SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
Commission file number 000-21783
8X8, INC.
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2445 Mission College Blvd.
Santa Clara, CA 95054
(408) 727-1885
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.001 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 121(b)2 of the Securities Exchange Act of 1934). YES [ ] NO [ X ]
Based on the closing sale price of the Registrant's common stock on the NASDAQ SmallCap Market System on September 30, 2002, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $9,083,000.
The number of shares of the Registrant's common stock outstanding as of May 22,
2003 was 28,475,370.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 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 12, 2003.
8X8, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED MARCH 31, 2003
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Part I. |
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Item 1. |
Business | |
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Item 2. |
Properties | |
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Item 3. |
Legal Proceedings | |
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Item 4. |
Submission of Matters to a Vote of Security Holders | |
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Part II. |
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Item 5. |
Market for Registrant's Common Stock and Related Security Holder Matters | |
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Item 6. |
Selected Financial Data | |
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Item 7. |
Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 7a. |
Quantitative and Qualitative Disclosures About Market Risk | |
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Item 8. |
Financial Statements and Supplementary Data | |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | |
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Part III. |
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Item 10. |
Directors and Executive Officers of the Registrant | |
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Item 11. |
Executive Compensation | |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management | |
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Item 13. |
Certain Relationships and Related Transactions | |
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Item 14. |
Controls and Procedures | |
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Part IV. |
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Item 15. |
Exhibits, Financial Statement Schedules and Reports on Form 8-K | |
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Signatures |
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PART I Forward-Looking Statements and Risk Factors Statements contained in this Report on Form 10-K
regarding our expectations, beliefs, estimates, intentions or strategies are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act and include statements regarding our
research and development plans for our various product groups; our expectation
concerning the adequacy of our facilities; our estimates of litigation exposure
and our beliefs about the sufficiency of our manufacturing arrangements. All
forward-looking statements included in this Report are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. You should not place undue reliance on these
forward-looking statements. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including a shifting of internal research and development focus based
on changes in the market or adequacy of funding; a failure of customers to adopt
voice and video over internet protocol technology or advances in competing
systems and services; our business may grow in an unanticipated manner causing
us to require different types of facilities; ordinary course litigation may
cause a greater than anticipated impact due to factual matters or issues beyond
our control; and our ability to source our products may be interrupted if our
manufacturers cease operations or no longer desire to do business with us.
Please also see the section entitled "Factors That May Affect Future Results"
for additional risks that may impact our business. Overview 8x8, Inc., or 8x8, and its subsidiaries (collectively, the Company)
develop and market telecommunication technology for internet protocol, or IP,
telephony and video applications. The Company was founded as Integrated
Information Technology, Inc. in 1987 and completed its initial public offering
on July 2, 1997 under the name 8x8, Inc. In August 2000, the Company changed its
name to Netergy Networks, Inc., but subsequently changed it back to 8x8, Inc. in
July 2001. The Company's principal offices are located at 2445 Mission College
Boulevard, Santa Clara, California 95054, and its telephone number at that
location is (408) 727-1885. The Company has three product lines: voice and video
communications services that are marketed under the Packet8 brand name
(collectively Packet8), voice and video semiconductors and related software, and
software that implements the functionality of a private branch exchange, or PBX,
over data networks. The Company has two primary subsidiaries, Netergy
Microelectronics, Inc., or Netergy, and Centile, Inc., or Centile, that comprise
two of its three product lines. Within the parent company, 8x8 offers the Packet8 service
that enables broadband internet users to add digital telephone service to their
high-speed internet connection. In addition, 8x8 offers videophones for use on
both traditional telephone networks and in conjunction with the Packet8
service. Netergy, formed in December 2000, provides voice and video
semiconductors and related communication software to original equipment
manufacturers, or OEMs, of telephones, terminal adapters, and other endpoint
communication devices and to other semiconductor companies. Netergy's
technologies are used to make IP telephones and media hubs and to voice-enable
cable and digital subscriber line, or DSL, modems, wireless devices, and other
broadband technologies. Centile, formed in March 2001, develops and markets hosted
iPBX solutions that allow service providers to offer, to small and medium-sized
businesses over broadband networks, the features and functions found in a
typical business phone system. A hosted iPBX solution is a software application
that implements the functionality of a business phone system over the same data
connection that a business uses for connection to the internet. The phone system
software runs on servers that are located at a central data center so that the
only phone system equipment that is required at the customer site are
telephones. Available Information The Company's website address is http://www.8x8.com. The
contents of this website are not incorporated in or otherwise to be regarded as
part of this annual report on Form 10-K. The Company files reports with the
Securities and Exchange Commission (SEC), which are available on 8x8's website
free of charge. These reports include annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to such
reports, each of which is provided on 8x8's website as soon as reasonably
practicable after the Company electronically files such materials with or
furnishes them to the SEC. You can also read and copy any materials we file with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. You can obtain additional information about the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including the Company. INDUSTRY BACKGROUND Traditional telecommunication networks use a fixed
electrical path that travels through a series of switches across the network.
These networks were designed solely to carry low-fidelity audio signals with a
high level of reliability. Although these networks are indeed reliable for their
initially intended use, these networks are not well suited to service the
explosive growth of digital communications applications. Traditional networks transmit data at very low rates and
resolutions, making them poorly suited for delivering high-fidelity audio,
entertainment-quality video or other rich multimedia content. Traditional
networks are also expensive to build because each subscriber's telephone must be
individually connected to the central office switch, which is usually several
miles away from a typical subscriber's location. The digital component of the
traditional telecommunications infrastructure 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
telecommunication service providers to provide new or differentiated services or
functions, like video communications, that the network was not designed to
accommodate. In contrast to the traditional telecommunications
infrastructure or public switched telephone network, or PSTN, data networks --
such as the internet or a corporate LAN -- utilize a "packet-switched" system 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. Packet-switched networks have been built mainly for carrying non real-time
data. The advantages of such networks are their 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 desired availability of bandwidth. Furthermore,
many terminals can share the same connection to the network. The exponential
growth of the internet in recent years has proven the scalability of these
underlying packet networks. The most common protocol used for communicating on
these packet networks is internet protocol, or IP. As broadband connectivity has become more available and less
expensive, it is now possible for service providers to offer voice and video
services that run over these IP networks to businesses and consumers. Providing
such services has the potential to both substantially lower the cost of
telephone and equipment costs to these customers and to increase the breadth of
features available to the end-user. Services like full-motion, two-way video are
now supported by the bandwidth spectrum commonly available to broadband
customers, whether business or residential. To enable such new products, service
and equipment suppliers need semiconductor products and software to connect
packet-based communication devices to the networks and the software that runs on
the network that enables these communication devices to be easily installed,
operated, and managed, as well as to replace commonly used functionality of the
legacy switched network, such as billing and customer assistance. PACKET8 AND CONSUMER SYSTEMS Technology 8x8 has deployed an end-to-end voice and video communication service
called Packet8. Packet8 is an internet-based communication solution that works
on virtually any ethernet network in the world, and allows calls to or from any
phone in the world, whether that phone is an IP phone or a regular PSTN phone on
the PSTN network. 8x8 utilizes IP communication endpoints which, when used in
conjunction with the Packet8 network software, enable plug and play installation
and a regular dialtone user interface. The Packet8 service also uses web-based
technologies to enable account setup, account management, billing and customer
support. The Company has developed all of the underlying technologies of the
Packet8 service, except for the trunking PSTN gateways (that are used to
terminate IP calls on the PSTN network). Packet8 works with industry-standard
PSTN gateways to terminate these calls. CONSUMER SYSTEMS -- 8x8 is currently reselling private-branded
telephone IP terminal adapters, which allow a regular analog telephone
to be connected to an IP network, and analog and IP videophones, all of which
are manufactured by several of Netergy's OEM semiconductor customers. These
devices incorporate certain unique software modifications to the protocol and
application code that enable them to take advantage of 8x8's Packet8 IP services
platform. The original designs of these devices are based on some of Netergy's
semiconductor reference designs. Products PACKET8 IP TELEPHONE SERVICE -- 8x8's Packet8 telephone
service was introduced in November 2002. Customers enter into a service
agreement with 8x8, and select a service plan based on their anticipated use of
the service. Service plans provide various minutes of usage, up to unlimited,
for calls in North America and Canada that are made to non-Packet8 customers.
