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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-15627
8X8, INC.
Delaware 77-0142404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2445 Mission College Blvd.
Santa Clara, CA 95054
(408) 727-1885
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of the Registrant's Common Stock outstanding as of July 22,
1997 was 14,936,059.
The exhibit index begins on page 22.
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8X8, INC.
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1997
and March 31, 1997....................................... 1
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1997 and 1996............... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 1997 and 1996............... 3
Notes to Unaudited Condensed Consolidated Financial
Statements.............................................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 6
PART II- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 20
Item 6. Exhibits and Reports on Form 8-K................ 20
Signatures............................................... 21
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
June 30, March 31,
1997 1997
-------- --------
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments..................... $ 12,948 $ 8,724
Accounts receivable, net.................... 1,925 1,012
Inventory................................... 918 1,178
Prepaid expenses and other assets........... 649 354
-------- --------
Total current assets...................... 16,440 11,268
Property and equipment, net................... 1,314 1,344
Deposits and other assets..................... 192 115
-------- --------
$ 17,946 $ 12,727
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 1,775 $ 1,379
Accrued compensation........................ 2,088 926
Accrued warranty............................ 1,563 1,603
Deferred revenue............................ 770 363
Other accrued liabilities................... 1,387 2,343
------- --------
Total current liabilities................. 7,583 6,614
------- --------
Minority interest............................. 132 72
------- --------
Stockholders' equity:
Convertible noncumulative preferred stock... 4 4
Common stock................................ 7 7
Additional paid-in capital.................. 23,092 23,291
Notes receivable from stockholders.......... (1,055) (1,078)
Deferred compensation....................... (1,833) (2,781)
Accumulated deficit......................... (9,984) (13,402)
-------- --------
Total stockholders' equity................ 10,231 6,041
-------- --------
$ 17,946 $ 12,727
======== ========
The accompanying notes are an integral part of these financial statements.
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8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Quarter ended June 30,
---------------------
1997 1996
--------- ---------
Product revenues.............................. $ 4,953 $ 4,360
License revenues.............................. 6,662 1,343
------- -------
Total revenues................................ 11,615 5,703
Cost of product revenues...................... 2,544 7,503
------- -------
Gross profit (loss)........................... 9,071 (1,800)
------- -------
Operating expenses:
Research and development.................. 3,213 2,405
Selling, general and administrative....... 3,540 3,322
------- -------
Total operating expenses............ 6,753 5,727
------- -------
Income (loss) from operations................. 2,318 (7,527)
Other income, net............................. 100 53
------- -------
Income (loss) before (benefit) provision
for income taxes............................. 2,418 (7,474)
(Benefit) provision for income taxes.......... (1,000) 100
------- -------
Net income (loss)............................. $ 3,418 $(7,574)
======= =======
Pro forma net income (loss) per share......... $ 0.29 $ (0.66)
======= =======
Pro forma weighted average number of
common and common equivalent shares......... 11,983 11,544
======= =======
The accompanying notes are an integral part of these financial statements.
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8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Quarter ended June 30,
---------------------
1997 1996
--------- ---------
Cash flows from operating activities:
Net income (loss)......................... $ 3,418 $ (7,574)
Charges to net income (loss) not
affecting cash. ...................... 1,049 2,681
Net effect of changes in current and
other assets and current liabilities.. (56) (1,074)
------- -------
Net cash provided by (used in)
operating activities............ 4,411 (5,967)
------- -------
Cash flows from investing activities:
Purchase of property and equipment..... (210) (470)
Sales of short-term investments, net... 2 5,151
------- -------
Net cash (used in) provided by
investing activities............ (208) 4,681
------- -------
Cash flows from financing activities:
Proceeds from issuance of
common stock.......................... 23 4
------- -------
Net cash provided by financing
activities...................... 23 4
------- -------
Net increase (decrease) in cash and
cash equivalents......................... 4,226 (1,282)
Cash and cash equivalents at the
beginning of the period.................. 8,722 4,652
------- -------
Cash and cash equivalents at the end of
the period............................... $12,948 $ 3,370
======= =======
The accompanying notes are an integral part of these financial statements.
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8X8, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
8x8, Inc. (the "Company" or "8x8") was incorporated in California in February
1987 as Integrated Information Technology, Inc. and formally changed its name to
8x8, Inc. on April 5, 1996. The Company designs, manufactures, and markets video
phones, referred to herein as VideoCommunicators, for use by the consumer
market. The Company also designs, develops and markets highly integrated
proprietary video compression semiconductors and associated software for video
phones and video conferencing.
2. BASIS OF PRESENTATION
The Company's fiscal year ends on the last Thursday on or before March 31. The
Company's fiscal quarters end on the last Thursday on or before the end of each
calendar quarter. The three month periods ended June 26, 1997 and June 27, 1996
respectively, each included 13 weeks of operations. For purposes of these
condensed consolidated financial statements, the Company has indicated its
fiscal year as ending on March 31 and its interim periods as ending on June 30.
