8x8 2004 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, 2004
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
    ... 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) 2445 Mission College Blvd. Santa Clara, CA 95054 (Address of Principal Executive...

  • Page 2
    ... Act of 1934). YES [ ] NO [ X ] Based on the closing sale price of the Registrant's common stock on the NASDAQ SmallCap Market System on September...Registrant was $35,246,240. The number of shares of the Registrant's common stock outstanding as of May 13, 2004 was 38,316,519. DOCUMENTS INCORPORATED BY...

  • Page 3
    ..., Financial Statement Schedules and Reports on Form 8-K 63 64 Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Principal Accountant Fees and Services 63 63 63 63 63...

  • Page 4
    ..., 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 5
    ...(for example, 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 internet protocol, or IP. VoIP allows for the transmission of voice along with other data over...

  • Page 6
    ... underlying packet switched networks. As broadband connectivity, including cable modem and digital subscriber line, or DSL, has become more available and less expensive, it is now possible for service providers like us to offer voice and video services that run over these IP networks to businesses...

  • 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
    ... 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 mail including email alerts, and direct transfer to mailbox; Call waiting / Caller-ID...

  • Page 9
    ... second half of 2004. Sales, Marketing and Promotional Activities We currently sell and market our Packet8 and Packet8 Virtual Office services to end users through our direct sales force, web site and third party resellers. In addition, we are marketing the wholesale voice and video service offering...

  • Page 10
    ... Santa Clara, California and Sophia Antipolis, France. Research and development expenses in each of the fiscal years ended March 31, 2004, 2003 and 2002 were $2.7 million, $7.8 million and $12.6 million, respectively. Regulatory The use of the Internet and private IP networks to provide voice, video...

  • Page 11
    ... circuit-switched access charges on phoneto-phone IP services. This petition was denied on April 14, 2004. On February 5, 2003, pulver.com filed a petition with the FCC seeking a declaratory ruling that its "Free World Dialup," which facilitates point-to-point broadband Internet protocol voice...

  • Page 12
    ... to predict the timetable or outcome of this process. In addition to California, various other state regulatory authorities have initiated proceedings to examine the regulatory status of Internet telephony services. Most recently, on May 19, 2004, in response to a 2003 complaint brought by Frontier...

  • Page 13
    ... on the former segment basis. The change in internal reporting processes was consistent with the change in business focus as we are primarily focusing our efforts on the Packet8 voice and video communication service. We reported our new segment structure in our Quarterly Report on Form 10-Q for the...

  • Page 14
    ...000 square foot facility in Santa Clara, California that is leased through November 2004. Design, testing, research and development, sales and marketing, shipping and administrative activities are performed in this facility. We are currently evaluating our facility requirements due to the expiration...

  • Page 15
    ... AND RELATED SECURITY HOLDER MATTERS We completed our initial 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." From April 4, 2000 through July 18, 2001, our...

  • Page 16
    ..., 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 17
    ... generate cash from the related license and sale transactions related to the semiconductor and IP PBX businesses. We continue to own the voice and video technology related to the semiconductor and IP PBX businesses, and utilize this technology in the Packet8 service offering and continue to sell or...

  • Page 18
    .... We base the fair value of services, such as training or consulting, on separate sales of these services to other customers. We recognize revenue for maintenance services ratably over the contract term. Our training and consulting services are billed based on hourly rates and we generally recognize...

  • Page 19
    ... obsolescence or unmarketable inventory equal to the difference between ...less favorable than those projected by us, additional inventory write-downs may be required. Income...31, 2004, due to uncertainties related to our ability to utilize most of our deferred tax assets before they expire. ...report. 16

  • Page 20
    ... decreased approximately $264,000 in fiscal 2004 as compared to fiscal 2003 due to decreases in sales of media hubs used with our hosted iPBX product and videophone sales offset by an increase in product revenues attributable to the Packet8 service. Product revenues were $5.7 million in fiscal...

  • Page 21
    ... and Veracity software to a single customer; and A $1.0 million increase in service revenues attributable to our Packet8 service. These increases were offset by: • • A $1.4 million reduction in revenues associated with the June 2000 sale of our video monitoring business; A $750,000 decrease...

  • Page 22
    ... of Packet8 revenues is allocated to product revenues, but these revenues are less than the cost of the DTA 310s. Gross profit from semiconductor sales decreased due to a decrease in total units shipped and product mix, as fiscal 2004 includes significantly less high margin video semiconductor sales...

  • Page 23
    ... closure of our UK office in late fiscal 2003 and the sale of Centile Europe SA in the second quarter of fiscal 2004; the reduction in Centile Europe expenses in France was partially offset by expenses attributable to 8x8 Europe SARL, our new French subsidiary formed in the third quarter of fiscal...

