8x8, Inc.
8X8 INC /DE/ (Form: 10-Q, Received: 08/03/2015 06:14:13)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 000-21783

8X8, INC.
(Exact name of Registrant as Specified in its Charter)

 

Delaware
77-0142404
  (State or Other Jurisdiction of Incorporation or Organization) 
(I.R.S. Employer Identification Number)

2125 O'Nel Drive
San Jose, CA  95131

(Address of Principal Executive Offices)

(408) 727-1885
(Registrant's Telephone Number, including Area Code)

      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 reports), and (2) has been subject to such filing requirements for the past 90 days.    x YES      ¨ NO   

      Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES   x     NO   ¨

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    x

Accelerated filer    ¨

Non-accelerated filer    ¨
(Do not check if a smaller reporting company)

Smaller reporting company    ¨

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES    ¨        NO    x

      The number of shares of the Registrant's Common Stock outstanding as of July 27, 2015 was 88,598,106.



TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION Page No.
     
Item 1. Financial Statements:
 
     
           Condensed Consolidated Balance Sheets at June 30, 2015 and March 31, 2015
3
     
           Condensed Consolidated Statements of Income (Loss) for the three
           months ended June 30, 2015 and 2014
4
     
           Condensed Consolidated Statements of Comprehensive Income for the three
           months ended June 30, 2015 and 2014
5
     
           Condensed Consolidated Statements of Cash Flows for the three months
           ended June 30, 2015 and 2014
6
     
           Notes to Unaudited Condensed Consolidated Financial Statements
7
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
20
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
26
     
Item 4. Controls and Procedures
26
     
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
27
     
Item 1A. Risk Factors
27
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
27
     
Item 5. Other Information
27
     
Item 6. Exhibits
28
     
Signature
29

2


Part I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

8X8, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)

        June 30,     March 31,
      2015     2015
ASSETS            
Current assets:            
     Cash and cash equivalents   $ 29,298    $ 53,110 
     Short-term investments     127,668      123,984 
     Accounts receivable, net     8,041      6,642 
     Inventory     618      704 
     Deferred cost of goods sold     500      428 
     Deferred tax asset     3,978      4,454 
     Other current assets     4,034      2,274 
          Total current assets     174,137      191,596 
Property and equipment, net     11,714      10,248 
Intangible assets, net     28,510      12,260 
Goodwill     48,039      36,887 
Non-current deferred tax asset     43,169      43,169 
Other assets     1,463      1,464 
               Total assets   $ 307,032    $ 295,624 
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
Current liabilities:            
     Accounts payable   $ 9,736    $ 7,775 
     Accrued compensation     7,305      6,183 
     Accrued warranty     342      339 
     Accrued taxes     3,437      2,800 
     Deferred revenue     1,514      1,768 
     Other accrued liabilities     3,354      2,965 
          Total current liabilities     25,688      21,830 
             
Non-current liabilities     4,709      1,352 
Non-current deferred revenue     196      231 
          Total liabilities     30,593      23,413 
             
Commitments and contingencies (Note 6)            
             
Stockholders' equity:            
     Common stock     88      88 
     Additional paid-in capital     382,241      378,971 
     Accumulated other comprehensive loss     (679)     (2,109)
     Accumulated deficit     (105,211)     (104,739)
          Total stockholders' equity     276,439      272,211 
               Total liabilities and stockholders' equity   $ 307,032    $ 295,624 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share amounts; unaudited)

             
      Three Months Ended
      June 30,
      2015     2014
Service revenue   $ 44,168    $ 34,276 
Product revenue     3,724      3,637 
          Total revenue      47,892      37,913 
             
Operating expenses:            
     Cost of service revenue      8,459      6,997 
     Cost of product revenue      4,382      3,969 
     Research and development      5,080      3,406 
     Sales and marketing      23,824      19,160 
     General and administrative      6,068      3,878 
          Total operating expenses      47,813      37,410 
Income from operations      79      503 
Other income, net      234      177 
Income from operations before provision for income taxes     313      680 
Provision for income taxes     785      672 
Net income (loss)    $ (472)   $
             
Net income (loss) per share:            
Basic   $ (0.01)   $ 0.00 
Diluted   $ (0.01)   $ 0.00 
             
Weighted average number of shares:            
Basic     88,233      88,592 
Diluted     88,233      91,445 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, unaudited)

      Three Months Ended
      June 30,
      2015     2014
Net income (loss)   $ (472)   $
Other comprehensive income (loss), net of tax            
     Unrealized gain (loss) on investments in securities     (48)     86 
     Foreign currency translation adjustment     1,478      453 
Comprehensive income   $ 958    $ 547 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

             
      Three Months Ended
      June 30,
      2015     2014
Cash flows from operating activities:            
Net income (loss)   $ (472)   $
Adjustments to reconcile net income (loss) to net cash            
     provided by operating activities:            
          Depreciation     993      755 
          Amortization of intangible assets     546      567 
          Amortization of capitalized software     456      85 
          Net accretion of discount and amortization of             
               premium on marketable securities     236      192 
          Stock-based compensation     3,022      1,847 
          Deferred income tax provision     476      610 
          Other     74     
Changes in assets and liabilities:            
          Accounts receivable, net     (612)     (402)
          Inventory     88      47 
          Other current and noncurrent assets     (470)     (175)
          Deferred cost of goods sold     (53)     157 
          Accounts payable     1,132      988 
          Accrued compensation     725      674 
          Accrued warranty         (41)
          Accrued taxes and fees     492      128 
          Deferred revenue     (704)     (352)
          Other current and noncurrent liabilities     (1,272)     (447)
          Net cash provided by operating activities     4,660      4,650 
             
Cash flows from investing activities:            
     Purchases of property and equipment     (1,073)     (1,026)
     Purchase of businesses, net of cash acquired     (23,434)    
     Cost of capitalized software     (471)    
     Proceeds from maturity of investments     7,820      3,300 
     Sales of investments - available for sale     22,620      18,992 
     Purchase of investments - available for sale     (34,409)     (30,134)
          Net cash used in investing activities     (28,947)     (8,868)
             
Cash flows from financing activities:            
     Capital lease payments     (54)     (46)
     Repurchase of common stock     (25)     (48)
     Proceeds from issuance of common stock under employee stock plans     336      170 
          Net cash provided by financing activities     257      76 
             
Effect of exchange rate changes on cash     218      56 
Net decrease in cash and cash equivalents     (23,812)     (4,086)
             
Cash and cash equivalents at the beginning of the period     53,110      59,159 
Cash and cash equivalents at the end of the period   $ 29,298    $ 55,073 
             
Supplemental cash flow information            
     Income taxes paid   $ 52    $ 85 
     Interest paid        

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


8X8, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

8x8, Inc. (8x8 or the Company) is a leading provider of VoIP (Voice over Internet Protocol) technology and SaaS (Software as a Service) communication solutions in the cloud for SMBs (Small and Midsize Business) and mid-market and distributed enterprises. The Company delivers a broad suite of SaaS services to in-office and mobile devices spanning cloud telephony, virtual contact center and virtual meeting through its proprietary unified SaaS platform.

The Company was incorporated in California in February 1987 and was reincorporated in Delaware in December 1996.

BASIS OF PRESENTATION

The Company's fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the consolidated financial statements refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 2016 refers to the fiscal year ended March 31, 2016).

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared on substantially the same basis as our annual consolidated financial statements for the fiscal year ended March 31, 2015. In the opinion of the Company's management, these interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.

The March 31, 2015 year-end condensed consolidated balance sheet data in this document were derived from audited consolidated financial statements and does not include all of the disclosures required by U.S. generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements as of and for the fiscal year ended March 31, 2015 and notes thereto included in the Company's fiscal 2015 Annual Report on Form 10-K.

The results of operations and cash flows for the interim periods included in these condensed consolidated financial statements are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of 8x8 and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015 filed with the SEC on May 29, 2015, and there have been no changes to the Company's significant accounting policies during the three months ended June 30, 2015, except as described in the "Recent Accounting Pronouncements" section below.

7


RECENT ACCOUNTING PRONOUNCEMENTS

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . This ASU changes the requirements for reporting discontinued operations in FASB ASU 205-20, such that a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This ASU requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position, as well as additional disclosures about discontinued operations. Additionally, the ASU requires disclosures about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements and expands the disclosures about an entity's significant continuing involvement with a discontinued operation. The accounting update is effective for annual periods beginning on or after December 15, 2014. We adopted this pronouncement for our fiscal year beginning April 1, 2015, and there was no effect on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09,  Revenue from Contracts with Customers (Topic 606)  and the International Accounting Standards Board (IASB) has issued International Financial Reporting Standards (IFRS) 15,  Revenue from Contracts with Customers . The issuance of these documents completes the joint effort by the FASB and the IASB to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS. The new guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This ASU will supersede the revenue recognition requirements in Topic 605,  Revenue Recognition , and most industry-specific guidance. In July 2015, the FASB voted to delay the effective date of this standard until the first quarter of 2018. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.

2. CASH, CASH EQUIVALENTS AND INVESTMENTS

Cash, cash equivalents, and available-for-sale investments were (in thousands):

            Gross     Gross           Cash and      
      Amortized     Unrealized     Unrealized     Estimated     Cash     Short-Term
As of June 30, 2015     Costs     Gain     Loss     Fair Value     Equivalents     Investments
     Cash   $ 12,466        $   $ 12,466    $ 12,466    $
Level 1:                                    
     Money market funds     16,832              16,832      16,832     
     Mutual funds     2,000          (139)     1,861          1,861 
          Subtotal     31,298          (139)     31,159      29,298      1,861 
Level 2:                                    
     Commercial paper     9,783          (1)     9,784          9,784 
     Corporate debt     72,828      38      (29)     72,837          72,837 
     Municipal securities     6,471          (1)     6,472          6,472 
     Asset backed securities     23,427          (8)     23,424          23,424 
     Mortgage backed securities     5,000          (23)     4,978          4,978 
     Agency bond     7,509          (2)     7,509          7,509 
     International government securities     800              803          803 
          Subtotal     125,818      53      (64)     125,807          125,807 
          Total   $ 157,116    $ 53    $ (203)   $ 156,966    $ 29,298    $ 127,668 

8


            Gross     Gross           Cash and      
      Amortized     Unrealized     Unrealized     Estimated     Cash     Short-Term
As of March 31, 2015     Costs     Gain     Loss     Fair Value     Equivalents     Investments
     Cash   $ 24,734    $   $   $ 24,734    $ 24,734    $
Level 1:                                    
     Money market funds     28,376              28,376      28,376     
     Mutual funds     2,000          (107)     1,893          1,893 
          Subtotal     55,110          (107)     55,003      53,110      1,893 
Level 2:                                    
     Commercial paper     9,043              9,044          9,044 
     Corporate debt     75,284      57      (10)     75,331          75,331 
     Municipal securities     5,435          (1)     5,436          5,436 
     Asset backed securities     21,503          (5)     21,502          21,502 
     Mortgage backed securities     5,822          (52)     5,770          5,770 
     Agency bond     4,201              4,204          4,204 
     International government securities     800              804          804 
          Subtotal     122,088      71      (68)     122,091          122,091 
          Total   $ 177,198    $ 71    $ (175)   $ 177,094    $ 53,110    $ 123,984 

Contractual maturities of cash equivalents and investments as of June 30, 2015 are set forth below (in thousands):

      Estimated
      Fair Value
Due within one year   $ 68,976 
Due after one year     58,692 
     Total   $ 127,668 

3. BALANCE SHEET DETAIL

        June 30,     March 31,
      2015     2015
Inventory (in thousands)      
     Work-in-process   $ 11    $ 169 
     Finished goods     607      535 
    $ 618    $ 704 

9


4. INTANGIBLE ASSETS

The carrying value of intangible assets consisted of the following (in thousands):

    June 30, 2015     March 31, 2015
    Gross           Net     Gross           Net
    Carrying     Accumulated     Carrying     Carrying     Accumulated     Carrying
    Amount     Amortization     Amount     Amount     Amortization     Amount
Technology $ 21,840    $ (2,978)   $ 18,862    $ 8,242    $ (2,905)   $ 5,337 
Customer relationships   10,554      (3,778)     6,776      9,686      (3,720)     5,966 
Trade names/domains   2,522          2,522      957          957 
In-process research and development   350          350             
     Total acquired identifiable                                  
          intangible assets $ 35,266    $ (6,756)   $ 28,510    $ 18,885    $ (6,625)   $ 12,260 

At June 30, 2015, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following (in thousands):

      Amount
Remaining 2016   $ 3,891 
2017     4,714 
2018     4,445 
2019     4,192 
2020     4,192 
Thereafter     4,554 
     Total   $ 25,988 

5. RESEARCH, DEVELOPMENT AND SOFTWARE COSTS

In the first three months of fiscal 2016, the Company expensed all research and development costs in accordance with ASC 985-20, Costs of Software to be Sold, Leased or Marketed (ASC 985-20). At June 30, 2015 and March 31, 2015, total capitalized software development costs included in other long-term assets was approximately $0 and $1.0 million, respectively, and accumulated amortization costs related to capitalized software was approximately $0 and $0.5 million, respectively.

