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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 333-15627
8X8, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0142404
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2445 MISSION COLLEGE BLVD.
SANTA CLARA, CA 95054
(408) 727-1885
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR
VALUE $.001 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price of the Registrant's common stock on the
Nasdaq National Market System on June 15, 2000, the aggregate market value of
the voting stock held by non-affiliates of the Registrant was $227,103,000.
Shares of the Registrant's common stock held by each officer and director and by
each person who owns 5% or more of the Registrant's outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of the Registrant's common stock outstanding as of
June 15, 2000 was 23,059,076.
DOCUMENTS INCORPORATED BY REFERENCE
Items 11, 12, and 13 of Part III incorporate information by reference from
the Proxy Statement for the Annual Meeting of Stockholders to be held on August
14, 2000.
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8X8, INC.
INDEX
PART I
PAGE
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Item 1. Business............................................ 2
Item 2. Properties.......................................... 24
Item 3. Legal Proceedings................................... 24
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 24
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 25
Item 6. Selected Financial Data............................. 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 26
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................... 32
Item 8. Financial Statements and Supplementary Data......... 32
Consolidated Balance Sheets............................... 34
Consolidated Statements of Operations..................... 35
Consolidated Statements of Stockholders' Equity........... 36
Consolidated Statements of Cash Flows..................... 37
Notes to Consolidated Financial Statements................ 38
Consolidated Quarterly Financial Data..................... 55
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure....................... 55
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................ 55
Item 11. Executive Compensation............................. 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 56
Item 13. Certain Relationships and Related Transactions..... 56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 56
Signatures.................................................. 57
Exhibit Index............................................... 58
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This Report on Form 10-K contains forward-looking statements, including but
not limited to those specifically identified as such, that involve risks and
uncertainties. The statements contained in this Report on Form 10-K that are not
purely historical are forward-looking statements, including without limitation
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
Report on Form 10-K are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including, but not limited to, those set forth below under
the headings "Manufacturing," "Competition" and "Factors That May Affect Future
Results" and elsewhere in this Report on Form 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
8x8, Inc., which is doing business today as Netergy Networks, Inc.,
develops and markets telecommunication equipment and technology exclusively for
Internet protocol (IP) telephony applications. The Company has two lines of
products: Advanced Telephony Solutions and Network Communications Technologies.
The Solutions products include network software and appliances that allow
service providers to build IP-based telephone systems. The Technologies product
line includes protocol software and communication semiconductors marketed to
original equipment manufacturers (OEMs) of telephones and terminal adapters, and
to other semiconductor companies. These technologies are used to make
cost-effective IP telephones, as well as cable and DSL modems that are IP
telephony capable.
Today, substantial changes are enveloping the telecommunications industry,
driven by both technological and regulatory changes. The circuit-switched analog
network, which is more than 100 years old, is being replaced by fully digital,
packet-switched networks that are more efficient and that can offer far greater
functionality than the old networks. This new functionality will include
everything from personal phone numbers that move with consumers to unified
messaging to computer control of phone systems. These innovations will increase
productivity and make telephone systems easier to manage for both businesses and
consumers. Deregulation is allowing competition between both local and long
distance telephone companies, making connectivity a commodity and lowering
profit margins for service providers. In this environment, service providers are
being forced to provide innovative new services to differentiate themselves from
their competition and to increase revenues.
This confluence of regulatory and technological change is creating a new
telecommunications landscape, one that will be dominated by services, not
connectivity. As during all market and technical discontinuities, the companies
that provide the tools and infrastructure used to create and deliver these
services will have the opportunity to gain market share at the expense of legacy
providers.
With its combination of network software products for service creation and
communication technologies for network appliances, the Company stands ready to
provide the service delivery products and technologies that service providers
need to prosper on this new landscape.
HISTORY
The Company began developing its multimedia communication technology in the
form of programmable multimedia semiconductors and accompanying software in
1990, and has subsequently become a leading manufacturer of semiconductors for
the embedded videoconferencing and videophone markets. Customers for the
Company's multimedia processors include OEM manufacturers such as Sony
Electronics, Inc., Samsung, Mitsubishi, Panasonic, and PictureTel Corporation.
The primary customer applications for the Company's semiconductors are
multimedia communication terminals (such as videophones, telephones or room
conferencing systems) for the integrated services digital network (ISDN), the
public switched telephone network
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(PSTN), and IP networks such as local area networks (LANs), wide area networks
(WANs), and the Internet. The Company maintains sales and marketing operations
for its multimedia communication semiconductor business, but is focusing
virtually all its research and development efforts on IP telephony products.
In an effort to expand the available market for its multimedia
communication products, and to capitalize on its vertically integrated
technology, the Company began developing low cost consumer videophones and
marketing these products to consumers under the ViaTV brand name in 1997. Over
the next two years, the Company became a leading manufacturer of consumer
videophones. However, in 1999 the Company determined that a combination of
factors including the high cost of maintaining a consumer distribution channel,
the slower than expected growth rate of the consumer videophone market, and the
low gross margins typical of a consumer electronics product made it unlikely
that the consumer videophone business would be profitable in the foreseeable
future. Therefore, the Company announced in April 1999 that it would cease
production of the ViaTV product line and withdraw from its distribution channels
over the subsequent several quarters. By March 2000 the Company had completed
its exit from the consumer videophone business and expects no further revenues
from ViaTV products.
In June 1998, using technology designed for its consumer videophone
business, the Company entered the video monitoring market, focusing on security
applications for small businesses. The Company's first product was the RSM-1500
Remote Surveillance Module, which was subsequently replaced with an improved
RSM-1600 model. The RSM-1600 module enables real-time remote video monitoring
over POTS lines. Its target market is primarily owners of small businesses such
as convenience stores and restaurants who need the ability to view their
premises from any remote location in the world at any time. Other products in
the Company's video monitoring line include the RSM-3000 Remote Surveillance
Module, which enables real-time video monitoring over ISDN lines; the RSM-700
Expander Module, which expands the number of monitoring devices that can attach
to the RSM-1600 or RSM-3000, and the RSM-PC software application, which allows a
PC to view the video feed from the RSM-1600. Until recently, the Company sold
its RSM products to security distributors and dealers in North America and
Europe. However, in 2000 the Company determined that its video monitoring
business was not well aligned with its strategic focus on the IP telephony
market, and in May 2000 announced the sale of its entire video monitoring
business to Interlogix, a leading manufacturer of security equipment. The
Company is currently transitioning its video monitoring operations to Interlogix
and expects no further revenues from this business.
The Company entered the market for embedded IP telephony products in
December 1998 with the announcement of its Audacity Internet Telephony
Processor. The Audacity processor combines IP telephony protocol support with
audio compression/decompression capability and runs multiple simultaneous IP
phone calls on a single integrated circuit. In April 1999, the Company announced
its Netergy Media Hub (formerly known as the Symphony module), an integrated
system product that is based on the Audacity semiconductor and that connects up
to four analog telephone lines to an IP network. In September 1999, the Company
announced its Audacity-T2 IP Phone Processor, which combines all the digital
processing required to implement an IP telephone onto a single integrated
circuit. The Company's embedded IP telephony products target OEM manufacturers
of IP telephony equipment, such as voice-enabled cable and DSL modems, as well
as IP phones and gateways.
In May 1999, the Company acquired Odisei S.A., a privately held developer
of IP telephony software based in Sophia Antipolis, France. The Company has
leveraged the acquisition of Odisei to develop and market IP telephony solutions
to service providers such as competitive local exchange carriers (CLECs) and
Internet service providers (ISPs). In March 2000 the Company announced its
Netergy Advanced Telephony System (ATS), an all-Internet protocol (IP) hosted
iPBX(TM) solution that allows service providers to offer dial tone and advanced
private branch exchange (PBX) services to business customers over any broadband
IP connection, including DSL, cable, T1/E1, frame relay and broadband wireless.
The ATS makes use of the Companies embedded IP telephony products, including the
Netergy Media Hub, semiconductors and embedded IP telephony software.
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In March 2000, the Company announced that it would change its name, subject
to shareholder approval, to Netergy Networks, Inc. The name change reflects the
Company's strategic transition to the IP telephony market.
In May 2000, the Company announced that it had entered into a definitive
agreement to acquire UIForce, Inc., a developer of IP-based software
applications (such as voicemail and unified messaging) based in Montreal,
Canada. UIForce also develops a service creation environment (SCE) that allows
telecommunication service providers to develop, deploy and manage telephony
applications and services to their customers. The Company intends to integrate
the UIForce products into its IP telephony solutions product line.
INDUSTRY BACKGROUND
Traditional telecommunications networks such as the PSTN, ISDN, and
corporate PBXs utilize a "circuit-switched" topology in which two communicating
telephones are connected via a fixed electrical path that travels through a
series of switches across the network. In many cases, the connection between the
terminals consists of both analog and digital components; for example a normal
residential phone call uses an analog connection from each caller's house to the
closest telephone exchange, and a digital connection between the exchanges. The
circuit-switched topology allots a fixed bandwidth to the digital component of
the connection; typically this is 64 kilobits per second (Kbps) for a voice
call.
Circuit-switched networks, such as the PSTN, have been built over decades
for the single purpose of carrying real-time voice communications. These
networks provide very high reliability, a guaranteed quality of service (QoS)
and ubiquitous availability. The common standard of reliability for a voice
network is 99.999% ("five-nines") reliability, meaning that the network can only
be down for a few minutes per year. The vast majority of calls over the PSTN
have imperceptible delay and a consistently satisfactory audio quality known as
"toll quality." In addition, the PSTN is ubiquitous, with over 500 million lines
installed throughout the world.
Circuit-switched networks, however, have some inherent disadvantages.
First, the PSTN was designed to carry low-fidelity audio and nothing else.
Although the PSTN is often used to transmit data -- for dial-up Internet
connections, for example -- and images (facsimiles), it does so at very low data
rates and resolutions, making the PSTN poorly suited for delivering
high-fidelity audio, entertainment-quality video or other rich multimedia
content. PSTN networks are expensive to build because each subscriber's
telephone must be individually connected to the central office switch, which is
several miles away from the average subscriber's location. The PSTN is also less
efficient than modern networks because it allots fixed bandwidth throughout the
duration of each call, whether or not voice is actually being transmitted.
Further, it is difficult for telecommunications service providers to provide new
or differentiated services because the network was not designed to do so.
Equipment providers for the circuit-switched telecommunications network are
traditional switch and PBX (private branch exchange) manufacturers such as
Lucent Technologies, Nortel Networks and Siemens AG. Service providers for this
market are regional Bell operating companies (RBOCs), long distance carriers and
national public telephone companies.