Subscribers are charged at a per-minute rate for international calls, and,
depending on the level of plan selected, may be charged for calls to the PSTN if
they exceed the minutes allowed under their plan. Depending on the service plan
selected, 8x8 will either sell or provide at no cost to the user an 8x8 Desktop
Terminal Adapter model DTA310 or Desktop Videophone model DV325 to use with the
Packet8 service. Each subscriber is assigned a telephone number in any of the
more than 1,500 United States ratecenters currently offered by the service. All
Packet8 customers receive access to a variety of telephone features, including
voice mail, caller ID, call forwarding, online account management and billing
(including real-time access to current bills), virtual phone lines,
international call blocking and caller ID blocking. DTA310 DESKTOP TERMINAL ADAPTER -- 8x8's DTA310 product is a
telephone handset-to-Ethernet adapter that interfaces regular analog phones with
IP-based telephony networks. The DTA-310 is installed at the subscriber's
premises and supports a single voice port with its own direct dial phone number.
This adapter runs a variety of communication and network protocols, including
Session Initiation Protocol, or SIP. DV325 DESKTOP SIP IP VIDEOPHONE -- 8x8's DV325 product is an
IP videophone that contains all of the voice features of a regular Packet8
account. In addition, when a Packet8 subscriber with a DV325 calls another
Packet8 subscriber with a DV325, the videophones connect with instant-on high-speed
video sent over the Internet. The videophones can be configured by the
user to use a maximum total data bandwidth between 84 kilobits per second and
640 kilobits per second. The video quality of the call varies with the data
bandwidth selected and other network conditions. The DV325 videophone is
designed to be compatible with other SIP protocol devices. 8x8 began trials of
the product in April 2003. DV324 DESKTOP VIDEOPHONE -- 8x8's DV324 product is a
videophone with an integrated display and camera that is compatible with the
H.324 standard, and therefore works over standard analog phone lines. The
videophone can also be used to make a normal audio PSTN call. Controls on the
videophone and the on-screen menu system enable the user to adjust the quality
of the video that is sent and received, electronically pan/tilt/zoom the near-end and
far-end cameras, take a high-resolution snapshot image, and turn on
privacy mode to block outgoing video. The phone supports two sets of audio/video
inputs (for connecting external cameras, camcorders or digital cameras) and one
audio/video output port (for connecting an external TV or other display device)
and supports caller-ID, auto-answer (so the phone can be used as a monitoring
device), and 10 configurable speed-dial numbers. Customers 8x8 sells and markets the Packet8 service to end users
through its web site and third party resellers of the service. In addition, 8x8
is marketing the Packet8 service offering to service providers and cable
television and digital subscriber line, or DSL, providers. Packet8 is offered to
these third parties through reseller agreements, hosted and prepaid service
agreements or OEM technology license agreements. The DV324 Desktop Videophone is
sold direct to end-users from 8x8's website, as well as through distributors and
value-added resellers. Sales and Marketing 8x8 markets the Packet8 IP services via its own direct
sales force and through third-party resellers. 8x8 markets its consumer systems
through its direct sales force and third-party resellers. Sales of the products
to end-users are also conducted from 8x8's website. Competition Competitors for the Packet8 service include Vonage,
Net2Phone and iConnectHere and Voice Pulse, as well as incumbent telephone
carriers, and other providers of traditional and legacy telephone service. 8x8's
consumer systems products compete with other providers of videophones and
videoconferencing systems, including Vialta, Inc., Innomedia, MotionMedia, and
various software offerings that implement videophone functionality on a personal
computer. Principal competitive factors in the market for 8x8's products include
product feature parity, interface design, product reliability, performance,
time-to-market, adherence to standards, price, functionality, customer service
and IP network delivery/design. SEMICONDUCTORS AND EMBEDDED SOFTWARE Netergy develops and markets a range of technology
products, including semiconductors, embedded software, system software, and
reference designs, that allow telecommunication equipment OEMs to: i) build
voice and video IP phones, ii) build IP-to-analog phone adapter products, and
iii) add IP telephony functions to DSL, cable, and wireless modems.
Additionally, Netergy provides semiconductors and embedded software for use in
videoconferencing applications. Technology SEMICONDUCTOR ARCHITECTURE -- Netergy's semiconductors
are based on programmable processor architectures that enable implementation of
IP telephony and videoconferencing applications in a highly efficient manner.
Netergy's semiconductor architectures employ 32-bit reduced instruction set
computing, or RISC, microprocessor cores, which execute the embedded
applications software. Some of Netergy's semiconductors also employ a 64-bit
Single Instruction Multiple Data, or SIMD, digital signal processor, or DSP, to
accelerate the execution of signal processing intensive operations. Furthermore,
Netergy's Audacity-T2 and T2U semiconductors benefit from the unique feature of
not requiring any external SRAM or DRAM to operate. EMBEDDED SOFTWARE -- Netergy has developed a broad range of
embedded application software that runs on its semiconductor products. Netergy's
application software allows the use of its semiconductors in systems that
conform to various emerging and established international telephony standards
for audio and video encoders and decoders (also known as codecs) and call
signaling protocols. By refining its software, Netergy can enhance quality,
address new standards, and add significant features and functionality to systems
that contain the semiconductor products. In addition, certain customers have
licensed source code to which they add proprietary features and custom
interfaces and, in some cases, port to other semiconductor or processor
architectures. Call signaling protocol stacks are complex software programs
required to make voice calls over IP networks, including the internet. Codecs
format and compress digital audio and video signals so they can be represented
and efficiently transmitted in a digital form. Developing functional VoIP and
video software and obtaining interoperability with other VoIP and video systems
requires significant development time, which is why many OEMs choose to license
it. Netergy's protocol stacks support the four most commonly deployed VoIP
protocols, along with seven codecs. Netergy is also developing new video compression algorithm
technology based on the H.264 (formerly called H.26L) standard. The H.264
standard is a new set of algorithms being jointly specified by standards bodies
in the International Teleconferencing Union, or ITU, and the Moving Pictures
Expert Group, or MPEG, with the goal of improving video compression ratios by a
factor of two versus any current video algorithm specification at any bit rate.
For a given bit rate, implementations of the new H.264 video codec are expected
to improve the picture quality of video streaming, telephony, and entertainment
applications beyond the quality of pictures that are available today from either
the MPEG-2 or MPEG-4 algorithms. SYSTEM DESIGN -- Netergy has developed expertise in
integrating its semiconductors and software with peripheral components to
produce complete IP telephony and multimedia communication systems. Netergy's
system technology consists of modular subsystems that can be combined and
rearranged to interface to various networks (such as analog telephone, ISDN,
Ethernet LAN, wireless, and home networks) and to various telephony devices,
such as the analog phones in a home or facsimile machines in an office
environment. Products AUDACITY-T2 IP TELEPHONY PROCESSOR -- The Audacity-T2
semiconductor performs the digital processing functions required to build an IP
phone, including formatting digital audio data for transmission over packet
networks (such as Ethernet, the internet, DSL links and digital cable systems).
The chip can also be used in two-port analog telephone terminal adapters or
gateway applications. AUDACITY-T2U IP TELEPHONY PROCESSOR -- The Audacity-T2U
semiconductor has all of the functionality of the Audacity-T2 processor but runs
at faster processing speeds, has more on-chip memory, and contains an extra
interface for connecting the chip to interfaces commonly found on DSL modem
chipsets. The additional on-chip memory and higher processing speed enable the
Audacity-T2U to address more advanced products, such as higher-end IP phones and
four-port terminal adapters or gateways. VERACITY SOFTWARE -- The Veracity software suite is a
comprehensive package of VoIP call control protocols, standard network
protocols, and audio processing functions. Veracity software stacks can run on
either the Audacity family of semiconductors or on third-party VoIP processors.