The Company accounts for computer software developed or obtained for internal use in accordance with ASC 350-40, Internal Use Software (ASC 350-40). In the first three months of fiscal 2016, the Company capitalized $0.5 million in accordance with ASC 350-40, which is classified as other assets. No such costs were capitalized in the first three months of fiscal 2015. As of June 30, 2015, the Company capitalized $2.0 million in accordance with ASC 350-40, of which $1.2 million is classified as other assets, and $0.8 million is classified as property and equipment. As of March 31, 2015, the Company capitalized $1.5 million in accordance with ASC 350-40, of which $0.8 million is classified as property and equipment and $0.7 million is classified as long-term assets. At June 30, 2015, the projects had not yet been placed into service, and accordingly no amortization has been recognized.

10


6. COMMITMENTS AND CONTINGENCIES

Guarantees

Indemnifications

In the normal course of business, the Company may agree to indemnify other parties, including customers, lessors and parties to other transactions with the Company, with respect to certain matters such as breaches of representations or covenants or intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors.

It is not possible to determine the maximum potential amount of the Company's exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on the Company's operating results, financial position or cash flows. Under some of these agreements, however, the Company's potential indemnification liability might not have a contractual limit.

Product Warranties

The Company accrues for the estimated costs that may be incurred under its product warranties upon revenue recognition. Changes in the Company's product warranty liability, which is included in cost of product revenues in the consolidated statements of income (loss), were as follows (in thousands):

      Three Months Ended
      June 30,
      2015     2014
Balance at beginning of period   $ 339    $ 660 
     Accruals for warranties     98      54 
     Settlements     (83)     (95)
     Adjustments     (12)    
Balance at end of period   $ 342    $ 619 

Minimum Third Party Customer Support Commitments

In the third quarter of 2010, the Company amended its contract with one of its third party customer support vendors containing a minimum monthly commitment of approximately $0.4 million effective April 1, 2010. The agreement requires a 150-day notice to terminate. At June 30, 2015, the total remaining obligation under the contract was $2.2 million.

Minimum Third Party Network Service Provider Commitments

The Company entered into contracts with multiple vendors for third party network service which expire on various dates in fiscal 2016 through 2018. At June 30, 2015, future minimum annual payments under these third party network service contracts were as follows (in thousands):

Year ending March 31:            
Remaining 2016         $ 2,231 
2017           2,452 
2018           891 
     Total minimum payments         $ 5,574 

11


Legal Proceedings

The Company, from time to time, is involved in various legal claims or litigation, including patent infringement claims that can arise in the normal course of the Company's operations. Pending or future litigation could be costly, could cause the diversion of management's attention and could upon resolution, have a material adverse effect on the Company's business, results of operations, financial condition and cash flows.

On February 22, 2011, the Company was named a defendant in, Bear Creek Technologies, Inc. v. 8x8, Inc.  et al. , filed in the U.S. District Court for the District of Delaware, along with 20 other defendants. On August 17, 2011, the suit was dismissed without prejudice as to the Company under Rule 21 of the Federal Rules of Civil Procedure. On August 17, 2011, Bear Creek Technologies, Inc. refiled its suit against the Company in the United States District Court for the District of Delaware. Further, on November 28, 2012, the U.S. Patent & Trademark Office initiated a Reexamination proceeding with a Reexamination Declaration explaining that there is a substantial new question of patentability, based on four separate grounds and affecting each claim of the patent which is the basis for the complaint filed against us.  On March 26, 2013, the USPTO issued a first Office Action in the Reexamination, with all claims of the '722 patent being rejected on each of the four separate grounds raised in the Request for Reexamination.  On July 10, 2013, the Company filed an informational pleading in support of and joining a motion to stay the proceeding in the District Court; the District Court granted the motion on July 17, 2013, based on the possibility that at least one of the USPTO rejections will be upheld and considering the USPTO's conclusion that Bear Creek's patent suffers from a defective claim for priority.  On March 24, 2014, the USPTO issued another Office Action in which the rejections of the claims were maintained.  On August 15, 2014, the USPTO issued a Right of Appeal Notice, as the USPTO maintained all rejections of the patent claims.  On September 15, 2014, Bear Creek Technologies, Inc. filed a Notice of Appeal of this decision with the Patent Trial and Appeal Board, and the USPTO's rejections are currently on appeal. By an order issued on May 5, 2015, the Court administratively closed this case with leave to reopen if further attention by the Court is required. 

On March 31, 2014, the Company was named as a defendant in a lawsuit, CallWave Communications LLC (CallWave) v. 8x8, Inc. CallWave also sued Fonality Inc. on March 31, 2014, and previously had sued other companies including Verizon, Google, T-Mobile, and AT&T. The Company answered the complaint and filed counterclaims in response thereto. On April 21, 2015, the Company filed its answer and alleged a number of counterclaims including patent misuse. On or about May 26, 2015, the parties agreed to settle all claims in the suit, including, (but not necessarily limited to) a release and/or covenant not to sue by the plaintiff on future claims that 8x8 products infringe the CallWave patents alleged to have been infringed. The case was dismissed with prejudice on June 5, 2015.

On December 31, 2014, the Company was named as a defendant in a lawsuit, Adaptive Data, LLC v. 8x8, Inc., filed in the U.S. District Court for the District of Delaware. Adaptive Data, LLC also sued another 36 other defendants on December 31, 2014 and another 16 defendants on January 5, 2015 regarding the same patents asserted in our case. Service of process was never effected on the Company.  The Court issued a Notice of Voluntary Dismissal on January 23, 2015.

On April 15, 2015, the Company was named as a defendant in a lawsuit, UrgenSync, LLC v. 8x8, Inc., filed in the U.S. District Court for the E.D. of Texas. UrgenSync, LLC also sued another 14 other defendants on the same day regarding the same patent asserted in the complaint filed against 8x8.  The Court issued an Order of Voluntary Dismissal with Prejudice on June 18, 2015.

On April 16, 2015, the Company was named as a defendant in a lawsuit, Slocumb Law Firm v. 8x8, Inc., filed in the United States District Court for the Middle District of Alabama. The Slocumb Law Firm alleges that it purchased certain business services from the Company that did not perform as advertised or expected, and asserts various causes of actions including fraud, breach of contract, violations of the Alabama Deceptive Trade Practices Act and negligence. On June 30, 2015, the Court granted the Company's motion to stay the case and compel the Slocumb Law Firm to arbitrate its claims against the Company in Santa Clara County, California pursuant to a clause mandating arbitration of disputes set forth in the terms and conditions to which Slocumb Law Firm agreed in connection with its purchase of business services from the Company. The Company has not yet received a formal arbitration demand from the Slocumb Law Firm, nor has discovery commenced. The Company intends to vigorously defend against the Slocumb Law Firm's claims.

12


State and Municipal Taxes

From time to time, the Company has received inquiries from a number of state and municipal taxing agencies with respect to the remittance of sales, use, telecommunications, excise, and income taxes. Several jurisdictions currently are conducting tax audits of the Company's records. The Company collects or has accrued for taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the accruals established by the Company.

7. STOCK-BASED COMPENSATION

The following table summarizes stock-based compensation expense (in thousands):

      Three Months Ended
      June 30,
      2015     2014
Cost of service revenue   $ 219    $ 115 
Cost of product revenue        
Research and development     531      314 
Sales and marketing     1,197      744 
General and administrative     1,075      674 
Total stock-based compensation expense related to employee            
     stock options and employee stock purchases, pre-tax     3,022      1,847 
             
Tax benefit        
Stock-based compensation expense related to employee            
     stock options and employee stock purchases, net of tax   $ 3,022    $ 1,847 

Stock Options, Stock Purchase Right and Restricted Stock Unit Activity

Stock Option activity under all the Company's stock option plans for the three months ended June 30, 2015, is summarized as follows:

          Weighted Average
    Number of     Exercise Price
    Shares     Per Share
Outstanding at March 31, 2015   5,327,907    $ 5.19 
     Granted    229,000      8.66 
     Exercised   (88,048)     3.10 
     Canceled/Forfeited   (8,167)     6.78 
Outstanding at June 30, 2015   5,460,692    $ 5.37 
           
Vested and expected to vest at June 30, 2015   5,460,692    $ 5.37 
Exercisable at June 30, 2015   3,316,717    $ 3.57 

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Stock Purchase Right activity for the three months ended June 30, 2015 is summarized as follows:

          Weighted     Weighted
          Average     Average
          Grant-Date     Remaining
    Number of     Fair Market     Contractual
    Shares     Value     Term (in Years)
Balance at March 31, 2015   223,835    $ 5.92      1.50 
Granted            
Vested   (28,760)     4.42       
Forfeited   (1,875)     11.26       
Balance at June 30, 2015   193,200    $ 6.09      1.31 

Restricted Stock Unit activity for the three months ended June 30, 2015 is summarized as follows:

                Weighted
          Weighted     Average
          Average     Remaining
    Number of     Grant Date     Contractual
    Shares     Fair Value     Term (in Years)
Balance at March 31, 2015   2,698,686    $ 7.33      1.88 
Granted   543,147      8.85       
Vested   (39,921)     7.86       
Forfeited   (35,462)     8.63       
Balance at June 30, 2015   3,166,450    $ 7.57      1.77 

The following table summarizes stock options outstanding and exercisable at June 30, 2015:

    Options Outstanding   Options Exercisable
          Weighted   Weighted               Weighted      
          Average   Average               Average      
          Exercise   Remaining     Aggregate         Exercise     Aggregate
          Price   Contractual     Intrinsic         Price     Intrinsic
    Shares     Per Share   Life (Years)     Value   Shares     Per Share     Value
$ 0.55 to $ 1.26   1,095,000    $ 1.11    2.6    $ 8,595,630    1,095,000    $ 1.11    $ 8,595,630 
$ 1.27 to $ 4.32   1,166,033    $ 1.98    1.9      8,144,892    1,141,467    $ 1.93      8,029,723 
$ 4.45 to $ 6.86   1,353,069    $ 6.33    8.3      3,558,963    544,405    $ 5.87      1,682,505 
$ 7.52 to $ 9.70   1,272,022    $ 8.99    8.8      368,605    295,412    $ 9.54      2,925 
$ 9.74 to $ 11.26   574,568    $ 10.10    8.3        240,433    $ 10.05     
    5,460,692              $ 20,668,090    3,316,717          $ 18,310,783 

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As of June 30, 2015, there was $26.3 million of unamortized stock-based compensation expense related to unvested stock options and awards which is expected to be recognized over a weighted average period of 2.71 years.

Assumptions Used to Calculate Stock-Based Compensation Expense

The fair value of each of the Company's option grants has been estimated on the date of grant using the Black-Scholes pricing model with the following assumptions:

      Three Months Ended
      June 30,
      2015     2014
Expected volatility     53%     59%
Expected dividend yield        
Risk-free interest rate     1.59%     1.53%
Weighted average expected option term     5.25 years     5.00 years
             
Weighted average fair value of options granted   $ 4.17   $ 4.01

Stock Repurchases

In February 2015, the Company's board of directors authorized the Company to purchase up to $20 . 0 million of its common stock from time to time until February 29, 2016 (the Repurchase Plan). Share repurchases, if any, will be funded with available cash. Repurchases under the Repurchase Plan may be made through open market purchases at prevailing market prices or in privately negotiated transactions. The timing, volume and nature of share repurchases are subject to market prices and conditions, applicable securities laws and other factors, and are at the discretion of the Company's management. Share repurchases under the Repurchase Plan may be commenced, suspended or discontinued at any time. The remaining authorized repurchase amount at June 30, 2015 was approximately $15.7 million. There were no stock repurchases made under the Repurchase Plan in the three months ended June 30, 2015.