In contrast to the PSTN, data networks -- such as the Internet or a
corporate LAN -- utilize a "packet-switched" topology in which information
between two communicating terminals (for example, a PC downloading a page from a
web server) is transmitted in the form of small data packets that travel through
a series of switches, routers and hubs across the network. Individual packets do
not necessarily travel along the same path, nor arrive in the same order in
which they were sent. If the terminals are not exchanging data then no bandwidth
is allotted to their connection. Information is sent strictly in digital form
over the entire connection, and the most common protocol used for communicating
is the Internet protocol (IP).
Packet-switched networks have been built mainly for carrying non real-time
data. The advantages of such networks are efficiency, flexibility and
scalability. Bandwidth is only consumed when needed. Networks can be built in a
variety of configurations to suit the number of users, client/server application
requirements and
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desired availability of bandwidth. Many terminals can share the same connection
to the network. In terms of scalability, the exponential growth of the Internet
in recent years has proven the scalability of packet networks.
Historically, however, packet-switched networks offer limited or no QoS;
typical networks cannot guarantee that a transmitted packet will arrive at its
destination within a given amount of time, or at all, and cannot guarantee a
minimum bandwidth available to a particular connection. Furthermore, traditional
packet-switched networks offer only moderate reliability; for example, it is not
uncommon for a corporate LAN to be down several hours every month.
Equipment providers for the packet-switched telecommunications network are
data networking companies like Cisco Systems, Inc., 3Com Corporation and Nortel
Networks. Service providers for this market are mainly Internet service
providers (ISPs).
Until recently circuit-switched networks for real-time voice and video
communications have been completely separate from packet-switched data networks.
For example, a typical residential customer uses a different service provider
and a different network for Internet access and for telephone calls. Most
businesses have completely separate networks for voice (based on a PBX) and data
(based on routers and hubs). Recently, however, a strong trend towards the
convergence of voice, video and data over packet-switched networks has emerged
within the telecommunication industry, mainly focused on IP networks. This
convergence has been driven by several factors, including:
- The deregulation of the telecommunications industry, which has allowed
new competitive local exchange carriers (CLECs) and long distance
carriers to compete with established service providers in offering
telephony services. The resulting competition has reduced margins for
long distance services and promises to do so for local telephone service
as well;
- The growth of IP backbone networks for carrying both data and voice;
- The emergence of high-bandwidth, or broadband, access devices such as
cable and DSL modems that extend broadband IP access, and thus the
ability to carry voice, to homes and businesses.
Initial applications for IP telephony focused on reducing long distance and
international toll charges, principally for consumers but also for some large,
multi-national enterprises. The first voice over IP (VoIP) product, launched in
1995, was a software package that allowed PC users to talk for free over the
Internet. Because this service used the public Internet, the quality of calls
was sometimes poor, but the service allowed consumers to avoid paying very high
tariffs on international phone calls. As reliable IP backbone connections became
available, service providers were able to use VoIP to offer reduced long
distance rates (toll bypass) to consumers generally, usually via a 10-10-xxx
access number. In toll bypass applications, calls are routed off the PSTN and
onto the IP network at the local exchange using gateway equipment. The call is
routed back to the PSTN (again via a gateway) at the local exchange nearest the
far end of the call. The advantage of toll bypass is that it lowers the cost of
long distance calls and uses standard telephone equipment (no PC required).
As broadband connectivity to the edge of the network becomes both more
available and less expensive, it will become possible to offer VoIP services to
businesses and consumers. To date, broadband connectivity to residences is not
sufficiently widespread to make VoIP services viable as a consumer service. AT&T
and other cable television system operators are upgrading their systems to make
delivering VoIP services practical, but it will be several years before such
services are widely available to consumers. However, inexpensive broadband IP
connectivity is readily available to businesses in North America today, making
it practical to begin delivery of VoIP services to enterprises. Doing so has the
potential to both substantially lower the cost of telephone service and to
increase the breadth of features available to businesses.
A business today requires an individual phone for each office worker,
typically dozens for small and medium sized enterprises (SMEs). Until recently,
there were two ways that businesses could obtain this type of phone service:
subscribe to Centrex services from their local telephone company or buy a PBX
system. In a Centrex service, the telephone company provides a telephone line
from its central office switch for each "extension" and associates all of the
lines with a central number assigned to the business. Centrex, however,
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scales poorly for both regulatory and architectural reasons. That is, it is
expensive on a per line basis when compared to enterprise-owned PBXs, which
typically deliver additional functionality as well. In addition, Centrex
services do not offer the ability for computer telephony integration (CTI)
application development, require long lead times for moves, adds and changes,
and are difficult to manage.
Rather than subscribe to individual telephone lines for each employee
(Centrex), most companies purchase a PBX, a telephone switch that allows dozens
or hundreds of employees to share a few incoming and outgoing telephone lines,
allowing efficient usage of those lines. Traditional PBXs use circuit-switched
technology and must be installed on the enterprise premise because every phone
is connected to it by an individual cable. These systems are expensive (from
$20,000 to $200,000, depending on the number of extensions), difficult to manage
and maintain, difficult to use, and cannot be easily integrated with the
enterprise's data processing systems.
With the availability of broadband IP connectivity to businesses, however,
a third alternative is emerging: hosted iPBX services. In this model, the
service provider delivers PBX functionality over an IP connection, which reduces
the scaling problems by allowing many extensions to share a single connection.
This solution also offers many of the advantages of an enterprise-owned PBX,
including easy integration with the enterprise data processing system and the
ability to support call centers, while eliminating the capital investment and
maintenance investment required for a PBX.
In order for the IP telephony market to continue to grow, several things
need to occur. First, IP networks must improve their QoS for real-time
communications, managing effects such as packet jitter, packet loss and
unreliable bandwidth, so that toll-quality service can be provided. Second, IP
communications equipment must achieve "five-nines" reliability that users of the
PSTN have come to expect from their telephone service. Third, IP telephone
service providers must offer cost and feature benefits to their customers that
are sufficient to cause the customers to switch away from traditional telephony
service providers.
PRODUCTS
As noted in the Overview, above, the Company has two product lines:
Advanced Telephony Solutions and Network Communication Technologies. Solutions
products include network software and network appliances for the customer
premise to service providers, and Technologies products include primarily IP
telephony semiconductors and protocol software to telecommunications OEMs and
other semiconductor companies.
Advanced Telephony Solutions
The Company offers a range of network software and network appliances that
allow service providers to offer a variety of business communications
applications and services over packet switched networks. Historically,
telecommunications service providers such as local and long distance telephone
companies and ISPs have essentially offered connectivity to their customers,
whether it was voice connectivity or data connectivity. In today's deregulated
telecommunications environment with its multiple communication providers,
connectivity has become a commodity. The rise of ubiquitous, broadband IP
networks has also brought other changes, specifically the ability to deliver
applications over these networks as services, which has in turn given rise to a
new class of service providers: applications service providers (ASPs).
To escape the commodity trap, connectivity providers would like to offer
value-added services such as PBX functionality and voice messaging to business
customers. To take advantage of this trend, the Company has developed a network
application called the Netergy(TM) iPBX Server System, which, over IP networks,
allows service providers to offer PBX functionality as a service to business
customers. Because the Netergy iPBX application uses an IP network instead of a
circuit-switched one, it can be located in the service provider's data center,
which may be miles away from the customer enterprise premise and connected to it
by only a single broadband IP link.
The Netergy iPBX solution was designed to address the shortcomings of
traditional Centrex service offerings in a number of ways. First, the use of an
IP network allows the iPBX to scale easily and economically, because subscribers
can add additional extensions without adding a new cable for each
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extension. Additional IP phones are plugged into the existing LAN. Second, the
iPBX solution was designed to be easy to manage and use by incorporating
graphical user interfaces in the product's administrator and end-user software.
Third, the iPBX was designed with industry standard computer interfaces, making
it easier to integrate with an enterprise's computer and data processing systems
to implement call centers and customer relationship management systems. Finally,
the redundancies built into the system increase its reliability, particularly
when compared to enterprise owned PBXs.
Because service providers require complete, essentially turn-key solutions,
the Company produces the complete range of network software and network
appliances necessary to do so. This is called the Netergy Advanced Telephony
System (ATS). The Company has developed these products based on its own
technology, including IP telephony semiconductors, protocol and vocoder
software, iPBX network software, and user interface software. The table below
describes the Company's current offerings in the Solutions area:
PRODUCT DESCRIPTION
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Netergy iPBX Server Running on a cluster of five Netra t1 servers from Sun
Software Microsystems, this product is designed to support 100 iPBX
instances with up to 100 extensions each.
Netergy Media Hubs Media Hubs are customer premise equipment that adapt
standard analog telephones and fax machines for IP service.
The Company makes Media Hub models with four and sixteen
lines.
Netergy User Interface A series of Java and Web-based applications designed to
Software allow attendants, end users and system managers to easily
control a Netergy iPBX system.
Netergy iPBX Evaluation A self-contained iPBX system designed to allow service
System providers to evaluate the iPBX system's features and
functionality.
Netergy CTI Software A software development environment designed to allow
Developer's Kit programmers to write, test and prototype computer telephony
integration (CTI) applications.
NETERGY IPBX SERVER SOFTWARE -- Introduced in March 2000, the Netergy iPBX
Server Software runs on a cluster of Sun Microsystems Netra t1s to provide full
PBX functionality over IP networks. The iPBX software was designed specifically
to allow service providers to deliver hosted iPBX services to small- and
medium-sized business customers. The Netergy iPBX will allow service providers
to support up to 100 discrete iPBXs -- each dedicated to an individual
customer -- and up to 10,000 total extensions. The iPBX Server Software is
written completely in Java.
The Netra cluster running the iPBX Server Software is located in the
service provider's data center. It is connected to the customer's premise using
any broadband IP connection, usually DSL or T1. For telephone sets, customers
can use Netergy Media Hubs to adapt standard analog telephones to IP service or
they can use next-generation IP phones. The Netergy iPBX Server System connects
to the PSTN and the long-distance IP backbone through a gateway.
The Netergy iPBX Server Software provides complete PBX functionality: call
hold, call transfer, three-way conferencing, multi-line phone support, paging,
hunt groups, voicemail (optional, includes interactive voice response menuing
and automated call distribution), direct inbound dialing, and more. Each Netergy
iPBX Server can be custom configured for each customer. Support for Sun
Microsystems' Java Telephony Application Programming Interface (JTAPI 1.3)
allows customers to deploy CTI applications from third-party vendors.