The accompanying interim condensed consolidated financial statements are
unaudited and have been prepared on substantially the same basis as the
Company's annual financial statements for the year ended March 31, 1997. In the
opinion of management, these financial statements reflect all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the periods presented. These financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
March 31, 1997, including notes thereto, included in the Company's Registration
Statement on Form S-1, as amended July 2, 1997.
The results of operations for the interim periods included in these financial
statements are not necessarily indicative of the results to be expected for any
future period or the entire fiscal year.
3. INITIAL PUBLIC OFFERING
In the first week of July 1997, the Company completed an initial public
offering of its common stock, selling 4,140,000 shares at $6.50 per share. Net
proceeds to the Company were approximately $24 million after deducting related
issuance costs. The accompanying condensed consolidated financial statements do
not reflect the impact of such offering as it occurred subsequent to June 30,
1997.
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4. BALANCE SHEET DETAIL
(in thousands) June 30, March 31,
1997 1997
-------- --------
Inventories:
Raw materials............................. $ 368 $ 418
Work-in-process........................... 164 613
Finished goods............................ 386 147
------- -------
$ 918 $ 1,178
======= =======
5. PRO FORMA NET INCOME (LOSS) PER SHARE
Pro forma net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of convertible preferred stock (using the
if-converted method) and stock options (using the treasury stock method). Common
equivalent shares are excluded from the computation if their effect is
anti-dilutive, except that, pursuant to a Securities and Exchange Commission
Staff Accounting Bulletin, shares of common stock, convertible preferred stock
(using the if-converted method) and common stock options (using the treasury
stock method and the initial public offering price of $6.50) issued from October
1, 1995 to June 30, 1997 have been included in the computations as if they were
outstanding for each period presented.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (FAS 128), "Earnings Per Share." The
Statement replaces the presentation of primary EPS with a presentation of basic
EPS. Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS is computed similarly to fully diluted EPS under APB
Opinion No. 15. The Statement also requires dual presentation of basic and
diluted EPS on the face of the financial statements for all periods for which a
statement of operations is presented. The requirements of FAS 128 are effective
for the Company beginning the third fiscal quarter of fiscal 1998. Unaudited pro
forma basic and diluted EPS pursuant to the requirements of FAS 128 would be as
follows:
Quarter Ended June 30,
-----------------------
Pro forma earnings (loss) per share 1997 1996
------ ------
Basic.................................... $ 0.32 $(0.74)
Diluted.................................. $ 0.29 $(0.66)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Report on Form 10-Q contains forward-looking statements, including but
not limited to those specifically identified as such, that involve risks and
uncertainties. The statements contained in this Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future. All forward-looking statements included in
this Report on Form 10-Q are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including, but not limited to, those set forth below under
the heading "Factors That May Affect Future Results" and elsewhere in this
Report on Form 10-Q.
Overview
The Company was incorporated in February 1987 in California and reincorporated
in Delaware in December 1996. Since June 1995, the Company has been executing a
business strategy designed to focus the Company's efforts towards video
conferencing. As part of this strategy, the Company discontinued sales of its
MPEG semiconductor product line and reduced its workforce in the quarter ended
June 30, 1996. In the quarters ended June 30, 1997 and 1996, sales of the
Company's video conferencing products accounted for 100% and 71%, respectively,
of product revenues. In the fiscal years ended March 31, 1997 and 1996, sales of
the Company's video conferencing products accounted for 86% and 65%,
respectively, of product revenues.
To address new video conferencing opportunities, the Company has leveraged its
strengths in semiconductor design and related software to develop and market
video conferencing systems for the consumer market. The Company began shipping
the ViaTV, the first product in its planned family of VideoCommunicators in
February 1997. The ViaTV 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. The Company is currently demonstrating prototypes of additional
VideoCommunicators all of which are non-PC based video telephones running on
standard analog telephone lines (POTS). The VC50, designed without a camera,
utilizes an external camera device such as a camcorder. The VC200 incorporates a
liquid crystal display and a telephone into one unit. In addition, the Company
is currently demonstrating a prototype internet web browser for use on its
VideoCommunicator products.
The Company is marketing its VideoCommunicators through retail channels,
catalogs and original equipment manufacturers (OEMs) as well as through direct
marketing efforts utilizing a combination of advertising, toll-free
telemarketing and direct mail supported by co-marketing arrangements with third
parties. In contrast, the Company sells its video conferencing semiconductors
and related software to OEMs and distributors.
