8x8 2005 Annual Report Download

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2005
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 000-21783
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)
3151 Jay Street
Santa Clara, CA 95054
(Address of Principal Executive Offices including Zip Code)
(408) 727-1885
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.001 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [ X ]

Table of contents

  • Page 1
    ... file number 000-21783 8X8, INC. (Exact name of Registrant as Specified in its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 77-0142404 (I.R.S. Employer Identification Number) 3151 Jay Street Santa Clara, CA 95054 (Address of Principal Executive Offices...

  • Page 2
    ...Act of 1934). YES [ X ] NO [ ] Based on the closing sale price of the Registrant's common stock on the NASDAQ SmallCap Market System on September...Registrant was $159,961,000. The number of shares of the Registrant's common stock outstanding as of May 20, 2005 was 53,816,989. DOCUMENTS INCORPORATED BY...

  • Page 3
    8X8, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED MARCH 31, 2005 Part I. Item 1. ...Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Principal Accounting Fees and Services...

  • Page 4
    ... service, and then use an 8x8-supplied terminal adapter to connect any telephone to a broadband Internet connection and make or receive calls from a regular telephone number. All Packet8 telephone accounts come with voice mail, caller ID, call waiting, call waiting caller ID, call forwarding, hold...

  • Page 5
    ...a PC downloading a page from a web server, or one computer sending an e-mail message to another computer). The most common protocol used for communicating on these packet switched networks is IP. VoIP allows for the transmission of voice along with other data over these same packet switched networks...

  • Page 6
    ... differentiated services or functions, such as video communications, that the network was not originally designed to accommodate. Until recently, traditional telephone companies have avoided the use of packet switched networks for transmitting voice calls due to the potential for poor sound quality...

  • Page 7
    .... All Packet8 customers receive access to a variety of telephone features, including voice mail, caller ID, call forwarding, call waiting, 3-way calling, online account management and billing, international call blocking and caller ID blocking. We are also offering video over IP service using our...

  • Page 8
    ...; Unlimited Packet8 extension-to-extension dialing anywhere in the world; Direct Inward Dial (DID) phone number with any desired area code for each extension; Conference bridge, 3-Way conferencing, music on hold, call park/pick-up, call transfer, hunt groups, and do not disturb; Business-class voice...

  • Page 9
    ... voice port with its own direct dial phone number. This adapter runs a variety of communication and network protocols, including SIP. DESKTOP IP VIDEOPHONE Our desktop videophone product, the DV326, is an IP videophone that contains all of the voice features of a regular Packet8 service. In addition...

  • Page 10
    ... Clara, California and employ a staff of individuals with experience in both voice and data operations to provide twenty-four hour operations support We use various tools to monitor and manage all elements of our network in real-time. Additionally, our Network Operations Center provides technical...

  • Page 11
    respectively. Regulatory The use of the Internet and private IP networks to provide voice, video and other forms of real-time, two-way communications services is a relatively recent development. Although the provisioning of such services is currently permitted by United States law and largely ...

  • Page 12
    ... 2005, the FCC issued an opinion and order denying SBC's forbearance petition, and concluding that the petition was procedurally defective. Several states have also demonstrated an interest in regulating VoIP services at a state public utility level, as they do for providers of traditional telephone...

  • Page 13
    ...is unclear at this time what impact this new rulemaking will have on the CPUC's classification or treatment of VoIP services. In May 2004, in response to a 2003 complaint case brought by Frontier Telephone of Rochester against Vonage, the New York State Public Service Commission, or NYPSC, concluded...

  • Page 14
    ... service to all of our customers could have an adverse effect on our business, financial condition and results of operations. In May 2005, we began charging a Regulatory Recovery Fee, currently an additional $1.50 per month, on each telephone number that is used by our customers, including toll free...