The stock repurchase activity as of June 30, 2015 is summarized as follows:

    Shares     Weighted Average
Price
    Amount
    Repurchased     Per Share     Repurchased (1)
Repurchase of common stock                
under 2015 Repurchase Plan   574,467    $ 7.38    $ 4,239,216 
Total   574,467          $ 4,239,216 
                 
(1) Amount excludes commission fees.

8. INCOME TAXES

For the three months ended June 30, 2015, the Company recorded a provision for income taxes of $0.8 million, which was primarily attributable to income from operations. For the three months ended June 30, 2014, the Company recorded a provision for income taxes of $0.7 million which was primarily attributable to income from operations.

The effective tax rate is calculated by dividing the income tax provision by net income before income tax expense.

At March 31, 2015, there were $2.4 million of unrecognized tax benefits that, if recognized, would have affected the effective tax rate.  The Company does not believe that there has been any significant change in the unrecognized tax benefits in the three-month period ended June 30, 2015, and does not expect the remaining unrecognized tax benefit to change materially in the next 12 months. To the extent that the remaining unrecognized tax benefits are ultimately recognized, they will have an impact on the effective tax rate in future periods.

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The Company is subject to taxation in the U.S., California and various other states and foreign jurisdictions in which it has or had a subsidiary or branch operations or it is collecting sales tax. All tax returns from fiscal 1996 to fiscal 2015 may be subject to examination by the Internal Revenue Service, California and various other states. As of July 22, 2015, there were no active federal or state income tax audits. Returns filed in foreign jurisdictions may be subject to examination for the fiscal years 2011 to 2015.

9. NET INCOME (LOSS) PER SHARE

The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share (in thousands, except share and per share data):

      Three Months Ended
      June 30,
      2015     2014
Numerator:            
Net income (loss) available to common stockholders   $ (472)   $
             
Denominator:            
Common shares     88,233      88,592 
             
Denominator for basic calculation     88,233      88,592 
Employee stock options          2,480 
Stock purchase rights         373 
Denominator for diluted calculation      88,233      91,445 
             
Net income (loss) per share            
     Basic    $ (0.01)   $ 0.00 
     Diluted    $ (0.01)   $ 0.00 

The following shares attributable to outstanding stock options and restricted stock purchase rights were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive (in thousands):

      Three Months Ended
      June 30,
      2015     2014
Employee stock options     2,447      1,370 
Stock purchase rights     70      79 
Total anti-dilutive employee stock-based securities     2,517      1,449 

10. SEGMENT REPORTING

ASC 280, Segment Reporting , establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

As of June 30, 2015, the Company has reclassified the presentation of the information regarding its reportable segments to reflect a change from one reportable segment in prior periods to two reportable segments, due to changes in reporting structure as a result of a business acquisition that occurred in the first fiscal quarter of 2016. The Company manages its operations primarily on a geographic basis. The Company's chief operating decision makers (CODMs) are the Chief Executive Officer, the Chief Financial Officer, and the Chief Technology Officer, who evaluate performance of the Company and make decisions regarding allocation of resources based on geographic results.   The Company's reportable operating segments are the Americas and Europe. The Americas segment is primarily North America. The Europe segment is primarily the United Kingdom. Each operating segment provides similar products and services.

The Company's CODMs evaluate the performance of its operating segments based on revenues and net income. Revenues are attributed to each segment based on the ordering location of the customer or ship to location. The Company allocates corporate overhead costs such as research and development, sales and marketing, general and administrative, amortization expense, stock-based compensation expense, and commitment and contingencies to the US segment. The Company did not allocate goodwill for each segment as the Company had not completed its analysis of assigning goodwill to its reporting units as of July 31, 2015.

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The Company's revenue distribution by geographic region (based upon the destination of shipments and the customer's service address) was as follows:

      Three Months Ended
      June 30,
      2015     2014
Americas (principally US)     88%     91%
Europe     9%     8%
Asia-Pacific     3%     1%
      100%     100%

Geographic area data is based upon the location of the property and equipment and is as follows (in thousands):

        June 30,     March 31,
      2015     2015
Americas (principally US)   $ 8,280    $ 8,348 
Europe     2,931      1,411 
Asia-Pacific     503      489 
     Total   $ 11,714    $ 10,248 

The following table provides financial information by operating segment for the three month period ending June 30, 2015 and 2014 (in thousands):

      Three Months Ended
      June 30,
      2015     2014
Americas (principally US):            
     Net Revenues   $ 43,588    $ 35,128 
     Net Income (loss)   $ 251    $ 803 
Europe:            
     Net Revenues   $ 4,304    $ 2,785 
     Net Income (loss)   $ (723)   $ (795)

11. ACQUISITIONS

DXI Group Limited

On May 26, 2015, the Company entered into a share purchase agreement with the shareholders of DXI Limited, API Telecom Limited, Easycallnow Limited and RAS Telecom Limited (collectively, DXI) for the purchase of the entire share capital of DXI. The transaction closed effective May 29, 2015 and was not subject to regulatory approvals. The total aggregate purchase price was approximately $22.5 million, consisting of $18.7 million in cash paid to the DXI shareholders at closing, and $3.8 million in cash deposited into escrow to be held for two years as security against indemnity claims made by the Company after the closing date. Approximately 352,000 shares of common stock valued at approximately $3.0 million were issued only to former management shareholders of DXI as part of the share purchase agreement and are subject to certain restrictions, including a four-year annual vesting requirement based on the continued employment of such shareholders. Under ASC 805-10-55-25, Business Combinations , the shares are considered post acquisition compensation vs. consideration transferred. The value of the shares will be amortized over the vesting period of forty-eight months. The shares are further subject to indemnity claims asserted by the Company prior to vesting. Vesting of the shares is subject to acceleration in the event of the shareholder's death or disability, or upon an employment termination without adequate cause, as provided in the share purchase agreement. The cash escrow also applies only to the management shareholders of DXI and is to be released in annual installments over two years. The share purchase agreement contains representations and warranties by the management shareholders that are

17


customary in the UK for transactions of this size and nature. The Company also awarded restricted stock units representing the right to receive approximately 53,000 shares of common stock that were valued at approximately $482,000 to certain continuing employees of DXI, which will be amortized as stock-based compensation over the requisite service period.

The Company recorded the acquired tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the aggregate fair values of the assets acquired and liabilities assumed is recorded as goodwill. The amount of goodwill recognized is primarily attributable to the expected contributions of the entity to the overall corporate strategy in addition to synergies and acquired workforce of the acquired business. The finite−lived intangible assets consist of the following: customer relationships, with an estimated weighted-average useful life of two and five years; and developed technology, with an estimated weighted-average useful life of seven years. The indefinite lived intangible asset consisted of a tradename. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management using various income approach methods. Intangible assets are amortized on a straight-line basis.

The preliminary fair values of the assets acquired and liabilities assumed are as follows (in thousands):

      Estimated
      Fair Value
Assets acquired:      
     Cash   $ 1,318 
     Current assets     2,016 
     Property and equipment     1,453 
     Intangible assets     14,691 
          Total assets acquired     19,478 
Liabilities assumed:      
     Current liabilities and non-current liabilities     (5,997)
          Total liabilities assumed     (5,997)
               Net identifiable assets acquired     13,481 
     Goodwill     9,071 
               Total consideration transferred   $ 22,552 

None of the goodwill recognized is expected to be deductible for income tax purposes.

DXI contributed revenue of approximately $1.1 million and net income was not material for the period from the date of acquisition to June 30, 2015. Total acquisition related costs were approximately $0.8 million. The Company determined it is impractical to include pro forma information given the difficulty in obtaining the historical financial information of DXI. Inclusion of such information would require the Company to make estimates and assumptions regarding DXI's historical financial results that we believe may ultimately prove inaccurate.

Quality Software Corporation

On June 18, 2015, the Company entered into an asset purchase agreement with the shareholder of Quality Software Corporation (QSC) and other parties affiliated with the shareholder and QSC for the purchase of certain assets as per the purchase agreement. The total aggregate fair value of the consideration was approximately $2.9 million, which was paid in cash to the QSC shareholder at closing. As part of the aggregate purchases price, there is also $0.5 million in contingent consideration payable subject to attainment of certain revenue and product release milestones for the acquired business, and $0.3 million in cash held by the Company in escrow to be retained for two years as security against indemnity claims made by the Company after the closing date. The preliminary fair value of the contingent consideration and escrow amounts was $0.7 million at the acquisition date.

The Company recorded the acquired identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the aggregate fair values of the assets acquired and liabilities assumed is recorded as goodwill. The amount of goodwill recognized is primarily attributable to the expected contributions of the entity to the overall corporate strategy in addition to synergies and acquired workforce of the acquired business. The finite−lived intangible assets consist of the following: customer relationships, with an estimated weighted-average useful life of five years; and developed technology, with an estimated weighted-average useful life of seven years. The indefinite lived intangible asset consisted of a tradename. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management using various income approach methods. Intangible assets are amortized on a straight-line basis.

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The preliminary fair values of the assets acquired and liabilities assumed are as follows (in thousands):

      Estimated
      Fair Value
Assets acquired:      
     Intangible assets   $ 1,675 
     Goodwill     1,214 
          Total consideration transferred   $ 2,889 

The goodwill recognized is expected to be deductible for income tax purposes.

QSC's contributions to revenue and income for the period from the date of acquisition to June 30, 2015 was not material. Total acquisition related costs were approximately $0.1 million.

 

 

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Management 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. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors. These factors include, but are not limited to, customer acceptance and demand for our cloud communications and collaboration services, the quality and reliability of our services, the prices for our services, customer renewal rates, customer acquisition costs, our ability to compete effectively in the hosted telecommunications and cloud-based computing services business, actions by our competitors, including price reductions for their competitive services, our ability to provide cost-effective and timely service and support to larger distributed enterprises, potential federal and state regulatory actions, compliance costs, potential warranty claims and product defects, our need for and the availability of adequate working capital, our ability to innovate technologically, the timely supply of products by our contract manufacturers, our management's ability to execute its plans, strategies and objectives for future operations, including the execution of integration plans, and to realize the expected benefits of our acquisitions, and potential future intellectual property infringement claims and other litigation that could adversely affect our business and operating 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. In addition to the factors discussed elsewhere in this Form 10-Q, see the Risk Factors discussion in Item 1A of our 2015 Form 10-K. The forward-looking statements included in this Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

BUSINESS OVERVIEW

We are a leading provider of VoIP and SaaS communication solutions in the cloud for SMBs and mid-market and distributed enterprises. We deliver a broad suite of SaaS services including hosted cloud telephony, virtual contact center, and virtual meeting to in-office and mobile devices through our proprietary unified SaaS platform. Our integrated, "pure-cloud" services platform is based on internally owned and managed technologies and is uniquely positioned to serve mid-market and enterprise businesses making the shift to cloud based Unified Communications. We make a full set of unified communications capabilities including cloud telephony, contact center, video and web conferencing available from anywhere in the world. With 8x8 analytics and reporting, our customers have a robust suite of web based tools that provide enterprise-level analytics that can be used to make highly informed business decisions, whether employees are mobile via the mobile client or in-office using a softphone, or a desk phone. Since fiscal 2004, substantially all of our revenue has been generated from the sale, license and provision of communications services. Prior to fiscal 2003, our focus was on our Voice over Internet Protocol semiconductor business.

Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this report refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal 2016 refers to the fiscal year ending March 31, 2016).

SUMMARY AND OUTLOOK

In the first quarter of fiscal 2016, our new monthly recurring revenue sold to mid-market customers and by channel sales teams increased 38% year-over-year reflecting strong demand for our services in our target market segment. Revenue from midmarket customers increased 40% year-over year and now represents 45% of our total service revenue. Average monthly service revenue per business customer increased 20% to a record $353, compared with $293 in the same period last year. Of the $353, DXI contributed $27 to our average monthly service revenue per customer. DXI revenues are primarily usage based. As such, revenues and average monthly service revenue per customer can fluctuate from quarter to quarter. The Company added more than 1,000 net new customers in our first fiscal quarter excluding customers from DXI.

