8x8 2008 Annual Report Download - page 54

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WARRANT LIABILITY
The Company accounts for its warrants in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to and Potentially Settled in a Company’ s Own Stock” (“EITF 00-19”) which
requires warrants to be classified as permanent equity, temporary equity or as assets or liabilities. In general, warrants that
either require net-cash settlement or are presumed to require net-cash settlement are recorded as assets and liabilities at fair
value and warrants that require settlement in shares are recorded as equity instruments. Certain of the Company’ s warrants
require settlement in shares and are accounted for as permanent equity. The Company has two investor warrants that are
classified as liabilities because they include a provision that specifies that the Company must deliver freely tradable shares
upon exercise by the warrant holder. Because there are circumstances, irrespective of likelihood, which may not be within the
control of the Company that could prevent delivery of registered shares, EITF 00-19 requires the warrants be recorded as a
liability at fair value, with subsequent changes in fair value recorded as income (loss) in change in fair value of warrant
liability. The fair value of the warrant is determined using a Black-Scholes option pricing model, and is affected by changes in
inputs to that model including the Company’ s stock price, expected stock price volatility and contractual term.
The amount we record as a liability under EITF 00-19 is not, nor do we intend for it to be an admission or stipulation of the
amount that we would owe or be obligated to pay the warrant holder in the event of an actual breach by us of the warrant terms.
In fact, we have made no determination of the amount of liability, if any, that we would owe to the warrant holder in the event
of such a breach.
RESEARCH, DEVELOPMENT AND SOFTWARE COSTS
Research and development costs are charged to operations as incurred. Software development costs for software to be sold or
otherwise marketed incurred prior to the establishment of technological feasibility are included in research and development
and are expensed as incurred. The Company defines establishment of technological feasibility as the completion of a working
model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of
general market availability of the product are capitalized, if material. To date, all software development costs for software to be
sold or otherwise marketed have been expensed as incurred. In accordance with American Institute of Certified Public
Accountants Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use,” the Company capitalizes purchase and implementation costs of internal use software. In accordance with
SOP No. 98-1, during fiscal 2008, 2007 and 2006, the Company capitalized $0, $81,000, and $679,000, respectively.
SALE OF PATENTS
In the third quarter of fiscal 2008, the Company completed the sale of two of its patents for proceeds of $1.2 million. The
proceeds from the sale of the two patents are included in other income, net. The Company has retained a worldwide, royalty-
free non-exclusive, non-sublicensable, non-transferable right and license to use the technology covered by these patents for all
of its current and future products. The Company has no ongoing obligations associated with this transaction.
ADVERTISING COSTS
Advertising costs are expensed as incurred and were $6,989,000, $5,614,000 and $5,265,000 for the years ended March 31,
2008, 2007 and 2006, respectively.
SUBSCRIBER ACQUISITION COSTS
Subscriber acquisition costs are expensed as incurred and include the advertising, marketing, promotions, commissions, rebates
and equipment subsidy costs associated with our efforts to acquire new subscribers.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are translated from their respective functional currencies at
exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates
prevailing during the year. If the functional currency is the local currency, resulting translation adjustments are reflected as a
separate component of stockholders' equity. If the functional currency is the U.S. dollar, resulting conversion adjustments are
included in the results of operations. Foreign currency transaction gains and losses, which have been immaterial, are also
included in results of operations. Total assets of the Company's foreign subsidiaries were $44,000, $45,000 and $45,000 as of
March 31, 2008, 2007 and 2006, respectively. At March 31, 2008, the U.S. dollar was the functional currency for all foreign
subsidiaries. The Company does not undertake any foreign currency hedging activities.