment for dilution, and will be automatically converted into common stock in the event of the closing of an underwritten public offering of at least $5,000,000. The preferred stock has voting rights equal to common stock on an as-if converted basis. Holders of the Series A, B, C and D preferred stock are entitled to receive noncumulative dividends at a rate of $0.05, $0.20, $1.10 and $0.55 per share per annum, respectively, when and as declared by the Board of Directors, prior to payment of dividends on common stock. In the event of liquidation, dissolution or winding up of the Company, either voluntary or involuntary, holders of the Series A, B, C and D preferred stock shall be entitled to receive $0.50, $2.00, $11.00 and $5.50 per share, respectively, plus any declared but unpaid dividends, prior to any distribution to the holders of common stock. To date, no dividends have been declared. The Company has reserved 3,726,373 shares of its common stock for issuance upon conversion of the outstanding preferred stock. On October 21, 1996 the Company's Board of Directors approved that effective upon the closing of the Offering, the Company will be authorized to issue five million shares of undesignated preferred stock. The F-13 75 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Board of Directors will have the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. 1987 INCENTIVE STOCK PLAN In 1987, the Company adopted an Incentive Stock Plan ("the 1987 Plan") which was subsequently terminated by the Board of Directors in January 1992. The Company had reserved 2,962,000 shares of its common stock for issuance under the 1987 Plan. The 1987 Plan provided for grants of stock purchase rights at prices equal to the fair market value of stock as determined by the Company's Board of Directors. Stock purchase rights granted under the plan generally vested over five years. During the years ended March 31, 1995 and 1996, unvested shares aggregating 6,665 and 15,089, respectively, were repurchased at prices ranging from $0.10 to $0.40 per share. In January 1992, on termination, all unissued shares under the 1987 Plan were canceled. At March 31, 1997, all shares of common stock purchased under the 1987 Plan were fully vested. 1992 STOCK OPTION PLAN In January 1992, the Board of Directors adopted the 1992 Stock Option Plan ("the 1992 Plan") and reserved 1,000,000 shares of the Company's common stock for issuance under this plan. In August 1994, the Board of Directors authorized an increase in the number of shares of the Company's common stock reserved for issuance under the 1992 Plan to 2,000,000 shares. The 1992 Plan provides for granting incentive and nonstatutory stock options to employees at prices equal to the fair market value of the stock at the grant dates as determined by the Company's Board of Directors. Options generally vest over periods ranging from two to four years. Vesting for certain options accelerates if certain predefined milestones are met. KEY PERSONNEL PLAN In July 1995, the Board of Directors adopted the Key Personnel Plan and reserved 2,000,000 shares of the Company's common stock for issuance under this plan. In June 1996, the Board of Directors authorized an increase in the number of shares of the Company's common stock reserved for issuance under the Key Personnel Plan to 2,200,000 shares. The Key Personnel Plan provides for granting incentive and nonstatutory stock options to officers of the Company at prices equal to the fair market value of the stock at the grant dates as determined by the Company's Board of Directors. Options generally vest over periods ranging from two to four years. Vesting for certain options accelerates if certain predefined milestones are met. 1996 STOCK PLAN In June 1996, the Board of Directors adopted the 1996 Stock Plan (the 1996 Plan) and reserved 1,000,000 shares of the Company's common stock for issuance. This amount is to be increased annually on the first day of each of the Company's fiscal years commencing November 1, 1997 in an amount equal to 5% of the Company's common stock issued and outstanding at the end of the immediately preceding fiscal year subject to certain maximum limitations. The 1996 Plan provides for granting incentive and nonstatutory stock options to employees at prices equal to the fair market value of the stock at the grant dates as determined by the Company's Board of Directors. Options generally vest over a period of not more than five years. 1996 DIRECTOR OPTION PLAN The Company's 1996 Director Option Plan ("the Director Plan") was adopted in June 1996 and will become effective upon the closing of the Offering. A total of 150,000 shares of common stock have been reserved for issuance under the Director Plan. The Director Plan provides for the grant of nonstatutory stock options to certain nonemployee directors of the Company ("the Outside Directors"). The Director Plan provides that each Outside Director shall be granted a nonstatutory stock option to purchase 16,000 shares of common stock on the date upon which such person first becomes an Outside Director or, if later, on the effective date of the Director Plan. Thereafter, each Outside Director shall be automatically granted an option F-14 76 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) to purchase 4,000 shares of common stock on the date such Outside Director is reelected to the Board of Directors, if on such date, such Outside Director shall have served on the Company's Board of Directors for at least six months. The Director Plan provides that each option shall become exercisable in monthly installments over a period of one year from the date of grant. The exercise price per share of all options granted under the Director Plan shall be equal to the fair market value of a share of the Company's common stock on the date of grant. Options granted to Outside Directors under the Director Plan have a ten year term, or shorter upon termination of an Outside Director's status as a director. If not terminated earlier, the Director Plan will have a term of ten years. Option activity under the Company's various currently effective stock option plans is summarized as follows:
WEIGHTED AVERAGE OPTIONS SHARES SUBJECT EXERCISE AVAILABLE TO OPTIONS PRICE FOR GRANT OUTSTANDING PER SHARE ---------- --------------- ---------- Balance at March 31, 1994.............................. 205,384 787,350 $2.31 Increase in options available for grant................ 1,000,000 -- -- Granted................................................ (423,367) 423,367 $2.50 Exercised.............................................. -- (14,199) $2.50 Returned to plan....................................... 98,168 (98,168) $2.27 --------- ------- ----- Balance at March 31, 1995.............................. 880,185 1,098,350 $2.38 Increase in options available for grant................ 2,000,000 -- -- Granted................................................ (2,973,550) 2,973,550 $2.50 Exercised.............................................. -- (246,389) $2.48 Returned to plan....................................... 1,264,754 (1,264,754) $2.49 --------- ------- ----- Balance at March 31, 1996.............................. 1,171,389 2,560,757 $2.46 Increase in options available for grant................ 1,200,000 -- -- Granted................................................ (4,947,462) 4,947,462 $1.68 Exercised.............................................. -- (2,188,265) $0.50 Cancellation of options available for grant............ (75) -- -- Returned to plan....................................... 3,028,804 (3,028,804) $2.32 --------- ------- ----- Balance at March 31, 1997.............................. 452,656 2,291,150 $2.83 --------- ------- ----- Options exercisable at March 31, 1997.................. -- 483,388 $0.74
The weighted average fair value of options granted during the year ended March 31, 1996 and 1997 as computed under the Black-Scholes option pricing model was $0.60 and $0.40, respectively. Significant option groups outstanding at March 31, 1997 and related weighted average exercise price and contractual life information are as follows:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS - ------------------------------------------- EXERCISABLE WEIGHTED -------------- NUMBER AVERAGE NUMBER OUTSTANDING AT CONTRACTUAL EXERCISABLE AT EXERCISE MARCH 31, LIFE MARCH 31, PRICE 1997 (YEARS) 1997 - -------- -------------- ----------- -------------- $ 0.50 1,431,000 8.59 464,801 $ 5.00 75,200 9.63 -- $ 6.80 784,950 9.81 18,587 --------- ------- 2,291,150 483,388 ========= =======
F-15 77 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the year ended March 31, 1997, options to purchase 2,156,800 shares under the Key Personnel Plan were exercised for partial recourse notes. At March 31, 1997, approximately 1,295,994 shares issued under this plan were not vested and are subject to repurchase at their original issuance price of $0.50 if the employee departs prior to vesting. In June 1996, the Board of Directors approved a proposal under which employees elected to cancel approximately 2,467,000 options in exchange for grants of new options with an exercise price equal to the then current fair market value as determined by the Board of Directors. In conjunction with the Offering, the Company has recorded a deferred compensation charge of approximately $7,267,000 with respect to the options repriced and certain additional options granted in fiscal 1997. The Company recognized $4,486,000 of said amount as compensation expense in the fiscal year ended March 31, 1997. The Company will recognize the balance of this deferred compensation over the related vesting period of the options (which is generally 48 months). The balance of this deferred compensation is subject to reduction for any employee who terminates employment prior to the expiration of such employee's option vesting period. 1996 EMPLOYEE STOCK PURCHASE PLAN The Company's 1996 Stock Purchase Plan ("the Purchase Plan") was adopted in June 1996 and will become effective upon the closing of the Offering. Under the Purchase Plan a total of 500,000 shares of common stock have been reserved for issuance to participating employees who meet eligibility requirements. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 10% of an employee's base compensation, including commissions, bonuses and overtime, at a price equal to 85% of the fair market value of the common stock at the beginning of each offering period or the end of a six month purchase period, whichever is lower. In the event of a merger of the Company with or into another corporation or the sale of all or substantially all of the assets of the Company, the Purchase Plan provides that a new exercise date shall be set for each option under the plan which exercise date shall occur before the date of the merger or asset sale. CERTAIN PRO FORMA DISCLOSURES The Company accounts for its stock plans in accordance with the provisions of Accounting Principles Board Opinion No. 25. Had compensation cost for the Company's stock plans been determined based on the fair value of options at their grant dates, as prescribed in FAS 123, the Company's net loss would have been as follows:
YEAR ENDED MARCH 31, ---------------------------- 1996 1997 ----------- ------------ Net loss: As reported.................................... $(3,217,000) $(13,613,000) Pro forma as adjusted.......................... (3,685,000) (14,744,000) Pro forma net loss per share: As reported.................................... $ (1.13) As adjusted.................................... (1.23)
For the purposes of the above noted FAS 123 pro forma disclosures, the fair value of each option grant has been estimated on the date of grant using the minimum value method with the following assumptions used for grants during the applicable period: dividend yield and volatility of 0.0% for both years, risk-free interest rates of 5.1% to 6.7% for options granted during the year ended March 31, 1996 and 5.7% to 6.5% for options granted during the year ended March 31, 1997 and a weighted average expected option term of five years for both years. F-16 78 8X8, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- EMPLOYEE BENEFITS PLANS: 401(K) SAVINGS PLAN In April 1991, the Company adopted a 401(k) savings plan (the "Savings Plan") covering substantially all of its U.S. employees. Under the Savings Plan, eligible employees may contribute up to the maximum allowed by the IRS from their compensation to the Savings Plan with the Company matching participants' contributions up to $300 per employee per year at a dollar for dollar rate of the employee contribution. The Company matching vests over 3 years. To date, the Company's contributions have not been material. PROFIT SHARING PLAN In July 1995, the Company's Board of Directors approved a profit sharing plan which provides for additional compensation to all employees of the Company based on quarterly income before income taxes. The profit sharing plan is effective beginning in fiscal 1996 and provides for payments of up to 15% of total quarterly income before income taxes. Charges related to this plan were not material for the fiscal years ended March 31, 1996 or 1997. NOTE 8 -- GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION: The Company's export sales to Europe represented 26%, 17% and 21% of total revenues in fiscal years 1995, 1996 and 1997, respectively. The Company's export sales to the Asia Pacific region represented 14%, 32% and 33% of total revenues in fiscal years 1995, 1996 and 1997, respectively. Product sales to one customer accounted for 13% of the Company's total revenues for the fiscal year ended March 31, 1995. During the fiscal year ended March 31, 1996, product sales to no customer accounted for 10% or more of the Company's total revenues. During the fiscal year ended March 31, 1997, product sales to one customer accounted for 13% of the Company's total revenues. During the fiscal years ended March 31, 1995 and 1997, license revenues from no customer accounted for 10% or more of the Company's total revenues. License revenues from one customer accounted for approximately 24% of the Company's total revenues for the year ended March 31, 1996. NOTE 9 -- RESTRUCTURING COSTS AND INVENTORY CHARGES: During fiscal 1996, the Company recorded restructuring charges resulting from the Company's decision to reduce the scope of its research and development activities by eliminating certain product development efforts. The restructuring costs related primarily to a write off of equipment associated with the terminated development efforts. During fiscal 1997, the Company recorded an additional charge for restructuring its operations by reducing its workforce by approximately 25%. As of March 31, 1997, the Company's restructuring actions were fully completed and there were no remaining restructuring cost accruals. During the quarter ended June 30, 1996, the Company recorded a charge of $4.0 million related to its MPEG inventories. In September 1996, the Company sold its remaining MPEG inventory. F-17 79 APPENDIX -- DESCRIPTION OF GRAPHICS OUTSIDE FRONT COVER Graphic: 8x8, Inc. logo. INSIDE FRONT COVER Graphic: 8x8, Inc. logo. GATE FOLD The graphic heading reads "Silicon, software and systems for video conferencing." Underneath this heading, and to the left, there is a picture of the VC100, the first product in the Company's planned family of VideoCommunicators. To the right of this picture is the following text: "8x8 is developing a family of VideoCommunicator products. The initial VideoCommunicator, the VC100, is compliant with the H.324 standard for POTS video telephony and connects to a television and touch-tone phone to add video to an otherwise normal telephone call." Underneath the heading, and to the right, there is a picture of the Company's VCP and LVP semiconductor products. To the left of this picture is the following text: "8x8's video compression semiconductors combine, on a single chip, a RISC microprocessor, a high performance digital signal processor, specialized video processing circuitry, static RAM memory and proprietary software to perform the real time compression and decompression of video and audio information and establish and maintain network connections in a manner consistent with international standards for video telephony." Underneath the text at the top of the page are four pictures demonstrating the use of the Company's VideoCommunicator product. Underneath these four pictures is the following text: "8x8, Inc. designs, develops and markets highly integrated, proprietary video compression semiconductors and associated software to manufacturers of corporate video conferencing systems. To address new opportunities, the Company intends to leverage its strengths in semiconductor design and related software by introducing video conferencing systems for the consumer market." In the bottom right hand corner of the gate fold is the 8x8, Inc. logo. INSIDE BACK COVER In the middle of the page is a picture of a prototype of the Company's VC200 Product (desktop phone with LCD display). Underneath the picture is the following text: "VC200 PROTOTYPE." In the bottom right hand corner of the inside back cover is the 8x8, Inc. logo. OUTSIDE BACK COVER Graphic: 8x8, Inc. logo. 80 ====================================================== No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with this Offering other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any of the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of any offer to buy any securities other than the shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company or that information contained herein is correct as of any time subsequent to the date hereof. ---------------------------- TABLE OF CONTENTS ----------------------------
