8x8 2006 Annual Report Download - page 63

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60
Capital Leases
In April 2005, the Company entered into a series of five-year capital lease agreements for office equipment bearing
interest at various rates. At March 31, 2006, future minimum annual lease payments under noncancelable capital
leases were as follows (in thousands):
Capital leases included in office equipment were $108,000 at March 31, 2006. Total accumulated amortization was
$20,000 at March 31, 2006. Amortization expense for assets recorded under capital leases is included in
depreciation expense.
Legal Proceedings
The Company is also involved in various other legal claims and litigation that have arisen 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.
State and Municipal Taxes
Currently, the Company does not collect or remit state or municipal taxes (such as sales and use, excise and ad
valorem taxes), fees or surcharges ("Taxes") on the charges to the Company's customers for its services, except that
the Company collects and remits California sales tax. The Company has received inquiries or demands from a few
states and municipal taxing and 911 agencies seeking payment of Taxes that are applied to or collected from the
customers of providers of traditional public switched telephone network services. The Company has consistently
maintained that these Taxes do not apply to its service for a variety of reasons depending on the statute or rule that
establishes such obligations. In addition, a few states address how VoIP providers should contribute to support
public safety agencies, and in those states the Company will begin to remit fees to appropriate state agencies in
fiscal 2007. The Company had recorded a reserve of $198,000 for the year ended March 31, 2005, and an additional
$531,000 for the year ended March 31, 2006 as its best estimate of the probable tax exposure for retroactive
assessments. The Company believes the estimated exposure for retroactive assessments is $729,000 as of March 31,
2006, and these reserves have been recorded in the other accrued liabilities line item in the consolidated balance
sheets.
Regulatory
To date VoIP communication services have been largely unregulated in the United States. Many regulatory actions
are underway or are being contemplated by federal and state authorities, including the Federal Communications
Commission (FCC), and state regulatory agencies. To date, the FCC has treated Internet service providers as
information service providers. Information service providers are currently exempt from federal and state regulations
governing common carriers, including the obligation to pay access charges and contribute to the universal service
fund. The FCC is currently examining the status of Internet service providers and the services they provide. The
FCC initiated a notice of public rule-making in early 2004 to gather public comment on the appropriate regulatory
environment for IP telephony. In November 2004, the FCC ruled that the VoIP service of a competitor and
"similar" services are jurisdictionally interstate and not subject to state certification, tariffing and other legacy
Year ending March 31:
2007...............................................................................................................
.
$25
2008...............................................................................................................
.
25
2009...............................................................................................................
.
25
2010...............................................................................................................
.
25
2011...............................................................................................................
.
2
Total minimum payments.............................................................................. 102
Less: Amount representing interest...........................................................
.
(11)
91
Less: Short-term portion of capital lease obligations............................... (21)
Long-term portion of capital lease obligations.........................................
.
$70