8x8 2003 Annual Report Download - page 23

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• Reductions in research and development personnel staffing levels in the first and second quarters of fiscal 2002;
• Lower tooling and other project related expenses associated with semiconductor and system-level reference
design projects in fiscal 2002;
• Lower third-party consulting expenses associated with development of the graphical user interface for Centile's
hosted iPBX product;
• A decrease in stock compensation charges of approximately $435,000; and
• Our overall efforts to reduce discretionary operating costs.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses consist primarily of personnel and related overhead costs for sales,
marketing, finance, human resources, and general management. Such costs also include advertising, sales
commissions, trade show, and other marketing and promotional expenses. Selling, general, and administrative
expenses were $7.4 million, $8.6 million, and $16.9 million in fiscal 2003, 2002, and 2001, respectively. The $1.2
million decrease in selling, general, and administrative expenses in fiscal 2003 as compared to fiscal 2002 was due
to the following:
• Reductions in sales, marketing and administrative personnel staffing levels; and
• Lower legal, financial reporting, corporate function, telephone, travel, corporate marketing, public relations and
trade show expenditures resulting from our efforts to reduce discretionary operating costs.
The decrease in selling, general, and administrative expenses during fiscal 2002 as compared to fiscal 2001 was due
primarily to the reasons set forth above, as well as:
• a $3.7 million decrease due to the elimination of our Canadian operations in the fourth quarter of fiscal 2001;
and
• a $325,000 decrease in stock compensation expense.
IN-PROCESS RESEARCH AND DEVELOPMENT AND AMORTIZATION OF INTANGIBLES
We incurred in-process research and development charges of $4.6 million in the second quarter of fiscal 2001
related to the acquisition of U|Force, Inc. (U|Force). Our consolidated financial statements reflect the acquisition of
all of the outstanding stock of U|Force, Inc. 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 service providers to develop, deploy, and manage telephony applications and services to their
customers. The purchase price was comprised of 8x8 common stock with a fair value of approximately $38.0
million comprised of: (i) 1,447,523 shares issued at closing of the acquisition, and (ii) 2,107,780 shares to be issued
upon the exchange or redemption of the exchangeable shares (the Exchangeable Shares) of Canadian entities held by
former employee shareholders or indirect owners of U|Force stock. The Exchangeable Shares held by U|Force
employees were subject to certain restrictions, including our right to repurchase the Exchangeable Shares if an
employee departed prior to vesting. In addition, we also agreed to issue one share of preferred stock (the Special
Voting Share) that provides holders of Exchangeable Shares with voting rights equivalent to the shares of common
stock into which their shares are convertible. We also assumed outstanding stock options to purchase shares of
U|Force common stock for which the Black-Scholes pricing model value of approximately $6.5 million was
included in the purchase price. Direct transaction costs related to the merger were approximately $747,000.
Additionally, the Company advanced $1.5 million to U|Force upon signing the acquisition agreement, but prior to
the close of the transaction. This amount was accounted for as part of the purchase price. The following table
summarizes the composition of the purchase price (in thousands):
Value of common stock and Exchangable Shares issued........................
.
$38,042
Value of stock otions assumed.................................................................... 6,546
Cash advanced to U|Force prior to closing...............................................
.
1,500
Direct transaction costs................................................................................ 747
$46,835