  • Page 24
    ...plans, by thirty-two employees or thirty percent. The majority of the affected employees were Netergy employees based in 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,...

  • Page 25
    ...,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 $239,000 decrease in other accrued liabilities, and a $91,000 decrease in other assets. Cash used in operations was...

  • Page 26
    ...sale of our common stock to employees through our employee stock purchase and stock option plans. At March 31, 2004, we had open purchase orders related to our contract... engineering services. In March 2002, 8x8's board of directors (the Board) authorized us to open securities trading accounts with two ...

  • Page 27
    ... million on behalf of 8x8, Inc. as directed by its then Chairman, Joe Parkinson, Chief Executive Officer, or Chief Financial Officer. Since the formation of these accounts in 2002, neither the Company's Chief Executive Officer nor Chief Financial Officers made any trades in the investment accounts...

  • Page 28
    ... that we may encounter, including regulatory hurdles, discussed below, and other problems that we may not anticipate. To date, we have not generated significant revenue from the sale of our VoIP telephony products and services, including our Packet8 service, and there is no guarantee that we will be...

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

  • Page 30
    ... cycles for our VoIP telephony products may cause our revenue and operating results to vary. Our Packet8 service has lengthy sales cycles, and we may incur substantial sales and marketing expenses and expend significant management effort without making a sale. A customer's decision to purchase...

  • Page 31
    ...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 32
    ... of the potential customers for our Packet8 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 of products...

  • Page 33
    ... voice and video communications could render our products obsolete. Circuit-switched telephony networks feature very high reliability, with a guaranteed quality of service. In addition, such networks have imperceptible delay and consistently satisfactory audio quality. Emerging broadband IP networks...

  • Page 34
    ...initiated a notice of public rule-making to update FCC policy and consider the appropriate regulatory classification for VoIP and other IP enabled services. On February 11, 2004, the California Public Utilities Commission (CPUC) initiated an investigation into voice over IP providers. As a tentative...

  • Page 35
    ...We do not collect Value Added Tax, or VAT, for services that we provide to customers in European Union, or EU, member countries. Future expansion of our Packet8 service, along with other aspects of our evolving business, may result in additional sales and other tax obligations. One or more states or...

  • Page 36
    ... our residential customers to use Packet8 as their only telephone service, due to the fact that the IP dialtone service is only as reliable as a customer's underlying data service (which is not provided by us). We play a recorded message to any of our customers who dial 911 from phones connected...

  • Page 37
    ... 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 38
    ...sales and manufacturing are subject to a number of risks, including general economic conditions in regions such as Asia, changes...on May 13, 2004, our common stock had a closing bid price of $2.40 per share. We must also meet additional continued listing requirements contained in Nasdaq Marketplace ...

  • Page 39
    .... 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, almost all of our arrangements with our semiconductor and...

  • Page 40
    ... AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SHEDULE Page FINANCIAL STATEMENTS: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at March 31, 2004 and 2003 Consolidated Statements of Operations for each of the three years in the...

  • Page 41
    Report of Independent Registered Public Accounting Firm 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 ...

  • Page 42
    8X8, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) March 31, 2004 2003 ASSETS Current assets: Cash and cash equivalents...$ Restricted cash...Short term... 2004 and 28,470,987 shares at March 31, 2003...Additional paid-in capital...Deferred compensation......

  • Page 43
    8X8, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Years Ended March 31, 2004 2003 2002 2,679 $ 5,739 $ ...service revenues...Total revenues...Cost of product revenues...Cost of license and service revenues (includes $1,164,...$0 and $0 of stock-based compensation...

  • Page 44
    8X8, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARES) Notes Receivable Additional Common Stock Shares Balance at March 31, 2001...Redem ption of convertible subordinated debentures...Issuance of com mon stock under stock plans...plans...Sale... Deferred Compensation (174)...

  • Page 45
    ... of property and equipment...Proceeds from sale of investments...Proceeds from the sale of equipment...Restricted cash (increase) decrease...Proceeds from sale of Centile Europe SA, net...Short-term investments--trading activity, net...Net cash (used in) provided by investing activities...Cash...

  • Page 46
    ... video communications service (Packet8) enables broadband internet users to add digital voice and video communications services to their high-speed internet connection. Customers can choose a direct-dial phone number from any of the rate centers offered by the service, and then use an 8x8-supplied...

  • Page 47
    ... a license agreement requiring that the Company provide significant customization of the software products, the license and consulting revenue is recognized using contract accounting. Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most...

  • Page 48
    ... 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. Property and equipment at March 31, 2004 and 2003, was comprised of the...

  • Page 49
    ... events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be... rates in effect at the balance sheet date, and revenues and expenses are translated at... of equity was removed and reported in other income. At March 31, 2004, the U.S. dollar was the...