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Results of Operations
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Statements of Operations and the notes thereto:
(In millions) Quarter ended June 30,
-------------------------
1997 1996 Change
------ ----- ------
Product revenues $ 4.9 $ 4.4 $ 0.5
License revenues 6.7 1.3 5.4
----- ----- -----
Total revenues $11.6 $ 5.7 $ 5.9
----- ----- -----
Cost of product revenues $ 2.5 $ 7.5 $(5.0)
As a percentage
of total revenues 21.6% 131.6%
Gross profit (loss) $ 9.1 $(1.8) $10.9
As a percentage
of total revenues 78.4% (31.6%)
Net income (loss) $ 3.4 $(7.6) $11.0
As a percentage
of total revenues 29.3% (133.3%)
Revenues
Total revenues were $11.6 million and $5.7 million in the first quarters of
fiscal 1998 and 1997, respectively, and consist of product sales and the
licensing of technology. Product revenues were $4.9 million in the first quarter
of fiscal 1998, an increase of $500,000 from the $4.4 million reported in the
first quarter of fiscal 1997. The increase in product revenues is due primarily
to sales generated from the Company's VideoCommunicators, which were first
introduced in February 1997, combined with an increase in sales of the Company's
video conferencing semiconductors, offset by a significant decrease in MPEG
semiconductor sales due to the discontinuation of the product line in fiscal
1997. License revenues, all of which were non-recurring, were $6.7 million and
$1.3 million in the first quarters of fiscal 1998 and 1997, respectively.
License revenues from two different customers accounted for approximately 45%
and 18% of the Company's total revenues for the quarters ended June 30, 1997 and
June 30, 1996, respectively. There can be no assurance that the Company will
receive any revenues from such arrangements in the future.* See "Factors That
May Affect Future Results -- Dependence on Key Customers."
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that 8x8's actual future
performance will meet 8x8's current expectations. See the "Factors That May
Affect Future Results" commencing on page 11 for a discussion of certain
factors that could affect future performance.
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Sales to customers outside of the United States decreased to 29% of total
revenues in the quarter ended June 30, 1997 from 74% in the quarter ended June
30, 1996, due primarily to the geographic mix of domestic and foreign
non-recurring license revenues. See "Factors That May Affect Future Results --
International Operations."
Cost of Product Revenues
The cost of product revenues consists of costs associated with
VideoCommunicator components, wafer fabrication, VideoCommunicator and
semiconductor assembly and testing performed by third-party vendors and direct
and indirect costs associated with purchasing, scheduling and quality assurance.
Cost of product revenues were $2.5 million and $7.5 million in the first
quarters of fiscal 1998 and 1997, respectively. The cost of product revenues in
the quarter ended June 30, 1997 includes start-up costs associated with initial
production of the ViaTV, the Company's first product in its VideoCommunicator
family. In addition, the system level ViaTV product has a substantially
different cost structure from the Company's semiconductor products. Cost of
product revenues in the quarter ended June 30, 1996 included a $4.0 million
charge associated with the write off of inventories related to the Company's
exit from the MPEG market.
Gross Profit (Loss)
Gross profit was $9.1 million and gross loss was $1.8 million in the first
quarters of fiscal 1998 and 1997, respectively. License revenues, all of which
were non-recurring and had no material associated costs, contributed $6.7
million and $1.3 million to gross profit in the first quarters of fiscal 1998
and 1997, respectively. There can be no assurance that the Company will receive
any revenues from such arrangements in the future.*
Operating Expenses
(In millions) Quarter ended June 30,
-------------------------
1997 1996 Change
------ ------ ------
Research and development $ 3.2 $ 2.4 $ 0.8
As a percentage
of total revenues 27.6% 42.1%
Selling, general and administrative $ 3.5 $ 3.3 $ 0.2
As a percentage
of total revenues 30.2% 57.9%
Research and Development
Research and development expenses consist primarily of personnel, system
prototype design and fabrication, mask, prototype wafer and equipment costs
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that 8x8's actual future
performance will meet 8x8's current expectations. See the "Factors That May
Affect Future Results" commencing on page 11 for a discussion of certain
factors that could affect future performance.
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necessary for the Company to conduct its development efforts. Research and
development costs, including software development costs, are expensed as
incurred. Research and development expenses were $3.2 million and $2.4 million
in the first quarters of fiscal 1998 and 1997, respectively. The higher level of
research and development expenses during the first quarter of fiscal 1998 is due
to overall higher compensation expenses, increased non-recurring engineering and
prototype expenses associated with the Company's VideoCommunicator products, and
mask and prototype costs associated with the ongoing development of the
Company's next generation video conferencing semiconductor product. While total
compensation expenses increased, the non-cash compensation expense recognized on
certain stock option grants decreased to $123,000 in the first quarter of fiscal
1998 from $567,000 in the first quarter of fiscal 1997. The Company expects to
continue to allocate substantial resources to research and development.*
Therefore, future research and development costs may vary both in absolute
dollars and as a percentage of total revenues.* See "Factors That May Affect
Future Results - Rapid Technological Change; Dependence on New Product
Introduction."
