Exhibit 99.2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 2002, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, as of April 1, 2002, the Company ceased amortization of goodwill to conform with the provisions of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets."
PRICEWATERHOUSECOOPERS LLP
San Jose, California
May 2, 2003, except as to the Liquidity paragraph in Note 1 and Note 12,
for which the date is March 26, 2004
8X8, INC.
The accompanying notes are an integral part of these consolidated financial
statements.
8X8, INC.
The accompanying notes are an integral part of these consolidated financial
statements.
8X8, INC.
The accompanying notes are an integral part of these consolidated financial
statements.
8X8, INC.
The accompanying notes are an integral part of these consolidated financial
statements.
8X8, INC. 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES THE COMPANY 8x8, Inc., or 8x8, and its subsidiaries
(collectively, the Company) develop and market communication technology and
services for internet protocol or, IP, telephony and video applications. The
Company was incorporated in California in February 1987, and in December 1996
was reincorporated in Delaware. In August 2000, the Company changed its name
from 8x8, Inc. to Netergy Networks, Inc. The Company changed its name back to
8x8, Inc. in July 2001. During the fiscal year ended March 31, 2001, 8x8
formed two subsidiaries, Netergy Microelectronics, Inc. (Netergy) and Centile,
Inc. (Centile) and reorganized its operations more clearly along its three
product lines. The Company's three product lines are: LIQUIDITY
The Company has sustained net losses and negative cash flows from operations since fiscal 1999 that have been funded primarily through the issuance of equity
securities and borrowings. Management believes that current cash and cash equivalents, including net cash proceeds of approximately $7.9 million from the
August and November 2003 sales of approximately 4.9 million shares of common stock and warrants to purchase approximately 6.0 million shares of common stock,
will be sufficient to finance the Company's operations for the next twelve months. However, the Company is evaluating its cash needs and may pursue
additional equity or debt financing in order to achieve the Company's overall business objectives. There can be no assurance that such financing will be
available, or, if available, at a price that is acceptable to the Company. Failure to generate sufficient revenues, raise additional capital or reduce
certain discretionary spending could have an adverse impact on the Company's ability to achieve its longer term business objectives. FISCAL YEAR Effective beginning in fiscal 2001, the Company
changed its fiscal year from a year ending on the Thursday closest to March 31
to a year ending on March 31. Fiscal 2001 was 52 weeks and 2 days, while fiscal
2002 and fiscal 2003 were each 52 weeks. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of 8x8 and its subsidiaries. All material intercompany accounts and
transactions have been eliminated. USE OF ESTIMATES The preparation of the consolidated financial
statements, in conformity with accounting principles generally accepted in the
United States, requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities and equity and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, the Company evaluates its estimates, including, but not limited to, those
related to bad debts, investments, goodwill and intangible assets, income taxes,
restructuring and impairment charges, and other contingencies. The Company bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results could differ
from those estimates under different assumptions or conditions. REVENUE RECOGNITION Product revenue -- The Company recognizes revenue
from product sales upon shipment to OEMs and end users provided that persuasive
evidence of an arrangement exists, the price is fixed, title has transferred,
collection of resulting receivables is reasonably assured, there are no customer
acceptance requirements, and there are no remaining significant obligations.
Reserves for returns and allowances for OEM and end user sales are recorded at
the time of shipment. The Company defers recognition of revenue on sales to
distributors and resellers where the right of return exists until products are
resold to the end user. License and other revenue -- The Company recognizes
revenue from license contracts when a non-cancelable, non-contingent license
agreement has been signed, the software product has been delivered, no
uncertainties exist surrounding product acceptance, fees from the agreement are
fixed and determinable, and collection is probable. The Company uses the
residual method to recognize revenue when a license agreement includes one or
more elements to be delivered at a future date if evidence of the fair value of
all undelivered elements exists. If evidence of the fair value of the
undelivered elements does not exist, revenue is deferred and recognized when
delivery occurs. When the Company enters into 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 instances is one year. The Company
recognizes royalties upon notification 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 estimating costs and in measuring progress towards
completion. These judgments underlie the Company's determinations regarding
overall contract value, contract profitability and timing of revenue
recognition. Revenue and cost estimates are revised periodically based on
changes in circumstances, and any losses on contracts are recognized
immediately. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and reevaluates the classification at each
reporting date. The cost of the Company's investments is determined based upon
specific identification. Investments classified as available-for-sale are reported at
fair value, based upon quoted market prices, with unrealized gains and losses,
net of related tax, if any, included in Accumulated Other Comprehensive Loss in
the Consolidated Balance Sheet. At March 31, 2002 and 2003, there were no
investments classified as available-for-sale. Investments classified as trading securities are carried at
fair value, with unrealized holding gains and losses included in earnings.
Realized gains and losses are determined using the specific identification
method based on the trade date of a transaction. The Company had $208,000 of
investments classified as trading securities at March 31, 2003, and no
investments classified as trading securities at March 31, 2002. In March 2002 8x8's board of directors (the Board) authorized
the Company to open securities trading accounts and make investments of up to
$1.0 million, as directed by the Company's Chairman, Joe Parkinson, the Chief
Executive Officer, or the 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 balance of
$1.0 million. The Board has been assured of Mr. Parkinson's ability to cover any
such losses; however, should he be unable to do so, it could have a material
impact on the Company's cash flows and results of operations. As part of the
arrangement, the Board has expressed its intent, but not obligation, to pay Mr.
Parkinson a quarterly bonus in an amount equal to 25% of the profits
attributable to investments made on the Company's behalf by Mr. Parkinson 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. Under the
arrangement, the Company is required to return to Mr. Parkinson the amount
representing the increase in value of the investment account over $1.0 million
to the extent required to restore replenishment payments made by Mr. Parkinson
in prior quarters. Through March 31, 2003, Mr. Parkinson had made cumulative
replenishment payments of approximately $137,000 to offset losses incurred. As
of March 31, 2003, the investment account balance approximated $1,018,000.
Accordingly, the Company had a payable of approximately $18,000 to Mr. Parkinson
at March 31, 2003. As of March 31, 2003, $208,000 of the $1.0 million allocated
for such investment activities was invested in marketable equity securities, and
the remainder was invested in money market funds. INVENTORY Inventory is stated at the lower of standard cost, which approximates
actual cost using the first-in, first-out method, or market. Inventory reserves
are established when conditions indicate that the selling price could be less
than cost due to physical deterioration, obsolescence, changes in price levels,
or other causes. Reserves are established for excess inventory generally based
on inventory levels in excess of demand, as determined by management, for each
specific product. If actual product demand or selling prices are less favorable
than the Company's estimate, the Company may be required to take additional
inventory write-downs. Conversely, if the Company sells more inventory or at
higher prices than the Company's forecast, future margins may be higher. Inventory at March 31, 2003 and 2002 was comprised of the
following: PROPERTY AND EQUIPMENT Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using 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.
Property and equipment at March 31, 2003 and 2002, was comprised of the
following components: Maintenance, repairs and ordinary replacements are charged to
expense. Expenditures for improvements that extend the physical or economic life
of the property are capitalized. Gains or losses on the disposition of property
and equipment are reflected in Other Income, net. IMPAIRMENT OF 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 may not be recoverable. The
assessment of possible impairment is based on the Company's ability to recover
the carrying value of the asset or asset group from the expected future pre-tax
cash flows (undiscounted and without interest charges) of the related
operations. If these cash flows are less than the carrying value of such asset,
an impairment loss is recognized for the difference between estimated fair value
and carrying value. The measurement of impairment requires management to
estimate future cash flows and the fair value of long-lived assets. WARRANTY EXPENSE The Company accrues for the estimated cost that may be incurred under
its product warranties upon revenue recognition. Changes in the Company's
product warranty liability during the year ended March 31, 2003 were not
material. RESEARCH AND SOFTWARE DEVELOPMENT COSTS Research and development costs are charged to operations as incurred.
