ACQUISITIONS - Note 9

12 Months Ended

Mar. 31, 2012

Notes to Financial Statements

ACQUISITIONS - Note 9

9. ACQUISITIONS

Zerigo, Inc.

On June 16, 2011, the Company entered into an agreement with Zerigo, Inc. ("Zerigo"), a provider of cloud services pursuant to which the Company acquired 100% of the outstanding stock of Zerigo from its sole shareholder. Under the terms of the agreement, the Company paid the selling shareholder $750,000 in cash and issued 207,756 shares of its common stock. In addition, the Company agreed to pay the selling shareholder an earn-out of up to $500,000 cash upon the achievement of specified software development milestones by December 31, 2011. As of December 31, 2011, the shareholder had achieved the specified software development milestones and the earn-out of $500,000 had been paid to the shareholder.

The fair value of the consideration transferred consisted of the following (in thousands):

Cash	$	750
Contingent payments		441
Fair value of shares of stock issued		750
Total purchase price	$	1,941

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 operating synergies expected to be realized through the acquisition of Zerigo and the workforce of the acquired business. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management. Intangible assets will be amortized on a straight-line basis.

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

		Estimated
		Fair Value
Assets acquired:
Cash	$	35
Property and equipment, net		25
Intangible assets		1,046
Total assets acquired		1,106
Liabilities assumed
Accounts payable		(8)
Deferred income tax liability, non-current		(413)
Total liabilities assumed		(421)
Net identifiable assets acquired		685
Goodwill		1,256
Total purchase price	$	1,941

Contactual, Inc.

On September 15, 2011, the Company acquired 100% of the outstanding shares of capital stock of Contactual, Inc. ("Contactual"), a provider of cloud-based call center and customer interaction management solutions, pursuant to the terms of a merger agreement between the Company and Contactual. The Company issued a total of 6,484,900 shares of common stock as acquisition consideration. This figure reflects a 215,100 share reduction related to 8x8's agreement to pay statutory tax withholding on behalf of five former Contactual executives under the terms of the merger agreement. Approximately 1,005,000 of the shares of common stock issued as acquisition consideration are being held in escrow as security for the indemnification obligations of the Contactual stockholders under the merger agreement. The estimated fair value of the consideration transferred consisted of the following (in thousands):

Cash	$	892
Fair value of shares of stock issued		30,608
Fair value of options		274
Total purchase price	$	31,774

The Company recorded the acquisition of 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 operating synergies expected to be realized through the acquisition of Contactual and the workforce of the acquired business. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management. Intangible assets will be amortized on a straight-line basis.

The estimated fair values of the assets acquired and liabilities assumed are as follows:

		Estimated
		Fair Value
Assets acquired:
Cash	$	894
Restricted cash		28
Accounts receivable, net		572
Prepaids and other assets		265
Property and equipment, net		347
Intangible assets		11,150
Total assets acquired		13,256
Liabilities assumed
Accounts payable		(2,059)
Accrued compensation		(1,255)
Deferred revenue		(253)
Other accrued liabilities		(166)
Total current liabilities		(3,733)
Deferred income tax liability, non-current		(301)
Accrued liabilities, non-current		(131)
Total liabilities assumed		(4,165)
Net identifiable assets acquired		9,091
Goodwill		22,683
Total purchase price	$	31,774

The above fair values of consideration transferred and assets acquired and liabilities assumed are based on the information that was available as of the acquisition date. The Company believes that information that was available as of the acquisition date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Contactual as if the merger occurred at the beginning of the earliest period presented. The pro forma financial information for all periods presented also includes the business combination accounting effects resulting from this acquisition including the acquisition costs of $0.5 million and amortization charges from acquired intangible assets. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each reporting period presented.

The unaudited pro forma financial information for the year ended March 31, 2012 combined the historical results of the Company for the year ended March 31, 2012, the historical results of Contactual for the six months ended June 30, 2011, and the effects of the pro forma adjustments described above.

The unaudited pro forma financial information for the year ended March 31, 2011 combined the historical results of the Company for the year ended March 31, 2011, the historical results of Contactual for the year ended December 31, 2010 and the effects of the pro forma adjustments described above:

		Fiscal Year Ended
		March 31,
		2012		2011
		(In thousands, except per share data)
Pro forma net revenue	$	89,693	$	77,589
Pro forma net income	$	68,689	$	3,310
Pro forma net income per share (basic)	$	1.05	$	0.05
Pro forma net income per share (diluted)	$	1.00	$	0.05

There is no impact to the Company's tax provision for the year ended March 31, 2012 and 2011 from the pro forma adjustments since the Contactual had tax losses and the Company had a 100% valuation allowance on deferred tax assets in those periods.

As the Company has begun to integrate the combined operations, eliminating overlapping processes and expenses and integrating its products and sales efforts with those of Contactual, it is impractical to determine the revenues and earnings specific to Contactual since the acquisition date.

Central Host, Inc.

On May 1, 2010, the Company entered into an agreement with Central Host pursuant to which the Company acquired this provider of managed hosting services from its sole shareholder. Under the terms of the agreement, the Company paid $1,000,000 in cash and issued 432,276 shares of 8x8 common stock, at an average price of $1.388 per share, to the sole shareholder in exchange for all of the outstanding shares of capital stock of Central Host.

The estimated fair value of the consideration transferred consisted of the following (in thousands):

Cash	$	1,000
Fair value of stock issued		600
Total acquisition costs	$	1,600

The Company recorded the acquisition of 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 fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management.

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

		Estimated
		Fair Value
Cash	$	2
Accounts receivable, net		61
Other assets		10
Property and equipment, net		105
Intangible assets		308
Total assets acquired		486
Accounts payable		(67)
Other liabilities		(29)
Total liabilities assumed		(96)
Net identifiable assets acquired		390
Goodwill		1,210
Total acquisition costs	$	1,600