In addition, we closed the acquisitions of DXI and QSC, which broaden our geographic footprint in the UK and Europe, expand our cloud communications portfolio, and add technical development talent in both London, England and Cluj, Romania. We also enhanced our contact center capabilities with focused R&D to deliver one of the most complete platform of cloud-based communications services available to midmarket and enterprise customers. Our ability to offer a broad range of cloud-based mission critical communications services is bringing us larger deals where we continue to displace incumbent, premises-based systems.

As we continue our focus on building a more profitable and sustaining midmarket customer base, one that contributes significantly greater lifetime value than the average small business customer, we are adding fewer one - five line business customers. We expect this trend to continue based on our continued focus on selling to larger businesses. As our average business customer size continues to grow, 8x8 management believes the net additional customer metric no longer correlates to our monthly recurring and top line revenue growth.

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CRITICAL ACCOUNTING POLICIES & ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

RECENT ACCOUNTING PRONOUNCEMENTS

See Item 1 of Part I, "Financial Statements - Note 1 - Basis of Presentation - Recent Accounting Pronouncements."

SELECTED OPERATING STATISTICS

We periodically review certain key business metrics, within the context of our articulated performance goals, in order to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. The selected operating statistics include the following:

    Selected Operating Statistics
    June 30,   March 31,   Dec. 31,   Sept. 30,   June 30,
    2015   2015   2014   2014   2014
Business customers average monthly                    
     service revenue per customer (1)   $ 353    $ 320    $ 305    $ 299    $ 293 
Monthly business service revenue churn (2)(3)   1.0%   0.5%   1.0%   0.9%   0.4%
                     
Overall service margin   81%   81%   80%   79%   80%
Overall product margin   -18%   -19%   -11%   -8%   -9%
Overall gross margin   73%   73%   72%   72%   71%

_____________

(1)

Business customer average monthly service revenue per customer is service revenue from business customers in the period divided by the number of months in the period divided by the simple average number of business customers during the period.

(2)

Business customer service revenue churn is calculated by dividing the service revenue lost from business customers (after the expiration of 30-day trial) during the period by the simple average of business customer service revenue during the same period and dividing the result by the number of months in the period.

(3)

Excludes DXI business customer service revenue churn for the period ending June 30, 2015.

   

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RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto.

      June 30,     Dollar   Percent
Service revenue     2015     2014     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 44,168    $ 34,276    $ 9,892    28.9%
Percentage of total revenue     92.2%     90.4%          

Service revenue consists primarily of revenue attributable to the provision of our 8x8 cloud communication and collaboration services, and royalties earned from cloud technology licenses. We expect that 8x8 service revenues will continue to comprise nearly all of our service revenues for the foreseeable future. 8x8 service revenues increased in the first quarter of fiscal 2016 primarily due to a one-time $1.2 million accelerated technology license payment, an increase in our business customer subscriber base (net of customer churn) which includes customers acquired as part of the DXI and QSC acquisitions in the latter part of the quarter, and an increase in the average monthly service revenue per customer. Average monthly service revenue per customer increased from $293 at June 30, 2014 to $353 for at June 30, 2015. We expect growth in the number of business customers and average monthly service revenue per customer to continue to grow in fiscal 2016.

      June 30,     Dollar   Percent
Product revenue     2015     2014     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 3,724    $ 3,637    $ 87    2.4%
Percentage of total revenue     7.8%     9.6%          

Product revenue consists primarily of revenue from sales of IP telephones in conjunction with our 8x8 cloud telephony service. Product revenue increased for the three months ended June 30, 2015 primarily due to an increase in equipment sales to business customers.

No customer represented greater than 10% of the Company's total revenues for the three months ended June 30, 2015 or 2014.

      June 30,     Dollar   Percent
Cost of service revenue     2015     2014     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 8,459    $ 6,997    $ 1,462    20.9%
Percentage of service revenue     19.2%     20.4%          

The cost of service revenue primarily consists of costs associated with network operations and related personnel, telephony origination and termination services provided by third party carriers and technology license and royalty expenses. Cost of service revenue for the three months ended June 30, 2015 increased over the comparable period in the prior fiscal year primarily due to costs associated with a one-time accelerated technology license payment of $0.4 million, a $0.3 million increase in payroll and related expenses, a $0.3 million increase in third party network services expenses, a $0.2 million increase in amortization expense, a $0.1 million increase in depreciation expense, and a $0.1 million increase in stock-based compensation cost.

      June 30,     Dollar   Percent
Cost of product revenue     2015     2014     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 4,382    $ 3,969    $ 413    10.4%
Percentage of product revenue     117.7%     109.1%          

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The cost of product revenue consists primarily of IP Telephones, estimated warranty obligations and direct and indirect costs associated with product purchasing, scheduling, shipping and handling. The amount of revenue allocated to product revenue based on the relative selling price is less than the cost of the IP phone equipment. The cost of product revenue for the three months ended June 30, 2015 increased over the comparable period in the prior fiscal year primarily due to an increase in equipment shipped to customers. The increase in negative margin is due to more discounting of equipment in the current period.

      June 30,     Dollar   Percent
Research and development     2015     2014     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 5,080    $ 3,406    $ 1,674    49.1%
Percentage of total revenue     10.6%     9.0%          

Historically, our research and development expenses have consisted primarily of personnel, system prototype design, and equipment costs necessary for us to conduct our development and engineering efforts. During the three months ended June 30, 2015, we expensed all research and development costs as they were incurred in accordance with ASC 985-20. The research and development expenses for the three months ended June 30, 2015 increased over the comparable period in the prior fiscal year primarily due to a $1.2 million increase in payroll and related costs, a $0.2 million increase in stock-based compensation costs, a $0.1 million increase in consulting, temporary personnel, and outside service expenses, offset by a $0.5 million of consulting and outside services capitalized in accordance with ASC 350-40.

      June 30,     Dollar   Percent
Sales and marketing     2015     2014     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 23,824    $ 19,160    $ 4,664    24.3%
Percentage of total revenue     49.7%     50.5%          

Sales and marketing expenses consist primarily of personnel and related overhead costs for sales, marketing, and customer service which includes deployment engineering. Such costs also include outsourced customer service call center operations, sales commissions, as well as trade show, advertising and other marketing and promotional expenses. Sales and marketing expenses for the first quarter of fiscal 2016 increased over the same quarter in the prior fiscal year primarily because of a $2.2 million increase in payroll and related costs, a $0.5 million increase in indirect channel commission expenses, a $0.4 million increase in temporary personnel, consulting and outside service expenses, a $0.4 increase in stock-based compensation costs, a $0.3 million increase in travel costs, and a $0.3 million increase in advertising expenses.

      June 30,     Dollar   Percent
General and administrative     2015     2014     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 6,068    $ 3,878    $ 2,190    56.5%
Percentage of total revenue     12.7%     10.2%          

General and administrative expenses consist primarily of personnel and related overhead costs for finance, human resources and general management. General and administrative expenses for the first quarter of fiscal 2016 increased over the same quarter in the prior fiscal year primarily because of a $0.6 million increase in legal fees, which are primarily related to our business acquisition costs, a $0.5 million increase in payroll and related costs, a $0.4 million increase in stock-based compensation costs, and a $0.2 million increase in temporary personnel, consulting and outside service expenses. Increases in legal fees and consulting expenses were primarily due to acquisition activities during the quarter.

      June 30,     Dollar   Percent
Other income, net     2015     2014     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 234    $ 177    $ 57    32.2%
Percentage of total revenue     0.5%     0.5%          

23


Other income, net, primarily consisted of interest income earned on our cash, cash equivalents and investments and amortization or accretion of investments in fiscal 2016 and 2015.

      June 30,     Dollar   Percent
Provision for income tax     2015     2014     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 785    $ 672    $ 113    16.8%
Percentage of income                      
     before provision for income taxes     250.8%     98.8%          

For the three months ended June 30, 2015, we recorded a provision for income taxes of $0.8 million, all of which related to net income (loss) from operations. For the three months ended June 30, 2014, we recorded a provision for income taxes of $0.7 million, all of which related to net income from operations.

The effective tax rate set forth in the previous table is calculated by dividing the income tax provision by net income before income tax expense. We estimate our annual effective tax rate at the end of each quarter. In estimating the annual effective tax rate, we, in consultation with our tax advisors, consider, among other things, annual pre-tax income, permanent tax differences, the geographic mix of pre-tax income and the application and interpretations of existing tax laws.

The increase in the effective tax rate for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 was primarily attributable to net operating losses incurred by our UK subsidiaries not currently tax deductible for US purposes, and various one-time discrete tax items occurring in the current quarter.

Liquidity and Capital Resources

As of June 30, 2015, we had approximately $157.0 million in cash, cash equivalents and short-term investments.

Net cash provided by operating activities for the three months ended June 30, 2015 was approximately $4.7 million, compared with $4.7 million for the three months ended June 30, 2014. Cash provided by operating activities has historically been affected by the amount of net income (loss), sales of subscriptions, changes in working capital accounts particularly in deferred revenue due to timing of annual plan renewals, add-backs of non-cash expense items such as the use of deferred tax assets, depreciation and amortization and the expense associated with stock-based awards.

Net cash used in investing activities was approximately $28.9 million during the three months ended June 30, 2015. We spent approximately $1.1 million on the purchase of property and equipment, we spent approximately $23.4 million on acquisitions of two businesses, and we purchased approximately $4.0 million of short term investments, net of sales and maturities of short term investments. The net cash used in investing activities for the three months ended June 30, 2014 was $8.9 million during which purchased approximately $7.8 million of short term investments, net of sales and maturities of short term investments, and we spent approximately $1.0 million on the purchase of property and equipment.

Net cash provided by financing activities for the three months ended June 30, 2015 were approximately $0.3 million, which was primarily due from cash received from the issuance of common stock under our employee stock purchase plan. Our financing activities for the three months ended June 30, 2014 were not material.

Contractual Obligations

We lease our headquarters facility in San Jose, California under an operating lease agreement that expires in October 2019. The lease is an industrial net lease with monthly base rent of $130,821 for the first 15 months with a 3% increase each year thereafter, and requires us to pay property taxes, utilities and normal maintenance costs.

We entered into a series of noncancelable capital lease agreements for office equipment bearing interest at various rates. Assets under capital lease at June 30, 2015 totaled $0.5 million with accumulated amortization of $0.3 million.

In the third quarter of 2010, we amended the contract with one of our third party customer support vendors containing a minimum monthly commitment of approximately $0.4 million. The agreement requires a 150-day notice to terminate. At June 30, 2015, the total remaining obligation under the contract was $2.2 million.

We have entered into contracts with multiple vendors for third party network services. At June 30, 2015, future minimum annual payments under these third party network service contracts were $2.2 million in fiscal 2016, $2.5 million for fiscal 2017, and $0.9 million for fiscal 2018.

24


We lease our UK headquarters in Aylesbury UK under operating lease agreements that expires in March 2017. The lease was amended in September 2014 for additional space.  The lease has a base monthly rent of approximately $8,800, and requires us to pay property taxes, service charges, utilities and normal maintenance costs. We also lease office space in London UK under an operating lease agreement that expires in April 2019. The lease has a base monthly rent of approximately $7,100 until March 2016, rising to approximately $7,300 thereafter.

We lease additional spaces in London UK for our DXI location under operating leases that expire through October 2016. The lease has a base monthly rent of approximately $18,200, and requires us to pay service charges and normal maintenance costs.

DXI has entered into a series of noncancelable capital lease agreements for office equipment bearing interest at various rates. Assets under capital lease at June 30, 2015 totaled $1.9 million with accumulated amortization of $0.8 million.

 

 

 

 

25


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency

Our financial market risk consists primarily of risks associated with international operations and related foreign currencies. We derive a portion of our revenue from customers in Europe and Asia. In order to reduce the risk from fluctuation in foreign exchange rates, the vast majority of our sales are denominated in U.S. dollars. In addition, almost all of our arrangements with our contract manufacturers are denominated in U.S. dollars. We have not entered into any currency hedging activities. To date, our exposure to exchange rate volatility has not been significant; however, there can be no assurance that there will not be a material impact in the future.