These stacks are designed for cost competitive, high quality applications,
including VoIP/VoDSL gateways, Ethernet PBXs, and IP phones. REFERENCE DESIGN KITS -- Netergy currently supplies the
following reference design kits for its semiconductor products: Netergy's reference design kits are intended to serve as
prototype system products and allow a customer to leverage Netergy's system
design expertise to accelerate the time to market for new products. Each
reference design package includes schematics, bills of materials, documentation,
embedded software, and a software development environment that enables a
customer to add new features and otherwise customize the software. Customers Netergy sells its IP telephony semiconductors, embedded
software, and reference designs to OEMs of VoIP and VoDSL products, such as
Kinpo, Ericsson and Telsey. In addition, Netergy signed a license and
development agreement with a large OEM of video communications devices in 2002
for its new video firmware and semiconductor, which is designed for use in
videoconferencing and video telephony applications. Netergy has also separately
licensed a VoIP semiconductor core and embedded VoIP software to
STMicroelectronics, or STM. Sales and Marketing Netergy markets its semiconductor, embedded software, and
reference design products through its own direct sales force and third-party
sales representatives. Netergy supports its domestic and international direct
sales efforts from its headquarters in Santa Clara, California. Netergy's sales
and marketing personnel typically provide support to OEM customers through its
application engineering team and periodic training sessions. Netergy sells its
products to customers on an order-to-order basis and has long-term agreements
with only a limited number of customers. As such, order backlog at any given
time is generally not significant and may not be a reliable indicator of future
revenues. Competition Netergy competes with both manufacturers of digital
signal processing semiconductors and software products developed for the OEM
VoIP marketplace. Netergy also competes with manufacturers of videoconferencing
semiconductors and related firmware. Intense competition, declining average
selling prices, and rapid technological changes characterize the markets for
Netergy's products. The principal competitive factors in the market for IP
telephony and videoconferencing semiconductors and embedded software include
product definition, product design, system integration, chip size, code size,
functionality, time-to-market, adherence to industry standards, price, and
reliability. Netergy has a number of competitors in this market including: Agere
Systems, Analog Devices, Atmel, Broadcom, DSP Group, Motorola, Radvision, Texas
Instruments/Telogy Networks, TriMedia Technologies, Winbond, and Zarlink
Semiconductor. HOSTED IPBX SOLUTIONS Centile has developed and markets a hosted iPBX,
which is a software-driven telephony solution that allows network service
providers and PBX resellers to offer PBX functionality as a business
communication service over broadband IP networks. Technology Typically, today's businesses require an individual phone
for each office worker. The phones provide various functions, such as voicemail,
transfer and hold capability, and other services. Until recently, there were two
ways that businesses could obtain this type of phone service: i) subscribe to
Centrex services from their local telephone company, or ii) buy a dedicated
piece of hardware that operates as a business PBX system. With the availability of broadband IP connectivity to
businesses, however, a third alternative has emerged: 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 and further enables integration with enterprise data
processing systems and support of call centers, while eliminating the capital
and maintenance investments required for dedicated on-site hardware that
provides the PBX functionality. Products TELEPHONY CALL MANAGEMENT SOFTWARE -- Centile's telephony
call management uses an IP network for its switching fabric and media
connections, and provides 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, web-based
control, voice message retrieval, and conferencing. IPBX SERVER SOFTWARE -- The Centile iPBX server software runs
on a cluster of five Sun Microsystems carrier grade server platforms and
provides software 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 Centile iPBX allows service
providers to support up to eighty discrete iPBXs per cluster, each dedicated to
an individual customer, and up to five thousand total extensions. 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 is designed to provide control of phone number block assignments, dial
plans, service provisioning, direct dial phone number assignments, iPBX status,
and bandwidth management. The iPBX supports voicemail, interactive voice
response, automatic call distribution, auto attendants, directory service,
unified messaging modules, and operation, service, and support integration. MULTIPBX -- Introduced in 2002, the MultiPBX combines the
iPBX server software with a complete package of VoIP and data equipment that
enables a building owner to offer converged voice and data services through a
multi-tenant building. The product can support thousands of user extensions in
its standard configuration and can be located anywhere within the building.
Regular PSTN phones can be used with the MultiPBX and all regular PSTN functions
are supported with these phones (e.g., message waiting indicator, caller ID,
etc.). IP phones can also be used to enable the more advanced features of the
system at the user's desktop. The MultiPBX is able to place and receive local
and long distance calls via a PSTN gateway integrated with the product.
Interoffice and telecommuter calls can be carried directly via a Virtual Private
Network, or VPN, or directly across the internet, thus offsetting communication
costs for distant offices and remote facilities. MH4 & MH16 MEDIA HUBs -- Terminal adapters and media hubs
are customer premise equipment that adapt conventional telephony equipment, such
as analog telephones and fax machines, for IP service. Centile's MH4 and MH16
media hub products support four and sixteen analog lines, or ports,
respectively. Centile currently uses its MH4 and MH16 products, along with
certain IP phones and terminal adapters developed by third parties, in its
hosted iPBX and MultiPBX business communication service deployments. IPBX USER INTERFACE SOFTWARE -- Centile has three user
interface applications for its hosted iPBX solution: ComCenter, Switchboard, and
Administrator. All of these applications are designed to harness the graphical
capabilities of personal computers and workstations to make the hosted iPBX easy
to use. The Centile ComCenter software with Call Announcer is
designed for the end users of the iPBX. 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, listen to
messages, set call forwarding numbers and filters, and set up personal speed
dial numbers. The Centile Switchboard software is the attendant interface
for the iPBX. Switchboard runs on a personal computer or workstation to allow
attendants to 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. Centile Administrator enables customers to control their own
moves, adds, and changes. The customer 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, and set voicemail parameters, all
with a point-and-click interface. Customers Centile is marketing the product to service providers and
resellers in Europe, Asia and North America. Centile has signed licensing
agreements with Lucent Technologies (formerly AG Communication Systems) Dialink,
Song Networks AB, and Oy Datatie AB (an ELISA group company). Sales and Marketing Centile markets the hosted iPBX software product through a direct sales
force, and distributors. In addition, in 2002, Centile signed a license and
distribution with AG Communication Systems, or AGCS, now Lucent Technologies
(Lucent). Lucent is marketing the hosted iPBX as the SoftConnect business
communication service. Lucent's SoftConnect product provides a single source for
consolidated voice and data services on IP networks, enabling enterprises to
consolidate multiple separate office data and telephone networks into a single
unified corporate network. Under the terms of the agreement with Lucent, Centile
is entitled to receive license fees and royalties for each SoftConnect
customer. Centile's sales force operates from the Company's
headquarters in Santa Clara, California and from its European office in Sophia Antipolis,
France. Competition Centile currently competes with suppliers of traditional
PBXs, Centrex equipment, and newer generation IP-based PBX or Centrex solutions
that seek to sell such products to telecommunication service providers or to the
small and medium-size enterprise marketplace. The main competition includes
Avaya, UT Starcom, Mitel, Nortel Networks, and several other providers of
traditional and newer generation IP-based solutions, such as Broadsoft, Inc.,
Cisco Systems, Shoreline Communications, Syndeo Corporation, Sylantro,
VocalData, Inc., Vocaltec Communications, and Vertical Networks. MANUFACTURING 8x8 outsources the manufacturing of its videophones
and DTA 310 terminal adapters, and Centile outsources the manufacturing of its
media hubs, to third-party manufacturers, which are generally also semiconductor
customers of Netergy. Neither Centile nor 8x8 have long-term purchase agreements
with their contract manufacturers. Netergy outsources the manufacturing of its semiconductors to
independent foundries, and its primary semiconductor supplier is
STMicroelectronics NV, or STM, which primarily uses Taiwan Semiconductor
Manufacturing, or TSMC, for the production of Netergy's product. Our reliance on
STM and its vendors for overseas wafer fabrication, sort, assembly and test
services entails certain political and economic risks, including political
instability and expropriation, currency controls and exchange fluctuations, and
changes in tariff and freight rates. Furthermore, in the event overseas wafer
fabrication, sort, assembly or test operations, or air transportation to or from
foreign foundries or contractors, were disrupted for any reason, our operations
could be severely harmed. Netergy does not have long-term purchase agreements
with its contract manufacturers or its component suppliers. RESEARCH AND DEVELOPMENT Research and development expenses in each of the
fiscal years ended March 31, 2003, 2002 and 2001 were $7.8 million, $12.6
million and $20 million, respectively. The development of new products and the
enhancement of existing products by the Company and its subsidiaries are
essential to their success. The Company's current and future research and development
efforts relate primarily to its Packet8 service offering and the development of
new endpoints for subscribers of the service, and Netergy's next generation
video semiconductor and embedded software. Areas of emphasis will include:
enhanced versions of 8x8's Packet8 telecommunication services offering and
related endpoints, and enhanced versions of Netergy's video communication
processor technology to provide support for the H.264 video compression
algorithm. Future development may also focus on emerging audio and video
telephony standards and protocols, quality and performance enhancements to
multimedia compression algorithms, and additional features supporting all of the
Company's products. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS Our ability to compete depends, in part, on our
ability to obtain and enforce intellectual property protection for our
