8x8 2003 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, 2003
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)
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)
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
    ... 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) 2445 Mission College Blvd. Santa Clara, CA 95054 (Address of Principal Executive Offices...

  • Page 2
    ... 1934). YES [ ] NO [ X ] Based on the closing sale price of the Registrant's common stock on the NASDAQ SmallCap Market System on September 30...the Registrant was $9,083,000. The number of shares of the Registrant's common stock outstanding as of May 22, 2003 was 28,475,370. DOCUMENTS INCORPORATED BY...

  • Page 3
    ... Item 15 Signatures Exhibits, Financial Statement Schedules and Reports on Form 8-K 70 71 Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Controls and Procedures 68...

  • Page 4
    ..., Santa Clara, California 95054, and its telephone number at that location is (408) 727-1885. The Company has three product lines: voice and video communications services that are marketed under the Packet8 brand name (collectively Packet8), voice and video semiconductors and related software...

  • Page 5
    ... to replace commonly used functionality of the legacy switched network, such as billing and customer assistance. PACKET8 AND CONSUMER SYSTEMS Technology 8x8 has deployed an end-to-end voice and video communication service called Packet8. Packet8 is an internetbased communication solution that works...

  • Page 6
    ... or other display device) and supports caller-ID, autoanswer (so the phone can be used as a monitoring device), and 10 configurable speed-dial numbers. Customers 8x8 sells and markets the Packet8 service to end users through its web site and third party resellers of the service. In addition, 8x8 is...

  • Page 7
    ...features and custom interfaces and, in some cases, port to other semiconductor or processor architectures. Call signaling protocol stacks are complex software programs required to make voice calls over IP networks, including the internet. Codecs format and compress digital audio and video signals so...

  • Page 8
    ... processing speed enable the Audacity-T2U to address more advanced products, such as higherend IP phones and four-port terminal adapters or gateways. VERACITY SOFTWARE -- The Veracity software suite is a comprehensive package of VoIP call control protocols, standard network protocols, and audio...

  • Page 9
    ... location using any workstation with a browser. The administrator interface is designed to provide control of phone number block assignments, dial plans, service provisioning, direct dial phone number assignments, iPBX status, and bandwidth management. The iPBX supports voicemail, interactive voice...

  • Page 10
    ... Caller ID, call transfers, conference call setup, on-screen directories, contact management, and call logging. It also lets users set up and control their voicemail, listen to messages, set call forwarding numbers and filters, and set up personal speed dial numbers. The Centile Switchboard software...

  • Page 11
    ... Networks. MANUFACTURING 8x8 outsources the manufacturing of its videophones and DTA 310 terminal adapters, and Centile outsources the manufacturing of its media hubs, to third-party manufacturers, which are generally also semiconductor customers of Netergy. Neither Centile nor 8x8 have long-term...

  • Page 12
    ... Centile's products. In March 2002, 8x8 licensed certain Very Long Instruction Word, or VLIW, microprocessor cores, related tools and MPEG4 video compression firmware from STM for use in Netergy's IP video communication processor development initiatives. Additionally, the Company agreed to license...

  • Page 13
    ... of March 31, 2003, the Company employed 54... principal operations are located in an approximately 45,000 square foot facility in Santa Clara, California that is... For additional information regarding the Company's obligations under leases see Note 9 to the consolidated financial statements contained in...

  • Page 14
    ... the symbol "EGHT." The Company has never paid cash dividends on its common stock and has no plans to do so in the foreseeable future. As of May 22, 2003, there were 295 holders of record of the Company's common stock. The following table sets forth the range of high and low closing prices for...

  • Page 15
    ... broadband networks. 8x8 sells internet protocol telephony software and services that enable customers to provision and use IP dial-tone services with IP telephones and videophones. The service is marketed under the brand name Packet8. 8x8 also sells videophones that work over normal phone lines. 12

  • Page 16
    .... The phone system software runs on servers that are located at a central data center so that the only phone system equipment that is required at the customer site are telephones. The phone system can also be accessed and controlled from any web browser on the internet. CRITICAL ACCOUNTING POLICIES...

  • Page 17
    ... maintenance services ratably over the contract term. Our training and consulting services are billed based on hourly rates and we generally recognize revenue as these services are performed. For sales generated from long-term contracts, we use the percentage of completion method of accounting. In...

  • Page 18
    ...the fair value of the goodwill within the reporting unit is less than the carrying value. The fair value for goodwill is determined based on discounted cash flows, market multiples or appraised values, as appropriate. In the fourth quarter of fiscal 2003, the Company recorded an impairment charge of...

