1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 (IRS 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 October
15, 1997 was 14,637,374.
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
September 30, 1997 and March 31, 1997...........................1
Condensed Consolidated Statements of Operations for the
three and six months ended September 30, 1997 and 1996..........2
Condensed Consolidated Statements of Cash Flows for the
six months ended September 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...................5
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...............20
Item 6. Exhibits and Reports on Form 8-K........................21
Signature.......................................................21
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
September 30, March 31,
1997 1997
---------- ---------
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments ................. $ 36,413 $ 8,724
Accounts receivable, net ................ 4,997 1,012
Inventory ............................... 2,706 1,178
Prepaid expenses and other assets ....... 998 354
-------- --------
Total current assets .................. 45,114 11,268
Property and equipment, net ............... 1,383 1,344
Deposits and other assets ................. 186 115
-------- --------
$ 46,683 $ 12,727
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................ $ 3,157 $ 1,379
Accrued compensation .................... 1,485 926
Accrued warranty ........................ 1,536 1,603
Deferred revenue ........................ 3,221 363
Other accrued liabilities ............... 1,797 2,343
-------- --------
Total current liabilities ............. 11,196 6,614
-------- --------
Minority interest ......................... 124 72
-------- --------
Stockholders' equity:
Convertible noncumulative preferred stock -- 4
Common stock ............................ 15 7
Additional paid-in capital .............. 47,784 23,291
Notes receivable from stockholders ...... (1,055) (1,078)
Deferred compensation ................... (1,492) (2,781)
Accumulated deficit ..................... (9,889) (13,402)
-------- --------
Total stockholders' equity ............ 35,363 6,041
-------- --------
$ 46,683 $ 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)
Three months ended Six months ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Product revenues ...................... $ 8,103 $ 3,354 $ 13,056 $ 7,714
License and other revenues ............ 2,791 1,018 9,453 2,361
-------- -------- -------- --------
Total revenues ........................ 10,894 4,372 22,509 10,075
Cost of product revenues .............. 3,987 1,942 6,531 9,445
Cost of license and other revenues .... 550 -- 550 --
-------- -------- -------- --------
Gross profit .......................... 6,357 2,430 15,428 630
-------- -------- -------- --------
Operating expenses:
Research and development ............ 2,982 2,340 6,195 4,745
Selling, general and administrative . 3,760 1,733 7,300 5,055
-------- -------- -------- --------
Total operating expenses .... 6,742 4,073 13,495 9,800
-------- -------- -------- --------
Income (loss) from operations ......... (385) (1,643) 1,933 (9,170)
Other income, net ..................... 480 74 580 127
-------- -------- -------- --------
Income(loss)before(benefit)provision
for income taxes ..................... 95 (1,569) 2,513 (9,043)
(Benefit) provision for income taxes .. -- 46 (1,000) 146
-------- -------- -------- --------
Net income (loss) ..................... $ 95 $ (1,615) $ 3,513 $ (9,189)
======== ======== ======== ========
Net income per share .................. $ 0.01
========
Weighted average number of
common and common equivalent shares .. 16,264
========
Pro forma net income (loss) per share . $ (0.14) $ 0.25 $ (0.79)
======== ======== ========
Pro forma weighted average number of
common and common equivalent shares .. 11,798 14,124 11,671
======== ======== ========
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)
Six months ended
September 30,
----------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss) ................... $ 3,513 $ (9,189)
Charges to net income (loss) not
affecting cash ..................... 1,583 3,706
Net effect of changes in current and
other assets and current liabilities (1,646) 1,175
-------- --------
Net cash provided by (used in)
operating activities ......... 3,450 (4,308)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment .. (518) (465)
Sales of short-term investments, net 2 5,152
-------- --------
Net cash (used in) provided by
investing activities ......... (516) 4,687
-------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible
noncumulative preferred stock, net . -- 2,276
Proceeds from issuance of
common stock, net .................. 24,757 14
Proceeds from minority interest in
subsidiary ......................... -- 52
-------- --------
Net cash provided by financing
activities ................... 24,757 2,342
-------- --------
Net increase in cash and cash
equivalents ........................... 27,691 2,721
Cash and cash equivalents at the
beginning of the period ............... 8,722 4,652
-------- --------
Cash and cash equivalents at the end of
the period ............................ $ 36,413 $ 7,373
======== ========
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
The Company designs, manufactures, and markets video phones, referred to
herein as its family of VideoCommunicator products, 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 and six month periods ended September 25, 1997
and September 26, 1996 included 13 weeks and 26 weeks of operations,
respectively. For purposes of these condensed consolidated financial statements,
the Company has indicated its fiscal year as ending on March 31 and its interim
periods as ending on September 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 $24.7 million after deducting related
issuance costs. As of the closing date of the offering, all of the convertible
noncumulative preferred stock outstanding was converted into an aggregate of
3,726,373 shares of common stock.