Investments

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we may maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates would have a significant impact on our interest income.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Disclosure Controls) that are designed to ensure that information we are required to disclose in reports filed or submitted under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our Disclosure Controls. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our Disclosure Controls were effective as of June 30, 2015.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, do not expect that our Disclosure Controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Changes in Internal Control over Financial Reporting

During the first quarter of fiscal 2016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II -- OTHER INFORMATION

ITEM 1. Legal Proceedings

Descriptions of our legal proceedings are contained in Part I, Item 1, Financial Statements - Notes to Condensed Consolidated Financial Statements - " Note 6 " .

ITEM 1A. Risk Factors

We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. We have disclosed a number of material risks under Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended March 31, 2015, which we filed with the Securities and Exchange Commission on May 29, 2015.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

On May 29, 2015, we issued a total of 352,044 shares of our common stock to certain shareholders of DXI Limited as partial consideration in connection with our acquisition of all of the outstanding shares of DXI Limited and several affiliated entities.  The shares are subject to a right of repurchase in our favor at a nominal purchase price upon the termination of the recipient's employment or other association with us.  This right of repurchase lapses over a four-year period, with one-fourth of such shares being released on each anniversary of the original issuance date, subject to the recipient's continuing employment or other association with us.

The shares were issued pursuant to Regulation S and/or Section 4(2) under the Securities Act of 1933, as amended.  The purchasers to whom we offered and sold the shares were residents of the United Kingdom, the offer and sale of such shares were made outside of the United States and we did not conduct any directed selling efforts in the United States.

ITEM 5. OTHER INFORMATION

On July 21, 2015, our board of directors approved the equity-based and cash compensation described below for our non-employee directors for the year beginning with our 2015 Annual Meeting of Stockholders.   The board's compensation decisions were based on data and analysis from a study of director compensation prepared by Compensia, our compensation committee's independent compensation consultant, initiated in May 2015.

As equity-based compensation, our non-employee directors receive the following awards:

  • upon a new director's election or appointment to our board, (a) an initial award of RSUs equal in value to $100,000, vesting in equal annual installments over two years, plus (b) an award of RSUs equal in value to a pro rata portion of $175,000 (depending on the length of service until the next annual meeting), vesting in full after one year, with vesting in each case subject to the director's continued service on our board; and
  • upon the director's re-election to our board, an award of RSUs equal in value to $175,000, vesting in full after one year, subject to the director's continued service on our board.

 As cash compensation, non-employee directors receive the following amounts:

  • annual payment of $40,000 for service on our board;
  • annual payment for service as a committee member in the amount of $12,500 for the Audit Committee, $7,500 for the Compensation Committee and $5,000 for the Nominating Committee; 
  • annual payment for service as the chairman of a committee in the amount of $25,000 for the Audit Committee, $15,000 for the Compensation Committee and $10,000 for the Nominating Committee; and
  • annual payment of $35,000 to our lead director for service on our board.

Total compensation for each non-employee director upon re-election this year is less than what was paid last year, with the value of the equity-based compensation less than what was paid last year and the cash compensation substantially the same as what was paid last year (based on attendance at board and committee meetings).

27


ITEM 6. EXHIBITS

Exhibit
Number


Description


3.2

Change-in-Control and Severance Policy

10.2

Amendment of Employment Agreement between the Company and Vikram Verma dated June 23, 2015

10.3

Form of Indemnification Agreement for directors and certain officers

31.1 

Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 

Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

101.DEF

XBRL Taxonomy Extension Definition Linkbase

101.LAB

XBRL Taxonomy Extension Label Linkbase

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

  

 

28


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: July 31, 2015

8X8, INC. 

(Registrant)  

By: /s/ M ARY E LLEN G ENOVESE          

MaryEllen Genovese  

Chief Financial Officer
(Principal Financial and Chief Accounting Officer and Duly Authorized Officer)

 

 

 

 

 

29


Exhibit 3.2

8X8, INC.
EXECUTIVE CHANGE-IN-CONTROL AND SEVERANCE POLICY

(effective as of June 19, 2015)

Section       Page
1.   INTRODUCTION   1
2.   DEFINITIONS   1
3.   CHANGE-IN-CONTROL BENEFITS   4
4.   CHANGE-IN-CONTROL SEVERANCE BENEFITS   4
5.   SEVERANCE BENEFITS NOT IN CONNECTION WITH A CHANGE-IN-CONTROL   5
6.   CONDITIONS FOR PAYMENT OF SEVERANCE   6
7.   COORDINATION WITH OTHER BENEFITS   6
8.   LIMITATION ON BENEFITS   6
9.   ADMINISTRATION   7
10.   AMENDMENT OR TERMINATION   7
11.   NOTICES   7
12.   SECTION 409A   8
13.   MISCELLANEOUS   8

 

 


8X8, INC.
EXECUTIVE CHANGE-IN-CONTROL AND SEVERANCE POLICY

1.    INTRODUCTION

This Executive Change-in-Control and Severance Policy (the "Policy") is established by 8x8, Inc., effective as of June 19, 2015, to provide for the payment of certain benefits in connection with certain terminations of an Executive's employment, including in connection with a potential Change-in-Control of the Company.

2.    DEFINITIONS

2.1.    Administrator . For purposes of this Policy, "Administrator" means the person(s) designated by the Board or the Committee as the administrator of this Policy.

2.2.    Board . For purposes of this Policy, the "Board" means the Board of Directors of the Company.

2.3.    Cause . For purposes of this Policy, "Cause" means Executive's:

  1. willful failure to attend to Executive's duties that is not cured by Executive within 30 days of receiving written notice from the CEO (or, in the case of the CEO, from the Board) specifying such failure;
  2. material breach of Executive's employment agreement that is not cured by Executive within 30 days of receiving written notice from the CEO (or, in the case of the CEO, from the Board) specifying such breach;
  3. conviction of (or plea of guilty or nolo contendere to) any felony or a misdemeanor involving theft, embezzlement, dishonesty or moral turpitude; or
  4. misconduct resulting in material harm to the Company's business or reputation, including fraud, embezzlement, misappropriation of funds or a material violation of the Executive's Confidential Information, Non-Disclosure and Invention Assignment Agreement.

2.4.    Change-in-Control . For purposes of this Policy, "Change-in-Control" means the consummation of any of the following corporate transactions:

  1. an acquisition in one or more related transactions of 45% or more of the Company's common stock or voting securities by a "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act, but excluding the Company, any employee benefit plan of the Company and any corporation controlled by the Company's stockholders) or multiple "persons" acting as a group;
  2. a complete liquidation or dissolution of the Company;
  3. a sale, transfer or other disposition of all or substantially all of the Company's assets; or
  4. a merger, consolidation or reorganization (collectively, a " Business Combination ") other than a Business Combination in which (i) the stockholders of the Company receive 50% or more of the stock of the corporation resulting from the Business Combination and (ii) at least a majority of the board of directors of such resulting corporation were incumbent directors of the Company immediately prior to the consummation of the Business Combination and (iii) after which no individual, entity or group (excluding any corporation or other entity resulting from the Business

1


    Combination or any employee benefit plan of such corporation or of the Company) who did not own 45% or more of the stock of the resulting corporation or other entity immediately before the Business Combination owns 45% or more of the stock of such resulting corporation or other entity.

2.5.    Code . For purposes of this Policy, "Code" means the Internal Revenue Code of 1986, as amended.

2.6.    Committee . For purposes of this Policy, "Committee" means the Compensation Committee of the Board.

2.7.    Company . For purposes of this Policy, "Company" means 8x8, Inc., a Delaware corporation, and any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of 8x8, Inc.

2.8.    Constructive Termination . For purposes of this Policy, "Constructive Termination" means the termination of Executive's employment (a) by the Company other than for Cause or Disability or (b) by the Executive for Good Reason.

2.9.    Disability . For purposes of this Policy, "Disability" means a physical or mental impairment for which the Executive qualifies for benefits under the Company's long-term disability program, as it may be amended from time to time.

2.10.    Equity Award . For purposes of this Policy, "Equity Award" means each incentive award relating to the Company's common stock (whether stock options, stock appreciation rights, shares of restricted stock, restricted stock units, performance shares, performance units or other similar awards).

2.11.    Executive . For purposes of this Policy, "Executive" means any one of the following individuals: the Company's Chief Executive Officer, any officer classified by the Company as an Executive Vice President, including the Company's Chief Technology Officer and the Company's Chief Financial Officer, and any officer classified by the Company as a Senior Vice President.

2.12.    Good Reason . For purposes of this Policy, "Good Reason" means the occurrence of any of the following conditions without Executive's consent, but only if such condition is reported by the Executive within 90 days of Executive's knowledge of such condition and remains uncured 30 days after written notice from Executive to the Board of said condition:

  1. a material reduction in Executive's then-current base salary or annual target bonus (expressed as a percentage of Executive's then-current base salary), except for a reduction proportionate to reductions concurrently imposed on all other members of the Company's executive management;

2


  1. a material reduction in Executive's then-current employee benefits package, taken as a whole, except for a reduction proportionate to reductions concurrently imposed on all other members of the Company's executive management;
  2. a material reduction in Executive's responsibilities with respect to the Company's overall operations, such that continuity of responsibilities with respect to business operations existing prior to a corporate transaction will serve as a material reduction in responsibilities if such business operations represent only a subsidiary or business unit of the larger Company after the corporate transaction;
  3. a material reduction in the responsibilities of the Executive's direct report, including a requirement for the Chief Executive Officer to report to another officer as opposed to the Company's Board or a requirement for an Executive Vice President or Senior Vice President to report to any officer other than the Company's Chief Executive Officer;
  4. a material breach by the Company of any material provision of Executive's employment agreement;
  5. a requirement that Executive relocate Executive's Company office to a location more than 35 miles from Executive's then-current Company office location, unless such office relocation results in the distance between the new office and Executive's home being closer or equal to the distance between the prior office and Executive's home;
  6. a failure of a successor or transferee to assume the Company's obligations under this Policy; or
  7. a failure to nominate Executive for election as a Board director if at the proper time for nomination, the Executive is a Board member.

2.13.    In Connection with a Change-in-Control . For purposes of this Policy, a termination of Executive's employment will be "in Connection with a Change-in-Control" if Executive's employment terminates at any time within three months before, on or within 12 months following a Change-in-Control.

2.14.    Transaction Price . For purposes of this Policy, "Transaction Price" means the per share consideration paid pursuant to the transaction(s) constituting the Change-in-Control.

2.15.    Stock Performance-Based Equity Award . For purposes of this Policy, "Stock Performance-Based Equity Award" means each Equity Award with vesting conditioned all or in part on the per share fair market value of the Company's common stock exceeding one or more target levels.

2.16.    TSR Performance-Based Equity Award . For purposes of this Policy, "TSR Performance-Based Equity Award" means each Equity Award with vesting conditioned all or in part on the relative appreciation of the per share fair market value of the Company's common stock versus one or more other publicly-traded securities.

2.17.    Time-Based Equity Award . For purposes of this Policy, "Time-Based Equity Award" means each Equity Award that generally vests based only on Executive's service to the Company over a specified time period.

3


3.    CHANGE-IN-CONTROL BENEFITS

If Executive is either employed at the time of a Change-in-Control or experiences a Constructive Termination in Connection with a Change-in-Control, Executive will receive the following change-in-control benefits from the Company:

3.1.    Stock Performance-Based Equity Awards . Executive will be deemed to have satisfied the performance vesting condition for 100% of Company shares covered by Executive's outstanding Stock Performance-Based Equity Award(s) that (i) were granted prior to the Change-in-Control and (ii) have a target Company share price for vesting purposes equal to or less than the Transaction Price. The effective date of the foregoing vesting credit will be the Executive's date of termination (or, if later, the date of the Change-in-Control). Any such Stock Performance-Based Equity Awards will continue to vest in accordance with any service-based vesting condition specified in the award agreement(s), except as otherwise provided by Article 4 of this Policy.

3.2.    TSR Performance-Based Equity Awards . Executive will be deemed to have satisfied the performance vesting condition for that percentage of Company shares covered by Executive's outstanding TSR Performance-Based Equity Award(s) equal to (i) 100% minus (ii) the product of two multiplied by the percentage by which the Company's shares underperformed the NASDAQ Composite index for the period beginning on the applicable grant date and ending on the date of the Change-in-Control; provided , however , that no vesting credit under this Section 3.2 will apply to Executive's TSR Performance-Based Award(s) first granted after the Change-in-Control. The effective date of the foregoing vesting credit will be the Executive's date of termination (or, if later, the date of the Change-in-Control). Any such TSR Performance-Based Equity Awards will continue to vest in accordance with any service-based vesting condition specified in the award agreement(s), except as otherwise provided by Article 4 of this Policy.