Software development costs incurred prior to the establishment of technological
feasibility are included in research and development and are expensed as
incurred. The Company defines establishment of technological feasibility as the
completion of a working model. Software development costs incurred subsequent to
the establishment of technological feasibility through the period of general
market availability of the product are capitalized, if material. To date, all
software development costs have been expensed as incurred. FOREIGN CURRENCY TRANSLATION Assets and liabilities of the Company's foreign
subsidiaries are translated from their respective functional currencies at
exchange rates in effect at the balance sheet date, and revenues and expenses
are translated at average exchange rates prevailing during the year. If the
functional currency is the local currency, resulting translation adjustments are
reflected as a separate component of stockholders' equity. If the functional
currency is the U.S. dollar, resulting conversion adjustments are included in
the results of operations. Foreign currency transaction gains and losses, which
have been immaterial, are also included in results of operations. Total assets
of the Company's foreign subsidiaries were $508,000, $1.6 million and $3.8
million as of March 31, 2003, 2002, and 2001, respectively. During the year
ended 2003, the Company substantially completed the liquidation of its
investment in its Canadian operations acquired in conjunction with the
acquisition of U|Force, Inc. in June 2000. As a result, the $92,000
attributable to that entity and accumulated in the translation adjustment
component of equity was removed and reported in other income.
At March 31, 2003, the U.S. dollar was
the functional currency for all foreign subsidiaries. The Company does not
undertake any foreign currency hedging activities. INCOME TAXES Income taxes are accounted for using the asset and
liability approach. Under the asset and liability approach, a current tax
liability or asset is recognized for the estimated taxes payable or refundable
on tax returns for the current year. A deferred tax liability or asset is
recognized for the estimated future tax effects attributed to temporary
differences and carryforwards. If necessary, the deferred tax assets are reduced
by the amount of benefits that, based on available evidence, are not expected to
be realized. TAX CREDITS Research and development and other refundable tax
credits are accounted for using the cost reduction method. Under this method,
tax credits relating to eligible expenditures are accounted for as a reduction
of related expenses in the period during which the expenditures are incurred,
provided there is reasonable assurance of realization. CONCENTRATIONS Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of cash
and cash equivalents and trade accounts receivable. At March 31, 2003,
approximately 55% of the Company's cash equivalents were placed in an
institutional money market fund of a reputable, U.S. based financial
institution. The Company
has not experienced any material losses relating to any investment instruments.
The Company sells its products to OEMs and distributors
throughout the world. The Company performs ongoing credit evaluations of its
customers' financial condition, and for certain transactions requires collateral
from its customers. For each of the three years ended March 31, 2003, the
Company experienced minimal write-offs for bad debts and doubtful accounts. At
March 31, 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 manufacturers. The inability of any
contract manufacturer to fulfill supply requirements of the Company could
materially impact future operating results, financial position and cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments is
determined by the Company using available market information and valuation
methodologies considered to be appropriate. The carrying amounts of the
Company's cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate their fair values due to their short maturities.
ACCOUNTING FOR STOCK-BASED COMPENSATION The Company accounts for employee stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25) and related
interpretations thereof. As required under Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
the Company provides pro forma disclosure of net income and earnings per share.
If the Company had elected to recognize compensation costs based on the fair
value at the date of grant of the awards, consistent with the provisions of SFAS
No. 123, net income and earnings per share amounts would have been as follows
(in thousands, except per share amounts): *These amounts have been adjusted to reflect a correction to the forfeiture
rate, which resulted in reductions in the pro forma net losses for 2002 and 2001
of $6.5 million and $3.1 million, respectively. COMPREHENSIVE LOSS Comprehensive loss, as defined, includes all 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
short-term investments classified as available-for-sale and foreign currency
translation adjustments. Comprehensive loss is reflected in the Consolidated
Statements of Stockholders' Equity. RECLASSIFICATIONS Certain prior year balances have been reclassified to
conform with the current year presentation. NET LOSS PER SHARE Basic net loss per share is computed by dividing net
loss available to common stockholders (numerator) by the weighted average number
of vested, unrestricted common and Exchangeable Shares (see Note 2) outstanding
during the period (denominator). Net loss available to common stockholders was
as follows (in thousands): Due to net losses incurred for all periods presented,
weighted average basic and diluted shares outstanding for the respective periods
are the same. The following equity instruments were not included in the
computations of net loss per share because the effect on the calculations would
be anti-dilutive (in thousands): RECENT ACCOUNTING PRONOUNCEMENTS On October 3, 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 144 applies to all long-lived assets (including
discontinued operations) and consequently amends Accounting 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 No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (i) can
be distinguished from the rest of the entity, and (ii) will be eliminated from
the ongoing operations of the entity in a disposal transaction. The Company
adopted SFAS No. 144 in the first quarter of fiscal 2003, and its adoption did
not have a material impact on the Company's results of operations and financial
condition. In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities," which addresses
accounting for restructuring and similar costs. SFAS No. 146 supercedes previous
accounting guidance, principally Emerging Issues Task Force Issue (EITF) No. 94-3.
SFAS No. 146 requires that a liability for costs associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF No.
94-3, a liability for an exit cost was recognized at the date of the entity's
commitment to an exit plan. SFAS No. 146 also requires that the liability be
initially measured and recorded at fair value. SFAS No. 146 was effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company adopted SFAS No. 146 in the fourth quarter of fiscal 2003, and its
adoption did not have a material impact on its results of operations and
financial condition. In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN 45
requires an entity to recognize an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial
recognition and measurement of the liability will be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company
does not expect this interpretation to have a material impact on its
consolidated results of operations or financial position. The Company has
included additional disclosures in accordance with FIN 45 in the footnotes to
these consolidated financial statements. 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 compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
additional disclosure requirements of SFAS 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 consolidated financial statements. 2. ACQUISITION OF U|FORCE, INC. The Company's consolidated financial statements reflect
the purchase acquisition of all of the outstanding stock of U|Force, Inc.
(U|Force) 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. See Note 10 regarding further discussion of the
Exchangeable Shares. 8x8 also assumed outstanding stock options to purchase
shares of U|Force common stock for which the Black-Scholes option-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): The purchase price was allocated to tangible assets acquired
and liabilities assumed based on the book value of U|Force's assets and
liabilities, which approximated their fair value. Intangible assets acquired
included amounts allocated to U|Force's in-process research and development. The
in-process research and development related to U|Force's initial products, the
SCE and a unified messaging application, for which technological feasibility had
not been established and the technology had no alternative future use. The
estimated percentage complete for the unified messaging and SCE products was
approximately 44% and 34%, respectively, at June 30, 2000. 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 technologies. Risks that were considered as part of the
analysis included the scope of the efforts necessary to achieve technological
feasibility, rapidly changing customer markets, and significant competitive
threats from numerous companies. The Company also considered the risk that if
the products were not brought to market in a timely manner, it could adversely
affect sales and profitability of the combined company in the future. The
resulting estimated net cash flows were discounted at a rate of 25%. This
discount rate was based on the estimated cost of capital plus an additional
discount for the increased risk associated with in-process technology. The value
of the acquired U|Force in-process research and development, which was expensed
in the second quarter of fiscal 2001, approximated $4.6 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,
the value of an assumed distribution agreement, and workforce were being
amortized on a straight-line basis over three, three, and two years,
respectively, prior to the write-off of the unamortized balances in the fourth
quarter of fiscal 2001 as discussed in Note 4. The allocation of the purchase
price was as follows (in thousands): 3. ADOPTION OF SFAS NO. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS In July 2001, the FASB issued SFAS No. 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142). Under SFAS No.
142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Furthermore, SFAS No. 142 requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless these
lives are determined to be indefinite. In accordance with SFAS No. 142, the
effect of this accounting change was reflected prospectively. Supplemental
comparative disclosure as if the change had been retroactively applied to the
prior year period is as follows (in thousands, except per share amounts): In accordance with SFAS No. 142, 8x8 is required to perform an annual
impairment test for goodwill. Goodwill SFAS No. 142 requires 8x8 to compare the
fair value of the reporting unit to its carrying amount on an annual basis to
determine if there is potential impairment. If the fair value of the reporting
unit is less than its carrying value, an impairment loss is recorded to the
extent that 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. As
described in Note 4 below, the Company recorded a $1.5 million goodwill
impairment charge in the fourth quarter of fiscal 2003. 4. RESTRUCTURING AND OTHER CHARGES 2003 Restructuring Actions During the third and fourth quarters of fiscal 2003, the
Company continued its cost reduction activities to better align expense levels
with current revenue levels and ensure conservative spending during the current
economic downturn. As a result of these activities, the Company recorded
restructuring and other asset impairment charges of approximately $3.4 million.