technology in the United States and internationally. We currently rely primarily
on a combination of trade secrets, patents, copyrights, trademarks and licenses
to protect our intellectually property. As of March 31, 2003, we had fifty-four
United States patents and a number of United States and foreign patents pending,
none of which we consider critical to our business. Our patents expire on dates
ranging from 2009 to 2018. We cannot predict whether our pending patent
applications will result in issued patents. Due to rapid technological change,
we believe that factors such as the technological and creative skills of our
personnel, new product developments and enhancements to existing products are
more important than the various legal protections of our technology to
establishing and maintaining technology leadership. To protect our trade secrets and other proprietary
information, we require our employees to sign agreements providing for the
maintenance of confidentiality and also the assignment of rights to inventions
made by them while in our employ. There can be no assurance that our means of
protecting our proprietary rights in the United States or abroad will be
adequate or that competition will not independently develop technologies that
are similar or superior to our technology, duplicate our technology or design
around any of our patents. We are also subject to the risks of adverse claims
and litigation alleging infringement of the intellectual property rights of
others. The semiconductor and software industries are subject to frequent
litigation regarding patent and other intellectual property rights. In addition,
the laws of foreign countries in which our products are or may be sold do not
protect our intellectual property rights to the same extent as do the laws of
the United States. Our failure to protect our proprietary information could
cause our business and operating results to suffer. We rely upon certain technology, including hardware and
software, licensed from third parties. There can be no assurance that the
technology licensed by us will continue to provide competitive features and
functionality or that licenses for technology currently utilized by us or other
technology which we may seek to license in the future will be available to us on
commercially reasonable terms or at all. The loss of, or inability to maintain
existing licenses could result in shipment delays or reductions until equivalent
technology or suitable alternative products could be developed, identified,
licensed and integrated, and could harm our business. These licenses are on
standard commercial terms made generally available by the companies providing
the licenses. The cost and terms of these licenses individually are not material
to our business. 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, Netergy
has licensed portions of its systems technology and software object code for its
s emiconductors to virtually all of its semiconductor customers. Moreover, many
of Netergy's OEM customers have licensed portions of the software source code
for its semiconductors currently being sold and under development. Netergy
intends to continue to license its semiconductor, software, and systems
technology to other companies, many of which are current or potential
competitors. Such arrangements may enable these companies to use Netergy's
technology to produce products that compete with the Company's IP telephony and
video products. Netergy has also licensed the right to manufacture certain of
its videoconferencing and IP telephony semiconductor products to several
original equipment manufacturers, or OEMs. These licenses generally provide for
the payment of royalties. Only certain of these OEM licensees, such as STM, may
s ell semiconductors based on the licensed technology to third parties, while
other licensees are limited to sales of such semiconductors as part of
multimedia communication systems or sub-systems. Item 13 of this Report provides
further information regarding the Company's license and other arrangements with
s TM. In addition, in April 2002, Netergy licensed all of its Veracity software
and the H.264 and MPEG software under development to a third party, and granted
that party rights to use the technology on Netergy's semiconductors. Centile may, in the future, license its source code for
portions or all of the hosted iPBX technology to other companies. For example,
the license and distribution agreement between Centile and AGCS, provides AGCS
with the opportunity to purchase a source code license under certain conditions.
s uch arrangements may enable these companies to use the technology to produce
products that compete with Centile's products. In March 2002, 8x8 licensed certain Very Long Instruction
Word, or VLIW, microprocessor cores, related tools and MPEG4 video compression
firmware from STM for use in Netergy's IP video communication processor
development initiatives. Additionally, the Company agreed to license STM certain
of its existing and future H.263 and H.264 firmware implementations for use with
s TM's semiconductor products. The licenses are non-exclusive, non-transferable
and non-assignable and provide for the sharing of updates and enhancements to
the licensed technology, subject to certain limitations. The agreement includes
provisions that allow the Company to manufacture semiconductor devices that
contain the STM VLIW core at STM or at other third-party fabrication facilities.
The Company is required to pay STM per-unit royalties based upon shipments of
products that incorporate the VLIW technology. In addition, STM is required to
pay the Company certain per-unit royalties based upon shipments of STM
s emiconductor products that contain the Company's H.263 and H.264 video
technology. The Company expects to continue licensing its technology to
others, many of whom may be located outside of the United States. In addition to
licensing its technology to others, the Company from time to time will take a
license to technology owned by third parties and currently relies upon certain
technology, including hardware and software, licensed from third parties. INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS Financial information relating to our segments and
information on revenues generated in different geographic areas are set forth in
Note 12 to our consolidated financial statements contained in Part II, Item 8 of
this Report. In addition, information regarding risks attendant to our foreign
operations are set forth under the heading "Factors that May Affect Future
Results" later in this Report. EMPLOYEES As of March 31, 2003, the Company employed 54
persons, including 4 in manufacturing operations, 25 in research and
development, 8 in sales and marketing, and 17 in general and administrative
capacities. None of the Company's employees are represented by a labor union or
are subject to a collective bargaining arrangement. The Company believes that
relations with employees are good. The Company's principal operations are located in an
approximately 45,000 square foot facility in Santa Clara, California that is
leased through November 2004. Design, limited manufacturing, research and
development, sales and marketing, and administrative activities are performed in
this facility. The Company also leases a facility for its research and
development operation in Sophia-Antipolis, France. The Company believes that its
existing facilities are adequate to meet its current and foreseeable future
needs. For additional information regarding the Company's obligations under
leases see Note 9 to the consolidated financial statements contained in Part II,
Item 8. 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 significantly 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 condition could be adversely
impacted. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS No matters were submitted to a vote of security holders
during the fourth quarter of fiscal 2003. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS The Company completed 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 (the NASDAQ)
under the symbol "EGHT." From April 4, 2000 through July 18, 2001, the Company's
common stock was traded on the NASDAQ under the symbol "NTRG." Since July 19,
2001 the Company's common stock has traded under the symbol "EGHT." The Company
has never paid cash dividends on its common stock and has no plans to do so in
the foreseeable future. As of May 22, 2003, there were 295 holders of record of
the Company's common stock. The following table sets forth the range of high and low
closing prices for each period indicated:
|
Period |
High |
Low |
|
|
Fiscal 2003: |
|||
|
First quarter |
$ 1.05 |
$ 0.31 |
|
|
Second quarter |
$ 0.60 |
$ 0.29 |
|
|
Third quarter |
$ 0.43 |
$ 0.20 |
|
|
Fourth quarter |
$ 0.37 |
$ 0.18 |
|
|
Fiscal 2002: |
|||
|
First quarter |
$ 2.32 |
$ 0.65 |
|
|
Second quarter |
$ 1.48 |
$ 0.60 |
|
|
Third quarter |
$ 1.11 |
$ 0.68 |
|
|
Fourth quarter |
$ 1.30 |
$ 0.84 |
ITEM 6. SELECTED FINANCIAL DATA
Years Ended March 31, (1) (8)
----------------------------------------------------------
2003 (7) 2002 (2) 2001(6)(3) 2000(4)(6) 1999(5)
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
Total revenues............................ $ 11,003 $ 14,691 $ 18,228 $ 25,384 $ 31,682
Net loss.................................. $ (11,403) $ (9,105) $ (74,399) $ (24,848) $ (19,224)
Net loss per share:
Basic................................... $ (0.40) $ (0.33) $ (2.99) $ (1.38) $ (1.28)
Diluted................................. $ (0.40) $ (0.33) $ (2.99) $ (1.38) $ (1.28)
Total assets.............................. $ 6,705 $ 19,653 $ 39,145 $ 59,983 $ 28,709
Convertible subordinated debentures....... $ -- $ -- $ 6,238 $ 5,498 $ --
Contingently redeemable common stock...... $ 669 $ 813 $ -- $ -- $ --
Accumulated deficit....................... $ (148,679) $ (137,276) $ (128,146) $ (53,747) $ (28,899)
Total stockholders' equity................ $ 2,164 $ 13,234 $ 21,632 $ 47,390 $ 18,823
____________
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including our statements regarding anticipated cost savings arising from the restructuring activities implemented during fiscal 2003; our assumptions underlying our critical accounting determinations concerning revenue, allowances for doubtful accounts, valuation of goodwill, tax allowances and reserves for legal issues; factors that could impact our gross margins; our cost estimates under contracts accounted for using the percentage of completion method; efforts to raise additional financing; commitment of resources, and reduction in operating costs including the possible sale or cessation of certain business segments and the possible further reduction of personnel and suspension of salary increases and capital expenditures. You should not place undue reliance on these forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including our good faith assumptions being incorrect, our business expenses being greater than anticipated due to competitive factors or unanticipated development or sales costs; revenues not resulting in the manner anticipated due to a continued slow down in technology spending, particularly in the telecommunications market; our failure to generate investor interest or to sell certain of our assets or business segments. The forward-looking statements may also be impacted by the additional risks faced by us as described in this Report, including those set forth under the section entitled "Factors that May Affect Future Results." All forward-looking statements included in this Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.