Page ---- Prospectus Summary.................... 3 Risk Factors.......................... 6 Use of Proceeds....................... 16 Dividend Policy....................... 16 Capitalization........................ 17 Dilution.............................. 18 Selected Consolidated Financial Data................................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 26 Management............................ 40 Certain Transactions.................. 50 Principal Stockholders................ 52 Description of Capital Stock.......... 54 Shares Eligible for Future Sale....... 56 Underwriting.......................... 58 Legal Matters......................... 59 Experts............................... 59 Additional Information................ 59 Index to Consolidated Financial Statements.......................... F-1
Until , 1997 (25 days after the date of this Prospectus), all dealers effecting transactions in the Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. ====================================================== ====================================================== 2,500,000 SHARES LOGO COMMON STOCK ---------------------------- PROSPECTUS ---------------------------- MONTGOMERY SECURITIES DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION , 1997 ====================================================== 81 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale of the Common Stock being registered hereby. All amounts are estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID BY REGISTRANT ------------ SEC Registration Fee................................................... $ 8,712 NASD Filing Fee........................................................ 3,375 Nasdaq National Market Application Fee................................. 50,000 Printing............................................................... 175,000 Legal Fees and Expenses................................................ 275,000 Accounting Fees and Expenses........................................... 250,000 Blue Sky Fees and Expenses............................................. 10,000 Director and Officer Liability Insurance............................... 350,000 Custodial Fees......................................................... 2,500 Transfer Agent and Registrar Fees...................................... 5,000 Miscellaneous.......................................................... 170,413 -------- Total........................................................ $1,300,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "Delaware Law") authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article Ten of the Registrant's Certificate of Incorporation (Exhibit 3.1 hereto) and Article VI of the Registrant's Bylaws (Exhibit 3.3 hereto) provide for indemnification of the Registrant's directors, officers, employees and other agents to the maximum extent permitted by Delaware Law. In addition, the Registrant has entered into Indemnification Agreements (Exhibit 10.1 hereto) with its officers and directors. The Underwriting Agreement (Exhibit 1.1) also provides for crossindemnification among the Company and the Underwriters with respect to certain matters, including matters arising under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since December 31, 1993, the Registrant has issued and sold the following unregistered securities: 1. Between March 3, 1994 and June 26, 1996, the Registrant sold an aggregate of 214,921 shares of Common Stock at a price of $2.50 per share for an aggregate purchase price of $537,302.50 to the following stockholders pursuant to the exercise of an option granted under the Registrant's 1992 Stock Option Plan: 183 shares to Maria Balicka; 150 shares to Yu-Chuan Liu; 83 shares to Aaron Emigh; 600 shares to Amit Gulati; 8,000 shares to David Laws; 125 shares to Kathleen Hassett; 441 shares to Norman Duong; 600 shares to Leslie Jan; 4,200 shares to Faisal Khan; 200 shares to Laura Stansfield; 1,900 shares to Xiaolin (Richard) Tang; 177 shares to Henry Hao-jan Tung; 538 shares to Deborah Rudd; 867 shares to Chiao-er Allisa Lee; 1,642 shares to Dong Ha Lim; 1,300 shares to Clyde Wright; 980 shares to Wen-Huei Adam Wang; 90,000 shares to Chi-Shin Wang; 1,042 shares to Duat Hoang Tran; 50 shares to Manu Gulati; 20,000 shares to Mark Birman; 4,000 shares to Brett Coon; 68,333 shares to Richard Johnson; 850 shares to Hay-Pang Stephen Leung; 600 shares to Ekman Tsang; 418 shares to Joanna Liu; 1,000 shares to Dawn Wang; 2,925 shares to II-1 82 Arijanto Soemedi; 2,042 shares to Sehat Sutardja; 100 shares to Peter Kong; and 1,575 shares to Robin Chirico. 2. Between February 24, 1994 and November 21, 1995, the Registrant sold an aggregate of 12,100 shares of Common Stock at a price of $1.00 per share for an aggregate purchase price of $12,100 to the following stockholders pursuant to the exercise of an option granted under the Registrant's 1992 Stock Option Plan: 2,500 shares to Sydney Lee; 5,200 shares to Sergio Golombek; and 4,400 shares to Ramah Sutardja. 3. In November 1995, the Registrant sold 43,125 shares of Common Stock at a price of $2.50 per share for an aggregate purchase price of $107,812.50 to Chi-Shin Wang pursuant to the exercise of an option granted under the Registrant's Key Personnel Plan. 4. In May 1994, the Registrant sold 681,820 shares of Series C Preferred Stock to National Semiconductor Corporation at a purchase price of $7,500,020. 5. In July 1996, the Registrant sold an aggregate of 2,156,800 shares to the following officers and directors at an aggregate purchase price of $1,078,400: 122,400 shares to Sandra L. Abbott; 122,400 shares to David Harper; 160,400 shares to Bryan Martin; 176,400 shares to Chris McNiffe; 125,400 shares to Michael Noonen; 1,000,000 shares to Joe Parkinson; 292,400 shares to Y.W. Sing; and 157,400 shares to Samuel Wang. 6. Between August 24, 1996 and December 12, 1996, the Registrant sold an aggregate of 635 shares of Common Stock at a price of $0.50 per share for an aggregate purchase price of $317.50 to the following stockholders pursuant to the exercise of an option granted under the Registrant's 1996 Stock Option Plan: 205 shares to Scott Shengwei Zhang; 42 shares to Richard Williams; 250 shares to Susan Velasquez; and 138 shares to Bernadette Romero. 7. Between August 24, 1996 and December 17, 1996, the Registrant sold an aggregate of 16,574 shares of Common Stock at a price of $0.50 per share for an aggregate purchase price of $8,287 to the following stockholders pursuant to the exercise of an option granted under the Registrant's 1992 Stock Option Plan: 3,271 shares to Scott Shengwei Zhang; 958 shares to Richard Williams; 2,000 shares to Rong-Xiang Ni; and 3,603 shares to Carl Fong; 750 shares to Shannon Rhoades; 542 shares to Susan Velasquez; 2,375 shares to Art Rawers; 275 shares to Bernadette Romero; and 2,800 shares to Chun-Chau Lin. 8. In September 1996, the Registrant sold an aggregate of 413,640 shares of Series D Preferred Stock to the following investors at an aggregate purchase price of $2,275,020: 363,640 shares to Sanyo Semiconductor Corporation; and 50,000 shares to Guy Hecker. 9. In September 1996, the Registrant issued 20,000 shares of Common Stock to Daniel Helman at a value of $0.50 per share for an aggregate value of $10,000. The Registrant issued to Mr. Helman such shares in connection with services provided to the Registrant. 10. In October 1996, the Registrant sold an aggregate of 270,913 shares of Series D Preferred Stock to the following investors at an aggregate purchase price of $1,490,021.50: 84,545 shares to Montgomery Associates 1992, L.P.; 10,364 shares to G. Farman-Farmaian; 100,000 shares to Bexley Enterprises; 26,000 shares to Alidad Farman Farma; 4,550 shares to Jeffrey D. Saper; and 45,454 shares to John Price. 11. Between February 1997 and March 1997, the Registrant sold an aggregate of 10,914 shares of Common Stock at a price of $0.50 per share for an aggregate purchase price of $5,457 to the following stockholders pursuant to the exercise of options granted under the Registrant's 1992 Stock Option Plan: 5,468 shares to Yeou C. (Sidney) Yen; 1,029 shares to Lina El-Tabech; and 4,417 shares to Minna W. Yen. 12. Between February 1997 and March 1997, the Registrant sold an aggregate of 1,667 shares of Common Stock at a price of $0.50 per share for an aggregate purchase price of $833.50 to Yeou C. (Sidney) Yen pursuant to the exercise of options granted under the Registrant's 1996 Stock Plan. There was no underwriter involved in connection with any transaction set forth above. The issuances of the securities set forth in paragraph 1, 2, 3, 5, 6, 7, 11 and 12 of this Item 15 were deemed to be exempt from registration under the Securities Act in reliance upon Rule 701 promulgated thereunder. The other issuances II-2 83 set forth in this Item 15 were deemed to be exempt from registration pursuant to Section 4(2) of the Securities Act and Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering. In all of such transactions, the recipients of securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ --------------------------------------------------------------------- 1.1+ Form of Underwriting Agreement. 3.1+ Certificate of Incorporation of Registrant. 3.2+ Form of Amended and Restated Certificate of Incorporation of Registrant. 3.3+ Bylaws of Registrant. 5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1+ Form of Indemnification Agreement. 10.2+ 1992 Stock Option Plan, as amended, and form of Stock Option Agreement. 10.3+ Key Personnel Plan, as amended, and form of Stock Option Agreement. 10.4+ 1996 Stock Plan, as amended, and form of Stock Option Agreement. 10.5+ 1996 Employee Stock Purchase Plan, as amended, and form of Subscription Agreement. 10.6+ 1996 Director Option Plan, as amended, and form of Director Option Agreement. 10.7+ Amended and Restated Registration Rights Agreement dated as of September 6, 1996 among the Registrant and certain holders of the Registrant's Common Stock. 10.8 Facility lease dated as of July 3, 1990 by and between Sobrato Interests, a California Limited Partnership, and the Registrant, as amended. 10.9*+ License Agreement dated as of May 7, 1996 by and between Kyushu Matsushita Electric Industrial Co., Ltd. and the Registrant. 10.10+ Promissory Note between Joe Parkinson and Registrant dated June 29, 1996. 10.11+ Promissory Note between Y.W. Sing and Registrant dated June 29, 1996. 10.12+ Promissory Note between Sandra L. Abbott and Registrant dated June 29, 1996. 10.13+ Promissory Note between David M. Harper and Registrant dated June 29, 1996. 10.14+ Promissory Note between Bryan R. Martin and Registrant dated June 29, 1996. 10.15+ Promissory Note between Chris McNiffe and Registrant dated June 29, 1996. 10.16+ Promissory Note between Mike Noonen and Registrant dated June 29, 1996. 10.17+ Promissory Note between Samuel T. Wang and Registrant dated June 29, 1996. 10.18* License Agreement dated as of May 5, 1997 by and between U.S. Robotics Access Corporation and the Registrant. 11.1 Computation Regarding Earnings Per Share. 21.1+ Subsidiaries of Registrant.
II-3 84
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ --------------------------------------------------------------------- 23.1 Consent of Independent Accountants. 23.2+ Consent of Counsel (included in Exhibit 5.1). 24.1+ Power of Attorney (see page II-5 of initial filing and Amendment No. 8). 27.1 Financial Data Schedule.
- --------------- * Confidential treatment requested as to certain portions of this exhibit. + Previously filed. (B) FINANCIAL STATEMENT SCHEDULES Schedule II Valuation and Qualifying Accounts. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of this prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing, as specified in the Underwriting Agreement, certificates in such denomination and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-4 85 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 8 to the Registrant's Registration Statement on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on May 16, 1997. 8x8, Inc. By: /s/ JOE PARKINSON ------------------------------------ Joe Parkinson, Chairman and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each of Keith R. Barraclough and Paul Voois hereby constitutes and appoints Joe Parkinson and Sandra L. Abbott and each of them acting individually, as his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement, or any related registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended. Pursuant to the requirements of the Securities Exchange Act of 1933, this Amendment No. 8 to the Registrant's Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ------------------------------------- ---------------------------------- ------------------ /s/ JOE PARKINSON Chairman of the Board and Chief May 16, 1997 - ------------------------------------- Executive Officer (Principal Joe Parkinson Executive Officer) * Vice Chairman of the Board May 16, 1997 - ------------------------------------- Y.W. Sing /s/ KEITH R. BARRACLOUGH President, Chief Operating Officer May 16, 1997 - ------------------------------------- and Director Keith R. Barraclough /s/ PAUL VOOIS Executive Vice President and May 16, 1997 - ------------------------------------- Director Paul Voois * Chief Financial Officer and Vice May 16, 1997 - ------------------------------------- President, Finance (Principal Sandra L. Abbott Financial and Accounting Officer) * Vice President, Process Technology May 16, 1997 - ------------------------------------- and Director Samuel Wang * Director May 16, 1997 - ------------------------------------- Bernd Girod * Director May 16, 1997 - ------------------------------------- Richard Chang
II-5 86
SIGNATURE TITLE DATE - ------------------------------------- ---------------------------------- ------------------ * Director May 16, 1997 - ------------------------------------- Sada Chidambaram * Director May 16, 1997 - ------------------------------------- Akifumi Goto * Director May 16, 1997 - ------------------------------------- William Tai *By: /s/ JOE PARKINSON -------------------------------- Joe Parkinson (Attorney-in-Fact)
II-6 87 8X8 INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS WRITE-OFFS/ BALANCE AT CHARGED TO RECOVERIES OF BALANCE AT BEGINNING COSTS AND UNCOLLECTIBLE END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS PERIOD - ---------------------------------------------- ---------- ---------- ------------- ---------- Allowance for doubtful accounts: March 31, 1995................................ $676 $ -- $ 279 $397 March 31, 1996................................ 397 234 111 520 March 31, 1997................................ 520 -- 146 374
S-1 88 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT - ----------- ------------------------------------------------------------------ 1.1+ Form of Underwriting Agreement. 3.1+ Certificate of Incorporation of Registrant. 3.2+ Form of Amended and Restated Certificate of Incorporation of Registrant. 3.3+ Bylaws of Registrant. 5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1+ Form of Indemnification Agreement. 10.2+ 1992 Stock Option Plan, as amended, and form of Stock Option Agreement. 10.3+ Key Personnel Plan, as amended, and form of Stock Option Agreement. 10.4+ 1996 Stock Plan, as amended, and form of Stock Option Agreement. 10.5+ 1996 Employee Stock Purchase Plan, as amended, and form of Subscription Agreement. 10.6+ 1996 Director Option Plan, as amended, and form of Director Option Agreement. 10.7+ Amended and Restated Registration Rights Agreement dated as of September 6, 1996 among the Registrant and certain holders of the Registrant's Common Stock. 10.8 Facility lease dated as of July 3, 1990 by and between Sobrato Interests, a California Limited Partnership, and the Registrant, as amended. 10.9*+ License Agreement dated as of May 7, 1996 by and between Kyushu Matsushita Electric Industrial Co., Ltd. and the Registrant. 10.10+ Promissory Note between Joe Parkinson and Registrant dated June 29, 1996. 10.11+ Promissory Note between Y.W. Sing and Registrant dated June 29, 1996. 10.12+ Promissory Note between Sandra L. Abbott and Registrant dated June 29, 1996. 10.13+ Promissory Note between David M. Harper and Registrant dated June 29, 1996. 10.14+ Promissory Note between Bryan R. Martin and Registrant dated June 29, 1996. 10.15+ Promissory Note between Chris McNiffe and Registrant dated June 29, 1996. 10.16+ Promissory Note between Mike Noonen and Registrant dated June 29, 1996. 10.17+ Promissory Note between Samuel T. Wang and Registrant dated June 29, 1996. 10.18* License Agreement dated as of May 5, 1997 by and between U.S. Robotics Access Corporation and the Registrant. 11.1 Computation Regarding Earnings Per Share. 21.1+ Subsidiaries of Registrant. 23.1 Consent of Independent Accountants. 23.2+ Consent of Counsel (included in Exhibit 5.1). 24.1+ Power of Attorney (see page II-5 of initial filing and Amendment No. 8). 27.1 Financial Data Schedule.
- --------------- * Confidential treatment requested as to certain portions of this exhibit. + Previously filed.