These charges included severance and benefits of approximately $1.2 million, as
the Company reduced its workforce, under voluntary and involuntary separation
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, Tempe, Arizona and Marlow, United Kingdom and included employees
from sales and marketing and research and development, as well as four
executives of the semiconductor business. Severance of approximately $325,000
attributable to involuntary terminations was paid during the year ended March
31, 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, the Company
recorded asset impairment charges of $212,000 related to assets in the United
Kingdom that were abandoned or disposed of. The Company also recorded a charge of approximately $74,000
for its remaining lease liability for office space in Tempe, Arizona that was
vacated as a result of the restructuring actions during the fourth quarter. In the fourth quarter of fiscal 2003, the Company also
implemented a plan to reduce the workforce at its Sophia Antipolis, France
office by ten employees or seventy percent. This downsizing and its potential
impact on the iPBX business prompted an assessment of the key assumptions
underlying the Company's goodwill valuation judgments. As a result of the
analysis, the Company determined that an impairment charge of $1.5 million was
required because the estimated fair value of the goodwill was less than the book
value of the goodwill that arose from the acquisition of Odisei S.A. in fiscal
2000. The following table illustrates the charges, credits and
balances of the restructuring reserves as of March 31, 2003 and summarizes
impairment charges (in thousands): 2001 Restructuring Actions During the fourth quarter of fiscal 2001, after a
significant number of employees had resigned, the Company discontinued its
Canadian operations acquired in conjunction with the acquisition of U|Force in
June 2000. The Company closed its offices in Montreal and Hull, Quebec and
laid-off all remaining employees resulting in the cessation of most of the research
and development efforts and all of the sales and marketing and professional
services activities associated with the U|Force business. As a result of the
restructuring, the Company recorded a one-time charge of $33.3 million in the
quarter ended March 31, 2001. The restructuring charge consisted of the
following (in thousands): Employee separation costs represent severance payments
related to the 96 employees in the Montreal and Hull offices who were
terminated. The impairment charges for fixed assets approximated $2.1
million which included write-offs of abandoned and unusable assets of
approximately $1.4 million, a loss on sale of assets of $567,000, and a charge
for assets to be disposed of $172,000. The asset write-offs of $1.4 million
included approximately $850,000 related to leasehold improvements and $560,000
related to computer equipment, 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. The Company received common stock of the
purchaser valued at approximately $412,000 at the date of sale. Fair value of
assets to be disposed of was measured based on expected salvage value, less
costs to sell. Assets to
be disposed of consist of computer equipment with a fair value of $57,000 at
March 31, 2001. Substantially all of these assets were liquidated during fiscal
2002. The impairment charges for intangible assets represented the
write-off of the unamortized intangible assets recorded in connection with the
acquisition of U|Force. The charges of approximately $30.2 million included:
$28.7 million for the goodwill related to the acquisition, $739,000 for the
assembled workforce, and $789,000 related to a distribution agreement. The
impairments were directly attributable to the cessation of operations in Canada.
The Company performed an evaluation of the recoverability of the 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 the remaining
unamortized goodwill. The distribution agreement asset was written off because
the Company will no longer provide products and services to customers under that
agreement. Cash payments related to the restructuring during the quarter
ended March 31, 2001, which included all employee separation costs and certain
lease termination costs, approximated $920,000. Accrued obligations related to
remaining lease commitments on the Montreal and Hull facilities totaled $212,000
at March 31, 2001. The Company terminated the lease for its primary facility in
Montreal in March 2001, but was required to pay rent on the facility through May
31, 2001. The Company terminated the lease for the facility in Hull, Quebec, in
fiscal 2002. The payments made in fiscal 2002 related to the terminations of the
Montreal and Hull facility leases totaled $225,000. There were no remaining
restructuring related accruals at March 31, 2002. 5. DEBT Convertible Subordinated Debentures Issuance of the Debentures In December 1999, the Company issued $7.5 million of
4% Series A and Series B convertible subordinated debentures (the Debentures)
due in December 2002. In conjunction with the issuance of the Debentures, the
lenders received warrants to purchase 531,915 8x8 common shares at $7.05 per
share and 105,634 shares at $35.50 per share (the Lender Warrants). The Company
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 associated with the fair value of the warrants issued to
the lenders approximated $2.2 million. The costs of issuing the Debentures
totaled $864,000, including a non-cash charge for the value of warrants issued
to the placement agent. The debt discount and debt issuance costs were amortized
to interest expense on a straight-line basis over the term of the Debentures.
Cumulative Effect of Change in Accounting Principle - Beneficial
Conversion Feature In November 2000, the Emerging Issues Task Force
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 feature for
such securities. The SEC required companies to record a cumulative catch-up
adjustment in the fourth quarter of calendar 2000 related to the application of
the "accounting conversion price" method to securities issued after May 21,
1999. Accordingly, the Company recorded a $1.1 million non-cash expense during
the quarter ended December 31, 2000 to account for a beneficial conversion
feature associated with the Debentures and related warrants. The Company has
presented the charge in the Consolidated Statements of Operations as a
cumulative effect of a change in accounting principle. Extraordinary Item - Early Extinguishment of Debentures In December 2001, the Company redeemed the Debentures
for $4.5 million in cash and 1,000,000 contingently redeemable shares of common
stock. Additionally, the Company agreed to reduce the exercise price of the
Lender Warrants to $0.898 per share. This transaction resulted in an
extraordinary gain of $779,000, net of the incremental fair value of the
repriced warrants, the write-off of unamortized debt discount and debt issue
costs, and other costs associated with the early extinguishment of the
Debentures. Contingently Redeemable Common Stock Under the terms of the registration rights agreement
that the Company and the lenders entered into in connection with the issuance of
the 1,000,000 shares of common stock associated with the extinguishment
described above, the Company agreed to register the shares for resale and
maintain the effectiveness of the registration statement for specified periods
of time until the shares are resold or can be resold without the registration
statement (the Maintenance Requirements). The Company further agreed that if it
does not comply with the Maintenance Requirements in the future, it may be
required to pay cash penalties and redeem all or a portion of the shares held by
the lenders at the higher of $0.898 per share or the market price of the
Company's stock at the time of the redemption. The remaining shares held by the
lenders at March 31, 2003 and March 31, 2002 were recorded at their potential
redemption values of $669,000 and $813,000, respectively, and classified as
contingently redeemable common stock due to the redemption rights described
above. The Company will not mark the contingently redeemable common stock to the
higher of $0.898 per share or market unless it becomes probable that the Company
will not be able to comply with the Maintenance Requirements. The approximately $25,000 difference between the
potential redemption value of the shares held by the lenders at March 31, 2002
and the value of those shares on the date of issuance has been treated as a
deemed dividend and included as an adjustment to net income (loss) available to
common stockholders for purposes of calculating the Company's net income (loss)
per share for fiscal 2002. 6. DISPOSITION OF VIDEO MONITORING PRODUCT LINE On May 19, 2000, the Company entered into an Asset
Purchase Agreement with Interlogix, Inc. (Interlogix) providing for the 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 of the Asset
Purchase Agreement, the Company and Interlogix entered into a Technology License
Agreement (the License Agreement) providing for the licensing of certain related
intellectual property to Interlogix, a Development Agreement providing
Interlogix continuing rights in certain products to be developed by the Company,
a Transition Services Agreement providing for certain services to be rendered by
the Company to Interlogix in respect of the Business, and a Supply Agreement
providing for the continuing sale of certain products to Interlogix by the
Company. The aggregate purchase price paid by Interlogix was approximately $5.2
million in cash. The Company's obligations under the Transition Services
Agreement expired in fiscal 2001. The cost of services provided under the
Transition Services Agreement was reimbursed by Interlogix. Pursuant to the
Asset Purchase Agreement, the Company is responsible for reimbursing Interlogix
for costs they incur associated with warranty obligations related to video
monitoring products manufactured prior to May 19, 2000. The Company's estimated
remaining exposure to such warranty obligations is reflected in the warranty
accrual at March 31, 2003. At signing, the Company's continuing obligations under the
License and Development Agreements included: (i) providing future updates and
upgrades to the licensed technology, if any, over the initial three-year term of
the License Agreement (the Maintenance Obligations) and (ii) certain potential
obligations to assist Interlogix in the development of future products (the
Development Obligations). The Company deferred the recognition of the
approximately $3.9 million of revenue ascribed to the license of video
monitoring technology to Interlogix until the Development Obligations expired in
the quarter ended March 31, 2001. Upon expiration of the Development
Obligations, the Company commenced recognition of the previously deferred
revenue and is recognizing the revenue ratably over the license term, which
expires in May 2003, due to the remaining Maintenance Obligations. The remaining
balance in deferred revenue at March 31, 2003 is approximately $285,000. 7. TRANSACTIONS WITH RELATED PARTIES Strategic Relationship with STMicroelectronics NV During the fourth quarter of fiscal 2000, the Company
sold 3.7 million shares of its common stock to STMicroelectronics NV (STM) at a
purchase price of $7.50 per share and received net proceeds of $27.7 million. In
addition, the Company granted STM the right to a seat on the Company's Board of
Directors as long as it holds at least 10% of the Company's outstanding shares.