4.    CHANGE-IN-CONTROL SEVERANCE BENEFITS

If Executive experiences a Constructive Termination in Connection with a Change-in-Control, Executive will receive the following severance benefits from the Company.

4.1.    Earned Amounts . Executive will receive all compensation that is earned but unpaid as of the date of termination, including salary, commissions and accrued but unused paid time off and vacation.

4.1.    Cash Severance . Executive will receive a single lump sum severance payment equal to the sum of the percentage of Base Salary and Bonus set forth in the Benefit Schedules applicable to Executive's job title tier. This lump sum payment will be made within 60 days following termination of employment.

4.2.    Time-Based Equity Awards . Executive will vest in 100% of Executive's outstanding Time-Based Equity Awards effective as of the Executive's date of termination (or, if later, the date of the Change-in-Control).

4


4.3.    Benefits . For a period of 12 months following the date of termination, (i) Executive will on a monthly basis receive reimbursement of the full premium amount (less withholding taxes) charged under the Consolidated Omnibus Budget Reconciliation Act for continuation of Executive's group health insurance in effect as of the date of termination and (ii) Executive will have the right, on the same basis as other employees of the Company, to participate in and to receive benefits under any Company group medical, dental, life, disability or other group insurance plans, as well as under the Company's, educational assistance, holiday, and other benefit plans and policies.

4.4.    Performance-Based Equity Awards . Executive will fully vest in all shares covered by outstanding Stock Performance-Based Equity Awards and TSR Performance-Based Equity Awards for which the performance condition was deemed satisfied pursuant to Article 3 of this Policy. Executive will also receive this vesting acceleration benefit upon a Constructive Termination that occurs more than 12 months after a Change-in-Control (i.e., after such termination is no longer considered to be "in connection with a Change-in-Control").

5.    SEVERANCE BENEFITS NOT IN CONNECTION WITH A CHANGE-IN-CONTROL

If Executive experiences a Constructive Termination during any time period not addressed by Article 4 of this Policy or terminates due to death or Disability at any time, Executive will receive the following severance benefits from the Company.

5.1.    Earned Amounts. Executive will receive all compensation that is earned but unpaid as of the date of termination, including salary, commissions and accrued but unused paid time off and vacation.

5.2.    Cash Severance . Executive will receive a single lump sum severance payment equal to the sum of the percentage of Base Salary and Bonus set forth in the Benefit Schedules applicable to Executive's job title tier. This lump sum payment will be made within 60 days following termination of employment.

5.3.    Time-Based Equity Awards . Executive will vest in that portion (if any) of Executive's outstanding Time-Based Equity Awards set forth in the Benefit Schedules applicable to Executive's job title tier, effective as of the Executive's date of termination (or, if later, the date of the Change-in-Control).

5.4.    Benefits . For the period set forth in the Benefit Schedules applicable to Executive's job title tier, (i) Executive will receive payment of the full premium amount (less withholding taxes) charged under the Consolidated Omnibus Budget Reconciliation Act for continuation of Executive's group health insurance in effect as of the date of termination and (ii) Executive will have the right, on the same basis as other employees of the Company, to participate in and to receive benefits under any Company group medical, dental, life, disability or other group insurance plans, as well as under the Company's, educational assistance, holiday, and other benefit plans and policies.

5


5.5.    Performance-Based Equity Awards . Executive will receive no acceleration of outstanding Stock Performance-Based Equity Awards and TSR Performance-Based Equity Awards.

6.    CONDITIONS FOR PAYMENT OF SEVERANCE

6.1.    Release of Claims . The payment of any severance or other benefits pursuant to Articles 3, 4 or 5 of this Policy will be subject to Executive signing and not revoking a release of claims agreement in a form approved by the Company, and such release becoming effective and irrevocable within 60 days of Executive's termination or such earlier deadline required by the release. Any severance amounts or benefits otherwise payable between the date of Executive's termination and the date such release becomes effective shall be paid on the effective date of such release. If the release does not become effective within the time period set forth above, Executive will forfeit all rights to severance payments and benefits under this Policy.

6.2.    Confidentiality . The payment of any severance or other benefits pursuant to Articles 3, 4 or 5 of this Policy will be subject to Executive's adherence to Executive's Confidential Information, Non-Disclosure and Invention Assignment Agreement (and/or any similar agreement as the Company and Executive may enter into from time to time).

7.    COORDINATION WITH OTHER BENEFITS

7.1.    Existing Severance Benefits . Any Executive that is, at the time this Policy is first adopted, subject to an employment agreement providing for severance and/or change-in-control benefits will be subject to, and benefit under, this Policy only if the Executive signs an amendment to his or her employment agreement providing that this Policy supersedes all severance and change-in-control provisions of his or her employment agreement.

7.2.    Sole Severance Benefit . If any severance benefits and payments are payable to an Executive under this Policy, then such amounts will be the only severance benefits and payments that are due to Executive's upon Executive's Constructive Termination.

7.3.    Mitigation . Executive will not be required to mitigate the amount of any payment contemplated by this Policy, nor will any earnings that Executive may receive from any other source reduce any such payment.

8.    LIMITATION ON BENEFITS

8.1.    Treatment of Parachute Payments . To the extent that any of the payments and benefits provided for in this Policy or otherwise payable to Executive (the " Payments ") constitute "parachute payments" within the meaning of Section 280G of the Code, the amount of such Payments shall be either:

(i) the full amount of the Payments, or

6


(ii) a reduced amount that would result in no portion of the Payments being subject to the excise tax imposed pursuant to Section 4999 of the Code (the " Excise Tax "),

whichever of the foregoing amounts, taking into account the applicable federal, state, local and foreign income and employment taxes and the Excise Tax, results in the receipt by Executive, on an after-tax basis, of the greatest amount of benefit. In the event that any Excise Tax is imposed on the Payments, Executive will be fully responsible for the payment of any and all Excise Tax, and the Company will not be obligated to pay all or any portion of any Excise Tax.

8.2.    Determination of Amounts . All computations and determinations called for by Section 8.1 shall be promptly determined and reported in writing to the Company and the Executive by independent public accountants or other independent advisors selected by the Company and reasonably acceptable to the Executive (the " Accountants "), and all such computations and determinations shall be conclusive and binding upon the Participant and the Company. For the purposes of such determinations, the Accountants may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make their required determinations. The Company shall bear all fees and expenses charged by the Accountants in connection with these services.

9.    ADMINISTRATION

The Policy will be administered by the Administrator. The Administrator may interpret the Policy, prescribe, amend and rescind rules and regulations under the Policy and make all other determinations necessary or advisable for the administration of the Policy, subject to all of the provisions of the Policy. The Administrator may delegate any of its duties hereunder to such person or persons from time to time as it may designate.

10.    AMENDMENT OR TERMINATION

The Board will have the right to amend or terminate this Policy at any time in its sole discretion; provided , however that any amendment or termination reasonably determined to have an adverse effect on the then-eligible Executives (a) must be disclosed to the Executives at least three months prior to taking effect and (b) cannot take effect within three months before, on or within 12 months following any Change-in-Control.

11.    NOTICES

11.1.    Notice . Notices and all other communications contemplated by this Policy will be in writing and will be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of Executive, mailed notices will be addressed to him/her at the home address which he/she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to its corporate headquarters, and all notices will be directed to the attention of the Company's General Counsel.

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11.2.    Notice of Termination . Any Constructive Termination will be communicated by a notice of termination to the other party hereto given in accordance with Section 11.1 of this Policy. Such notice will indicate the specific termination provision in this Policy relied upon, will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and will specify the termination date.

12.    SECTION 409A

12.1.    General . Any benefits payable under this Policy upon an Executive's termination will be interpreted to require that Executive experiences a "separation from service" (as such term is defined in Treasury regulations issued under Code Section 409A). Further, if Executive is a "specified employee" within the meaning of Code Section 409A at the time of his separation from service (other than due to Executive's death), then the severance benefits payable to Executive under this Policy that are considered deferred compensation under Section 409A and are due to Executive on or within the six-month period following his separation from service will accrue during such six-month period and will become payable (without interest) in a lump sum payment on the earlier of (a) the first payroll date that occurs on or after the date six months and one day following the date of Executive's separation from service and (b) the Executive's death.

12.2.    Reimbursements . Notwithstanding any other provision herein to the contrary, to the extent that any in-kind benefit or reimbursement arrangement provides for a payment that is considered deferred compensation under Section 409A, then such in-kind benefit or reimbursements will be made in accordance with Treasury Regulations 1.409A-3(i)(1)(iv) including: (a) the amount of such in-kind benefits provided in any calendar year and the amount of such expenses eligible for reimbursement in any calendar year will not affect the in-kind benefits to be provided or expenses eligible for reimbursement in any other calendar year; (b) in no event will any such expenses be reimbursed after the last day of the calendar year following the calendar year in which the Executive incurred such expenses; and (c) in no event will any such right to reimbursement or the provision of any in-kind benefit be subject to liquidation or exchange for another benefit or payment.

12.3.    Interpretation . The foregoing provisions are intended to comply with the requirements of Code Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Code Section 409A, and any ambiguities herein will be interpreted to so comply. Notwithstanding the foregoing, the Company makes no representations as to the tax compliance or treatment of any benefits payable under this Policy. The Company and Executive agree to work together in good faith to consider amendments to this Policy and to take such reasonable actions which are necessary, appropriate or desirable to avoid imposition of any additional tax or income recognition.

13.    MISCELLANEOUS

13.1.    Choice of Law . The validity, interpretation, construction and performance of this Policy will be governed by the laws of the State of California (with the exception of its conflict of laws provisions).

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13.2.    Integration . Except as provided in Section 7.1 of this Policy, this Policy represents the entire agreement and understanding between the parties as to the payment of severance or other benefits if Executive's employment with the Company terminates, including in Connection with a Change-in-Control, and supersedes all prior or contemporaneous agreements and the vesting provisions of any Equity Award, with respect to the subject matter of this Policy.

13.3.    Severability . In the event that any provision or any portion of any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable, or void, this Policy will continue in full force and effect without said provision or portion of provision. The remainder of this Policy will be interpreted so as best to effect the intent of the Company and Executive.

13.4.    Funding . The Company will not be required to fund or otherwise segregate assets to be used for the payment of any benefits under the Policy. The Company will make such payments only out of its general corporate funds, and therefore its obligation to make such payments will be subject to any claims of its other creditors.

13.5.    Withholding . The Company may withhold all applicable taxes from payments or benefit due under this Policy.

 

 

 

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8X8, INC.
EXECUTIVE CHANGE-IN-CONTROL AND SEVERANCE POLICY

BENEFIT SCHEDULES AS OF [●]

Tier

Change-in-Control Benefits

Change-in-Control Severance Benefits

Severance Benefits

Tier One

Chief Executive Officer

Stock Performance-Based Equity Awards: Performance condition satisfied for 100% of shares subject to a per-share target price no higher than Transaction Price; any service-based vesting applies thereafter

TSR Performance-Based Equity Awards: Performance condition satisfied for that number of shares equal to 100% minus 2x Company's TSR underperformance for applicable period; any service-based vesting applies thereafter

Cash: 100% of Base Salary + 100% of target Bonus

Benefits: 12 months after date of termination

Time-Based Equity Awards: 100% acceleration

Performance-Based Equity Awards: 100% acceleration for shares for which performance criteria deemed satisfied as Change-in-Control benefit

Cash: 150% of Base Salary + prorated % of earned Bonus, based on % of performance period before termination

Benefits: 18 months after date of termination

Time-Based Equity Awards: 12 months acceleration

Performance-Based Equity Awards: 0% acceleration

Tier Two

Executive Vice Presidents

See Tier One

Cash: 100% of Base Salary + 0% of Bonus

Benefits: 12 months after date of termination

Time-Based Equity Awards: 100% acceleration

Performance-Based Equity Awards: 100% acceleration for shares for which performance criteria deemed satisfied as Change-in-Control benefit

Cash: 100% of Base Salary + pro-rated Bonus

Benefits: 12 months after date of termination

Time-Based Equity Awards: no acceleration

Performance-Based Equity Awards: 0% acceleration

 


Tier Three

Senior Vice Presidents

See Tier One

Cash: 100% of Base Salary + 0% of Bonus

Benefits: 12 months after date of termination

Time-Based Equity Awards: 100% acceleration

Performance-Based Equity Awards: 100% acceleration for shares for which performance criteria deemed satisfied as Change-in-Control benefit

Cash: 75% of Base Salary + pro-rated Bonus

Benefits: 9 months after date of termination

Time-Based Equity Awards: no acceleration

Performance-Based Equity Awards: 0% acceleration

 

 


Exhibit 10.2

June 23, 2015

8x8, Inc.
2125 O'Nel Drive
San Jose, CA 95131

Re: Amendment of Employment Agreement

Ladies and Gentlemen,

I hereby agree to amend my offer letter and any other employment agreement I have entered into with 8x8, Inc. (the " Company "), each as currently in effect (collectively, my " Employment Agreement "), as set forth in this letter agreement.