1 EXHIBIT 10.8 1. PARTIES: THIS LEASE, is entered into on this _____ day of June, 1990, between SOBRATO INTERESTS, a California Limited Partnership, and INTEGRATED INFORMATION TECHNOLOGY, INC., a California Corporation, hereinafter called respectively Landlord and Tenant. 2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord those certain Premises with the appurtenances, situated in the City of Santa Clara, County of Santa Clara, State of California, and more particularly described as follows, to-wit: A part of that certain real property commonly known and designated 2441 Mission College Boulevard of 100,272 square feet ("Building") consisting of a part of the first floor totaling 42,450 square feet as outlined in red on Exhibit "A"; in a complex comprised of four buildings (including the Building) totaling 419,357 square feet ("Project"). 3. USE: Tenant shall use the Premises only for the following purposes and shall not change the use of the Premises without the prior written consent of Landlord: Office, research, development, testing, light manufacturing, ancillary warehouse, and related legal uses. 4. TERM AND RENTAL: The term shall be for eighty-four (84) months, commencing, as adjusted pursuant to paragraph 7, on the first day of October, 1990 ("Commencement Date"), and ending as adjusted pursuant to Paragraph 7 on the thirtieth day of September 1997 at the effective rent of $0.94 per square foot for a total rent or sum of Three Million Three Hundred Fifty-one Thousand Eight Hundred Fifty-Two and No/100 Dollars ($3,351,852.00), payable, without deduction or offset, in monthly installments of: 10/1/90-9/30/91 $16,980.00 per month $203,760.00 $0.40/sq.ft. 10/1/91-9/20/92 $35,233.50 per month $422,802.00 $0.83/sq.ft. 10/1/92-9/30/93 $40,327.50 per month $483,930.00 $0.95/sq.ft. 10/1/93-9/30/94 $42,874.50 per month $514,494.00 $1.01/sq.ft. 10/1/94-9/30/95 $45,421.50 per month $545,059.00 $1.07/sq.ft. 10/1/95-9/30/96 $47,968.40 per month $575,622.00 $1.13/sq.ft. 10/1/96-9/30/97 $50,515.50 per month $606,196.00 $1.19/sq.ft. due on or before the full day of each calendar month during the term hereof. Said rental shall be paid in lawful money of the United States of America, without offset or deduction, and shall be paid to Landlord at such place or places as may be designated from time to time by Landlord. Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. Concurrently with Tenant's execution of this Lease, Tenant shall pay to Landlord the sum of Sixteen Thousand Nine Hundred Eighty and No/100 Dollars ($16,980.00) as prepaid rent for the first month of the term. 2 4.(a) Tenant shall be allowed to use the Premises prior to October 1, 1990, at the rate to cover the utility charges only. 5. SECURITY DEPOSIT: Concurrently with Tenant's execution of this Lease, Tenant his deposited with Landlord the sum of Thirty-Five Thousand Two Hundred Thirty-Three and 50/100 Dollars ($35,233.50) as a security deposit. If Tenant defaults with respect to any provisions of this lease, including but not limited to the provisions relating to payment of rent or other charges, Landlord may, to the extent reasonably necessary to remedy Tenant's default, use all or any part of said deposit for the payment of rent or other charges in default or the payment of any other payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore said deposit to the full amount hereinabove stated and shall pay to Landlord such other sums as shall be necessary to reimburse Landlord for any sums paid by Landlord. Said deposit shall be returned to Tenant within thirty (30) days after the expiration of the term hereof less any amount deducted in accordance with this paragraph, together with Landlord's written notice itemizing the amounts and purposes for such retention. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said deposit to Landlord's successor in interest. In addition to the cash security deposit provided above, Tenant shall provide Landlord a lease guarantee ("Lease Guarantee"), in the initial amount of Five Hundred Thousand and No/100 Dollars ($500,000.00). The Lease Guarantee shall be delivered to Landlord promptly after Lease execution. Upon the occurrence of any default by Tenant as defined in paragraph 24 of this Lease, Landlord shall be entitled to draw upon the Lease Guarantee to the extent necessary to cure such default. The Lease Guarantee shall be irrevocable, and shall be conditioned solely upon Landlord's certifying to the issuer thereof that a default exists under this Lease. Such Lease Guarantee shall provide for a schedule of reduction in the following amounts: 10/1/91-9/30/92 $425,000.00 10/1/92-9/30/93 $350,000.00 10/1/93-9/30/94 $275,000.00 10/1/94-9/30/95 $200,000.00 10/1/95-9/30/96 $125,000.00 10/1/96-9/30/97 $ 50,000.00 6. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, administrative, processing, accounting charges, and late charges, which may be imposed on Landlord by the terms of any contract, revolving credit, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days after such amount shall be due, -2- 3 Tenant shall pay to Landlord a late charge equal to five (5%) percent of such overdue amount which shall be due and payable with the payment then delinquent. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of rent, then rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding any provision of this Lease to the contrary. IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS: 7. CONSTRUCTION AND POSSESSION: The Tenant Improvements shall be constructed by independent contractors to be employed by and under the supervision of Landlord, as general contractor, in accordance with plans prepared by Dennis Kobza and Associates, to be attached as Exhibit "B" ("Working Drawings"). Landlord shall construct the Tenant Improvements in accordance with all existing applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances. Landlord shall be responsible for and shall pay the cost of the Tenant Improvements up to the amount of Four Hundred Eighty-Eight Thousand Four Hundred Five and No/100 Dollars ($488,405.00) ("Tenant Improvement Allowance"). In the event the cost of Tenant Improvements is less than the Tenant Improvement Allowance, the monthly rental under the f case shall be reduced at the rate of Fifteen Dollars ($15.00) per month for each One Thousand Dollars ($1,000.00) of the Tenant Improvement Allowance not used. The cost of the Tenant Improvements including fit-up of special areas shall include a fee of eight and one half percent (8.5%) to cover all Landlord's Costs and Expenses including but riot limited to: a field superintendent temporary on-site facilities; home office administration, supervision, and coordination; financing fees, and construction interest Landlord hereby guarantees that, under no circumstance, will the expense for Tenant Improvements exceed the said allowance without Tenant's prior approval Tenant shall have the right to approve the budget of the Tenant Improvements prior to the Landlord's contracting for the improvements. If the cost of the Tenant improvements exceed the Tenant Improvement Allowance by virtue of Tenant's written approval, Tenant shall pay for such excess costs in cash within thirty (30) days after Landlord has provided Tenant with evidence that Landlord's progress payments to subcontractors has exceeded said Tenant Improvement budget. All costs for Tenant Improvements shall be fully documented to and verified by Tenant. Anything to the contrary in the foregoing notwithstanding, Landlord shall provide Tenant with a list of contractors to whom Landlord proposes to let the contract for the Tenant Improvements to be constructed by Landlord hereunder. Tenant shall promptly notify Landlord of any reasonable objections to the use of any such contractor and shall also provide Landlord with the name of any contractor Tenant desires to have an opportunity to bid on the contract to construct the Tenant Improvements. Landlord will consult with Tenant in the final selection of a contractor and the letting of any contract to construct the Tenant Improvements. Tenant shall not unreasonably object to the selection of a contractor chosen by Landlord or the terms of the contract for the construction of the Tenant Improvements agreed to by Landlord. -3- 4 Tenant, at Tenants expense, to supply Landlord with preliminary improvement information ("Preliminary Information") including one line drawings of Tenants wall layout electrical and air conditioning requirements by July 7, 1990. Based on this information, Landlord shall prepare the final working drawings ("Working Drawings") which shall be approved by both Landlord and Tenant In the event (i) Tenant fails to provide the Preliminary Information by July 7, 1990 or, (ii) Tenant makes any changes to the Working Drawings which cause Landlord's construction schedule to be delayed, the Commencement Date shall occur one (1) day in advance of Substantial Completion as defined below for each day of delay. If the delay is not caused by Tenant and is to be more than three (3) months after the originally scheduled date, Landlord shall notify the Tenant not later than the original schedule date and the Tenant shall have the right to terminate this Lease at Tenants option. In all events, Landlord shall provide Tenant will a minimum of two (2) weeks prior written notice of the Commencement Date of the Lease. If Landlord, for any reason whatsoever, cannot deliver possession of the said Premises to Tenant at the commencement of the said term, as hereinbefore specified,; and if Tenant has not terminated this Lease, Tenant shall be entitled to one(1) free day of rent for every day of delay. In that event the Commencement Date and termination date of the Lease and all other dates affected thereby in that event the Commencement Date and termination date of the Lease and all other dates affected thereby in that event the Commencement Date and termination date of the Lease and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession. The term of the Lease shall not commence until substantial completion of the Premises occurs. "Substantial Completion" shall mean that: (i) all necessary governmental approvals, permits, consents, and certificates have been obtained by or for Landlord for the lawful construction by Landlord, and occupancy by Tenant, or said Premises, excluding work attributable to any special fit-up requested or required by Tenant, (ii) all of the Premises interior fully meet all of the Working Drawings, excluding Tenant's special fit-up, (iii) all of the Premises exterior substantially meets the applicable Working Drawings, including paved parking areas, and (iv) said interior is in a "broom clean" finished condition. If necessary, Landlord reserves the right to post a bond for the uncompleted portion of the landscaping. 8. ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: By entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the Building and the other improvements in their present condition, except for a"punch list" delivered by Tenant to Landlord within five (5) business days after Tenant's entry onto the Premises. The Tenant agrees on the last day of the term hereof, or on the sooner termination of this Lease, to surrender the Premises unto Landlord in good condition and repair, reasonable wear and tear excepted. "Good condition" shall mean that the interior walls of all office and warehouse areas, the floors of all office and warehouse areas, all suspended ceilings and any carpeting will be cleaned to the same condition as existed at the commencement of the Lease, normal wear and tear excepted. Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition as of the commencement of this Lease or to cause Tenant to surrender all alterations, additions, and improvements in place to Landlord. If Landlord shall so desire, then Tenant shall remove such alterations, additions, and improvements as Landlord may require and shall repair and -4- 5 restore said Premises or such part or parts thereof before the termination of this Lease at Tenants sole cost and expense. Tenant on or before the end of the term or sooner termination of this Lease, shall remove all his or its personal property and trade fixtures from the Premises, and all property not so removed shall be deemed to be abandoned by Tenant. If the Premises are not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. 9. USES PROHIBITED: Tenant shall not commit or suffer to be committed any waste upon the said Premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant in or around the Buildings in which the Premises may be located or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful or objectionable purpose, or place any loads upon the floor, walls, or ceiling which endanger the structure, or use any machinery or apparatus which will in any abnormal manner vibrate or shake the Premises or the Building of which it is a part, or place any harmful liquids, waste materials, or hazardous materials in the drainage system of, or upon or in the soils surrounding the Building. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature or any waste materials, refuse, scrap or debris shall be stored upon or permitted to remain on any portion of the Premises outside of the Building proper without Landlord's prior approval, which approval may be withheld in its sole discretion. 10. ALTERATIONS AND ADDITIONS: Tenant shall not make, or suffer to be made, any major alteration or addition to the said Premises, or any part thereof, without the written consent of Landlord first had and obtained, which consent will not be unreasonably withheld or delayed, based upon Tenants delivering to Landlord the proposed architectural and structural plans for all such alterations; any addition or alteration to the said Premises except movable furniture and trade fixtures, shall become at once a part of the realty and belong to Landlord unless otherwise agreed between Landlord and Tenant. Alterations and additions which are not to be deemed as trade fixtures shall include heating, lighting, electrical systems, air conditioning, partitioning, carpeting, or any other installation which has become an integral part of the Premises. After having obtained Landlord's consent, Tenant agrees that it will not proceed to make such alterations or additions, until three (3) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant acknowledges Landlord's right to and hereby consents to construction of additional Buildings and improvements in the Building, on the Land where the Building is situated, in the Project and on adjacent land owned by Landlord subject; always, to recalculation of Tenants Allocable share of Costs as set forth below. Anything to the contrary in the foregoing notwithstanding, Tenant shall have the right to make improvements or alterations to the Premises upon notice to Landlord if such alterations or improvements do not cause any major alteration to the appearance of the Building or any material alteration in the electrical, heating, air conditioning, ventilation or plumbing systems of the Building and, in any case, cost less than Twenty-Five Thousand and No/100 Dollars ($25,000.00). -5- 6 11. LANDLORD'S AND TENANT'S OBLIGATIONS REGARDING COMMON AREA COSTS: Tenant agrees to reimburse Landlord for the reasonable expenses resulting from Landlords payment of Common Area Costs as defined in paragraph 1.1(a) incurred by Landlord because the cost is not directly allocable to or payable by a single tenant in the Building or the Project. Tenant agrees to pay Tenants Allocable Share as defined in paragraph 1.1.(b) of the Common Area Costs, as additional rental, within thirty (30) days of written invoice from Landlord. 11.(A) COMMON AREA COSTS: For purposes of calculating Tenants Allocable Share of Building and of Project Costs, the term "Common Area Costs" shall mean all costs and expenses of the nature hereinafter described which am incurred in connection with ownership and operation of the Building or the Project in which the Premises are located, as the case may be not directly allocable to or payable by a single tenant in the Building or the Project, together with such additional facilities as may be determined by Landlord to be reasonably desirable or necessary to the ownership and operation of the Building and/or Project. Common Area Costs shall not include any capital expenditures, except to the extent such expenditures benefit the occupants of the Project, Building, and Tenant during the term of the Lease and are amortized over the useful life of the property acquired or constructed as a result of such expenditure. All costs and expenses shall be determined in accordance with generally accepted accounting principles which shall be consistently applied (with accruals appropriate to Landlord's business), including but not limited to, the following: (i) Common area utilities, including water and power, heating, lighting, air-conditioning, ventilating and Building utilities to the extent not separately metered and are not in an area separately rented out and are the located only in a common area; (ii) All common area maintenance and service agreements for the Building or the Project and the equipment therein including, without limitation, common area janitorial services, alarm and security services, exterior window cleaning, and maintenance of the sidewalks, landscaping, waterscape, roof membrane, parking areas, driveways, service areas, mechanical rooms, elevators, and the building exterior, (iii) All insurance premiums and costs, including without limitation, the premiums and cost of fire, casualty and liability coverage and rental abatement and earthquake (if commercially available) insurance applicable to the Building or Project; (iv) Repairs, replacements and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and repairs or alterations attributable solely to tenants of the Building or Project other than Tenant). This also includes the repairs and maintenance for the area which is common to the Premises and the floor above the Premises such as roof membrane and exterior walls, sidewalks, etc.; (v) All real estate taxes, special assessment service payments in lieu of taxes, excises, transit charges, housing fund assessment, levies, fees or charges and including any substitutes or additions thereto which may occur during the Term (and -6- 7 Renewal Terms, if any) of this lease which are assessed, or imposed by any public authority upon the Building or Project, the act of entering this Lease, the occupancy by Tenant, the rent provided for in this Term and including real estate tax increases due to a sale or transfer of the Building or the Project, in which the Premises are located, as such taxes are levied or appear on the City and County tax bills and assessment rolls. Nothing in the foregoing shall be construed to require Tenant to pay any taxes or other fees of the sort usually denominated as general income taxes by any federal, state, county or city governmental unit. (vi) At a sum equal to eight and one-half percent (8.5%) of all the above operating costs to reimburse Landlord for its supervisory, managerial, administration and collection services therewith. This shall be a Net Lease and the Rental shall be paid to Landlord absolutely net of all costs and expenses. The provision for payment of Common Area Costs by mews of periodic payment of Tenants Allocable Share of Building and/or Project Costs are intended to pass on to Tenant and reimburse Landlord for all costs of operating and managing the Building and/or Project. 11.(B) TENANT'S ALLOCABLE SHARE: For purposes of prorating Common Area Costs which Tenant shall pay, Tenant's Allocable Share of Building Costs is computed by multiplying the total Common Area Costs for services shared by the Building by a fraction, the numerator of which is the rentable square footage of the Building (excluding common areas). Tenant's Allocable Share of Project Costs shall be computed on a shared service by service basis, by multiplying the total Common Area Costs for services shared by the Building and one or more buildings in the Project by a fraction, the numerator of which is the rentable square footage of the Buildings in the Project which share the services. It is understood and agreed by Landlord and Tenant that Tenant's Allocable Share of Building Costs is 42.33% and of Project Costs is 10.12%. For all tax-related expenses, tenant's allocable share shall be 17.19% of the Parcel cost. It is understood and agreed that Tenant's obligation to share in Common Area Costs shall be adjusted to reflect the commencement and termination dates of the Lease Term and are subject to recalculation in the event of expansion of the Building or Project. 12. MAINTENANCE OF PREMISES: Except as provided in paragraph 11 Tenant shall at its sole cost, keep and maintain, repair and replace, said Premises and appurtenances and every part hereof. including but not limited to, exterior walls, roof, glazing, sidewalks, parking plumbing, electrical and HVAC systems excluding those areas that have been designated as Common Areas in Paragraph 11.