Selling, General and Administrative
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 $3.5 million and $3.3 million in the first quarters
of fiscal 1998 and 1997 respectively. Expenses increased due to higher
compensation costs and costs associated with the marketing, advertising and
promotion of the Company's new VideoCommunicator product line. While total
compensation expenses increased, the non-cash compensation expense recognized on
certain stock option grants decreased to $582,000 in the first quarter of fiscal
1998 from $1.7 million in the first quarter of fiscal 1997. The Company expects
that its sales and marketing expenses may increase as the Company launches new
VideoCommunicator products and promotes its current VideoCommunicator products.*
Therefore, future selling, general and administrative costs may vary both in
absolute dollars and as a percentage of total revenues.* See "Factors That May
Affect Future Results -- Management of Growth and Change; Dependence on Key
Personnel."
Other Income, Net
In the first quarters of fiscal 1998 and 1997, other income, net was $100,000
and $53,000, respectively, and consisted primarily of interest income.
(Benefit) Provision for Income Taxes
In the first quarters of fiscal 1998 and 1997, income taxes were a benefit of
$1.0 million and an expense of $100,000, respectively. In August 1995, the
Internal Revenue Service (IRS)
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that 8x8's actual future
performance will meet 8x8's current expectations. See the "Factors That May
Affect Future Results" commencing on page 11 for a discussion of certain
factors that could affect future performance.
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asserted a deficiency against the Company for the taxable year 1992. The IRS
alleged that as of March 31, 1992, the Company had accumulated earnings beyond
the reasonable needs of its business. The Company contested this assessment. On
May 15, 1997, the Company received a notice from the IRS indicating that the IRS
has fully reversed its assertion of deficiency. As a result, the Company
reversed approximately $1 million of its income tax liability during the first
quarter of fiscal 1998. In the first quarter of fiscal 1997, the provision for
income taxes represents certain foreign withholding taxes.
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. The Company currently
has no bank borrowing arrangements.
Operations provided $4.4 million of net cash during the first quarter of
fiscal 1998, as compared to net cash used in operations of $6.0 million during
the first quarter of fiscal 1997. Cash provided by operations in the first
quarter of fiscal 1998 reflects net income of $3.4 million, noncash items,
including a deferred compensation charge of $700,000 and an increase in accrued
compensation related primarily to profit sharing and performance based bonuses,
offset by an increase in accounts receivable and a decrease to income taxes
payable. Cash used in operations in the first quarter of fiscal 1997 reflects a
net loss of $7.6 million and decreases in accounts payable and accrued
liabilities that were partially offset by reductions in inventory and accounts
receivable and a non-cash deferred compensation charge of $2.5 million.
Cash used in investing activities for the first quarter of fiscal 1998 is
primarily attributable to capital expenditures of $0.2 million. Cash provided by
investing activities for the first quarter of fiscal 1997 is primarily
attributable to net sales of short-term investments of $5.2 million, offset by
capital expenditures of $0.5 million. At June 30, 1997, the Company did not have
any material capital commitments outstanding.
In the first week of July 1997, the Company completed an initial public
offering of its common stock, selling 4,140,000 shares at $6.50 per share. Net
proceeds to the Company were approximately $24 million after deducting related
issuance costs. The accompanying condensed consolidated financial statements do
not reflect the impact of such offering as it occurred subsequent to June 30,
1997.
The Company believes that the net proceeds from its initial public offering,
its existing cash balances, and funds, if any,
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that 8x8's actual future
performance will meet 8x8's current expectations. See the "Factors That May
Affect Future Results" commencing on page 11 for a discussion of certain
factors that could affect future performance.
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generated from operations, will be sufficient to meet the Company's capital and
operating requirements for 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. In particular, the development and marketing of new
products could require a significant commitment of resources, which could in
turn require the Company to obtain additional financing earlier than otherwise
expected.
There can be no assurance that the Company will be able to raise such capital
on acceptable terms, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors should be considered in conjunction with the information
in this Report on Form 10-Q.
History of Losses; Uncertainty of Future Profitability
The Company recorded operating losses of $13.6 million, $4.1 million and $6.5
million in the years ended March 31, 1997, 1996 and 1995, respectively. The
Company would not have been profitable in the first quarter of fiscal 1998 had
it not received a non-recurring license fee from one customer. Revenues
fluctuated from $19.1 million in fiscal 1997 to $28.8 million in fiscal 1996 to
$19.9 million in fiscal 1995. In view of the Company's historical operating
losses, there can be no assurance that the Company will either be able to
sustain profitability on an annual or quarterly basis. Future losses will likely
occur in the event that the Company's initial VideoCommunicators do not achieve
widespread consumer market acceptance, of which there can be no assurance.
