UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 333-15627
8X8, INC.
(Exact name of Registrant as specified in its Charter)
|
Delaware
|
77-0142404
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S. Employer Identification Number)
|
2445 Mission College Blvd.
Santa Clara, CA 95054
(Address of Principal Executive Offices including Zip Code)
(408) 727-1885
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed
since last report)
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 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
February 11, 2000 was 18,924,880.
8X8, INC.
FORM 10-Q
INDEX
PART I. Financial Information
Item 1. Financial statements
Condensed Consolidated Balance Sheets as of
December 31, 1999 and March 31, 1999
Condensed Consolidated Statements of Operations for the three months
and nine months ended December 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1999 and 1998
Notes to Unaudited Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Results of Operations
Year 2000
Liquidity and Capital Resources
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. Other Information
Item 6: Exhibits and Reports on Form 8-K
Signatures
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
8X8, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, unaudited)
December 31, March 31,
1999 1999
------------ ------------
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments ........................ $21,781 $15,810
Accounts receivable, net ......................... 1,395 5,886
Inventory ........................................ 1,536 3,915
Prepaid expenses and other assets ................ 1,084 878
------------ ------------
Total current assets ........................... 25,796 26,489
Property and equipment, net ........................ 2,260 2,163
Intangibles and other assets ....................... 3,307 57
Deferred debt issuance costs........................ 2,346 --
------------ ------------
$33,709 $28,709
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $1,750 $1,917
Accrued compensation ............................. 1,875 1,236
Accrued warranty ................................. 643 1,043
Deferred revenue ................................. 1,331 4,089
Other accrued liabilities ........................ 1,300 1,601
------------ ------------
Total current liabilities ...................... 6,899 9,886
------------ ------------
Convertible subordinated debentures................. 7,500 --
------------ ------------
Total liabilities .............................. 14,399 9,886
------------ ------------
Stockholders' equity:
Common stock ..................................... 19 15
Additional paid-in capital ....................... 63,835 48,363
Notes receivable from stockholders ............... (235) (266)
Deferred compensation ............................ -- (197)
Accumulated other comprehensive loss ............. -- (193)
Accumulated deficit .............................. (44,309) (28,899)
------------ ------------
Total stockholders' equity ..................... 19,310 18,823
------------ ------------
$33,709 $28,709
============ ============
The accompanying notes are an integral part of these financial statements.
8X8, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Product revenues ....................... $4,941 $7,611 $15,715 $22,497
License and other revenues ............. 1,297 2,468 3,127 3,685
--------- --------- --------- ---------
Total revenues ......................... 6,238 10,079 18,842 26,182
--------- --------- --------- ---------
Cost of product revenues ............... 1,937 5,621 6,678 15,874
Cost of license and other revenues ..... 56 9 114 59
--------- --------- --------- ---------
Gross profit ........................... 4,245 4,449 12,050 10,249
--------- --------- --------- ---------
Operating expenses:
Research and development ............. 2,854 2,512 8,137 7,877
Selling, general and administrative... 3,545 5,409 10,918 14,061
In-process research and development... -- -- 10,100 --
Amortization of intangibles .......... 189 -- 424 --
--------- --------- --------- ---------
Total operating expenses .... 6,588 7,921 29,579 21,938
--------- --------- --------- ---------
Loss from operations ................... (2,343) (3,472) (17,529) (11,689)
Other income, net ...................... 109 249 2,185 845
--------- --------- --------- ---------
Loss before provision for income taxes.. (2,234) (3,223) (15,344) (10,844)
Provision for income taxes ............. -- -- 66 --
--------- --------- --------- ---------
Net loss ............................... ($2,234) ($3,223) ($15,410) ($10,844)
========= ========= ========= =========
Net loss per share:
Basic and diluted .................... ($0.12) ($0.21) ($0.88) ($0.73)
Shares used in per share calculations:
Basic and diluted .................... 18,035 15,105 17,421 14,945
The accompanying notes are an integral part of these financial statements.
8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended
December 31,
----------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net loss ............................................... ($15,410) ($10,844)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ...................... 1,310 684
Amortization of deferred compensation .............. 87 329
Purchased in-process research and development ...... 10,100 --
Gain on sale of investments, net ................... (1,687) --
Other .............................................. -- (192)
Net effect of changes in current and other assets
and current liabilities ................................ 3,265 940
---------- ----------
Net cash used in operating activities ............... (2,335) (9,083)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment .................... (950) (1,473)
Proceeds from sale of nonmarketable equity investment .. 1,880 --
Cash paid for acquisitions, net ........................ (133) --
Purchases of common stock from minority interest
in subsidiary ...................................... -- (85)
Short-term investments-trading activity, net ........... -- 60
---------- ----------
Net cash provided by (used in) investing activities.. 797 (1,498)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net ............ 577 489
Proceeds from issuance of convertible subordinated
debentures ......................................... 7,500 --
Debt issuance costs .................................... (556) --
Loans to stockholders .................................. (76) --
Repurchase of common stock ............................. (10) --
Repayment of notes receivable from stockholders ........ 74 479
---------- ----------
Net cash provided by financing activities .......... 7,509 968
---------- ----------
Net increase (decrease) in cash and cash equivalents ...... 5,971 (9,613)
Cash and cash equivalents at the beginning of the period .. 15,810 26,677
---------- ----------
Cash and cash equivalents at the end of the period ........ $21,781 $17,064
========== ==========
See accompanying notes to condensed consolidated financial statements.
