8x8 2003 Annual Report Download - page 58

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$864,000, including a non-cash charge for the value of warrants issued to the placement agent. The debt discount
and debt issuance costs were amortized to interest expense on a straight-line basis over the term of the Debentures.
Cumulative Effect of Change in Accounting Principle – Beneficial Conversion Feature
In November 2000, the Emerging Issues Task Force reached several conclusions regarding the accounting for debt
and equity securities with beneficial conversion features, including a consensus requiring the application of the
"accounting conversion price" method, versus the use of the stated conversion price, to calculate the beneficial
conversion feature for such securities. The SEC required companies to record a cumulative catch-up adjustment in
the fourth quarter of calendar 2000 related to the application of the "accounting conversion price" method to
securities issued after May 21, 1999. Accordingly, the Company recorded a $1.1 million non-cash expense during
the quarter ended December 31, 2000 to account for a beneficial conversion feature associated with the Debentures
and related warrants. The Company has presented the charge in the Consolidated Statements of Operations as a
cumulative effect of a change in accounting principle.
Extraordinary Item – Early Extinguishment of Debentures
In December 2001, the Company redeemed the Debentures for $4.5 million in cash and 1,000,000 contingently
redeemable shares of common stock. Additionally, the Company agreed to reduce the exercise price of the Lender
Warrants to $0.898 per share. This transaction resulted in an extraordinary gain of $779,000, net of the incremental
fair value of the repriced warrants, the write-off of unamortized debt discount and debt issue costs, and other costs
associated with the early extinguishment of the Debentures.
Contingently Redeemable Common Stock
Under the terms of the registration rights agreement that the Company and the lenders entered into in connection
with the issuance of the 1,000,000 shares of common stock associated with the extinguishment described above, the
Company agreed to register the shares for resale and maintain the effectiveness of the registration statement for
specified periods of time until the shares are resold or can be resold without the registration statement (the
Maintenance Requirements). The Company further agreed that if it does not comply with the Maintenance
Requirements in the future, it may be required to pay cash penalties and redeem all or a portion of the shares held by
the lenders at the higher of $0.898 per share or the market price of the Company’s stock at the time of the
redemption. The remaining shares held by the lenders at March 31, 2003 and March 31, 2002 were recorded at their
potential redemption values of $669,000 and $813,000, respectively, and classified as contingently redeemable
common stock due to the redemption rights described above. The Company will not mark the contingently
redeemable common stock to the higher of $0.898 per share or market unless it becomes probable that the Company
will not be able to comply with the Maintenance Requirements.
The approximately $25,000 difference between the potential redemption value of the shares held by the lenders at
March 31, 2002 and the value of those shares on the date of issuance has been treated as a deemed dividend and
included as an adjustment to net income (loss) available to common stockholders for purposes of calculating the
Company’s net income (loss) per share for fiscal 2002.
6. DISPOSITION OF VIDEO MONITORING PRODUCT LINE
On May 19, 2000, the Company entered into an Asset Purchase Agreement with Interlogix, Inc. (Interlogix)
providing for the sale of certain assets comprising the Company's video monitoring business (the Business) to
Interlogix. The assets sold included certain accounts receivable, inventories, technical information, machinery,
equipment, contract rights, intangibles, records, and supplies. Concurrently with the execution of the Asset Purchase
Agreement, the Company and Interlogix entered into a Technology License Agreement (the License Agreement)
providing for the licensing of certain related intellectual property to Interlogix, a Development Agreement providing
Interlogix continuing rights in certain products to be developed by the Company, a Transition Services Agreement
providing for certain services to be rendered by the Company to Interlogix in respect of the Business, and a Supply
Agreement providing for the continuing sale of certain products to Interlogix by the Company. The aggregate
purchase price paid by Interlogix was approximately $5.2 million in cash.
The Company's obligations under the Transition Services Agreement expired in fiscal 2001. The cost of services
provided under the Transition Services Agreement was reimbursed by Interlogix. Pursuant to the Asset Purchase
Agreement, the Company is responsible for reimbursing Interlogix for costs they incur associated with warranty