Vonage 2010 Annual Report Download

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2010 Annual Report

Table of contents

  • Page 1
    2010 Annual Report

  • Page 2
    ...focused on the attractive international calling segment of the market. And we launched innovative services that start to deliver on our expansive vision to provide compelling communication services that connect individuals and social networks worldwide, through broadband devices. We emerged from the...

  • Page 3
    ... approximately 10%, improved customer care costs by 20% per line for the second consecutive year, and reduced international long distance termination rates by 25%. We also re-engineered the telephone adapter that is sold with all of our in-home phone services, cutting the cost of our devices by more...

  • Page 4
    ... for mobility, growing smartphone penetration, and the increased availability of broadband networks and Wi-Fi are changing the communications landscape. These market dynamics provide Vonage with opportunities to leverage our VoIP network to deliver compelling new services to consumers for years to...

  • Page 5
    ... Street, Holmdel, New Jersey (Address of principal executive offices) 07733 (Zip Code) (732) 528-2600 Registrant's telephone number, including area code: Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, Par...

  • Page 6
    ... IV Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services 43 43 43...

  • Page 7
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  • Page 8
    ... in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Such factors include, but are not limited to: the competition we face; our ability to adapt to rapid changes in the market for voice and messaging services; our ability to retain customers and...

  • Page 9
    ... as customers who make 20 or more minutes of international long distance calls per month within their plan. Our primary product offering is Vonage World, a residential plan with unlimited calling domestically and to more than 60 countries, including India, Mexico, and China, for a flat monthly rate...

  • Page 10
    ... no-cost Wi-Fi and other broadband around the world, accelerating smart phone adoption rates, and the growth of social communities. We plan to deliver easy-to-use applications that provide significant cost savings in large existing markets, which could include such services as international calling...

  • Page 11
    ... enhanced features or limited minutes, in addition to offering our legacy Residential Premium Unlimited plan to existing customers. We offer two small and home office calling plans, one of which offers unlimited local and long distance calling anywhere in the United States, Canada, Puerto Rico...

  • Page 12
    ... equipment and employs the personnel who develop and operate our technology. The Vonage network uses our customer's existing highspeed broadband Internet service to allow calls over the Internet either from a standard telephone through a Vonage-enabled device or through soft phone software or mobile...

  • Page 13
    ...plan to expand to additional markets in 2011. Customer Service We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and our toll free number. Many customers use our self-service website when they have a question or problem...

  • Page 14
    ... broadband Internet access, VoIP phone service, and cable television to their customers and they often have larger product development and marketing budgets than us. Providing home phone, Internet access, and cable television to many of our existing and potential customers may enhance their...

  • Page 15
    ... phone, improving call quality at a subscriber's residence or other location. Calls connected via a femtocell signal are carried over the customer's home broadband network allowing the wireless carriers to offer unlimited calling or discounted rates for calls from home. Wireless telephone companies...

  • Page 16
    ..., Comcast Corporation, Cox Communications, and Time Warner Cable, which have added VoIP services to their existing cable television and broadband offerings. Further, as wireless providers, including AT&T, Sprint, T-Mobile, and Verizon Wireless, offer more minutes at lower prices, better...

  • Page 17
    ...may introduce other free services for mobile and other connected devices. As an optional feature of these free services, we may offer and charge for premium services such as international calling plans, alternatives for high priced international roaming services, and lower cost text messaging. If we...

  • Page 18
    ...access our residential, small office, and home office services, a customer needs to connect a standard telephone to a broadband Internet connection through a Vonageenabled device that we provide. Although we closely monitor inventory levels, if we are unable to procure a sufficient number of devices...

  • Page 19
    ..., high-quality service, our reputation will be harmed and we may lose customers. We offer our customers support 24 hours a day, seven days a week through both our comprehensive online account management website and our toll free number. Our customer support is currently provided via United States...

  • Page 20
    ... respect to our business practices, marketing disclosures, e-mail marketing, and quality issues for both phone and fax service. In 2010, the parties reached a proposed settlement that included a release and dismissal with prejudice of all consumer claims against us and provided a settlement benefit...

  • Page 21
    ...operating abroad, including increased governmental regulation, currency restrictions, and other restraints and burdensome taxes. Our services are in use in countries outside of the United States, Canada, and the United Kingdom where we have regular operations including countries where providing VoIP...

  • Page 22
    ...quality than they are used to from traditional wire line telephone companies, including static, echoes, and delays in transmissions. > Our customers may experience higher dropped-call rates than they are used to from traditional wire line telephone companies. > Customers who obtain new phone numbers...

  • Page 23
    ...to the traditional wire line E-911 infrastructure. In addition, certain of our services designed to be highly mobile including soft phone service, which is software that enables a customer to make telephone calls from a computer, route callers to a national emergency call center that in turns routes...

  • Page 24
    ... premium over the then-current market price for their shares. The market price of our common stock has been and may continue to be volatile, and purchasers of our common stock could incur substantial losses. Securities markets experience significant price and volume fluctuations. This market...

