Vonage 2009 Annual Report Download - page 71

VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
review indicates that the carrying value of an asset will not
be recoverable, based on a comparison of the carrying
value of the asset to the undiscounted future cash flows,
the impairment will be measured by comparing the carrying
value of the asset to its fair value. Fair value will be
determined based on quoted market values, discounted
cash flows or appraisals. Impairments are recorded in the
statement of operations as part of depreciation expense. In
2009, 2008 and 2007, we incurred an impairment loss of
$1,886, $1,762 and $1,374, respectively. The impairments
were mainly for marketing displays, network equipment,
computer hardware and furniture and fixtures.
Facility Exit and Restructuring Costs
In June 2009, we announced the closing of our office
facility in Canada. The facility exit and restructuring costs
for the year ended December 31, 2009 were $2,529. These
costs included $1,090 for severance and personnel-related
costs which were recorded as selling, general and admin-
istrative in the statement of operations, $670 for lease
termination and facilities-related costs which were recorded
as selling, general and administrative in the statement of
operations and $769 for asset impairments which were
recorded in the statement of operations as part of deprecia-
tion expense. As of December 31, 2009, all of these costs
were paid.
Restricted Cash and Letters of Credit
Our credit card processors have established reserves
to cover any exposure that they may have as we collect
revenue in advance of providing services to our customers,
which is a customary practice for companies that bill their
customers in advance of providing services. As such, we
have provided our credit card processors with cash
reserves of $22,423 and a cash collateralized letter of credit
for $10,500. We have a cash collateralized letter of credit
for $7,350 and $7,000 as of December 31, 2009 and
December 31, 2008, respectively, related to lease deposits
for our offices. The total amount of collateralized letters of
credit was $18,000 and $17,562 at December 31, 2009 and
December 31, 2008, respectively. Pursuant to the terms of
credit facilities (see Note 7. Long-term Debt) commencing
October 1, 2009, all specified unrestricted cash above
$30,000, subject to certain adjustments, is swept into a
concentration account (the “Concentration Account”), and
until the balance in the Concentration Account is at least
equal to $30,000, we may not access or make any with-
drawals from the Concentration Account. Thereafter, with
limited exceptions, we will have the right to withdraw funds
from the Concentration Account in excess of $30,000. As of
December 31, 2009, we have funded $3,277 into the Con-
centration Account. We funded an additional $18,718
through February 25, 2010. In the aggregate, cash reserves
and collateralized letters of credit of $43,700 and $39,585
were recorded as long-term restricted cash at
December 31, 2009 and December 31, 2008, respectively.
Debt Related Costs
Costs incurred in raising debt are deferred and amor-
tized as interest expense using the effective interest
method over the life of the debt. In connection with our
financing transaction in November 2008, we recorded debt
related costs of $12,271, which are being amortized over
the life of the debt which is five years and seven years.
Amortization expense related to these costs is included in
interest expense in the consolidated statements of oper-
ations and was $2,708 and $478 for 2009 and 2008,
respectively. Accumulated amortization of debt related
costs was $4,859 and $478 at December 31, 2009 and
December 31, 2008, respectively, including a $1,673 write
off of debt related costs associated with the conversion of
convertible notes for the year ended December 31, 2009.
Costs of $9,935 in connection with our December
2005 and January 2006 issuance of convertible notes was
deferred and amortized as interest expense through Sep-
tember 30, 2007 over the five-year term of the notes.
Although the notes would have matured on December 1,
2010, they could have been put to us on December 16,
2008. In the fourth quarter of 2007, the rate of amortization
was accelerated so that only one third of the original
deferred financing costs remained to be amortized in 2008.
Amortization expense related to these costs was included
in interest expense in the consolidated statements of oper-
ations and was $2,758, $4,689 in 2008 and 2007,
respectively. Additionally, the unamortized portion of $414
at the time the convertible notes (“Previous Convertible
Notes”) were repaid was included in loss on early
extinguishment of notes in our consolidated statement of
operations for 2008.
Derivatives
We do not hold or issue derivative instruments for trad-
ing purposes; however, certain features within our 20%
senior secured third lien notes due 2015 and a common
stock warrant to purchase 514 shares of common stock at
an exercise price of $0.58 require us to account for such
features as derivative instruments. In accordance with new
guidance codified in FASB ASC 815, “Derivatives and
Hedging” (“FASB ASC 815”) which we adopted on Jan-
uary 1, 2009, we recognize these embedded derivatives as
liabilities in our consolidated balance sheet at fair value
each period and recognize any change in the fair value in
our statement of operations in the period of change. We
estimate the fair value of these embedded derivatives using
available market information and appropriate valuation
methodologies.
Foreign Currency
Generally, the functional currency of our non-U.S.
subsidiaries is the local currency. The financial statements
of these subsidiaries are translated to U.S. dollars using
month-end rates of exchange for assets and liabilities, and
average rates of exchange for revenues, costs and
expenses. Translation gains and losses are deferred and
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