1. Executive Change-in-Control and Severance Policy . In accordance with Section 7.1 of the Executive Change-in-Control and Severance Policy effective as of June 19, 2015 (the " Policy "), I hereby agree that the Policy supersedes all severance and change-in-control compensation provisions of my Employment Agreement. Without limiting the foregoing, I agree that the Policy represents the entire agreement and understanding between the Company and me as to the payment of severance or other benefits if my employment with the Company terminates in a manner that would entitle me to compensation under the Policy, and that I will not otherwise be entitled to receive any severance pay from the Company upon any termination of my employment with the Company. I also agree and acknowledge that upon any event or transaction that constitutes a Change-in-Control (as defined in the Policy), and upon any termination of my employment with the Company in connection with a Change-in-Control within the meaning of the Policy, I will be entitled to receive only such compensation and benefits, including vesting and accelerated vesting of equity awards as provided by the Policy, and no such provisions of my Employment Agreement shall be applicable with respect to any such event or transaction. I acknowledge that this paragraph does not modify any other subject matter or provision of my Employment Agreement, which I agree remains in effect, as modified by this paragraph.

2. Share Retention . I agree to acquire and retain an ownership interest in Common Stock which is, at any and all times, at least equal in value to three times the amount of my then-current base salary, as such amount may change from time to time. For purposes of satisfying this requirement, shares subject to unvested RSUs (whether or not such unvested RSUs are subject only to time-based vesting) shall not be counted as shares that I own. Except as modified herein, the provisions of Section 3(d) (Share Retention) of my Employment Agreement shall remain in effect.

Sincerely,

/s/ Vikram Verma             

Vikram Verma
Chief Executive Officer

The Company hereby agrees to the amendment of the Employment Agreement as set forth herein.

8x8, Inc.

By: /s/ Mary Ellen Genovese           
Name: Mary Ellen Genovese
Title: Chief Financial Officer

Date: June 23, 2015

8x8, Inc.

2125 O'Nel Dr.

San Jose, CA 95131

Phone: 408.727.1885

Fax: 408.980.0432

 


Exhibit 10.3

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (the "Agreement" ) is made as of ____________, 20__, by and between 8x8, Inc. , a Delaware corporation (the "Company" ), and ______________________ ( "Indemnitee" ).

RECITALS

The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and key employees, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and agents of the Company may not be willing to continue to serve as agents of the Company without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, and to indemnify its directors, officers and key employees so as to provide them with the maximum protection permitted by law.

The Company desires and has requested the Indemnitee to serve or continue to serve as a director, officer or agent of the Company or one or more of its subsidiaries free from undue concern for claims for damages arising out of or related to such services to the Company, and

Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he or she be indemnified as herein provided.

AGREEMENT

In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows:

1.    Services by Indemnitee. Indemnitee agrees to serve or continue to serve (a) as a director or Company, or as a manager, director or employee of a directly or indirectly controlled subsidiary of the Company, or one or more of such positions, and until such time as Indemnitee resigns or fails to stand for election or is removed from Indemnitee's position, or (b) otherwise as an agent of the Company. Indemnitee may from time to time also perform other services at the request or for the convenience of, or otherwise benefiting the Company or one or more of its subsidiaries. Indemnitee may at any time and for any reason resign or be removed from his or her position or positions (subject to any other contractual obligation or other obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in any such position.


2.    Indemnification .

  1. Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any Proceeding (other than a Proceeding by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent (which, for purposes hereof, shall include a trustee, partner or manager or person acting in a similar capacity) of another corporation, partnership, joint venture, trust or other enterprise, against all Losses actually and reasonably incurred by, or on behalf of, Indemnitee in connection with such Proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal Proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful.
  2. Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any Proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by, or on behalf of, Indemnitee in connection with the defense or settlement of such Proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders. Termination of any Proceeding by judgment or settlement shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interest of the Company. Notwithstanding the foregoing, no indemnification under this Section 2(b) shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its stockholders unless and only to the extent that the Delaware Court of Chancery or the court in which such Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such Expenses which such court shall determine.
  3. Indemnification for Expenses as a Witness. Anything in this Agreement to the contrary notwithstanding, to the fullest extent permitted by applicable law, to the extent that the Indemnitee, by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, is or was, or is or was

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    threatened to be made, a witness in any Proceeding to which the Indemnitee is not a party, the Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee's behalf in connection therewith. To the extent permitted by applicable law, the Indemnitee shall be entitled to indemnification for Expenses incurred in connection with being or threatened to be made a witness, as provided in this Section 2(c), regardless of whether the Indemnitee met the standards of conduct set forth in Sections 2(a) and 2(b) hereof.

  1. Review of Indemnification. Notwithstanding the foregoing, (i) the obligations of the Company under Sections 2(a) and 2(b) (unless ordered by a court) shall be subject to the condition that the Reviewing Party shall authorize (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 2(e) hereof is involved) indemnification in the specific case, upon a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct set forth in Sections 2(a) and 2(b), (ii) the obligation of the Company to make an advance of Expenses pursuant to Section 4(a) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences a Proceeding in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any advance of Expenses until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any advance of Expenses shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control, the applicable Reviewing Party shall be determined by a majority of the Company's directors who are not parties to the particular claim (even if less than a quorum) for which Indemnitee is seeking indemnification, if there are any such disinterested directors. If there has been such a Change in Control, or if there are no such disinterested directors, the Reviewing Party shall be the Independent Legal Counsel. If there has been no determination by the Reviewing Party, or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court de novo without regard to the previous adverse determination, and the Company hereby consents to service of process and to appear in any such Proceeding. Absent such litigation, any determination by the Reviewing Party shall be conclusive and binding on the Company and Indemnitee.
  2. Change in Control. The Company agrees that if there is a Change in Control of the Company, then, with respect to all matters arising prior to the Change in Control, the rights of Indemnitee to payments of Expenses and advances of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, shall be decided by Independent Legal Counsel as the Reviewing Party, if desired by Indemnitee. Such Independent Legal Counsel shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld).

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    Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees involved in such matters unless (i) the Company otherwise determines or (ii) any Indemnitee shall provide a written statement setting forth in detail a reasonable and material objection to such Independent Legal Counsel.

  1. Mandatory Payment of Expenses. Notwithstanding the other provisions of this Section 2, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding referred to in Section 2(a) or Section 2(b) or the defense of any claim, issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against Expenses actually and reasonably incurred by, of on behalf of, Indemnitee in connection therewith, regardless of whether the Indemnitee met the standards of conduct set forth in Sections 2(a) and 2(b) hereof. For purposes of this Agreement and without limiting the foregoing, if any Proceeding is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) an adjudication that Indemnitee was liable to the Company, (ii) a plea of guilty or nolo contendere by Indemnitee, (iii) an adjudication that Indemnitee did not act in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or (iv) with respect to any criminal Proceeding, an adjudication that Indemnitee had reasonable cause to believe Indemnitee's conduct was unlawful, Indemnitee shall be considered for the purposes hereof to have been wholly successful with respect thereto.

3.    No Employment Rights. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment.

4.    Expenses; Indemnification Procedure.

  1. Advancement of Expenses. Except as otherwise determined pursuant to Section 2(d), the Company shall promptly advance all Expenses incurred by, or on behalf of, Indemnitee in connection with the investigation, defense, settlement or appeal of any Proceeding referred to in Section 2(a) or Section 2(b). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby.
  2. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company, or to the Chairman of the Board of Directors or Secretary of the Company if Indemnitee is the Chief Executive Officer, and shall be given in accordance with the provisions of Section 13(d) below. In addition, Indemnitee shall give the

4


    Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. Notwithstanding the foregoing, any failure of Indemnitee to provide such notice or information, or to provide such notice or information in a timely fashion, shall not relieve the Company of any liability that it may have to Indemnitee under this Agreement, except to the extent that such failure actually and materially prejudices the interests of the Company.

  1. Procedure. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within 30 days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 9 of this Agreement, Indemnitee also shall be entitled to advance payment for the Expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for Expenses incurred in connection with any Proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. It is the parties' intention that, if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company or the Reviewing Party to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company or the Reviewing Party that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.
  2. Notice of Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 4(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay all amounts payable as a result of such Proceeding in accordance with the terms of such policies.
  3. Selection of Counsel. In the event the Company shall be obligated under Section 4(a) hereof to pay the Expenses of any Proceeding against Indemnitee, the Company shall be entitled to assume the defense of such Proceeding, with counsel reasonably acceptable to Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of other counsel subsequently incurred by, or on behalf of, Indemnitee with respect to the same Proceeding, provided that Indemnitee shall have the right to employ additional counsel in any such Proceeding at Company's expense if: (i) the employment of counsel by Indemnitee has been previously authorized by the Company, (ii) counsel to the Company or Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (iii) the Company shall not, in fact, have employed counsel to assume the defense of such Proceeding. The Company shall not be entitled, without the consent of Indemnitee, to assume the defense of any claim brought by or in the right

5


    of the Company or as to which counsel to the Company or Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above.

  1. Settlement. The Company shall not settle any Proceeding in any manner that would impose any penalty or limitation on Indemnitee without Indemnitee's written consent; provided, however, that Indemnitee will not unreasonably withhold his or her consent to any proposed settlement. The Company shall promptly notify Indemnitee once the Company has received an offer or intends to make an offer to settle any such Proceeding, and the Company shall provide Indemnitee as much time as reasonably practicable to consider such offer. Regardless of whether the Company has assumed the defense of a Proceeding, the Company shall not be liable to indemnify Indemnitee under this Agreement for any Losses incurred in a settlement of the Proceeding effected without the Company's written consent.

5.    Additional Indemnification Rights; Nonexclusivity.

  1. Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute, including, but not limited to, Section 102(b)(7) of the General Corporation Law. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder.
  2. Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any additional rights to indemnification to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any vote of stockholders or disinterested members of the Company's Board of Directors, the General Corporation Law, any other agreement entered into subsequent to the date of this Agreement, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in any such capacity at the time of any Proceeding.

6.    Contribution.

  1. Partial Indemnification . To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for Losses and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such claim

6


    (and Proceeding with respect thereto) in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such claim (and Proceeding with respect thereto); and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).

  1. Advance Payment . Whether or not the indemnification provided in Section 2 of this Agreement is available, in respect of any threatened, pending or completed Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding), the Company shall pay, in the first instance, the entire amount of any judgment or settlement of such Proceeding without requiring Indemnitee to contribute to such payment, and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. The Company shall not enter into any settlement of any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding) unless such settlement provides for a full and final release of all claims (and counterclaims) asserted therein against Indemnitee.
  2. Fraud Exception . If Indemnitee is found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) Indenmnitee shall not be entitled to contribution from the Company if the Company was not found guilty of such fraudulent misrepresentation.

7.    Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC" ) has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee.

