1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549



                                    FORM 10-Q



[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the quarterly period ended December 31, 1998

[ ]June 30, 1999

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                        Commission File Number: 333-15627


                                    8X8, INC.


Delaware                                                         77-0142404
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)
2445 Mission College Blvd. Santa Clara, CA 95054 (408) 727-1885 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ][_] The number of shares of the Registrant's Common Stock outstanding as of January 5,August 6, 1999 was 15,295,977.18,561,395. The exhibit index begins on page 26.30. 2 8X8, INC. INDEX
Page ---- PART I - FINANCIAL INFORMATION Page ----- Item 1. Financial Statements Condensed Consolidated Balance Sheets at December 31, 1998June 30, 1999 and March 31, 1998...............................................11999................................... 2 Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 1998June 30, 1999 and 1997..........................................................21998.................. 3 Condensed Consolidated Statements of Cash Flows for the ninethree months ended December 31, 1998June 30, 1999 and 1997....................................................31998.................. 4 Notes to Unaudited Condensed Consolidated Financial Statements........................4Statements......... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................................6Operations....................................................... 9 PART II- OTHER INFORMATION Item 5. Other Information...........................................................25 Item 6. Exhibits and Reports on Form 8-K............................................25 Signatures...........................................................................258-K....................................... 29 Signatures...................................................................... 29
i 3 PART I - FINANCIAL INFORMATION ITEMItem 1. FINANCIAL STATEMENTSFinancial Statements 8X8, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, unaudited)
December 31,June 30, March 31, 1998 1998 ------------1999 1999 -------- -------- ASSETS Current assets: Cash, cash equivalents and short-term investments ................investments....................... $ 17,06417,929 $ 26,73715,810 Accounts receivable, net ............... 6,771 4,527 Inventory .............................. 10,729 12,758net........................ 1,918 5,886 Inventory....................................... 1,508 3,915 Prepaid expenses and other assets ...... 852 876assets............... 899 878 -------- -------- Total current assets ................. 35,416 44,898assets.......................... 22,254 26,489 Property and equipment, net .............. 2,165 1,370 Depositsnet....................... 1,998 2,163 Intangibles and other assets ................ 85 161assets...................... 3,544 57 -------- -------- $ 37,66627,796 $ 46,42928,709 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .......................payable................................ $ 2,6361,371 $ 2,6251,917 Accrued compensation ................... 1,790 1,445compensation............................ 1,735 1,236 Accrued warranty ....................... 1,237 1,461warranty................................ 854 1,043 Deferred revenue ....................... 3,483 2,447revenue................................ 1,186 4,089 Other accrued liabilities .............. 1,810 1,923liabilities....................... 1,881 1,601 -------- -------- Total current liabilities ............ 10,956 9,901 -------- -------- Minority interest ........................ -- 857,027 9,886 -------- -------- Stockholders' equity: Common stock ........................... 15stock.................................... 18 15 Additional paid-in capital ............. 48,012 47,785capital...................... 61,721 48,363 Notes receivable from stockholders ..... (286) (893)stockholders.............. (239) (266) Deferred compensation .................. (281) (744)compensation........................... (94) (197) Unrealized loss on investments ......... (231) (45)investments.................. -- (193) Accumulated deficit .................... (20,519) (9,675)deficit............................. (40,637) (28,899) -------- -------- Total stockholders' equity ........... 26,710 36,44320,769 18,823 -------- -------- $ 37,66627,796 $ 46,42928,709 ======== ========
The accompanying notes are an integral part of these financial statements. 12 4 8X8, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited)
Three months ended Nine months ended December 31, December 31, ----------------------- -----------------------June 30, --------------------------- 1999 1998 1997 1998 1997 -------- -------- -------- -------- Product revenues ...................... $ 7,6115,560 $ 12,325 $ 22,497 $ 25,3816,511 License and other revenues ............ 2,468 2,813 3,685 12,266 -------- --------334 589 -------- -------- Total revenues ........................ 10,079 15,138 26,182 37,6475,894 7,100 Cost of product revenues .............. 5,621 6,475 15,865 13,006 Cost of license and other revenues .... 9 404 68 954 -------- --------3,353 4,390 -------- -------- Gross profit .......................... 4,449 8,259 10,249 23,687 -------- --------2,541 2,710 -------- -------- Operating expenses: Research and development ............ 2,512 3,284 7,877 9,4792,423 2,612 Selling, general and administrative . 5,409 5,358 14,061 12,658 -------- --------3,587 4,362 In-process research and development 10,100 -- Amortization of intangibles 50 -- -------- -------- Total operating expenses .... 7,921 8,642 21,938 22,13716,160 6,974 -------- -------- -------- -------- Income (loss)Loss from operations ......... (3,472) (383) (11,689) 1,550(13,619) (4,264) Other income, net ..................... 249 515 845 1,0951,881 93 -------- -------- -------- -------- Income(loss)before(benefit)Loss before provision (benefit) for income taxes ..................... (3,223) 132 (10,844) 2,645 (Benefit) provision(11,738) (3,971) Provision (benefit) for income taxes .. -- -- -- (1,000) -------- -------- -------- -------- Net income (loss) .....................loss (11,738) $ (3,223) $ 132 $(10,844) $ 3,645 ======== ========(3,971) ======== ======== Net income (loss)loss per share: Basic ............................... $ (0.21)(0.72) $ 0.01(0.27) Diluted $ (0.73)(0.72) $ 0.32 Diluted ............................. $ (0.21) $ 0.01 $ (0.73) $ 0.25 ======== ======== ======== ========(0.27) Shares used in per share calculations: Basic ............................... 15,105 14,274 14,945 11,25016,341 14,792 Diluted ............................. 15,105 16,723 14,945 14,800 ======== ========16,341 14,792
The accompanying notes are an integral part of these financial statements. 3 5 8x8, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited)
Three months ended June 30, --------------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net loss.............................................. $(11,738) $ (3,971) Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization..................... 337 222 Amortization of deferred compensation............. 54 124 Purchased in-process research and development..... 10,100 -- Gain on sale of investments, net.................. (1,687) -- Net effect of changes in current and other assets and current liabilities............................... 3,102 (1,201) -------- -------- Net cash provided by (used in) operating activities...................................... 168 (4,826) -------- -------- Cash flows from investing activities: Purchases of property and equipment................... (89) (135) Proceeds from sale of nonmarketable equity investment......................................... 1,880 -- Cash paid for acquisitions, net....................... (15) -- Short-term investments-trading activity, net.......... -- 60 -------- -------- Net cash provided by (used in) investing activities...................................... 1,776 (75) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock................ 153 131 Repayment of notes receivable from stockholders....... 22 470 -------- -------- Net cash provided by financing activities......... 175 601 -------- -------- Net increase (decrease) in cash and cash equivalents..... 2,119 (4,300) Cash and cash equivalents at the beginning of the period............................................ 15,810 26,677 -------- -------- Cash and cash equivalents at the end of the period....... $ 17,929 $ 22,377 ======== ========
The accompanying notes are an integral part of these financial statements. 2 5 8X8, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, unaudited)
Nine months ended December 31, ------------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net income (loss) .......................... $(10,844) $ 3,645 Charges to net income (loss) not affecting cash ............................ 821 1,978 Net effect of changes in current and other assets and current liabilities ................... 940 (5,340) -------- -------- Net cash (used in) provided by operating activities ................... (9,083) 283 -------- -------- Cash flows from investing activities: Purchase of property and equipment ......... (1,473) (722) Short-term investments-trading activity, net ............................. 60 2 Purchases of common stock from minority shareholders in subsidiary ....... (85) -- -------- -------- Net cash used in investing activities ............................. (1,498) (720) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock, net ......................... 489 24,776 Repayment of notes receivable from stockholders .............................. 479 126 -------- -------- Net cash provided by financing activities ............................. 968 24,902 -------- -------- Net (decrease) increase in cash and cash equivalents ............................ (9,613) 24,465 Cash and cash equivalents at the beginning of the period ..................... 26,677 8,722 -------- -------- Cash and cash equivalents at the end of the period ........................... $ 17,064 $ 33,187 ======== ========
The accompanying notes are an integral part of these financial statements. 34 6 8X8, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF THE BUSINESS The Company designs, manufactures,8x8, Inc. ("We" or "8x8") was incorporated in California in February 1987. In December 1996, 8x8 was reincorporated in Delaware. We develop, manufacture and markets videophones for use by the consumer and business market. The Company also designs, develops and marketsmarket telecommunication equipment focused on multimedia Internet protocol (IP) applications. Our products are highly integrated, leverage our proprietary technology and are comprised of multimedia communication semiconductors, multimedia compression algorithms, network protocols and associated softwareembedded system design. Our products are used in applications including voice-over-IP, video monitoring and streaming, and videoconferencing. We market our products mainly to original equipment manufacturers (OEMs) but also to end users for our video monitoring system products. In an effort to expand the available market for our multimedia communication products, we began developing low-cost consumer videophones and marketing these products to consumers under the ViaTV brand name in 1997. However in the fourth quarter of fiscal 1999, we determined that a combination of factors including the high cost of maintaining a consumer distribution channel, the slower than expected growth rate of the consumer videophone market, and the low gross margins typical of a consumer electronics product made it unlikely that the consumer videophone business would be profitable in the foreseeable future. Therefore, we announced in April 1999 that we would cease production of the ViaTV product line and withdraw from our distribution channels over the subsequent several quarters. We do not expect to be able to generate revenues from our other multimedia communication products.products to compensate for the loss of ViaTV revenues for at least the next twelve months, if at all.* If we cannot adequately compensate for lower revenues with decreased manufacturing overhead expenses and with lower operating expenses, it could have a material adverse effect on our business and operating results. 2. BASIS OF PRESENTATION The Company'sOur fiscal year ends on the last Thursday on or before March 31. Fiscal 2000 will be a 53 week year, while fiscal 1999 was a 52 week year. Our fiscal quarters end on the last Thursday on or before the end of each calendar quarter. The three and nine month periods ended December 31,June 24, 1999 and June 25, 1998, included 14 weeks and 40 weeks of operations, respectively. The three and nine month periods ended December 25, 1997respectively, each included 13 weeks and 39 weeks of operations, respectively.operations. For purposes of these condensed consolidated financial statements, the Company haswe have indicated itsour fiscal year as ending on March 31 and itsour interim periods as ending on December 31.June 30. 5 7 The accompanying interim condensed consolidated financial statements are unaudited and have been prepared on substantially the same basis as the Company'sour annual financial statements for the year ended March 31, 1998.1999. 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'sour financial position, results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the Company'sour audited financial statements for the year ended March 31, 1998,1999, including notes thereto, included in the Company'sour fiscal 1999 Annual Report on Form 10-K. The results of operations for the interim periods included in these financial statements are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. 3. BALANCE SHEET DETAIL (in thousands)
(in thousands) December 31,June 30, March 31, 1998 1998 ------------1999 1999 -------- --------- Inventories:Inventory: Raw materialsmaterials.......................... $ 2,680108 $ 3,864 Work-in-process 3,491 5,337952 Work-in-process........................ 481 892 Finished goods 4,558 3,557goods......................... 919 2,071 ------- ------- $10,729 $12,758$ 1,508 $ 3,915 ======= =======
4. NET INCOME (LOSS) PER SHARE All prior years' data in this report have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128 (FAS 128). FAS 128 requires a reconciliation of the numerators and denominators of the basic and dilutedBasic net income (loss) per share calculations. There were no adjustmentsis computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of common shares outstanding during the period (denominator). Diluted net income (loss) per share is computed using the weighted average number of common shares and potential common shares outstanding during the period. Potential common shares result from the assumed exercise, using the treasury stock method, of common stock options and unvested restricted common stock having a dilutive effect. The numerators for each period presented are equal to the numerators for any period presented. 4 7reported net loss. The reconciliation of the denominators is as follows (in thousands):
Three months ended Nine months ended December 31, December 31, ------------------ ------------------ 1998 1997 1998 1997 ------ ------Months Ended June 30, --------------------------- 1999 1999 ------ ------ Basic shares 15,105 14,274 14,945 11,25016,341 14,792 Effect of dilutive securities: Preferred stock -- -- -- 1,297 Common stock options -- 1,833 -- 1,480 Unvested restricted common stock -- -- 616 773 ------ ------ ------ ------ Diluted shares 15,105 16,723 14,945 14,800 ====== ======16,341 14,792 ====== ======