8X8, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
8x8, Inc. ("We" or "8x8") was incorporated in California in
February 1987. In December 1996, 8x8 was reincorporated in Delaware.
We develop, manufacture and market telecommunication
equipment and software focused primarily 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 embedded system design.
Our products are used in applications including voice-over-IP, videoconferencing
and video monitoring. We currently market our products mainly to
original equipment manufacturers (OEMs), and also to distributors, dealers and
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 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
Our 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 30, 1999
included 13 weeks and 40 weeks of operations, respectively. The three and nine
month periods ended December 31, 1998 included 14 weeks and 40 weeks of
operations, respectively. For purposes of these condensed consolidated financial
statements, we have indicated our fiscal year as ending on March 31 and our
interim periods as ending on December 31.
The accompanying interim condensed consolidated financial
statements are unaudited and have been prepared on substantially the same basis
as our annual financial statements for the year ended March 31, 1999. In our
opinion, these financial statements reflect all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation of our
financial position, results of operations and cash flows for the periods
presented. These financial statements should be read in conjunction with our
audited financial statements for the year ended March 31, 1999, including notes
thereto, included in our 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)
December 31, March 31,
1999 1999
------------ ------------
Inventory:
Raw materials.................... $123 $952
Work-in-process.................. 605 892
Finished goods................... 808 2,071
------------ ------------
$1,536 $3,915
============ ============
4. CONVERTIBLE SUBORDINATED DEBENTURES
In December 1999, we issued $7.5 million of 4% Series A and Series B
convertible subordinated debentures (the "Debentures"). The Debentures mature on
December 17, 2002, unless converted or redeemed earlier.
The $3.75 million Series A debentures are convertible into 8x8's common stock
at a conversion price equal to 117.5% of the average closing bid price of 8x8's
common stock for the five trading days starting February 1, 2000. The
conversion price per share cannot be higher than $7.05 or lower than $4.00. The
$3.75 million Series B debentures are convertible into 8x8's common stock at a
conversion price equal to 117.5% of the average closing bid price of 8x8's
common stock for the five trading days starting March 8, 2000. We have the
option to redeem the Series B debentures at par in the event that the Series B
conversion price is lower than the Series A conversion price divided by 1.175.
In addition, we have the option to redeem the Series B debentures at 107% of par
in the event that the Series B conversion price is greater than two times the
Series A conversion price.
For each of the Debentures, the lender received a three year warrant to
purchase common shares of 8x8 equal in number to the amount of the corresponding
debentures divided by the conversion price of the debentures. The exercise
price of the warrants will be equal to the conversion price of the corresponding
debentures. We also issued warrants to the placement agent equal to 10% of the
total warrants issued to the lender at substantially the same terms granted to
the lender. If the Series B debentures are redeemed by 8x8, the related
warrants will be terminated.
Using the Black-Scholes pricing model, we estimated that the fair value of
the warrants issued in connection with the Series A debentures approximated $1.8
million at December 31, 1999. We will reflect the amortization of the fair value
of the warrants as a non-cash charge to interest expense over the term of the
warrants. We recognized $32,000 of interest expense associated with these
warrants during the quarter ended December 31, 1999. We have not estimated the
fair value of the warrants accompanying the Series B debentures as of December
31, 1999 because of our potential ability to redeem said debentures under the
conditions discussed above.
Under the Securities Act of 1933, as amended, we have agreed to register for
resale of the common stock issuable upon conversion of the debentures and
exercise of the warrants. We are obligated to file a registration statement
covering such shares within 95 days after the closing and will use our best
efforts to have the registration statement declared effective within 150 days
after closing.
On January 23, 2000, 8x8, the lender and the placement agent agreed to fix
the conversion price of the Series A debentures and the related warrants at
$7.05 per share.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), as defined, includes all changes in equity (net
assets) during a period from non-owner sources. For us, the primary difference
between net income (loss) and comprehensive income (loss) is gains and losses on
short-term investments classified as available-for-sale. Comprehensive income
(loss) for the current reporting and comparable periods in the prior year is as
follows (in thousands):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net loss, as reported........... ($2,234) ($3,223) ($15,410) ($10,844)
Unrealized gains (losses)
on investments................ -- (124) 193 (186)
--------- --------- --------- ---------
Comprehensive loss.............. ($2,234) ($3,347) ($15,217) ($11,030)
========= ========= ========= =========
6. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is 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 warrants, unvested restricted
common stock, and common stock issuable upon the conversion of convertible
subordinated debentures having a dilutive effect. The numerators for each
period presented are equal to the reported net loss. Additionally, due to net
losses incurred for all periods presented, weighted average basic and diluted
shares outstanding for the respective three and nine month periods are the same.
The following equity instruments were not included in the computations of net
income (loss) per share because the effect on the calculations would be anti-
dilutive (in thousands):
Three and Nine Month
Periods Ended
December 31,
--------------------------
1999 1998
------------ ------------
Common stock options................. 4,163 3,346
Unvested restricted common stock..... 501 187
Common stock issuable upon the
conversion of subordinated 1,300 --
debentures.........................
Common stock warrants................ 1,430 --
------------ ------------
Total 7,394 3,533
============ ============
Common stock issuable upon conversion of the Series A and
Series B subordinated debentures and related warrants was estimated using a
conversion price calculated based upon the average closing bid price of our
common stock for the five trading days ended December 31, 1999.
