Vonage 2008 Annual Report Download - page 50

Net Operatin
g
Loss Carryforwards
A
s of December 31, 2008, we had net operating loss carryfor
-
wards for U.S. federal and state tax purposes of $765,748 and
$
726,521, respectively, expiring at various times from years end
-
i
ng 2020 t
h
roug
h
2028.
I
na
ddi
t
i
on, we
h
a
d
net operat
i
ng
l
oss
carryforwards for Canadian tax purposes of $56,161 expirin
g
t
hrough 2027. We also had net operating loss carry
f
orwards
f
o
r
United Kingdom tax purposes of
$
33,409 with no expiration date.
Under
S
ection 382 of the Internal Revenue
C
ode, if a cor
p
o
-
r
ation under
g
oes an “ownership chan
g
e”
(g
enerally defined as
a
greater than 50% change (by value) in its equity ownership over
a
t
hree-year period
)
, the corporation’s ability to use its pre-change
of control net operatin
g
loss carry forward and other pre-chan
g
e
t
ax attributes against its post-change income may be limited. The
S
ection 382 limitation is applied annually so as to limit the use o
f
our pre-chan
g
e net operatin
g
loss carryforwards to an amoun
t
t
hat generally equals the value o
f
our stock immediately be
f
or
e
t
he ownership change multiplied by a designated federal long-
t
erm tax-exempt rate.
I
na
ddi
t
i
on, we ma
yb
ea
bl
eto
i
ncrease t
he
b
ase Section 382 limitation amount during the first five years fol-
l
ow
i
ng t
h
e owners
hi
pc
h
ange to t
h
e extent
i
t rea
li
zes
b
u
il
t-
i
nga
i
ns
d
ur
i
n
g
t
h
at t
i
me per
i
o
d
.
Ab
u
il
t-
i
n
g
a
i
n
g
enera
ll
y
i
s
g
a
i
nor
i
ncom
e
attributable to an asset that was held at the date o
f
the ownership
change and that had a fair market value in excess of the tax basis
at the date of the ownership chan
g
e.
S
ection 382 provides that
an
y
unused Section 382 limitation amount can be carried forward
and aggregated with the following year’s available net operatin
g
l
osses. Due to the cumulative impact of our equity issuances over
t
he three year period ended April 2005, a chan
g
eo
f
ownership
occurred upon the issuance of our previously outstanding
S
er-
i
es E Preferred
S
tock at the end of A
p
ril 2005. As a result,
$
171,147 of the total U.S. net operatin
g
losses will be subject t
o
an annual base limitation of
$
39
,
374. As noted above
,
we believe
we may be able to increase the base
S
ection 382 limitation fo
r
b
uilt-in
g
ains durin
g
the
f
irst
f
ive years
f
ollowin
g
the ownershi
p
change
.
S
hare-Based
C
ompensation
Prior to the adoption of SFAS 123(R), we accounted fo
r
s
hare-based awards to employees and directors using th
e
i
ntr
i
ns
i
cva
l
ue met
h
o
di
n accor
d
ance w
i
t
h APB
25, as a
ll
owe
d
u
nder Statement of Financial Accountin
g
Standards No. 123
,
A
ccounting for
S
tock-Based
C
ompensation, or
S
FA
S
123. Unde
r
th
e
i
ntr
i
ns
i
cva
l
ue met
h
o
d
,nos
h
are-
b
ase
d
com
p
ensat
i
o
n
expense
f
or employee stock options had been reco
g
nized in our
r
esults of o
p
erations in
p
rior
p
eriods unless the exercise
p
rice o
f
th
e stoc
k
opt
i
ons
g
rante
d
to emp
l
oyees an
ddi
rectors was
l
ess
t
han the
f
air market value o
f
the underlyin
g
common stock at th
e
date o
f
grant. In accordance with the modi
f
ied prospective tran-
s
ition method that we used in adoptin
gS
FA
S
123
(
R
)
, the con-
s
olidated
f
inancial statements prior to 2006 have not bee
n
r
estated to re
f
lect, and do not include, the
p
ossible im
p
act o
f
S
FA
S
123
(
R
)
.
Recent Accountin
g
Pronouncement
s
I
n June 2008, the Financial Accounting Standards Boar
d
(
“FA
S
B”
)
ratified Emer
g
in
g
Issues Task Force Issue No. 07-5,
“
Determinin
g
Whether an Instrument (or an Embedded Feature) Is
I
ndexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 pro
-
vid
es t
h
at an ent
i
ty s
h
ou
ld
use a two step approac
h
to eva
l
uat
e
w
hether an equit
y
-linked financial instrument (or embedded fea-
ture) is indexed to its own stock, including evaluating the
i
nstrument
’
s cont
i
n
g
ent exerc
i
se an
d
sett
l
ement prov
i
s
i
ons.