Approximately 3,346,000 common stock options and 187,000 unvested restricted common shares were outstanding at December 31, 1998, but6 8 The following equity instruments were not included in the computationcomputations of diluted net income (loss) per share because their impact wasthe effect on the calculations would be anti-dilutive in view of losses incurred by the Company. The number of common stock options outstanding at December 31, 1997 that were not included in the computation of diluted net income (loss) per share because their impact was anti-dilutive was not material.(in thousands):
Three Months Ended June 30, --------------------------- 1999 1999 ------ ------ Common stock options 3,859 3,095 Unvested restricted common stock 240 532 ------ ------ Total 4,099 3,627 ====== ======
5. RECENT ACCOUNTING PRONOUNCEMENTS In April 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (FAS130), "ReportingCOMPREHENSIVE INCOME (LOSS) Comprehensive Income." Comprehensive net income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. TheFor us, the primary difference between net income (loss) and comprehensive net income (loss), for the Company, is gains and losses on short-term investments classified as available-for-sale. Comprehensive net income (loss)losses for the periods ended June 30, 1999 and 1998 were $11,545,000 and $3,955,000, respectively. As of June 30, 1999, accumulated other comprehensive loss and accumulated deficit are the same. 6. ACQUISITION OF ODISEI During the first quarter of fiscal 2000, we acquired Odisei S.A., a privately held, development stage company based in Sophia Antipolis, France, that develops IP telephony software. Odisei is developing a scalable, Java-based software solution for managing voice-over-IP networks. The software will run on a carrier-grade server located at a telephony service provider's site and will provide complete voice and data services over T1/E1, xDSL or cable communication links. The condensed consolidated financial statements reflect the acquisition of Odisei on May 24, 1999 for approximately 2,868,000 shares of our common stock. In addition, 8x8 issued approximately 154,000 8x8 options in exchange for certain Odisei options outstanding. Certain of the shares issued to Odisei employees are subject to repurchase at a price per share of $2.32 if the employee departs prior to vesting. The purchase price of the acquisition of approximately $13.4 million, which includes $112,000 of estimated acquisition related costs and $648,000 for the exchange of Odisei options for our options, was used to acquire the net assets of Odisei. The purchase price has been allocated to tangible assets acquired and liabilities assumed based on the book value of Odisei's current reportingassets and comparable periodliabilities, which we believe approximates their fair value. In addition, we engaged an independent appraiser to value the intangible assets, including amounts allocated to Odisei's in-process research and development. The in-process research and development relates to Odisei's initial product for which technological feasibility has not been established and is estimated to be approximately 60% complete. The fair value of the in-process technology was based on a discounted cash flow model, similar to the traditional "Income Approach," which discounts expected future cash flows to present value, net of tax. In developing cash flow projections, revenues were forecasted based on relevant factors, including aggregate revenue growth rates for the business as a whole, characteristics of the potential market for the technology and the anticipated life of the technology. Projected annual revenues for the in-process research and development projects were assumed to ramp up initially and decline significantly at the end of the in-process technology's economic life. Operating expenses and resulting profit margins were forecasted based on the characteristics and cash flow generating potential of the acquired in-process technology. Associated risks include the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and risks related to the impact of potential changes in market conditions and technology. The resulting estimated net cash flows have been discounted at a rate of 27%. This discount rate was based on the estimated cost of capital plus an additional discount for the increased risk associated with in-process technology. Based on a preliminary appraisal, the value of the acquired Odisei in-process research and development, which was expensed in the prior yearfirst quarter of fiscal 2000, is $10.1 million. The actual amount of acquired in-process research and development may differ from this estimate. The excess of the purchase price over the net tangible and intangible assets acquired and liabilities assumed has been allocated to goodwill. The allocation of the purchase price is as follows (in thousands):
Three Months Ended Nine months Ended December 31, December 31, ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- ComprehensiveIn-process research and development $10,100 Workforce 200 Odisei net income (loss) $ (3,347) $ 132 $(11,030) $ 3,645 ======== ======== ======== ========tangible liabilities (246) Goodwill 3,325 ------- $13,379 =======
7 9 The consolidated results of the Company include the results of the operations of Odisei from the date of the acquisition. Had the acquisition of Odisei taken place as of the beginning of the quarter, the pro form net loss of the Company would have been substantially the same as that reported for the quarter. 7. RECENT ACCOUNTING PRONOUNCEMENTS In October 1997,March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 97-298-1 (SOP 97-2)98-1), "Software for Internal Use," which provides guidance on accounting for recognizing revenue onthe cost of computer software transactions and supersedesdeveloped or obtained for internal use. We adopted SOP 91-1 "Software Revenue Recognition." SOP 98-4 deferred, for one year, the application of certain passages98-1 in SOP 97-2 pending further guidance. In December 1998, the AICPA provided further guidance by issuing SOP 98-9 "Modification of 97-2, Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 by clarifying vendor-specific objective evidence necessary to recognize revenue for software licenses on multiple element arrangements when undelivered elements exist. SOP 98-9 is effective for fiscal years beginning after March 15, 1999.2000. The Company does not expect the adoption of SOP 98-9 will be material to the Company's consolidated results of operations. Adoption of the remaining provisions of SOP 97-298-1 did not have a material impact on revenue recognition during the quarter or nine months ended December 31, 1998. 5 8our consolidated financial statements. In June 1997,1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of an Enterprise and Related Information." FAS 131 revises information regarding the reporting of certain operating segments for periods beginning after December 15, 1997. The Statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt FAS 131 in its fiscal 1999 annual report. The Company has not yet determined the impact, if any, of adopting this new standard. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities." FAS 133 is effective for fiscal years commencing after June 15, 1999. The Company will comply with the requirements ofWe are required to adopt FAS 133 in fiscal year 20012001. FAS 133 establishes methods of accounting for derivative financial instruments and doeshedging activities related to those instruments as well as other hedging activities. We do not expect that the adoption of FAS 133 will behave a material impact on our consolidated financial statements. In fiscal 1999, we adopted FAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographical areas and major customers. In accordance with the provisions of FAS 131, we determined that we have one reportable operating segment. In December 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-9, "Modification of SOP-97-2, Software Revenue Recognition, With Respect to the Company'sCertain Transactions", which amends SOP 97-2, "Software Revenue Recognition" and supercedes SOP 98-4. We adopted SOP 98-9 in fiscal 2000. The adoption of SOP 98-9 did not have a material impact on our consolidated results of operations. ITEM8 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement'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'sour expectations, beliefs, intentions or strategies regarding the future and statements contained within those sentences followed by an asterisk (i.e., "*"). All forward-looking statements included in this Report on Form 10-Q are based on information available to the Companyus on the date hereof, and the Company assumeswe assume no obligation to update any such forward-looking statements. The Company'sOur actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those set forth below under the heading "Factors That May Affect Future Results" and elsewhere in this Report on Form 10-Q. This information should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included in Item I of this Report on Form 10-Q and the audited Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended March 31, 1998 contained in the Company's Annual Report on Form 10-K. Overview Since June 1995, the Company haswe have been executing a business strategy designed to focus the Company'sour efforts exclusively on the development, manufacture and marketing of multimedia communication semiconductors, software and systems. In each of the third quarters ended December 31, 1998 and 1997, sales of the Company's multimedia communication products accounted for 100% of product revenues. In the fiscal years ended March 31, 1998 and 1997, 6 9 sales of the Company's multimedia communication products accounted for 100% and 86% of product revenues, respectively. The Company markets its line ofTo date, we have marketed our multimedia communication semiconductors and related softwaretechnology to OEMs and distributors, mainly for videoconferencing and videophone applications. This product line includes the LVP, VCP and VCPex processors. The Company has leveraged its strengths in semiconductor design and related softwaresemiconductors. In an effort to develop andexpand the available market low-costfor our multimedia communication systems, including its VideoCommunicator products.products, and to capitalize on our vertically integrated technology, we began developing low-cost consumer videophones and marketing these products to consumers under the ViaTV brand name in 1997. The Company began shipping theViaTV videophone enables phone call participants to both hear and see each other while communicating over a standard analog telephone line. We shipped our first ViaTV product in its planned familyFebruary 1997, and over the next two years introduced several new videophone products, expanded our distribution channels in North America, Europe and Asia, and became a leading manufacturer of VideoCommunicator products,consumer videophones. However in the ViaTVfourth quarter of fiscal 1999, we determined that a combination of factors including the high cost of maintaining a consumer distribution channel, the slower than expected growth rate of the consumer videophone model VC100,market, and the low gross margins typical of a consumer electronics product made it unlikely that the consumer videophone business would be profitable in February 1997. Subsequently, the Company introduced the VC105, an upgraded VC100, and added three new models, the VC50, VC55 and VC150, toforeseeable future. Therefore, we announced in April 1999 that we would cease production of the ViaTV product line. The Company also introduced versionsline and withdraw from our distribution channels over the subsequent several quarters. In conjunction with this decision we recorded a $5.7 million charge associated with the write off of its ViaTV videophones designed for European and Asian markets. In addition,videophone inventories in the Company introduced a VideoCommunicator product targeted towards the surveillance market segment. In August 1998, the Company began shipping the RSM-1500 remote surveillance module, and subsequently ceased shipmentfourth fiscal quarter of the VC50 model. The Company has announced the VC110 and VC160, which are upgrades1999. We do not expect to the VC105 and VC150, respectively. The Company expects thesebe able to generate revenues from our other products to become availablecompensate for the loss of ViaTV revenues for at least the next twelve months, if at all.* If we cannot adequately compensate for lower revenues with decreased manufacturing overhead expenses and with lower 9 11 operating expenses, it could have a material adverse effect on our business and operating results. In June 1998, we entered the market for video monitoring products with our RSM-1500 Remote Surveillance Module. The RSM-1500 module enables real-time remote video monitoring over POTS lines. The target market for video monitoring is primarily owners of small businesses such as convenience stores and restaurants who need the ability to view their premises from any remote location in the first quarter of fiscal 2000.* The Company markets its VideoCommunicators through retailworld at any time. We currently sell RSM-1500 products to security distributors and dealers in North America, and are attempting to expand our distribution channels catalogsinto Europe 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.Asia. In December 1998, the Companywe introduced a new semiconductor product, the Audacity internetInternet telephony processor, which combines telephony protocols with audio compression/decompression algorithms and implements multiple, simultaneous internetInternet protocol (IP) phone calls on a single integrated circuit. AtIn April 1999, we announced our Symphony VoIP Module, an integrated system product that is based on the same time, the Company announced a prototype system called the Packet Gateway cable adapter, which includes a cable modemAudacity semiconductor and that connects up to four analog telephone lines to an Audacity processor and enables IP telephony over cable networks.network. These products reflect the Company'sour recent efforts to develop broadband telephony technology. To dateIn the first quarter of fiscal 2000, we realized revenues of $60,000, associated with the sale of evaluation units of broadband telephony systems. During the first quarter of fiscal 2000, we acquired Odisei S.A., a privately held, development stage company based in Sophia Antipolis, France, that develops IP telephony software. Odisei is developing a scalable, Java-based software solution for managing voice-over-IP networks. The software will run on a carrier-grade server located at a telephony service provider's site and will provide complete voice and data services over T1/E1, xDSL or cable communication links. The condensed consolidated financial statements reflect the acquisition of Odisei on May 24, 1999 for approximately 2,868,000 shares of our common stock. In addition, 8x8 issued approximately 154,000 8x8 options in exchange for certain Odisei options outstanding. Certain of the shares issued to Odisei employees are subject to repurchase at a price per share of $2.32 if the employee departs prior to vesting. The purchase price of the acquisition of approximately $13.4 million, which includes $112,000 of estimated acquisition related costs and $648,000 for the exchange of Odisei options for our options, was used to acquire the net assets of Odisei. The purchase price has been allocated to tangible assets acquired and liabilities assumed based on the book value of Odisei's current assets and liabilities, which we believe approximates their fair value. In addition, we engaged an independent appraiser to value the intangible assets, including amounts allocated to Odisei's in-process research and development. The in-process research and development relates to Odisei's initial product for which technological feasibility has not been established and is estimated to be approximately 60% complete. The fair value of the in-process technology was based on a discounted cash flow model, similar to the traditional "Income Approach," which discounts expected future cash flows to present value, net of tax. In developing cash flow projections, revenues were forecasted based on relevant factors, including aggregate revenue growth rates for the business as a whole, characteristics of the potential market for the technology and the anticipated life of the technology. Projected annual revenues for the in-process research 10 12 and development projects were assumed to ramp up initially and decline significantly at the end of the in-process technology's economic life. Operating expenses and resulting profit margins were forecasted based on the characteristics and cash flow generating potential of the acquired in-process technology. Associated risks include the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and risks related to the impact of potential changes in market conditions and technology. The resulting estimated net cash flows have been discounted at a rate of 27%. This discount rate was based on the estimated cost of capital plus an additional discount for the increased risk associated with in-process technology. Based on a preliminary appraisal, the value of the acquired Odisei in-process research and development, which was expensed in the first quarter of fiscal 2000, is $10.1 million. The actual amount of acquired in-process research and development may differ from this estimate. The excess of the purchase price over the net tangible and intangible assets acquired and liabilities assumed has been allocated to goodwill. The allocation of the purchase price is as follows (in thousands): In-process research and development $10,100 Workforce 200 Odisei net tangible liabilities (246) Goodwill 3,325 ------- $13,379 =======