(a); and all the Tenant Interior Improvements in good and sanitary order, condition, and repair, ordinary wear and tear excepted. Tenant shall provide Landlord with a copy of a service contract between Tenant and a licensed air-conditioning and heating contractor which contract shall provide for maintenance of all air conditioning and heating equipment with reasonable routine intervals at the Premises. Tenant shall pay the cost of all air-conditioning and heating equipment repairs or replacements which are either excluded from such service contract or any existing equipment warranties. Tenant shall be responsible for the preventive maintenance of the -7- 8 membrane of the roof, which responsibility shall be deemed properly discharged if (i) Tenant contracts with a licensed roof contractor who is reasonably satisfactory to both Tenant and Landlord, at Tenant's sole cost, to inspect the roof membrane at least every six months, with the first inspection due the sixth (6th) month after the Commencement Date, and (ii) Tenant performs, at Tenant's sole cost, all preventive maintenance recommendations made by such contractor within a reasonable time after such recommendations are made. Such preventive maintenance might include acts such as clearing storm gutters and drains, removing debris from the roof membrane, trimming trees overhanging the roof membrane, applying coating materials to seal roof penetrations, repairing blisters and other routine measures. Tenant shall provide to Landlord a copy of such preventive maintenance contract and paid invoices for the recommended work. All vinyl wall surfaces and floor tile are to be maintained in an as good a condition as when Tenant took possession free of holes, gouges, or defacements. Tenant agrees to limit attachments to vinyl wall surfaces exclusively to V-joints. Landlord shall, at Landlords cost and expense, maintain and repair the exterior walls of the Building, the roof structure of the building, the structural components of the Building, except to the extent such repair and maintenance is the responsibility of Tenant under this Lease or some other provision of this Lease may excuse Landlord's performance form such duties on account of casualty or similar cause, and the Common Areas of the complex of which the Building is a part. 13. HAZARD INSURANCE: Tenant shall not use, or permit said Premises, or any part thereof, to be used for any purpose other than that for which the said Premises are hereby leased; and no use shall be made or permitted to be made of the said Premises, nor acts done, which will cause an increase in premiums or a cancellation of any insurance policy covering said Building, or any part thereof, nor shall Tenant sell or permit to be kept, used or sold, in or about said Premises, any article which may be prohibited by the standard form of fire insurance policies. Tenant shall, at its sole cost and expense, comply with any and all requirements, pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance, covering said Building and appurtenances. The Landlord agrees to purchase and keep in force fire, earthquake (if commercially available and/or required by Landlord's Lender), and extended coverage insurance covering the Premises in amounts not to exceed the actual insurable value of the Building, including the Premises, as determined by Landlord's insurance company's appraisers. In addition, Tenant agrees to insure its personal property, additions, alterations, and improvements for their full replacement value (without depreciation) and to obtain workers compensation and public liability and property damage insurance for occurrences within the Premises of $5,000,000.00 combined single limit for bodily injury and property damage. Tenant shall name Landlord as an additional insured, shall deliver a copy of the policies and renewal certificates to Landlord. All such policies shall provide for thirty (30) days' prior written notice to Landlord of any cancellation or termination. Notwithstanding the above, Landlord retains the right to have Tenant provide other forms of insurance which may be reasonably required to cover future risks customarily insured against by reasonably prudent businesses in Tenant's industry located in the Santa Clara-San Jose area. Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to the Landlord or the Tenant as the case may be, or to the Premises -8- 9 or its contents, and which my arise from any risk covered by their respective insurance policies, as set forth above. The parties shall obtain from their respective insurance companies a waiver of any right of subrogation which said insurance company may have against the Landlord or the Tenant, as the case may be. 14. TAXES: Tenant shall be liable for all taxes levied against personal property and/or business fixtures, and agrees to pay, as additional rental, all real estate taxes and special assessment installments levied on the Premises, upon the occupancy of the Premises and including any substitute or additional charges which may be imposed during, or applicable to the Lease term including real estate tax increases due to a sale or other transfer of the Premises, as they appear on the City and County tax bills during the Lease term and as they become due. It is understood and agreed that Tenant's obligation under this paragraph will be prorated to reflect the commencement and termination dates of this Lease. If Tenant's Allocable Share of Taxes (based on square footage) is not consistent with the method used by the (county Tax Assessor, Landlord shall allocate based on the County's formula In any time during the term of this Lease a tax, excise on rents, business license tax, or any other tax, however described, is levied or assessed against Landlord, as a substitute or addition in whole or in part for taxes assessed or imposed on land or Buildings, Tenant shall pay and discharge his program share of such or excise on rents or other tax before it becomes delinquent, except that this provision is not intended to cover net income taxes, inheritance, gift or estate tax imposed upon the Landlord. 15. UTILITIES: Except as provided in paragraph 11, Tenant shall pay directly to the providing utility all water, gas, heat, light, power, telephone and other utilities supplied to the Premises. 16. WAIVER OF LIABILITY: Failure by Landlord to perform any defined services, or any cessation thereof, when such failure is caused by accident, breakage, repairs, strikes, lockout or other labor disturbances or labor disputes of any character, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord, shall not render Landlord liable in any respect for damages to either person or property, nor be construed as an eviction of Tenant, nor relieve Tenant from fulfillment of any covenant or agreement hereof. Should any of the equipment or machinery utilized in supplying the services listed herein break down, or for any cause cease to function property, upon receipt of written notice from Tenant of any deficiency or failure of any defined Services, Landlord shall use reasonable diligence to repair the same promptly, but Tenant shall have no right to terminate this Lease, and shall have no claim for rebate of rent or damages, on account of any interruptions in service occasioned thereby or resulting therefrom. Tenant waives the provisions of California Civil Code Sections 1941 and 1942 concerning the Landlord's obligation of tenantabilty and Tenant's right to make repairs and deduct the cost of such repairs from the rent. Landlord shall not be liable for a loss of or injury to property, however occurring, through or in connection with or incidental to furnishing or its failure to furnish any of the foregoing except if such loss is due to Landlord's own intentional acts or omissions. 17. ABANDONMENT: Tenant shall not vacate or abandon the Premises at any time during the term without Landlords approval; and if Tenant shall abandon, vacate or surrender said -9- 10 Premises or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned at the option of Landlord, except such property as may be mortgaged to Landlord. 18. FREE FROM LIENS: Tenant shall keep the Premises and the Building in which the Premises are situated, free from any liens arising out of any work performed, materials furnished, or obligations incurred by Tenant. 19. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Tenant shall, at its sole cost and expense, comply with all of the requirements of all Municipal, State and Federal authorities now in force, or which may hereafter be in force, pertaining to the said Premises, and shall faithfully observe in the use of the Promises all Municipal ordinances and State and Federal statutes now in force or which may hereafter be in force. The judgement of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use of the Premises, shall be conclusive of that fact as between Landlord and Tenant. 20. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: Without the prior written consent of Landlord, Tenant shall not bring, allow, use or permit upon the Premises, or generate or create at or emit or dispose from the Premises any chemicals, toxic or hazardous gaseous, liquid or solid or waste, including without limitation, material or substance having characteristics of ignitability, corrosivity, reactivity, or extraction procedure toxicity or substances or materials which are listed on any of the Environmental Protection Agency's lists of hazardous wastes or which are identified in Sections 66680 through 66685 of Title 22 of the California Administrative Code as the same may be amended from time to time. Tenant shall comply, at its sole cost, with all laws pertaining to, and shall indemnify and hold Landlord harmless from any claims, liabilities, costs or expenses incurred or suffered by Landlord arising from such bringing, allowing, using, permitting, generating, creating, or emitting or disposing of any such material & Tenant's indemnification and hold harmless obligations include, without limitation, (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability, Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation, (ii) claims, liabilities, costs or expenses pertaining to the cleanup or containment of wastes, the identification of the pollutants in the waste, the identification of scope of any environmental contamination, the removal of pollutants from soils, riverbeds or aquifers, the provision of an alternative public drinking water source, or the long term monitoring of ground water and surface waters, and (iii) all costs of defending such claims. Landlord shall, however, be responsible for damages directly caused by its own intentional acts and omissions and all costs and expenses, including reasonable attorney's fees, incurred in defending claims based upon them. In order to obtain consent, Tenant shall deliver to Landlord its written proposal describing the toxic material to be brought onto the Premises, measures to be taken for storage and disposal thereof, safety measures to be employed to prevent pollution of the air, grand, surface and ground water. Landlord's approval may be withheld in its reasonable judgement. Tenant further agrees to properly close the facility with regard to hazardous materials and obtain a Closure -10- 11 Certificate from the local administering agency. Landlord represents and warrants that it knows of no claim, and knows of no basis of any claim by any governmental agency or other person that the Premises, the Building or the land under them are put of any toxic waste site, nuisance or are otherwise environmentally harmful. Landlord represents and warrants that it has taken no action of its own and knows of no action or omission of anyone else or of any condition of the, Premises, the Building, or the land and complex of which the Premises and the Building are a part, that could lead to such a claim in the future. 21. INDEMNITY: As a material part of the consideration to be rendered to Landlord, Tenant hereby waives all claims against Landlord for damages to goods, wares and merchandise, and all other personal property in, upon or about said Premises and for injuries to persons in or about said Premises, from any cause arising at any time, and Tenant will hold Landlord exempt and harmless from any damage or injury to any person, or to the goods, ware and merchandise and all other personal property of any person, arising form the use of the Premises by Tenant, or from the failure of Tenant to keep the Premises in good condition and repair, as herein provided. Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant, Tenant will indemnify and hold Landlord harmless from any such claim or liability including Landlord's costs and expenses and reasonable attorney's fees incurred in defending such claims. 22. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be placed, in, upon or about the said Premises any unusual or extraordinary sips, or any sips except temporary signs or small signs not approved by the city or other governing authority. The Tenant will not place, or permit to be placed. upon the Premises, any signs, advertisements or notices without the written consent of the Landlord as to type, size, design, lettering, coloring and location, and such consent will not be unreasonably withheld. Landlord grants the right to Tenant, subject to approval by the City of Santa Clara to install an electrically lighted sip on the panel at the southwest corner of the Building facing Mission College Boulevard. Any sign so placed on the Premises shall be so placed upon the understanding and agreement that Tenant will remove same at the termination of the tenancy herein created and repair any damage or injury to the Premises caused thereby, and if not so removed by Tenant then Landlord may have same so removed at Tenant's expense. 23. ATTORNEY'S FEES: In case suit should be brought for the possession of the Premises, for the recovery of any sum due hereunder, or because of the breach of any other covenant herein, the losing party shall pay to the prevailing party a reasonable attorney's fee as part of its costs which shall be deemed to have accrued on the commencement of such action and shall be enforceable whether or not such action is prosecuted to judgement 24. TENANT'S DEFAULT: The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: a) Any failure by Tenant to pay the rental or to make any other payment request to be made by Tenant hereunder, where such failure continues for ten (10) days after written notice thereof by Landlord to Tenant; b) The abandonment or vacation of the Premises by Tenant without Landlord's approval; c) A failure by Tenant to observe and perform any other provision of this Lease to be observed or performed by Tenant, where such failure continues for thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, -11- 12 that if the nature of such default is such that the same cannot reasonably be cured within such thirty (30) day period Tenant shall not be deemed to be in default if Tenant shall within such period commence such cure and thereafter diligently prosecute the same to completion; d) The making by Tenant of any general assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed after the filing); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within sixty (60) days; or the attachment execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within sixty (60) days. The notice requirements set forth herein are in lieu of and not in addition to the notices required by California Code of Civil Procedure Section 1161. 24.(a) REMEDIES: In the event of any such default by Tenant then in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: a) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus b) the worth at the time of award of the amount by which the unpaid rent would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform his obligation sunder this Lease or which In the ordinary course of things would be likely to result therefrom, and e) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California law. The term "rent", as used herein, shall be deemed to be and to mean the minimum monthly installments of rent and all other sums required to be paid by Tenant pursuant to the terms of this Lease, all other such sums being deemed to be additional rental due hereunder. As used in (a) and (b) above, the "worth at the time of award" is computed by allowing interest at the rate of the discount rate of the Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used in (c) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one (1%) percent. 24.(b) RIGHT TO RE-ENTER: In the vent of any such default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. 24.(c) ABANDONMENT: In the event of the vacation or abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in paragraph 24.(b) above or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice -12- 13 provided by law, then if Landlord does not elect to terminate this Lease as provided in paragraph 24.(a) above, then the provisions of California Civil Code Section 1951.4, as amended from time to time, shall apply and Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to so relet, then rentals received by Landlord form such reletting shall be applied: first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises; fourth, to the payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied by the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand therefor by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. 24(d) NO TERMINATION: No re-entry or taking possession of the Premises by Landlord pursuant to 24.(b) or 24.(c) of this Article 24 shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such default. 25. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not automatically effect a merger of the Lease with Landlord's ownership of the Building and Premises. Instead, at the option of Landlord, Tenant's surrender may terminate all or any existing sublease or subtenancies, or may operate as an assignment to Landlord of any or all such subleases or subtenancies, thereby creating a direct Landlord-Tenant relationship between Landlord and any subtenants. 26. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in paragraph 24, 24 (a) (b) (c) and (d), the parties hereto agree that if the Tenant shall have defaulted in the performance of any (but not necessarily the same) material term or condition of this Lease for three or more times during any twelve month period during the term hereof, then such conduct shall at the election of the Landlord, represent a separate event of default which cannot be cured by the Tenant. Tenant acknowledges that the purpose of this provision is to prevent repetitive defaults by the Tenant under the Lease, which work a hardship upon the Landlord, and deprive the Landlord of the timely performance by the Tenant hereunder. -13- 14 27. LANDLORD'S DEFAULT: In the event of Landlords failure to perform any of its covenants or agreements under this Term, Tenant shall give Landlord written notice of such failure and shall give Landlord the reasonable opportunity not more than thirty (30) days to cure such failure prior to any claim for breech or for damages resulting from such failure Tenant shall also have the right to deduct the cost to cure from the Rent in the event Landlord has not cured its default within the time period provided above. 28. NOTICES: All notices required to be given under this Lease shall be sent by U.S. mail return receipt requested, or by personal delivery addressed to the party to be notified at the address for such party specified in paragraph 1 of this Lease, or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days notice to the notifying party. 29. ENTRY BY LANDLORD: Tenant shall permit Landlord and his agents to enter into and upon said Premises at all reasonable times subject to the permission and any security regulations of Tenant for the purpose of inspecting the same or for the purpose of maintaining the Premises or the Building in which said Premises are situated, or for the purpose of making repairs, alterations or additions to any other portion of said Building or for the purpose of renting additional buildings) and improvements in the Building, on the land where the Building is situated, in the Project, or on adjacent land owned by Landlord, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required and Tenant shall be entitled to a reasonable Rent abatement when said interruption occurs; and Tenant shall permit Landlord and his agents, at any time within ninety (90) days prior to the expiration of this Lease, to place upon said Premises any "For Sale" or "to lease" signs and exhibit the Premises to prospective tenants at reasonable hours. 30. DESTRUCTION OF PREMISES: In the event of a partial destruction of the Premises by an insured casualty during the said term from any cause, Landlord shall forthwith repair the same, provided such repairs can be made within one hundred eighty (180) days, including receipt of all necessary governmental approvals, under the laws and regulations of State, Federal, County or Municipal authorities, but such partial destruction shall in no way annul or void this Lease, except that Tenant shall be entitled to a proportionate reduction of rent while such repairs are being made, such proportionate reduction to be based upon the extent to which the making of such repairs shall interfere with the business carried on by Tenant in the said Premises in the mmnable judgement of Landlord. If such repairs cannot be made in one hundred eighty (180) days, Tenant, or Landlord may, at their option, terminate this Lease. For purposes of this paragraph 'partial destruction" shall mean destruction to the extent of one-third (1/3) of the Replacement Cost of the Premises including the Replacement Cost of Tenant's Interior Improvements paid for by Landlord, or less. In the event the Premises are more than partially destroyed, Landlord may elect to terminate this Lease or may proceed with repairs, this Lease continuing in full force and the rent to be proportionately reduced as aforesaid provided, however, that if such repairs are to take more than one-hundred eighty (180) days, Tenant may elect to terminate the Lease. In respect to any partial destruction which Landlord is obligated to repair or may elect to repair under the terms of this paragraph, the provision of Section 1932, Subdivision 2, and of Section 1933, Subdivision 4, of the Civil Code of the State of California are waived by Tenant. When a partial destruction of the Premises by an uninsured casualty, Landlord agrees to repair the damage at its own cost up to Two Hundred Fifty Thousand and No/100 -14- 15 Dollars ($250,000.00) for Tenant's portion of the Building. If such damage can not be repaired within one hundred eighty (180) days and within the specified cost, the Landlord or Tenant may then terminate this Lease. In the event that the Building in which the Premises may be situated be destroyed to the extent of not less than 33-1/3% of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be inured or not. A total destruction of the Building in which the said Premises may be situated shall terminate this Lease at the option of Landlord or Tenant. In all events Landlord shall not be required to restore additions, alterations or improvements made by Tenant or replace Tenant's fixtures or personal property. 