No Assurance of Future Licensing Revenues
The Company has in the past received substantial revenues from licensing of
technology. Licensing revenues, all of which were non-recurring, were $6.7
million and $1.3 million in the quarters ended June 30, 1997 and 1996 and $3.9
million, $9.0 million and $1.3 million in the fiscal years ended March 31, 1997,
1996 and 1995, respectively. There can be no assurance that the Company will
receive revenues from licensing of its technology in the future.
* This statement is a forward looking statement reflecting current
expectations. There can be no assurance that 8x8's actual future
performance will meet 8x8's current expectations. See the "Factors That May
Affect Future Results" commencing on page 11 for a discussion of certain
factors that could affect future performance.
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Potential Fluctuations in Future Operating Results
The Company's future operating results are expected to fluctuate as the
Company proceeds with the development and marketing of its family of
VideoCommunicators. The Company believes that its future profitability will be
largely dependent on the success of its VideoCommunicator business. As a result,
the Company believes that its historical operating results will not be
comparable to, and should not be relied upon as an indication of, future
operating results. In addition, the Company's operating results have fluctuated
significantly and may continue to fluctuate in the future, on an annual and a
quarterly basis, as a result of a number of factors, many of which are outside
the Company's control, including changes in market demand, the timing of
customer orders, competitive market conditions, lengthy sales cycles, regulatory
approval cycles, new product introductions by the Company or its competitors,
market acceptance of new or existing products, the cost and availability of
components, the mix of the Company's customer base and sales channels, the mix
of products sold, the management of inventory and the accuracy of the reporting
of sell-through by resellers of the Company's products, the level of
international sales, continued compliance with industry standards and general
economic conditions. The Company's gross margin is affected by a number of
factors, including product mix, the recognition of license revenues for which
there are no corresponding cost of revenues, product pricing, the allocation
between international and domestic sales, the percentage of direct sales and
sales to distributors, and manufacturing and component costs. The Company may
also be required to reduce prices in response to competitive pressure or other
factors or to increase spending to pursue new market opportunities. Any decline
in 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 the production of system level products, including the ViaTV, 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
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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 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 Company's Common Stock.
Competition
The Company competes with independent manufacturers of video compression
semiconductors and, as a result of the introduction of the its VideoCommunicator
product line, now competes with manufacturers of video conferencing products
targeted at the consumer market. The markets for the Company's products are
characterized by intense competition, declining average selling prices and rapid
technological change. The competitive factors in the market for the Company's
VideoCommunicators include audio and video quality, phone line connectivity at
high transmission rates, ability to connect and maintain stable connections,
ease of use, price, access to enabling technologies, product design,
time-to-market, adherence to industry standards, interoperability, strength of
distribution channels, customer support, reliability and brand name. In addition
to these factors, the Company's ability to compete depends upon its future
success in developing and manufacturing new generations of video compression
semiconductors that integrate additional functions and reduce costs. Otherwise,
competing semiconductor manufacturers may in the future have competitive
advantages in cost, size and performance which could make systems based on
competing semiconductors preferable to the Company's VideoCommunicators. The
Company expects intense competition for its VideoCommunicators from:
Large consumer electronics manufacturers. The Company will face intense
competition from many well known, established suppliers of consumer
electronics products, which may include Lucent Technologies, Matsushita
Electric Industrial Co., Ltd. ("Matsushita"), Philips, Samsung and Sony.
Many of these potential competitors sell television and telephone products
into which they may integrate video conferencing systems, thereby
eliminating a consumer's need to purchase a separate video conferencing
system, such as the ViaTV.
Licensees and purchasers of the Company's VideoCommunicator technology and
components. A number of companies have licensed portions of the
13
16
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. The Company may in the future
enter into similar license agreements with respect to substantial portions
of its technology. In addition, other companies have chosen or may choose
to manufacture and sell products competitive with the Company's
VideoCommunicators by incorporating video compression semiconductors
purchased from the Company into products that are based on the Company's
video phone reference board designs or other video phone designs. For
example, Leadtek, which is currently both a licensee of certain of the
Company's technology and a purchaser of the Company's video compression
semiconductors, recently began shipping to consumer electronics stores a
product that is directly competitive with the Company's ViaTV.
Purchasers of other companies' video compression semiconductors and
reference designs. Companies may choose to manufacture and sell products
based upon video compression semiconductors manufactured by suppliers other
than the Company or upon reference designs based upon such semiconductors.
Certain of these other suppliers of video compression semiconductors,
including Analog Devices, Chromatic Research, Lucent Technologies, Philips,
Texas Instruments and Winbond Electronics, may have significantly greater
resources than the Company. In order to increase the sale of their video
compression semiconductors, these manufacturers may provide marketing,
financial and other support to the purchasers of these products. Certain
companies have publicly announced that that they are developing consumer
video conferencing products based upon video compression semiconductors
manufactured by suppliers other than the Company. In addition, one company
has announced that it will be making available for sale to third parties a
video phone reference design incorporating Lucent Technologies'
semiconductors. The Company's ability to compete depends upon its future
success in developing and manufacturing new generations of video
compression semiconductors that integrate additional functions and reduce
costs. Otherwise, competing semiconductor manufacturers may in the future
have competitive advantages in cost, size and performance which could make
systems based on competing semiconductors preferable to the Company's
VideoCommunicators.