Results of Operations The consolidated results of the Company has not realized any revenueinclude the results of the operations of Odisei from broadband telephony. RESULTS OF OPERATIONSthe date of the acquisition. Had the acquisition of Odisei taken place as of the beginning of the quarter, had the pro forma net loss of the Company would have been substantially the same as that reported for the quarter. The following discussion should be read in conjunction with the Company'sour Condensed Consolidated Statements of Operations and the notes thereto: Revenues
Three months ended Nine months ended December 31, December 31, --------------------------------------- ---------------------------------------Months Ended June 30, ------------------------------- (In millions) 1999 1998 1997 1998 1997 ---------------- ---------------- ---------------- ---------------------------- ------------ Product revenues $ 7.6 75% $12.3 81% $22.5 86% $25.4 67%5.6 95% $ 6.5 92% License and other revenues 2.5 25% 2.8 19% 3.7 14% 12.3 33%0.3 5% 0.6 8% ----- --- ----- ----- ----- ----- ----- ----- ----- Total revenues $10.1--- $ 5.9 100% $15.1 100% $26.2 100% $37.7$ 7.1 100% ===== === ===== ===== ===== ===== ===== ===== ========
7 10 Total revenues were $10.1$5.9 million and $15.1$7.1 million for the thirdfirst quarters of fiscal 19992000 and 1998,1999, respectively. Total revenues for the thirdfirst quarter of fiscal 19992000 were divided among multimedia communication semiconductors 19%($2.5 million), videophoneViaTV systems 56%($1.5 million), video monitoring systems ($1.5 million), broadband telephony systems ($60,000), and nonrecurring license royalty and other revenue 25%revenues ($334,000). In the thirdfirst quarter of fiscal 19981999, total revenues were divided among multimedia communication semiconductors 40%($3.1 million), videophoneViaTV systems 41%($2.8 million), video monitoring systems ($622,000), and nonrecurring license and other revenue 19%revenues ($589,000). Product revenues were $7.6$5.6 million in the thirdfirst quarter of fiscal 1999,2000, a decrease of $4.7 million$900,000 from the $12.3$6.5 million reported in the thirdfirst quarter of fiscal 1998.1999. The decrease in product revenues was primarilyis due to a decrease in both units sold and ASPs for our ViaTV products, 11 13 due to our exit from the consumer videophone market, and in unit shipments of our multimedia communication semiconductor revenues. The decreaseproducts. These decreases were offset by an increase in semiconductor revenues is due mainly to softness in demand from OEM customers, particularly in Asia and Europe, that manufacture personal videoconferencing systems. In addition, VideoCommunicator product revenues were higher in the third quartersales of fiscal 1998 compared to the same period of fiscal 1999 because of nonrecurring shipments to one OEM customer.our video monitoring systems products. License and other revenues consist of technology licenses, including royalties earnedrequired under such licenses, and nonrecurring engineering fees for services performed by the Companythat we perform for itsour customers. License and other revenues were approximately $2.5 million$334,000 in the thirdfirst quarter of fiscal 1999,2000, a decrease of approximately $300,000$255,000 from the $2.8 million$589,000 reported in the thirdfirst quarter of fiscal 1998.1999. There can be no assurance that the Companywe will receive any revenues from licensing or other such arrangements in the future.* See "Factors That May Affect Future Results--No Assurance of Future License and Other Revenues" and "Factors That May Affect Future Results--Dependence on Key Customers." Total revenues were $26.2 million and $37.7 million in the first nine months of fiscal 1999 and 1998, respectively. Total revenues for the first nine months of fiscal 1999 were divided among multimedia communication semiconductors 33%; videophone systems 53%; and nonrecurring license and other revenues 14%. In the first nine months of fiscal 1998, total revenues were divided among multimedia communication semiconductors 39%; videophone systems 29%; and nonrecurring license and other revenues 32%. Product revenues were $22.5 million in the first nine months of fiscal 1999, a decrease of $2.9 million from the $25.4 million reported in the first nine months of fiscal 1998. In the first nine months of fiscal 1999 and 1998 license and other revenues, all of which were nonrecurring, were $3.7 million and $12.3 million, respectively. In the first nine months of fiscal 1998, license and other revenues included approximately $5.3 million paid by 3Com for a license to substantially all of the Company's technology underlying its VideoCommunicators. There can be no assurance that the Company will receive any revenues from such arrangements in the future.* See "Factors That May Affect Future Results -- No Assurance of Future License and Other Revenues." In the third quarter of fiscal 1999, revenuesRevenues derived from one customer represented approximately 14%eleven percent (11%) of our total revenues for the Company's total revenues. In the third quarter of fiscal 1998, revenues derived from one customer represented approximately 22% of total revenues.ended June 30, 1999. No customer represented ten percent (10%) or more of the Company'sour total revenues for the nine monthsquarter ended December 31,June 30, 1998. Revenues derived from one customerOur sales to Europe represented approximately 26%23% and 20% of total revenues for the first nine monthsquarters of fiscal 1998. Dependence on any significant customer or customers entails certain risks 8 11 Revenues derived from customers outside of2000 and 1999, respectively. Our sales to the United States as a percentageAsia Pacific region represented 17% and 22% of total revenues were as follows:
Three months ended Nine months ended December 31, December 31, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Asia Pacific 21% 22% 24% 26% Europe 13% 18% 17% 14% ---- ---- ---- ---- Total 34% 40% 41% 40% ==== ==== ==== ====
for the first quarters of fiscal 2000 and 1999, respectively. See "Factors That May Affect Future Results--International Operations." Cost of Revenues
Three months ended Nine months ended December 31, December 31, ----------------------- -----------------------Months Ended June 30, --------------------------- (In millions) 1999 1998 1997 1998 1997 ------- ------- ------- ----------- ---- Cost of product revenues $ 5.6 $ 6.4 $ 15.9 $ 13.0$3.4 $4.4 As a percentage of product revenues 74% 52% 71% 51% Cost of license and other revenues $ -- $ 0.4 $ 0.1 $ 1.0 As a percentage of license and other revenues 0% 14% 3% 8%58% 68%
The cost of product revenues consists of costs associated with VideoCommunicator components, semiconductor wafer fabrication, VideoCommunicatorsystem and semiconductor assembly and testing performed by third-party vendors and direct and indirect costs associated with purchasing, scheduling and quality assurance. Costs of product revenues were $5.6$3.4 million and $6.4$4.4 million for the thirdfirst quarters of fiscal 2000 and 1999, respectively. The decrease in the cost of product revenues in the first quarter of fiscal 2000 is due to the mix of product revenues and 1998, respectively. Costthe decrease in overall product revenues as compared to fiscal 1999. The decrease in the cost of product revenues as a percentage of total revenue in the first quarter of fiscal 2000 is due to lower sales of our ViaTV products as a percentage of total revenue, as our ViaTV products have a substantially different cost structure from our multimedia communication semiconductor and video monitoring products. There were no costs associated with license and other revenues in the third quarterfirst quarters of fiscal 2000 and 1999, and 1998 were approximately $9,000 and $404,000, respectively. Cost of license and other revenues in the third quarter of fiscal 1998 consisted primarily of personnel and other costs incurred to perform certain development work under terms of nonrecurring engineering contracts. This development work was performed by research and development personnel of the Company. Cost of product revenues were $15.9 million and $13.0 million in the first nine months of fiscal 1999 and 1998, respectively. The cost structure of the Company's ViaTV product line, the Company's first line of VideoCommunicator products, is substantially different from the Company's multimedia communication semiconductor products. The Company expects the costs of product revenues to continue to increase as a percentage of product revenues if the VideoCommunicator revenues continue to increase as a percent of product revenues. 912 1214 Gross Profit
Three months ended Nine months ended December 31, December 31, ----------------------- -----------------------Months Ended June 30, --------------------------- (In millions) 1999 1998 1997 1998 1997 ------- ------- ------- ----------- ---- Gross profit $ 4.4 $ 8.3 $ 10.2 $ 23.7$2.5 $2.7 As a percentage of total revenues 44% 55% 39% 63%42% 38%
Gross profit was $4.4$2.5 million and $8.3$2.7 million in the thirdfirst quarters of fiscal 19992000 and 1998,1999, respectively. Gross profit from product revenues was $2.0$2.2 million and $5.9$2.1 million for the thirdfirst quarters of fiscal 2000 and 1999, respectively. Lower gross profit in the first quarter of fiscal 2000 was due primarily to decreased unit shipments for both our ViaTV and 1998, respectively.multimedia communication semiconductor products. Gross profit from license and other revenues, all of which was nonrecurring, less related costs, was approximately $2.5 million$334,000 and $2.4 million$589,000 in the thirdfirst quarters of fiscal 19992000 and 1998,1999, respectively. There can be no assurance that the Companywe will receive any revenues from such license and other revenues sources in the future.* See "Factors That May Affect Future Results--No Assurance of Future License and Other Revenues." Gross profit was $10.2 million and $23.7 million in the first nine months of fiscal of 1999 and 1998, respectively. License and other revenues, net of associated costs, contributed $3.6 million and $11.3 million to gross profit in the first nine months of fiscal 1999 and 1998, respectively. Lower gross profit in the third quarter of fiscal 1999 was primarily due to the decrease in semiconductor revenues. The gross profit for the Company's VideoCommunicator products decreased due to declining average selling prices, but this decrease was partially offset by lower product costs and higher volumes. Total gross margin was 44%42% and 55%38% in the thirdfirst quarters of fiscal 2000 and 1999, and 1998, respectively. LowerThe increase in gross margin inis due primarily to the third quarter of fiscal 1999 was primarilyincreased gross margins for system level products, as video monitoring revenues, which have higher gross margins due to the decrease in semiconductorhigher ASPs and lower costs, increased while ViaTV revenues with lower gross margins decreased. The markets for our products are characterized by falling average selling prices, which could have a material adverse effect on our future business and operating results if we cannot achieve lower cost of sales and/or higher sales volumes.* We expect that, as a result of competitive pressures and other factors, gross profit as a percentage of total revenues. In addition, gross margins were lower due to increased sales ofrevenue for our semiconductor products will likely decrease for the Company's VideoCommunicator products which have substantially lower gross margins than the Company's semiconductor products. In the first nine months of fiscal 1999, semiconductor revenues have decreased compared to the same periods in fiscal 1998. Since grossforeseeable future.* Gross profit as a percent of revenue is substantially lower for the sales of VideoCommunicatorvideo monitoring and ViaTV systems products than for sales of the Company's semiconductors, if VideoCommunicatorour semiconductors. If our systems product revenue continuesrevenues continue to grow as a percentage of total product revenue, the Company expectswe expect that gross profit as a percentage of total product revenue will decrease.* See "Factors That May Affect Future Results--Fluctuations in Operating Results." In addition, the markets for the Company's VideoCommunicatorResearch and semiconductor products are characterized by falling average selling prices, which could have a material adverse effect on the Company's future business and operating results if the Company cannot achieve lower cost of sales and/or higher sales volumes.* 10 13 Operating Expenses--Research and Development Expenses
Three months ended Nine months ended December 31, December 31, ----------------------- -----------------------Months Ended June 30, --------------------------- (In millions) 1999 1998 1997 1998 1997 ------- ------- ------- ----------- ---- Research and development $ 2.5 $ 3.3 $ 7.9 $ 9.5$2.4 $2.6 As a percentage of total revenues 25% 22% 30% 25%41% 37%
Research and development expenses consist primarily of personnel, system prototype design and fabrication, mask, prototype wafer and equipment costs necessary for the Companyus to conduct itsour development efforts. Research and development costs, including software development costs, are expensed as incurred. During the three and nine month periods ended December 31, 1998 and 1997, respectively, researchResearch and development expenses were primarily attributable to$2.4 million and $2.6 million for the Company's next generation developmentfirst quarters of its multimedia communication semiconductorsfiscal 2000 and continued development of its VideoCommunicators.1999, respectively. Lower research and development expenses during the thirdfirst quarter and nine months ended December 31, 1998of fiscal 2000 were due to decreases in profit sharing and incentive bonuses, non-recurring VideoCommunicatorViaTV design costs, and costs associated with materials and tooling used in prototype builds of the Company's VideoCommunicator products. During the quarter and nine months ended December 31, 1997 research and development costs would have been higher, except that certain research and development personnel performed non-recurring engineering services under a revenue-generating contract. The costs associated with this contract were included in the cost of license and other revenues. Higher research and development costs as a percentage of total revenues for both the three and nine month periods ended December 31, 1998 were due to lower revenues as compared to the comparable periods in the prior fiscal year. The Company expectscosts. 13 15 We expect to continue to allocate substantial resources to research and development.* However, future research and development costs may vary both in absolute dollars and as a percentage of total revenues.* See "Factors That May Affect Future Results--Rapid Technological Change; Dependence on New Product Introduction." Operating Expenses--Selling,Selling, General and Administrative Expenses