OVERVIEW
8x8, Inc., or 8x8, and its subsidiaries (collectively, the Company) develop and market telecommunication technology for IP telephony and video applications. The Company has three product lines: internet protocol telephone devices, videophones, and internet communication services; voice and video semiconductors and related software; and software that implements the functionality of a private branch exchange, or PBX, over data networks.
8x8's first product line includes consumer telephones, videophones, and communication software and services that work over broadband networks. 8x8 sells internet protocol telephony software and services that enable customers to provision and use IP dial-tone services with IP telephones and videophones. The service is marketed under the brand name Packet8. 8x8 also sells videophones that work over normal phone lines.
The Company has two primary subsidiaries, Netergy Microelectronics, Inc. (Netergy) and Centile, Inc. (Centile). Netergy provides voice and video semiconductors and related communication software to original equipment manufacturers, or OEMs, of telephones, terminal adapters, and other endpoint communication devices and to other semiconductor companies. Netergy's technologies are used to make IP telephones and to voice-enable cable and digital subscriber line, or DSL, modems, wireless devices, and other broadband technologies. Centile develops and markets hosted iPBX solutions that allow service providers to offer to small and medium-sized businesses over broadband networks the features and functions that are commonly found in a typical business phone system. A hosted iPBX solution is a software application that implements the functionality of a business phone system over the same data connection that a business uses for connection to the internet. The phone system software runs on servers that are located at a central data center so that the only phone system equipment that is required at the customer site are telephones. The phone system can also be accessed and controlled from any web browser on the internet.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Note 1 to the consolidated financial statements in Part II, Item 8 of this Report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.
We have identified the policies below as some of the more critical to our business and the understanding of our results of operations. These policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our financial statements.. Although we believe our judgments and estimates are appropriate and correct, actual future results may differ from our estimates. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.
Use of estimates
The preparation of our consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates, particularly estimates relating to litigation and other contingencies, have a material impact on our financial statements, and are discussed in detail throughout our analysis of the results of operations.
In addition to evaluating estimates relating to the items discussed above, we also consider other estimates, including, but not limited to, those related to bad debts, the valuation of inventories, goodwill, income taxes, and financing operations. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions. Additional information regarding risk factors that may impact our estimates is included below under "Factors that May Affect Future Results."
Revenue recognition
Our revenue recognition policies are described in Note 1 to the consolidated financial statements in Part II, Item 8 of this Report. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.
At the time of each revenue transaction we assess whether the revenue amount is fixed and determinable and whether or not collection is reasonably assured. We assess whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a significant portion of a fee is due after our normal payment terms, which are thirty to ninety days from invoice date, we account for the fee as not being fixed and determinable. In these cases, we recognize revenue as the fees become due. We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We generally do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of payment.
For arrangements with multiple obligations (for example, undelivered maintenance and support), we allocate revenue to each component of the arrangement using the residual value method based on the fair value of the undelivered elements, which is specific to the Company. This means that we defer revenue from the arranged fee that is equivalent to the fair value of the undelivered elements. Fair values for the ongoing maintenance and support obligations for our technology licenses are based upon separate sales of renewals to other customers or upon renewal rates quoted in the contracts. We base the fair value of services, such as training or consulting, on separate sales of these services to other customers. We recognize revenue for maintenance services ratably over the contract term. Our training and consulting services are billed based on hourly rates and we generally recognize revenue as these services are performed.
For sales generated from long-term contracts, we use the percentage of completion method of accounting. In doing so, management makes important judgments in costs and in measuring progress towards completion. These judgments underlie our determinations regarding overall contract value, contract profitability and timing of revenue recognition. Revenue and cost estimates are revised quarterly based on changes in circumstances, and any losses on contracts are recognized immediately.
If an arrangement includes acceptance criteria, revenue is not recognized until we can objectively demonstrate that the software or service can meet the acceptance criteria or when the customer has signed formal acceptance documentation. If a software license arrangement obligates us to deliver unspecified future products, revenue is recognized on a subscription basis, ratably over the term of the contract.
For all sales, except those completed via the internet, we use either a binding purchase order or other signed agreement as evidence of an arrangement. For sales over the internet, we use a credit card authorization as evidence of an arrangement.
Our ability to enter into revenue generating transactions and recognize revenue in the future is subject to a number of business and economic risks discussed below under "Factors that May Affect Future Results."
Collectibility of accounts receivable
We must make estimates of the collectibility of our accounts receivable. Management specifically analyzes accounts receivable, including historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The accounts receivable balance was $1.4 million, net of an allowance for doubtful accounts of $141,000 as of March 31, 2003, and one customer represented 30% of our gross accounts receivable. Based upon this customer's past payment history, discussions with the customer and our review of their financial condition, the outstanding balance was considered collectible and therefore no portion of this balance was specifically reserved for at March 31, 2003.
Valuation of inventories
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by us, additional inventory write-downs may be required.
Valuation of goodwill
We assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:
Goodwill is included in our Centile reporting unit, which is the same as our Centile operating segment. During our impairment assessment, we compare the carrying value of our Centile reporting unit to its fair value. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value. The fair value for goodwill is determined based on discounted cash flows, market multiples or appraised values, as appropriate.
In the fourth quarter of fiscal 2003, the Company recorded an impairment charge of $1.5 million to write-off its remaining goodwill. The impairment assessment resulted from our plan implemented in the fourth quarter of fiscal 2003 to reduce the workforce of Centile's France office by seventy percent.
Income taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. In the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Significant management judgment is required in determining the valuation allowance recorded against our net deferred tax assets, which primarily consist of net operating loss and tax credit carryforwards. We have recorded a valuation allowance of $51 million as of March 31, 2003, due to uncertainties related to our ability to utilize most of our deferred tax assets before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable.
Litigation
Management's current estimated range of liability related to pending litigation involving the Company is based on claims for which our management can estimate the amount and range of loss. We have recorded the minimum estimated liability related to those claims, where there is a range of loss. At March 31, 2003, liabilities related to litigation matters were not significant. Because of the uncertainties related to both the amount and range of loss on pending litigation, management is unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we will assess the potential liability, if any, related to our pending litigation and revise our estimates. Such revisions in our estimates of the potential liability could materially impact our results of operation and financial position.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data for each of the years ended March 31, 2003, 2002, and 2001, expressed 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 our Consolidated Financial Statements and related notes included elsewhere in this Report.
Year Ended March 31,
-------------------------
2003 2002 2001
------- -------- --------
Product revenues..................................... 52 % 41 % 70 %
License and other revenues........................... 48 % 59 % 30 %
------ ------- -------
Total revenues............................. 100 % 100 % 100 %
------ ------- -------
Cost of product revenues............................. 48 % 43 % 41 %
Cost of license and other revenues................... 29 % 2 % 32 %
------ ------- -------
Total cost of revenues..................... 39 % 19 % 38 %
------ ------- -------
Gross profit............................... 61 % 81 % 62 %
------ ------- -------
Operating expenses:
Research and development........................... 71 % 85 % 109 %
Selling, general and administrative................ 68 % 59 % 93 %
In-process research and development................ -- % -- % 25 %
Amortization of intangibles........................ -- % 5 % 60 %
Restructuring and other charges.................... 31 % -- % 183 %
------ ------- -------
Total operating expenses................... 170 % 149 % 470 %
------ ------- -------
Loss from operations................................. (109)% (68)% (408)%
Other income, net.................................... 5 % 7 % 14 %
Interest expense..................................... -- % (6)% (8)%
------ ------- -------
Loss before provision for income taxes............... (104)% (67)% (402)%
Provision for income taxes........................... -- % -- % -- %
------ ------- -------
Net loss before extraordinary gain and cumulative
effect of change in accounting principle .......... (104)% (67)% (402)%
Extraordinary gain on extinguishment of debt, net.... -- % 5 % -- %
Cumulative effect of change in accounting principle.. -- % -- % (6)%
------ ------- -------
Net loss............................................. (104)% (62)% (408)%
====== ======= =======
REVENUES
Product revenues were $5.7 million in fiscal 2003, a decrease of $300,000 from the $6 million reported in fiscal 2002. The decrease in fiscal 2003 was due to a $1.1 million decrease in videoconferencing semiconductor sales, offset by a $300,000 increase in voice over internet protocol (VoIP) semiconductor sales and a $500,000 increase in sales of videophones and media hub systems. The significant decrease in videoconferencing semiconductor revenues was due primarily to a slight decrease in unit shipments, combined with decreases in average selling prices, or ASPs. The decrease in unit shipments of our videoconferencing semiconductors as compared to the prior year, is primarily attributable to our announcement during fiscal 2003 of the end of life of our existing videoconferencing semiconductors, as well as the factors set forth below explaining the decline for fiscal 2002 versus fiscal 2001. Our remaining videoconferencing semiconductor customers have been designing out our products in anticipation of the end of life. The increase in VoIP semiconductor sales was attributable to a significant increase in unit shipments, offset by decreases in ASPs. The increase in videophone system sales was attributable to our commencement of sales of these products in the fourth quarter of fiscal 2002, and as a result, fiscal 2003 includes four quarters of sales versus only one quarter of sales in fiscal 2002. The increase in media hub system revenues was attributable to the increase in licenses of our hosted iPBX product.