Personal computer system and software manufacturers. Potential customers
for the Company's VideoCommunicators may elect instead to buy PCs equipped
with video conferencing capabilities, which are currently available. As a
result, the Company faces or may face competition from Intel; PC system
manufacturers such as Apple, Compaq, IBM and Sony; PC software suppliers
such as Microsoft and Netscape; and PC add-on component suppliers.
Existing manufacturers of video conferencing equipment. Manufacturers of
more expensive corporate video conferencing systems may enter the market
for lower cost consumer video conferencing products. Potential competitors
include C-Phone (which is shipping to consumer electronics stores a product
that is competitive with the Company's ViaTV), PictureTel, Sony and Vtel.
14
17
Emerging suppliers of "internet appliances." Potential customers for the
Company's VideoCommunicators may elect instead to buy standalone internet
access terminals which may provide some or all of the functionality of the
Company's products. Consumer products for television-based internet access
have been announced or introduced by companies such as Microsoft, Philips
and Sony.
C-Phone and Leadtek recently began shipping to consumer electronics stores
products that are directly competitive with the Company's ViaTV. Leadtek is
currently both a licensee of certain of the Company's technology and a purchaser
of the Company's video compression semiconductors. The Company expects that
others will introduce products that compete with the Company's
VideoCommunicators in the future.
The principal competitive factors in the market for video compression
semiconductors include product definition, product design, system integration,
chip size, functionality, time-to-market, adherence to industry standards, price
and reliability. The Company has a number of competitors in this market
including Analog Devices, Chromatic Research, Lucent Technologies, Philips,
Texas Instruments and Winbond Electronics. Certain of the Company's competitors
for video compression semiconductors maintain their own semiconductor foundries
and may therefore benefit from certain capacity, cost and technical advantages.
Many of the Company's current and potential competitors have longer operating
histories, are substantially larger, and have greater financial, manufacturing,
marketing, technical and other resources. A number also have greater name
recognition and a larger installed base of products than the Company.
Competition in the Company's markets may result in significant price reductions.
As a result of their greater resources, many current and potential competitors
may be better able than the Company to initiate and withstand significant price
competition or downturns in the economy. There can be no assurance that the
Company will be able to continue to compete effectively, and any failure to do
so would have a material adverse effect on the Company's business and operating
results.
Uncertainty of Market Acceptance; Limits of Existing Technology
Previous efforts to sell consumer video phones have been unsuccessful and
there can be no assurance that the market for such products will develop. The
Company has no reliable data to suggest that there will be significant customer
demand for such products, including the Company's VideoCommunicators. The
Company's current VideoCommunicator products are not capable of delivering video
data at rates of 24 frames per second. Below this data rate, the human eye can
detect degradation of video quality. Further, POTS infrastructure varies widely
in configuration and integrity, which can result in decreased rates of
transmission and difficulties in establishing and maintaining connections.
Actual or perceived technical difficulties related to video conferencing on POTS
could impede market acceptance and have a material adverse effect on the
Company's business and results of operations.
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18
Rapid Technological Change; Dependence on New Product Introduction
The video compression semiconductor and video conferencing markets are
characterized by rapid changes in customer requirements, frequent introductions
of new and enhanced products, and continuing and rapid technological
advancement. To compete successfully, the Company must continue to design,
develop, manufacture and sell new and enhanced products that provide
increasingly higher levels of performance and reliability, take advantage of
technological advancements and changes and respond to new customer requirements.
The Company's success in designing, developing, manufacturing and selling such
products will depend on a variety of factors, including the identification of
market demand for new products, product selection, timely implementation of
product design and development, product performance, cost-effectiveness of
products under development, effective manufacturing processes and the success of
promotional efforts.
The Company plans to introduce additional VideoCommunicators and video
compression semiconductors. 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.
Dependence on Proprietary Technology; Reliance on Third Party Licenses
The Company relies in part on trademark, copyright and trade secret law to
protect its intellectual property in the United States and abroad. The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright law, which afford only limited protection. The
Company also relies in part on patent law to protect its intellectual property
in the United States and abroad. The Company currently holds four United States
patents, including patents relating to video compression and memory architecture
technology, and has 17 United States patent applications pending. The Company
has a number of foreign patent applications pending. There can be no assurance
that any such patent applications will result in an issued patent. There can be
no assurance that the Company's means of protecting its proprietary rights in
the United States or abroad (where effective intellectual property protection be
may unavailable or limited) will be adequate or that competitors will not
independently develop technologies that are similar or superior to the Company's
technology, duplicate the Company's technology or design around any patent of
the Company. Moreover, litigation may be necessary in the future to enforce the
Company's intellectual property rights, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
management time and resources and could have a material adverse effect on the
Company's business and operating results.