  • Page 50
    ... 31, 2003, three customers accounted for 30%, 18% and 15% of gross accounts receivable. The Company outsources the manufacturing of its semiconductor and system products to independent contract manufacturers. The inability of any contract manufacturer to fulfill supply requirements of the Company...

  • Page 51
    ...options...Warrants... RECENT ACCOUNTING PRONOUNCEMENTS In March 2004, the EITF issued EITF Issue No. 03-06, "Participating Securities and the Two-class Method Under FASB Statement No. 128, Earnings Per Share." EITF Issue No. 03-06 addresses a number of questions regarding the computation of earnings...

  • Page 52
    ... plans, by thirty-two employees or thirty percent. The majority of the affected employees were employees of the semiconductor business based in Santa Clara, California and Marlow, United Kingdom and included employees from sales and marketing and research and development, as well as four executives...

  • Page 53
    ... also issued warrants to the placement agent to purchase 53,191 8x8 common shares at $7.05 per share and 10,563 shares at $35.50 per share. All of the warrants expired in December 2002 without being exercised. Using the Black-Scholes pricing model, the Company determined that the debt discount...

  • Page 54
    ...sale of certain assets comprising the Company's video monitoring business (the Business) to Interlogix. The assets sold included certain accounts receivable, inventories, technical information, machinery, equipment, contract rights, intangibles, records, and supplies. Concurrently with the execution...

  • Page 55
    ... services. Other Transactions In March 2002, 8x8's board of directors (the Board) authorized the Company to open securities trading accounts with two brokerage firms and make investments of up to $1.0 million on behalf of 8x8, Inc. as directed by its then Chairman, Joe Parkinson, Chief Executive...

  • Page 56
    ... income taxes. In addition, at March 31, 2004, the Company had research and development credit carryforwards for federal and state tax reporting purposes of approximately $3.1 million and $2.4 million, respectively. The federal credit carryforwards will expire at various dates beginning in 2010 and...

  • Page 57
    ...services. Leases The Company leases its primary facility in Santa Clara, California under a non-cancelable operating lease agreement that expires in November 2004...cash flows could be adversely impacted. Regulatory To date VoIP communication services have been largely unregulated in the United States....

  • Page 58
    ... affect its results of operations. 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. The effect of potential future VoIP telephony laws and regulations on the Company...

  • Page 59
    ...a share of the Company's common stock on the date of grant. Options generally vest over a period of four years. Options granted to Outside Directors under the Director Plan have a ten year term, or shorter upon termination of an Outside Director's status as a director. If not terminated earlier, the...

  • Page 60
    ...of grant, respectively. To date, options granted vest over four years. However, in the event of a change in control (as defined in the Netergy Plan document) vesting for certain options will be accelerated. Option activity during each of the three years ended March 31, 2004, was as follows: Weighted...

  • Page 61
    ... 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's stock plans been determined based...

  • Page 62
    ... of Netergy and Centile are not publicly traded and therefore the Company's overall volatility factor has been reduced by 50% for these plans. The various risk free interest rates used in the computations reflect the different rates in effect at the respective grant dates. Year Ended March 31, 2003...

  • Page 63
    ... former segment basis. The change in internal reporting processes is consistent with the change in business focus as the Company is primarily focusing its efforts on its Packet8 broadband communications service. The following table presents net revenues by groupings of similar products (in thousands...

  • Page 64
    8X8, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) Description Allowance for doubtful accounts: Year ended March 31, 2002...$ Year ended March 31, 2003...Year ended March 31, 2004... Balance at Beginning of Year 389 $ 286 141 Additions Charged to Costs and Expenses 0 $ 20 0...

  • Page 65
    ... used ...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 2004...

  • Page 66
    ... quarter ended December 31, 2003. On January 29, 2004, the Company filed a Form 8-K regarding changes to the composition of the Company's Board of Directors. On March 31, 2004, the Company filed a Form 8-K to provide an update to the Company's Annual Report on Form 10-K for the year ended March 31...

  • Page 67
    ..., 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 28, 2004. 8X8, INC. By: /s/ BRYAN R. MARTIN Bryan R. Martin, Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW...

  • Page 68
    ... between the Registrant and STMicroelectronics N.V. Investment Agreement dated April 1, 2002 by and between the Registrant and Joe Parkinson. Subsidiaries of Registrant. Consent of Independent Accountants. Power of Attorney. Certification of Chief Executive Officer of the Registrant pursuant to 18...

  • Page 69
    ...July 1, 1997. (b) Incorporated by reference to exhibit 3.2 filed in response to Item 8, "Exhibits" of the Registrant's Form S-3 dated March 30, 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 year...