  • Page 15
    ...subject to a collective bargaining arrangement. ITEM 2. PROPERTIES Our principal operations are located in an approximately 47,000 square foot facility in Santa Clara, California that is leased through August 2009. Design, testing, research and development, sales and marketing, shipping, customer 12

  • Page 16
    ...for the Eastern District of Texas, Marshall Division. The complaint alleged that certain Sony Ericsson products infringe two 8x8 patents, U.S. Patent Numbers 6,441,842, issued on August 27, 2002, and 6,119,178, issued on September 12, 2000. In March 2005, we and Sony Ericsson agreed to terminate the...

  • Page 17
    ...public offering on July 2, 1997 under the name 8x8, Inc. From that date through April 3, 2000, our common stock was traded on the NASDAQ National Market (the NASDAQ) under the symbol "EGHT...fiscal 2005. As of May 20, 2005, there were 303 holders of record of our common stock. The following table sets ...

  • Page 18
    ..., or IP, telephony and video applications. We offer the Packet8 broadband voice over Internet protocol, or VoIP, and video communications service, Packet8 Virtual Office service and videophone equipment and services. We shipped our first VoIP product in 1998, launched our Packet8 service in November...

  • Page 19
    ... has expired. New customers may terminate their service within thirty days of order placement and receive a full refund of fees previously paid. As we have been providing our Packet8 service for a limited period of time, we have not developed sufficient history to apply a return rate and reserve...

  • Page 20
    ... on a subscription basis, ratably over the term of the contract. For all sales, except those completed via the Internet, we use either a binding purchase order or other signed agreement as evidence of an arrangement. For sales over the Internet, we use a credit card authorization as evidence of an...

  • Page 21
    ... to the growth in the subscriber base compared to the prior year, partially offset by a $1.7 million decrease in sales of video and VoIP semiconductors. During fiscal 2005, our Packet8 lines in service increased from approximately 11,000 at March 31, 2004 to approximately 57,000 at March 31...

  • Page 22
    ... decrease in the future as revenues from our Packet8 service increase as a percentage of overall revenues. Sales to customers outside the United States represented 9%, 71% and 62% of total revenues in the fiscal years ended March 31, 2005, 2004 and 2003, respectively. The following table illustrates...

  • Page 23
    ...quality assurance, shipping and handling. The cost of product revenues was $4.5 million, $1.8 million and $2.8 million for fiscal 2005, 2004 and 2003, respectively. We generally do not charge Packet8 subscribers for the terminal adapters used to provide our service when they subscribe on our website...

  • Page 24
    ... attributable to 8x8 Europe SARL, our new French subsidiary formed in the third quarter of fiscal 2004. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, customer support, finance...

  • Page 25
    ... on our cash, cash equivalents and investment balances. The $264,000 decrease in fiscal 2005 was primarily attributable to a $790,000 one time gain recorded in fiscal 2004 in connection with the sale of Centile Europe SA, partially offset by an increase in interest income of $276,000 due to higher...

  • Page 26
    ...,000 gain on the sale of Centile Europe and $565,000 of depreciation and amortization, a decrease in accrued compensation of $258,000, a decrease in warranty liability of $234,000, a $249,000 decrease in other accrued liabilities, and a $91,000 decrease in other assets. Cash used in operations was...

  • Page 27
    ... are reflected in our consolidated financial statements once goods or services have been received or at such time when we are obligated to make payments related to these goods or services. At March 31, 2005, future minimum annual lease payments under noncancelable operating leases, net of sublease...

  • Page 28
    ... in our operating results; announcements of technical innovations; future legislation or regulation of the Internet and/or voice over Internet protocol (VoIP); loss of key personnel; new entrants into the VOIP service marketplace, including cable companies and other well-capitalized competitors...

  • Page 29
    ... need to occur. Telephone and cable service providers must continue to invest in the deployment of high speed broadband networks to residential and business customers. VoIP networks must improve quality of service for real-time communications, managing effects such as packet jitter, packet loss, and...