7. SEGMENT REPORTING
Due to a change in 8x8's organizational structure and
enhancements in our systems for internal reporting during our second quarter
ended September 30, 1999, we determined that we have two reportable segments,
Broadband Communications and Video Monitoring, as defined by Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Due to limitations in our internal
reporting systems, it is not practicable to disclose results for the segments
for either the nine month period ended December 31, 1999 or the three and nine
month periods ended December 31, 1998. There are no intersegment revenues
between the two reportable segments. Shared support service functions such as
human resources, facilities management and other infrastructure support and
overhead aren't allocated, but rather are included in the Corporate and Other
category. In addition, all activities associated with our ViaTV product
line, which has been discontinued as discussed in Note 1, have been included in
the Corporate and Other category. Special charges determined to be significant
are reported separately in the Condensed Consolidated Statements of Operations
and are not assigned or allocated to the segments. All other accounting policies
are applied consistently to the segments, where applicable.
(In thousands)
Three Months Ended Six Months Ended
December 31, 1999 December 31, 1999
--------------------- --------------------
Operating Operating
Revenues Loss Revenues Loss
---------- ---------- --------- ----------
Broadband Communications......... $4,279 ($191) $8,549 $110
Video Monitoring................. 1,574 (63) 2,966 (518)
Corporate and Other.............. 385 (2,089) 1,433 (3,502)
---------- ---------- --------- ----------
Total $6,238 ($2,343) $12,948 ($3,910)
========== ========== ========= ==========
The only asset allocated by segment is inventory. Inventory allocated to the
Broadband Communications and Video Monitoring segments at December 31, 1999 was
approximately $867,000 and $669,000, respectively.
8. 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 software for managing voice-over-IP networks. 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 approximately $1.30 if the
employee departs prior to vesting. The purchase price of the acquisition of
approximately $13.5 million, which included approximately $244,000 of
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
was 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 had not
been established and was 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 were 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 the independent 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 excess of
the purchase price over the net tangible and intangible assets acquired and
liabilities assumed was allocated to goodwill. Amounts allocated to goodwill and
workforce are being amortized on a straight-line basis over five and three
years, respectively. 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................................... 3,452
---------
$13,506
=========
The consolidated results of 8x8 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 fiscal year, the pro forma net loss of 8x8
would have been substantially the same as that reported for the period.
9. NONSTATUTORY STOCK OPTION PLAN
In December 1999, our Board of Directors approved the 1999
Nonstatutory Stock Option Plan (the "Plan") with 200,000 shares initially
reserved for issuance thereunder. Under terms of the Plan, options may not be
issued to either Officers or Directors of 8x8; provided, however, that options
may be granted to an Officer in connection with the Officer's initial employment
by 8x8. The Plan has not received stockholder approval.
10. SUBSEQUENT EVENT
On January 24, 2000, we entered into a Common Stock Purchase Agreement with
STMicroelectronics NV ("STM") for the private sale of 3.7 million shares of our
common stock to STM at a purchase price of $7.50 per share. The closing is
subject to certain conditions including the expiration or early termination
of the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended.
Upon closing of the transaction we will appoint a designee of STM to our
Board of Directors. In addition, we will execute an agreement pursuant to which
we will grant a non-exclusive license to certain of our technology to a
subsidiary of STM, and an agreement which outlines certain joint development
activities that we will conduct with said subsidiary.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position No. 98-1 ("SOP 98-1"),
"Software for Internal Use," which provides guidance on accounting for the cost
of computer software developed or obtained for internal use. We adopted SOP 98-
1 in fiscal 2000. The adoption of SOP 98-1 did not have a material impact on our
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." We are required to adopt FAS
133 in fiscal 2001. FAS 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. We do not expect that the adoption of FAS 133
will have a material impact on our consolidated financial statements.
In December 1998, the AICPA issued Statement of Position 98-9
("SOP 98-9"), "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain 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.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Report on Form 10-Q contains forward-looking
statements, including but not limited to those specifically identified as such,
that involve risks and uncertainties. The statements contained in this Report
on Form 10-Q that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, including without limitation statements regarding our
expectations, beliefs, estimates, intentions or strategies regarding the future.
All forward-looking statements included in this Report on Form 10-Q are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements. You should not place undue reliance
on these forward-looking statements. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including, but not limited to, those set forth below under
the heading "Factors That May Affect Future Results" and elsewhere in this
Report on Form 10-Q.
Overview
Since June 1995, we have been executing a business
strategy designed to focus our efforts exclusively on the development,
manufacture and marketing of multimedia communication semiconductors, software
and systems. To date, we have marketed our multimedia communication
semiconductors and related technology to OEMs and distributors, mainly for
videoconferencing and videophone applications. This product line includes the
LVP, VCP and VCPex semiconductors.
In an effort to expand the available market for our
multimedia communication 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 ViaTV 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 February 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
consumer videophones. 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. In
conjunction with this decision we recorded a $5.7 million charge associated with
the write-off of ViaTV videophone inventories in the fourth fiscal
quarter of 1999. 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 overhead expenses and with lower 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. In August
1999, we announced the RSM-1600 Master Transceiver, an upgrade version of
the RSM-1500 module, and the RSM-700 Video/Alarm Expander. The RSM-
1500 and RSM-1600 modules enable 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 world at any time. We
currently sell video monitoring products to security distributors and dealers in
North America, and are attempting to expand our distribution channels into
Europe and Asia.