Three months ended Nine months ended December 31, December 31, ----------------------- -----------------------Months Ended June 30, --------------------------- (In millions) 1999 1998 1997 1998 1997 ------- ------- ------- ----------- ---- Selling, general and administrative $ 5.4 $ 5.4 $ 14.1 $ 12.7$3.6 $4.4 As a percentage of total revenues 53% 36% 54% 34%61% 62%
11 14 Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources and general management. Such costs also include advertising, sales commissions, trade show and other marketing and promotional expenses. Selling, general and administrative expenses were $5.4$3.6 million and $4.4 million in each of the thirdfirst quarters of fiscal 19992000 and 1998,1999, respectively. In the thirdfirst quarter of fiscal 1999,2000, expenses increaseddecreased due to lower costs associated with the marketing, advertising and promotion of the Company's VideoCommunicatorViaTV product line and additionallower headcount required to support these activities. These increases were offset by decreases in profit sharingactivities as we exited from the consumer videophone business. As we exit the ViaTV business and incentive bonuses,promote new video monitoring and commission expenses. The Company expects that its sales and marketing expenses may increase as the Company launches new VideoCommunicatorbroadband telephony products, and promotes its current VideoCommunicator products.* Therefore, future selling, general and administrative costs may vary both in absolute dollars and as a percentage of total revenues.* See "Factors That May Affect Future Results--Potential Fluctuations in Operating Results." Selling, generalIn-process Research and administrative expenses were $14.1 millionDevelopment and $12.7Amortization of Intangibles As part of the May 1999 acquisition of Odisei, we recorded intangible assets related to goodwill and workforce that are being amortized on a straight-line basis over five and three years, respectively. Amortization of goodwill and work force charged to operations was $50,000 in the first quarter of fiscal 2000. In addition, we incurred an in-process research and development charge of $10.1 million in the first nine monthsquarter of fiscal 2000 related to the acquisition of Odisei. Other Income, Net In the first quarters of fiscal 2000 and 1999, other income, net, was $1.9 million and 1998,$289,000, respectively. While total expenses increased asDuring fiscal 1996, we acquired an equity position in a resultprivately held company. In the first quarter of fiscal 2000, we realized $1.9 million of other income by selling the factors listed above, the non-cash compensation expense recognizedstock of this company. Interest income earned on certain stock option grants and charged to selling, general and administrative expenses decreased to $64,000our cash equivalents in the first nine monthsquarter of fiscal 1999 from $354,000 in2000 was offset by losses realized on the first nine monthssale of fiscal 1998. Other Income, Net Other income, net, consists primarilycertain of interest earned onour cash equivalents and short-term investments. Other income, net was approximately $249,000 forequivalent investments during the three month period ended December 31, 1998 compared to $515,000 forperiod. In the three month period ended December 31, 1997. Other income, net was $845,000 for the nine month period ended December 31, 1998 compared to $1.1 million for the comparable period in the prior fiscal year. The decrease in interest income in the thirdfirst quarter of fiscal 1999, is dueother income consisted primarily to lower averageof interest income earned on our cash equivalents and short-term investment balances as compared to the third quarter of fiscal 1998. (Benefit)equivalents. 14 16 Provision for Income Taxes There was no tax provision for the threefirst fiscal quarters of 2000 and nine month periods ended December 31, 19981999 due to net losses incurred. The tax benefit in the nine month period ended December 31, 1997 resulted from the reversal of approximately $1.0 million of the Company's income tax liability in the first quarter of fiscal 1998 upon notice from the Internal Revenue Service that it had reversed a previously asserted deficiency related to the taxable year 1992. Year 2000 Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. As the Year 2000 approaches, these code fields will need to accept four digit entries to distinguish years beginning with "19" from those beginning with "20." The Company is assessing the readiness of its products, internal computer systems, and third-party equipment and software utilized by the Company for handlingto handle Year 2000 issues. Based upon the Company's assessments, all of the Company's products are Year 2000 compliant. With regard to the Company's internal computer systems, the Company is currently implementingcompleted its implementation of an enterprise-wide database and information management system.system that is Year 2000 compliant during the quarter ended March 31, 1999. The total cost of the system implementation project was approximately $1.6 million. The Company does not believe that the incremental project cost associated with Year 2000 compliance was material as the feature is included with a system purchased by the Company to satisfy its business needs. As such, the Company has not allocated any portion of the total project cost to the Year 2000 issue. While the Company continues to monitor its system implementation costs, the Company does not believe the incremental project cost associated with Year 2000 compliance to be material, as this feature is included with software purchased by the Company to satisfy its business needs. Though the Company currently expects to successfully implement this and other internal computer systems and programming changes necessary to address Year 2000 issues, there can be no assurance that such implementations will be done within the projected timeframe or within budget.* See "Factors That May Affect Future Results--Enterprise-Wide Database Implementation." See also the discussion below regarding the estimated cost of the enterprise-wide database implementation project. The Company is also assessing the possible effects on the Company's operations of the Year 2000 readiness of key customers, subcontract manufacturers, component suppliers subcontractors and customers.other providers of goods and services to the Company. The Company expects that this assessment, as well as related remediation and contingency planning activities, will be on-going throughout calendar year 1999. The Company's reliance on suppliers, subcontractors and customers, and, therefore, on the proper functioning of their information systems and software, means that failure* Failure to address Year 2000 issues by itsthe Company's customers, subcontract manufacturers, component suppliers, subcontractors and customersother providers of goods and services could have a material adverse impact on the Company's business and operating results.* The total estimated cost to be incurred by the Company regarding the testing of current products for Year 2000 compliance, and answering and responding to customer requests related to Year 2000 issues, including both incremental spending and redeployed resources, is currently not expected to exceed $100,000. The total cost estimate does not include costs of internal software and hardware replaced in the normal course of business. In some instances, the installation schedule of new software and hardware in the normal course of business is being accelerated to also afford a solution to Year 2000 compliance issues. * This statement isThe failure to correct a forward looking statement reflecting current expectations. There can be no assurance that 8x8's actual future performance will meet 8x8's current expectations. See "Factors That May Affect Future Results" commencing on page 15 formaterial Year 2000 problem could result in an interruption in, or a discussionfailure of, certain factors thatnormal business activities or operations. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of key customers, subcontract manufacturers, component suppliers and other partners providing goods and services to the Company, the Company is unable to determine at this time whether the consequences of Year 2000 related interruptions or failures will have a material impact on the Company's results of operations, liquidity or financial condition. To attempt to mitigate the impact of Year 2000 related risks, the Company has begun development of contingency plans which will include, for example, 15 17 attempting to identify alternative vendors of critical materials and services in the event of a Year 2000 related disruption in supply.* Contingency planning will continue through at least calendar 1999, and will depend heavily on responses received from current vendors and customers regarding their Year 2000 readiness.* However, even if the Company, in a timely manner, develops contingency plans believed to be adequate, some problems may not be identified or corrected in time to prevent material adverse consequences to the Company.* Additionally, if the Company fails to satisfactorily resolve Year 2000 issues in a timely manner, it could affect future performance. 12 15be exposed to claims by third parties. Liquidity and Capital Resources Prior to the Company's initial public offering, the Company had satisfied its liquidity needs principally from proceeds generated from two issuances of its equity securities and cash generated from operations in fiscal 1994 and prior years. As of December 31, 1998, the CompanyJune 30, 1999, we had cash and liquid investments totaling $17.1$17.9 million, representing a decreasean increase of $9.6$2.1 million from March 31, 1998. The Company1999. We currently hashave no bank borrowing arrangements. Net cash usedCash provided by operations of $168,000 in operations was $9.1 million during the first nine monthsquarter of fiscal 1999. Net cash2000 is primarily attributable to a decreases in accounts receivable, net, and inventory of $4.0 million and $2.4 million, respectively, an increase in other accrued liabilities of $177,000, and noncash items, including a charge for purchased in-process research and development of $10.1 million and depreciation and amortization of $337,000. Cash provided by operations was $283,000 duringpartially offset by the first nine monthsnet loss of fiscal 1998. Net cash$11.7 million, decreases in deferred revenue and accounts payable of $2.9 million and $587,000, respectively, and a net gain resulting from the sale of investments of $1.7 million. Cash used inby operations in the nine month period ended December 31, 1998first quarter of fiscal 1999 reflected a net loss of $10.8$4.0 million, ana $1.5 million increase of $2.2 millionin inventory, and a $834,000 decrease in accounts receivable, and a $224,000 decrease in accrued warranty,payable, offset primarily by a decrease of $2.0 million in inventory, increases of $1.0 million$482,000 in deferred revenue, $225,000 in other accrued liabilities, and $345,000$205,000 in accrued compensation and $821,000 of noncash items. The decrease in inventory during the nine months ended December 31, 1998 was due to decreases in VideoCommunicator product inventory heldcompensation. Cash provided by the Company and inventory balances held by retailers and distributors. The Company does not recognize revenue on the shipment of its VideoCommunicator products to retailers or distributors until the products are sold-through by the retailer or distributor. If the Company broadens its distribution channels, inventories at retailers and distributors, which are reflectedinvesting activities in the Company's inventories, are expectedquarter ended June 30, 1999 is primarily attributable to increase.* Netproceeds from the sale of a nonmarketable equity investment of $1.9 million, offset by capital expenditures of $89,000 and net cash paid of $15,000 related to the acquisition of Odisei. Cash used in investing activities in the nine monthsquarter ended December 31,June 30, 1998 is primarily attributable to capital expenditures of $1.5 million and the repurchase of common stock from minority shareholders in the Company's VidUs subsidiary in conjunction with its merger with the Company in August 1998. Net cash$135,000. Cash provided by financing activities in the nine monthsquarters ended December 31,June 30, 1999 and 1998 consisted primarily of net proceeds from the repayment of stockholders' notes receivable and net proceeds from sales of the Company's common stock upon the exercise of employee stock options. We will need to raise additional capital in 2000 to support our anticipated growth, and failure to do so in a timely manner may cause us to delay our plans for growth.* This statement is a forward looking statement reflecting current expectations. There can be no assuranceWe believe that 8x8's actual future performance will meet 8x8's current expectations. See "Factors That May Affect Future Results" commencing on page 15 for a discussion of certain factors that could affect future performance. 13 16 The Company believes that itwe will be able to fund planned expenditures and satisfy itsour cash requirements for at least the next twelve months from cash flow from operations, if any, and existing cash balances.* The Company believes that it may require additional financial resources over the next several years for working capital, research and development, expansion of sales and marketing resources, and capital expenditures.* Net cash used in operating activities during the nine months ended December 31, 1998 and in the fiscal year ended March 31, 1998 was approximately $9.1 million and $6.5 million, respectively, due primarily to cash requirements of the Company's VideoCommunicator product business. The Company has incurred, and will continue to incur, significant costs related to the development of VideoCommunicator products, advertising for its ViaTV products, support of the retail sales channel and growth in ViaTV inventory. In addition, the Company has entered into a contract to purchase a new enterprise-wide database and information management system from a major software supplier. The Company currently estimates that total expenditures related to the purchase of the software and incremental hardware requirements, as well as the cost of implementation and training, will be between $1.6 million and $1.8 million, of which approximately $1.3 million has been incurred as of December 31, 1998. See "Factors That May Affect Future Results--Enterprise-Wide Database Implementation. As of December 31, 1998, the CompanyJune 30, 1999, we had approximately $17.1$17.9 million in cash and cash equivalents. However, the Company is operating in a rapidly changing industry. There canwe currently estimate that we will be no assurancerequired to raise additional financing at some point during calendar year 2000 and if we are unable to 16 18 do so, our growth may be limited.* We will be evaluating financing alternatives prior to that the Company will nottime. We may also seek to exploit business opportunities that will require it to raise additional capital from equity or debt sources in order 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 willWe may not be able to obtain additional financing as needed on acceptable terms or at all. * This statement is a forward looking statement reflecting current expectations. There can be no assurance that 8x8's actual future performance will meet 8x8's current expectations. See "Factorsall which would force us to delay our plans for growth and implementation of our strategy. Factors That May Affect Future Results" commencing on page 15 for a discussion of certain factors that could affect future performance. 