  • Page 30
    ... new and enhanced products must take advantage of technological advancements and changes, and respond to new customer requirements. Our success in designing, developing, manufacturing, and selling such products and services will depend on a variety of factors, including the identification of market...

  • Page 31
    ...more complete product despite the technical merits or advantages of our products. These competitors include traditional telephone service providers, such as AT&T, SBC and Verizon, cable television companies, such as Cablevision, Cox and Time Warner, and other VoIP service providers such as Skype and...

  • Page 32
    ...our public switched telephone network calls. Our Packet8 service depends on the availability of third party network service providers that provide telephone numbers and public switched telephone network (PSTN) call termination and origination services for our customers. Many of these network service...

  • Page 33
    ... and products that we do not offer together with long distance or VoIP telephony services. These services could include wireless communications, voice and data services, Internet access and cable television. This form of bundling would put us at a competitive disadvantage if these providers can...

  • Page 34
    ... a guaranteed quality of service. 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, digital subscriber lines, and wireless local loop...

  • Page 35
    ...the California Public Utilities Commission (CPUC) initiated an investigation into voice over IP providers, including us. As a tentative conclusion of law, the CPUC stated that they believe that VoIP providers are telecommunications providers and should be treated as such from a regulatory standpoint...

  • Page 36
    ... is unclear at this time what impact this new rulemaking will have on the CPUCs classification or treatment of VoIP services. In May 2004, in response to a 2003 complaint case brought by Frontier Telephone of Rochester against Vonage, the New York State Public Service Commission, or NYPSC, concluded...

  • Page 37
    ... and disputed their assertion. In May 2005, we began charging a Regulatory Recovery Fee, currently an additional $1.50 per month, on each telephone number that is used by our customers, including toll free and virtual numbers. The Regulatory Recovery Fee is charged monthly to offset costs incurred...

  • Page 38
    ...currently play a recorded message in response to customers who dial 911 from these lines instructing them to hang up and either dial their local police/fire department directly from the phone on the Packet8 service, or to dial 911 from a phone connected to the traditional telephone network. The VoIP...

  • Page 39
    ... deliver credit card transaction processing services. A fundamental requirement for operating an internet-based, worldwide voice and video communications service and electronically billing our Packet8 customers is the secure transmission of confidential information over public networks. Although we...

  • Page 40
    ... or others against us, or the loss of credibility with our current and prospective customers. We will likely need to raise additional capital to support our operations. As of March 31, 2005, we had cash and cash equivalents, restricted cash and investments of approximately $31.8 million. Unless...

  • Page 41
    ... 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, almost all of our arrangements with our contract manufacturers are denominated in U.S. dollars...

  • Page 42
    ... FINANCIAL STATEMENTS: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at March 31, 2005 and 2004 Consolidated...ended March 31, 2005 Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2005 Notes to Consolidated Financial...

  • Page 43
    ... of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of 8x8, Inc. We have completed an integrated audit of 8x8, Inc.'s 2005 consolidated financial statements and of its internal control over financial reporting as of March 31, 2005 and audits of its 2004...

  • Page 44
    ...provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company...changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP San Jose, California June 13, 2005...

  • Page 45
    ...: 100,000,000 shares at March 31, 2005 and March 31, 2004; Issued and outstanding: 53,816,989 shares at March 31, 2005 and 38,315,769 shares at March 31, 2004...Additional paid-in capital...Deferred compensation...Accumulated other comprehensive loss...Accumulated deficit...Total stockholders...

  • Page 46
    ...Total revenues...Operating expenses: Cost of product revenues...Cost of license and service revenues (includes $0, $1,164 and $0 of stock-based compensation expense)...Research and development...Selling, general and administrative...Restructuring and other charges...Total operating expenses...Loss...

  • Page 47
    8X8, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARES) Accumulated other Additional... stock plans...Sale of com... prehensive loss...Balance at March 31, 2005...---38,315,769 294,830 15,206... $ Paid-in Capital 150,612 $ Deferred Compensation (30) $ Comprehensive Loss (99) $...

