Vonage 2009 Annual Report Download - page 81

VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
Security
Amounts borrowed under the Financing are secured by
substantially all of the assets of the Credit Parties. The col-
lateral secures the First Lien Senior Facility on a first lien
basis, the Second Lien Senior Facility on a second lien
basis and the Convertible Notes on a third lien basis, sub-
ject to an inter creditor agreement.
Commencing October 1, 2009, all specified unre-
stricted cash above $30,000, subject to certain adjust-
ments, is swept into a Concentration Account, and until the
balance in the Concentration Account is at least equal to
$30,000, we may not access or make any withdrawals 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.
Other Terms and Conditions of the Financing
The Credit Documentation includes customary repre-
sentations and warranties of the Credit Parties. In addition,
Credit Documentation for the Financing contains affirmative
and negative covenants that affect, and in many respects
may significantly limit or prohibit, among other things, the
Credit Parties’ ability to incur, prepay, refinance or modify
indebtedness; enter into acquisitions, investments, sales,
mergers, consolidations, liquidations and dissolutions;
invest in foreign subsidiaries, repurchase and redeem
stock; modify material contracts; engage in transactions
with affiliates and 5% stockholders; change lines of busi-
ness; and make marketing expenditures under contracts
with a duration in excess of one year that exceed
(i) $95,000 until December 31, 2009 and (ii) for each quarter
thereafter, an amount equal to 20% of consolidated
pre-marketing operating income for the four quarters
immediately preceding such quarter. Board approval must
be obtained for any long-term commitment or series of
related long-term commitments that would result in
aggregate marketing expenditures by any of the Credit Par-
ties of more than $25,000 during the term of the Financing.
In addition, we must comply with certain financial cove-
nants, which include a total leverage ratio, senior lien lever-
age ratios, minimum consolidated adjusted EBITDA, a fixed
charge coverage ratio, maximum consolidated capital
expenditures, minimum consolidated liquidity and minimum
consolidated pre-marketing operating income. As of
December 31, 2009, we were in compliance with all cove-
nants, including financial covenants, under the Credit
Documentation.
The Credit Documentation contains events of default
that may permit acceleration of the debt under the Credit
Documentation and a default interest rate of 3% above the
interest rate which would otherwise be applicable. If an
event of default has occurred, and the debt under the
Financing becomes due and payable as a result, such
payment will be subject to a make-whole (or the prepay-
ment premium, if applicable to the First Lien Senior Facility
in years 4 and 5) and, in the case of the Convertible Notes,
liquidated damages payable in the form of shares of
common stock for any loss of the option to convert in
whole or in part. Conversion rights will continue to exist
while the Convertible Notes are outstanding notwithstand-
ing acceleration or maturity, including as a result of a volun-
tary or involuntary bankruptcy.
Note 8. Fair Value of Financial
Instruments
Effective January 1, 2008, we adopted FASB ASC 820,
“Fair Value Measurements and Disclosures” (“FASB ASC
820”). This standard establishes a framework for measuring
fair value and expands disclosure about fair value
measurements. We did not elect fair value accounting for
any assets and liabilities allowed by FASB ASC 825,
“Financial Instruments”.
FASB ASC 820 defines fair value as the amount that
would be received for an asset or paid to transfer a liability
(i.e., an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction
between market participants on the measurement date.
FASB ASC 820 also establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measur-
ing fair value. FASB ASC 820 describes the following three
levels of inputs that may be used:
>Level 1: Quoted prices (unadjusted) in active markets that
are accessible at the measurement date for identical
assets and liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
>Level 2: Observable prices that are based on inputs not
quoted on active markets but corroborated by mar-
ket data. Our common stock warrant with a value of $553
as of December 31, 2009 is included as a Level 2 liability.
>Level 3: Unobservable inputs when there is little or no
market data available, thereby requiring an entity to
develop its own assumptions. The fair value hierarchy
gives the lowest priority to Level 3 inputs. The embedded
derivative within our Convertible Notes with a value of
$25,050 as of December 31, 2009 is included as a Level 3
liability.
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