31. ASSIGNMENT OR SUBLEASE: In the event Tenant desires to assign this Lease or any interest including, without limitation, a pledge, mortgage or other hypothecation, or sublet the Premises or any part thereof, Tenant shall deliver to landlord executed counterparts of any such agreement and of all ancillary agreements with the proposed assignee or subtenant, financial statements, and any additional information as reasonably required to determine whether it will consent to the proposed assignment/subtenant, proposed use of the Premises, rental rate and current financial statement; and upon request to Tenant, Landlord shall be given additional information as reasonably required to determine whether it will consent to the proposed assignment or sublease. Landlord shall then have a period of ten (10) business days following receipt of such notice within which to notify Tenant in writing that Landlord elects (i) to terminate this Lease as to the space so affected as of the date so specified by Tenant in which event Tenant will be relieved of all further obligations hereunder as to such space, (ii) to permit Tenant to assign or sublet such space to the named assign subtenant on the terms and conditions set forth in the notice. If Landlord should fail to notify Tenant in writing of such election within said ten (10) business days period, Landlord shall be deemed to have elected option (ii) above. Any rent or other economic consideration realized by Tenant under any such sublease and assignment in excess of the Base Rental and Additional Rental payable hereunder (including an allocation of the purchase price attributable to Tenant's Leasehold interest in the event of a sale of the Tenant's business), after the net unamortized cost of the Tenant Extra Improvements for which Tenant has itself paid, and reasonable subletting and assignment costs, shall be delivered and paid fifty percent (50%) to Landlord and fifty percent (50%) to Tenant. Tenant's obligation to pay over Landlord's portion of the consideration shall constitute an obligation for additional rent hereunder. The above provisions relating to Landlord's right to terminate the lease and relating to the allocation of bonus rent are independently negotiated terms of the Lease, constitute a material inducement for the Landlord to enter into the Lease, and are agreed as between the parties to be commercially reasonable. No assignment or subletting by Tenant shall relive Tenant of any obligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. If Landlord exercises its option to terminate this Lease in part in the event Tenant desires to sublet or assign part of the Premises, then (a) this Lease shall end and expire, with respect to such part of the Premises, on the date upon which the proposed sublease was to commence, and (b) from and after such date, the amount and Tenants allocable share of all other costs and charges shall be adjusted, -15- 16 based upon the proportion that the rental area of the Premises remaining bears to the total rentable area of the Premises. If Landlord does not exercise its option to terminate this Lease, Landlord's consent (which must be in writing and in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld or delayed, provided and upon condition that: (a) In Landlord's reasonable judgement, the proposed assignee or subtenant is engaged in such a business, and the Premises, or the relevant part thereof, will be used in such a manner, that: (i) is limited to the use expressly permitted under this Lease; and (ii) will not violate any negative covenant as to use contained in any other lease of space in the Building; (b) The proposed assignee or subtenant is a company with sufficient financial worth and management ability similar to that of the Tenant at the commencement of the Lease to undertake the responsibility involved, and Landlord has been furnished with reasonable proof thereof or the Tenant takes responsibility for the proposed assignee or subtenant in the case of default of the said subtenant or assignee; (c) Neither (i) the proposed assignee or subtenant nor (ii) any person that, directly or indirectly, controls, is controlled by, or is under common control with, the proposed assignee or subtenant or any person who controls the proposed assignee or subtenant, is then an occupant of any part of the Building or Project of which the Premises are part; (d) The proposed sublease shall be in form reasonably satisfactory to Landlord; (e) There shall not be more than two (2) subtenants of the Premises at any one time; (f) Tenant shall reimburse Landlord on demand for any costs that may be incurred by Landlord in connection with said assignment or sublease, including the costs of making investigations as to the acceptability of the proposed assignee or subtenant and legal costs incurred in connection with the granting of any requested consent in no case to be greater than One Thousand and No/100 Dollars ($1,000.00); and (g) Tenant shall not have: (i) advertised or publicized in any way the availability of the Premises without prior notice to, and approval by, Landlord. Any assignment or transfer shall be made only if and shall not be effective until the assignee shall execute, acknowledge and deliver to Landlord an agreement, in form and substance satisfactory to Landlord, whereby the assignee shall assume all of the obligations of this Lease on the part of Tenant to be performed or observed and shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such sublease or assignment and the acceptance of rent or additional rent by Landlord from any subtenant or assignee, Tenant shall and will remain fully liable for the payment of the rent and additional rent due, and to become due -16- 17 hereunder, for the performance of all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such sublease or assignment and the acceptance of rent or additional rent by Landlord from any subtenant or assignee, Tenant shall and will remain fully liable for the payment of the rent and additional rent due, and to become due hereunder, for the performance of all of the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and for all acts and omissions of any license, subtenant, assignee or any other person claiming under or through any subtenant that shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant. Tenant shall further indemnify, defend and hold Landlord harmless from and against any and all losses, liabilities, damages, costs and expenses (including reasonable attorney fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any real estate brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. In the event of Tenant's default, Tenant hereby assigns all rents due from any assignment or subletting to Landlord as security for performance of its obligations under this Lease and Landlord may collect such rents as Tenants Attorney-in-Fact, except that Tenant may collect such rents unless a default occurs as described in Paragraph 24 above. The termination of this Lease due to Tenant's default shall not automatically terminate any assignment or sublease then in existence. At the election of Landlord, the assignee or subtenant shall attorney to Landlord and Landlord shall undertake the obligations of the Tenant under the sublease or assignment; provided the Landlord shall not be liable for prepaid rent security deposits or other defaults of the Tenant to the subtenant or assignee. If Tenant is a corporation or partnership, all the above provisions shall apply to a transfer (by one or more transfers) of a majority of the stock of the corporation or the majority of ownership or control of the partnership, as if such transfer were an assignment of this Lease; but said provisions shall not apply to transactions with a corporation or partnership that controls, is controlled by, or is under common control with Tenant, provided that, in any of such events: (i) the successor to Tenant has a net worth, computed in accordance with generally accepted accounting principles, at least equal to the greater of (x) the net worth of Tenant immediately prior to such transfer or (y) the net worth of Tenant herein named on the date of this Lease; and (ii) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction. 32. CONDEMNATION: If any part of the Premises shall be taken for any public or quasi public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and a part thereof remains which is susceptible of occupation hereunder, this Lease shall as to the part so taken, terminate as of the date title shall vest in the condemn or purchaser, and the rent payable hereunder shall be adjusted so that the Tenant shall be required to pay for the remainder of the term only such portion of such rent as the value of the part remaining after such taking bears to the value of the entire Premises prior to such taking, but in such event Landlord or Tenant shall have the option to terminate this Lease as of the date when title to the part so taken vests in the condemnor or purchaser. If all of the premises, or such part of be taken so that there does not remain a portion susceptible for occupation hereunder, this Lease shall thereupon terminate. If a part or all of the -17- 18 Premises be taken, all compensation awarded upon such taking shall go to the Landlord and the Tenant shall have no claim thereto but Landlord shall cooperate with Tenant to recover compensation for damage to or taking of any alterations, additions or improvements made by Tenant. Tenant hereby waives the provisions of California Code of Civil Procedures Section 1265.130. 33. EFFECTS OF CONVEYANCE: The term "Landlord" as used in this Lease, means only the owner for the time being of the land and Building, containing the Premises, so that, in the event of any sale of said land or Building, or in the event of a master Lease of the Building, the Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of the Landlord hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, or the master tenant of the Building, that the purchaser or master tenant of the Building has assumed and agreed to carry out any and all covenants and obligations of the Landlord hereunder. Landlord shall transfer and deliver Tenant's security deposit, to the purchaser at any such sale or the master tenant of the Building, and thereupon the Landlord shall be discharged from any further liability in reference thereto. 34. SUBORDINATION: In the event Landlord notifies Tenant in writing, this Lease shall be subordinate to any ground Lease, deed of trust, or other hypothecation for security now or hereafter placed upon the real property of which the Premises are a part and to any and all advances made on the security thereof and to renewals, modifications, replacements and extensions thereof. Tenant agrees to promptly execute any documents which may be required to effectuate such subordination. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease. At the request of any lender, Tenant agrees to execute and deliver any reasonable modifications of this Lease which do not materially adversely affect the leasehold or Tenant's rights hereunder. 35. WAIVER: The waiver by Landlord of any breach of any term, covenant or condition, herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlords knowledge of such preceding breach at the time of acceptance of such rent. 36. HOLDING OVER: Any holding over after the termination or expiration of the said term, shall be construed to be a hold over tenancy and Tenant shall pay rent to Landlord at a rate equal to the average of (i) one hundred thirty percent (130%) of the effective rent of the current term of the Lease, or (ii) the Fair Market Rental (as defined in paragraph 39). Any holding over shall otherwise be on the terms and conditions herein specified, except those provisions relating to the term and any options to extend or renew, which terms are expressly waived during any hold over. Furthermore, no holding over shall be deemed or construed to exercise any option to extend or renew this Lease in lieu of full and timely exercise of any such option as required hereunder. -18- 19 37. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all the parties hereto; and all of the parties hereto shall be jointly and severally liable hereunder. 38. ESTOPPEL CERTIFICATES: Tenant shall at any time during the term of this Lease, upon not less than five (5) business days prior written notice from Landlord, execute and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification) and the date to which the rent and other charges are paid in advance, if any, and acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults if they are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon the Tenant that: (a) this Lease is in full force and effect, without modification except as may be represented by Landlord; (b) them are not uncured defaults in Landlord's performance. Tenant also agrees to provide when available up to three (3) years of audited financial statements within five (5) days of a request by Landlord for Landlord's use in financing the premises with commercial lenders. As a condition of Tenant providing such financial statements, Landlord shall secure the written agreement of any such commercial lender to use the financial statements only for the purpose of evaluating the applied for financing and not to disclose the financial statements to any other person without the prior written consent of Tenant. 39. OPTION TO EXTEND THE TERM: Landlord hereby grants to Tenant, upon and subject to the terms and conditions set forth in this paragraph, the option (the "Option") to extend the term of this Lease for an additional term (the "Option Term"), which Option Term shall be a period of sixty (60) months. The Option Term shall be exercised, if at all by written notice to Landlord on or before the date that is three (3) months prior to the expiration date of the initial term of the Lease. If Tenant exercises the Option. each of the terms, covenants and conditions of this Lease except this paragraph shall apply during the Option Term as though the expiration date of the Option Term was the date originally set forth herein as the expiration date of the initial term provided that the rent to be paid shall be the Fair Market Rental, as hereinafter defined, for the Premises for the Option Term. Anything contained herein to the contrary notwithstanding, if Tenant is in monetary or material non-monetary default under any of the terms, covenants or conditions of this Lease either at the time Tenant exercises the Option or at any time thereafter prior to the commencement date of the Option Term, Landlord shall have, in addition to all of Landlords other rights and remedies provided in this Lease, the right to terminate the Option upon notice to Tenant, in which event the expiration date of this Lease shall be and remain the expiration date of the initial term. As used herein, the term "Fair Market Rental" for the Premises shall mean the rental and all other monetary payments that Landlord could obtain during the Option Term from a third party desiring to lease the Premises for the Option Term taking into account the age of the Building, the quality of construction of the Building and the Premises, the services provided under the terms of this Lease, the rental and other monetary payments, and any escalations and adjustments thereto (including without limitation Consumer Price Indexing) then being obtained for new leases of space comparable to the Premises in the locality of the Building and all other factors that would be relevant to a third party desiring to lease the Premises -19- 20 for the Option Term in determining the rental such party would be willing to pay therefor. The Lease Guarantee will no longer be required for the Option Term. If Tenant exercises the Option, Landlord shall send to Tenant a notice setting forth the Fair Market Rental for the Premises for the Option Term, on or before the date that is one hundred fifty (150) days prior to the expiration date of the initial term. If Tenant disputes Landlord's determination of the Fair Market Rental for the Option Term, Tenant shall within thirty (30) days after the date of Landlords notice setting forth the Fair Market Rental for the Option Term, send to Landlord a notice stating that Tenant either (x) elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease shall terminate on the expiration date of the initial term in the manner provided herein, or (y) disagrees with Landlord's determination of Fair Market Rental for the Option Term and elects to resolve the disagreement as provided in paragraph 39(a) below. If Tenant does not send to Landlord a notice as provided in the previous sentence, Landlord's determination of the Fair Market Rental shall be the basis for determining the rent to be paid by Tenant hereunder during the Option Term. If Tenant elects to resolve the disagreements as provided in paragraph 39(a) below and such procedures shall not have bene concluded prior to the commencement date of the Option Term, Tenant shall pay rent to Landlord hereunder adjusted to reflect the Fair Market Rental as determined by Landlord In the manner provided above. If the amount of Fair Market Rental as finally determined pursuant to in paragraph 39(a) below is greater than Landlord's determination, Tenant shall pay to Landlord the difference between the amount paid by Tenant and the Fair Market Rental as so determined in paragraph 39(a) below within thirty (30) days after the determination. If the Fair Market Rental as finally determined in paragraph 39(a) below is less than Landlord's determination, the difference between the amount paid by Tenant and the Fair Market Rental as so determined in paragraph 39(a) below shall be credited against the next installments of rent due from Tenant to Landlord hereunder. 39(a) RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any disagreement regarding the Fair Market Rental shall be resolved as follows: (i) Within thirty (30) days after Tenant's response to Landlords notice to Tenant of the Fair Market Rental, Landlord and Tenant shall meet no less than two (2) times, at a mutually agreeable time and place, to attempt to resolve any such disagreement. (ii) If within the thirty (30) day period referred to in (i) above, Landlord and Tenant can not reach agreement as to the Fair Market Rental, they shall each select one appraiser to determine the Fair Market Rental. Each such appraiser shall arrive at a determination of the Fair Market Rental and submit their conclusions to Landlord and Tenant within thirty (30) days after the expiration of the thirty (30) day consultation period described in (i) above. (iii) If only one appraisal is submitted within the requisite time period, it shall be deemed to be the Fair Market Rental. If both appraisals are submitted within such time period, and if the two appraisals so submitted differ by less than ten percent (10%) of the higher of the two, the average of the two shall be the Fair Market Rental. If the two appraisals differ by more than ten percent (10%) of the higher of the two, then the two appraisers shall immediately select a -20- 21 third appraiser who shall within thirty (30) days after his or her selection make a determination of the Fair Market Rental and submit such determination to Landlord and Tenant. This third appraisal will then be averaged with the closer of the two previous appraisals and the result shall be the Fair Market Rental. (iv) All appraisers specified pursuant to this paragraph shall be members of the American Institute of Real Estate Appraisers with not less than ten (10) years experience appraising commercial properties in the Santa Clara Valley. Each party shall pay the cost of the appraiser selected by such party and one-half of the cost of the third appraiser plus one-half of any other incurred in resolving the dispute pursuant to this paragraph. 40. OPTION AND RIGHT OF FIRST OFFERING TO LEASE: 40(a). OPTION TO LEASE: Subject to the rights of any existing tenants, Landlord hereby grants Tenant an option to lease the space comprising the balance of the Building of 58,601 square feet ("Expansion Space") upon the expiration of the existing lease on the Expansion Space. Tenant shall have the option, which may be exercised by written notice to Landlord at any time within forty-five (45) days after Tenant's receipt of Landlord's notice, to agree to lese the Expansion Space at Fair Market Rental determined pursuant to paragraph 39. The lease term for the Expansion Space shall be coterminous with the expiration of this Lease and shall provide for a five year option to extend at Fair Market Rental. Notwithstanding the foregoing, in the event Tenant fails to exercise this option within said forty-five (45) days, Landlord shall have one hundred eighty (180) days thereafter to lese the Expansion Space at Fair Market Rental. In the event Landlord fails to lease the Expansion Space within said one hundred eighty (180) day period, Landlord shall be required to resubmit such offer to Tenant in accordance with this paragraph 40(a). 40(b) RIGHT OF FIRST OFFERING TO LEASE: Subject to the rights of any existing tenants and if Tenant does not exercise its option provided in paragraph 40(a) above, Landlord hereby grants Tenant a right of first offering to lease the Expansion Space at such time as the Expansion Space again becomes available for lease. Prior to Landlord offering to lease the Expansion Space to a third party, Landlord shall first give Tenant prior written notice of such desire and the terms and other information under which Landlord intends to lease the Expansion Space. Tenant shall have the option, which may be exercised by written notice to Landlord at any time within ten (10) business days after Tenant's receipt of Landlord's notice, to agree to lese the Expansion Space at the rent and terms of lease specified in the notice. In the event Tenant agrees to lease the Expansion Space, Landlord shall lease the Expansion Space to Tenant in accordance with the notice. In the event Tenant fails to exercise Tenant's option within said ten (10) days, Landlord shall have ninety (90) days thereafter to lease the Expansion space at the same or higher rent and upon the same terms of lease as specified in the notice to Tenant. In the event Landlord fails to lease the Expansion Space to a third party within said ninety (90) day period or in the event Landlord proposes to lease the Expansion Space to a third party at a lower rent or on more favorable terms than that proposed to Tenant, Landlord shall be required to resubmit such offer to Tenant in accordance with this paragraph 40(b). -21- 22 41. OPTIONS: All Options provided Tenant in this Lease are personal and granted to original Tenant and are not exercisable by any third party should Tenant assign or sublet all or a portion of its rights under this Lease, unless Landlord consents to permit exercise of any option by any assignee or subtenant, in Landlords sole discretion. In the event that Tenant hereunder has any multiple options to extend this Lease, a later option to extend the Lease cannot be exercised unless the prior option has been so exercised. Any purchaser of Tenant's assets, or successor to Tenant by way of merger or other corporate reorganization shall not be considered a third party if said successor's credit worthiness and the ability of its management is, in Landlord's reasonable opinion, equivalent to those of the original Tenant. 