Service providers control and configure the iPBX Server Software via a Web
interface, allowing the system administrator to manage the iPBX from any
location using any workstation with a browser. The administrator interface
provides control of phone number block assignment, dial plans, service
provisioning, DID assignments, iPBX status, bandwidth management and network
topology. The iPBX supports external billing, voicemail, interactive voice
response, automatic call distribution, auto attendants, directory service,
unified messaging modules and OSS (operation, service and support) integration.
The iPBX Server Software is in trial deployment, and the Company has not derived
significant revenue from this product to date.
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NETERGY MEDIA HUBS -- The Company makes two models of Media Hubs, the MH4
and MH16, where the number designates the number of analog lines provided. Media
Hubs adapt conventional telephony equipment, such as telephones and fax
machines, to use over IP networks. Each Media Hub supports as many simultaneous
connections as it has analog lines and multiple Media Hubs can be used in an IP
telephony system to provide as many lines as required.
In concert with the Netergy iPBX Server Software, Media Hubs offers a full
range of PBX features, including call waiting, call hold, call transfer,
three-way calling, message waiting indicator, and call forwarding. During a
phone call, the feature set can be controlled via the touch-tone keypad of a
standard telephone. Because it uses standard touch-tone telephones as both its
audio and user interface, Netergy-based systems are both reliable and
cost-effective, especially when compared to proprietary digital PBX telephones.
Media Hubs with 16 lines are designed to be placed in a central wiring
closet, while the four line version is designed to be located near the
telephones that it supports. For example, a Netergy Media Hub MH4 could be
located at the union of four office cubicles, eliminating the need for a
separate twisted-pair wiring network for telephones in an office.
Netergy Media Hubs support the MGCP IP telephony standard with Netergy
extensions for auto-discovery and configuration. All Netergy Media Hubs
incorporate FLASH memory and remote upgrade capability, so that the Netergy iPBX
Server Software can upgrade the Media Hubs automatically via the network as
required.
The MH4 is in limited deployment and the MH16 is in pre-production. The
Company has not derived significant revenue from either product to date.
NETERGY IPBX USER INTERFACE SOFTWARE -- The Company has announced three
user interface applications for the Netergy iPBX Server System: Communication
Center, Switchboard and Administrator. All of these applications are designed to
harness the graphical capabilities of personal computers and workstations to
make the iPBX system easy and intuitive to use.
The Netergy Communications Center software with Call Announcer is designed
for the end users of the iPBX system. It provides Caller ID, call transfers,
conference call setup, on-screen directories, contact management and call
logging. It also lets users set up and control their voicemail, set forwarding
numbers and filters, and set up personal speed dial numbers.
The Netergy Switchboard software is the attendant interface for the Netergy
iPBX System. A Java-based application, Switchboard runs on a personal computer
or workstation to allow attendants route incoming calls to an enterprise with a
point-and-click interface. Switchboard provides caller ID for multiple incoming
calls, extension status, two-click call transfers, corporate voice mailbox
management and multi-attendant support. Its graphical interface minimizes
training and improves attendant productivity.
With the Netergy iPBX, customers control their own moves, adds and changes
using a Java-based application called Netergy Administrator. Adding additional
lines is easy: the customer simply connects an additional Netergy Media Hub to
the IP network. The Netergy Auto Discovery mechanism automatically configures
the Media Hub. The customer then uses Administrator to assign extension numbers,
associate user names and create a voicemail account for each line. Administrator
also allows the customer to define hunt groups, set user permissions, define
phone button functions, set voicemail parameters (optional), etc., all with a
point-and-click interface.
Prototype versions of these interface software packages are in trial
deployment. The Company has derived no significant revenue from these products
to date.
NETERGY IPBX EVALUATION SYSTEM -- The Netergy iPBX Evaluation System allows
service providers to evaluate the Netergy iPBX Server Software. The Evaluation
System offers all of the PBX functionality of the Netergy iPBX, but supports
only two simultaneous instances of the Netergy iPBX Server Software. The
Evaluation System includes all of the hardware and software necessary to
simulate a hosted iPBX environment.
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Service providers can use the Evaluation System to completely deploy a
Netergy iPBX within their laboratories, supporting two iPBX instances and 16
extensions (four per MH4). With this system, service providers can simulate
delivering hosted iPBX services to two separate customers or link the two iPBX
instances together with a virtual tie line.
NETERGY CTI SOFTWARE DEVELOPER'S KIT (SDK) -- The Netergy CTI SDK is a
self-contained software development environment for creating, testing and
debugging Java-based CTI call control applications. The kit is designed to allow
developers to prototype and test CTI applications without requiring access to a
traditional PBX. The SDK contains all of the components a developer needs to
begin creating JTAPI CTI applications, including:
- A developer version of the Netergy iPBX Server Software
- Sample CTI application called ePhone
- Java-based sample code using JTAPI
- A virtual Netergy Media Hub
- Detailed installation and user documentation
Network Communication Technologies
The Company offers a range of technology products that allow
telecommunication equipment OEMs to build IP phones, add IP telephony functions
to DSL and cable modems, build IP to PSTN gateway products, and build IP
telephony systems. Products include semiconductor, embedded software and system
level products.
The Company's IP telephony semiconductor products are based on the
Company's proprietary architecture. This architecture combines, on a single
chip, a custom RISC microprocessor, DSP capability, static random access memory
and proprietary software, which together perform the core processing functions
required for IP telephony and other digital communication applications.
The Company's system level products are based upon its proprietary
semiconductor architecture and are highly integrated gateway systems which allow
for voice and data communications over broadband networks such as cable, DSL,
and LANs.
The table below summarizes the Company's current Network Communication
Technologies product offerings:
PRODUCT DESCRIPTION APPLICATIONS
------- ----------- ------------
Audacity(TM) Internet Telephony Communication semiconductor for IP - Low density analog/IP gateways
Processor phone gateways.
Audacity-T2 IP Phone Processor Communication semiconductor for IP - Cable modem audio communication
phones. systems
- DSL audio communication systems
Veracity VoIP Software Stacks Communication protocol and vocoder - Cable modem audio communication
software for Audacity processors systems
and other industry standard DSPs. - DSL audio communication systems
- Signaling gateways
Netergy Media Hub 4-line VoIP gateway for broadband - IP Centrex systems
networks. - iPBX systems
AUDACITY INTERNET TELEPHONY PROCESSOR -- The Audacity ITP is designed to
support IP based phone terminals and gateways operating over broadband networks.
The Audacity ITP translates audio signals from analog telephones into the
compressed data format needed for real time audio transmission over networks
that use packet protocols, including corporate LANs, WANs and the Internet. Two
versions of the Audacity ITP are available: the 8x84006ARCA provides full-duplex
acoustic echo cancellation, DTMF detection and generation, and SGCP or H.323
communication stacks for up to two channels of G.728, four channels of
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G.723 and up to eight channels of G.711 or G.722. The 8x84106ARCA provides
identical audio performance but adds a graphics display channel for driving TV
or LCD screens for a user interface, or for network data or graphics.
Implemented in the Company's proprietary "dual programmable" architecture, the
Audacity ITP has the flexibility of a general-purpose RISC processor while
supplying the processing power of a single-instruction, multiple-datapath DSP.
The RISC processor runs the user interface and the SGCP or H.323 communication
stacks under the control of a POSIX operating system, which performs memory
management and process scheduling functions. The DSP executes the audio codec,
DTMF detection/generation and echo cancellation routines.
The Audacity ITP is available in quantity, but due to the limited
deployment of IP telephony networks, the Company has not derived significant
revenue from this product to date.
AUDACITY-T2 IP PHONE PROCESSOR -- The Audacity-T2 chip is a single-chip IP
phone processor. It is designed to integrate all of the digital functions
required to build an IP phone onto a single chip, which includes formatting
digital audio data for transmission over packet networks, including Ethernets,
the Internet, DSL links, digital cable systems and so on. The Audacity-T2 chip
uses the Company's proprietary MIPSx5 RISC processor with DSP extensions. As
such, it can run both the communication protocol stacks and vocoder processes
simultaneously, reducing cost and complexity. It supports three protocols: SIP,
MGCP and H.323v2 and the G.711, G.722, G.723, G.726, G.728 and G.729 vocoders.
The chip also executes DTMF detection/generation and echo cancellation routines.
The Audacity-T2 IP Phone Processor is available in sample quantities to
customers. The Company has derived no significant revenue from this product to
date.
VERACITY VOIP EMBEDDED SOFTWARE -- The Veracity software product provides
complex DSP and protocol functions required in VoIP terminal devices. The
Veracity Software, or stack(s), includes three standardized VoIP protocols, six
ITU-standard audio vocoders, a suite of audio services, TCP/IP networking,
network provisioning and management elements and an embedded, real-time
operating system. The Company supplies the Veracity stacks with its Audacity
semiconductors to provide customers with both the chips and the software
required for VoIP terminal applications. The Company also licenses the Veracity
stacks for use on other platforms.
Prototypes of the Veracity VoIP Embedded Software are available for testing
IP telephony terminals and for trial deployments of IP telephony systems. The
Company has derived no significant revenue from this product.
NETERGY MEDIA HUB MH4 -- The Netergy Media Hub MH4, is a four-line, VoIP
gateway designed to be used in a variety of applications including telephony
over cable and DSL networks as well as the emerging iPBX segment. About the size
of a video cassette tape, the Media Hub uses the Audacity ITP to deliver four
independent voice telephone lines over broadband IP networks. Multiple Media
Hubs may be used together for applications requiring more than four telephone
lines.
The Media Hub connects to cable, DSL modems or LANs via a standard Ethernet
connection and it connects up to four telephones with standard RJ-11 connectors.
The Media Hub supports numerous industry standard audio codecs including the
G.711, G.722, G.723 and G.728 audio codecs. Any codec can be used on any line,
and the codecs can be changed dynamically during a call. The Media Hub also
provides full-duplex acoustic echo cancellation (AEC) on each line. With its
multi-codec capability, the module can respond to varying network congestion by
switching among audio codecs both at the initiation of a call and also during a
call. This ability to select lower bandwidth codecs allows system operators to
make the most efficient use of their networks while maintaining call quality.
The Media Hub supports the following call control protocols: H.323, MGCP and the
Cable Labs PacketCable Network Client Specification.
The MH4 is in limited deployment, primarily for system trials. The Company
has not derived significant revenue from this product to date.
SEMICONDUCTOR REFERENCE DESIGNS -- The Company sells reference designs,
based on the Company's semiconductors, that serve as prototype system products.
These reference designs allow a customer to leverage
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the Company's system design expertise and accelerate its time to market with new
products. Each reference design is provided with schematics, complete
documentation, embedded software and board-level software diagnostics.