In December 1998, we introduced the Audacity Internet
telephony processor, which combines telephony protocols with audio
compression/decompression algorithms and implements multiple, simultaneous
Internet protocol (IP) phone calls on a single integrated circuit. In April
1999, we announced our Symphony Media Hub, an integrated system product
that is based on the Audacity semiconductor and that connects up to four
analog telephone lines to an IP network. In September 1999, we announced the
Audacity-T2 IP Telephone Processor, an IP phone on a chip, and the
IntraSwitch iPBX Evaluation System, a full-function IP-based private branch
exchange (PBX). These products reflect our continuing efforts to develop
broadband telephony technology. In the three and nine month periods ended
December 31, 1999, we realized revenues of approximately $264,000 and $404,000,
respectively, associated primarily with the sale of evaluation units of
broadband telephony systems and the license of related software and reference
designs.
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 software for managing voice-over-IP networks. 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 approx. $1.30 if the employee
departs prior to vesting. The purchase price of the acquisition of
approximately $13.5 million, which included $244,000 of 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 was 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 had not been established and
was 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 were
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 the independent 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 excess of the purchase price
over the net tangible and intangible assets acquired and liabilities assumed has
been allocated to goodwill. Amounts allocated to goodwill and workforce are
being amortized on a straight-line basis over five and three years,
respectively. 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................................... 3,452
---------
$13,506
=========
Results of Operations
The following discussion should be read in
conjunction with our Condensed Consolidated Statements of Operations and the
notes thereto:
Revenues
($ in millions)
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------- ----------------------------
1999 1998 1999 1998
Product revenues: -------------- -------------- -------------- -------------
Multimedia communication
semiconductor............. $2.8 $1.9 $8.1 $8.5
Video monitoring............ 1.6 1.1 4.5 2.0
Consumer videophone......... 0.4 4.6 2.9 12.0
Broadband telephony......... 0.1 -- 0.2 --
------- ------- ------- -------
Total product revenues........ $4.9 79% $7.6 75% $15.7 84% $22.5 86%
License and other revenues.... 1.3 21% 2.5 25% 3.1 16% 3.7 14%
------- ------ ------- ------ ------- ------ ------- -----
Total revenues............ $6.2 100% $10.1 100% $18.8 100% $26.2 100%
======= ====== ======= ====== ======= ====== ======= =====
Total product revenues decreased by $2.7 million in the third
quarter of fiscal 2000 as compared to the third quarter of fiscal 1999, and
decreased by $6.8 million in the first nine months of fiscal 2000 as compared to
the first nine months of fiscal 1999. The decrease in product revenues in the
third quarter of fiscal 2000 is due primarily to a decrease in both units sold
and ASPs for our ViaTV products due to our exit from the consumer
videophone market. This decrease was partially offset by increases in unit
shipments of our multimedia communication semiconductor and video monitoring
systems products. The decrease in product revenues for the nine months ended
December 31, 1999 as compared to the prior year period is due primarily to a
significant decrease in both units sold and ASPs for our ViaTV products
as well as a slight decrease in both units sold and ASPs for our multimedia
communication semiconductor products. These decreases were partially offset by
an increase in sales of our video monitoring systems products.
License and other revenues consist of technology
licenses, including royalties required under such licenses, and nonrecurring
engineering fees for services that we perform for our customers. License and
other revenues decreased by approximately $1.2 million in the third quarter of
fiscal 2000 as compared to the third quarter of fiscal 1999, and decreased by
$558,000 in the first nine months of fiscal 2000 as compared to the first nine
months of fiscal 1999. There can be no assurance that we will receive any
revenues from licensing or other such arrangements in the future. See "Factors
That May Affect Future Results-No Assurance of Future License and Other
Revenues" and "Factors That May Affect Future Results-Dependence on Key
Customers."
No customer represented 10% or more of our total revenues for
the quarter ended December 31, 1999. Revenues derived from ViaTV products
sold-through by one distribution customer represented approximately 14% of our
total revenues for the quarter ended December 31, 1998. No customer represented
10% or more of our total revenues for the nine month periods ended December 31,
1999 and 1998, respectively.
Revenues derived from customers outside of the United States
as a percentage of total revenues were as follows (See "Factors That May Affect
Future Results-International Operations."):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Asia Pacific.......... 25% 31% 21% 27%
Europe................ 27% 18% 24% 19%
--------- --------- --------- ---------
Total............... 52% 49% 45% 46%
========= ========= ========= =========
Gross Profit
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
($ in millions) 1999 1998 1999 1998
--------- --------- --------- ---------
Gross profit from product
revenues.................. $3.0 $2.0 $9.0 $6.6
Gross margin................ 61% 26% 57% 29%
Gross profit from license
and other revenues........ $1.2 $2.5 $3.0 $3.6
Gross margin................ 92% 100% 97% 97%
Product gross margins increased to 61% in the third quarter
of fiscal 2000 as compared to 26% in the third quarter of fiscal 1999, and
increased to 57% in the first nine months of fiscal 2000 from 29% for the first
nine months of fiscal 1999. The increase in
product gross margins during the three and nine month periods ended December 31,
1999 as compared to the prior year is due to an increase in higher margin
multimedia communication semiconductor and video monitoring system revenues as a
percentage of total revenues and due to significantly higher gross margins
realized on sales of our ViaTV products.
As discussed above, we recorded a $5.7 million reserve
associated with the write-off of ViaTV product inventory in the fourth
quarter of fiscal 1999 due to our decision to cease production of the
ViaTV product line and withdraw from our distribution channels. Gross
margins on ViaTV product sales during the three and nine month periods
ended December 31, 1999 were impacted significantly as we released excess
reserves due to much better than expected ViaTV unit sales and related
selling prices and due to the liquidation of certain raw material inventories
rendered excess or obsolete when we ceased production of the ViaTV
product line.