42. QUIET ENJOYMENT: Upon Tenant's faithful and timely performance of all the terms and covenants of the Lease, Tenant shall quietly have and hold the Premises for the term and any extensions thereof. 43. BROKERS: Tenant represents it has not utilized or contacted a real estate broker or finder with respect to this Lease other than Grubb & Ellis and Tenant agrees to indemnify and hold Landlord harmless against any claim, cost, liability or cause of action asserted by any broker or finder claiming through Landlord. 44. LANDLORD'S LIABILITY: If tenant should recover a money judgment against Landlord arising in connection with this Lease, the judgment shall be satisfied only out of Landlord's interest in the Premises including the improvements and real property and neither Landlord or any of its partners shall be liable personally for any deficiency. General partners of Landlord shall be liable personally for any deficiency if their own intentional acts or omissions are responsible for the claim upon which the judgment was obtained. 45. AUTHORITY OF PARTIES: 45(a) CORPORATE AUTHORITY: If Tenant is a corporation, each individual executing this Lease on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the bylaws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. 45(b) LIMITED PARTNERSHIPS: If the Landlord herein is a limited partnership, it is understood and agreed that any claim by Tenant on Landlord shall be limited to the assets of the limited partnership. And furthermore, Tenant expressly waives any and all rights to proceed against the individual partners or the officers, directors or shareholders of any corporate partner, except to the extent of their interest in said limited partnership. 46. TRANSPORTATION DEMAND MANAGEMENT REQUIREMENTS: Should a government agency or municipality require Landlord to institute TDM (Transportation Demand Management) facilities and/or program, Tenant hereby agrees that the cost of IDM imposed facilities required on the Premises, including but not limited w employee showers, lockers, cafeteria, or -22- 23 lunchroom facilities, shall be included as Tenant Improvement Costs and any ongoing costs or expenses associated with a TDM program such as an on-site TDM coordinator, which are required for premises and not provided by Tenant shall be provided by Landlord with such costs being included as Additional Rent and reimbursed to Landlord by Tenant. 47. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are cumulative and not alternative to the extent permitted by law and are in addition to all other rights and remedies in law and in equity. If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction. the remainder of the term shall not be invalidated thereby but shall be enforceable in accordance with its terms, omitting the invalid or unenforceable term. This Lease shall be governed by and construed in accordance with California law. Tenant shall not permit or condone any nuisance or distance of any kind on the Premises which annoys or disturbs Landlord, or other occupants of the Building. All sums due hereunder, including rent and additional rent, if not paid when due, shall bear interest at a reasonable rate under California law accruing from the date due until the date paid to Landlord. Time is of the essence hereunder. The headings or titles to the paragraphs of this Lease am not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof nor shall any phrases in capital letters have any increased emphasis. This instrument contains all of the ingredients and conditions made between the parties hereto and may not be modified orally or in any other manner than by an agreement in writing signed by all of the parties hereto or their respective successors in interest. If Tenant fails to perform any obligation required under this Lease or by law or governmental regulation, Landlord in its sole discretion may with ten (10) business days notice perform such obligation, in which event Tenant shall pay Landlord as additional rent all sums paid by Landlord in connection with such substitute performance within ten (10) business days following Landlord's written notice for such payment. Any delinquent sum shall bear interest at a reasonable lawful contract rate to be charged under California law. All monetary sums due from Tenant to Landlord under this Lease shall be deemed to be rent. Tenant acknowledges that neither Landlord or its affiliates or agents have made any agreements, representations, warranties or promises with respect to the demised Premises or the Building of which they are a part, or with respect to present or future rents, expenses, operations, tenancies or any other matter. Except as herein expressly set forth, Tenant relied on no statement of Landlord or its agents for that purpose. -23- 24 48. ARBITRATION: It is the express intention of the parties that any claim or controversy of any land arising out of or relating in any way to this Agreement shall be resolved only by submission to binding arbitration in accordance with the then prevailing American Arbitration rules with the following modifications: (a) The Parties will attempt to agree upon one arbitrator: in the event that they cannot so agree, them shall be three (3) arbitrators, one appointed in writing by each of the parties within five (5) days after either party gives notice to the other of failure to agree on a single arbitrator, and a third arbitrator shall be chosen within ten (10) days by the two (2) arbitrators appointed by the parties. Should either party refuse or neglect to name the arbitrator to be appointed by it within said five (5) days, such party shall be conclusively presumed to have waived its right to appoint such arbitrator, the arbitrator named by the other party may appoint the third arbitrator, and such two arbitrators may proceed with determination of the dispute. Should the two (2) arbitrators to be appointed by the parties fail to choose a third arbitrator within said ten (10) days, the Arbitration Association shall name the third arbitrator on the request of either party. (b) Arbitration shall take place in the County of Santa Clara, California. (c) Notwithstanding any provision to the contrary in the applicable law or in the rules of the American Arbitration Association, the arbitrators shall have authority to award injunctive relief, specific performance, and damages for lost profits, as well as punitive and consequential damages of any nature, in addition to awarding actual damages, the cost of the arbitration and reasonable attorney's fees. (d) Pursuant to California Code of Civil Procedure l283.1(b), the Parties agree that the provisions of 1283.05 are hereby incorporated into, made a part of and are applicable to this Agreement to arbitrate solely for the purpose of obtaining the production of documents. (e) To the extent not covered by the arbitrator's award, the cost of the arbitration shall be shared equally by the parties. (f) Any award rendered by the arbitrator may be entered for enforcement, if necessary, in any court of competent jurisdiction, the party against whom enforcement is sought bearing the costs and expenses, including -24- 25 IN WITNESS WHEREOF, Landlord and Tenant have executed these presents, the day and year first above written. LANDLORD: TENANT: SOBRATO INTEREST INTEGRATED INFORMATION a California Limited Partnership TECHNOLOGY, INC. a California Corporation BY: __________________________ BY: ______________________ ITS: Managing General Partner ITS: President -25- 26 LANDLORD'S CONSENT TO ALTERATIONS AND IMPROVEMENTS Premises: 2445 Mission College Boulevard, Santa Clara, CA Landlord: Sobrato Interests Tenant: 8 x 8 Lease Agreement Dated: July 3, 1990 Pursuant to Paragraph 4 of the Lease Agreement between the Parties, by signature below, Landlord consents to the construction by Tenant of the alterations and improvements proposed in accordance with the following description: Install a Fiber Optic cable for 8 x 8, Inc.: This will require Brooks Fiber Communications to place 45 feet of 4" conduit rising on the rear of building 2445 at the telephone/equipment room. The conduit win start from the outside at column D1 and penetrate into the telephone room. The 4" conduit will rise approximately 10 feet on the building exterior wall and terminate in a weatherproof NEMA enclosure and then enter the building. This consent is expressly conditioned upon Tenant's acknowledgment of and timely and faithful performance as follows: 1. Landlord's consent to the plans and specifications is an accommodation to Tenant only, and Landlord shall have no liability or responsibility, either express or implied, for the completeness or suitability of the plans and specifications for their intended purpose. 2. Tenant shall construct the improved alterations and improvements in accordance with all existing applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances. 3. Tenant will not commence construction until it has obtained validly issued and fully paid permits for the contemplated work. 4. Tenant will obtain Landlord's prior written consent to substantial and material changes in the nature or scope of the work. 5. Tenant will indemnify and hold Landlord harmless from any loss, cost, damage or expense of any kind or nature resulting from the work, including, without limitation, any loss or damage as result of defective work from any cause; any damage or injury to persons or property, including any damage to the structure or adjacent improvements; claims of workmen, suppliers and/or professional consultants, including mechanics lien claims; and any cost or expense incurred by Landlord in defense of, repair of or payment of such claims, including its reasonable attorneys' fees. Upon written demand from Landlord, Tenant shall immediately pay to Landlord any such cost or 27 expense incurred by Landlord, and such obligation shall be a claim for "additional rent" due from Tenant under the terms of the Lease Agreement. 6. If applicable, Tenant covenants and agrees it will not interfere with the use or occupancy of the premises by other tenants, or their licensees or invitees, and will not disturb their quiet enjoyment of the premises and appurtenant amenities, including access to parking, etc. 7. Tenant agrees to post and insure continued posting of the statutory Notice of Non responsibility of Landlord prior to commencement of any of the work. 8. On or before the expiration of the term or sooner termination of the Lease, Tenant shall remove all of its personal property, trade fixtures and any alterations and improvements constructed hereunder from the premises unless the Landlord shall notify Tenant in writing of any exception to this obligation and all property not so removed shall be deemed abandoned by Tenant. Any damage or destruction caused by Tenant's removal of such items shall be repaired and paid for at Tenant's sole cost and expenses. 9. Tenant agrees to provide Lessor with half size (15" X 21") vellums of the as-built floor, electrical and mechanical plans describing the entire Premises within 2 weeks of completion of all alterations and improvements that properly reflect all of the demised premises in its revised state. Landlord: Sobrato Interests By: _________________________ Date: _______________________ Tenant: 8 x 8, Inc. By: _________________________ Date: _______________________ -2- 28 LANDLORD'S CONSENT TO ALTERATIONS AND IMPROVEMENTS PREMISES: 2445 Mission College Boulevard LANDLORD: Sobrato Interests, a California Limited Partnership TENANT: Integrated Information Technology, Inc. LEASE AGREEMENT DATED: July 3, 1990 Pursuant to Paragraph 10 of the Lease Agreement between the Parties, by signature below, Landlord consents to the construction by Tenant of a wall mounted sign at 2445 Mission College Boulevard proposed in accordance with the specifications submitted to Landlord dated February 22, 1991: This consent is expressly conditioned upon Tenant's acknowledgment of and timely and faithful performance as follows: 1. Landlord's consent to the plans and specifications is an accommodation to Tenant only, and Landlord shall have no liability or responsibility, either express or implied, for the completeness or suitability of the plans and specifications for their intended purpose. 2. Tenant shall construct the improved alterations and improvements in accordance with all existing applicable municipal, local, state and federal laws, statutes, rules, regulations and ordinances. 3. Tenant will not commence construction until it has obtained validly issued and fully paid permits for the contemplated work. 4. Tenant will obtain Landlord's prior written consent to substantial and material changes in the nature or scope of the work. 5. Tenant will indemnify and hold Landlord harmless from any loss, cost, damage or expense of any kind or nature resulting from the work, including, without limitation, any loss or damage as result of defective work from any cause; any damage or injury to persons or property, including any damage to the structure or adjacent improvements; claim of workmen, suppliers and/or professional consultants, including mechanics lien claims; and any cost or expense incurred by Landlord in defense of, repair of or payment of such claims, including its reasonable attorneys' fees. Upon written demand from Landlord, Tenant shall immediately pay to Landlord any such cost or expense incurred by Landlord, and such obligation shall be a claim for "additional rent" due from Tenant under the terms of the Lease Agreement. 6. If applicable, Tenant covenants and agrees it will not interfere with the use or occupancy of the premises by other tenants, or their licensees or invitees, and will not disturb their quiet enjoyment of the premises and appurtenant amenities, including access to parking, etc. 29 7. Tenant agrees to post and insure continued posting of the statutory Notice of Nonresponsibility of Landlord prior to commencement of any of the work. 8. On or before the expiration of the term or sooner termination of the Lease, Tenant shall remove all of its personal property, trade fixtures and any alterations and improvements consumed hereunder from the premises unless the Landlord shall notify Tenant in writing of any exception to this obligation and all property not so removed shall be deemed abandoned by Tenant. Any damage or destruction caused by Tenants removal of such items shall be repaired and paid for at Tenant's sole cost and expenses. LANDLORD: Sobrato Interests, a California Limited Partnership By: _________________________ Date: _______________________ TENANT: Integrated Information Technology, Inc. By: _________________________ Date: _______________________ -2- 30 FIRST AMENDMENT TO LEASE This Amendment is made this 31st day of March 1991 by and between SOBRATO INTERESTS, a California Limited Partnership having an address at 10600 N. DeAnza Blvd., Suite 200, Cupertino, California 95014 ("Landlord") and INTEGRATED INFORMATION TECHNOLOGY, INC., a California corporation ("Tenant"). WITNESSETH WHEREAS Landlord and Tenant entered into a lease ("Lease") dated July 3, 1990 for the premises ("Premises") located at 2441 Mission College Boulevard, Santa Clara, California; and WHEREAS effective ]December 15, 1990, Landlord and Tenant wish to modify the Lease to document the Commencement Date; and WHEREAS Landlord and Tenant wish to modify the address of the Premises to 2445 Mission College Boulevard, Santa Clara, California; and WHEREAS Landlord and Tenant wish to modify the square footage, adjust Tenant's Allocable Share of the Common Area Costs and adjust the rent schedule of the Premises to reflect the elimination of 63 square feet by the toilet room constructed for Stanford Telecommunications' cafeteria. NOW, THEREFORE, in order to effect the intent of the parties as set forth above and for good and valuable consideration exchanged between the parties, the Lease is amended effective December 15, 1990 as follows: 1. The Lease Commencement Date shall be December 15, 1990 and the Lease shall expire on December 14, 1997. 2. The address of the Premises shall be changed to 2445 Mission College Boulevard and the square footage of the Premises shall be reduced to 42,387 square feet. 3. The revised rent schedule, total shall be $3,346,877.52, paid in monthly installments as follows: 12/15/90-12/14/91 $16,954.80 $203,457.60 $0.40/sq.ft. 12/15/91-12/14/92 $35,181.21 $422,174.52 $0.83/sq.ft. 12/15/92-12/14193 $40,267.65 $483,211.80 $0.95/sq.ft. 12/15/93-12/14/94 $42,810.87 $513,730.44 $1.01/sq.ft. 12/15/94-12/14/95 $45,354.09 $544,249.08 $1.07/sq.ft. 12/15/95-12/14/96 $47,897.31 $574,767.72 $1.13/sq.ft. 12/15/96-12/14/97 $50,440.53 $605,286.36 $1.19/sq.ft. 31 4. Tenant's Allocable Share of Building Costs shall be changed to 42.27%, Share of Project Costs to 10.11%, and for all tax-related expenses, to 17.89%. 5. Except as hereby amended, the Lease and all of the terms, covenants and conditions thereof are ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have set their hands to this Amendment as of the day and date first above written. LANDLORD TENANT Sobrato Interests Integrated Information Technology, Inc., a California limited partnership a California corporation By: ______________________________ By: _______________________________ Its: General Partner Its: Vice President -2- 32 SECOND AMENDMENT TO LEASE This second amendment to lease ("Amendment") is made this 22nd day of March, 1994 by and between Sobrato Interests, a California Limited Partnership having an address at 10600 N. DeAnza Blvd., Suite 200, Cupertino, California 95014 ("Landlord") and Integrated Information Technology, Inc., a California Corporation having its principal place of business at 2445 Mission College Boulevard, Santa Clara, California ("Tenant"). WITNESSETH WHEREAS Landlord and Tenant entered into a lease dated July 3, 1990 and a First Amendment to Lease dated March 31, 1991 (collectively the "Lease") for the premises ("Premises") located on the first floor of 2441-45 Mission College Boulevard, Santa Clara, California; and WHEREAS effective July 6, 1993, Landlord and Tenant wish to modify the Lease to reflect the Tenant's lease of certain space within the Building totaling an additional 13,568 rentable square feet on the first and second floors ("Expansion Space") and the first floor cafeteria area ("Cafeteria") of 2,933 square feet as more particularly outlined in red on Exhibit "A-1 & A-2" attached hereto. NOW, THEREFORE, in order to effect the intent of the parties as set forth above and for good and valuable consideration exchanged between the parties, the Lease is amended as follows: 1. Beginning on August 8, 1993 and continuing through the expiration of the Lease on December 14, 1997 the Premises shall be increased to include the Cafeteria resulting in a total square footage leased by tenant of 45,320 square feet and the monthly rent due from Tenant shall increase at that time by $3,000.00 to $43,267.65. 2. Beginning on April 1, 1994 or sixty (60) days following the termination of the existing lease with Xerox for the Expansion Space, whichever is later, and continuing through the expiration of the Lease on December 14, 1997 the Premises shall be increased to include Expansion Space resulting in a total square footage leased by Tenant of 58,888 square feet and the monthly rent shall increase by $11,125.76 at that time to $56,936.63. 3. The rent schedule specified in the First Amendment to Lease shall be modified as follows: 04/01/94-12/14/94 $56,936.63 per month 12/15/94-12/14/95 $59,479.85 per month 12/15/95-12/14/96 $62,023.07 per month 12/15/96-12/14/97 $64,566.29 per month 4. Within five (5) days of the date of this Amendment Tenant shall deposit $15,766.50 as an additional security deposit to provide a total security deposit of $51,000.00. 33 5. Tenant's Allocable Share of Building Costs for costs allocable to the entire Building shall be equal to 58.73%, Share of Building Costs for costs allocable to the second floor only shall be equal to 24.56%, Share of Project Costs shall be equal to 14.04% and Share of tax related costs (shared with 2451 Mission) shall be equal to 24.85%. Tenant shall not be responsible for its pro-rata share of utilities until Tenant occupies any portion of the Expansion Space. 6. No tenant improvement allowance shall be provided by Landlord for the Cafeteria or the Expansion Space. 7. Tenant agrees to allow access to the Cafeteria to SynOptics Communication and Xerox ("SynOptics") on the same basis as it is provided to Tenant's employees through December 31, 1993. In the event, SynOptics or Xerox utilizes the Cafeteria, the rent paid by Tenant for the Cafeteria during such period of shared use shall be reduced to an amount equal to $3,000 times a fraction, the numerator of which is the headcount of Tenant, the denominator of which is the headcount of Tenant plus the headcount of SynOptics and Xerox within the Project. 8. Article 7 (Construction) and Article 40 (Option and Right of First Offering) are deleted. 9. Landlord shall install, at its expense, one door in the northwest corner of the Expansion Space and shall reconfigure the first floor loading area as shown on Exhibit "A-1 & A-2". 10. Tenant shall have the right to utilize the freight elevator within the SynOptics' or Xerox space one or two times monthly with prior written notice to, and accompaniment by, SynOptics or Xerox. In addition Tenant shall have the right to utilize the passenger elevator at the Xerox lobby as necessary to accommodate handicapped persons pursuant to ADA and other applicable regulations. 11. This Amendment shall replace that certain Second Amendment to Lease executed by the parties dated September 23,1993. 12. All defined terms shall have the same meanings as in the Lease, except as otherwise stated in this Amendment. 13. Except as hereby amended, the Lease and all of the terms, covenants and conditions thereof shall remain unmodified and in full force and effect. In the event of any conflict or inconsistency between the terms and provisions of this Amendment and the terms and provisions of the Lease, the terms and provisions of this Amendment shall prevail. -2- 34 IN WITNESS WHEREOF, the parties hereto have set their hands to this Amendment as of the day and date first above written. LANDLORD TENANT Sobrato Interests, Integrated Information Technology, Inc., a California Limited Partnership a California Corporation By: ______________________________ By: _____________________________________ Its: General Partner Its: Chief Operating Officer -3- 35 BUILDING FOOTAGE ANALYSIS (SQ. FT.)