VIDEOCONFERENCING SEMICONDUCTORS -- Although it is no longer actively
developing and marketing video conferencing semiconductors, the Company
continues to supply and support its videoconferencing semiconductor customers.
These chips are based on the Company's proprietary architecture, which combines,
on a single chip, a custom RISC microprocessor, a high performance DSP core,
static random access memory and proprietary software, which together perform the
core processing functions required by video communication and other digital
video applications. The VCP, LVP and VCPex semiconductors also include
specialized video processing circuitry.
The table below describes the Company's videoconferencing semiconductors
and their applications:
PRODUCT DESCRIPTION APPLICATIONS
- ------- ----------- ------------
Video Communications H.320 compression semiconductor for - PC ISDN video communication add-
Processor (VCP) ISDN video communication systems; in boards
or H.323 semiconductor for LAN - ISDN group video communication
videoconferencing systems or - systems
Internet phone calls. - LAN video communication systems
- Internet phone calls
Low bit-rate H.324 compression semiconductor for - Consumer video telephones for
Videophone Processor POTS video communication systems; POTS
(LVP) Compression semiconductor for video - PC videophone add-in boards for
capture and encoding systems. POTS
- Cameras with embedded compression
- Video capture PC add-in boards
Enhanced Video Successor product to the VCP and - See VCP and LVP applications
Communications LVP. above
Processor (VCPex)
Video to PCI Interface chip which connects the - PC (POTS, ISDN or LAN-based)
Interface Chip (VPIC) VCP/LVP devices to the PCI Bus. video communication boards
TECHNOLOGY
The Company has developed a broad range of telephony technologies,
including telephony call management software, system design, call control
protocol software, vocoders, and semiconductors. The following sections describe
this technology more fully.
Telephony Call Management Software
The foundation of the Company's telephony solution product line is the
Netergy iPBX Server Software package. This PBX software was designed
specifically to allow telephone companies to offer PBX functionality as a
service over broadband IP networks. The PBX software uses an IP network for both
its switching fabric and media connections, providing the call routing, setup
and teardown necessary to establish a connection between two terminals on an IP
network. It also provides a variety of more complex PBX features such as call
transfers, hunt groups, ring groups and n-way conferencing.
The iPBX Server Software runs on a cluster of carrier-grade server
platforms that are located in the service provider's data center. A cluster
typically consists of both active and backup servers. Each active server runs
several copies or "instances" of the iPBX software simultaneously, each of which
is dedicated to a particular customer. The server cluster in the data center is
linked to customer sites with a dedicated broadband IP link such as a T1 or DSL
line. On the customer premise, Netergy Media Hubs or IP telephones are connected
to the IP link via an IP router and Ethernet hubs or switches. Media Hubs
connect standard
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analog telephones and fax machines to the IP network. To provide a high degree
of scalability and reliability, Netergy Networks uses a modular and distributed
architecture for the iPBX system. In this architecture, a single instance of the
iPBX server software provides complete PBX functionality, but it is designed to
support approximately 100 extensions. Limiting the number of extensions
supported limits both the processing capacity and memory requirements of the
server platform, allowing less powerful, less expensive servers to be used.
Multiple iPBX instances can be run on each server, and the system can be scaled
by adding more servers.
This modular approach has another advantage. By limiting the capacity and
therefore the size and processing requirements of the iPBX software, an instance
of the iPBX can be dedicated to a specific customer. Doing so allows each
instance to be customized for each customer by linking it to customer-specific
computer programs for call center automation or by selecting unique functions
for feature phone buttons.
Much of the flexibility of the iPBX is due to the use of abstraction layers
between the core iPBX engine and the devices with which it interfaces and which
it controls. To allow it to interface to a variety of different telephone sets,
PSTN gateways and softswitches, the iPBX uses hardware drivers that support
various industry standard and proprietary call setup and teardown protocols.
Currently, the iPBX supports session initiation protocol (SIP), media gateway
control protocol (MGCP), H.323v2 and a variety of proprietary protocols.
To allow easy integration with computer programs (computer telephony
integration, or CTI), the iPBX was based on the ECTF C.001 specification for PBX
functionality and supports Sun Microsystems' Java Telephony Application Program
Interface (JTAPI 1.3). The ECTF C.001 specification defines a consistent call
control behavior for PBXs, making it easier to develop computer programs that
can control a PBX, and the JTAPI provides an industry standard series of
function calls to allow computer programs to control PBXs from more than one
manufacturer. Computer programs interfaced to the PBX might provide a graphical
user interface to make call transfers or conference calls easy, or they might
connect a company's customer relationship management software directly to the
phone system, displaying customer information on a computer screen when that
customer calls for support.
The Netergy iPBX was written entirely in the Java programming language.
Java provides a number of important advantages over older computer languages
such as C and C++. For example, all Java programs run in a Java Virtual Machine,
which translates Java code to a specific operating environment, such as Windows
or Sun Solaris. The Virtual Machine also provides memory management, eliminating
pointer arithmetic and supplying automatic garbage collection, frequent sources
of problems in other development environments. Java removes coding ambiguities
(direct access to memory, machine dependent integer format, unsigned numbers,
etc.), as well, another common problem with C and C++.
Running each instance of the iPBX in its own Java Virtual Machine (VM)
offers a number of advantages. First, every instance of the iPBX is completely
insulated from every other instance, so a failure in one should never cause a
failure in any other. In other operating environments, system resources such as
communications routines, database managers and so on are frequently shared
between all of the programs that run on that machine. If one program misuses a
display driver, for example, all of the other programs running on that machine
may be affected. Because each Java VM provides all of these resources to the
program it hosts, this kind of inter-process interference does not occur.
A second advantage is security. Because each iPBX instance is separate from
all others, its configuration data is separate also. Thus, it is much less
likely that another user will inadvertently (or purposely) misconfigure another
customer's iPBX.
System Design
The Company has developed expertise in integrating its semiconductors and
software with peripheral components to produce complete IP telephony and
multimedia communication systems. The Company's system technology consists of
modular subsystems that can be combined and rearranged to interface to various
networks (such as POTS, ISDN, Ethernet LAN and home networks) and to interface
to various telephony devices, such as the analog phones in a home. The Company's
system design expertise includes design and
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testing for national and international regulatory requirements such as consumer
safety, public telephone network requirements and electromagnetic emissions.
The Company's system designs are sometimes deployed as the customer premise
equipment and terminals used by the advanced telephony system.
Embedded Software
The Company has developed a broad range of application software that runs
on the Company's semiconductor products. The Company's application software
allows the use of its semiconductors in systems that conform with various
emerging and established international telephony standards for vocoders and call
signaling protocols. By refining its software, the Company can enhance quality,
address new standards and add significant features and functionality to systems
that contain the semiconductor product. In addition, certain of the Company's
customers have licensed source code to which they add proprietary features and
custom interfaces, and in some cases, port to other semiconductor architectures.
Call signaling protocol stacks are complex software programs required to
make voice calls over IP networks, including the Internet. Vocoders format and
compress digital audio signals and serve as the interface between the old phone
networks and new VoIP networks. Developing and establishing interoperability for
VoIP software requires major engineering resources and significant development
time, which is why many OEMs choose to license it instead. The Company's
protocol stacks support the three most commonly deployed VoIP protocols, along
with seven vocoders.
Written entirely in ANSI C, the Companies VoIP software is highly modular
and portable, making it straightforward to use with industry-standard operating
systems. It can be compiled and run unchanged under the Company's own POSIX
micro-kernel, Linux and Solaris. Using a thin translation layer it can be
adapted to run on other embedded operating systems such as VxWorks and pSOS.
The Company's protocol stacks were designed specifically for embedded
applications such as consumer electronics products and terminals, rather than
for personal computers. The stacks are extremely efficient and compact,
requiring a fraction of the memory of PC-derived implementations. The Company
has also designed a compact real-time POSIX micro-kernel along with TCP/IP, RTP
and other network services that provides process scheduling and communication
support services for its protocol stacks and vocoders. This micro-kernel is
appropriate for very low-cost VoIP devices where a large, costly real-time
operating system is not practical.
Semiconductor Architecture
The Company's IP and multimedia communication semiconductors are based on
programmable processor architectures that enable implementation of multimedia
communication applications in a highly efficient manner. In such an application,
a multimedia communication terminal must compress and transmit one or multiple
sources of audio, video, graphics and/or other data while simultaneously
receiving and decompressing similar data from a remote source. The Company's
semiconductor architectures employ 32-bit RISC microprocessor cores which
execute the embedded applications software. Some of the Company's semiconductors
also employ a 64-bit Single Instruction Multiple Data (SIMD) DSP to accelerate
the processing of signal processing intensive operations.
The Company's VCP and LVP semiconductors currently in production are
manufactured using a 5-volt, 0.5 micron, 3-layer metal complementary metal oxide
semiconductor (CMOS) process technology. The VCPex and Audacity Internet
Telephony Processor (ITP) semiconductors currently in production are
manufactured using a 3.3-volt, 0.35 micron, 4-layer metal CMOS process
technology. The Audacity-T2 IP Phone Processor semiconductor currently available
as engineering samples is manufactured using a 1.8 volt, 0.18 micron, 6-layer
metal CMOS process technology.
The Company's RISC processor cores use a proprietary instruction set
specifically designed for multimedia communication applications. The RISC cores
control the overall chip operation and manage the input/output interface through
a variety of specialized ports which connect the chip directly to external host,
audio and network subsystems. The cores are programmable in the C programming
language and allow
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customers to add their own features and functionality to the device software
provided by the Company. The RISC cores access 32-bit instructions and data
through a bus that interfaces to internal and external static random access
memory (SRAM). The RISC core in the Audacity-T2 semiconductor also contains an
extended instruction set to execute specialized DSP instructions.
The Company's DSP core architecture is a SIMD processor that implements
computationally intensive video, audio and graphics processing routines as well
as certain digital communications protocols. The DSP core in the VCP and LVP
semiconductors operates at frequencies up to 72 MHz, while the VCPex and
Audacity ITP DSP cores operate at 80 MHz. A new version of the Audacity ITP DSP
core is in design which is intended to operate at up to 125 MHz. The DSP cores
are programmable with a proprietary instruction set consisting of
variable-length 32-bit and 64-bit microcode instructions that provide the
flexibility to improve algorithm performance, enhance video and/or audio quality
and maintain compliance with changing digital video, audio, graphics and
communication protocol standards. The DSP cores access their instructions
through an internal bus that interfaces to on-chip SRAM and ROM that is
preprogrammed with video and audio processing subroutines.
The RISC and DSP cores combined provide an efficient and flexible
architecture that can be reconfigured through a change of application software.