Product revenues were $6.0 million in fiscal 2002, a decrease of $6.8 million from the $12.8 million reported in fiscal 2001. The decrease in product revenues in fiscal 2002 was due to decreases in sales of video monitoring and consumer videophone systems approximating $1 million, resulting from our decision to terminate further development and sales of these product lines in prior years, a slight decrease in IP telephony semiconductor sales, a $300,000 decrease in media hub system revenues, and a $5.4 million decrease in revenue derived from our videoconferencing semiconductor products. The decrease in media hub system revenues as compared to the prior year period was due primarily to a decline in sales to a significant customer. The significant decrease in videoconferencing semiconductor revenues was due primarily to a significant decrease in unit shipments, offset partially by increases in average selling prices, or ASPs. Factors that contributed to the significant decrease in unit shipments of our videoconferencing semiconductors as compared to the prior year include:
License and other revenues were $5.3 million in fiscal 2003, a decrease of $3.3 million from the $8.6 million recorded in fiscal 2002. License and other revenues, the majority of which are considered to be non- recurring in nature, consisted primarily of technology licenses and related maintenance revenues, as well as royalties earned under such licenses. License and other revenues for both fiscal 2003 and 2002 included approximately $1.6 million of non-cash revenue recognition associated with the license of our video monitoring technology to Interlogix in fiscal 2001. The decrease in fiscal 2003 was primarily attributable to:
These decreases were partially offset by:
License revenues were $8.6 million in fiscal 2002, an increase of $3.2 million from the $5.4 million recognized in fiscal 2001. License and other revenues recognized in fiscal 2002 consisted primarily of technology licenses and related maintenance revenues, as well as royalties earned under such licenses. License and other revenues for fiscal 2001 also included $1.2 million of professional service revenues associated with our Canadian operations. No professional service revenues were recognized in fiscal 2002 due to the elimination of the professional services organization as part of the restructuring of our Canadian operations in the fourth quarter of fiscal 2001. The negative impact of eliminating professional service revenues in fiscal 2002 was more than offset by the following:
Revenues from our ten largest customers in the fiscal years ended March 31, 2003, 2002, and 2001 accounted for approximately 63%, 73%, and 48%, respectively, of our total revenues. Two customers represented more than 10% of our total revenues in fiscal 2003. These customers, GE Interlogix, Inc. and Leadtek Research, Inc. represented 17% and 11% of our total revenues, respectively. Three customers represented more than 10% of our total revenues in fiscal 2002. These customers, ESS Technology, Inc., Leadtek Research, Inc. and GE Interlogix, Inc. represented 13%, 13% and 12% of our total revenues, respectively. During the fiscal year ended March 31, 2001 no customer accounted for 10% or more of total revenues.
Sales to customers outside the United States represented 62%, 61%, and 69%, and of total revenues in the fiscal years ended March 31, 2003, 2002, and 2001, respectively. The following table illustrates our net revenues by geographic area. Revenues are attributed to countries based on the destination of shipment (in thousands):
Year Ended March 31,
-------------------------------------
2003 2002 2001
----------- ----------- -----------
United States........................... $ 4,218 $ 5,777 $ 5,632
Europe.................................. 2,657 4,126 5,862
Taiwan.................................. 1,569 2,026 2,739
Japan................................... 919 1,119 1,188
Other................................... 1,640 1,643 2,807
----------- ----------- -----------
$ 11,003 $ 14,691 $ 18,228
=========== =========== ===========
COST OF REVENUES AND GROSS PROFIT
The cost of product revenues consists of costs associated with system manufacturing, components, semiconductor wafer fabrication, system and semiconductor assembly and testing performed by third-party vendors, and direct and indirect costs associated with purchasing, scheduling, and quality assurance. Gross profit from product revenues was $3 million, $3.4 million, and $7.6 million, for the fiscal years ended March 31, 2003, 2002, and 2001, respectively. Product gross margin was 52%, 57%, and 59% for the fiscal years ended March 31, 2003, 2002, and 2001, respectively.
The $400,000 decrease in gross profit from product revenues was primarily due to a decrease in product revenues primarily attributable to lower ASPs, and a charge of approximately $270,000 for non-cancelable purchase orders for IP telephony semiconductors recorded in the quarter ended March 31, 2003. The decreases in gross profit were partially mitigated by lower costs for our IP telephony semiconductors resulting from a change in suppliers during fiscal 2003.
The $4.1 million decrease in gross profit from fiscal 2001 to fiscal 2002 was due primarily to a significant decrease in sales of our videoconferencing semiconductors and video monitoring systems. Gross profit in fiscal 2002 was also impacted by a decrease in product gross margins due to lower average selling prices realized on sales of our IP telephony semiconductors, and to a lessor extent, an increase in inventory reserves associated with our media hub products in the first quarter of fiscal 2002. The decrease in margins was mitigated to some extent by an increase in average selling prices realized on the sale of our videoconferencing semiconductors and the reversal of $143,000 of reserves associated with our semiconductor products in the fourth quarter of fiscal 2002 due to the sale of inventory that had been specifically reserved for in fiscal 2001.
Gross profit from license and other revenues, which were largely nonrecurring, was $3.8 million, $8.4 million, and $3.7 million, in fiscal 2003, 2002, and 2001, respectively. Associated gross margins were 71%, 98%, and 68% in fiscal 2003, 2002, and 2001. The decrease in gross margin from fiscal 2002 to fiscal 2003 was due primarily to the reduction in license and other revenues, and costs incurred to perform development services under revenue generating contracts in fiscal 2003, which included a loss approximating $300,000 in the quarter ended March 31, 2003. The significant increase in gross margin from fiscal 2001 to fiscal 2002 was due to the elimination of our professional service organization as part of the restructuring of our Canadian operations in the fourth quarter of fiscal 2001.