  • Page 48
    ... 2005 Cash flows from operating activities: Net loss...$ Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...Stock compensation expense...Non-cash portion of restructuring and other charges...Gain on sale of Centile Europe SA...Other...Changes...

  • Page 49
    ... number. All Packet8 telephone accounts come with voice mail, caller ID, call waiting, call waiting caller ID, call forwarding, hold, line-alternate, 3way conferencing, web access to account controls, and real-time online billing. In addition, 8x8 offers a videophone for use with the Packet8 service...

  • Page 50
    ... expired. New customers may terminate their service within thirty days of order placement and receive a full refund of fees previously paid. As the Company has been providing its Packet8 service for a limited period of time, it has not developed sufficient history to apply a return rate and reserve...

  • Page 51
    ...investments...$ 24,604 $ (20) $ 24,584 Reported as (in thousands): Cash and cash equivalents...$ Short-term investments...Total ...$ 15,549 9,035 24,584 Contractual maturities of available-for-sale debt securities as of March 31, 2005 are set forth below (in thousands): Due within one year...$ Due...

  • Page 52
    ... and software and five years for furniture and fixtures. Amortization of leasehold improvements is computed using the shorter of the remaining facility lease term or the estimated useful life of the improvements. Property and equipment at March 31, 2005 and 2004 was comprised of the following...

  • Page 53
    ..., financial position and cash flows. The Company also relies on primarily one third party network service provider to provide telephone numbers and public switched telephone network (PSTN) call termination and origination services for its customers. If this service provider failed to perform on...

  • Page 54
    ...term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, first-time..., 2005, the SEC approved a rule that delays the effective date for SFAS No. 123(R) to annual periods beginning after June 15, 2005. ...

  • Page 55
    ...changes in equity (net assets) during a period from non-owner sources. The difference between net loss and comprehensive loss is due primarily to unrealized losses on investments classified as available-for-sale...the weighted average number of common shares...2005 2004 2003 7,146 6,213 7,615 6,117 2,319 -...

  • Page 56
    ... to purchase 1,403,509 shares of 8x8 common stock at an exercise price of $4.10 per share. The shares issued in this offering were issued under a shelf registration statement previously filed with the Securities and Exchange Commission. The Company paid total cash fees of six percent of the gross...

  • Page 57
    ...Santa Clara, California and Marlow, United Kingdom and included employees from sales and marketing and research and development, as well as four executives...services. In addition,...2005 -- $ (33) (33) ---(33) $ -8 8 ---8 (1,002) $ (161) (1,163) ---(1,163) $ 5. DEBT In December 1999, the Company issued...

  • Page 58
    ... of directors (the Board) authorized the Company to open securities trading accounts with two brokerage firms and make investments of up to $1,000,000 on behalf of 8x8, Inc. as directed by its then Chairman, Joe Parkinson, Chief Executive Officer, or Chief Financial Officer. Since the formation of...

  • Page 59
    ...with Mr. Parkinson was terminated and the Company's securities trading accounts were closed. 8. INCOME TAXES For the year ended March 31, 2005, the Company.... In addition, at March 31, 2005, the Company had research and development credit carryforwards for federal and state tax reporting purposes of...

  • Page 60
    ...the tax provision (benefit) to the amounts computed using the statutory U.S. federal income tax rate of 34% is as follows (in thousands): Years Ended March 31, 2005 2004 2003 (6,575) $ (1,033) $ ... the time within which an indemnification claim can be made and the amount of the claim. In addition, the...

  • Page 61
    ... the status of Internet service providers and the services they provide. The FCC initiated a notice of public rule-making in early 2004 to gather public comment on the appropriate regulatory environment for IP telephony. In November 2004, the FCC ruled that the VoIP service of a competitor and...