Gross profit from license and other revenues decreased by
approximately $1.3 million in the third quarter of fiscal 2000 as compared to
the third quarter of fiscal 1999, and decreased by approximately $613,000 in the
first nine months of fiscal 2000 as compared to the first nine months of fiscal
1999. There can be no assurance that we will receive any revenues from such
license and other revenue sources in the future. See "Factors That May Affect
Future Results-No Assurance of Future License and Other Revenues."
The markets for our products are characterized by falling
average selling prices, which could have a material adverse effect on our future
business and operating results if we cannot achieve lower cost of sales and/or
higher sales volumes. We expect that, as a result of competitive pressures and
other factors, gross profit as a percentage of revenue for our multimedia
communication semiconductor products will likely decrease for the foreseeable
future. Gross profit as a percent of revenue is substantially lower for the
sales of video monitoring systems products than for sales of our multimedia
communication semiconductors. If our systems product revenues grow as a
percentage of total product revenue, we expect that gross profit as a percentage
of total product revenue will decrease. See "Factors That May Affect Future
Results-Fluctuations in Operating Results."
Research and Development Expenses
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
($ in millions) 1999 1998 1999 1998
--------- --------- --------- ---------
Research and development... $2.9 $2.5 $8.1 $7.9
As a % of total revenues... 47% 25% 43% 30%
Research and development expenses consist primarily of
personnel, system prototype design and fabrication, mask, prototype wafer and
equipment costs necessary for us to conduct our development efforts. Research
and development costs, including software development costs, are expensed as
incurred. Research and development expenses increased by $342,000 in the third
quarter of fiscal 2000 as compared to the third quarter of fiscal 1999, and
increased by approximately $260,000 in the first nine months of fiscal 2000 as
compared to the first nine months of fiscal 1999. Higher research and
development expenses during the three and nine months ended December 31, 1999 as
compared to the comparable periods in the prior year primarily reflects
increased expenses associated with our Odisei subsidiary, which we acquired in
May 1999. These increases were offset primarily by lower ViaTV product
design and prototype costs due to the discontinuation of ViaTV
product development efforts in April 1999.
We expect to continue to allocate substantial resources to
research and development. However, future research and development costs may
vary both in absolute dollars and as a percentage of total revenues. See
"Factors That May Affect Future Results-Rapid Technological Change; Dependence
on New Product Introduction."
Selling, General and Administrative Expenses
Three Months Ended Nine Months Ended
December 31, December 31,
------------------- -------------------
($ in millions) 1999 1998 1999 1998
--------- --------- --------- ---------
Selling, general and
administrative........... $3.5 $5.4 $10.9 $14.1
As a % of total revenues... 56% 53% 58% 54%
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 decreased by $1.9 million in the
third quarter of fiscal 2000 as compared to the third quarter of fiscal 1999,
and decreased by approximately $3.2 million in the first nine months of fiscal
2000 as compared to the first nine months of fiscal 1999. These decreases are
due primarily to lower costs associated with the marketing, advertising and
promotion of the ViaTV product line and lower headcount required to
support these activities as we exited from the consumer videophone business. As
we introduce and promote new broadband telephony products, and attempt to expand
distribution channels for such products, 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."
In-process Research and Development and Amortization 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 workforce charged to operations was $189,000 and
$424,000 in the three and nine month periods ended December 31, 1999,
respectively. In addition, we incurred an in-process research and development
charge of $10.1 million in the first quarter of fiscal 2000 related to the
acquisition of Odisei.
Other Income, Net
In the third quarter of fiscal 2000, other income, net,
was $109,000 and consisted primary of interest income earned on our cash
equivalents, offset by approximately $46,000 of interest expense associated with
the convertible subordinated debentures and related warrants issued in December
1999. Other income, net, for the third quarter of fiscal 1999 was $249,000 and
consisted primary of interest income earned on our cash equivalents. Other
income, net, was $2.2 million for the nine month period ended December 31, 1999
compared to $845,000 for the comparable period in the prior year. Other income,
net, for the nine months ended December 31, 1999 includes both a $1.9 million
gain realized from the sale of a nonmarketable equity investment and
approximately $193,000 of losses realized on the sale of certain of our cash
equivalent investments.
Provision for Income Taxes
There was no tax provision for the three month period
ended December 31, 1999 or during the three and nine month periods ended
December 31, 1998 due to net losses incurred. The tax provision for the nine
month period ended December 31, 1999 represented certain foreign withholding
taxes.
Year 2000
Through the first two weeks of February 2000, we have not encountered any
disruption to our business operations due to Year 2000 issues in our internal
systems and so far we consider the transition to calendar year 2000 to be
smooth. While still too early to determine the effects of the Year 2000 issues
on transactions with our customers and suppliers, so far we have not encountered
any significant disruptions to our business operations or been notified by our
customers of any Year 2000 problems with respect to our products. We continue
to monitor closely both our internal systems and transactions with customers and
suppliers for any indication of Year 2000 related problems.
As of the end of the third quarter of fiscal 2000, total costs incurred by
8x8 regarding the testing of current products for Year 2000 readiness, and
answering and responding to customer requests related to Year 2000 issues,
including both incremental spending and redeployed resources, has not exceeded
$100,000. With our Year 2000 readiness programs essentially complete, we do not
anticipate incurring any significant costs beyond the third quarter of fiscal
2000 related to such programs. Our expectation regarding incurring additional
Year 2000 related costs is based upon currently known circumstances and various
assumptions regarding future events, and does not take into account costs
related to the potential failure of key suppliers to timely address or correct
Year 2000 issues, potential costs related to any customer or other product
liability claims or the cost of internal software and hardware replaced in the
ordinary course of business. Actual costs incurred could differ materially from
our current estimates.