STM was also granted certain rights to maintain its percentage ownership
interest of the Company's outstanding voting securities, including certain
rights to participate in future securities offerings of the Company, or, in
certain circumstances, the right to acquire additional shares through market
purchases. The Company also granted to an STM subsidiary a non-exclusive,
royalty-bearing license to certain technology and undertook certain joint
development activities with a subsidiary of STM. Under the terms of the
agreement, the STM subsidiary guaranteed certain minimum payments to the Company
totaling $1.0 million; $500,000 for prepaid royalties and $500,000 for certain
non-recurring engineering services (the Minimum Payments). The Company received
the Minimum Payments in fiscal 2001. During fiscal 2003, the Company purchased semiconductors from
a subsidiary of STM. Such purchases approximated $550,000. In addition, during
fiscal 2003 the Company contracted with a subsidiary of STM for non-recurring
engineering services related to the development of a new semiconductor product
by the Company. As of March 31, 2003, the Company had recorded liabilities to
STM of $392,000 for semiconductor purchases and purchase commitments and
engineering services. Other Transactions In March 2002 the Board of Directors authorized the
Company to open securities trading accounts and make investments in other
classes of securities that may generate higher returns than the currently low
yields on governmental and corporate debt securities and money market funds. The
amount allocated for such investments was $1.0 million to be invested on behalf
of 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
balance of $1.0 million. As part of the arrangement, the Company's Board of
Directors has expressed its intent, but not obligation, to pay Mr. Parkinson a
quarterly bonus in an amount equal to 25% of the profits attributable to
investments made on the Company's behalf by Mr. Parkinson 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 between Mr. Parkinson and the Company. Under the arrangement, the
Company is required to return to Mr. Parkinson the amount representing the
increase in value of the investment account over $1.0 million to the extent
required to restore replenishment payments made by Mr. Parkinson in prior
quarters. Through March 31, 2003, Mr. Parkinson had made cumulative
replenishment payments of approximately $137,000 to offset losses incurred. As
of March 31, 2003, the investment account balance approximated $1,018,000.
Accordingly, the Company had a payable of approximately $18,000 to Mr. Parkinson
at March 31, 2003. As of March 31, 2003, approximately $200,000 was invested in
equity securities, and the remaining $800,000 was invested in money market
accounts. During fiscal 2001, Dr. Bernd Girod, a director of 8x8 and
its subsidiary, Netergy, received $22,000 in consideration for technical
consulting services that he provided to the Company. In addition, the Company
contributed $150,000 during fiscal 2001 to a Stanford University research
program managed by Dr. Girod. 8. INCOME TAXES The Company's loss before income taxes included $65,000,
$161,000 and $162,000 of foreign subsidiary income for the fiscal years ended
March 31, 2003, 2002, and 2001, respectively. The components of the consolidated provision for income taxes
consisted of the following (in thousands): Deferred tax assets were comprised of the following (in
thousands): Management believes that, based on a
number of factors, the weight of objective available evidence indicates that it
is more likely than not that the Company will not be able to realize its
deferred tax assets, and thus a full valuation allowance was recorded at March
31, 2003 and March 31, 2002. At March 31, 2003, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately $115
million and $42 million, respectively, which expire at various dates beginning
in 2005. The net operating loss carryforwards include approximately $5 million
resulting from employee exercises of non-qualified stock options or
disqualifying 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 state
tax reporting purposes of approximately $3 million and $2.3 million,
respectively. The federal credit carryforwards will begin expiring in 2010 while
the California credit will carryforward indefinitely. Under applicable tax laws,
the amount of and benefits from net operating losses and credits that can be
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating loss carryforwards
that the Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period. A reconciliation of the tax provision (benefit) to the
amounts computed using the statutory U.S. federal income tax rate of 34% is as
follows (in thousands): 9. COMMITMENTS AND CONTINGENCIES Leases The Company leases its primary facility in Santa
Clara, California under a non-cancelable operating lease agreement that expires
in November 2004. The Company also has leased facilities in Arizona, France and
Canada. The facility leases include rent escalation clauses, and require the
Company to pay taxes, insurance, and normal maintenance costs. At March 31,
2003, future minimum annual lease payments under non-cancelable operating
leases, net of sublease income, were as follows (in thousands): Rent expense for the years ended March 31, 2003, 2002 and
2001, was $1.5 million, $1.5 million and $1.8 million, respectively. The Company subleases office space under operating lease agreements expiring
at various dates through 2005. The total future minimum rentals to be received
under these noncancelable sublease agreements approximate $18,000 in each of
fiscal 2004, 2005 and 2006 and $12,000 in fiscal 2007. Legal Proceedings In November 2001, the Company settled a lawsuit that
was filed against it in 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 fiscal 2002 the Company recognized $309,000 of previously deferred
revenue stemming from a March 2000 license agreement with Milinx. The Company is also involved in various other legal claims
and litigation that have arisen in the normal course of the Company's
operations. While the results of such claims and litigation cannot be predicted
with certainty, the Company believes that the final outcome of such matters will
not have a significant adverse effect on the Company's financial position or
results of operations. However, should the Company not prevail in any such
litigation, its operating results and financial position could be adversely
impacted. 10. STOCKHOLDERS' EQUITY Common Stock In August 2000, the Company's stockholders authorized
an amendment to the restated certificate of incorporation to increase the
authorized number of shares of common stock to 100,000,000 shares from
40,000,000 shares. Exchangeable Shares and Preferred Stock In conjunction with the acquisition of U|Force (see
Note 2), the Company agreed to issue up to 2,107,780 shares of 8x8 common stock
upon the exchange or redemption of the exchangeable shares (the Exchangeable
Shares) of Canadian entities held by employee shareholders of U|Force stock. The
Exchangeable Shares held by U|Force employees were subject to certain
restrictions, including the Company's right to repurchase the Exchangeable
Shares if an employee departed the Company prior to vesting. Upon vesting, the
Exchangeable Shares were convertible into 8x8 common stock on a 1-for-1 basis.
The Company also issued one share of preferred stock (the Special Voting Share)
that provides holders of Exchangeable Shares with voting rights that are
equivalent to the shares of common stock into which their shares are
convertible. During the fourth quarter of fiscal 2001, the Company
repurchased a total of 1,034,107 unvested Exchangeable Shares at an average
price of $0.49 per share when the beneficial holders of such shares resigned
from the Company. In addition, 812,866 Exchangeable Shares were converted into
an equivalent number of shares of the Company's common stock in the fourth
quarter of fiscal 2001. The remaining 260,807 Exchangeable Shares were exchanged
for shares of the Company's common stock during the year ended March 31, 2002.