XEROX ITT SYNOPTICS COMMON ------ --------- ------ FIRST FLOOR 45,115 1,053 192 795 1,018 ------ ----- ----- TOTALS 45,910 + 2,071 192 = 48,173 PRORATED 182 8 0 TOTAL 46,094 2,079 0 = 48,173 SECOND FLOOR 11,716 36,578 3,615 = 52,099 190 ------ ------ ----- TOTALS 11,906 + 36,578 + 3,615 = 52,099 PRORATED 888 2,727 0 TOTAL 12,794 + 39,305 0 = 52,099 ------------------------------------------------------------- TOTALS 58,888 + 41,384 + 0 = 100,272
-4- 36 [XEROX/SYNOPTICS SQUARE FOOTAGE MAP] 37 [XEROX/SYNOPTICS SQUARE FOOTAGE MAP] 38 THIRD AMENDMENT TO LEASE This third amendment to lease ("Amendment") is made this 18th day of December, 1995 by and between Sobrato Interests, a California Limited partnership having an address at 10600 N. DeAnza Blvd., Suite 200, Cupertino, California 95014 ("Landlord") and Integrated Information Technology, Inc., a California corporation having its principal place of business at 2445 Mission College Boulevard, Santa Clara, California ("Tenant"). WITNESSETH WHEREAS Landlord and Tenant entered into a lease dated July 3, 1990 a First Amendment to Lease dated March 31, 1991 and a Second Amendment to Lease dated March 22, 1994 (collectively the "Lease") for the premises ("Premises") located on the first and second floors of 2441-2445 Mission College Boulevard, Santa Clara, California; and WHEREAS effective October 25, 1995, Landlord and Tenant wish to clarify the language in the Lease regarding the payment of common area expenses for the second floor space leased to Tenant ("Expansion Space"); NOW, THEREFORE, in order to effect the intent of the parties as set forth above and for good and valuable consideration exchanged between the parties, the Lease is amended as follows: 1. Beginning on May 14, 1994, the date the Expansion Space was added to the Premises, Tenant agrees to reimburse Landlord for common area operating expenses related to Tenants occupancy of the Expansion Space, on a monthly basis as provided herein. Tenants allocable share of such costs shall be twenty-four percent (24%). The foregoing electric allocable shares shall be subject to further adjustment in the event (i) the meter configuration is modified so the meters no longer service just the second floor or (ii) if either tenant on the second floor disproportionately utilizes the utility services. 2. The parties estimate that Tenants allocable share of costs for common area operating expenses associated with the Expansion Space for 1994 and 1995 will be equal to the following: Electric, Water - $12,000 x 24% $2,880.00 HVAC Monthly Maint. (11,906 sf x $.007 psf) $83.00 Janitorial Common Area $72.00 HVAC Common Area (3,615 sf x $.007 x 24%) $6.00 ------------ Total $3,041.00 In addition, 24% of all costs and expenses for repairs to the Common Areas and building systems (which are not included in the above costs and cannot be determined at this time) shall be paid by Tenant to Landlord promptly when due. 39 Within thirty (30) days following the end of each calendar year, Landlord shall provide Tenant an accounting reconciling the amount paid by Tenant against the amount owed by Tenant based on the actual costs for the year. Any amount due from one party to the other shall be paid within ten (10) days of such determination. 3. All defined terms shall have the same meanings as in the Lease, except as otherwise stated in this Amendment. 4. Except as hereby amended, the Lease and all of the terms, covenants and conditions thereof shall remain unmodified and in full force and effect. In the event of any conflict or inconsistency between the terms and provisions of this Amendment and the terms and provisions of the Lease, the terms and provisions of this Amendment shall prevail. IN WITNESS WHEREOF, the parties hereto have set their hands to this Amendment as of the day and date first above written. LANDLORD TENANT Sobrato Interests, Integrated Information Technology, Inc., a California Limited Partnership a California Corporation By: ______________________________ By: _____________________________________ Its: General Partner Its: Vice President, Finance -2- 40 I.I.T. XEROX CHGS I.I.T.
TENANT: 442TR 2445 MISSION COLLEGE DATE XEROX CHARGES MARK-UP 8.5% AMOUNT 5/15/94-8/31/94 $10,822.63 + $919.92 = $11,742.55 9/1/94-11/30/94 $9,123.00 + $775.46 = $9,898.46 12/1/94-4/30/94 $15,205.00 $1,292.43 = $16,497.43 ---------- TOTALS $35,150.63 $2,987.80 $38,138.43 ----------
-1- 41 EXHIBIT "A" PREMISES [FLOOR PLAN] FEATURES - - Prestigious location adjacent to Marriott Hotel, two blocks from City of Santa Clara's Convention Center, Techmart, and Light Rail Terminus. - - Dock high loading facilities. - - Surrounded by lush landscaping and waterscape - - 296 Parking spaces [3.6/1000 SF] - - 225 Tons of HVAC, 4000 Amps at 277/480v - - All Ground Floor Space - - Use of full service cafeteria - No Rental to be Paid. - - Cafeteria to be relocated at landlord's expense to the northeast corner of the building and Exhibit to be revised accordingly 18 42 EXHIBIT "B" WORKING DRAWINGS 19 43 FOURTH AMENDMENT TO LEASE This fourth amendment to lease ("Fourth Amendment") is made this _____ day of March, 1997 by and between Sobrato Interests, a California limited partnership having an address at 10600 North De Anza Boulevard, Suite 200, Cupertino, California 95014 ("Landlord") and 8x8, Inc., a Delaware corporation ("Tenant"), which changed its name in April 1996 from Integrated Information Technology, Inc. ("IIT"). WITNESSETH WHEREAS Landlord and IIT entered into a lease dated July 3, 1990, a lease amendment dated March 31, 1991, a second amendment dated March 22, 1994, and a third amendment dated December 18, 1995, (collectively the "Lease") for the premises located at 2445 Mission College Boulevard, California ("Premises"); and WHEREAS effective April 1, 1997, Landlord and Tenant wish to modify the Lease to (i) change the expiration date of the Lease, (ii) specify the monthly rent due during the extended Lease term, and (iii) modify the provisions of Lease paragraph 39 regarding Tenant's Option to Extend the Lease; NOW, THEREFORE, in order to effect the intent of the parties as set forth above and for good and valuable consideration exchanged between the parties, the Lease is amended effective April 1, 1997 as follows: 1. The expiration date of the Lease is changed from December 14, 1997 to April 30, 1999. 2. Monthly rent for the period from December 15, 1997 through April 30, 1999 is One Hundred Three Thousand Fifty Four and No/100 Dollars ($103,054.00), which represents 95% of current fair market value for the Premises. The parties acknowledge that the 5% discount reflects the fact that (i) Tenant is already occupying and using the Premises in its existing condition and (ii) Landlord is not incurring any costs or commissions associated with this Fourth Amendment. 3. The first two sentences of Lease paragraph 39 are deleted and replaced by the following: Landlord hereby grants to Tenant, upon and subject to the terms and conditions set forth in this paragraph 39 and the terms of paragraph 4 of the Fourth Amendment, the option ("Option") to extend the term of this Lease for an additional term ("Option Term"), which Option Term shall be for a period of forty-eight (48) months. The Option Term shall be exercised, if at all, by written notice to Landlord on or before December 5, 1998. 4. Tenant's ability to exercise its option to extend the Lease is expressly conditioned upon (i) the election by the tenant in balance of the Building ("the Other Tenant") not to lease the Premises, and (ii) the Other Tenant's election to exercise its option to extend its lease for the remaining portion of the Building, which elections are required to be made by the Other Tenant on or before December 1, 1998. Further, in the event the Other Tenant does not exercise its option to extend its lease on the -1- 44 remaining portion of the Building, instead of Tenant having an option to extend the lease for the Premises, Tenant shall only have an option to extend the lease on the entire Building. 5. All defined terms shall have the same meanings as in the Lease, except as otherwise stated in this Fourth Amendment. 6. Except as hereby amended, the Lease and all the terms, covenants and conditions thereof shall remain unmodified and in full force and effect. In the event of any conflict or inconsistency between the terms and provisions of this Fourth Amendment and the terms and provisions of the Lease, the terms and provisions of this Fourth Amendment shall prevail. IN WITNESS WHEREOF, the parties hereto have set their hands to this Fourth Amendment as of the day and date first above written. LANDLORD TENANT Sobrato Interests, 8x8, Inc., a California limited partnership a Delaware corporation By: By: ------------------------------ ------------------------------ Its: General Partner Its: ---------------------------- -2-

1 EXHIBIT 10.18 TECHNOLOGY LICENSE AGREEMENT This Agreement is made between U.S. ROBOTICS ACCESS CORP., a Delaware corporation, with principal offices at 8100 North McCormick Boulevard, Skokie, IL 60076-2999, (herein called "USR"); and 8x8, INC., a Delaware corporation, with principal offices at 2445 Mission College Blvd., Santa Clara, CA 94027 (herein called "8x8"), effective the 5th day of May, 1997 (the "Effective Date"). The parties include any affiliate of a party; an "affiliate" is defined as the parent company of a party and any company that is controlled directly or indirectly by that party or its parent company through more than fifty percent (50%) ownership, provided such affiliate agrees to be bound by this agreement. WHEREAS, 8x8, a developer and a supplier of videoconferencing products, intends to license certain technology to USR according to these terms and conditions; and WHEREAS, USR, a developer and a supplier of modems, certain information access products and other products, intends to license certain technology to 8x8 according to these terms and conditions: NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained hereinafter, 8x8 and USR agree as follows: 1. LICENSES. (a) Licensed Technology. The license from 8x8 to USR covers: . the technology that 8x8 has relating to videoconferencing in a standalone format (i.e. in a system that is not directly connected to a personal computer), and thus includes what 8x8 calls its "videocommunicators," i.e. ViaTV, LCD Phone and variations on them (such as the Truedox design that was also displayed during 8x8's presentation on January 21, 1997), which are herein called the "VC"; VCP chip and current variations relevant to videoconferencing like LVP, which are herein called the "VCP"; . any source and object code related to videoconferencing 8x8 has that will work in the VC, including H.320, H.323, H.324, and MPEG (other than on MPP or MPPex, as excluded below) and related controls of the standalone system, such as the controls from the telephone keypad, herein called the "VC Code"; . any technology 8x8 has developed for direct connection to the personal computer, such as DVC6 or the Vidus CompressionCam and related technology (demonstrated to USR by Sanyo, based on its nonexclusive license of technology from 8x8's subsidiary, Vidus, Inc.) . all development tools applicable to the "Licensed Technology" that 8x8 can provide to USR without violating copyright or license agreements. 2 All of the technology described above is herein collectively called "Licensed Technology." Excluded from the Licensed Technology is: . the web browser technology developed by 8x8 with PlanetWeb, Inc. . the audio code 8x8 licensed from Signal Processing Associates ("SPA") . the modem technology licensed from ELSA GmbH [though 8x8 will use its best efforts to persuade each of those parties (at the request of USR) to make available such technology to USR on the same terms and conditions as such technology is available to 8x8 (in which case thereafter USR will share enhancements to technology with 8x8 as provided below for the duration that the parties are sharing enhancements)]. Also excluded from the Licensed Technology is: . the MPP and MPPex (licensed exclusively to ESS Technology, Inc. for MPEG and CD Players), and related MPEG code and software to the extent used on MPP and MPPex; except that USR can use the MPEG on the VCP. The Licensed Technology is as it exists on the Effective Date in written and electronic documents, including schematics, data base tapes, software, source and object code for delivery to USR, and, except for the foregoing, does not include delivery of any physical products; provided, however, future modifications and enhancements to the Licensed Technology pursuant to this Agreement shall become part of the "Licensed Technology." (b) Grant: 8x8 will immediately deliver to USR the Licensed Technology and hereby grants to USR a nonexclusive (except as set forth in Section 4 hereof), nonassignable (except as allowed under Section 14 hereof) world-wide license to use the Licensed Technology and to make, have made, use, market and sell products containing or embodying such Licensed Technology, and enhancements as described below, including rights under any 8x8 patents or copyrights relevant thereto (including after-acquired rights). USR is free to use and market the Licensed Technology as follows: . Sell systems (what 8x8 calls its "videocommunicators," i.e., ViaTV, LCD Phone and variations on them) for itself (USR) or to Original Equipment Manufacturers under their brand names ("OEMs"), including selling systems without casing for incorporation into other manufacturers products such as television sets. . Sell direct computer products (such as DVC6 and Compression Cam) for itself (USR) or to Original Equipment Manufacturers under their brand names -2- 3 ("OEMs"), including selling systems for incorporation into other manufacturers products. . Sell "daughter" cards or partial boards as subsystems for another manufacturer's video solution. USR is free to use the 8x8 H.323 stack and the H.245 and H.223 code for incorporation into its own products of all types. (c) Consideration: In consideration therefor, USR will pay 8x8 [*] immediately on execution of this Agreement. (d) Royalty: On any system that USR sells that incorporates any Licensed Technology (excluding USR products in which the only use of the Licensed Technology is the incorporation of the 8x8 H.323 stack, the H.245 code or the H.223 code), USR agrees to pay 8x8 the following royalties:
CUMULATIVE NUMBER OF SYSTEMS SOLD BY USR UNDER THIS AGREEMENT ROYALTY PER SYSTEM OWED 8x8 ON THOSE SYSTEMS 1 - 20,000 [*] 20,001 - 40,000 [*] 40,001 - 60,000 [*] 60,001 - 80,000 [*] 80,001 - 100,000 [*] 100,001 - 120,000 [*] 120,001 - 140,000 [*] 140,001 - 160,000 [*] 160,001 - 180,000 [*] 180,001 - 200,000 [*] 200,001 - 220,000 [*] >220,000 [*]
If USR elects to manufacture the VCP, then for each such chip incorporated into a system and sold (or sold on the open market as permitted herein if the option is exercised), USR agrees to pay 8x8 the following royalties: ____________________________________________________ [*] Confidential treatment requested. -3- 4
CUMULATIVE NUMBER OF CHIPS SOLD BY USR UNDER THIS AGREEMENT ROYALTY/CHIP OWED 8x8 ON THOSE CHIPS 1 - 20,000 [*] 20,001 - 40,000 [*] 40,001 - 60,000 [*] 60,001 - 80,000 [*] 80,001 - 100,000 [*] 100,001 - 120,000 [*] 120,001 - 140,000 [*] 140,001 - 160,000 [*] 160,001 - 180,000 [*] 180,001 - 200,000 [*] 200,001 - 220,000 [*] >220,000 [*]
Provided, however that the chip royalty will be proportionately reduced by the die area on the chip attributable exclusively to enhancements by USR. Also, the [*] royalty on the chip is not due on any chip purchased by USR from 8x8. If USR uses the 8x8 H.323 stack, the H.245 code or the H.223 code on some system other than 8x8's chip USR agrees to pay 8x8 a royalty of [*] per port (or end user customer); provided further, that USR does not owe such [*] royalty if the H.323 stack, the H.245 code or the H.223 code is developed independently of 8x8's technology in good faith ("clean room" environment) and used on systems independent of 8x8's chip; and provided further, that with this exception, the VC Code may only be used on the VCP subject to royalty above. Such royalty will be paid within 45 days of the end of each USR fiscal quarter. Royalties shall not be due, and if already paid shall be credited to USR, for systems and chips sold by USR but returned by the purchaser. 8x8 is entitled to audit the records of USR through 8x8's auditor, provided that (a) such audit shall occur no more than once per year, and (b) such auditor (i) shall be acceptable to USR and (ii) shall have executed an appropriate nondisclosure agreement. If such an audit discloses a deficiency in the royalty paid of greater than five percent (5%), then USR will pay the reasonable cost of such audit plus interest on the deficiency from the time due until paid of twelve percent (12%) simple interest per annum. USR will give 8x8 in the report each quarter a good faith estimate of the number of systems that were for direct computer products (DVC6 or CompressionCam). (e) Grant back from USR: USR will provide 8x8 theUSR technical and other confidential and proprietary information that USR determines is necessary or useful for 8x8 to improve ____________________________________________________ [*] Confidential treatment requested. -4- 5 the modem and speakerphone functionality for the video communicator (hereinafter "USR Information") and USR hereby grants to 8x8 a paid up, royalty-free, nonexclusive, nonassignable world-wide license to use the USR Information to make, have made, use or sell products incorporating the USR Information; provided, however, (i) such products shall include 8x8's videophone technology only, and not direct computer products such as DVC6 or CompressionCam; (ii) 8x8 shall use the USR information only for its own branded system products, and shall not sublicense or otherwise disclose the USR information to third parties for use in their products or for any other reason; and (iii) such improvements shall be included in the Licensed Technology and thereby licensed to USR for incorporation into USR's products. Notwithstanding the foregoing, in the event USR sells one or more of its products to OEMs, then 8x8 shall thereafter have the right to sell its own similar products to OEMs. Upon determining that it will sell its product(s) to OEMs, USR shall give 8x8 notice of that decision. (f) Source Code: All source code licensed hereunder, whether from 8x8 to USR or from USR to 8x8, shall, in addition to the terms and conditions of this Agreement, be subject to the terms of the Source Code License in the form of Exhibit A attached hereto. 