14 17 FACTORS THAT MAY AFFECT FUTURE RESULTSResults The following factors should be considered in conjunction with the information in this Report on Form 10-Q. HistoryWe have a history of Losses; Uncertainty of Future Profitability The Company recorded an operating loss of $11.7 million in the first nine months of fiscal 1999. In addition, the Company recorded operating losses in three of the four quarters in fiscal 1998 and we are uncertain as to our future profitability. We recorded an operating loss of $13.6 million in the first quarter of fiscal 2000. In addition, we recorded operating losses for the year ended March 31, 1997. The Company1999 and in three of the four quarters in fiscal 1998. We would not have been profitable in fiscal 1998 had itwe not received nonrecurring license and other revenues. Revenues fluctuated from $28.8 million in fiscal 1996 to $19.1 million in fiscal 1997 to $49.8 million in fiscal 1998 and were $26.2to $31.7 million in the first nine months of fiscal 1999. In view of the Company'sour historical operating losses, there canwe cannot be no assurancecertain that the Companywe will be able to achieve profitability on either an annual or quarterly basis. No AssuranceOur operating results may decline from previous periods if we are unable to secure future license and other sources of Future License and Other Revenues The Company has inrevenues. In the past, we have received substantial revenues from the licensing of its technology. License and other revenues, all of which were nonrecurring, were $3.7 million$334,000 and $12.3 million$589,000 for the ninethree month periods ended December 31,June 30, 1999 and 1998, and 1997, respectively, and were $14.5$5.5 million and $3.9$14.5 million in the fiscal years ended March 31, 1999 and 1998, and 1997, respectively. There can be no assurance that the Company willIf we do not receive substantialadditional revenues from licensing of itsour technology in the future, whichour operating results may decline from previous periods. We have discontinued our ViaTV product line and if we cannot lower expenses and sell remaining inventory, our operating results may decline. We announced in April 1999 that we would cease production of our ViaTV product line and withdraw from our distribution channels over the next several quarters. In the first fiscal quarter of fiscal 2000, ViaTV revenues represented 27% of total product revenues. For the years ended March 31, 1999 and 1998, ViaTV revenues represented 49% and 38% of product revenues, respectively. With the discontinuation of production, it is not clear how much, if any, revenue we will be able to generate from selling our existing inventories of ViaTVs. We do not expect to be able to generate revenues from our other products to compensate for the loss of ViaTV revenues for at least the next twelve months, if at all.* If we cannot adequately compensate for lower revenues with decreased manufacturing 17 19 overhead expenses and with lower operating expenses, it could have a material adverse effect on the Company'sour business and operating results. Potential FluctuationsIn fiscal 1999, we recognized a $5.7 million expense associated with valuing the ViaTV inventory at the current estimated fair market value. If we are unable to sell the remaining ViaTV inventory in Future Operating Resultsa timely manner, at or above the estimated fair market value, it would have a material adverse effect on our business and operating results. Our discontinuation of the sale of ViaTV's may also result in higher levels of product returns, the necessity of granting price protection to resellers, more lengthy receivable collection cycles and higher warranty costs, which may have a material adverse effect on our business and operating results. Our operating results historically have been subject to increased seasonality with sales higher during our third fiscal quarter, corresponding to the Christmas shopping season. Our discontinuation of ViaTV products may result in substantially different patterns in operating results. The Company'sgrowth of our business and future profitability depends on future broadband telephony revenue. We believe that our business and future profitability will be largely dependent on widespread market acceptance of our broadband telephony products. Neither our videoconferencing semiconductor business nor our video monitoring business have provided, nor are they expected to provide sufficient revenues to profitably operate our business. To date, we have not sold any significant quantities of broadband telephony products. If we are not able to generate revenue selling into the broadband telephony market, it would have a material adverse effect on our business and operating results. Our future operating results may not follow past trends due to many factors and any of these could cause our stock price to fall. Our historical operating results have fluctuated significantly and will likely continue to fluctuate in the future.future, and a decline in our operating results could cause our stock price to fall. On an annual and a quarterly and an annual basis there are a number of factors that may affect theour operating results, of the Company, many of which are outside the Company'sour control. These include, but are not limited to: o changes in market demand,demand; o the timing of customer orders,orders; o competitive market conditions,conditions; o lengthy sales cycles, regulatory approval cycles,cycles; o new product introductions by the Companyus or its competitors,our competitors; o market acceptance of new or existing products,products; o the cost and availability of components,components; 18 20 o the mix of the Company'sour customer base and sales channels,channels; o the mix of products sold,sold; o the management of inventory and the accuracy of the reporting of sell-through by resellers of the Company's products,inventory; o the level of international sales,sales; o continued compliance with industry standardsstandards; and o general economic conditions. The Company'sOur gross margin is affected by a number of factors including, product mix, the recognition of license and other revenues for which there may be no or little corresponding cost of revenues, product pricing, the allocation between international and domestic sales, the percentage of direct sales and sales to resellers, and manufacturing and component costs. The markets for the Company'sour products are characterized by falling average selling prices. The Company expectsWe expect that, as a result of competitive pressures and other factors, gross profit as a percentage of revenue for the Company'sour semiconductor products will likely decrease for the foreseeable future. The market for IP telephony semiconductors is likely to be a high volume market characterized by commodity pricing. We will not be able to generate average selling prices or gross margins for our broadband telephony semiconductors similar to those that we have historically commanded for our videoconferencing semiconductors. In addition, the gross margins for the Company's VideoCommunicatorsour video monitoring and broadband systems products are, and will likely continue to be, substantially lower than the gross margins for itsour semiconductors. Thus, the 15 18 growth of the Company's VideoCommunicator business has reduced overall product gross profit as a percentage of revenue. For example, total gross margin was 44% and 55% in the third quarters of fiscal 1999 and 1998, respectively due to continued growth of the Company's VideoCommunicator business relative to its semiconductor business. If the Company cannot adequately compensate for falling average selling prices with lower costs of sales, its gross margins will continue to be reduced and could result in a material adverse effect on the Company's business and operating results. In the likely event that the Company encounterswe encounter significant price competition in the markets for itsour products, the Companywe could be at a significant disadvantage compared to itsour competitors, many of which have substantially greater resources, and therefore may be better able to withstand an extended period of downward pricing pressure. Variations in timing of sales may cause significant fluctuations in future operating results. In addition, because a significant portion of the Company'sour business including sales of its VideoCommunicator products, may be derived from orders placed by a limited number of large customers, including OEM customers, and distributors, the timing of such orders can also cause significant fluctuations in the Company'sour operating results. For example, 3Com, which purchased approximately 34% of videophone systems sold by the Company in the year ended March 31, 1998, has not ordered additional products from the Company since delivery of its purchases in the quarter ended December 31, 1997. Also, one customer which represented approximately 20% of semiconductor revenues in fiscal 1998 has not placed significant semiconductor orders with the Company in fiscal 1999. The Company recognizes revenue when distributors sell product to their customers. The Company may not be able to anticipate the rate at which distributors will receive additional orders from their end customers. Anticipated orders from customers may fail to materialize. Delivery schedules may be deferred or canceled for a number of reasons, including changes in specific customer requirements or international economic conditions. The adverse impact of a shortfall in the Company'sour revenues may be magnified by the Company'sour inability to adjust spending to compensate for such shortfall. Announcements by the Companyus or itsour competitors of new products and technologies could cause customers to defer purchases of the Company'sour existing products, which would also have a material adverse effect on the Company's business and operating results. The Company's products have lead times of up to four months, and are built to forecasts that are necessarily imperfect, particularly given the early stage of the videophone market. Because of the Company's practice of building its products to necessarily imprecise forecasts, it is likely that, from time to time, the Company will have either excess or insufficient product inventory. This risk is heightened because of the need for and presence of significant VideoCommunicator inventory in retail distribution. As the Company introduces new products or upgrades to current products, the Company's retailers or distributors may decide to return to the Company inventory which they determine they cannot sell. Further, because retailers and other distributors may have significant quantities of VideoCommunicator inventory on hand and generally have contractual rights to price protection if the Company decreases the selling price, in the event of a significant price decrease, the Company's cost of such inventory may exceed the Company's actual selling price. Excess inventory levels will subject the Company to the risk of inventory obsolescence and the risk that the Company's selling prices may drop below the Company's inventory costs, while insufficient levels of inventory may negatively affect relations with customers. Any of 16 19 these factors could have a material adverse effect on the Company's operating results and business. The Company's introduction of VideoCommunicators has resulted in substantially different patterns in operating results. For example, during fiscal 1999 and 1998, the Company's operating results were subject to increased seasonality with sales higher during the Company's third fiscal quarter, corresponding to the Christmas shopping season. In addition, the Company is spending substantial additional amounts on advertising, support of the retail channel, toll-free marketing and customer support. There can be no assurance that revenues adequate to justify such spending will result. The Company's shift to sale of VideoCommunicators has resulted in higher levels of product inventory and product returns, the necessity of granting price protection to resellers, more lengthy receivable collection cycles and higher warranty costs, which may have a material adverse effect on the Company'sour business and operating results. As a result of these and other factors, it is likely that in some future period the Company'sour 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'sour common stock. DependenceWe may not be able to manage our inventory levels effectively which may lead to inventory obsolescence which would force us to lower our prices. 19 21 Our products have lead times of up to several months, and are built to forecasts that are necessarily imprecise. Because of our practice of building our products to necessarily imprecise forecasts, it is likely that, from time to time, we will have either excess or insufficient product inventory. In particular, we had significant inventory quantities of ViaTV products, both on Key Customershand and at our retail distributors when we discontinued production in April 1999. In the fourth quarter ended March 31, 1999, cost of product revenues included a $5.7 million charge associated with the write off of inventories related to our decision to cease production of our ViaTV product line. Because retailers and other distributors may have contractual rights to price protection if we decreases the selling price, and because we may need to significantly decrease the selling price to sell existing ViaTV inventory, our cost of such inventory may exceed our actual selling price. Excess inventory levels will subject us to the risk of inventory obsolescence and the risk that our selling prices may drop below our inventory costs, while insufficient levels of inventory may negatively affect relations with customers. Any of these factors could have a material adverse effect on our operating results and business. We will need to raise additional capital in 2000 to support our growth, and failure to do so in a timely manner may cause us to delay our plans for growth. We believe that we will be able to fund planned expenditures and satisfy our cash requirements for at least the next twelve months from cash flow from operations, if any, and existing cash balances. As of June 30, 1999, we had approximately $17.9 million in cash and cash equivalents. However, we currently estimate that we will be required to raise additional financing at some point during calendar year 2000 and if we are unable to do so, our growth may be limited. We will be evaluating financing alternatives prior to that time. We may also seek to exploit business opportunities that will require additional capital from equity or debt sources in order to finance growth and capital requirements. In particular, the development and marketing of new products could require a significant commitment of resources, which could in turn require the Company to obtain additional financing earlier than otherwise expected. We may not be able to obtain additional financing as needed on acceptable terms or at all which would force us to delay our plans for growth and implementation of our strategy. We depend on purchase orders from key customers and failure to receive significant purchase orders in the future would cause a decline in our operating results. Historically, a significant portion of the Company'sour sales hashave been to relatively few customers, although the composition of these customers has varied. Revenues from the Company'sour ten largest customers infor the third quarterquarters ended June 30, 1999 and nine months ended December 31, 1998, respectively, accounted for approximately 51%56% and 44%49%, respectively, of total revenues, respectively. For both ofrevenues. Revenues from our ten largest customers for the fiscal years ended March 31, 19981999 and 1997, revenues from the Company's ten largest customers1998 accounted for approximately40% and 61% of total revenues. Revenues derived from one customer represented approximately 14% of the Company's total revenues for the quarter ended December 31, 1998. No customer represented ten percent (10%) or more of the Company's total revenues for the nine months ended December 31, 1998. During each of the last two fiscal years the Company had one customer that accounted for ten percent or more, respectively, of total revenues. 