1992 Stock Option Plan The Board of Directors reserved 2,000,000 shares of
the Company's common stock for issuance under the 1992 Stock Option Plan (the
1992 Plan). The 1992 Plan expired in fiscal 2003. Key Personnel Plan In July 1995, the Board of Directors adopted the Key
Personnel Plan. The Board of Directors reserved 2,200,000 shares of the
Company's common stock for issuance under this plan. The Key Personnel Plan
provided for granting incentive and nonstatutory stock options to 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 of
$0.50 per share if the employee left the Company prior to vesting. During fiscal
2001, the Company repurchased 5,982 unvested shares. As of March 31, 2003, all
shares were vested and no shares are available for grant under the Key Personnel
Plan. The Company is no longer issuing options under this plan. 1996 Stock Plan In June 1996, the Board of Directors adopted the 1996
Stock Plan (the 1996 Plan) and reserved 1,000,000 shares of the Company's common
stock for issuance under this plan. The Company's stockholders subsequently
authorized increases in the number of shares of the Company's common stock
reserved for issuance under the 1996 Plan of 500,000 shares in June 1997 and
2,000,000 shares in August 2000. The 1996 Plan also provides for an annual
increase in the number of shares reserved for issuance under the 1996 Plan on
the first day of the Company's fiscal year in an amount equal to 5% of the
Company's common stock issued and outstanding at the end of the immediately
preceding fiscal year, subject to a maximum annual increase of 1,000,000 shares.
The annual increase was 1,000,000 shares in each of fiscal 2003, 2002 and 2001.
To date, this provision has resulted in increases in shares reserved for
issuance under the 1996 Plan totaling 4,535,967. The 1996 Plan provides for
granting incentive stock options to employees and nonstatutory stock options to
employees, directors or consultants. The stock option price of incentive stock
options granted may not be less than the determined fair market value at the
date of grant. Options generally vest over four years and expire ten years after
grant. 1996 Director Option Plan The Company's 1996 Director Option Plan (the Director
Plan) was adopted in June 1996 and became effective in July 1997. A total of
150,000 shares of common stock were initially reserved for issuance under the
Director Plan. The Company's stockholders subsequently authorized an increase in
the number of shares of common stock reserved for issuance under the Director
Plan to 500,000 shares in August 2000, and 1,000,000 in July 2002. The Director
Plan provides for both discretionary and periodic grants of nonstatutory stock
options to non-employee directors of the Company (the Outside Directors). The
exercise price per share of all options granted under the Director Plan will be
equal to the fair market value of 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 Director Plan will have a term of ten years. 1999 Nonstatutory Stock Option Plan In fiscal 2000, the Company's Board of Directors
approved the 1999 Nonstatutory Stock Option Plan (the 1999 Plan) with 600,000
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, that options may be
granted to an officer in connection with the officer's initial employment by the
Company. Options generally vest over four years and expire ten years after
grant. The 1999 Plan has not been approved by the stockholders of the
Company. UForce Company -- Societe UForce Amended and Restated 1999 Stock Option
Plan In connection with the acquisition of U|Force (see
Note 2), the Company assumed the UForce Company -- Societe UForce Amended and
Restated 1999 Stock Option Plan (the U|Force Plan), and reserved 1,023,898
shares of the Company's common stock related to options issued thereunder. The
U|Force Plan provided for the grant of nonstatutory stock options to employees
and consultants of U|Force at prices equal to the fair market value of the stock
at the grant dates. Due to the cessation of the Company's Canadian operations
(see Note 4), 1,016,408 and 7,490 of the options previously granted under the
U|Force Plan were forfeited and returned to the U|Force Plan in fiscal 2001 and
fiscal 2002, respectively. In fiscal 2002, the Company's Board of Directors
terminated the U|Force Plan. Option activity under the Company's stock option plans since
March 31, 2000, excluding the Netergy and Centile stock option plans, is
summarized as follows: Significant option groups outstanding at March 31, 2003 and
related weighted average exercise price and contractual life information for
8x8, Inc.'s stock option plans are as follows: The Company recorded a deferred
compensation charge of approximately $7,267,000 with respect to options repriced
and certain additional options granted in fiscal 1997. In addition, the Company
recorded deferred compensation charges of approximately $503,000 and $406,000 in
connection with certain options granted to non-officer employees in fiscal 2001
and 2000, respectively. The Company recognizes deferred compensation over the
related vesting period of the options (which is generally forty-eight months).
The Company recognized $753,000 as compensation expense in the fiscal year ended
March 31, 2001. Stock compensation expense in fiscal 2003 and 2002 was not
significant. Deferred compensation is subject to reduction for any employee who
terminates employment prior to the expiration of such employee's option vesting
period. Netergy Microelectronics, Inc. 2000 Stock Option Plan Netergy's 2000 Stock Option Plan (the Netergy Plan)
was adopted in December 2000 by the Netergy Board of Directors. The Netergy Plan
provides for granting incentive stock options (ISO) to employees and
nonstatutory stock options (NSO) to employees, directors, and consultants of
Netergy. Options granted under the Netergy Plan may be granted for periods up to
ten years and at prices no less than 85% of the estimated fair value of the
shares on the date of grant as determined by the Netergy Board of Directors,
provided, however, that (i) the exercise price of an ISO and NSO shall not be
less than 100% and 85% of the estimated fair value of the shares on the date of
grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a
10% shareholder shall not be less than 110% of the estimated fair value of the
shares on the date 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, 2003 was as follows:
As of March 31, 2003, 991,702 options were exercisable,
the weighted average remaining contractual life was 5.9 years, and the weighted
average exercise price was $0.50 per share. Centile, Inc. 2001 Stock Option Plan Centile's 2001 Stock Option Plan (the Centile Plan)
was adopted in March 2001 by the Centile Board of Directors. The Centile Plan
provides for granting ISOs to employees and NSOs to employees, directors, and
consultants of Centile. Options granted under the Centile Plan may be granted
for periods up to ten years and at prices no less than 85% of the estimated fair
value of the shares on the date of grant as determined by the Centile Board of
Directors, provided, however, that (i) the exercise price of an ISO and NSO
shall not be less than 100% and 85% of the estimated fair value of the shares on
the date of grant, respectively, and (ii) the exercise price of an ISO and NSO
granted to a 10% shareholder shall not be less than 110% of the estimated fair
value of the shares on the date of grant, respectively. To date, options granted
vest over four years. Option activity during each of the three years ended March
31, 2003 was as follows: 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 Plan (the Purchase
Plan) was adopted in June 1996 and became effective upon the closing of the
Company's initial public offering in July 1997. Under the Purchase Plan, 500,000
shares of common stock were initially reserved for issuance. At the start of
each fiscal year, the number of shares of common stock subject to the Purchase
Plan increases so that 500,000 shares remain available for issuance. This
provision resulted in increases of 416,589, 281,583 and 180,910 shares issuable
under the Purchase Plan during the fiscal years ended March 31, 2003, 2002 and
2001, respectively. During fiscal 2003, 2002 and 2001, 189,575, 416,589 and
281,583 shares, respectively, were issued under the Purchase Plan. The Purchase Plan permits eligible employees to purchase
common stock through payroll deductions at a price equal to 85% of the fair
market value of the common stock at the beginning of each two year offering
period or the end of a six month purchase period, whichever is lower. The
contribution amount may not exceed ten percent of an employee's base
compensation, including commissions but not including bonuses and overtime. In
the event of a merger of the Company with or into another corporation or the
sale of all or substantially all of the assets of the Company, the Purchase Plan
provides that a new 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's stock plans been determined based on the fair value of options at
their grant dates, as prescribed in SFAS No. 123, the Company's net loss would
have been as follows (in thousands, except per share amounts): *These amounts have been adjusted to reflect a correction to the forfeiture
rate, which resulted in reductions in the pro forma net losses for 2002 and 2001
of $6.5 million and $3.1 million, respectively. For the purposes of the disclosure above, the fair value of each of the
Company's option grants, excluding those options issued under the Netergy and
Centile Plans, has been estimated on the date of grant using the Black-Scholes
pricing model with the following assumptions: The fair value of grants under the
Netergy and Centile stock option plans, for purposes of the pro forma
disclosure, have also been estimated on the date of grant using the
Black-Scholes pricing model using the weighted average assumptions noted below. The
expected volatility factors for the Netergy and Centile plans reflect the fact
that the underlying shares 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. For the purpose of providing pro forma disclosures, the
estimated fair value of stock purchase rights granted under the Purchase Plan
were estimated using the Black-Scholes pricing model with the following
weighted-average assumptions: 11. EMPLOYEE BENEFIT PLANS 401(k) Savings Plan In April 1991, the Company adopted a 401(k) savings
plan (the Savings Plan) covering substantially all of its U.S. employees.