  • Page 19
    ... to our announcement during fiscal 2003 of the end of life of our existing videoconferencing semiconductors, as well as the factors set forth below explaining the decline for fiscal 2002 versus fiscal 2001. Our remaining videoconferencing semiconductor customers have been designing out our...

  • Page 20
    ... video compression semiconductor product that is accounted for using the percentage of completion method. Profit estimates on this contract are revised periodically based on changes in facts; any loss is required to be recognized immediately. Based on our cost estimates as of March 31, 2003...

  • Page 21
    ... license and maintenance revenues associated with Netergy's videoconferencing technology. • • • • Revenues from our ten largest customers in the fiscal years ended March 31, 2003, 2002, and 2001 accounted for approximately 63%, 73%, and 48%, respectively, of our total revenues. Two...

  • Page 22
    ... of our professional service organization as part of the restructuring of our Canadian operations in the fourth quarter of fiscal 2001. Our gross margin is affected by a number of factors including product mix, product pricing, the percentage of direct sales and sales to resellers, and manufacturing...

  • Page 23
    ...on June 30, 2000 for a total purchase price of $46.8 million. U|Force, based in Montreal, Canada, was a developer of IP-based software applications and a provider of professional services. U|Force was also developing a Java-based service creation environment (SCE) designed to allow telecommunication...

  • Page 24
    ... developing cash flow projections, revenues were forecasted based on relevant factors, including estimated 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...

  • Page 25
    ...services. In addition, we recorded asset impairment charges of $212,000 related to assets in the United Kingdom that were abandoned or disposed of. We also recorded a charge of approximately $74,000 for its remaining lease liability for office... 31, 2003 175 74 249 ---249 We expect annual savings of...

  • Page 26
    ...intangible assets related to these operations in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The lack of estimated future net cash flows related to the acquired products necessitated an impairment charge to write-off...

  • Page 27
    ...Accounting Standards Board reached several conclusions regarding the accounting for debt and equity securities with beneficial conversion features, including a consensus requiring the application of the "accounting conversion price" method, versus... 2003 was attributable to purchases of short-term ...

  • Page 28
    ... may not be able to obtain additional financing as needed on acceptable terms, or at all, which may require us to reduce our operating costs and other expenditures, including reductions of personnel, salaries and capital expenditures. Alternatively, or in addition to such potential measures, we may...

  • Page 29
    ... services. In March 2002 the Board authorized us to open securities trading accounts and make investments of up to $1.0 million on behalf of 8x8, Inc. as directed by our Chairman, Joe Parkinson, Chief Executive Officer, or Chief Financial Officer. Mr. Parkinson has agreed to personally reimburse 8x8...

  • Page 30
    ... Part II, Item 8 of this Report. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee...

  • Page 31
    ... products or new contracts by us, our competitors or their customers; 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; and the potential...

  • Page 32
    ... 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...

  • Page 33
    ... 31, 2003, 2002 and 2001, accounted for approximately 62%, 73% and 48%, respectively, of total revenues. 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...

  • Page 34
    ... on various factors, including: the size of the network deployment; the complexity of our customers' network environments; our customers' skill sets; the hardware and software configuration and customization necessary to deploy our products; and our customers' ability to finance their purchase...

  • Page 35
    ... iPBX product and Packet8 voice and video IP telephone service have requested that our products and services be designed to interoperate with their existing networks, each of which may have different specifications and use multiple standards. Our customers' networks may contain multiple generations...

  • Page 36
    ...which in turn will cause our business to suffer. In addition, our focus on developing a range of technology products, including semiconductors and related embedded software, hosted iPBX solutions, and the Packet8 telephone service products, places a significant strain on our research and development...

  • Page 37
    ... 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, may...

  • Page 38
    ... the availability and quality of the services that it provides The operation of our Packet8 voice and video service depends on our ability to avoid and mitigate any interruptions in service or reduced capacity for customers. Interruptions in service or performance problems, for whatever reason...

  • Page 39
    ...complex as those we offer frequently contain errors, defects, and functional ... quality or compatibility problems could significantly...to customers outside of the United States during the years ended March 31, 2003,...number of risks, including general economic conditions in regions such as Asia, changes...

  • Page 40
    ... 8x8, Inc. at the direction of the Company's Chairman, Joe Parkinson, Chief Executive Officer, or Chief Financial Officer. Mr. Parkinson has agreed to personally reimburse 8x8 on a quarterly basis for any losses resulting from his trading activities in order to maintain a minimum investment account...