This flexibility allows the architecture to implement the fundamental processing
steps that form the basis of MGCP, SIP and H.323 standards-based audio telephony
systems and H.320, H.323 and H.324 (together, H.32x) standards-based video
communication systems in embedded software that runs on the integrated circuit
device.
CUSTOMERS AND MARKETING
Advanced Telephony Solutions
CUSTOMERS -- During fiscal 2000, the Company announced the Netergy iPBX
Server Software and a limited external deployment of hosted iPBX services based
on it by Dialink, a competitive local exchange carrier (CLEC) based in the San
Francisco Bay Area. In addition to the Dialink customer trial, the Company is in
laboratory trial testing with several other service providers and has obtained
INIP certification, which provides for system interoperability with leading
telecommunications vendor products. The Company is currently establishing
contact with a range of service providers in preparation for general
availability of the iPBX software product in the second half of fiscal 2001.
SALES AND MARKETING -- The Company markets the iPBX software and integrated
third-party software products through a direct sales force. In addition, the
Company has established a relationship with Exodus Communications, a hosted
service provider partner, and intends to establish relationships with system
integrators that can serve as resellers. The sales force operates from the
Company's headquarters in Santa Clara, California, to support sales in North
America. The Company uses a combination of employees and outside contractors to
provide the business modeling tools, sales presentations, product literature and
technical publications (white papers) necessary to support the direct sales of
the iPBX products. The Company also utilizes several marketing programs to
support the sale and distribution of its products, including participation in
industry trade shows and conferences. The Company also publishes technical
articles, distributes sales and product literature and has an active public
relations plan to encourage coverage of the Company's products and technology by
the media.
COMPETITION -- The Company competes with suppliers of traditional PBXs,
Centrex equipment and newer generation IP-based solutions that seek to sell such
products to telecommunication service providers, which in turn offer voice
services to the Small Medium Enterprise (SME) marketplace. This market is
rapidly shifting to a network centric, IP-based solutions model. New IP-based
solutions are cannibalizing traditional markets due to increased efficiencies of
IP technology, lower costs, increases in return on investment (ROI), improved
features sets and the requirement for rapid innovation. As an IP-based solution,
the Solutions iPBX product competes by leveraging the innate efficiencies of IP
architectures and combining those efficiencies with best-of-class features from
competitive products. This market is characterized by rapid technological
change, intense competition and first mover advantage.
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The main competition includes Lucent, Nortel Networks, VocalData, VocalTec
Communications, Inter-tel and several other providers of traditional and newer
generation IP-based solutions. Although each of these companies is in
competition with the Company's iPBX product suite, all today provide solutions
based on past-generation integrated solutions, whereas the ATS product suite and
hosted iPBX establishes a new methodology for addressing an existing growth
market. Directly competitive products targeted for general release in calendar
year 2001 are currently under development at several pre-IPO startup companies,
including BroadSoft, Sylantro Systems, IPCell Technologies and Shoreline
Communications.
Principle competitive factors in the market for hosted iPBX solutions
include product feature parity, interface design, product reliability,
time-to-market, adherence to standards, price, functionality and IP network
delivery/design. The Company believes that the market for iPBX solutions is
currently in the initial adoption phase and that growth of the market will be
driven by the ability of iPBX products to meet the advanced feature requirements
of service providers, by the lower costs of IP-based solutions, and by a general
trend toward the replacement of circuit-switched networks with packet switched
ones.
We expect our competitors to continue to improve the performance of their
current products and introduce new products or new technologies. If our
competitors successfully introduce new products or enhance their existing
products, this could reduce the sales or market acceptance of our products and
services, increase price competition or make our products obsolete. To be
competitive, we must continue to invest significant resources in research and
development, sales and marketing and customer support. We may not have
sufficient resources to make these investments or to make the technological
advances necessary to be competitive, which in turn will cause our business to
suffer.
Network Communication Technologies
CUSTOMERS -- The Company markets its OEM semiconductor, system and software
products through its own direct sales force as well as through distributors. The
Company sells its Audacity ITP and Audacity-T2 semiconductors to OEMs of VoIP
products such as Philips and CIDCO. In March 2000, the Company announced that is
would actively pursue customers to license portions of its semiconductor
technology and to license its VoIP firmware for operation on third party
processors. The Company has already licensed portions of its semiconductor
technology and VoIP firmware to STMicroelectronics and to Alcatel
Microelectronics. The Company is also selling its Media Hub system technology
through partners such as AG Communications to establish initial market presence.
The Company sells its LVP semiconductors and related software and reference
board designs to OEMs of POTS video communication systems for the consumer
market such as Kyushu Matsushita Electric Co., Ltd., (KME), Samsung, Leadtek
Research, Inc., and Truedox Technology Corporation. The Company is selling its
VCP and VCPex semiconductors and related software and reference designs
primarily to OEMs of ISDN office videoconferencing systems including PictureTel
Corporation, Sony Electronics, Inc., Ezenia!, VCON Telecommunications Ltd. and
VTEL Corporation.
SALES AND MARKETING -- The Company employs a direct sales force to market
its Technologies products that supports domestic and international sales and
operates from the Company's headquarters in Santa Clara, California and a
European office in London, England. The Company's sales and marketing personnel
typically provide support to its OEM and distributor customers through sales
literature, periodic training, customer symposia, pre-sales support and joint
sales calls. The Company utilizes several marketing programs to support the sale
and distribution of its products, including participation in industry trade
shows and conferences. The Company also publishes technical articles,
distributes sales and product literature and has an active public relations plan
to encourage coverage of the Company's products and technology by the media.
COMPETITION -- With regard to its Technologies product line, the Company
competes with both manufacturers of digital signal processing semiconductors and
media hub products developed for the growing VoIP marketplace. The Company also
competes with manufacturers of multimedia communication semiconductors, and
systems. The markets for the Company's products are characterized by intense
competition, declining average selling prices and rapid technological change.
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The principal competitive factors in the market for IP telephony and
videoconferencing semiconductors and firmware include product definition,
product design, system integration, chip size, code size, functionality,
time-to-market, adherence to industry standards, price and reliability. The
Company has a number of competitors in this market including Analog Devices,
Audio Codes, Broadcom Corporation, Conexent, DSP Group, Lucent Technologies,
Motorola, Inc., Philips Electronics, Texas Instruments/Telogy Networks, Inc.,
Mitel Semiconductors, Winbond Electronics, and Radvision Ltd. Certain of the
Company's competitors for IP telephony and videoconferencing semiconductors
maintain their own semiconductor foundries and may therefore benefit from
certain capacity, cost and technical advantages.
Principle competitive factors in the market for VoIP media hub products
include product definition, product design, system integration, system
functionality, time-to-market, interoperability with common network equipment,
adherence to industry standards, price and reliability. Currently there are a
limited number of system suppliers offering residential and small office VoIP
media hub-like products, including Komodo Technology, Soliton Systems, Nx
Networks and MCK Communications. The Company expects, however, that this market
will be characterized by intense competition, declining average selling price
and rapid technology change. In addition, the presence of the Company in the
VoIP systems business may result in certain customers or potential customers
perceiving the Company as a competitor or potential competitor, which may be
used by other semiconductor manufacturers to their advantage.
The Company's reliance on developing vertically integrated technology,
comprising systems, circuit boards, software and semiconductors, places a
significant strain on the Company and its research and development resources.
Competitors that focus on one aspect of technology, such as systems or
semiconductors, may have a considerable advantage over the Company. In addition,
many of the Company's current and potential competitors have longer operating
histories, are substantially larger, and have greater financial, manufacturing,
marketing, technical and other resources. Many also have greater name
recognition and a larger installed base of products than the Company.
Competition in the Company's markets may result in significant price reductions.
As a result of their greater resources, many current and potential competitors
may be better able than the Company to initiate and withstand significant price
competition or downturns in the economy. There can be no assurance that the
Company will be able to continue to compete effectively, and any failure to do
so would have a material adverse effect on the Company's business and operating
results.
MANUFACTURING
The Company outsources the manufacturing of its semiconductors and its IP
telephony system products to independent foundries and subcontract
manufacturers, respectively. The Company's primary semiconductor manufacturer is
Taiwan Semiconductor Manufacturing Corporation. Subcontract manufacturers
include EFA Corporation in Taiwan. The Company also relies on Amkor Electronics
in South Korea, Integrated Packaging Assembly Corporation in San Jose,
California, and Digital Testing Services in Santa Clara, California, for
packaging and testing of its semiconductors. The Company does not have long term
purchase agreements with its subcontract manufacturers or its component
suppliers. There can be no assurance that the Company's subcontract
manufacturers will be able or willing to reliably manufacture the Company's
products, or that the Company's component suppliers will be able or willing to
reliably supply components for the Company's products, in volumes, on a cost
effective basis or in a timely manner. The Company may experience difficulties
due to its reliance on independent semiconductor foundries, subcontract
manufacturers and component suppliers that could have a material adverse effect
on the Company's business and operating results.
RESEARCH AND DEVELOPMENT
Research and development expenses in the fiscal years ended March 31, 2000,
1999 and 1998 were $11.9 million, $9.9 million and $12.3 million, respectively.
The Company's development of new products and the enhancement of existing
products is essential to its success. Accordingly, the Company anticipates that
research and development expenses will continue to increase in the foreseeable
future. However, such expenses may fluctuate from quarter to quarter depending
on a wide range of factors, including the status of and prospects for various
development projects.
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The Company's current and future research and development efforts relate
primarily to digital and multimedia communication systems and the components
which comprise those systems. Areas of emphasis will include enhanced versions
of its advanced telephony system and digital communication semiconductor
architectures intended to provide higher performance, enhanced functionality and
further integration of certain essential system functions. This integration is
designed to permit improved system price/performance. To expand its line of
telephony products, the Company is developing new form factors, network
topologies and embedded systems that are designed to comply with new and
emerging IP telephony standards. Future software developments may focus on
emerging audio and video telephony standards and protocols, quality and
performance enhancements to multimedia compression algorithms and additional
features supporting both the Company's Advanced Telephony Solutions and Network
Communication Technologies products.
If the Company is unable to develop and introduce new or enhanced products
in a timely manner, or if such new or enhanced products do not achieve
sufficient market acceptance, it would have a material adverse effect on the
Company's business and operating results.
LICENSING AND DEVELOPMENT ARRANGEMENTS
The Company has entered into licensing and development arrangements with
its customers to promote the design, development, manufacture and sale of the
Company's products. In order to encourage the use of its semiconductors, the
Company has licensed portions of its systems technology and software object code
for its semiconductors to virtually all of its semiconductor customers.