Eligible employees may contribute to the Savings Plan from their compensation up
to the maximum allowed by the Internal Revenue Service. The Company made
matching contributions of $85,000 and $125,000 to the Savings Plan during fiscal
2002 and 2001, respectively. The matching contributions vest over three years.
The Savings Plan does not allow employee contributions to be invested in 8x8
common stock. 12. SEGMENT REPORTING SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. Under SFAS No. 131,
the method for determining what information to report is based upon the way
management organizes the operating segments within the Company for making
operating decisions and assessing financial performance. In the fourth quarter
of fiscal 2001, management began evaluating the Company's results based on three
reportable segments: Packet8 (formerly known as Corporate and Other), Netergy,
which consisted of the semiconductor business, and Centile, which consisted of
the hosted iPBX business. During the third quarter of fiscal 2004, the Company
changed its internal reporting processes and determined that it had only one
reportable segment, and ceased preparing operational data on the 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). The following table illustrates net revenues by geographic
area. Revenues are attributed to countries based on the destination of shipment
(in thousands): 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): Two customers represented more than 10%
of our total revenues in fiscal 2003. These customers represented 17%, and 11%
of our total revenues, respectively. During the fiscal year ended March 31,
2002, three customers represented more than 10% of our total revenues. These
customers represented 13%, 13%, and 12% of our total revenues. During the fiscal
year ended March 31, 2001, no customer accounted for 10% or more of total
revenues.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31,
--------------------
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 3,371 $ 12,422
Short term investments................................... 208 --
Accounts receivable, net of allowance of
$141 and $286, respectively............................. 1,290 1,239
Inventory................................................ 352 733
Other current assets..................................... 595 612
--------- ---------
Total current assets............................. 5,816 15,006
Property and equipment, net................................ 841 2,740
Intangibles and other assets............................... 48 1,907
--------- ---------
$ 6,705 $ 19,653
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 652 $ 548
Accrued compensation..................................... 847 921
Accrued warranty......................................... 477 478
Deferred revenue......................................... 545 2,421
Other accrued liabilities................................ 1,125 958
Income taxes payable..................................... 226 280
--------- ---------
Total current liabilities........................ 3,872 5,606
--------- ---------
Contingently redeemable common stock....................... 669 813
--------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized: 5,000,000 shares;
Issued and outstanding: 1 share at March 31, 2003
and March 31, 2002................................... -- --
Common stock, $0.001 par value:
Authorized: 100,000,000 shares at March 31, 2003
and March 31, 2002;
Issued and outstanding: 28,470,987 shares
at March 31, 2003 and 28,228,215 shares
at March 31, 2002.................................... 28 27
Additional paid-in capital................................. 150,827 150,612
Deferred compensation...................................... (12) (30)
Accumulated other comprehensive loss....................... -- (99)
Accumulated deficit........................................ (148,679) (137,276)
--------- ---------
Total stockholders' equity....................... 2,164 13,234
--------- ---------
$ 6,705 $ 19,653
========= =========
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended March 31,
-------------------------------
2003 2002 2001
--------- --------- ---------
Product revenues....................................... $ 5,739 $ 6,044 $ 12,808
License and other revenues............................. 5,264 8,647 5,420
--------- --------- ---------
Total revenues............................... 11,003 14,691 18,228
--------- --------- ---------
Cost of product revenues............................... 2,781 2,626 5,225
Cost of license and other revenues..................... 1,509 197 1,761
--------- --------- ---------
Total cost of revenues....................... 4,290 2,823 6,986
--------- --------- ---------
Gross profit................................. 6,713 11,868 11,242
--------- --------- ---------
Operating expenses:
Research and development............................. 7,835 12,559 19,950
Selling, general and administrative.................. 7,441 8,560 16,899
In-process research and development.................. -- -- 4,563
Amortization of intangibles.......................... -- 763 10,987
Restructuring and other charges...................... 3,437 -- 33,316
--------- --------- ---------
Total operating expenses..................... 18,713 21,882 85,715
--------- --------- ---------
Loss from operations................................... (12,000) (10,014) (74,473)
Other income, net...................................... 597 1,029 2,628
Interest expense....................................... -- (884) (1,456)
--------- --------- ---------
Loss before provision for income taxes................. (11,403) (9,869) (73,301)
Provision for income taxes............................. -- 15 17
--------- --------- ---------
Net loss before extraordinary gain and cumulative
effect of change in accounting principle ............ (11,403) (9,884) (73,318)
Extraordinary gain on extinguishment of debt, net...... -- 779 --
Cumulative effect of change in accounting principle.... -- -- (1,081)
--------- --------- ---------
Net loss............................................... $ (11,403) $ (9,105) $ (74,399)
========= ========= =========
Basic and diluted per share amounts:
Net loss before extraordinary gain and cumulative
effect of change in accounting principle .......... $ (0.40) $ (0.36) $ (2.95)
Extraordinary gain on extinguishment of debt, net.... -- 0.03 --
Cumulative effect of change in accounting principle.. -- -- (0.04)
--------- --------- ---------
Net loss............................................. $ (0.40) $ (0.33) $ (2.99)
========= ========= =========
Basic and diluted shares outstanding................... 28,386 27,271 24,846
========= ========= =========
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
Notes Accumulated
Receivable other
Preferred Stock Common Stock Additional from Deferred Comprehen-
---------------- -------------------- Paid-in Stock- Compensa- sive Accumulated
Shares Amount Shares Amount Capital holders tion Loss Deficit Total
------- ------- ----------- ------- ---------- --------- ---------- ---------- ---------- ---------
Balance at March 31, 2000........ -- $ -- 22,958,921 $ 23 $ 101,559 $ (69) $ (376) $ -- $ (53,747) $ 47,390
Acquisition of UForce, Inc. ..... 1 -- 3,555,303 4 44,584 -- -- -- -- 44,588
Issuance of common stock under
stock plans.................... -- -- 1,206,591 1 2,761 -- -- -- -- 2,762
Repayment of notes receivable
from stockholders.............. -- -- -- -- -- 60 -- -- -- 60
Repurchase of common stock and
Exchangeable Shares............ -- -- (1,040,089) (1) (521) 8 -- -- -- (514)
Deferred compensation related
to stock options............... -- -- -- -- 551 -- 202 -- -- 753
Value of beneficial conversion
feature associated with the
convertible subordinated
debentures..................... -- -- -- -- 1,081 -- -- -- -- 1,081
Change in unrealized loss on
investments.................... -- -- -- -- -- -- -- (24) --
Cumulative translation
adjustment..................... -- -- -- -- -- -- -- (65) --
Net loss......................... -- -- -- -- -- -- -- -- (74,399)
Total comprehensive loss......... -- -- -- -- -- -- -- -- -- (74,488)
------- ------- ----------- ------- ---------- --------- ---------- ---------- ---------- ---------
Balance at March 31, 2001........ 1 $ -- 26,680,726 $ 27 $ 150,015 $ (1) $ (174) $ (89) $ (128,146) $ 21,632
Redemption of convertible
subordinated debentures........ -- -- 1,000,000 -- 321 -- -- -- (25) 296
Issuance of common stock under
stock plans.................... -- -- 457,346 -- 335 -- -- -- -- 335
Issuance of common stock to debt
holders to satisfy interest
obligations.................... -- -- 95,699 -- 97 -- -- -- -- 97
Forgiveness of note receivable... -- -- (5,556) -- (1) 1 -- -- -- --
Deferred compensation related
to stock options............... -- -- -- -- (155) -- 144 -- -- (11)
Cumulative translation
adjustment..................... -- -- -- -- -- -- -- (10) --
Net loss......................... -- -- -- -- -- -- -- -- (9,105)
Total comprehensive loss......... -- -- -- -- -- -- -- -- -- (9,115)
------- ------- ----------- ------- ---------- --------- ---------- ---------- ---------- ---------
Balance at March 31, 2002........ 1 $ -- 28,228,215 $ 27 $ 150,612 $ -- $ (30) $ (99) $ (137,276) $ 13,234
Issuance of common stock under
