8x8 2004 Annual Report Download - page 58

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Several state regulatory authorities have contacted the Company regarding its Packet8 service. These inquiries have
ranged from notification that the Packet8 service should be subject to local regulation, certification and fees to broad
inquiries into the nature of the Packet8 services provided. The Company responds to the various state authorities as
inquiries are received. Based on advice of counsel, the Company disputes the assertion, among others, that the
Packet8 service should be subject to state regulation. While the Company does not believe that exposure to material
amounts of fees or penalties exists, if we are subject to an enforcement action, the Company may become subject to
liabilities and may incur expenses that adversely affect its results of operations. The California Public Utilities
Commission (CPUC) instituted its own investigation in early 2004 to determine how it will classify and treat VoIP
service providers like Packet8.
The effect of potential future VoIP telephony laws and regulations on the Company’s operations, including, but not
limited to, Packet8, cannot be determined.
11. STOCKHOLDERS' EQUITY
Exchangeable Shares and Preferred Stock
In conjunction with the acquisition of U|Force, Inc. in June 2000, the Company agreed to issue up to 2,107,780
shares of 8x8 common stock upon the exchange or redemption of the exchangeable shares (the Exchangeable
Shares) of Canadian entities held by employee shareholders of U|Force stock. The Exchangeable Shares held by
U|Force employees were subject to certain restrictions, including the Company's right to repurchase the
Exchangeable Shares if an employee departed the Company prior to vesting. Upon vesting, the Exchangeable Shares
were convertible into 8x8 common stock on a 1-for-1 basis. The Company also issued one share of preferred stock
(the Special Voting Share) that provided holders of Exchangeable Shares with voting rights that are equivalent to the
shares of common stock into which their shares are convertible.
During the fourth quarter of fiscal 2001, the Company repurchased a total of 1,034,107 unvested Exchangeable
Shares at an average price of $0.49 per share when the beneficial holders of such shares resigned from the Company.
In addition, 812,866 Exchangeable Shares were converted into an equivalent number of shares of the Company's
common stock in the fourth quarter of fiscal 2001. The remaining 260,807 Exchangeable Shares were exchanged for
shares of the Company's common stock during the year ended March 31, 2002.
1992 Stock Option Plan
The Board of Directors reserved 2,000,000 shares of the Company's common stock for issuance under the 1992
Stock Option Plan (the 1992 Plan). The 1992 Plan expired in fiscal 2003.
1996 Stock Plan
In June 1996, the Board of Directors adopted the 1996 Stock Plan (the 1996 Plan) and reserved 1,000,000 shares of
the Company's common stock for issuance under this plan. The Company's stockholders subsequently authorized
increases in the number of shares of the Company's common stock reserved for issuance under the 1996 Plan of
500,000 shares in June 1997 and 2,000,000 shares in August 2000. The 1996 Plan also provides for an annual
increase in the number of shares reserved for issuance under the 1996 Plan on the first day of the Company's fiscal
year in an amount equal to 5% of the Company's common stock issued and outstanding at the end of the
immediately preceding fiscal year, subject to a maximum annual increase of 1,000,000 shares. The annual increase
was 1,000,000 shares in each of fiscal 2004, 2003 and 2002. To date, this provision has resulted in increases in
shares reserved for issuance under the 1996 Plan totaling 5,535,967. The 1996 Plan provides for granting incentive
stock options to employees and nonstatutory stock options to employees, directors or consultants. The stock option
price of incentive stock options granted may not be less than the determined fair market value at the date of grant.
Options generally vest over four years and expire ten years after grant.
1996 Director Option Plan
The Company's 1996 Director Option Plan (the Director Plan) was adopted in June 1996 and became effective in
July 1997. A total of 150,000 shares of common stock were initially reserved for issuance under the Director Plan.
The Company's stockholders subsequently authorized an increase in the number of shares of common stock reserved
for issuance under the Director Plan to 500,000 shares in August 2000, and 1,000,000 in July 2002. The Director
Plan provides for both discretionary and periodic grants of nonstatutory stock options to non-employee directors of
the Company (the Outside Directors). The exercise price per share of all options granted under the Director Plan will