  • Page 41
    ... to the extent such a bonus exceeds his salary for the corresponding period. The Company or Mr. Parkinson can terminate this arrangement at any time, subject to the terms of an agreement that was filed with our fiscal 2002 report. As of March 31, 2003, approximately $800,000 of the $1.0 million was...

  • Page 42
    ...' Equity for each of the three years in the period ended March 31, 2003 Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2003 Notes to Consolidated Financial Statements FINANCIAL STATEMENT SCHEDULE: Schedule II -- Valuation and Qualifying Accounts...

  • Page 43
    Report of Independent Accountants To the Board of Directors and Stockholders of 8x8, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of 8x8, Inc. and its subsidiaries, at March 31, 2003 and ...

  • Page 44
    8X8, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) March 31, 2003 2002 ASSETS Current assets: Cash and cash equivalents...$ Short term investments...Accounts receivable, net of allowance of $141 and $286, respectively...Inventory...Other current assets...Total ...

  • Page 45
    8X8, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE... gain on extinguishment of debt, net...Cumulative effect of change in accounting principle...Net loss...$ Basic and diluted shares outstanding... Years Ended March 31, 2003 2002 2001 5,739 $ 6,044 $ 12,808 5,264...

  • Page 46
    8X8, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARES) Notes Receivable Preferred Stock Shares Amount -$ -1 Common Stock Shares Amount 22,958,921 $ 23 3,555,303 4 --1,206,591 1 --(1,040,089) ---(1) -Additional...Change...loss...Balance at March 31, 2003... $ $ $ $ $...

  • Page 47
    ...) 2003 Cash flows from operating activities: Net loss...$ Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...Extraordinary gain due to debt redemption ...Stock compensation expense...Cumulative effect of change in accounting principle...

  • Page 48
    ... to their high-speed internet connection. In addition, 8x8 offers videophones for use on both traditional telephony networks and in conjunction with the Packet8 service; Netergy provides voice and video semiconductors and related communication software to original equipment manufacturers (OEMs...

  • Page 49
    ... of sale by its licensees. Revenue from consulting, training, and development services is recognized as the services are performed. For sales generated from long-term contracts, the Company uses the percentage of completion method of accounting. In doing so, management makes important judgments in...

  • Page 50
    ... the straight-line method. Estimated useful lives of three years are used for equipment 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...

  • Page 51
    ...LONG-LIVED ASSETS 8x8 reviews the recoverability of its long-lived assets, such as plant and equipment when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group...component of equity was removed and reported in other income. At March 31, 2003, the ...

  • Page 52
    ...2003, three customers accounted for 30%, 18% and 15% of gross accounts receivable. At March 31, 2002, one customer accounted for 45% of accounts receivable. The Company outsources the manufacturing of its semiconductor and system products to independent contract... in reported net...all changes in equity ...

  • Page 53
    ... Principles Board Opinion No. 30. SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale and requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS...

  • Page 54
    ... No. 148 are effective for fiscal years ended after December 15, 2002. 8x8 will continue to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25. The Company has included additional disclosures in accordance with SFAS No. 148 in the footnotes to these...

  • Page 55
    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 ...

  • Page 56
    ... employees were Netergy employees based in Santa Clara, California and Marlow, United Kingdom and...2003. The Company closed its facility in Marlow, United Kingdom, and recorded charges of $434,000 related to the termination of the operating leases for the facility and related services. In addition...

  • Page 57
    ...furniture, and software. The loss on sale of assets of $567,000 was attributable to the sale of office, computer, and other equipment of the Montreal office..."Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The lack of estimated future net cash flows ...

  • Page 58
    ... reached several conclusions regarding the accounting for debt and equity securities with beneficial conversion features, including a consensus requiring the application of the "accounting conversion price" method, versus the use of the stated conversion price, to calculate the beneficial conversion...

  • Page 59
    ... 8x8, Inc. as directed by the Company's Chairman, Joe Parkinson; Chief Executive Officer; or Chief Financial Officer. Mr. Parkinson has agreed to personally reimburse 8x8, Inc. on a quarterly basis for any losses resulting from his trading activities in order to maintain a minimum investment account...

  • Page 60
    ... dispositions, the tax benefits of which, when realized, will be accounted for as an addition to additional paid-in capital rather than as a reduction of the provision for income taxes. In addition, at March 31, 2003, the Company had research and development credit carryforwards for federal and...

  • Page 61
    ... April 2001 in British Columbia, Canada by Milinx Business Services, Inc. and Milinx Business Group, Inc (collectively, Milinx). The Company was released of any further obligations to Milinx in exchange for returning a portion of the original license fee. As a result of the settlement agreement, in...