2. LICENSING OF ENHANCEMENTS. Each party agrees [*] to license to the other party any enhancements it makes to the Licensed Technology. (Such enhancements created by 8x8 shall then become Licensed Technology.) Such enhancements shall be delivered promptly upon their development, until USR discontinues the licensing of such enhancements by both parties by providing notice to 8x8 (but enhancements delivered by either party up to the date of such notice shall continue to be licensed); provided, however, that (a) 8x8 will in any event deliver the first taped out version of the VCPex, and (b) USR will in any event deliver to 8x8 the initial enhancements it makes to the VCP, VCPex, or VC relating to modem and speakerphone technology, including porting V.34 to 8x8's chip. (All such enhancements by USR are hereinafter called "USR Enhancements.") Such deliveries by 8x8 and USR, along with related development tools (to the extent delivery can be done without paying a fee to third parties or violating other agreements) will be in the same form and completeness as similar prior deliveries by 8x8 of Licensed Technology, and with engineering support as provided below. Nothing herein entitles USR to receive enhancements developed by other licensees of 8x8, and nothing herein entitles 8x8 to sublicense, distribute or otherwise disclose USR's enhancements to other licensees of 8x8; provided further that 8x8 will limit production of chips with USR Enhancements to incorporation on finished systems produced (made or have made) and sold or leased by 8x8, and in no event will 8x8 sell or otherwise make available on the open market such components in component form or on printed circuit boards for incorporation into the systems of others; and thus, the chip that 8x8 sells on the open market to its other chip customers will have deleted from it any USR Enhancements. After June 30, 2000, either party may elect to terminate sharing of enhancements developed after date of such termination. ____________________________________________________ [*] Confidential treatment requested. -5- 6 3. ENGINEERING SUPPORT. 8x8 will provide engineering support to USR, for all Licensed Technology, including all such technology initially delivered to USR and all enhancements. Such engineering support shall be sufficient to enable USR quickly to implement the Licensed Technology and enhancements for demonstration purposes and to enable USR to achieve its objectives of volume shipments as soon as possible. USR shall provide comparable engineering support to 8x8 for the USR Enhancements. [*] If the receiving party asks the delivering party at any time for engineers or others to travel to the receiving party's location to support the technology delivery, and the other party agrees to do so, receiving party will pay the reasonable costs associated therewith, including the traveling party's labor costs for such personnel as well as travel (coach class on the airplane), meals and lodging. 4. EXCLUSIVITY. 8x8 agrees that for a period of one year beginning on the Effective Date hereof it will not grant to any third party any licenses to use the Licensed Technology, or any portion thereof, or to make, have made, use, market or sell products with such Licensed Technology, or any portion thereof, provided 8x8 may still deliver to its customers object code with chips and reference designs for boards; 8x8 may deliver to its customers example source code needed by customers for integration of 8x8's chips into customer products, including PC driver code and microprocessor controller code for controlling VCP applications (including changing display size, logo, trademark, menu, options and features); 8x8 can honor currently outstanding licenses; and 8x8 can sell to OEMs its system level products (whether partial boards, complete boards or partial or complete systems branded as the customer desires) for resale in that form or incorporated in other systems (like TV) as the customer desires. None of the delivery of source or object code to customers shall include USR Information other than as allowed in section 1(c). 5. VCP PRICING. 8x8 agrees to sell VCP chips to USR (as enhanced with enhancements that become part of the Licensed Technology as described above) at a price [*]. USR is entitled to audit the records of 8x8 through USR's auditor, solely to verify 8x8 pricing, provided that (a) such audit shall occur no more than once per year, and (b) such auditor (i) shall be acceptable to 8x8 and (ii) shall have executed an appropriate nondisclosure agreement. If such an audit discloses a pricing discrepancy unfavorable to USR of greater than five percent (5%), then 8x8 will pay the reasonable costs of such audit plus interest on the discrepancy of twelve percent (12%) simple interest per annum. 6. WARRANTIES (a) 8x8 warrants that (i) all portions of the Licensed Technology owned by third party licensors of 8x8, if any, are provided to USR hereunder pursuant to appropriate authority of those third ____________________________________________________ [*] Confidential treatment requested. -6- 7 parties, and (ii) 8x8 owns all rights in and to all other portions of the Licensed Technology, free of any liens, claims, encumbrances or other restrictions that would impair USR's rights under this Agreement. The foregoing warranties exclude any warranty that the Licensed Technology does not infringe the intellectual property rights of any third party. However, 8x8 warrants that to the best of its knowledge the Licensed Technology does not infringe the intellectual property rights of any third party. (b) 8x8 warrants that the Licensed Technology shall be free of material defects and shall function in conformance with its published documentation and other specifications customarily provided to 8x8's licensors for a period of thirty (30) days from the date of delivery of the Licensed Technology. During such thirty-day period, USR may return the Licensed Technology to 8x8 for a full refund of all moneys paid to 8x8 hereunder if USR is not satisfied with the Licensed Technology. (c) 8x8 represents and warrants that as of the effective date of this agreement it has received no notice that the Licensed Technology infringes any patent, copyright, trade secret or other intellectual property right (collectively "Intellectual Property Rights") of any third party, though 8x8 has incorporated a patent license from DSP Group and is considering negotiating licenses of patents possibly applicable to G.723 (and USR would need to consider negotiating similar licenses for its benefit). 8x8 will immediately advise USR of any such notice received by 8x8 in the future as it applies to Licensed Technology, and whether the enhancement was done by 8x8 or USR; likewise, USR will notify 8x8 of any notice USR receives where there is a claim that applies to Licensed Technology, and whether the enhancement was done by 8x8 or USR. Each party bears the risk that some party claims or sues it with respect to alleged infringement of intellectual property rights of others; provided that the other party will cooperate in such litigation to the extent it can be helpful in defending against such claims of other third parties. (d) EXCEPT AS SET FORTH IN SECTIONS 6(a), (b) AND (c) ABOVE, NEITHER PARTY MAKES ANY WARRANTIES, EXPRESS OR IMPLIED, AS TO THE QUALITY, PATENTS OR COPYRIGHTS OF ANYTHING DELIVERED HEREUNDER AND ENHANCEMENTS, EXCEPT AS SPECIFIED IN THIS AGREEMENT. EACH PARTY MAKES NO INDEMNITY IN THE EVENT THAT THE OTHER PARTY IS SUED FOR ANYTHING RELATED TO THE LICENSED TECHNOLOGY OR ENHANCEMENTS HEREUNDER EXCEPT AS SPECIFIED IN THIS AGREEMENT, BUT EACH PARTY WILL COOPERATE IN THE EVENT OF SUCH LITIGATION TO ASSIST THE OTHER PARTY TO DEFEND SUCH LITIGATION. THE PARTIES SPECIFICALLY DISCLAIM LIABILITY FOR CONSEQUENTIAL DAMAGES. 7. CONFIDENTIAL INFORMATION. The parties will keep confidential any information provided to it by the other party that is proprietary to the other party and marked confidential; provided such information shall not be considered proprietary once it is in the public domain by no fault of the other party. Such confidentiality will be maintained by the other party with the same care that such party would use for its own confidential information, but in any event with reasonable care. -7- 8 8. RECRUITING. Until such time as the parties cease to share enhancements, each party agrees not to directly solicit the employment, either temporary, full time or consultancy, of any person after the effective date who was employed by the other party within one year of the date of such potential hiring. 9. COMPLETE AGREEMENT. This is a complete agreement binding upon the parties, their heirs, successors and assigns. It may only be modified in writing signed by officers of both parties. 10. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Delaware, excluding its choice-of-law provisions. 11. PUBLIC STATEMENTS. The parties agree immediately to publish a joint press release stating that Licensee has licensed 8x8's videoconferencing technology, and 8x8 endorses USR's "x2" and related technologies. Further, either party is free to file with the SEC any document required to be filed there on advice of counsel (redacted in a form advised by counsel). Other public statements and press releases related to this licensing agreement are subject to approval in advance by both parties; neither party shall use the name of the other party without advance approval. 12. INDEPENDENT CONTRACTORS. The parties are independent contractors, and nothing herein shall be deemed to create any agency, joint venture or partnership relationship between them. Neither party shall have the right to bind the other to any obligation, nor have the right to incur any liability on behalf of the other. 13. FORCE MAJEURE. Neither party shall be liable to the other for delay or failure to perform if and to the extent such delay or failure to perform is due to causes beyond the reasonable control of the party affected. 14. ASSIGNMENT. Neither party shall assign this Agreement or its rights hereunder without the prior written consent of the other party, except to an affiliate of that party; provided, however, in the event of a change in control of one party through a merger, consolidation or other business combination or acquisition by or with a person or entity a material portion of whose business is the sale or licensing of products that are competitive with products of the other party, the other party shall have the right to terminate the licenses granted by both parties hereunder. Notwithstanding the foregoing, 8x8 agrees that USR's parent company's merger transaction with 3COM, as previously announced to the public, does not give rise to any such termination right of 8x8. 15. NON-WAIVER. No course of dealing or failure of either party to enforce strictly any term, right, obligation or provision of this Agreement shall be construed as a waiver of such provision. 16. SEVERABILITY. If any provision of this Agreement shall be held invalid or unenforceable, such provision shall be deemed deleted from the Agreement and replaced by a valid and enforceable provision that achieves, as much as possible, the same purpose, and the remaining provisions of the Agreement shall continue in full force and effect. -8- 9 IN WITNESS WHEREOF, the parties have executed this Agreement. U.S. ROBOTICS ACCESS CORP. 8x8, INC. By: /s/ Michael S. Seedman By: /s/ Joe Parkinson ---------------------------------- --------------------------------- Name: Seedman Name: Joe Parkinson -------------------------------- ------------------------------- Title: SVP-GM Title: Chairman ------------------------------- ------------------------------ Date: May 12, 1997 Date: May 5, 1997 -------------------------------- ------------------------------- -9- 10 EXHIBIT A SOURCE CODE LICENSE This Source Code License ("License") is effective this _____ day of ____________, 19__, by and between ___________________________ ("Licensor") and ___________________________ ("Licensee"). This License is an addendum to the Technology License Agreement between the parties dated _______________ ("Agreement"), and all Source Code licensed hereunder is subject to all terms and conditions of that Agreement as well as those terms and conditions set forth below. In the event of any conflict or inconsistency between the Agreement and this License, this License shall take precedence. 1. License Grant. Licensor grants to Licensee, and Licensee accepts, a license to use internally and copy the Source Code described in Exhibit I attached hereto solely for the purpose of developing the products described in the Agreement. 2. Restrictions. 2.1 Licensee may make a reasonable number of copies of the Source Code solely for its own internal use under the terms of this License, provided that all legal notices set forth on the Source Code are reproduced on such copies. 2.2 Licensee shall limit access to the Source Code to those of its employees who have a need to know for the purpose of enabling Licensee to perform under this License and the Agreement. Licensee shall ensure that all of its employees given access to the Source Code shall be bound by Licensee's standard confidentiality agreement, copies of which may be requested by Licensor upon demand, and which shall contain nondisclosure and usage restrictions consistent with those set forth herein. 2.3 Except in furtherance of the license granted above, Licensee shall not (i) modify, alter or prepare derivative works based on the Source Code or (ii) engage in or cause the reverse engineering, disassembly or decompilation or similar manipulation of the Source Code. Further, Licensee acknowledges that it shall not lend, sell, assign, sublicense, lease, hypothecate, disclose, disseminate or otherwise transfer the Source Code to any third party in any media or permit any third party to use, execute, reverse engineer, disassemble, decompile or engage in any similar manipulation of the Source Code or any part thereof. 2.4 Notwithstanding the earlier termination of this License, the obligations of this section shall remain in effect until such time as the Source Code becomes publicly known, through no act or failure to act on Licensee's part. 3. Ownership of Source Code. Source Code and all copies, in whole or in part, and all additional materials provided therewith, as described in Exhibit I, are and shall remain the property of Licensor. This Agreement grants no rights other than those set forth herein. 11 4. Export Control. Both parties recognize that an export license must be obtained before the Source Code can be exported and will make all reasonable efforts to obtain such license. Licensee will not transfer any technical information that it receives from Licensor or products made using such information to any country prohibited from obtaining such data by the U.S. Department of Commerce Export Administration Regulations without first obtaining a validated export license, and Licensee will otherwise comply with all export control laws and regulations of the United States. 5. General. This Agreement shall be governed by the laws of the State of Delaware. This License and the Agreement collectively comprise the complete and exclusive agreement between the parties relating to this subject matter and no amendments shall be effective unless in a writing signed by both parties. LICENSOR: LICENSEE: By:__________________________________ By:_________________________________ Name:________________________________ Name:_______________________________ Title:_______________________________ Title:______________________________ Date:________________________________ Date:_______________________________ -2- 12 EXHIBIT I TO SOURCE CODE LICENSE Source Code to be provided by Licensor: Additional materials to be provided by Licensor:

1 EXHIBIT 11.1 8x8, Inc. STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER SHARE (in thousands, except per share data)
Year Ended March 31, 1997 ---- Net loss $(13,613) -------- Reconciliation of weighted average number of shares outstanding to amount used in proforma loss per share computation: Weighted average number of shares outstanding 7,824 Additional shares included in accordance with requirements of the Securities and Exchange Commission under Staff Accounting Bulletin 83 4,202 ------ Weighted average number of shares outstanding as adjusted 12,026 ====== Proforma net loss per share $(1.13) =======

1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated May 1, 1997, except for note 4, which is as of May 15, 1997 relating to the consolidated financial statements of 8x8, Inc., which appears in such Prospectus. We also consent to the application of such report to the Financial Statement Schedule for the three years ended March 31, 1997 listed under Item 16(b) of this Registration Statement when such schedule is read in conjunction with the consolidated financial statements referred to in our report. The audits referred to in such report also included this schedule. We also consent to the reference to us under the heading "Experts" in such prospectus. PRICE WATERHOUSE LLP San Jose, California May 16, 1997

5 1,000 YEAR YEAR MAR-31-1996 MAR-31-1997 APR-01-1995 APR-01-1996 MAR-31-1996 MAR-31-1997 4,652 8,722 5,241 2 4,099 1,386 520 374 7,270 1,178 21,026 11,268 7,048 6,616 5,522 5,272 23,067 12,727 11,693 6,614 0 0 0 0 3 4 5 7 11,366 6,030 23,067 12,727 28,774 19,146 28,774 19,146 16,668 12,030 16,255 20,667 (952) (120) 313 0 0 0 (3,197) (13,431) 20 182 (3,217) (13,613) 0 0 0 0 0 0 (3,217) (13,613) 0 0 0 (1.13) Proforma net loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the period assuming the conversion of all shares of the Company's Convertible Preferred Stock into Common Stock which will occur upon the consummation of the offering. Pursuant to the requirements of the SEC, common equivalent shares relating to preferred stock (using the if-converted method) and stock options (using the treasury stock method when assuming an initial public offering price of $9 per share) issued subsequent to September 30, 1995, have been included in the computation for all periods presented.