4. BALANCE SHEET DETAIL
(in thousands)
September 30, March 31,
1997 1997
------ ------
Inventories:
Raw materials ............... $1,227 $ 418
Work-in-process ............. 318 613
Finished goods .............. 1,161 147
------ ------
$2,706 $1,178
====== ======
5. COMPUTATION OF HISTORICAL AND PRO FORMA NET INCOME (LOSS) PER SHARE
Historical net income per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of the incremental common
shares issuable upon conversion of stock options (using the treasury stock
method) as-if converted.
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Pro forma net income (loss) per share for the three months ended September
30, 1996 and the six months ended September 30, 1997 and 1996, respectively, 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 as-if converted method) and stock options
(using the treasury stock method). Common equivalent shares are excluded from
the computation if their effect is antidilutive, except that, pursuant to a
Securities and Exchange Commission Staff Accounting Bulletin, shares of common
stock, convertible preferred stock (using the as-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 common stock equivalents 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 historical and pro forma basic and diluted EPS
pursuant to the requirements of FAS 128 would be as follows:
Three months ended Six months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
-------- ------- ------ ------
Historical earnings per share
Basic .............................. $ 0.01
Diluted ............................ $ 0.01
Pro forma earnings (loss) per share
Basic .............................. $(0.16) $ 0.28 $(1.02)
Diluted ............................ $(0.14) $ 0.25 $(0.79)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income." The Statement establishes standards for the reporting of comprehensive
income and its components in a full set of general-purpose financial statements
for periods beginning after December 15, 1997. Comprehensive income as defined
includes all changes in equity (net assets) during a period from nonowner
sources. Reclassification of financial statements for earlier periods for
comparative purposes is required. The Company will adopt FAS 130 in its fiscal
1999 annual report; however, it is not expected to have a significant effect on
the Company's disclosure requirements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (FAS 131), "Disclosures About Segments of
An Enterprise and Related Information." The Statement revises information
regarding the reporting of certain operating segments for periods beginning
after December 15, 1997. The Statement also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company will adopt FAS 131 in its fiscal 1999 annual report; however, it is
not expected to have a significant effect on the Company's disclosure
requirements.
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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 second quarters ended September 30, 1997 and 1996, sales of the
Company's video conferencing products accounted for 100% and 73%, respectively,
of product revenues. For the six months ended September 30, 1997 and 1996, sales
of the Company's video conferencing products accounted for 100% and 72%,
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 first product in its planned family of VideoCommunicator products, the ViaTV
(VC100), in February 1997. The VC105, an upgraded VC100, was introduced in
August 1997. The Company added two new models, the VC50 and VC55, to the ViaTV
product line in September 1997.
The ViaTV products (VC100, VC105, VC50 and VC55) connect 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). Further, the VC50
and VC55 are designed without a camera and utilize an external camera device
such as a camcorder or digital still camera. In addition to video conferencing
capability, the VC55 includes an Internet web browser. 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 Company's prototype VC200 incorporates a liquid crystal display (LCD) and a
telephone into one unit.
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. The Company sells its video conferencing semiconductors and related
software to OEMs and distributors.