8.    Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

9.    Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

7


  1. Claims Initiated by Indemnitee. To indemnify or advance Expenses to Indemnitee with respect to Proceedings or claims or counterclaims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law, but such indemnification or advancement of Expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate.
  2. Lack of Good Faith. To indemnify Indemnitee for any Expenses incurred by, or on behalf of, Indemnitee with respect to any Proceeding instituted by Indemnitee to enforce or interpret this Agreement, with respect to any claim or material assertion made by Indemnitee in such Proceeding that a court of competent jurisdiction has determined was not made in good faith or was frivolous.
  3. Insured Claims. To indemnify Indemnitee for Expenses or Losses of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such Expenses or Losses have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company.
  4. Non-compete and Non-disclosure. To indemnify Indemnitee in connection with Proceedings or claims involving the enforcement of non-compete and/or non-disclosure agreements or the non-compete and/or non-disclosure provisions of employment, consulting or similar agreements the Indemnitee may be a party to with the Company.
  5. Claims Under Section 16(b). To indemnify Indemnitee for Expenses or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

10.    Insurance.

  1. Duty to Insure . The Company represents that it presently has in place certain directors' and officers' liability insurance policies covering the directors and officers of the Company and the directors and officers of the directly or indirectly controlled subsidiaries of the Company. Subject only to the provisions within this Section 10, the Company agrees that so long as Indemnitee shall have consented to serve or shall continue to serve as a director or officer of the Company or as a director, manager or officer of a directly or indirectly controlled subsidiary of the Company, or one or more of such positions, or as an Agent of the Company, and thereafter so long as Indemnitee shall be subject to any possible Proceeding (such periods being hereinafter sometimes referred to as the " Indemnification Period "), the Company will use all reasonable efforts to maintain in effect for the benefit of Indemnitee one or more valid, binding and enforceable policies of directors' and officers' liability insurance from established and reputable insurers, providing, in all respects, coverage both in scope and amount which is reasonable in light of the Company's size, operations and market capitalization. Notwithstanding the foregoing, the Company shall not be required to maintain said policies of directors' and officers' liability insurance during any time period if during such period such

8


    insurance is not reasonably available, or if it is determined in good faith by the then directors of the Company either that:

    1. The premium cost of maintaining such insurance is substantially disproportionate to the amount of coverage provided thereunder; or
    2. The protection provided by such insurance is so limited by exclusions, deductions or otherwise that there is insufficient benefit to warrant the cost of maintaining such insurance.

  1. Indemnitee as Covered Person . Anything in this Agreement to the contrary notwithstanding, to the extent that and for so long as the Company shall choose to continue to maintain any policies of directors' and officers' liability insurance during the Indemnification Period, the Company shall maintain similar and equivalent insurance for the benefit of Indemnitee during the Indemnification Period (unless such insurance shall be less favorable to Indemnitee than the Company's existing policies).
  2. Enforcement and Tail Coverage . If the Company has in effect policies of directors' and officers' liability insurance at the time that Indemnitee notifies the Company of the commencement of any Proceeding, the Company shall give prompt notice of the commencement of such Proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. In the event of a Change in Control or the Company's becoming insolvent, including being placed into receivership or entering the federal bankruptcy process, the Company shall maintain in force any directors' and officers' liability insurance policies then maintained by the Corporation in providing insurance in respect of Indemnitee, for a period of six years thereafter (a "Tail Policy"). Such coverage shall be with the incumbent insurance carriers using the policies that were in place at the time of the change of control event (unless the incumbent carriers will not offer such policies, in which case the Tail Policy shall be substantially comparable in scope and amount as the expiring policies, shall be placed by the Company's existing broker, and the insurance carriers for the Tail Policy shall have an AM Best rating that is the same or better than the AM Best ratings of the expiring policies, or unless otherwise determined by a majority of the then-sitting directors).

11.    Subrogation and Set Off.

  1. Subrogation . In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.
  2. Set-Off . The Company's obligation to indemnify, hold harmless, exonerate or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, trustee, partner, managing member, fiduciary, employee or agent of any other person shall be reduced by any amount Indemnitee has actually received as

9


    indemnification, hold harmless or exoneration payments or advancement of expenses from such other enterprise. Notwithstanding any other provision of this Agreement to the contrary, (i) Indemnitee shall have no obligation to reduce, offset, allocate, pursue or apportion any indemnification, hold harmless, exoneration, advancement, contribution or insurance coverage among multiple parties possessing such duties to Indemnitee prior to the Company's satisfaction and performance of all its obligations under this Agreement, and (ii) the Company shall perform fully its obligations under this Agreement without regard to whether Indemnitee holds, may pursue or has pursued any indemnification, advancement, hold harmless, exoneration, contribution or insurance coverage rights against any person or entity other than the Company.

12.    Indemnification and Advancement Rights Primary. The Company hereby acknowledges that Indemnitee has or may have certain rights to indemnification, advancement of expenses and/or insurance provided by one or more parties other than the Company or an affiliate of the Company (collectively, the " Secondary Indemnitors "). The Company hereby acknowledges and the Company and Indemnitee hereby agree: (i) that the Company is the indemnitor of first resort; i.e., its obligations to Indemnitee are primary and any obligation of the Secondary Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by Indemnitee are secondary; (ii) that the Company shall be required to advance the full amount of expenses incurred by Indemnitee and shall be liable for the full amount of all expenses, judgments, penalties, fines and amounts paid in settlement to the extent legally permitted and as required by the terms of this Agreement and the Certificate of Incorporation and/or Bylaws of the Company (or any other agreement between the Company and Indemnitee), without regard to any rights Indemnitee may have against the Secondary Indemnitors; and (iii) that the Company irrevocably waives, relinquishes and releases the Secondary Indemnitors from any and all claims against the Secondary Indemnitors that the Company may have for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Secondary Indemnitors on behalf of Indemnitee with respect to any claim for which Indemnitee has sought indemnification from the Company shall affect the foregoing and the Secondary Indemnitors shall have a right of contribution and/or subrogation to the extent of such advancement or payment to all of the rights of recovery of Indemnitee against the Company.

The Company and Indemnitee agree that the Secondary Indemnitors are express third party beneficiaries of the terms of this provision.

13.    General.

  1. Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of Delaware, without giving effect to principles of conflicts of laws of any state.
  2. Entire Agreement; Enforcement of Rights. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in

10


    writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

  1. Construction. This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto.
  2. Notices. Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally, or 24 hours after being deposited with a nationally recognized overnight courier, or 48 hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or facsimile number as set forth below or as subsequently modified by written notice.
  3. Counterparts. This Agreement may be executed in counterparts, and delivery of a signed counterpart by facsimile transmission will constitute due execution and delivery of this Agreement.
  4. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee's heirs and legal representatives.

14.    Certain Definitions; Construction of Phrases.

  1. A " person ," has the meaning given such term under Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the " Exchange Act ") and the regulations promulgated thereunder, and a person shall be deemed the " beneficial owner " of and shall be deemed to " beneficially own " any securities:
    1. which such person or any of such person's affiliates or associates (as such terms are defined in Rule 12b-2 promulgated under the Exchange Act), directly or indirectly, has the right to vote or dispose of or otherwise has "beneficial ownership" of (as determined pursuant to Rule 13d-3 promulgated under the Exchange Act);
    2. which such person or any of such person's affiliates or associates has: (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the beneficial owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made pursuant to and in accordance with the applicable rules and regulations promulgated under the Exchange Act by or on behalf of such person or any of such person's affiliates or associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the beneficial owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely

11


      from a revocable proxy or consent given to such person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report);

    1. which are beneficially owned, directly or indirectly, by any other person with which such person or any of such person's affiliates or associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso in Section 1(a)(ii)(B)) or disposing of any securities of the Company; provided, however, that in no case shall an officer or director of the Company be deemed the beneficial owner of securities held of record by the trustee of any employee benefit plan of the Company or any subsidiary of the Company for the benefit of any employee of the Company or any subsidiary of the Company, other than the officer or director, by reason of any influence that such officer or director may have over the voting of the securities held in the plan. Notwithstanding anything in this definition of beneficial ownership to the contrary, the phrase "then outstanding," when used with reference to a person's beneficial ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such person would be deemed to own beneficially hereunder; or
    2. which are securities underlying a derivative transaction entered into by a person, or derivative securities acquired by a person, which give such person the opportunity to profit or share in any profit derived from any increase in the value of securities of the Company due to the fact that the value of the derivative transaction is explicitly determined by reference to the price or value of securities in the Company, without regard to whether (A) such derivative securities convey any voting rights in securities in the Company to such person, (B) such derivative securities are required to be, or capable of being, settled through delivery of securities of the Company, or (C) such Person may have entered into other transactions that hedge the economic effect of such derivative securities.

  1. " Change in Control " shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any person (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the beneficial owner, directly or indirectly, of securities of the Company representing 45% or more of the total voting power represented by the then outstanding securities of the Company that vote generally at elections ( "Voting Securities" ), (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other

12


    corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least a majority of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets.

  1. References to the " Company " shall include, in addition to the Company, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which the Company (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.
  2. " Expenses " shall include, without limitation, reasonable attorneys' fees; retainers; disbursements of counsel; court costs; filing fees; transcript costs; fees and expenses of experts; fees and expenses of witnesses; fees and expenses of accountants and other consultants (excluding public relations consultants unless approved in advance by the Company); travel expenses; duplicating and imaging costs; printing and binding costs; telephone charges; facsimile transmission charges; computer legal research costs; postage; delivery service fees; fees and expenses of third-party vendors; the premium, security for, and other costs associated with any bond (including supersedeas or appeal bonds, injunction bonds, cost bonds, appraisal bonds or their equivalents), in each case incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding (including, without limitation, any judicial or arbitration Proceeding brought to enforce the Indemnitee's rights under, or to recover damages for breach of, this Agreement), as well as all other "expenses" within the meaning of that term as used in Section 145 of the General Corporation Law of the State of Delaware (the " General Corporation Law ") and all other disbursements or expenses of types customarily and reasonably incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, actions, suits, or proceedings similar to or of the same type as the Proceeding with respect to which such disbursements or expenses were incurred; and any fees and expenses of actions to enforce this Agreement incurred by or on behalf of the Indemnitee; but, notwithstanding anything in the foregoing to the contrary, "Expenses" shall not include amounts of judgments, penalties, or fines actually levied against the Indemnitee in connection with any Proceeding.
  3. " Independent Legal Counsel " shall mean an attorney or firm of attorneys experienced in matters of corporation law, who have been selected in accordance with the provisions of Section 2(e) hereof and who shall not have otherwise performed services for the

13


    Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements).

  1. " Losses " shall mean all Expenses, judgments, penalties, fines, liabilities, and amounts paid in settlement in connection with a Proceeding.
  2. References to " other enterprises " shall include employee benefit plans; references to " fines " shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to " serving at the request of the Company " shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement.
  3. " Proceeding " shall mean any threatened, pending, or completed action, suit, arbitration, alternative dispute resolution mechanism, investigation (including any internal investigation), inquiry, administrative hearing, or any other threatened, pending, or completed proceeding, whether brought by or in the right of the Company or otherwise, and whether civil, criminal, administrative, or investigative.
  4. " Reviewing Party " shall mean (i) a majority of the Company's Board of Directors who are not parties to the particular claim (even if less than a quorum) for which Indemnitee is seeking indemnification, (ii) a committee of the Company's Board of Directors comprised of directors who are not parties to the particular claim for which Indemnitee is seeking indemnification, designated by a majority vote of such disinterested directors, or (iii) Independent Legal Counsel.

 

 

14


The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement.

8x8, INC.
a Delaware corporation

By: ___________________________

Its: __________________________

Address:

2125 O'Nel Dr.
San Jose, CA 95131

 

 

AGREED TO AND ACCEPTED:

 

By: ________________________________

_________________________________
Name

Address:

____________________________
____________________________
____________________________

 

 


Exhibit 31.1

CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Vikram Verma, certify that:

1. I have reviewed this quarterly report on Form 10-Q of 8x8, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
  4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

  1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

July 31, 2015

/s/ V IKRAM V ERMA
Vikram Verma
Chief Executive Officer








Exhibit 31.2

CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, MaryEllen Genovese, certify that:

1. I have reviewed this quarterly report on Form 10-Q of 8x8, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
  4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

  1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

July 31, 2015

/s/ M ARY E LLEN G ENOVESE
MaryEllen Genovese
Chief Financial Officer and Secretary








Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of 8x8, Inc. (the "Company") for the period ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Vikram Verma, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ V IKRAM V ERMA
Vikram Verma
Chief Executive Officer

July 31, 2015

This certification accompanies this Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.








Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of 8x8, Inc. (the "Company") for the period ended June 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, MaryEllen Genovese, Chief Financial Officer and Secretary of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ M ARY E LLEN G ENOVESE
MaryEllen Genovese
Chief Financial Officer and Secretary

July 31, 2015

This certification accompanies this Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.