3Com accounted for 20% of total revenues during the year ended March 31, 1998; ASCII, the Company's former distributor in Japan, accounted for 13% of total revenues during the year ended March 31, 1997.1998. Substantially all the Company'sof our product sales have been made, and are expected to continue to be made, on a purchase order basis. None of the Company'sour customers has entered into a long-term agreement requiring it to purchase our products. In 20 22 the Company's products.future, we will need to gain purchase orders for our products to earn additional revenue. Further, all of the Company'sour license and other revenues are nonrecurring. The growth of our business depends on the growth of the IP telephony market. Success of our broadband telephony product strategy assumes that there will be future demand for IP telephony systems. In order for the IP telephony market to continue to grow, several things need to occur. Telephone service providers must continue to invest in the deployment of high speed broadband networks to residential and commercial customers. IP networks must improve acceptable quality of service for real-time communications, managing effects such as packet jitter, packet loss and unreliable bandwidth, so that toll-quality service can be provided. IP telephony equipment must achieve the five-nines reliability that users of the public switched telephone network have come to expect from their telephone service. IP telephony service providers must offer cost and feature benefits to their customers that are sufficient to cause the customers to switch away from traditional telephony service providers. If any or all of these factors fail to occur our business will not grow. Technical and quality difficulties could impede market acceptance of our video monitoring products which would limit our growth. Due to bandwidth constraints, our video monitoring products transmit video over a plain old telephone system, which is known as POTS, at a frame rate and resolution that are significantly less than the frame rate and resolution of standard closed circuit TV monitors. Furthermore, our video monitoring products transmit audio over a POTS line with a fidelity that is often less than toll quality and that degrades in the presence of background noise. The POTS infrastructure varies widely in configuration and integrity, can degrade, make unreliable or even eliminate the digital connections between our video monitoring products. The security industry demands a high degree of quality, robustness and reliability of its products. Actual or perceived technical difficulties or insufficient video or audio quality could cause our existing customers to forego future purchases or cause potential customers to seek alternative solutions, either of which would limit the growth of our business. Competition We compete with both manufacturers of digital signal processing semiconductors and gateway products developed for the growing VoIP marketplace. We also compete with manufacturers of multimedia communication semiconductors and systems. The markets for our products are characterized by intense competition, declining average selling prices and rapid technological change. Broadband Telephony and Videoconferencing Semiconductors The principal competitive factors in the market for broadband telephony and videoconferencing semiconductors include product definition, product design, system integration, chip size, functionality, time-to-market, adherence to industry standards, price 21 23 and reliability. We have a number of competitors in this market including Analog Devices, Audio Codes, Broadcom Corporation, Conexent, DSP Group, Lucent Technologies, Motorola, Inc., Neo Paradigm Labs, Philips Electronics, Telogy Networks, Texas Instruments, Inc. and Winbond Electronics. Certain of our competitors for broadband telephony and videoconferencing semiconductors maintain their own semiconductor foundries and may therefore benefit from certain capacity, cost and technical advantages. Principle competitive factors in the market for VoIP gateway products include product definition, product design, system integration, system functionality, time-to-market, interoperability with common network equipment, adherence to industry standards, price and reliability. Currently there are a large number of system suppliers offering carrier-class gateway products such as Ascend Communications, Inc., Cisco Systems, Inc., Clarent Corporation, Nokia Corporation, Nortel Networks, Nuera Communications, Inc., VolcalTec Communications, and Lucent Technologies. At this time there is limited competition in the residential and small office VoIP gateway market. We expect, however, that this market will be characterized by intense competition, declining average selling price and rapid technology change. In addition, our presence in the VoIP systems business may result in certain customers or potential customers perceiving us as a competitor or potential competitor, which may be used by other semiconductor manufacturers to their advantage. Video Monitoring and ViaTV Products The competitive factors in the market for our RSM-1500 and ViaTV products include audio and video quality, acceptable phone line transmission rates, ability to connect and maintain stable connections, ease of use, price, access to enabling technologies, product design, time-to-market, adherence to industry standards, interoperability, strength of distribution channels, customer support, reliability and brand name. We expect intense competition for our RSM-1500 module and we face ongoing competition for our ViaTV products as we exit that product area. Competition is expected from: o Large security equipment manufacturers. We may face intense competition for our video monitoring products from many well known, established suppliers of security equipment, such as Pelco, and Ultrek Electronics Limited who have continually reduced the cost of their products and may enter the market for lower cost video communication products. o Personal computer system and software manufacturers. Potential customers for our RSM-1500 and ViaTV products may elect instead to buy PCs pre-equipped with video communication software capabilities or a third-party software application for use on a PC. As a result, we face or may face competition from Intel, and PC software suppliers such as Microsoft, Netscape, Javelin and Prism. ADVIS, InnoMedia PTE Ltd., C-Phone Corporation, Leadtek Research, Inc., Truedox Technology Corporation and Video Communication Systems GmbH are among the companies selling low cost videophones, some targeted specifically at the video monitoring marketplace. Other companies have announced the development of low-cost videophones. We expect that additional companies will introduce products that compete with the 22 24 RSM-1500 and ViaTV products in the future.* Certain manufacturers or potential manufacturers of low-cost videophones have licensed or purchased, or may license or purchase, our technology and semiconductors in order to do so. KME and 3Com in particular have licensed substantially all of the technology underlying the ViaTV, and may use such technology to introduce products that compete with the RSM-1500 or ViaTV products. Each of Leadtek Research, Inc. and Truedox Technology Corporation license our technology and purchase our multimedia communication semiconductors. We aggressively license our semiconductor, software and systems technology and sell our semiconductor and system products to third parties. Thus, it is likely that other OEM customers will become competitors with respect to our RSM-1500 or ViaTV products business. Other competitors may purchase multimedia communication semiconductors and related technology from other suppliers. Our reliance on developing vertically integrated technology, comprising systems, circuit boards, software and semiconductors, places a significant strain on us and on our research and development resources. Competitors that focus on one aspect of technology, such as systems or semiconductors, may have a considerable advantage. In addition, many of our current and potential competitors have longer operating histories, are substantially larger, and have greater financial, manufacturing, marketing, technical and other resources. Many of our competitors also have greater name recognition and a larger installed base of products. Competition in our markets may result in significant price reductions. As a result of their greater resources, many current and potential competitors may be better able to initiate and withstand significant price competition or downturns in the economy. There can be no assurance that we will be able to continue to compete effectively, and any reductionfailure to do so would have a material adverse effect on our business and operating results. Our markets are subject to rapid technological change and we depend on new product introduction in ordersorder to maintain and grow our business. IP telephony and video monitoring are emerging markets and are characterized by rapid changes in customer requirements, frequent introductions of new and enhanced products, and continuing and rapid technological advancement. To compete successfully, we must continue to design, develop, manufacture and sell new and enhanced products that provide increasingly higher levels of performance and reliability and lower cost, take advantage of technological advancements and changes, and respond to new customer requirements. Our success in designing, developing, manufacturing and selling such products will depend on a variety of factors, including: o the identification of market demand for new products; o product selection; o timely implementation of product design and development; o product performance; o cost-effectiveness of products under development; o effective manufacturing processes; and o the success of promotional efforts. 23 25 We have in the past experienced delays in the development of new products and the enhancement of existing products, and such delays will likely occur in the future. If we are unable, due to resource constraints or technological or other reasons, to develop and introduce new or enhanced products in a timely manner, if such new or enhanced products do not achieve sufficient market acceptance or if such new product introductions decrease demand for existing products our operating results would decline and our business would not grow. If we do not develop and maintain successful partnerships for broadband telephony products, we may not be able to successfully market our solutions. We are entering into new market areas and our success is partly dependent on our ability to forge new marketing and engineering partnerships. IP telephony communications systems are extremely complex and no single company possesses all the required technology components needed to build a complete end to end solution. Partnerships will be required to augment our development programs and to assist us in marketing complete solutions to our customer base. We may not be able to develop such partnerships in the course of our product development. Even if we do establish the necessary partnerships, we may not be able to adequately capitalize on these partnerships to aid in the success of our business. Inability to protect our proprietary technology or infringement by us of a third party's proprietary technology would disrupt our business. We rely in part on trademark, copyright and trade secret law to protect our intellectual property in the United States and abroad. We seek to protect our software, documentation and other written materials under trade secret and copyright law, which afford only limited protection. We also rely in part on patent law to protect our intellectual property in the United States and abroad. We currently hold nine United States patents, including patents relating to programmable integrated circuit architectures, telephone control arrangements, software structures and memory architecture technology, and have a number of United States and foreign patent applications pending. We cannot predict whether such patent applications will result in an issued patent. We may not be able to protect our proprietary rights in the United States or abroad (where effective intellectual property protection may be unavailable or limited) and competitors may independently develop technologies that are similar or superior to our technology, duplicate our technology or design around any patent of ours. We have in the past licensed and in the future expect to continue licensing our technology to others, many of whom are located or may be located abroad. There are no assurances that such licensees will protect our technology from significant customersmisappropriation. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of management time and resources and could have a material adverse effect on the Company'sour business and operating results. International Operations24 26 There has been substantial litigation in the semiconductor, electronics and related industries regarding intellectual property rights, and from time to time third parties may claim infringement by us of their intellectual property rights. Our broad range of technology, including systems, digital and analog circuits, software and semiconductors, increases the likelihood that third parties may claim infringement by us of their intellectual property rights. If we were found to be infringing on the intellectual property rights of any third party, we could be subject to liabilities for such infringement, which could be material, and we could be required to refrain from using, manufacturing or selling certain products or using certain processes, either of which could have a material adverse effect on our business and operating results. From time to time, we have received, and may continue to receive in the future, notices of claims of infringement, misappropriation or misuse of other parties' proprietary rights. There can be no assurance that we will prevail in these discussions and actions, or that other actions alleging infringement by the Company of third-party patents will not be asserted or prosecuted against the Company. We rely on certain technology, including hardware and software licensed from third parties. The loss of, or inability to maintain, existing licenses could have a material adverse effect on our business and operating results. The failure of IP networks to meet the reliability and quality standards required for voice communications would render our products obsolete. Circuit-switched networks such as the public switched telephone network feature a very high reliability, with a guaranteed quality of service. The common standard for reliability of carrier-grade real-time voice communications is 99.999%, meaning that the network can be down for only a few minutes per year. In addition, such networks have imperceptible delay and consistently satisfactory audio quality. Emerging broadband IP networks such as LANs, WANs and the Internet, or emerging last mile technologies such as cable, DSL and wireless local loop will not be used for telephony unless such networks and technologies can provide reliability and quality consistent with these standards. Our products must comply with industry standards and FCC regulations, and changes may require us to modify existing products. In addition to reliability and quality standards, the market acceptance of telephony over broadband IP networks is dependent upon the adoption of industry standards so that products from multiple manufacturers are able to communicate with each