Results of Operations
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Statements of Operations and the notes thereto:
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Revenues
Three months ended Six months ended
September 30, September 30,
(In millions) ------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Product revenues $ 8.1 74% $ 3.4 77% $13.1 58% $ 7.7 76%
License and other
revenues 2.8 26% 1.0 23% 9.4 42% 2.4 24%
----- --- ---- --- ----- --- ----- ---
Total revenues $10.9 100% $ 4.4 100% $22.5 100% $10.1 100%
===== === ==== === ===== === ===== ===
Total revenues were $10.9 million and $4.4 million in the second quarters of
fiscal 1998 and 1997, respectively. Product revenues were $8.1 million in the
second quarter of fiscal 1998, a 138% increase over the $3.4 million in product
revenues reported in the second quarter of fiscal 1997. The increase in product
revenues is due primarily to sales generated from the Company's
VideoCommunicators, which were introduced in February 1997, combined with an
increase in sales of the Company's video conferencing semiconductors, offset by
a decrease in MPEG semiconductor sales due to the discontinuation of the product
line in September 1996.
License and other revenues, all of which were nonrecurring, were $2.8
million and $1.0 million in the second quarters of fiscal 1998 and 1997,
respectively. License and other revenues consist of technology licenses
including royalties required under such licenses, and nonrecurring engineering
charges for work performed by the Company for its customers. In the second
quarter of fiscal 1998, license and other revenues included approximately $1.0
million related to certain development work performed under the terms of a
contract between the Company and one of its customers. There can be no assurance
that the Company will receive any revenues from such arrangements in the
future.* See "Factors That May Affect Future Results -- No Assurance of Future
License and Other Revenues."
Total revenues were $22.5 million and $10.1 million in the first six months
of fiscal 1998 and 1997, respectively. Product revenues were $13.1 million in
the first six months of fiscal 1998, an increase of $5.4 million above the $7.7
million reported in the first six months of fiscal 1997, and represented 58% and
76% of total revenues, respectively. In the first six months of fiscal 1998 and
1997 license and other revenues, all of which were nonrecurring, were $9.4
million and $2.4 million, 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 -- No Assurance of Future License and
Other Revenues."
Sales to two separate customers represented approximately 15% and 10% of
total revenues for the quarter ended September 30, 1997. Sales to three separate
customers represented approximately 20%, 17% and 11% of total revenues for the
quarter ended September 30, 1996. Sales to two separate customers accounted for
approximately 28% and 10% of the Company's total revenues for the six months
ended September 30, 1997 and September 30, 1996, respectively. See "Factors That
May Affect Future Results -- Potential Fluctuations in Operating Results and
Dependence on Key Customers."
Sales to customers outside of the United States increased to 51% of total
revenues in the quarter ended September 30, 1997 from 47% in the quarter ended
September 30, 1996, due primarily to increased sales to Pacific Rim countries.
See "Factors That May Affect Future Results -- International Operations."
* 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 12 for a discussion of certain factors
that could affect future performance.
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Cost of Revenues
Three months ended Six months ended
September 30, September 30,
(In millions) ------------------ -----------------
1997 1996 1997 1996
------- ------- ------- ------
Cost of product revenues $ 4.0 $ 1.9 $ 6.5 $ 9.4
As a percentage
of product revenues 49% 56% 50% 122%
Cost of license and other revenues 0.5 - 0.5 -
As a percentage
of license and other revenues 18% 0% 5% 0%
The cost of product revenues consists of costs associated with
Video-Communicator components, semiconductor wafer fabrication,
VideoCommunicator and semiconductor assembly and testing performed by
third-party vendors and direct and indirect costs associated with purchasing,
scheduling and quality assurance. Costs of product revenues were $4.0 million
and $1.9 million in the second quarters of fiscal 1998 and 1997, respectively.
The cost of product revenues in the quarter ended September 30, 1997 included
costs associated with increased shipments of its VideoCommunicator products,
which the Company began shipping in February 1997, as well as increased
shipments of the Company's video conferencing semiconductor products. Cost of
product revenues in the quarter ended September 30, 1996 included costs
associated with the production of semiconductors sold into the MPEG market. The
Company discontinued this product line in September 1996.
Cost of license and other revenues in the second quarter of fiscal 1998 was
$550,000 and consisted of personnel and other costs incurred to perform certain
development work under terms of a nonrecurring engineering contract between the
Company and one of its customers. This development work was performed by
research and development personnel of the Company. There were no costs
associated with license and other revenues in the second quarter of fiscal 1997.