Our gross margin is affected by a number of factors including product mix, product pricing, the percentage of direct sales and sales to resellers, and manufacturing and component costs. The markets for our products are characterized by falling average selling prices. Average selling prices realized to date for our IP telephony semiconductors have been lower than those historically attained for our videoconferencing semiconductor products, resulting in lower gross margins. We have encountered significant price competition in the markets for our products, and are at a significant disadvantage compared to our competitors, many of whom have substantially greater resources, and therefore may be better able to withstand an extended period of downward pricing pressure. To respond to competitive pricing pressures, we will be required to introduce differentiated products and continue to reduce costs as a means of maintaining or improving our margins. We may not be successful in our development efforts or product cost reduction measures and may face continued erosion of margins.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of personnel, system prototype design and fabrication, mask, prototype wafer, and equipment costs necessary for us to conduct our development efforts. Research and development costs, including software development costs, are expensed as incurred. Research and development expenses were $7.8 million, $12.6 million, and $20 million for fiscal 2003, 2002, and 2001, respectively. The $4.8 million decrease in research and development expenses in fiscal 2003 as compared to fiscal 2002 was due to the following:
The $7.4 million decrease in research and development expenses during fiscal 2002 as compared to fiscal 2001 was due to the following:
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, human resources, and general management. Such costs also include advertising, sales commissions, trade show, and other marketing and promotional expenses. Selling, general, and administrative expenses were $7.4 million, $8.6 million, and $16.9 million in fiscal 2003, 2002, and 2001, respectively. The $1.2 million decrease in selling, general, and administrative expenses in fiscal 2003 as compared to fiscal 2002 was due to the following:
The decrease in selling, general, and administrative expenses during fiscal 2002 as compared to fiscal 2001 was due primarily to the reasons set forth above, as well as:
IN-PROCESS RESEARCH AND DEVELOPMENT AND AMORTIZATION OF INTANGIBLES
We incurred in-process research and development charges of $4.6 million in the second quarter of fiscal 2001 related to the acquisition of U|Force, Inc. (U|Force). Our consolidated financial statements reflect the acquisition of all of the outstanding stock of U|Force, Inc. on June 30, 2000 for a total purchase price of $46.8 million. U|Force, based in Montreal, Canada, was a developer of IP-based software applications and a provider of professional services. U|Force was also developing a Java-based service creation environment (SCE) designed to allow telecommunication service providers to develop, deploy, and manage telephony applications and services to their customers. The purchase price was comprised of 8x8 common stock with a fair value of approximately $38.0 million comprised of: (i) 1,447,523 shares issued at closing of the acquisition, and (ii) 2,107,780 shares to be issued upon the exchange or redemption of the exchangeable shares (the Exchangeable Shares) of Canadian entities held by former employee shareholders or indirect owners of U|Force stock. The Exchangeable Shares held by U|Force employees were subject to certain restrictions, including our right to repurchase the Exchangeable Shares if an employee departed prior to vesting. In addition, we also agreed to issue one share of preferred stock (the Special Voting Share) that provides holders of Exchangeable Shares with voting rights equivalent to the shares of common stock into which their shares are convertible. We also assumed outstanding stock options to purchase shares of U|Force common stock for which the Black-Scholes pricing model value of approximately $6.5 million was included in the purchase price. Direct transaction costs related to the merger were approximately $747,000. Additionally, the Company advanced $1.5 million to U|Force upon signing the acquisition agreement, but prior to the close of the transaction. This amount was accounted for as part of the purchase price. The following table summarizes the composition of the purchase price (in thousands):
Value of common stock and Exchangable Shares issued......... $ 38,042
Value of stock otions assumed............................... 6,546
Cash advanced to U|Force prior to closing................... 1,500
Direct transaction costs.................................... 747
---------
$ 46,835
=========
The purchase price was allocated to tangible assets acquired and liabilities assumed based on the book value of U|Force's assets and liabilities, which we believe approximated their fair value. Intangible assets acquired included amounts allocated to U|Force's in-process research and development. The in-process research and development related to U|Force's initial products, the SCE and a unified messaging application, for which technological feasibility had not been established and the technology had no alternative future use. The estimated percentage complete for the unified messaging and SCE products was approximately 44% and 34%, respectively, at June 30, 2000. The fair value of the in-process technology was based on a discounted cash flow model, similar to the traditional "Income Approach," which discounts expected future cash flows to present value, net of tax. In developing cash flow projections, revenues were forecasted based on relevant factors, including estimated aggregate revenue growth rates for the business as a whole, characteristics of the potential market for the technology, and the anticipated life of the technology. Projected annual revenues for the in-process research and development projects were assumed to ramp up initially and decline significantly at the end of the in-process technology's economic life. Operating expenses and resulting profit margins were forecasted based on the characteristics and cash flow generating potential of the acquired in-process technologies. Risks that were considered as part of the analysis included the scope of the efforts necessary to achieve technological feasibility, rapidly changing customer markets, and significant competitive threats from numerous companies. We also considered the risk that if we failed to bring the products to market in a timely manner, it could adversely affect sales and profitability of the combined company in the future. The resulting estimated net cash flows were discounted at a rate of 25%. This discount rate was based on the estimated cost of capital plus an additional discount for the increased risk associated with in-process technology. The value of the acquired U|Force in-process research and development, which was expensed in the second quarter of fiscal 2001, approximated $4.6 million. The excess of the purchase price over the net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. Amounts allocated to goodwill, the value of an assumed distribution agreement, and workforce were being amortized on a straight-line basis over three, three, and two years, respectively. The allocation of the purchase price was as follows (in thousands):
In-process research and development......................... $ 4,563
Distribution agreement...................................... 1,053
Workforce................................................... 1,182
U|Force net tangible assets................................. 1,801
Goodwill.................................................... 38,236
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$ 46,835
=========
Amortization of goodwill and intangible assets charged to operations was $763,000 and $11 million for the fiscal years ended March 31, 2002 and 2001, respectively. Amortization expense included amounts related to the amortization of goodwill and intangible assets arising from the acquisitions of U|Force in fiscal 2001 and Odisei S.A. in fiscal 2000. Beginning our fiscal year 2003, Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," was adopted, and we ceased to amortize approximately $1.5 million of goodwill, net of amortization, including intangibles related to the acquisition of Odisei S.A. that were classified as goodwill upon the adoption of SFAS No. 142.
RESTRUCTURING AND OTHER CHARGES
2003 Restructuring Actions
During the third and fourth quarters of fiscal 2003, we continued our cost reduction activities to better align expense levels with current revenue levels and ensure conservative spending during the current economic downturn. As a result of these activities, we recorded restructuring and other asset impairment charges of approximately $3.4 million. These charges included severance and benefits of approximately $1.2 million, as we reduced our workforce, under voluntary and involuntary separation plans, by thirty-two employees or thirty percent. The majority of the affected employees were Netergy employees based in Santa Clara, California and Marlow, United Kingdom and included employees from sales and marketing and research and development, as well as four executives of Netergy. Severance of approximately $325,000 attributable to involuntary terminations was paid during the year ended March 31, 2003.
We closed Netergy's facility in Marlow, United Kingdom, and recorded $434,000 of charges related to the termination of the operating leases for the facility and related services. In addition, we recorded asset impairment charges of $212,000 related to assets in the United Kingdom that were abandoned or disposed of.
We also recorded a charge of approximately $74,000 for its remaining lease liability for office space in Tempe, Arizona that was vacated as a result of the restructuring actions during the fourth quarter.
In the fourth quarter of fiscal 2003, we also implemented a plan to reduce the workforce at Centile's Sophia Antipolis, France office by ten employees or seventy percent. This downsizing and its potential impact on Centile's iPBX business prompted an assessment of the key assumptions underlying our goodwill valuation judgments. As a result of the analysis, we determined that an impairment charge of $1.5 million was required because the estimated fair value of the goodwill was less than the book value of the goodwill that arose from the acquisition of Odisei S.A. in fiscal 2000.
The following table illustrates the charges, credits and balances of the restructuring reserves as of March 31, 2003 and summarizes asset impairment charges (in thousands):
Total Cash Non-Cash Liability at
Charges Payments Charges March 31, 2003
----------- ----------- ----------- ----------------
Restructuring Charges:
Severance...................... $ 1,177 $ (1,002) $ -- $ 175
Facility related............... 508 (161) (273) 74
----------- ----------- ----------- ----------------
Total restructuring charges.. 1,685 (1,163) (273) 249
----------- ----------- ----------- ----------------
Asset Impairments:
Fixed Assets................... 212 -- (212) --
Goodwill....................... 1,539 -- (1,539) --
----------- ----------- ----------- ----------------
Total impairment charges..... 1,751 -- (1,751) --
----------- ----------- ----------- ----------------
Total restructuring and
impairment charges......... $ 3,436 $ (1,163) $ (2,024) $ 249
=========== =========== =========== ================
We expect annual savings of approximately $3 million related to voluntary and involuntary employee terminations. Future expected cost reductions will be reflected in the Cost of Sales, Selling, General and Administrative, and Research and Development line items in the consolidated statements of operations.
2001 Restructuring Actions
During the fourth quarter of fiscal 2001, after a significant number of employees had resigned, we discontinued our Canadian operations acquired in conjunction with the acquisition of U|Force in June 2000. We closed our offices in Montreal and Hull, Quebec and laid-off all remaining employees resulting in the cessation of the research and development efforts and the sales and marketing and professional services activities associated with the U|Force business. As a result of the restructuring, we recorded a one-time charge of $33.3 million in the quarter ended March 31, 2001. The restructuring and other charges consisted of the following (in thousands):
Employee separation......................................... $ 765
Fixed asset losses and impairments.......................... 2,084
Intangible asset impairments................................ 30,247
Lease obligation and termination............................ 220
---------
$ 33,316
=========
Employee separation costs represent severance payments related to the 96 employees in the Montreal and Hull offices who were laid-off.
The impairment charges for fixed assets of approximately $2.1 million included write-offs of abandoned and unusable assets of approximately $1.4 million, a loss on sale of assets of $567,000, and a charge for assets to be disposed of $172,000. The loss on sale of assets of $567,000 was attributable to the sale of office, computer, and other equipment of the Montreal facility. We received common stock of the purchaser valued at approximately $412,000 as of the date of sale. Fair value of assets to be disposed of was measured based on expected salvage value, less costs to sell. Assets to be disposed of consist of computer equipment with a fair value of $57,000 at March 31, 2001. Substantially all of these assets were liquidated during fiscal 2002.
The impairment charges for intangible assets represented the write-off of the unamortized intangible assets recorded in connection with the acquisition of U|Force. The charges of approximately $30.2 million included: $28.7 million for the goodwill related to the acquisition, $739,000 for the assembled workforce, and $789,000 related to a distribution agreement. The impairments were directly attributable to the cessation of operations in Canada. We performed an evaluation of the recoverability of the intangible assets related to these operations in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The lack of estimated future net cash flows related to the acquired products necessitated an impairment charge to write-off the remaining unamortized goodwill. The distribution agreement asset was written off because we will no longer provide products and services to customers under that agreement.