  • Page 62
    ...officers of the Company at prices equal to the fair market value of the stock at the grant dates. Options generally vest over four years. Shares issued under the Key Personnel Plan were subject to repurchase at the original issuance price... for an annual increase in the number of shares reserved...

  • Page 63
    ...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... stock options to employees and consultants of U|Force at prices equal to the fair market value of the stock at...

  • Page 64
    ...Change in options available for grant...Granted...Exercised...Returned to plan...Balance at March 31, 2003...groups outstanding at March 31, 2003 and related weighted average exercise price and contractual life information for 8x8...additional options granted in fiscal 1997. In addition... Netergy Board of ...

  • Page 65
    ...the Netergy Board of Directors, provided, however, that (i) the exercise price of an ..., in the event of a change in control (as defined in the Netergy Plan...2003, 991,702 options were exercisable, the weighted average remaining contractual life was 5.9 years, and the weighted average exercise price...

  • Page 66
    ... Share -0.43 0.43 0.43 -0.43 0.43 0.43 -0.43 0.43 As of March 31, 2003, 767,051 options were exercisable, the weighted average remaining contractual life was 7.5 years, and the weighted average exercise price was $0.43 per share. 1996 Employee Stock Purchase Plan The Company's 1996 Stock Purchase...

  • Page 67
    ...: Year Ended March 31, 2003 2002 2001 162% 135% 141% 0.0% 0.0% 0.0% 2.8% to 4.7% 3.5% to 4.9% 4.7% to 6.8% 5.1 years 5.1 years 5 years 0.45 $ 0.96 $ 5.17 Expected volatility...Expected dividend yield...Risk-free interest rate...Weighted average expected option term...Weighted average fair value of...

  • Page 68
    ... presented. Shared support service functions such as human resources, facilities management, and other infrastructure support and overhead are allocated between the segments. Accounting policies are applied consistently to the segments, where applicable. The Company's reportable segments have been...

  • Page 69
    ...Other...$ The majority of the Company's long-lived assets were located in the United States. Long-lived assets consist primarily of property and equipment and deposits. The following table illustrates long-lived assets by country (in thousands): March 31, 2003 2002 United States...$ United Kingdom...

  • Page 70
    ... 31, 2001, no customer accounted for 10% or more of total revenues. 8X8, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) Description Allowance for doubtful accounts: Year ended March 31, 2001...$ Year ended March 31, 2002...Year ended March 31, 2003... Balance at Beginning of...

  • Page 71
    ... 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Certain information required by Part III is omitted from this Report on Form 10-K in that the Registrant will file its definitive Proxy Statement for its Annual Meeting of Stockholders (the 2003...

  • Page 72
    ... executed in the quarter ended March 31, 2000, 8x8 and STM Inc. established a framework for the joint development of semiconductor products and defined two initial projects. One project provides for the joint development of a voice-enabled chipset for cable modems and cable television settop boxes...

  • Page 73
    ...is set forth in the 2003 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 74
    ..., 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 May 29, 2003. 8X8, INC. By: /s/ BRYAN R. MARTIN Bryan R. Martin, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL...

  • Page 75
    ... of Principal Executive Officer and Principal Financial Officer Regarding Facts and Circumstances Relating to Annual Reports I, Bryan R. Martin, certify that: 1. I have reviewed this annual report on Form 10-K of 8x8, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue...

  • Page 76
    ... of Principal Executive Officer and Principal Financial Officer Regarding Facts and Circumstances Relating to Annual Reports I, James Sullivan, certify that: 1. I have reviewed this annual report on Form 10-K of 8x8,Inc.; 2. Based on my knowledge, this annual report does not contain any untrue...

  • Page 77
    ... 4.7 (f) 4.8 (o) 4.9 (o) 10.1 (a) 10.2 (a) 10.3 (a) 10.4 (i) Exhibit Title Stock Exchange Agreement, dated as of May 13, 1999, by and among 8x8, Inc. (the Registrant), Odisei S.A. and the Security Holders named therein and the agreements related thereto. Share Exchange Agreement, dated as of May 19...

  • Page 78
    ...of December 13, 2001, by and among 8x8, Inc., Fisher Capital Ltd. and Wingate ...and STMicroelectronics, Inc. LX Video Development and License Agreement dated ...Joe Parkinson. Subsidiaries of Registrant. Consent of Independent Accountants. Power of Attorney. Certification of Chief Executive Officer...

  • Page 79
    ... by reference to exhibits filed in response to Item 14 (a), "Exhibits," of the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1998. (c) Incorporated by reference to identically numbered exhibits filed in response to Item 7, "Exhibits," of the Registrant's Report on Form...