8x8 2009 Annual Report Download - page 36

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SFAS No. 123(R) requires us to calculate the additional paid in capital pool (“APIC Pool”) available to absorb tax deficiencies
recognized subsequent to adopting SFAS No. 123(R), as if we had adopted SFAS No. 123 at its effective date of January 1,
1995. There are two allowable methods to calculate our APIC Pool: (1) the long form method as set forth in SFAS No. 123(R)
or (2) the short form method as set forth in FASB Staff Position No. 123(R)-3. We have elected to use the long form method
under which we track each award grant on an employee-by-employee basis and grant-by-grant basis to determine if there is a
tax benefit or tax deficiency for such award. We then compared the fair value expense to the tax deduction received for each
grant and aggregated the benefits and deficiencies to establish the APIC Pool.
Due to the adoption of SFAS No. 123R, some exercises result in tax deductions in excess of previously recorded benefits based
on the option value at the time of grant, or windfalls. We recognize windfall tax benefits associated with the exercise of stock
options directly to stockholders’ equity only when realized. Accordingly, we are not recognizing deferred tax assets for net
operating loss carryforwards resulting from windfall tax benefits occurring from April 1, 2006 onward. A windfall tax benefit
occurs when the actual tax benefit realized by the company upon an employee’ s disposition of a share-based award exceeds the
deferred tax asset, if any, associated with the award that the company had recorded. We use the “with and without” approach as
described in Emerging Issues Task Force (“EITF”) Topic No. D-32, in determining the order in which our tax attributes are
utilized. The “with and without” approach results in the recognition of the windfall stock option tax benefits only after all
other tax attributes of ours have been considered in the annual tax accrual computation. Also, we have elected to ignore the
indirect tax effects of share-based compensation deductions in computing our research and development tax and as such, we
recognize the full effect of these deductions in the income statement in the period in which the taxable event occurs.
On January 27, 2009, our board of directors approved the acceleration of unvested stock options to purchase 3,902,186 shares
of common stock. 1,737,509 of these shares are subject to options held by our executive officers and directors. These options
of our executive officers and directors, taken as a whole, have a weighted average exercise price of $1.06 per share and range
from $0.63 to $1.79 per share, and a weighted average remaining vesting term of 2.85 years. Approximately $1.1 million of the
$2.4 million stock-based compensation charge in the fourth quarter of 2009 applies to the options held by our executive
officers and directors.