Cost of product revenues were $6.5 million and $9.4 million in the first six
months of fiscal 1998 and 1997, respectively. The cost structure of the
Company's ViaTV product line, the Company's first line of VideoCommunicator
products, is substantially different from the Company's video conferencing
semiconductor products. Further, costs in the first six months of fiscal 1998
include startup costs associated with the ViaTV, which began shipping in volume
in fiscal 1998. In the first six months of fiscal 1997, costs of product
revenues included a $4.0 million charge associated with the write-off of
inventories related to the Company's exit from the MPEG market. As a result of
this writeoff, costs for the period were equal to 122% of product revenue.
Gross Profit
Three months ended Six months ended
September 30, September 30,
(In millions) ------------------ ------------------
1997 1996 1997 1996
-------- ------- ------- -------
Gross profit $ 6.4 $ 2.4 $15.4 $0.6
As a percentage
of total revenues 59% 55% 68% 6%
* 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 12 for a discussion of certain factors
that could affect future performance.
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Gross profit was $6.4 million and $2.4 million in the second quarters of
fiscal 1998 and 1997, respectively. Gross profit from product revenues increased
by 173% and was $4.1 million and $1.5 million in the second quarters of fiscal
1998 and 1997, respectively. The increase in gross profit from product revenues
was due to higher video conferencing semiconductor revenues and sales of the
Company's VideoCommunicator products. Gross profit from license and other
revenues, all of which were nonrecurring, less related costs, contributed $2.3
million and $1.0 million to gross profit in the second quarters of fiscal 1998
and 1997, respectively. There can be no assurance that the Company will receive
any revenues from such license and other revenues sources in the future.*
Gross profit was $15.4 million and $630,000 in the first six months of
fiscal of 1998 and 1997, respectively. License and other revenues, net of
associated costs, contributed $8.9 million and $2.4 million to gross profit in
the first six months of fiscal 1998 and 1997, respectively.
Operating Expenses
Research and Development Three months ended Six months ended
September 30, September 30,
(In millions) ------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
Research and development $ 3.0 $ 2.3 $ 6.2 $ 4.7
As a percentage
of total revenues 28% 52% 28% 47%
Research and development expenses consist primarily of personnel, system
prototype design and fabrication, mask, prototype wafer and equipment costs
necessary for the Company to conduct its development efforts. Research and
development costs, including software development costs, are expensed as
incurred. Research and development expenses were $3.0 million and $2.3 million
in the second quarters of fiscal 1998 and 1997, respectively. The higher level
of research and development expenses during the second quarter of fiscal 1998 is
due to increased headcount, increased 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. The overall increase in research and
development expenses was partially offset by the use of research and development
personnel to perform nonrecurring engineering services under a revenue
generating contract. The costs associated with this contract are included in the
cost of license and other revenues. The Company expects to continue to allocate
substantial resources to research and development.* However, future research and
development costs may vary both in absolute dollars and as a percentage of total
revenues.* See "Factors That May Affect Future Results - Rapid Technological
Change; Dependence on New Product Introduction."
In the first six months of fiscal 1998 and 1997, research and development
expenses were $6.2 million and $4.7 million, respectively, which is an increase
of $1.5 million. Although total research and development expenses increased as a
result of the factors listed above, the non-cash compensation expense recognized
on certain stock option grants and charged to research and development decreased
to $257,000 in the first six months of fiscal 1998 from $769,000 in the first
six months of fiscal 1997.
* 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 12 for a discussion of certain factors
that could affect future performance.
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Selling, General and Administrative
Three months ended Six months ended
September 30, September 30,
(In millions) ------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
Selling, general and administrative $ 3.8 $ 1.7 $ 7.3 $ 5.1
As a percentage
of total revenues 35% 39% 32% 50%
Selling, general and administrative expenses consist primarily of personnel
and related overhead costs for sales, marketing, finance, human resources and
general management. Such costs also include advertising, sales commissions,
trade show and other marketing and promotional expenses. Selling, general and
administrative expenses were $3.8 million and $1.7 million in the second
quarters of fiscal 1998 and 1997, respectively. Expenses increased due to
additional headcount, higher compensation costs and costs associated with the
marketing, advertising and promotion of the Company's new VideoCommunicator
product line, including introduction of the Company's VC50 and VC55 products.
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."