stock plans.................... -- -- 242,772 1 88 -- -- -- -- 89
Common stock no longer
contingently redeemable........ -- -- -- -- 144 -- -- -- -- 144
Deferred compensation related
to stock options............... -- -- -- -- (17) -- 18 -- -- 1
Cumulative translation
adjustment..................... -- -- -- -- -- -- -- 99 --
Net loss......................... -- -- -- -- -- -- -- -- (11,403)
Total comprehensive loss......... -- -- -- -- -- -- -- -- -- (11,304)
------- ------- ----------- ------- ---------- --------- ---------- ---------- ---------- ---------
Balance at March 31, 2003........ 1 $ -- 28,470,987 $ 28 $ 150,827 $ -- $ (12) $ -- $ (148,679) $ 2,164
======= ======= =========== ======= ========== ========= ========== ========== ========== =========
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended March 31,
-------------------------------
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities:
Net loss................................................... $ (11,403) $ (9,105) $ (74,399)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization............................ 1,780 3,862 14,355
Extraordinary gain due to debt redemption ............... -- (779) --
Stock compensation expense............................... 1 (11) 753
Cumulative effect of change in accounting principle...... -- -- 1,081
In-process research and development...................... -- -- 4,563
Gain on sale of investments, net......................... -- (131) (225)
Non-cash portion of restructuring and other charges...... 2,273 -- 32,331
Other.................................................... 204 26 (20)
Changes in assets and liabilities, net of effects
of businesses acquired and sold:
Accounts receivable.................................... (71) 1,668 851
Inventory.............................................. 298 501 (85)
Other current and noncurrent assets.................... 64 1,607 (1,281)
Accounts payable....................................... 104 (839) (2,197)
Accrued compensation................................... (249) (610) (623)
Accrued warranty....................................... (1) (47) (169)
Deferred revenue....................................... (1,876) (3,482) 197
Other accrued liabilities.............................. 93 (579) 378
Income taxes payable................................... (54) (26) (78)
--------- --------- ---------
Net cash used in operating activities............... (8,837) (7,945) (24,568)
--------- --------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment..................... (137) (172) (6,127)
Cash paid for acquisitions, net............................ -- -- (558)
Proceeds from sale of investments.......................... -- 543 225
Proceeds from the sale of video monitoring assets, net..... -- -- 5,160
Proceeds from the sale of equipment........................ 42 116 --
Purchases of short-term investments........................ (208) -- --
--------- --------- ---------
Net cash (used in) provided by investing activities. (303) 487 (1,300)
--------- --------- ---------
Cash flows from financing activities:
Debt repayments............................................ -- (4,581) (891)
Proceeds from issuance of common stock, net................ 89 335 2,763
Repayment of notes receivable from stockholders............ -- -- 60
Repurchase of common stock and Exchangeable Shares......... -- -- (514)
--------- --------- ---------
Net cash provided by (used in) financing activities. 89 (4,246) 1,418
--------- --------- ---------
Net decrease in cash and cash equivalents.................... (9,051) (11,704) (24,450)
Cash and cash equivalents, beginning of year................. 12,422 24,126 48,576
--------- --------- ---------
Cash and cash equivalents, end of year....................... $ 3,371 $ 12,422 $ 24,126
========= ========= =========
Supplemental and non-cash disclosures:
Income taxes paid.......................................... $ 36 $ 12 $ 25
========= ========= =========
Interest paid.............................................. $ -- $ 204 $ 308
========= ========= =========
Common stock issued to satisfy interest obligations........ $ -- $ 97 $ --
========= ========= =========
Issuance of shares and repricing of warrants in
connection with the debt extinguishment................. $ -- $ 1,109 $ --
========= ========= =========
Issuance of shares and assumption of options in
connection with the acquisition of U|Force.............. $ -- $ -- $ 44,586
========= ========= =========
Marketable securities received in exchange for
furniture and equipment................................. $ -- $ -- $ 412
========= ========= =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
. Customers can choose a direct-dial phone number from any of the rate
centers offered by the 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, line-alternate, 3-way conferencing, web access to account controls, and
real-time online billing. In addition, 8x8 offers a videophone for use with the
Packet8 service;
March 31,
--------------------
2003 2002
--------- ---------
(in thousands)
Raw materials and work-in-process........................... 147 528
Finished goods.............................................. 205 205
--------- ---------
$ 352 $ 733
========= =========
March 31,
--------------------
2003 2002
--------- ---------
(in thousands)
Machinery and computer equipment............................ $ 7,378 $ 8,076
Furniture and fixtures...................................... 847 1,084
Licensed software........................................... 4,142 4,105
Leasehold improvements...................................... 914 991
--------- ---------
13,281 14,256
Less: accumulated depreciation and amortization............... (12,440) (11,516)
--------- ---------
$ 841 $ 2,740
========= =========
Year Ended March 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Net loss: $ (11,403) $ (9,105) $ (74,399)
Add: Stock-based compensation expense
included in reported net income....... 1 (11) 753
Deduct: Total stock-based compensation
determined pursuant to SFAS No.123* (4,446) (9,483) (10,486)
----------- ----------- -----------
Pro forma net loss (basic and diluted) $ (15,848) $ (18,599) $ (84,132)
=========== =========== ===========
As reported net loss per share............. $ (0.40) $ (0.33) $ (2.99)
Pro forma net loss per share............... $ (0.56) $ (0.68) $ (3.39)
Year Ended March 31,
---------------------------------
2003 2002 2001
----------- --------- ---------
Net loss......................................... $ (11,403) $ (9,105) $ (74,399)
Accretion of dividends on contingently
redeemable common stock........................ -- (25) --
----------- --------- ---------
Net loss available to common
stockholders................................... $ (11,403) $ (9,130) $ (74,399)
=========== ========= =========
Year Ended March 31,
---------------------------------
2003 2002 2001
----------- --------- ---------
Common stock options............................. 7,615 9,900 7,732
Warrants......................................... -- 701 701
Convertible subordinated debentures.............. -- -- 638
Unvested restricted common stock................. -- -- 30
----------- --------- ---------
7,615 10,601 9,101
=========== ========= =========
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
=========
In-process research and development........................... $ 4,563
Distribution agreement........................................ 1,053
Workforce..................................................... 1,182
U|Force net tangible assets................................... 1,801
Goodwill...................................................... 38,236
---------
$ 46,835
=========
Year Ended March 31,
---------------------------------
2003 2002 2001
----------- --------- ---------
Reported net loss ............................... $ (11,403) $ (9,105) $ (74,399)
Add back: Goodwill and intangibles amortization.. -- 763 10,987
----------- --------- ---------
Adjusted net loss................................ $ (11,403) $ (8,342) $ (63,412)
=========== ========= =========
Basic and diluted earnings per share:
Reported net loss per share.................... $ (0.40) $ (0.33) $ (2.99)
Goodwill and intangibles amortization.......... -- 0.03 0.44
----------- --------- ---------
Adjusted net loss per share...................... $ (0.40) $ (0.30) $ (2.55)
=========== ========= =========
Total Cash Non-Cash Liability at
Charges Payments Charges March 31, 2003
----------- ----------- ----------- ----------------
Restructuring Charges:
Severance...................... $ 1,177 $ (1,002) $ -- $ 175
Facility related............... 508 (161) (273) 74
----------- ----------- ----------- ----------------
Total restructuring charges.. 1,685 (1,163) (273) 249
----------- ----------- ----------- ----------------
Asset Impairments:
Fixed Assets................... 212 -- (212) --
Goodwill....................... 1,539 -- (1,539) --
----------- ----------- ----------- ----------------
Total impairment charges..... 1,751 -- (1,751) --
----------- ----------- ----------- ----------------
Total restructuring and
impairment charges......... $ 3,436 $ (1,163) $ (2,024) $ 249
=========== =========== =========== ================
Employee separation........................................... $ 765
Fixed asset losses and impairments............................ 2,084