Liquidity and Capital Resources
As of December 31, 1999, we had cash and liquid
investments totaling $21.8 million, representing an increase of approximately
$6.0 million from March 31, 1999. We currently have no line of credit
arrangements.
Cash used in operations of approximately $2.3 million in the
first nine months of fiscal 2000 is primarily attributable to the net loss of
$15.4 million, decreases in deferred revenue and accrued warranty of $2.8
million and $400,000, respectively, and a net gain resulting from the sale of
investments of $1.7 million. Cash used in operations was partially offset by
decreases in accounts receivable, net, and inventory of $4.5 million and $2.4
million, respectively, an increase in accrued compensation of $304,000, and
noncash items, including a charge for purchased in-process research and
development of $10.1 million and depreciation and amortization of $1.3 million.
Cash used in operations of $9.1 million in the first nine months of fiscal 1999
reflected a net loss of approximately $10.8 million, an increase of $2.2 million
in accounts receivable, and a $224,000 decrease in accrued warranty, offset
primarily by a decrease of $2.0 million in inventory, increases of $1.0 million
in deferred revenue and $345,000 in accrued compensation and $821,000 of noncash
items.
Cash provided by investing activities in the nine month
period ended December 31, 1999 is primarily attributable to proceeds from the
sale of a nonmarketable equity investment of $1.9 million, offset by capital
expenditures of $950,000 and net cash paid of $133,000 related to the
acquisition of Odisei. Cash used in investing activities in
the nine month period ended December 31, 1998 is primarily attributable to
capital expenditures of $1.5 million and the repurchase of common stock from
minority shareholders of a subsidiary of 8x8 in conjunction with its merger with
8x8 in August 1998.
Cash provided by financing activities in the nine month
period ended December 31, 1999 included $7.5 million of proceeds from the
issuance of convertible subordinated debentures and $577,000 of net proceeds
from sales of our common stock upon the exercise of employee stock options,
offset by cash paid for debt issuance related costs of $556,000. Cash provided
by financing activities in the nine month period ended December 31, 1998
consisted primarily of proceeds from the repayment of stockholders' notes
receivable and net proceeds from sales of our common stock upon the exercise of
employee stock options.
We believe that we will be able to fund planned
expenditures and satisfy our cash requirements for at least the next twelve
months from existing cash balances and cash flow from operations, if any.
However, we may seek to explore business opportunities, including acquiring or
investing in complementary businesses or products, that will require additional
capital from equity or debt sources. Additionally, the development and
marketing of new products could require a significant commitment of resources,
which could in turn require us 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 which could seriously harm our
business, financial condition and results of operations. If we issue additional
equity or convertible debt securities to raise funds, the ownership percentage
of our existing stockholders would be reduced. New investors may demand rights,
preferences or privileges senior to those of existing holders of our common
stock.
Subsequent Event
On January 24, 2000, we entered into a Common Stock Purchase Agreement with
STMicroelectronics NV ("STM") for the private sale of 3.7 million shares of our
common stock to STM at a purchase price of $7.50 per share. The closing is
subject to certain conditions including the expiration or early termination
of the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended.
Upon closing of the transaction we will appoint a designee of
STM to 8x8's Board of Directors. In addition, we will execute an agreement
pursuant to which we will grant a non-exclusive license to certain of our
technology to a subsidiary of STM, and an agreement which outlines certain joint
development activities that we will conduct with said subsidiary.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Our financial market risk includes risks associated with international
operations and related foreign currencies. We derive a significant portion of
our revenues from customers in Europe and Asia. In order to reduce the risk
from fluctuation in foreign exchange rates, the vast majority of our sales are
denominated in U.S. dollars. In addition, all of our arrangements with our
semiconductor foundry and assembly vendors, and with our subcontract
manufacturer for our video monitoring and broadband telephony systems, are
denominated in U.S. dollars. We have subsidiaries in Europe, and as such we are
exposed to market risk from changes in exchange rates. We have not entered into
any currency hedging activities. To date, our exposure to exchange rate
volatility has not been significant, however, there can be no assurance that
there will not be a material impact in the future.
Factors That May Affect Future Results
The following factors should be considered in conjunction
with the information in this Report on Form 10-Q.
We have a history of losses and we are uncertain as to our
future profitability.
We recorded an operating loss of $17.5 million in
the nine month period ended December 31, 1999. In addition, we recorded
operating losses for the year ended March 31, 1999 and in three of the four
quarters in fiscal 1998. We would not have been profitable in fiscal 1998 had
we not received nonrecurring license and other revenues. We expect to continue
to incur operating losses for the foreseeable future, and such losses may be
substantial. We will need to generate significant revenue growth to achieve
profitability. Given our history of fluctuating revenues and operating losses,
we cannot be certain that we will be able to achieve profitability on either a
quarterly or annual basis.
Our operating results may decline from previous periods if
we are unable to secure future license and other sources of revenues.
In the past, we have received substantial revenues
from licensing of technology. License and other revenues, all of which were
nonrecurring, were $3.1 million and $3.7 million for the nine month periods
ended December 31, 1999 and 1998, respectively, and were $5.5 million and $14.5
million in the fiscal years ended March 31, 1999 and 1998, respectively. If we
do not receive additional revenues from licensing of our technology in the
future, our operating results may decline from previous periods.