other. Broadband telephony products rely heavily on standards such as H.323, SGCP, MGCP, and H.GCP to interoperate with other vendors' equipment. There is currently a lack of agreement among industry leaders about which standard should be used for a particular application, and about the definition of the standards themselves. Furthermore, the industry has had difficulty achieving true multivendor interoperability for highly complex standards such as H.323. We also must comply with certain rules and regulations of the Federal Communications Commission regarding electromagnetic radiation and safety standards established by Underwriters Laboratories as well as similar regulations and standards applicable in other countries. Standards are continuously being modified and 25 27 replaced. As standards evolve, we may be required to modify its existing products or develop and support new versions of its products. The failure of our products to comply, or delays in compliance, with various existing and evolving industry standards could delay or interrupt volume production of our broadband telephony products, which would have a material adverse effect on our business and operating results. We may transition to smaller geometry process technologies and higher levels of design integration which could disrupt our business. We continuously evaluate the benefits, on an integrated circuit, product-by-product basis, of migrating to smaller geometry process technologies in order to reduce costs. We have commenced migration of certain future products to smaller geometry processes. We believe that the transition of our products to increasingly smaller geometries will be important for us to remain competitive. We have in the past experienced difficulty in migrating to new manufacturing processes, which has resulted and could continue to result in reduced yields, delays in product deliveries and increased expense levels. Moreover, we are dependent on relationships with our foundries and their partners to migrate to smaller geometry processes successfully. If any such transition is substantially delayed or inefficiently implemented we may experience delays in product introductions and incur increased expenses. As smaller geometry processes become more prevalent, we expect to integrate greater levels of functionality as well as customer and third-party intellectual property into our products. Some of this intellectual property includes analog components for which we have little or no experience or in-house expertise. We cannot predict whether higher levels of design integration or the use of third-party intellectual property will adversely affect our ability to deliver new integrated products on a timely basis, or at all. If we discover product defects, we may have product-related liabilities which may cause us to lose revenues or delay market acceptance of our products. Products as complex as those offered by us frequently contain errors, defects and functional limitations when first introduced or as new versions are released. We have in the past experienced such errors, defects or functional limitations. We sell products into markets that are extremely demanding of robust, reliable, fully functional products. Therefore delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of such products, which could damage our credibility with our customers and adversely affect our ability to retain our existing customers and to attract new customers. Moreover, such errors, defects or functional limitations could cause problems, interruptions, delays or a cessation of sales to our customers. Alleviating such problems may require significant expenditures of capital and resources by us. Despite testing by us, our suppliers or our customers may find errors, defects or functional limitations in new products after commencement of commercial production, resulting in additional development costs, loss of, or delays in, market acceptance, diversion of technical and other resources from our other development efforts, product repair or replacement costs, claims by our customers or others against us, or the loss of credibility with our current and prospective customers. 26 28 Manufacturing We outsource the manufacturing of our semiconductors and our broadband telephony, video monitoring and ViaTV system products to independent foundries and subcontract manufacturers, respectively. Our primary semiconductor manufacturer is Taiwan Semiconductor Manufacturing Corporation. Subcontract manufacturers include EFA Corporation in Taiwan and Flash Electronics in Fremont, California. We also rely on Amkor/Anam Electronics in South Korea for packaging and testing of our semiconductors. We do not have long term purchase agreements with our subcontract manufacturers or our component suppliers. There can be no assurance that our subcontract manufacturers will be able or willing to reliably manufacture our products, or that our component suppliers will be able or willing to reliably supply components for our products, in volumes, on a cost effective basis or in a timely manner. We may experience difficulties due to our reliance on independent semiconductor foundries, subcontract manufacturers and component suppliers that could have a material adverse effect on our business and operating results. In addition, from time to time we may issue non-cancelable purchase orders to our third-party manufacturers for raw materials used in our video monitoring or other potential system level products to ensure availability for long lead-time items or to take advantage of favorable pricing terms. If we should experience decreased demand for our video monitoring products or future system level products, we would still be required to take delivery of and make payment for such raw materials. In the event of a significant decrease in system level product demand, such purchase commitments could have a material adverse effect on our business and operating results. We have significant international operations, which subjects us to risks that could cause our operating results to decline. Sales to customers outside of the United States represented 34%40%, 43% and 41% of the Company's total revenues for the third quarter and the nine months ended December 31, 1998. Sales to customers outside of the United States represented 47% and 54% of total revenues in the first quarter ended June 30, 1999 and the fiscal years ended March 31, 19981999 and 1997,1998, respectively. Specifically, sales to customers in the Asia Pacific region represented 21%17%, 26% and 24%25% of the Company'sour total revenues in the thirdfirst quarter and the nine months ended December 31, 1998. Sales to customers in Europe represented 13% and 17% of the Company's total revenues in the third quarter and the nine months ended December 31, 1998. Sales to customers in the Asia Pacific region represented 25% and 33% of the 17 20 Company's revenues inJune 30, 1999 for the fiscal years ended March 31, 19981999 and 1997,1998, respectively, while sales to customers in Europe represented 23%, 17% and 22% and 21% of the Company'sour total revenues for the same periods, respectively. International sales of the Company'sour semiconductors will continue to represent a substantial portion of the Company'sour product revenues for the foreseeable future. In addition, substantially all of the Company'sour current products are, and substantially all of the Company'sour future products will be, manufactured, assembled and tested by independent third parties in foreign countries. International sales and manufacturing are subject to a number of risks, including general economic conditions in regions such as Asia, changes in foreign government regulations and telecommunications standards, export license requirements, tariffs and taxes, other trade barriers, fluctuations in currency exchange rates, difficulty in collecting accounts receivable and difficulty in staffing and managing foreign operations. The Company isWe are also subject to geopolitical risks, such as political, social and economic instability, potential hostilities 27 29 and changes in diplomatic and trade relationships, in connection with its international operations. A significant decline in demand from foreign markets, such aswhich may result from the current economic conditions in the Asia Pacific region, or for other reasons could have a material adverse effect on the Company'sour business and operating results. Competition The Company competes with both independent manufacturers of multimedia communication semiconductors and with the introduction of its VideoCommunicator products now competes with manufacturers of multimedia communication products targeted at the consumer market. The markets for the Company's products are characterized by intense competition, declining average selling prices and rapid technological change. The competitive factors in the market for the Company's VideoCommunicators include audio and video quality, phone line connectivity at high transmission rates, ability to connect and maintain stable connections, ease of use, price, access to enabling technologies, product design, time-to-market, adherence to industry standards, interoperability, strength of distribution channels, customer support, reliability and brand name. The Company expects intense competition for its VideoCommunicators from: - Large consumer electronics manufacturers. The Company will face intense competition from many well known, established suppliers of consumer electronics products, which may include Lucent Technologies, Matsushita, Philips, Samsung and Sony. Many of these potential competitors sell television and telephone products into which they may integrate multimedia communication systems, thereby eliminating a consumer'sWe need to purchase a separate multimedia communication system, such as the Company's ViaTV product. - Personal computer systemexpand our management systems and software manufacturers. Potential customers for the Company's VideoCommunicators may elect insteadhire and retain key personnel to buy PCs equipped with multimedia communication capabilities, which are currently available. As a result, the Company faces or may face competition from Intel; PC system manufacturers such as Apple, Compaq, Dell, IBM and Sony; PC software suppliers such as Microsoft and Netscape; and PC add-on component suppliers such as 3Com. 18 21 - Existing manufacturers of corporate videoconferencing equipment. Manufacturers of more expensive corporate videoconferencing systems have continually reduced the cost of their products and may enter the market for lower cost consumer multimedia communicationsupport our products. Potential competitors include PictureTel, Polycom, Sony, Tandberg, VCON and Vtel. - Emerging suppliers of internet appliances. Potential customers for the Company's VideoCommunicators may elect instead to buy standalone internet access terminals which may provide some or all of the functionality of the Company's products. Consumer products for television-based internet access have been announced or introduced by companies such as Microsoft, Philips and Sony. C-Phone, Leadtek and Truedox are among the companies selling low cost videophones. Many other companies have announced the development of low cost videophones. The Company expects that additional companies will introduce products that compete with the VideoCommunicators in the future. Certain manufacturers or potential manufacturers of low cost videophones have licensed or purchased, or may license or purchase, the Company's technology and semiconductors in order to do so. KME and 3Com in particular have licensed substantially all of the technology underlying the VideoCommunicators, and may use such technology to introduce products that compete with the VideoCommunicators. Each of Leadtek and Truedox license the Company's technology and purchase the Company's multimedia communication semiconductors. The Company aggressively licenses its semiconductor, software and systems technology and sells its semiconductor and system products to third parties. Thus, it is likely that additional OEM customers of the Company will become competitors with respect to the Company's VideoCommunicator business. Other competitors may purchase multimedia communication semiconductor and related technology from other suppliers. The principal competitive factors in the market for multimedia communication semiconductors include product definition, product design, system integration, chip size, functionality, time-to-market, adherence to industry standards, price and reliability. The Company has a number of competitors in this market including Analog Devices, AudioCodes, DSP Group, Lucent Technologies, Motorola, NeoParadigm Labs, Philips, Texas Instruments and Winbond Electronics. Potential competitors include ESS Technology and Rockwell Semiconductor Systems. Certain of the Company's competitors for multimedia communication semiconductors maintain their own semiconductor foundries and may therefore benefit from certain capacity, cost and technical advantages. In addition, the presence of the Company in the multimedia communication systems business may result in certain customers or potential customers perceiving the Company as a competitor or potential competitor, which may be used by other semiconductor manufacturers to their advantage. The Company's reliance on developing vertically integrated technology, comprising systems, circuit boards, software and semiconductors, places a significant strain on the Company and its research and development resources. Competitors that focus on one aspect of technology, such as systems or semiconductors, may have a considerable advantage over the Company. In addition, many of the Company's current and potential competitors have longer operating histories, are substantially larger, and have greater financial, manufacturing, marketing, technical and other resources. Many also have greater name recognition and a larger installed base of products than the Company. Competition in the Company's markets may result in significant price reductions. As a result of their greater resources, many current and potential competitors may be better able 19 22 than the Company to initiate and withstand significant price competition or downturns in the economy. There can be no assurance that the Company will be able to continue to compete effectively, and any failure to do so would have a material adverse effect on the Company's business and operating results. Need for Additional Capital The Company believes that it will be able to fund planned expenditures and satisfy its cash requirements for at least the next twelve months from cash flow from operations, if any, and existing cash balances. The Company believes that it may require additional financial resources over the next several years for working capital, research and development, expansion of sales and marketing resources, and capital expenditures. Net cash used in operating activities during the nine months ended December 31, 1998 and in the fiscal year ended March 31, 1998 was approximately $9.1 million and $6.5 million, respectively, due primarily to cash requirements of the Company's VideoCommunicator business. The Company has incurred and will continue to incur, significant costs related on the development of VideoCommunicator products, advertising for its ViaTV products, support of the retail sales channel and growth in ViaTV inventory. The Company believes that it will be able to fund planned expenditures and satisfy its cash requirements for at least the next twelve months from cash flow from operations, if any, and existing cash balances. As of December 31, 1998, the Company had approximately $17.1 million in cash and cash equivalents. However, the Company is operating in a rapidly changing industry. There can be no assurance that the Company will not seek to exploit business opportunities that will require it to raise additional capital from equity or debt sources to finance its growth and capital requirements. In particular, the development and marketing of new products could require a