Moreover, many of the Company's OEM customers have licensed portions of the
source code to its software for its semiconductors. The Company intends to
continue to license its semiconductor, software and systems technology to other
companies, many of which are current or potential competitors of the Company.
Such arrangements may enable these companies to use the Company's technology to
produce products that compete with the Company's IP telephony and video
products.
The Company has also licensed the right to manufacture certain of its
multimedia communication semiconductors, subject to payment of royalties, to
several videoconferencing systems manufacturers. In addition, the Company has
licensed portions of its multimedia communication semiconductor technology to
ESS Technology. In addition, the Company has licensed portions of its embedded
software and DSP core technology to STMicroelectronics. Of these licensees, ESS
Technology and STMicroelectronics may sell semiconductors based on the licensed
technology to third parties, while the other licensees are limited to sale of
such semiconductors as part of multimedia communication systems or sub-systems.
The obligation of ESS Technology to pay royalties to the Company with regard to
the sale of semiconductors based on the licensed technology will expire in
October 2000.
In the fiscal years ended March 31, 2000, 1999 and 1998, technology
licensing revenues (all of which were nonrecurring) were $4.6 million, $5.5
million and $14.5 million, respectively. There can be no assurance that the
Company will receive such licensing revenues in the future.
The Company has in the past licensed and in the future expects to
continuing licensing its technology to others, many of whom are located or may
be located abroad. There are no assurances that such licensees will protect the
Company's technology from misappropriation.
In addition to licensing its technology to others, the Company from time to
time will take a license to others' technology. The Company relies upon certain
technology, including hardware and software, licensed from third parties. The
loss of, or inability to maintain, existing licenses could have a material
adverse effect on the Company's business and operating results.
EMPLOYEES
As of March 31, 2000, the Company employed a total of 147 people, including
19 in manufacturing operations, 72 in research and development, 38 in sales and
marketing and 18 in general and administrative capacities. The Company also
employs a number of temporary employees and consultants on a contract basis.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
WE HAVE A HISTORY OF LOSSES AND WE ARE UNCERTAIN AS TO OUR FUTURE PROFITABILITY
We recorded an operating loss of $27.1 million in the year ended March 31,
2000 and had an accumulated deficit of $53.7 million at March 31, 2000. In
addition, we recorded operating losses for the fiscal year ended March 31, 1999
and in three of the four quarters in fiscal 1998. We would not have been
profitable in fiscal 1998 had we not received nonrecurring license and other
revenues. We expect to continue to incur operating losses for the foreseeable
future, and such losses may be substantial. We will need to generate significant
revenue growth to achieve profitability. Given our history of fluctuating
revenues and operating losses, we cannot be certain that we will be able to
achieve profitability on either a quarterly or annual basis.
THE GROWTH OF OUR BUSINESS AND FUTURE PROFITABILITY DEPENDS ON FUTURE IP
TELEPHONY REVENUE
We believe that our business and future profitability will be largely
dependent on widespread market acceptance of our IP telephony products. Our
videoconferencing semiconductor business has not provided, nor is it expected to
provide, sufficient revenues to profitably operate our business. To date, we
have not generated significant revenue from the sale of our IP telephony
products. If we are not able to generate significant revenues selling into the
IP telephony market, it would have a material adverse effect on our business and
operating results.
THE GROWTH OF OUR BUSINESS DEPENDS ON THE GROWTH OF THE IP TELEPHONY MARKET
Success of our IP telephony product strategy assumes that there will be
future demand for IP telephony systems. In order for the IP telephony market to
continue to grow, several things need to occur. Telephone service providers must
continue to invest in the deployment of high speed broadband networks to
residential and commercial customers. IP networks must improve quality of
service for real-time communications, managing effects such as packet jitter,
packet loss and unreliable bandwidth, so that toll-quality service can be
provided. IP telephony equipment must achieve the 99.999% reliability that users
of the public switched telephone network have come to expect from their
telephone service. IP telephony service providers must offer cost and feature
benefits to their customers that are sufficient to cause the customers to switch
away from traditional telephony service providers. If any or all of these
factors fail to occur our business may not grow.
OUR FUTURE OPERATING RESULTS MAY NOT FOLLOW PAST OR EXPECTED TRENDS DUE TO MANY
FACTORS AND ANY OF THESE COULD CAUSE OUR STOCK PRICE TO FALL
Our historical operating results have fluctuated significantly and will
likely continue to fluctuate in the future, and a decline in our operating
results could cause our stock price to fall. On an annual and a quarterly basis
there are a number of factors that may affect our operating results, many of
which are outside our control. These include, but are not limited to:
- changes in market demand;
- the timing of customer orders;
- competitive market conditions;
- lengthy sales cycles, regulatory approval cycles;
- new product introductions by us or our competitors;
- market acceptance of new or existing products;
- the cost and availability of components;
- the mix of our customer base and sales channels;
- the mix of products sold;
- the management of inventory;
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- the level of international sales;
- continued compliance with industry standards; and
- general economic conditions.
Our gross margin is affected by a number of factors including, product mix,
the recognition of license and other revenues for which there may be no or
little corresponding cost of revenues, product pricing, the allocation between
international and domestic sales, the percentage of direct sales and sales to
resellers, and manufacturing and component costs. The markets for our products
are characterized by falling average selling prices. We expect that, as a result
of competitive pressures and other factors, gross profit as a percentage of
revenue for our semiconductor products will likely decrease for the foreseeable
future. The market for IP telephony semiconductors is likely to be a high volume
market characterized by commodity pricing. We will not be able to generate
average selling prices or gross margins for our IP telephony semiconductors
similar to those that we have historically commanded for our videoconferencing
semiconductors. In addition, the gross margins for our Media Hub systems
products are, and will likely continue to be, substantially lower than the gross
margins for our videoconferencing semiconductors. In the likely event that we
encounter significant price competition in the markets for our products, we
could be at a significant disadvantage compared to our competitors, many of
which have substantially greater resources, and therefore may be better able to
withstand an extended period of downward pricing pressure.
Variations in timing of sales may cause significant fluctuations in future
operating results. In addition, because a significant portion of our business
may be derived from orders placed by a limited number of large customers,
including OEM customers, the timing of such orders can also cause significant
fluctuations in our operating results. Anticipated orders from customers may
fail to materialize. Delivery schedules may be deferred or canceled for a number
of reasons, including changes in specific customer requirements or international
economic conditions. The adverse impact of a shortfall in our revenues may be
magnified by our inability to adjust spending to compensate for such shortfall.
Announcements by us or our competitors of new products and technologies could
cause customers to defer purchases of our existing products, which would also
have a material adverse effect on our business and operating results.
As a result of these and other factors, it is likely that in some or all
future periods our operating results will be below the expectations of
securities analysts or investors, which would likely result in a significant
reduction in the market price of our common stock.
WE MAY NOT BE ABLE TO MANAGE OUR INVENTORY LEVELS EFFECTIVELY WHICH MAY LEAD TO
INVENTORY OBSOLESCENCE WHICH WOULD FORCE US TO LOWER OUR PRICES
Our products have lead times of up to several months, and are built to
forecasts that are necessarily imprecise. Because of our practice of building
our products to necessarily imprecise forecasts, it is likely that, from time to
time, we will have either excess or insufficient product inventory. Excess
inventory levels would subject us to the risk of inventory obsolescence and the
risk that our selling prices may drop below our inventory costs, while
insufficient levels of inventory may negatively affect relations with customers.
Any of these factors could have a material adverse effect on our operating
results and business.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO SUPPORT OUR GROWTH, AND FAILURE TO DO
SO IN A TIMELY MANNER MAY CAUSE US TO DELAY OUR PLANS FOR GROWTH
As of March 31, 2000, we had approximately $48.6 million in cash and cash
equivalents. We believe that we will be able to fund planned expenditures and
satisfy our cash requirements for at least the next twelve months from existing
cash balances. However, we may seek to explore business opportunities, including
acquiring or investing in complementary businesses or products, that will
require additional capital from equity or debt sources. Additionally, the
development and marketing of new products could require a significant commitment
of resources, which could in turn require us to obtain additional financing
earlier than otherwise expected. We may not be able to obtain additional
financing as needed on acceptable terms, or at all, which would force us to
delay our plans for growth and implementation of our strategy which could
seriously harm
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our business, financial condition and results of operations. If we issue
additional equity or convertible debt securities to raise funds, the ownership
percentage of our existing stockholders would be reduced. New investors may
demand rights, preferences or privileges senior to those of existing holders of
our common stock.
WE DEPEND ON PURCHASE ORDERS FROM KEY CUSTOMERS AND FAILURE TO RECEIVE
SIGNIFICANT PURCHASE ORDERS IN THE FUTURE WOULD CAUSE A DECLINE IN OUR OPERATING
RESULTS
Historically, a significant portion of our sales have been to relatively
few customers, although the composition of these customers has varied. Revenues
from our ten largest customers for the fiscal years ended March 31, 2000, 1999
and 1998 accounted for approximately 35%, 40% and 61%, respectively, of total
revenues. 3Com Corp. accounted for 20% of total revenues during the year ended
March 31, 1998. Substantially all of our product sales have been made, and are
expected to continue to be made, on a purchase order basis. None of our
customers has entered into a long-term agreement requiring it to purchase our
products. In the future, we will need to gain purchase orders for our products
to earn additional revenue. Further, all of our license and other revenues are
nonrecurring.
THE IP TELEPHONY MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND WE DEPEND
ON NEW PRODUCT INTRODUCTION IN ORDER TO MAINTAIN AND GROW OUR BUSINESS
IP telephony is an emerging market that is characterized by rapid changes
in customer requirements, frequent introductions of new and enhanced products,
and continuing and rapid technological advancement. To compete successfully in
this emerging market, we must continue to design, develop, manufacture and sell
new and enhanced products that provide increasingly higher levels of performance
and reliability and lower cost, take advantage of technological advancements and
changes, and respond to new customer requirements. Our success in designing,
developing, manufacturing and selling such products will depend on a variety of
factors, including:
- the identification of market demand for new products;
- product selection;
- timely implementation of product design and development;
- product performance;
- cost-effectiveness of products under development;
- effective manufacturing processes; and
- the success of promotional efforts.
We have in the past experienced delays in the development of new products
and the enhancement of existing products, and such delays will likely occur in
the future. If we are unable, due to resource constraints or technological or
other reasons, to develop and introduce new or enhanced products in a timely
manner, if such new or enhanced products do not achieve sufficient market
acceptance or if such new product introductions decrease demand for existing
products our operating results would decline and our business would not grow.