16
19
There has been substantial litigation in the semiconductor, electronics and
related industries regarding intellectual property rights, and there can be no
assurance that third parties will not claim infringement by the Company of their
intellectual property rights. If the Company were found to be infringing on the
intellectual property rights of any third party, the Company could be subject to
liabilities for such infringement, which could be material, and the Company
could be required to refrain from using, manufacturing or selling certain
products or using certain processes, either of which could have a material
adverse effect on the Company's business and operating results.
The Company relies upon certain technology, including hardware and software,
licensed from third parties. The loss of, or inability to maintain, existing
licenses could have a material adverse effect on the Company's business and
operating results.
Dependence on Third Party Manufacturers and Component Suppliers
The Company outsources the manufacture of its VideoCommunicators and
semiconductors to subcontract manufacturers and independent foundries. The
Company does not have long term purchase agreements with its subcontract
manufacturers or its component suppliers. There can be no assurance that the
Company's contract manufacturers will be able or willing to reliably manufacture
the Company's products, or that the Company's component suppliers will be able
or willing to reliably supply components for the Company's products, in volumes,
on a cost effective basis or in a timely manner. The Company may experience
difficulties due to its reliance on independent subcontract manufacturers,
semiconductor foundries and component suppliers which could have a material
adverse effect on the Company's business and operating results.
Compliance with Regulations and Industry Standards
The Company must comply with certain rules and regulations of the Federal
Communications Commission ("FCC") regarding electromagnetic radiation and
standards established by Underwriters Laboratories, Inc., as well as similar
regulations and standards applicable in other countries. The failure of the
Company's products to comply, or delays in compliance, with the various existing
and evolving government regulations and industry standards could delay or
interrupt volume production of VideoCommunicators, which would have a material
adverse effect on the Company's business and operating results.
International Operations
Sales to customers outside of the United States represented 29% of the
Company's total revenues for the quarter ended June 30, 1997 and 54%, 49% and
40% of the total revenues in the fiscal years ended March 31, 1997, 1996 and
1995, respectively. Although the Company's VideoCommunicator sales outside of
the United States are currently limited, 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
17
20
telecommunications standards, export license requirements, tariffs and taxes,
other trade barriers, fluctuations in currency exchange rates, difficulty in
collecting accounts receivable and difficulty in staffing and managing foreign
operations. The Company is also subject to geopolitical risks, such as
political, social and economic instability, potential hostilities and changes in
diplomatic and trade relationships, in connection with its international
operations.
Management of Growth and Change; Dependence on Key Personnel
The development and marketing of the Company's VideoCommunicators will
continue to place a significant strain on the Company's limited personnel,
management and other resources, particularly in light of the Company's limited
experience in developing, manufacturing, marketing and selling consumer
products. The Company's ability to manage any future growth effectively will
require it to 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. The Company's failure
to manage its growth and change in its business effectively could have a
material adverse effect on the Company's business and operating results.
Further, the Company is highly dependent on the continued service of, and on
its ability to attract and retain, qualified technical, marketing, sales and
managerial personnel. The competition for such personnel is intense, and the
loss of any of such persons, as well as the failure to recruit additional key
technical and sales personnel in a timely manner, would have a material adverse
effect on the Company's business and operating results. There can be no
assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. The Company
currently does not have employment contracts with any of its employees and does
not maintain key person life insurance policies on any of its employees.
Product Concentration; Potential Loss of Semiconductor Sales; Dependence
on Video Conferencing Industry
Sales of video compression semiconductors and reference design boards accounted
for approximately 43% of the Company's total revenues in the quarter ended June
30, 1997 and 76%, 59%, 38% of total revenues in the fiscal years ended March 31,
1997, 1996 and 1996, respectively. Pending widespread market acceptance of its
VideoCommunicators, sales of video compression semiconductors will continue to
account for a substantial portion of total revenues. Moreover, successful
introduction of VideoCommunicators may adversely affect sales of semiconductors
to the Company's existing customers that currently, or may in the future, sell
products that compete with the Company's VideoCommunicators.
Sales of the Company's existing compression semiconductors and
VideoCommunicators are also dependent on the video conferencing industry. Any
reduction in the demand for the Company's video compression semiconductors
(particularly prior to substantial VideoCommunicator revenues) or any general
decline in the market for video conferencing products could have a material
adverse effect on the Company's business and operating results.
18
21
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 quarter
ended June 30, 1997 and in the years ended March 31, 1997, 1996 and 1995
accounted for approximately 57%, 54%, 39% and 44%, respectively, of its total
revenues. Substantially all the Company's sales have been made, and are expected
to be made, on a purchase order basis. None of the Company's customers has
entered into a long-term agreement requiring it to purchase the Company's
products. The loss of, or any reduction in orders from, significant customers
could have a material adverse effect on the Company's business and operating
results.