We have discontinued our ViaTV product line and if we
cannot lower expenses, 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 third quarter and nine months
ended December 31, 1999, ViaTV product revenues represented approximately
8% and 18% of total product revenues, respectively. For the years ended March
31, 1999 and 1998, ViaTV revenues represented 49% and 38% of product
revenues, respectively. We have been successful in selling the majority of
existing ViaTV related inventories as of December 31, 1999 and,
therefore, we do not anticipate any material revenues from our ViaTV
product line in the future. 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 overhead expenses and with lower
operating expenses, it could 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 growth 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 multimedia communications 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 generated significant revenue from the sale of our broadband telephony
products. If we are not able to generate significant revenues selling into the
broadband telephony market, it would have a material adverse effect on our
business and operating results.
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 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
99.999% 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.
Our future operating results may not follow past or
expected 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, and a decline
in our operating results could cause our stock price to fall. On an annual and
a quarterly basis there are a number of factors that may affect our operating
results, many of which are outside our control. These include, but are not
limited to:
- changes in market demand;
- the timing of customer orders;
- competitive market conditions;
- lengthy sales cycles, regulatory approval
cycles;
- new product introductions by us or our
competitors;
- market acceptance of new or existing products;
- the cost and availability of components;
- the mix of our customer base and sales channels;
- the mix of products sold;
- the management of inventory;
- the level of international sales;
- continued compliance with industry standards;
and
- general economic conditions.
Our 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 our products are characterized by falling average selling prices.
We expect that, as a result of competitive pressures and other factors, gross
profit as a percentage of revenue for our 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 IP
telephony semiconductors similar to those that we have historically commanded
for our videoconferencing semiconductors. In addition, the gross margins for
our video monitoring and broadband systems products are, and will
likely continue to be, substantially lower than the gross margins for our
videoconferencing semiconductors. In the likely event that we encounter
significant price competition in the markets for our products, we could be at a
significant disadvantage compared to our 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 our business may be derived from orders placed by a limited number of
large customers, including OEM customers, the timing of such orders can also
cause significant fluctuations in our operating results. 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 our revenues may be magnified by our inability to adjust spending
to compensate for such shortfall. Announcements by us or our competitors of new
products and technologies could cause customers to defer purchases of our
existing products, which would also have a material adverse effect on our
business and operating results.
As a result of these and other factors, it is likely that
in some future period our 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 our common stock.
We may not be able to manage our inventory levels
effectively which may lead to inventory obsolescence which would force us to
lower our prices.
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.
For example, we had significant inventory quantities of ViaTV products,
both on hand 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. Excess inventory levels would 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 may need to raise additional capital to support our
growth, and failure to do so in a timely manner may cause us to delay our plans
for growth.
As of December 31, 1999, we had approximately
$21.8 million in cash and cash equivalents. 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. However, we may seek to exploit business opportunities, including
acquiring or investing in complementary businesses or products, that will
require additional capital from equity or debt sources. Additionally, the
development and marketing of new products could require a significant commitment
of resources, which could in turn require us 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 which could
seriously harm our business, financial condition and results of operations. If
we issue additional equity or convertible debt securities to raise funds, the
ownership percentage of our existing stockholders would be reduced. New
investors may demand rights, preferences or privileges senior to those of
existing holders of our common stock.
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 our sales
have been to relatively few customers, although the composition of these
customers has varied. Revenues from our ten largest customers for the third
quarter and nine months ended December 31, 1999 accounted for approximately 44%
and 40%, respectively, of total revenues. Revenues from our ten largest
customers for the fiscal years ended March 31, 1999 and 1998 accounted for 40%
and 61%, respectively, of total revenues. 3Com accounted for 20% of total
revenues during the year ended March 31, 1998. Substantially all of our product
sales have been made, and are expected to continue to be made, on a purchase
order basis. None of our customers has entered into a long-term agreement
requiring it to purchase our products. In the future, we will need to gain
purchase orders for our products to earn additional revenue. Further, all of
our license and other revenues are nonrecurring.
Technical and quality difficulties could impede market
acceptance of our video monitoring products which would limit our growth.
Due to bandwidth constraints, certain of 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, audio transmitted over a POTS line has 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. In addition, we compete with manufacturers of PBX
systems focused on small and medium size businesses. The markets for our
products are characterized by intense competition, declining average selling
prices and rapid technological change.
IP Telephony and Videoconferencing
The principal competitive factors in the market for IP
telephony and videoconferencing semiconductors include product definition,
product design, system integration, chip size, functionality, time-to-market,
adherence to industry standards, price and reliability. We have a number of
competitors in this market including Analog Devices, AudioCodes Ltd., Broadcom
Corporation, Conexant, DSP Group, Lucent Technologies, Motorola, Inc., Neo
Paradigm Labs, Philips Electronics, Texas Instruments, Inc. and Winbond
Electronics. Certain of our competitors for IP 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, Mediatrix, NX Networks, Nokia Corporation, Nortel Networks, Nuera
Communications, Inc., VocalTec 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.
Principle competitive factors in the market for PBX 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 number of
suppliers of PBX related products and services including, but not limited to,
3Com, Cisco Systems, Inc., Coppercom, Lucent Technologies, NEC, Nortel
Networks, Siemens and Tundo. We expect, however, that this market will be
characterized by intense competition, declining average selling price and rapid
technology change.
Video Monitoring Products
The competitive factors in the market for our video
monitoring 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 video monitoring products. Competition is expected
from:
- 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 Ademco, 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.
- Personal computer system and software manufacturers.