significant commitment of resources, which could in turn require the Company to obtain additional financing earlier than otherwise expected. There can be no assurance that the Company will be able to obtain additional financing as needed on acceptable terms or at all. Uncertainty of VideoCommunicator Market Acceptance; Limits of Existing Technology Previous efforts to sell consumer videophones have been unsuccessful and there can be no assurance that the market for such products will develop. The current installed base of H.324 compliant videophones, which are compatible with the Company's ViaTV videophones, is quite limited, providing few parties for a purchaser of a single videophone to call. In addition, many consumers may not wish to be seen during a telephone call. The Company has no reliable data to suggest that there will be significant customer demand for such products, including the Company's VideoCommunicators and products offered by certain of the Company's OEM customers. The Company's current VideoCommunicator product line as well as products made by the Company's OEM customers for use on POTS, is not capable of delivering video data at rates of 24 frames per second. Below this data rate, the human eye can detect degradation of video quality. Further, POTS infrastructure varies widely in configuration and integrity, which can result in decreased rates of transmission and difficulties in establishing and maintaining connections. Actual or perceived technical difficulties or insufficient video quality related to multimedia communication on POTS could impede market acceptance and have a material adverse effect on the Company's business and results of operations. Uncertainty of Revenues from Broadband Telephony Market 20 23 The Company has committed, and intends to continue to commit, a significant amount of financial and personnel resources to the development, manufacturing and marketing of its broadband telephony products, such as the Audacity internet telephony processor and the Packet Gateway adapter. As of December 31, 1998, broadband telephony products have not contributed to the Company's revenue. Furthermore, the Company does not have significant backlog for future sales of these products. The Company faces severe competition and rapidly changing technology in the broadband telephony market. It is likely that the Company will need to invest significant additional resources to compete in this market, and there can be no assurance that such investment will result in significant revenues. Rapid Technological Change; Dependence on New Product Introduction The multimedia communication semiconductor and multimedia communication markets are characterized by rapid changes in customer requirements, frequent introductions of new and enhanced products, and continuing and rapid technological advancement. In order to compete in these markets, the Company must continue to design, develop, manufacture and sell new and enhanced products that provide increasingly higher levels of performance and reliability and lower cost, take advantage of technological advancements and changes, and respond to new customer requirements. The Company's success in designing, developing, manufacturing and selling such products will depend on a variety of factors, including the identification of market demand for new products, product selection, timely implementation of product design and development, product performance, cost-effectiveness of products under development, effective manufacturing processes and the success of promotional efforts. The Company plans to introduce additional VideoCommunicators and multimedia communication semiconductors. The development of new products or enhancements to existing products involves technical and other risks, which the Company may not fully understand. In addition, new product introductions or enhancements to products may decrease demand for existing products resulting in higher than expected product returns and/or excess inventory of existing products. The Company has in the past experienced delays in the development of new products and the enhancement of existing products, and such delays will likely occur in the future. If the Company is unable, due to resource constraints or technological or other reasons, to develop and introduce new or enhanced products in a timely manner, if such new or enhanced products do not achieve sufficient market acceptance or if such new product introductions decrease demand for existing products, it would have a material adverse effect on the Company's business and operating results. Dependence on Proprietary Technology; Reliance on Third Party Licenses The Company relies in part on trademark, copyright and trade secret law to protect its intellectual property in the United States and abroad. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright law, which afford only limited protection. The Company also relies in part on patent law to protect its intellectual property in the United States and abroad. The Company currently holds seven United States patents, including patents relating to video compression and memory architecture technology, and has a number of United States and foreign patent applications pending. There can be no assurance that any such patent applications will result in an issued patent. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad (where 21 24 effective intellectual property protection be may unavailable or limited) will be adequate or that competitors will not independently develop technologies that are similar or superior to the Company's technology, duplicate the Company's technology or design around any patent of the Company. The Company has in the past licensed and in the future expects to continuing licensing its technology to others, many of whom are located or may be located abroad. There are no assurances that such licensees will protect the Company's technology from misappropriation. Moreover, litigation may be necessary in the future to enforce the Company's intellectual property rights, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of management time and resources and could have a material adverse effect on the Company's business and operating results. There has been substantial litigation in the semiconductor, electronics and related industries regarding intellectual property rights, and there can be no assurance that third parties will not claim infringement by the Company of their intellectual property rights. The Company's broad range of technology, including systems, digital and analog circuits, software and semiconductors, increases the likelihood that third parties may claim infringement by the Company of their intellectual property rights. If the Company were found to be infringing on the intellectual property rights of any third party, the Company could be subject to liabilities for such infringement, which could be material, and the Company could be required to refrain from using, manufacturing or selling certain products or using certain processes, either of which could have a material adverse effect on the Company's business and operating results. The Company relies upon certain technology, including hardware and software, licensed from third parties. The loss of, or inability to maintain, existing licenses could have a material adverse effect on the Company's business and operating results. Dependence on Third Party Manufacturers and Component Suppliers The Company outsources the manufacture of its VideoCommunicators and semiconductors to subcontract manufacturers and independent foundries. The Company's VideoCommunicator subcontract manufacturers include EFA Corporation in Taiwan and Flash Electronics in Fremont, California, while its semiconductor manufacturers include Taiwan Semiconductor Manufacturing Corporation and United Micro Electronics Corporation in Taiwan. The Company also relies on Anam/Amkor Electronics Corporation in South Korea for packaging and testing of its semiconductors. The Company does not have long-term purchase agreements with its subcontract manufacturers or its component suppliers. There can be no assurance that the Company's contract manufacturers will be able or willing to reliably manufacture the Company's products, or that the Company's component suppliers will be able or willing to reliably supply components for the Company's products, in volumes, on a cost effective basis or in a timely manner. The Company may experience difficulties due to its reliance on independent subcontract manufacturers, semiconductor foundries and component suppliers that could have a material adverse effect on the Company's business and operating results. In addition, from time to time the Company may issue non-cancelable purchase orders to its third-party manufacturers for raw materials used in its VideoCommunicator products to ensure availability for long lead-time items or to take advantage of favorable pricing terms. If the Company should experience decreased demand for its VideoCommunicator products, the Company would still be required to take delivery of and make payment for such raw materials. In the event 22 25 of a significant decrease in VideoCommunicator product demand, such purchase commitments could have a material adverse effect on the Company's business and operating results. The Company's reliance on foreign subcontract manufacturers involves a number of risks. See "Factors That May Affect Future Results--International Operations." Compliance with Regulations and Industry Standards The Company must comply with certain rules and regulations of the Federal Communications Commission regarding electromagnetic radiation and standards established by Underwriters Laboratories as well as similar regulations and standards applicable in other countries. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving government regulations and industry standards could delay or interrupt volume production of VideoCommunicators, which would have a material adverse effect on the Company's business and operating results. Management of Growth and Change; Dependence on Key Personnel The development and marketing of the Company's VideoCommunicatorsour broadband telephony and video monitoring products will continue to place a significant strain on the Company'sour 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'sresources. Our ability to manage any future growth effectively will require itus to successfully attract, train, motivate, retain and manage employees, particularly key engineering and managerial personnel, to effectively integrate new employees into itsour operations and to continue to improve itsour operational, financial and management systems. The Company'sOur failure to manage its growth and changes in itsour business effectively and to attract and retain key personnel could have a material adverse effect onlimit our growth and the Company's businesssuccess of our products and operating results.business. Further, the Company iswe are highly dependent on the continued service of and itsour ability to attract and retain qualified technical, marketing, sales and managerial personnel. The competition for such personnel is intense, particularly in the San Francisco Bay area where the Company iswe are located. The loss of any suchkey person or the failure to recruit additional key technical and sales personnel in a timely manner would have a material adverse effect on the Company'sour 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 CompanyWe currently doesdo not have employment contracts with any of itsour employees and doeswe do not maintain key person life insurance policies on any of itsour employees. Product Concentration; Dependence on Multimedia Communication Industry Sales of multimedia communication products accounted for approximately 100%, 100%Our stock price has been volatile and 86% of total product revenues for the nine months ended December 31, 1998 and in the fiscal years ended March 31, 1998 and 1997, respectively. Any general decline in the market for multimedia communication products could have a material adverse effect on the Company's business and operating results. Enterprise-Wide Database The company is currently engaged in a major project to upgrade its enterprise-wide database and information management systems, based principally on software from a major software 23 26 supplier. In recent years, some fabless semiconductor and system-level product companies undertaking major systems transitions have experienced significant business disruption as a result of unexpected delays in the implementation of these projects. There can be no assurancewe cannot assure you that the Company's projectour stock price will be completed within the projected timeframe or within budget. Potential Volatility of Stock Pricenot decline. The market price of the shares of the Company'sour common stock has been and is likely to be highly volatile. It may be significantly affected by factors such as: o actual or anticipated fluctuations in the Company'sour operating results; o announcements of technical innovations; o loss of key personnel; o new products or new contracts by the Company, itsus, our competitors or their customers; o governmental regulatory action; o developments with respect to patents or proprietary rights, general market conditions, changes in financial estimates by securities analysts and other factors which could be unrelated to, or outside the control of, the Company.our control. The stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stocks of technology companies and that have often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market 28 30 price of the Company'sour common stock. In the past, following periods of volatility in the market price of a Company'scompany's securities, securities class action litigation has often been initiated against the issuing company. There canIf our stock price is volatile, we may also be no assurance thatsubject to such litigation will not occur in the future with respect to the Company.litigation. Such litigation could result in substantial costs and a diversion of management's attention and resources, which would havedisrupt business and could cause a material adverse effect on the Company's business anddecline in our operating results. Any settlement or adverse determination in such litigation would also subject the Companyus to significant liability, which would have a material adverse effect on the Company's business and financial condition. 24 27 PART II -- OTHER INFORMATION ITEM 5. OTHER INFORMATION The Company's 1999 Annual Meeting of Stockholders will be held at 2 p.m. Pacific Standard Time on June 21, 1999 at the Company's principal executive offices at 2445 Mission College Blvd., Santa Clara, California.liability. ITEM 6. EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K (a) See Exhibit Index. (b) No reportsReports on Form 8-K. On May 18, 1999, we filed a Current Report on Form 8-K wereto report a change in the previously reported date of our annual meeting of stockholders. On June 7, 1999, we filed duringa Current Report on Form 8-K announcing that 8x8 and Odisei had entered into a Stock Exchange Agreement, dated as of May 13, 1999, which sets forth the three month period ended December 31, 1998.terms and conditions of our proposed acquisition of Odisei pursuant to which Odisei will become a wholly-owned subsidiary of 8x8. On June 7, 1999, we filed a Current Report on Form 8-K to report the resignation of one of the members of our Board of Directors effective May 26, 1999. SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: Date: January 27, 1999 ----------------August 9, 1999. 8X8, INC. By: /s/ SANDRA L. ABBOTT --------------------------------------------------------------------------------- Sandra L. Abbott Chief Financial Officer and Vice President of Finance (Principal Financial and Accounting Officer) 2529 2831 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE 10.22 Sixth Amendment to Lease dated May 28, 1999 between Sobrato Interests and the Registrant. 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. 2630