  • Page 62
    ...financial position, results of operations and cash flows. The California Public Utilities Commission (CPUC) instituted its own investigation in early 2004 to determine how it will classify and treat VoIP service providers like Packet8. On April 7, 2005, the CPUC instituted a rulemaking to assess and...

  • Page 63
    ...,000 shares initially reserved for issuance thereunder. In fiscal 2001, the number of shares reserved for issuance was increased to 3,600,000 shares by the Board of Directors. Under the terms of the 1999 Plan, options may not be issued to either officers or directors of the Company provided, however...

  • Page 64
    ... employment, ii) $143,000 attributable to a change in option terms for a director of the Company upon his resignation from the Board, and iii) $3,000 of expense related to amortization of deferred compensation. Stock compensation expense in fiscal 2005 and 2003 was not significant. Deferred...

  • Page 65
    ...43 0.43 0.43 0.43 ---- Shares Available for Grant Balance at March 31, 2002...Granted...Returned to plan...Balance at March 31, 2003...Returned to plan...Balance at March 31, 2004...Termination of plan...Balance at March 31, 2005...2,235,000 (96,000) 459,128 2,598,128 1,901,872 4,500,000 (4,500,000...

  • Page 66
    ... exercise date will be set for each option under the plan which exercise date will occur before the date of the merger or asset sale. Certain pro forma disclosures The Company accounts for its stock plans in accordance with the provisions of APB Opinion No. 25. Had compensation cost for the Company...

  • Page 67
    ...1.25 years 0.33 $ 0.30 Expected volatility...Expected dividend yield...Risk-free interest rate...Weighted average expected rights term...Weighted average fair value of rights granted...$ Officer Bonus In February 2005, the Board approved a bonus program for two of the Company's officers. Under the...

  • Page 68
    ... and assessing financial performance. The Company has only one reportable segment. The following table presents net revenues by groupings of similar products (in thousands). Year Ended March 31, 2005 2004 Packet8 service, equipment and other...$ Semiconductors and related software...Hosted iPBX...

  • Page 69
    8X8, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) Balance at Beginning of Year 286 $ 47,331 141 50,576 135 54,190 Additions Charged to Costs... allowance for deferred tax assets...Year ended March 31, 2005: Allowance for doubtful accounts...Valuation allowance for deferred tax ...

  • Page 70
    ...30, 2005 2004 2004 2004 2004 2003 2003 2003 Product revenues...$ 471 $ 632 $ 690 $ 596 $ 731 $ 337 $ 750 $ 861 License and service revenues...Changes in Internal Control Over Financial Reporting There have not been any changes in the Company's internal control over financial reporting, as such term...

  • Page 71
    ... compliance with the policies or procedures may deteriorate. PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, has audited management's assessment of the effectiveness of the Company's internal control over financial reporting as of March 31, 2005 as stated in...

  • Page 72
    ...is set forth in the 2005 Proxy Statement under the captions "Additional Information -- Employment Contracts and Termination of Employment and Change in Control Arrangements," "Additional Information -- Compensation Committee Interlocks and Insider Participation," "Additional Information -- Report of...

  • Page 73
    ..., has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on June 14, 2005. 8X8, INC. By: /s/ BRYAN R. MARTIN Bryan R. Martin, Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW...

  • Page 74
    ...2004. (c) Incorporated by reference exhibits filed in response to Item 14(a), "Exhibits," of the Registrant's Annual Report on Form 10-K for the fiscal ...Registrant. Consent of Independent Registered Public Accounting Firm. Power of Attorney. Certification of Chief Executive Officer of the Registrant ...

  • Page 75
    ... 7, 2000. (f) Incorporated by reference to exhibit 4.1 filed in response to Item 8, "Exhibits," of the Registrant's Form S-8 dated July 17, 2000. (g) Incorporated by reference to exhibit filed in response to Item 9.01, "Exhibits," of the Registrant's Report on Form 8-K filed on October 5, 2004. 72