Potential customers for our remote surveillance module 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, C-Phone Corporation, Leadtek Research, Inc., Truedox
Technology Corporation and Video Communication Systems GmbH are among the
companies selling low-cost products targeted specifically at the video
monitoring marketplace. We expect that additional companies will introduce
products that compete with our video monitoring 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 our ViaTV products, and may use such technology
to introduce products that compete with our video monitoring 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 video
monitoring 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 failure 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 order 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 in these emerging markets,
as well as in the more established videoconferencing market, 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:
- 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.
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 sixteen 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 misappropriation. 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 our business and operating results.
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, SIP, 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 replaced. As
standards evolve, we may be required to modify our existing products or develop
and support new versions of our 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.
Future regulation or legislation could restrict our
business or increase our cost of doing business.
At present there are few laws or regulations that
specifically address access to or commerce on the Internet, including broadband
IP telephony. We are unable to predict the impact, if any, that future
legislation, legal decisions or regulations concerning the Internet may have on
our business, financial condition and results of operations. Regulation may be
targeted towards, among other things, assessing access or settlement charges,
imposing tariffs or imposing regulations based on encryption concerns or the
characteristics and quality of products and services, which could restrict our
business or increase our cost of doing business. The increasing growth of the
broadband IP telephony market and popularity of broadband IP telephony products
and services heighten the risk that governments will seek to regulate broadband
IP telephony and the Internet. In addition, large, established
telecommunications companies may devote substantial lobbying efforts to
influence the regulation of the broadband IP telephony market, which may be
contrary to our interests.
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.
Manufacturing
We outsource the manufacturing of our semiconductors and
our broadband telephony and video monitoring 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 45%, 43% and 47% of total revenues in the nine months ended December
31, 1999 and the fiscal years ended March 31, 1999 and 1998, respectively.
Specifically, sales to customers in the Asia Pacific region represented 21%, 26%
and 25% of our total revenues in the nine months ended December 31, 1999 for the
fiscal years ended March 31, 1999 and 1998, respectively, while sales to
customers in Europe represented 24%, 17% and 22% of our total revenues for the
same periods, respectively.
International sales of our semiconductors will continue to
represent a substantial portion of our product revenues for the foreseeable
future. In addition, substantially all of our current products are, and
substantially all of our 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. We are also subject to geopolitical risks, such as
political, social and economic instability, potential hostilities and changes in
diplomatic and trade relationships, in connection with its international
operations. A significant decline in demand from foreign markets, which may
result from the current economic conditions in the Asia Pacific region, or for
other reasons could have a material adverse effect on our business and operating
results.
We need to expand our management systems and hire and
retain key personnel to support our products.
The development and marketing of our broadband telephony
and video monitoring products will continue to place a
significant strain on our limited personnel, management and other resources.
Our ability to manage any future growth effectively will require us to
successfully attract, train, motivate, retain and manage employees, particularly
key engineering and sales managerial personnel, to effectively integrate new
employees into our operations and to continue to improve our operational,
financial and management systems. Our failure to manage growth and changes in
our business effectively and to attract and retain key personnel could limit our
growth and the success of our products and business.
Further, we are highly dependent on the continued service of
and our 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 we are located. The loss of
any key person or the failure to recruit additional key technical and sales
personnel in a timely manner would have a material adverse effect on our
business and operating results. We currently do not have employment contracts
with any of our employees and we do not maintain key person life insurance
policies on any of our employees.
Our stock price has been volatile and we cannot assure you
that our stock price will not decline.
The market price of the shares of our common stock has been
and is likely to be highly volatile. It may be significantly affected by
factors such as:
- actual or anticipated fluctuations in our operating
results;
- announcements of technical innovations;
- loss of key personnel;
- new products or new contracts by us, our competitors or
their customers;
- governmental regulatory action;
- developments with respect to patents or proprietary
rights, general market conditions, changes in financial estimates by securities
analysts and other factors which could be unrelated to, or outside 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 price of our common
stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
initiated against the issuing company. If our stock price is volatile, we may
also be subject to such litigation. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which would
disrupt business and could cause a decline in our operating results. Any
settlement or adverse determination in such litigation would also subject us to
significant liability.
PART II - OTHER INFORMATION.
ITEM 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index.
(b) Reports on Form 8-K.
On November 9, 1999, we filed a Current Report on Form 8-K reporting
that we announced the appointment of Lee Camp and Joseph Markee to our Board of
Directors effective October 21, 1999.
On December 23, 1999, we filed a Current Report on Form 8-K reporting that we
had completed a $7.5 million private placement of subordinated Series A and
Series B convertible debentures with funds managed by an institutional investor
effective December 17, 1999.
8X8, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 14, 2000
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David M. Stoll
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Chief Financial Officer and
Vice President of Finance
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(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
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Exhibit Number
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Description
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4.1
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Securities Purchase Agreement by and among Wingate Capital Ltd. and
Fisher Capital Ltd. (collectively the "Buyers") and 8x8, Inc. dated
December 15, 1999, with Schedule and Exhibits.
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4.2
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Registration Rights Agreement by and among 8x8, Inc. and the Buyers
dated December 15, 1999.
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4.3
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Form of Series A Warrant by and among 8x8, Inc. and FleetBoston
Robertson Stephens, Inc. dated December 16, 1999.
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4.4
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Form of Series B Warrant by and among 8x8, Inc. and FleetBoston
Robertson Stephens Inc. dated December 16, 1999.
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4.5
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Registration Rights Agreement by and among 8x8, Inc. and FleetBoston
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10.1
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1999 Nonstatutory Stock Option Plan, as amended, and form of Stock Option Agreement.
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27.1+
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Financial Data Schedule.
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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.