Selling, general and administrative expenses were $7.3 million and $5.1
million in the first six months of fiscal 1998 and 1997, respectively. While
total expenses increased as a result of the factors listed above, the non-cash
compensation expense recognized on certain stock option grants and charged to
selling, general and administrative decreased to $737,000 in the first six
months of fiscal 1998 from $2.3 million in the first six months of fiscal 1997.
Other Income, Net
In the second quarters of fiscal 1998 and 1997, other income, net was
$480,000 and $74,000, respectively, and consisted primarily of interest income.
Interest income in the second quarter of fiscal 1998 included interest earned on
the proceeds from the Company's initial public offering in July 1997.
(Benefit) Provision for Income Taxes
In the second quarters of fiscal 1998 and 1997, income taxes were $0.0 and
$46,000, respectively. In the second quarter of fiscal 1997, the provision for
income taxes represented certain foreign withholding taxes.
In the first six months of fiscal 1998 and 1997, income taxes were a benefit
of $1.0 million and an expense of $146,000, respectively. In August 1995, the
Internal Revenue Service (IRS) asserted a deficiency against the Company for the
taxable year 1992. The IRS alleged that as of March 31, 1992, the Company had
accumulated earnings beyond the reasonable needs of its business. The Company
contested this assessment. On May 15, 1997, the Company received a notice from
the IRS indicating that the IRS has fully reversed its assertion of deficiency.
As a result, the Company reversed approximately $1.0 million of its income tax
liability during the first quarter of fiscal 1998. In the first six months of
fiscal 1997, the provision for income taxes represents certain foreign
withholding taxes.
* 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 12 for a discussion of certain factors
that could affect future performance.
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Liquidity and Capital Resources
As of September 30, 1997, the Company had cash and liquid investments
totaling $36.4 million, representing a $27.7 million increase in the first six
months of fiscal 1998. 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 $24.7 million after
deducting related issuance costs. Prior to the Company's initial public
offering, the Company had satisfied its liquidity needs principally from
proceeds generated from two issuances of its equity securities after 1994 and
from cash generated from operations in fiscal 1994 and prior years. The Company
currently has no bank borrowing arrangements.
Operations provided $3.5 million of net cash during the first six months of
fiscal 1998, as compared to net cash used in operations of $4.3 million during
the first six months of fiscal 1997. Cash provided by operations in the first
six months of fiscal 1998 reflects net income of $3.5 million, increases of $2.9
million in deferred revenue, $1.8 million in accounts payable, and noncash
items, including a deferred compensation charge of $1.1 million. Cash used in
operations during this period includes a $4.0 million increase in accounts
receivable and a $1.5 million increase in inventory. Cash used in operations in
the first six months of fiscal 1997 reflects a net loss of $9.2 million, and a
decrease in accounts payable of $5.2 million. Cash used in operations was
partially offset by cash provided by decreases in inventory and accounts
receivable of $6.1 million and $1.8 million, respectively, and a non-cash
deferred compensation charge of $3.3 million.
Cash used in investing activities for the first six months of fiscal 1998 is
primarily attributable to capital expenditures of approximately $518,000. Cash
provided by investing activities for the first six months of fiscal 1997 is
primarily attributable to net sales of short-term investments of $5.2 million,
offset by capital expenditures of approximately $465,000. At September 30, 1997,
the Company did not have any material capital commitments outstanding.
Cash flows from financing activities in the first six months of 1998 and
1997 consisted primarily of $24.7 million in proceeds from sale of the Company's
common stock in its initial public offering and $2.3 million in proceeds for the
sale of preferred convertible stock, respectively.
The Company believes its existing cash balances, and funds, if any,
generated from operations, will be sufficient to meet the Company's capital and
operating requirements for the next twelve 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.
* 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 12 for a discussion of certain factors
that could affect future performance.
11
14
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 $385,000 in the second fiscal
quarter of 1998 and $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 six months of fiscal 1998 had it not received
nonrecurring license and other revenues. 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 historical operating losses, there can be no assurance
that the Company will be able to sustain profitability on an either 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 License and Other Revenues
The Company has in the past received substantial revenues from licensing of
technology. Licenses and other revenues, all of which were nonrecurring, were
$9.4 million and $2.4 million for the six month periods ended September 30, 1997
and 1996, respectively. License and other revenues were $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, which could have a
material adverse effect on the Company's business and operating results.