Potential Volatility of Stock Price
The market price of the shares of Common Stock has been and is likely to be
highly volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technical innovations, new products or new contracts by the Company, its
competitors or their customers, governmental regulatory action, developments
with respect to patents or proprietary rights, general market conditions,
changes in financial estimates by securities analysts and other factors, certain
of which could be unrelated to, or outside the control of, the Company. The
stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies and that have often been unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of the Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has been initiated against the issuing
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on the Company's business and operating results. Any
settlement or adverse determination in such litigation would also subject the
Company to significant liability, which would have a material adverse effect on
the Company's business and financial condition.
Shares Eligible for Future Sale
Prior to December 30, 1997, the majority of the outstanding shares of the
Company's Common Stock are subject to lock-up agreements under which the holders
of such shares have agreed not to sell or otherwise dispose of such shares
without the consent of Montgomery Securities, the lead managing underwriter for
the Company's initial public offering. On December 30, 1997, substantially all
shares of the Company's Common Stock will become eligible for sale into the
public market. The sale of part or all of such shares in the public market could
have an adverse effect on the trading price of the Company's Common Stock.
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22
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Stockholders was held on June 23, 1997 at
the Company's principal executive offices in Santa Clara, California. At the
meeting, 8,381,922 shares were present in person or by proxy.
(a) Election of Directors. Each person elected as a Director will serve until
the next annual meeting of stockholders or until such person's successor
is elected and qualified. The following nominees for Director were
elected:
Name of Nominee Votes Cast For Votes Withheld
- --------------- -------------- --------------
Keith Barraclough 6,910,025 122,142
Richard Chang 6,996,000 37,167
Bernd Girod 6,989,800 42,367
Joe Parkinson 6,902,575 128,592
Y.W. Sing 7,104,000 38,167
William Tai 6,921,500 110,667
Paul Voois 6,911,700 120,567
Samual Wang 6,995,000 37,167
Akifumi Goto 552,735 0
(b) Amendment to the 1996 Stock Plan. An increase in the number of shares
reserved for issuance under the Company's 1996 Stock Plan by 500,000
shares to 1,500,000 shares was approved by the stockholders with
7,907,698 voting in favor, 444,249 voting against and 1,775 representing
abstentions.
(c) Ratification of Independent Auditors. The ratification and appointment of
Price Waterhouse LLP as independent public accountants of the Company for
fiscal 1998 was approved by the stockholders with 8,265,555 voting in
favor, 0 voting against and 101,167 abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) No reports on Form 8-K were filed during the three month period ended
June 30, 1997.
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23
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized:
Date: ________________.
8X8, INC.
By: /s/ SANDRA L. ABBOTT
---------------------
Sandra L. Abbott
Chief Financial Officer and
Vice President of Finance
(Principal Financial and Accounting Officer)
21
24
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
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.
27.1+ Financial Data Schedule.
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25
* Confidential treatment requested as to certain portions of this exhibit.
+ Incorporated by reference from the exhibits with corresponding numbers from
the Company's Registration Statement (No. 333-15627), as amended on July 2,
1997.
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Condensed Consolidated
Financial Statements or notes thereto.
23
1
8X8, INC.
EXHIBIT 11.1
CALCULATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
(In thousands, except per share amounts)
(unaudited)
Quarter ended June 30,
---------------------
1997 1996
--------- ---------
Pro forma weighted average common and
common equivalent shares:
Preferred stock................... 3,726 3,147
Common stock...................... 6,976 4,784
Common stock options.............. 1,281 3,613
------- -------
11,983 11,544
======= =======
Net income (loss)..................... $ 3,418 $(7,574)
======= =======
Pro forma net income (loss) per share. $ 0.29 $ (0.66)
======= ========
24
5
3-MOS
MAR-31-1998
APR-01-1997
JUN-30-1997
12,948
0
2,276
351
918
16,440
6,714
5,400
17,946
7,583
0
0
4
7
10,220
17,946
11,615
11,615
2,544
6,753
(100)
0
0
2,418
(1,000)
3,418
0
0
0
3,418
0
0.29
Pro forma net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
Common equivalent shares consist of convertible preferred stock (using the
if-converted method) and stock options (using the treasury stock method).
Common equivalent shares are excluded from the computation if their effect is
anti-dilutive, except that, pursuant to a Securities and Exchange Commission
Staff Accounting Bulletin, shares of common stock, convertible preferred stock
(using the if-converted method) and common stock options (using the treasury
stock method and the initial public offering price of $6.50) issued from
October 1, 1995 to June 30, 1997 have been included in the computations as if
they were outstanding for each period presented.