I
ta
l
s
o
c
lari
f
ies on the impact o
ff
orei
g
n currency denominated strike
p
rices and market-based employee stock option valuatio
n
i
n
s
tr
u
m
e
nt
so
nth
ee
v
a
l
ua
ti
o
n. EITF
0
7-
5
i
se
ff
ec
tiv
e
f
o
rfi
scal
years be
g
innin
g
a
f
ter December 15, 2008. The adoption o
f
EITF
07-5 will not have an im
p
act on our consolidated
f
inancial
p
osition
a
nd results of o
p
erations.
In May 2008, the FA
S
B issued
S
tatement of Financia
l
Accountin
g
Standards No. 162 (“SFAS No. 162”), “The Hierarch
y
o
f Generally Accepted Accounting Principles.
”
S
FA
S
No. 16
2
i
dentifies the sources of accountin
g
principles and the framewor
k
f
or selectin
g
the principles used in the preparation o
ff
inancia
l
s
tatements that are presented in con
f
ormity with generally
a
ccepted accountin
g
principles.
S
FA
S
No. 162 becomes effective
6
0 days followin
g
the Securities and Exchan
g
e Commission’s
a
pproval of the Public Company Accounting Oversight Boar
d
a
mendments to AU
S
ection 411,
“
The Meanin
g
of Present Fairl
y
i
n
C
onformit
y
With Generall
y
Accepted Accountin
g
Principles.
”
W
e
d
o not ex
p
ect that the ado
p
tion of SFAS No. 162 will have a
material im
p
act on our consolidated financial statements.
In A
p
ril 2008, the FA
S
B issued F
S
P No. 142-3
(
“F
S
P 142-3”
)
,
“Determination of the Useful Life of Intan
g
ible Assets.” FSP 142-3
a
mends the
f
actors an entity should consider in developing
renewal or extension assumptions used in determinin
g
the useful
l
ife of reco
g
nized intan
g
ible assets under FASB Statement
No. 142, “Goodwill and Other Intangible Assets.” This new guid-
a
nce app
li
es prospect
i
ve
l
yto
i
ntan
gibl
e assets t
h
at are acqu
i
re
d
i
ndividually or with a
g
roup o
f
other assets in business combina-
tions and asset ac
q
uisitions. FSP 142-3 is effective for financia
l
s
tatements issued for fiscal years and interim periods be
g
innin
g
a
fter December 15, 2008. Earl
y
adoption is prohibited. Since thi
s
g
uidance will be applied prospectively, on adoption, there will b
e
no im
p
act to our current consolidated financial statements
.
In March 2008, the FA
S
B affirmed the consensus of FA
S
B
S
taff Position (FSP) Accountin
g
Principles Board Opinion No. 14-
1
(
APB 14-1
)
,Accounting for Convertible Debt Instruments That
Ma
y
Be
S
ettled in
C
ash upon
C
onversion
(
Includin
g
Partial
C
as
h
Settlement
)
,
w
hi
c
h
app
li
es to a
ll
convert
ibl
e
d
e
b
t
i
nstruments t
h
at
have a net settlement
f
eature
;
which means that such convertibl
e
d
e
b
t
i
nstruments,
b
yt
h
e
i
r terms, may
b
e sett
l
e
d
e
i
t
h
er w
h
o
ll
yor
p
artiall
y
in cash upon conversion. FSP APB 14-1 requires issuer
s
of
convertible debt instruments that ma
y
be settled wholl
y
or
p
artially in cash upon conversion to separately account for th
e
l
iabilit
y
and equit
y
components in a manner re
f
lective o
f
the issu-
e
r’s nonconvertible debt borrowing rate. Previous guidance
p
rovided for accounting for this type of convertible debt instru-
ment entirel
y
as debt. F
S
P APB 14-1 is effective for financia
l
s
tatements issued
f
or
f
iscal years beginning a
f
ter December 15,
2008 and interim periods within those fiscal years. The adoptio
n
o
fF
S
P APB 14-1 will not have an impact on our financia
l
st
a
t
emen
t
s.
In Februar
y
2008, the FASB issued FASB FSP 157-2, which
d
elayed the effective date of
S
FA
S
No. 157 for all nonfinancia
l
a
ssets and non
f
inancial liabilities, except those that are reco
g
-
nized or disclosed at
f
air value in the
f
inancial statements on a
recurring basis
(
at least annually
)
, until fiscal years beginning after
November 15, 2008, and interim periods within those
f
iscal
y
ears.
T
hese non
f
inancial items include assets and liabilities such a
s
42
VO
NA
G
E ANN
U
AL REP
O
RT 2008