We terminated the lease for our primary facility in Montreal in March 2001, but we were required to pay rent on the facility through May 31, 2001. We terminated the lease for our facility in Hull, Quebec in fiscal 2002. Accrued obligations related to remaining lease commitments on the Montreal and Hull facilities totaled $212,000 at March 31, 2001. Payments made in fiscal 2002 related to the terminations of the Montreal and Hull facility leases totaled $225,000.
Cash payments related to the restructuring during the quarter ended March 31, 2001, which included all employee separation costs and certain lease termination costs, approximated $920,000.
OTHER INCOME, NET
In fiscal 2003, 2002, and 2001, other income, net, was approximately $600,000, $1.0 million, and $2.6 million, respectively. The decrease in other income, net, in fiscal 2003 compared to fiscal 2002 was due primarily to an approximately $440,000 decrease in interest income resulting from lower average cash and cash equivalent balances and lower interest rates, a $131,000 non-recurring gain realized on the sale of an investment in fiscal 2002, and a $100,000 increase in foreign exchange losses. These decreases were offset by an increase in other income from our former Canadian operations of approximately $175,000. The increase in Canadian other income was primarily attributable to the collection of Canadian research and development and other tax credits in fiscal 2003, which was partially offset by a write off of $92,000, which represented the balance of the cumulative translation adjustment generated from the translation of the financial statements of our Canadian subsidiary. Our Canadian subsidiary has been substantially liquidated. We collected $560,000 of Canadian tax credits in fiscal 2003, but no further refundable tax credits are expected from Canada. Apart from the tax credit receipt in fiscal 2003 and investment gain in 2002 described above, other income, net, consists primarily of interest income earned on our cash and cash equivalents and foreign exchange gains and losses. Interest income has continued to decrease due to significantly lower average cash and cash equivalent balances combined with lower interest rates. See "Item 3. Quantitative And Qualitative Disclosures About Market Risk" elsewhere in this Report for further discussion of our exposure to currency risk.
The decrease in other income, net, in fiscal 2002 compared to fiscal 2001 was due primarily to a significant decrease in interest income resulting from lower average cash and cash equivalent balances and lower interest rates. Gains realized on the sale of investments also decreased by approximately $94,000 in fiscal 2002 as compared to fiscal 2001.
INTEREST EXPENSE
Interest expense in each of the two years ended March 31, 2002 consisted mainly of charges associated with the 4% convertible subordinated debentures, or the Debentures, that we issued in December 1999, including the amortization of the related debt discount and debt issuance costs. We redeemed the Debentures in December 2001. Interest expense for the year ended March 31, 2001 also included approximately $128,000 associated with lease lines of credit and a bank loan assumed as part of the U|Force acquisition. All of the U|Force debt obligations were repaid in the quarter ended March 31, 2001.
PROVISION FOR INCOME TAXES
The provisions of $15,000 and $17,000 for the years ended March 31, 2002 and 2001, respectively, were comprised primarily of certain foreign taxes. We had no provision for the fiscal year ended March 31, 2003. The provision for the year ended March 31, 2002 also reflected a $10,000 refund of U.S. federal income taxes received in fiscal 2002.
At March 31, 2003, we had net operating loss carryforwards for federal and state income tax purposes of approximately $115 million and $42 million, respectively, which expire at various dates beginning in 2005. In addition, at March 31, 2002, we had research and development credit carryforwards for federal and state tax reporting purposes of approximately $3 million and $2.3 million, respectively. The federal credit carryforwards will begin expiring in 2010 while the California credit will carryforward indefinitely. Under the ownership change limitations of the Internal Revenue Code of 1986, as amended, the amount and benefit from the net operating losses and credit carryforwards may be impaired or limited in certain circumstances.
At March 31, 2003 and 2002, we had gross deferred tax assets of approximately $51 million and $47 million. We believe that, based on a number of factors, the weight of objective available evidence indicates that it is more likely than not that we will not be able to realize our deferred tax assets, and a full valuation allowance was recorded at March 31, 2003 and March 31, 2002.
EXTRAORDINARY GAIN
We realized an extraordinary gain of $779,000 in the third quarter of fiscal 2002 resulting from the early extinguishment of our convertible subordinated debentures. See Note 5 to the consolidated financial statements in Part II, Item 8 of this Report for further discussion of this transaction.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In November 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board reached several conclusions regarding the accounting for debt and equity securities with beneficial conversion features, including a consensus requiring the application of the "accounting conversion price" method, versus the use of the stated conversion price, to calculate the beneficial conversion feature for such securities. The Securities and Exchange Commission (SEC) required companies to record a cumulative catch-up adjustment in the fourth quarter of calendar 2000 related to the application of the "accounting conversion price" method to securities issued after May 21, 1999. Accordingly, we recorded a $1.1 million non-cash expense during the quarter ended December 31, 2000 to account for a beneficial conversion feature associated with Debentures and related warrants issued in December 1999, and we presented it as a cumulative effect of a change in accounting principle as required by the SEC.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, we had cash and cash equivalents totaling $3.4 million, representing a decrease of $9 million from March 31, 2002. We currently have no borrowing arrangements.
Cash used in operations of $8.8 million in fiscal 2003 primarily resulted from the net loss of $11.4 million, a $249,000 decrease in accrued compensation, a $1.9 million decrease in deferred revenue, and a $71,000 increase in accounts receivable. Cash used in operations was partially offset by a $298,000 decrease in inventory and non-cash items, including depreciation and amortization of $1.8 million, $2.3 million for the non-cash portion of restructuring and asset impairment charges, and $83,000 related to the provision for inventory. Cash used in investing activities in fiscal 2003 was attributable to purchases of short-term investments of $208,000 and capital expenditures of $137,000, partially offset by proceeds from the sale of equipment of $42,000. Cash provided by financing activities during fiscal 2003 consisted of proceeds of $89,000 resulting from the sale of our common stock to employees through our employee stock purchase and stock option plans.
Cash used in operations of $7.9 million in fiscal 2002 reflected a net loss of $9.1 million, a decrease in accounts payable of $839,000, a decrease in accrued compensation of $610,000, a decrease of $579,000 in other accrued liabilities, a $3.5 million decrease in deferred revenue and a non-cash extraordinary gain of $779,000 due to redemption of the convertible subordinated debentures. Cash used in operations was partially offset by a decrease in accounts receivable of $1.7 million, a $501,000 decrease in inventory, a $1.6 million decrease in other current assets, and non-cash items including depreciation and amortization of $3.9 million. Cash provided by investing activities in fiscal 2002 was attributable to proceeds from the sale of an investment in marketable equity securities of $543,000 and proceeds from the sale of equipment of $116,000, partially offset by capital expenditures of $172,000. Cash used in financing activities during fiscal 2002 consisted of the $4.6 million payment associated with the redemption of the convertible subordinated debentures and certain costs incurred in connection with the redemption, offset partially by proceeds of $335,000 resulting from the sale of our common stock to employees through our employee stock purchase and stock option plans.
Cash used in operations of $24.6 million in fiscal 2001 reflected a net loss of $74.4 million, decreases in accounts payable and accrued compensation of $2.2 million and $623,000, an increase in other current and non-current assets of $1.3 million, and a non-cash adjustment for a gain on sale of investments of $225,000. Cash used in operations was partially offset by cash provided by a decrease in accounts receivable of $851,000, an increase in other accrued liabilities of $378,000, and non-cash items, including restructuring charges of $32.3 million, depreciation and amortization of $14.4 million, in-process research and development of $4.6 million, the cumulative effect of a change in accounting principle of $1.1 million, and stock compensation charges of $753,000. Cash provided by investing activities in fiscal 2001 is primarily attributable to net proceeds from the sale of assets and the license of technology associated with our video monitoring product line of $5.2 million, offset by acquisitions of property and equipment of $6.1 million and cash paid for acquisitions, net, of $558,000. Cash flows from financing activities in fiscal 2000 consisted primarily of proceeds from sales of the Company's common stock totaling $2.8 million, offset by debt repayments of $891,000 and repurchases of common stock and Exchangeable Shares of $514,000. For the year, cash and cash equivalents decreased $24.5 million.
As of March 31, 2003, our principal commitments consisted of obligations outstanding under non-cancelable operating leases. At March 31, 2003, future minimum annual lease payments under noncancelable operating leases, net of sublease income, were as follows (in thousands):
YEAR ENDING MARCH 31, --------------------- 2004....................