IF WE DO NOT DEVELOP AND MAINTAIN SUCCESSFUL PARTNERSHIPS FOR IP TELEPHONY
PRODUCTS, WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET OUR SOLUTIONS
We are entering into new market areas and our success is partly dependent
on our ability to forge new marketing and engineering partnerships. IP telephony
communications systems are extremely complex and no single company possesses all
the required technology components needed to build a complete end to end
solution. Partnerships will be required to augment our development programs and
to assist us in marketing complete solutions to our targeted customers. We may
not be able to develop such partnerships in the course of our product
development. Even if we do establish the necessary partnerships, we may not be
able to adequately capitalize on these partnerships to aid in the success of our
business.
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INABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY OR INFRINGEMENT BY US OF A THIRD
PARTY'S PROPRIETARY TECHNOLOGY WOULD DISRUPT OUR BUSINESS
We rely in part on trademark, copyright and trade secret law to protect our
intellectual property in the United States and abroad. We seek to protect our
software, documentation and other written materials under trade secret and
copyright law, which afford only limited protection. We also rely in part on
patent law to protect our intellectual property in the United States and abroad.
We currently hold nineteen United States patents, including patents relating to
programmable integrated circuit architectures, telephone control arrangements,
software structures and memory architecture technology, and have a number of
United States and foreign patent applications pending. We cannot predict whether
such patent applications will result in an issued patent. We may not be able to
protect our proprietary rights in the United States or abroad (where effective
intellectual property protection may be unavailable or limited) and competitors
may independently develop technologies that are similar or superior to our
technology, duplicate our technology or design around any patent of ours. We
have in the past licensed and in the future expect to continue licensing our
technology to others, many of whom are located or may be located abroad. There
are no assurances that such licensees will protect our technology from
misappropriation. Moreover, litigation may be necessary in the future to enforce
our intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
management time and resources and could have a material adverse effect on our
business and operating results.
There has been substantial litigation in the semiconductor, electronics and
related industries regarding intellectual property rights, and from time to time
third parties may claim infringement by us of their intellectual property
rights. Our broad range of technology, including systems, digital and analog
circuits, software and semiconductors, increases the likelihood that third
parties may claim infringement by us of their intellectual property rights. If
we were found to be infringing on the intellectual property rights of any third
party, we could be subject to liabilities for such infringement, which could be
material, and we could be required to refrain from using, manufacturing or
selling certain products or using certain processes, either of which could have
a material adverse effect on our business and operating results. From time to
time, we have received, and may continue to receive in the future, notices of
claims of infringement, misappropriation or misuse of other parties' proprietary
rights. There can be no assurance that we will prevail in these discussions and
actions, or that other actions alleging infringement by the Company of
third-party patents will not be asserted or prosecuted against the Company.
We rely on certain technology, including hardware and software licensed
from third parties. The loss of, or inability to maintain, existing licenses
could have a material adverse effect on our business and operating results.
THE FAILURE OF IP NETWORKS TO MEET THE RELIABILITY AND QUALITY STANDARDS
REQUIRED FOR VOICE COMMUNICATIONS WOULD RENDER OUR PRODUCTS OBSOLETE
Circuit-switched networks such as the public switched telephone network
feature a very high reliability, with a guaranteed quality of service. The
common standard for reliability of carrier-grade real-time voice communications
is 99.999%, meaning that the network can be down for only a few minutes per
year. In addition, such networks have imperceptible delay and consistently
satisfactory audio quality. Emerging broadband IP networks such as LANs, WANs
and the Internet, or emerging last mile technologies such as cable, DSL and
wireless local loop will not be used for telephony unless such networks and
technologies can provide reliability and quality consistent with these
standards.
OUR PRODUCTS MUST COMPLY WITH INDUSTRY STANDARDS AND FCC REGULATIONS, AND
CHANGES MAY REQUIRE US TO MODIFY EXISTING PRODUCTS
In addition to reliability and quality standards, the market acceptance of
telephony over broadband IP networks is dependent upon the adoption of industry
standards so that products from multiple manufacturers are able to communicate
with each other. IP telephony products rely heavily on standards such as H.323,
SIP,
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SGCP, MGCP, and H.GCP to interoperate with other vendors' equipment. There is
currently a lack of agreement among industry leaders about which standard should
be used for a particular application, and about the definition of the standards
themselves. Furthermore, the industry has had difficulty achieving true
multivendor interoperability for highly complex standards such as H.323. We also
must comply with certain rules and regulations of the Federal Communications
Commission regarding electromagnetic radiation and safety standards established
by Underwriters Laboratories as well as similar regulations and standards
applicable in other countries. Standards are continuously being modified and
replaced. As standards evolve, we may be required to modify our existing
products or develop and support new versions of our products. The failure of our
products to comply, or delays in compliance, with various existing and evolving
industry standards could delay or interrupt volume production of our IP
telephony products, which would have a material adverse effect on our business
and operating results.
FUTURE REGULATION OR LEGISLATION COULD RESTRICT OUR BUSINESS OR INCREASE OUR
COST OF DOING BUSINESS
At present there are few laws or regulations that specifically address
access to or commerce on the Internet, including IP telephony. We are unable to
predict the impact, if any, that future legislation, legal decisions or
regulations concerning the Internet may have on our business, financial
condition and results of operations. Regulation may be targeted towards, among
other things, assessing access or settlement charges, imposing tariffs or
imposing regulations based on encryption concerns or the characteristics and
quality of products and services, which could restrict our business or increase
our cost of doing business. The increasing growth of the broadband IP telephony
market and popularity of broadband IP telephony products and services heighten
the risk that governments will seek to regulate broadband IP telephony and the
Internet. In addition, large, established telecommunications companies may
devote substantial lobbying efforts to influence the regulation of the broadband
IP telephony market, which may be contrary to our interests.
WE MAY TRANSITION TO SMALLER GEOMETRY PROCESS TECHNOLOGIES AND HIGHER LEVELS OF
DESIGN INTEGRATION WHICH COULD DISRUPT OUR BUSINESS
We continuously evaluate the benefits, on an integrated circuit,
product-by-product basis, of migrating to smaller geometry process technologies
in order to reduce costs. We have commenced migration of certain future products
to smaller geometry processes. We believe that the transition of our products to
increasingly smaller geometries will be important for us to remain competitive.
We have in the past experienced difficulty in migrating to new manufacturing
processes, which has resulted and could continue to result in reduced yields,
delays in product deliveries and increased expense levels. Moreover, we are
dependent on relationships with our foundries and their partners to migrate to
smaller geometry processes successfully. If any such transition is substantially
delayed or inefficiently implemented we may experience delays in product
introductions and incur increased expenses. As smaller geometry processes become
more prevalent, we expect to integrate greater levels of functionality as well
as customer and third-party intellectual property into our products. Some of
this intellectual property includes analog components for which we have little
or no experience or in-house expertise. We cannot predict whether higher levels
of design integration or the use of third-party intellectual property will
adversely affect our ability to deliver new integrated products on a timely
basis, or at all.
OUR ANNOUNCED ACQUISITION OF UFORCE, INC. AND ANY FUTURE ACQUISITIONS MAY BE
DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION
We announced our intention to acquire UForce on May 19, 2000. Completion of
the transaction is subject to certain closing conditions. To the extent that we
are successful in closing the transaction, there are risks associated with the
assimilation and integration of UForce, including:
- unanticipated problems and costs associated with combining the businesses
and integrating UForce's products and technologies;
- impact of integration efforts on management's attention to our core
business;
- adverse effects on existing business relationships with suppliers and
customers;
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- risks associated with entering markets in which we have limited or no
prior experience; and
- potential loss of key employees, particularly those of the acquired
organizations.
If we are unable to successfully integrate UForce or to create new or
enhanced products, we may not achieve the anticipated benefits from the pending
acquisition. If we fail to achieve the anticipated benefits from the
acquisition, we may incur increased expenses, experience a shortfall in our
anticipated revenues and we may not obtain a satisfactory return on our
investment. In addition, if any significant number of UForce employees fail to
remain employed with us, we may experience difficulties in achieving the
expected benefits of the acquisition.
Beginning in the three months ended September 30, 2000, we will begin to
incur charges associated with this acquisition including amortization of
intangible assets and goodwill, in-process research and development and
potentially from non-cash compensation charges associated with certain stock
options assumed as part of the transaction. We expect these charges to be
significant.
IF WE DISCOVER PRODUCT DEFECTS, WE MAY HAVE PRODUCT-RELATED LIABILITIES WHICH
MAY CAUSE US TO LOSE REVENUES OR DELAY MARKET ACCEPTANCE OF OUR PRODUCTS
Products as complex as those offered by us frequently contain errors,
defects and functional limitations when first introduced or as new versions are
released. We have in the past experienced such errors, defects or functional
limitations. We sell products into markets that are extremely demanding of
robust, reliable, fully functional products. Therefore delivery of products with
production defects or reliability, quality or compatibility problems could
significantly delay or hinder market acceptance of such products, which could
damage our credibility with our customers and adversely affect our ability to
retain our existing customers and to attract new customers. Moreover, such
errors, defects or functional limitations could cause problems, interruptions,
delays or a cessation of sales to our customers. Alleviating such problems may
require significant expenditures of capital and resources by us. Despite testing
by us, our suppliers or our customers may find errors, defects or functional
limitations in new products after commencement of commercial production,
resulting in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from our other
development efforts, product repair or replacement costs, claims by our
customers or others against us, or the loss of credibility with our current and
prospective customers.
WE HAVE SIGNIFICANT INTERNATIONAL OPERATIONS, WHICH SUBJECTS US TO RISKS THAT
COULD CAUSE OUR OPERATING RESULTS TO DECLINE
Sales to customers outside of the United States represented 47%, 43% and
47% of total revenues in the fiscal years ended March 31, 2000, 1999 and 1998,
respectively. Specifically, sales to customers in the Asia Pacific region
represented 24%, 26% and 25% of our total revenues for the fiscal years ended
March 31, 2000, 1999 and 1998, respectively, while sales to customers in Europe
represented 23%, 17% and 22% of our total revenues for the same periods,
respectively.
International sales of our semiconductors will continue to represent a
substantial portion of our product revenues for the foreseeable future. In
addition, substantially all of our current products are, and substantially all
of our future products will be, manufactured, assembled and tested by
independent third parties in foreign countries. International sales and
manufacturing are subject to a number of risks, including general economic
conditions in regions such as Asia, changes in foreign government regulations
and telecommunications standards, export license requirements, tariffs and
taxes, other trade barriers, fluctuations in currency exchange rates, difficulty
in collecting accounts receivable and difficulty in staffing and managing
foreign operations. We are also subject to geopolitical risks, such as
political, social and economic instability, potential hostilities and changes in
diplomatic and trade relationships, in connection with its international
operations. A significant decline in demand from foreign markets could have a
material adverse effect on our business and operating results.