Intangible asset impairments.................................. 30,247
Lease obligation and termination.............................. 220
---------
$ 33,316
=========
Year Ended March 31,
---------------------------------
2003 2002 2001
----------- --------- ---------
Current:
Federal........................................ $ -- $ (10) $ --
State.......................................... -- -- --
Foreign........................................ -- 25 17
----------- --------- ---------
$ -- $ 15 $ 17
=========== ========= =========
March 31,
--------------------
2003 2002
--------- ---------
Research and development credit carryforwards................. $ 5,459 $ 4,809
Net operating loss carryforwards.............................. 41,543 23,954
Inventory valuation........................................... 419 569
Reserves and allowances....................................... 349 471
Goodwill...................................................... -- 14,193
Other......................................................... 2,806 3,335
--------- ---------
50,576 47,331
Valuation allowance........................................... (50,576) (47,331)
--------- ---------
Total............................................... $ -- $ --
========= =========
Year Ended March 31,
---------------------------------
2003 2002 2001
----------- --------- ---------
Benefit at statutory rate........................ $ (3,877) $ (3,090) $ (25,296)
State income taxes (benefit) before valuation
allowance, net of federal effect............... (684) 229 (3,909)
In-process research and development.............. -- -- 1,551
Non-deductible goodwill.......................... 523 259 --
Discount on issuance of Common Stock............. -- 558 --
Research and development credits................. -- (216) (1,162)
Change in valuation allowance.................... 4,030 2,302 29,027
Non-deductible compensation...................... -- (4) 256
Foreign rate differences......................... -- (30) 1
Other............................................ 8 7 (451)
----------- --------- ---------
$ -- $ 15 $ 17
=========== ========= =========
YEAR ENDING MARCH 31,
---------------------
2004.......................................................... $ 544
2005.......................................................... 280
2006.......................................................... 37
---------
Total minimum payments.............................. $ 861
=========
Weighted
Shares Average
Shares Subject to Exercise
Available Options Price
for Grant Outstanding Per Share
----------- ------------ ---------
Balance at March 31, 2000............... 15,437 4,173,762 $ 5.25
Change in options available for grant... 7,373,898 -- --
Granted or assumed...................... (8,116,100) 8,116,100 6.26
Exercised............................... -- (925,008) 2.30
Returned to plan........................ 3,632,963 (3,632,963) 8.29
----------- ------------
Balance at March 31, 2001............... 2,906,198 7,731,891 5.24
Change in options available for grant... (23,898) -- --
Granted................................. (4,901,073) 4,901,073 1.09
Exercised............................... -- (40,757) 0.01
Returned to plan........................ 2,692,381 (2,692,381) 6.18
----------- ------------
Balance at March 31, 2002............... 673,608 9,899,826 2.95
Change in options available for grant... 1,370,187 -- --
Granted................................. (857,800) 857,800 0.48
Exercised............................... -- (53,040) 0.37
Returned to plan........................ 3,089,997 (3,089,997) 3.05
----------- ------------
Balance at March 31, 2003............... 4,275,992 7,614,589 2.65
=========== ============
Options Outstanding Options Exercisable
---------------------------------- ------------ ------------
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise
Range of Exercise Price Contractual Price
Prices Shares Per Share Life (Years) Shares Per Share
------------------- ---------- --------- ------------ ------------ -----------
$ 0.01 to $ 3.16... 5,974,588 $ 1.38 8.0 2,394,740 $ 1.66
$ 3.16 to $ 6.32... 811,511 3.84 6.8 791,165 3.82
$ 6.32 to $ 9.49... 311,327 7.42 5.4 249,693 7.43
$ 9.49 to $12.65... 445,268 11.72 6.7 318,470 11.72
$12.65 to $15.81... 33,895 14.56 5.4 26,537 14.56
$15.81 to $28.46... 38,000 21.25 6.9 28,852 21.20
---------- ------------
7,614,589 $ 2.65 7.7 3,809,457 $ 3.57
========== ============
Weighted
Shares Average
Shares Subject to Exercise
Available Options Price
for Grant Outstanding Per Share
----------- ----------- ---------
Shares reserved at Netergy Plan's
inception........................ 5,000,000 -- $ --
Granted............................ (3,572,000) 3,572,000 0.50
Returned to plan................... 400,000 (400,000) 0.50
----------- -----------
Balance at March 31, 2001.......... 1,828,000 3,172,000 0.50
Granted............................ (136,000) 136,000 0.50
Exercised.......................... -- -- --
Returned to plan................... 264,834 (264,834) 0.50
----------- -----------
Balance at March 31, 2002.......... 1,956,834 3,043,166 $ 0.50
Granted............................ (617,000) 617,000 0.50
Exercised.......................... -- -- --
Returned to plan................... 1,945,490 (1,945,490) 0.50
----------- -----------
Balance at March 31, 2003.......... 3,285,324 1,714,676 $ 0.50
=========== ===========
Weighted
Shares Average
Shares Subject to Exercise
Available Options Price
for Grant Outstanding Per Share
----------- ----------- ---------
Shares reserved at Centile Plan's
inception........................ 4,500,000 -- --
Granted............................ (4,107,000) 4,107,000 0.43
----------- -----------
Balance at March 31, 2001.......... 393,000 4,107,000 0.43
Granted............................ (846,000) 846,000 0.43
Exercised.......................... -- --
Returned to plan................... 2,688,000 (2,688,000) 0.43
----------- -----------
Balance at March 31, 2002.......... 2,235,000 2,265,000 0.43
Granted............................ (96,000) 96,000 0.43
Exercised.......................... -- -- --
Returned to plan................... 459,128 (459,128) 0.43
----------- -----------
Balance at March 31, 2003.......... 2,598,128 1,901,872 $ 0.43
=========== ===========
Year Ended March 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Net loss:
As reported.............................. $ (11,403) $ (9,105) $ (74,399)
Pro forma*............................... $ (15,869) $ (18,588) $ (84,885)
Basic and diluted loss per share:
As reported.............................. $ (0.40) $ (0.33) $ (2.99)
Pro forma................................ $ (0.56) $ (0.68) $ (3.39)
Year Ended March 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Expected volatility........................ 162% 135% 141%
Expected dividend yield.................... 0.0% 0.0% 0.0%
Risk-free interest rate.................... 2.8% to 4.7% 3.5% to 4.9% 4.7% to 6.8%
Weighted average expected option term...... 5.1 years 5.1 years 5 years
Weighted average fair value of options
granted.................................. $ 0.45 $ 0.96 $ 5.17
Year Ended March 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Expected volatility........................ 81% 67% 70%
Expected dividend yield.................... 0.0% 0.0% 0.0%
Risk-free interest rate.................... 2.8% to 4.8% 4.1% to 4.8% 4.7% to 5.1%
Weighted average expected option term...... 5.16 years 5.25 years 5 years
Netergy weighted average fair value
of options granted....................... $ 0.34 $ 0.31 $ 0.31
Centile weighted average fair value
of options granted....................... $ 0.29 $ 0.26 $ 0.26
Year Ended March 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Expected volatility........................ 162% 135% 141%
Expected dividend yield.................... 0.0% 0.0% 0.0%
Risk-free interest rate.................... 1.53% 3.82% 4.92%
Weighted average expected rights term...... 1.25 years 1.25 years 1.25 years
Weighted average fair value of rights
granted.................................. $ 0.30 $ 1.16 $ 3.00
Year Ended March 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
Revenues:
Semiconductors and related software...... $ 9,719 $ 13,350 $ 15,850
Hosted iPBX solutions.................... 861 260 198
Packet8, videophones/equipment and other. 423 1,081 2,180
----------- ----------- -----------
Total revenues................... $ 11,003 $ 14,691 $ 18,228
=========== =========== ===========
Year Ended March 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
United States.............................. $ 4,218 $ 5,777 $ 5,632
Europe..................................... 2,657 4,126 5,862
Taiwan..................................... 1,569 2,026 2,739
Japan...................................... 919 1,119 1,188
Other...................................... 1,640 1,643 2,807
----------- ----------- -----------
$ 11,003 $ 14,691 $ 18,228
=========== =========== ===========
March 31,
--------------------
2003 2002
--------- ---------
(in thousands)
United States................................................. $ 645 $ 2,051
United Kingdom................................................ -- 602
France........................................................ 244 452
--------- ---------
$ 889 $ 3,104
========= =========