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 and other revenues for which there may
be 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 the
average selling price of a particular product that 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
12
15
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 Video-Communicators may
adversely impact its gross margins due in part to higher unit costs associated
with the production of system level products, including the current ViaTV
models, 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, including sales of its VideoCommunicator products, may be derived from
orders placed by a limited number of large customers, including but not limited
to OEM 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. The adverse impact of a shortfall in the Company's revenues may be
magnified by the Company's inability to adjust spending to compensate for such
shortfall. Announcements by the Company or its competitors of new products and
technologies could cause customers to defer purchases of the Company's existing
products, which would also have a material adverse effect on the Company's
business and operating results.
Certain of the Company's licensees, including US Robotics and KME, may
choose to purchase system level VideoCommunicators to label under their own
brand name, may choose to purchase video conferencing semiconductors and pay a
system level royalty, or may choose to produce both a system level product and
the semiconductors incorporated therein and pay only royalties. Any change in
the ordering patterns of such licensees, who were major customers of the Company
during the first six months of fiscal 1998, may have a substantial impact on
business and operating results of the Company. Moreover, the failure of such
licensees to continue to purchase substantial quantities of VideoCommunicators
or to produce their own system level products in such a manner to produce
significant royalty or semiconductor income for the Company, of which there can
be no assurance, may 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.
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 second
quarter and the six months ended September 30, 1997, and in the years ended
March 31, 1997, 1996 and 1995 accounted for approximately 44%, 32%, 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
13
16
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.
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 Company's ViaTV product line.
Licensees and purchasers of the Company's VideoCommunicator technology and
components. A number of companies have licensed portions of the Company's
technology, including US Robotics 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, the Company has sold ViaTVs to its licensees for
resale under such licensee's own brand name. Further, 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
14
17
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.
Emerging suppliers of "Internet appliances." Potential customers for the
Company's VideoCommunicators may elect instead to buy standalone Internet
access terminals which may provide some or all of the functionality of the
Company's products. Consumer products for television-based Internet access
have been announced or introduced by companies such as Microsoft, Philips
and Sony.
C-Phone, Leadtek, and US Robotics are shipping products to consumer
electronics stores and other resellers that are directly competitive with the
Company's ViaTV product line. Leadtek and US Robotics are currently licensees of
certain of the Company's technology; they have also purchased ViaTV products
and/or 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.
15
18
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 ViaTV product line is not capable of delivering video data at
rates of 24 frames per second. Below this data rate, the human eye can detect
degradation of video quality. Further, POTS infrastructure varies widely in
configuration and integrity, which can result in decreased rates of transmission
and difficulties in establishing and maintaining connections. Actual or
perceived technical difficulties 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.
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. The development of new products or enhancements to
existing products involves technical and other risks, which the Company may not
fully understand. In addition, new product introductions or enhancements to
products may decrease demand for existing products resulting in higher than
expected product returns and/or excess inventory of existing products. The
Company has in the past experienced delays in the development of new products
and the enhancement of existing products, and such delays 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, if such new or enhanced products do not achieve sufficient market
acceptance or if such new product introductions decrease demand for existing
products, it would have a material adverse effect on the Company's business and
operating results.
Dependence on Proprietary Technology; Reliance on Third Party Licenses
The Company relies in part on trademark, copyright and trade secret law to
protect its intellectual property in the United States and abroad. The Company
seeks to protect its software, documentation and other written materials under
trade secret and copyright law, which afford only limited protection. The
Company also relies in part on patent law to protect its intellectual property
in the United States and abroad. The Company currently holds four United States
patents, including patents relating to video compression and memory architecture
technology, and has a number of United States and foreign patent applications
pending. There can be no assurance that any such patent applications will result
in an issued patent. There can be no assurance that the Company's means of
protecting its proprietary rights in the United States or abroad (where
effective intellectual property protection be may unavailable or limited) will
be adequate or that competitors will not independently develop technologies that
are similar or superior to the Company's technology, duplicate the Company's
technology or design around any patent of the Company. Moreover, litigation may
be necessary in the future to enforce the Company's
16
19
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. 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.