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WE NEED TO HIRE AND RETAIN KEY PERSONNEL TO SUPPORT OUR PRODUCTS
The development and marketing of our IP telephony products will continue to
place a significant strain on our limited personnel, management and other
resources. Competition for highly skilled engineering, sales, marketing and
support personnel is intense because there are a limited number of people
available with the necessary technical skills and understanding of our market,
particularly in the San Francisco Bay area where we are located. Any failure to
attract, assimilate or retain qualified personnel to fulfill our current or
future needs could impair our growth. We currently do not have employment
contracts with any of our employees and we do not maintain key person life
insurance policies on any of our employees.
OUR STOCK PRICE HAS BEEN VOLATILE AND WE CANNOT ASSURE YOU THAT OUR STOCK PRICE
WILL NOT DECLINE
The market price of the shares of our common stock has been and is likely
to be highly volatile. It may be significantly affected by factors such as:
- actual or anticipated fluctuations in our operating results;
- announcements of technical innovations;
- loss of key personnel;
- new products or new contracts by us, our competitors or their customers;
- governmental regulatory action; and
- developments with respect to patents or proprietary rights, general
market conditions, changes in financial estimates by securities analysts
and other factors which could be unrelated to, or outside our control.
The stock market has from time to time experienced significant price and
volume fluctuations that have particularly affected the market prices for the
common stocks of technology companies and that have often been unrelated to the
operating performance of particular companies. These broad market fluctuations
may adversely affect the market price of our common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against the issuing
company. If our stock price is volatile, we may also be subject to such
litigation. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which would disrupt business and could
cause a decline in our operating results. Any settlement or adverse
determination in such litigation would also subject us to significant liability.
ITEM 2. PROPERTIES
The Company's principal operations are located in a 45,623 square foot
facility in Santa Clara, California. Design, limited manufacturing, research,
marketing and administrative activities are performed in this facility. This
lease expires in May 2003. The Company also leases on a short-term basis office
facilities for its sales management office outside of London, England and its
research and development facility in Sophia Antipolis, France. The Company's
believes that its existing facilities and planned future expansions are adequate
to meet its current and foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company effected its initial public offering on July 2, 1997 under the
name 8x8, Inc.. From that date through April 3, 2000 the Company's common stock
was traded on the Nasdaq National Market under the symbol "EGHT." Starting April
4, 2000 the Company's common stock has been traded on the Nasdaq National Market
under the symbol "NTRG." No dividends have ever been paid or declared on 8x8's
common stock. The Company does not anticipate paying any cash dividends on its
capital stock in the foreseeable future. As of June 19, 2000, there were 257
holders of record of the Company's common stock. Many of the Company's shares of
common stock are held by brokers and other institutions on behalf of
stockholders, therefore, the Company is unable to determine the total number of
stockholders represented by these record holders. Responses from brokers and
other institutions regarding shares held on behalf of other stockholders
indicate that there were at least 19,232 such other stockholders as of June 19,
2000.
PRICE RANGE OF COMMON STOCK
PERIOD HIGH LOW
------ ---- ---
Fiscal 1999
First Quarter............................................. $ 7 1/8 $5
Second Quarter............................................ $ 5 1/16 $1 7/8
Third Quarter............................................. $ 9 3/8 $2 1/4
Fourth Quarter............................................ $ 7 $3 11/16
Fiscal 2000
First Quarter............................................. $ 6 1/4 $3 15/16
Second Quarter............................................ $ 5 1/2 $2 3/4
Third Quarter............................................. $ 5 5/6 $3 15/16
Fourth Quarter............................................ $34 5/8 $5 5/8
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED MARCH 31,
------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total revenues........................ $ 25,384 $ 31,682 $49,776 $ 19,146 $28,774
Net income (loss)..................... (24,848) (19,224) 3,727 (13,613) (3,217)
Net income (loss) per share:
Basic............................... $ (1.38) $ (1.28) $ 0.31 $ (2.56) $ (0.70)
Diluted............................. $ (1.38) $ (1.28) $ 0.25 $ (2.56) $ (0.70)
Total assets.......................... $ 59,983 $ 28,709 $46,429 $ 12,727 $23,067
Total long-term debt.................. $ 5,498 $ -- $ -- $ -- $ --
The Company's fiscal year 2000 was a 53 week fiscal year, while fiscal
1999, 1998, 1997 and 1996 were 52 week fiscal years. The net loss for fiscal
2000 included a $6.4 million charge for a discount on common stock issued to
STMicroelectronics NV (see Note 4 of the Notes to Consolidated Financial
Statements or "Notes") and in-process research and development costs of $10.1
million related to the acquisition of Odisei on May 24, 1999 (see Note 2 of the
Notes). In fiscal 1999, the Company recorded a $5.7 million charge associated
with the write off of ViaTV videophone inventories associated with the Company's
decision to cease production of the ViaTV product line and withdraw from its
distribution channels (see Note 12 of the Notes).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We began developing multimedia communication technology in the form of
programmable multimedia semiconductors and accompanying software in 1990, and
have subsequently become a leading manufacturer of semiconductors for the
embedded videoconferencing and videophone markets. We maintain sales and
marketing operations to support our multimedia semiconductor business, but we
have focused virtually all of our ongoing research and development efforts on IP
telephony products and technologies.
In an effort to expand the available market for our multimedia
communication products, and to capitalize on our vertically integrated
technology, we began developing low cost consumer videophones and marketing
these products to consumers under the ViaTV brand name in 1997. Over the next
two years, we became a leading manufacturer of consumer videophones. However, in
1999 we determined that a combination of factors including the high cost of
maintaining a consumer distribution channel, the slower than expected growth
rate of the consumer videophone market, and the low gross margins typical of a
consumer electronics product made it unlikely that the consumer videophone
business would be profitable in the foreseeable future. Therefore, we announced
in April 1999 that we would cease production of the ViaTV product line and
withdraw from our ViaTV distribution channels over the subsequent several
quarters, resulting in a charge of $5.7 million related to the write off of
ViaTV inventories. By March 2000 we had completed the exit from the consumer
videophone business and we expect no further revenues from ViaTV products.
In June 1998, using technology designed for our consumer videophone
business, we entered the video monitoring market, focusing on security
applications for small businesses. Our first product was the RSM-1500 Remote
Surveillance Module, which was subsequently replaced with an improved RSM-1600
model. The RSM-1600 module enables real-time remote video monitoring over POTS
lines. Its target market is primarily owners of small businesses such as
convenience stores and restaurants who need the ability to view their premises
from any remote location in the world at any time. Other products in our video
monitoring line include the RSM-3000 Remote Surveillance Module, which enables
real-time video monitoring over ISDN lines; the RSM-700 Expander Module, which
expands the number of monitoring devices that can attach to the RSM-1600 or
RSM-3000, and the RSM-PC software application, which allows a PC to view the
video feed from the RSM-1600. Until recently, we sold our RSM products to
security distributors and dealers in North America and Europe. However, in an
effort to align our strategic focus on the IP telephony market, we announced the
sale of our entire video monitoring business to Interlogix, a leading
manufacturer of security
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equipment, in May 2000. We are currently transitioning our video monitoring
operations to Interlogix and expect no further revenues from this business. See
further discussion under "Recent Events" below.
We entered the market for embedded IP telephony products in December 1998
with the announcement of our Audacity Internet Telephony Processor. The Audacity
processor combines IP telephony protocol support with audio
compression/decompression capability and runs multiple simultaneous IP phone
calls on a single integrated circuit. In April 1999, we announced our Netergy
Media Hub (formerly known as the Symphony module), an integrated system product
that is based on the Audacity semiconductor and that connects up to four analog
telephone lines to an IP network. In September 1999, we announced our
Audacity-T2 IP Phone Processor, which combines all the digital processing
required to implement an IP telephone onto a single integrated circuit. Our
embedded IP telephony products target OEM manufacturers of IP telephony
equipment, such as voice-enabled cable and DSL modems, as well as IP phones and
gateways.
In May 1999, we acquired Odisei S.A., a privately held developer of IP
telephony software based in Sophia Antipolis, France. We have leveraged the
acquisition of Odisei to develop and market IP telephony solutions to service
providers such as competitive local exchange carriers (CLECs) and Internet
service providers (ISPs). In March 2000 the Company announced its Netergy
Advanced Telephony System (ATS), an all-IP hosted iPBX solution that allows
service providers to offer dial tone and advanced private branch exchange (PBX)
services to business customers over any broadband IP connection, including DSL,
cable, T1/E1, frame relay and broadband wireless. The ATS makes use of our
embedded IP telephony products, including the Netergy Media Hub, semiconductors
and embedded IP telephony software.
In March 2000, 8x8 announced that it would change its name, subject to
shareholder approval, to Netergy Networks, Inc. The name change reflects 8x8's
strategic transition to the IP telephony market.
RECENT EVENTS
On May 19, 2000, the Company entered into a definitive agreement to acquire
UForce, Inc. ("UForce"), a developer of IP-based software applications (such as
voicemail and unified messaging) based in Montreal, Canada, by issuing
approximately 3.6 million shares of our common stock in exchange for all of the
outstanding shares of UForce. In addition, we will issue common stock options
for approximately 1.0 million shares in exchange for all outstanding UForce
stock options. The transaction will be accounted for using the purchase method.
The acquisition is subject to certain closing conditions, and we anticipate
completing the acquisition during our second fiscal quarter ending September 30,
2000.
Also, on May 19, 2000, the Company entered into an agreement with
Interlogix, Inc. ("Interlogix") whereby the Company agreed to sell certain
assets and license certain technology related to the Company's video monitoring
business. The Company is obligated to provide Interlogix with future updates and
upgrades to the licensed technology. The assets sold included certain accounts
receivable, inventories, machinery, equipment, and intangibles. Interlogix
agreed to pay the Company $5.5 million, subject to certain adjustments, for the
assets and the associated technology license, which has an initial term of three
years. Upon the earlier of six months from the date of the agreement or upon
delivery of certain remaining obligations, the Company will commence recognition
of the resulting net gain over the remaining term of the technology license.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data
for each of the years ended March 31, 2000, 1999 and 1998, as well as the
percentage of our total revenues represented by each item. Cost of product
revenues is presented as a percentage of product revenues and cost of license
and other revenues is presented as a percentage of license and other revenues.
You should read this information in conjunction with
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our annual audited consolidated financial statements and related notes included
elsewhere in this annual report:
YEAR ENDED MARCH 31,
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