In addition, from time to time the Company may issue non-cancelable purchase
orders to its third-party manufacturers for raw materials used in its
VideoCommunicator products to ensure availability for long lead-time items or to
take advantage of favorable pricing terms. If the Company should experience
decreased demand for its VideoCommunicator products, the Company would still be
required to take delivery of and make payment for such raw materials. In the
event of a significant decrease in VideoCommunicator product demand, such
purchase commitments could have a material adverse effect on the Company's
business and operating results.
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 51% and 39% of
the Company's total revenues for the second quarter and the six months ended
September 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 product revenues for the
17
20
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. 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 45% and 37% of the Company's total revenues for the
second quarter and the six months ended September 30, 1997 and 76%, 59%, 38% of
total revenues in the fiscal years ended March 31, 1997, 1996 and 1995,
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.
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
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21
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 Company's common stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has 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
The majority of the outstanding shares of the Company's common stock have
been 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 October 27, 1997, one third of the shares subject to
lock-up agreements shall be released from such agreements. On December 30,
1997, substantially all remaining shares of the Company's common stock subject
to lock-up agreements 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective Date of the Company's
Registration Statement: July 1, 1997
Commission File Number: 333-15627
Date the offering commenced: July 2, 1997
Names of Managing Underwriters: Montgomery Securities
Donaldson, Lufkin & Jenrette
Securities Corporation
Class of Securities Registered: Common Stock
Amount Registered and Sold: 4,140,000
Aggregate Price of Offering Amount
Registered and Sold: $26,910,000
Underwriter's discounts and commissions $ 1,883,700
Finders fees 0
Expenses paid to or for underwriters 0
Other expenses (1) 327,137
-----------
Total expenses $ 2,210,837
Net offering proceeds $24,699,163
Use of net offering proceeds:
Purchase of machinery and equipment (1) $ 308,000
Product development (1)(2) 2,949,000
Sales, marketing and administration (1)(2) 2,906,000
Officer compensation 887,290
Working capital (1)(2) 4,538,300
----------
$11,588,590
Temporary investments:
Money market mutual fund (2) $13,110,573
- ----------
(1) Does not include any direct or indirect payments to directors, officers,
general partners of the issuer or their associates; to persons owning ten (10)
percent or more of any class of equity securities of the issuer; or to
affiliates of the issuer.
(2) This amount represents a reasonable estimate.
20
23
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
September 30, 1997.
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: 10/22/97
8X8, INC.
By: /s/ SANDRA L. ABBOTT
---------------------
Sandra L. Abbott
Chief Financial Officer and
Vice President of Finance
(Principal Financial and Accounting Officer)
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24
EXHIBIT INDEX
8X8, INC.
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
11.1 Calculation of Historical and Pro forma Net Income (Loss)
Per Share
27.1 Financial Data Schedule
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.
22
1
EXHIBIT 11.1
CALCULATION OF HISTORICAL AND PRO FORMA NET INCOME (LOSS) PER SHARE
(In thousands, except per share amounts)
(unaudited)
Three months ended Six months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
Net income (loss) ..................... $ 95 $(1,615) $ 3,513 $(9,189)
======= ======= ======= =======
Primary net income per share........... $ 0.01
=======
Historical weighted average number of
common and common equivalent shares:
Preferred stock.................... 165
Common stock....................... 14,472
Dilutive common stock options ..... 1,627
-------
16,264
=======
Pro forma net income (loss)
per share.. $ (0.14) $ 0.25 $(0.79)
======= ======= =======
Pro forma weighted average number of
common and common equivalent shares
Preferred stock.................... 3,236 1,946 3,192
Common stock....................... 6,928 10,724 5,856
Common stock options .............. 1,634 1,454 2,623
------- ------- -------
11,798 14,124 11,671
======= ======= =======
23
5
1,000
6-MOS
MAR-31-1998
APR-01-1997
SEP-30-1997
36,413
0
4,997
0
2,706
45,114
6,991
5,608
46,683
11,196
0
0
0
15
35,348
46,683
22,509
22,509
7,081
7,081
13,495
0
0
2,513
(1,000)
3,513
0
0
0
3,513
0
0.25
Item shown net of allowance, consistent with the balance sheet presentation.
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.