  • Page 25
    ... of our offices and locations: Lease Expiration Date 2017 2015 2011 2015 Location Holmdel, New Jersey London, United Kingdom Atlanta, Georgia Tel Aviv, Israel Business Use Corporate Headquarters, Network Operations, Customer Service, Sales and Marketing, and Administration Sales and Marketing...

  • Page 26
    ... that Vonage's products and services are covered by a patent held by Ceres, United States Patent No. 5,774,526, entitled "Reconfigurable On-Demand Telephone and Data Line System." The suit also named numerous other companies as defendants, including AT&T, Inc., Cablevision Systems Corporation...

  • Page 27
    ..., use, and ad valorem taxes), fees or surcharges ("Taxes") on the charges to our customers for our services, except that we historically complied with the New Jersey sales tax. We have received inquiries or demands from a number of state and municipal taxing and 911 agencies seeking payment of Taxes...

  • Page 28
    ... rule that establishes such obligations, a number of states have changed their statutes to expressly include VoIP and we are now collecting and remitting sales taxes in those states. In addition, many states address how VoIP providers should contribute to support public safety agencies, and in those...

  • Page 29
    ... and Issuer Purchases of Equity Securities Price Range of Common Stock Our common stock has been listed on the New York Stock Exchange under the ticker symbol "VG" since May 24, 2006. Prior to that time, there was no public market for our common stock. The following table sets forth the high and low...

  • Page 30
    ..., if any. The graph assumes the initial value of our common stock on May 24, 2006 was the closing sales price of $14.85 per share. The graph below and related information shall not be deemed "soliciting material" or "filed" with the Securities and Exchange Commission or otherwise subject to the...

  • Page 31
    ... Annual Report on Form 10-K. For the Years Ended December 31, 2008 2007 2006 (in thousands, except per share amounts) Statement of Operations Data: Operating Revenues: Telephony services Customer equipment and shipping Operating Expenses: Direct cost of telephony services(1) Royalty Total direct...

  • Page 32
    ... activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Balance Sheet Data (at period end): Cash, cash equivalents and marketable securities Property and equipment, net Restricted cash Total assets Total notes payable, including current...

  • Page 33
    ..., or DSL broadband networks. This technology enables us to offer attractively priced services that provide our customers with access to Vonage voice, messaging, and features, regardless of location, device, or their form of Internet access. Our customers include both domestic and international long...

  • Page 34
    ... line to evaluate how effective we are at managing our costs of providing service. Our average monthly direct cost of telephony services per line increased to $8.40 for 2010 compared to $7.08 for 2009, due primarily to higher costs from higher international call volume associated with Vonage World...

  • Page 35
    ... per minute fees are not included in our monthly subscription fees. In October 2009, we launched Vonage Mobile, our first mobile calling application for smart phones. Vonage Mobile is a free downloadable application that provides seamless, low-cost pay-per-use international calling while on Wi-Fi or...

  • Page 36
    ... our services. These fees include: > Access charges that we pay to other telephone companies to terminate domestic and international calls on the public switched telephone network. These costs represented approximately 49% and 44% of our total direct cost of telephony services for 2010 and 2009...

  • Page 37
    ..., accounting, tax, public relations, lobbying, and development activities. > Litigation settlements. Marketing expense. Marketing expense consists of: > Advertising costs, which comprise a majority of our marketing expense and include online, television, direct mail, alternative media, promotions...

  • Page 38
    ... in our network costs of $2,261, which includes costs for co-locating equipment in other carriers' facilities, leasing phone numbers, routing calls on the Internet, transferring calls to and from the Internet to the public switched telephone network, and E-911 costs, and a decrease in local number...

  • Page 39
    ...equipment recovery fees for new customers beginning in September 2010. In addition, there was a decrease in customer shipping revenue of $2,260 due to promotions providing free shipping for customers who signed up for our residential unlimited plan or our Vonage World plan. Direct cost of goods sold...

  • Page 40
    ... lower impairment charges of $835. These increases were offset by a decrease in depreciation of network equipment and computer equipment of $449, including higher impairment charges of $123 and less amortization related to patents of $1,496. Dollar Change 2010 vs. 2009 $ 242 5,651 (49,405) (35,064...

  • Page 41
    ...participate in the program. The program requires that a purchaser pay at least 75% of the amount of the surrendered tax benefit. In tax years 2008, 2009, and 2010, we sold approximately, $10,051, $0, and $2,194, respectively, of our New Jersey State net operating loss carry forwards for a recognized...

  • Page 42
    ...common shares outstanding: Basic Diluted Operating Data: Gross subscriber line additions Net subscriber line additions Subscriber lines at end of period Average monthly customer churn Average monthly revenue per line Average monthly telephony services revenue per line Average monthly direct costs of...

  • Page 43
    ... with new deferred costs due to the introduction of a new promotion in May 2009 that eliminated activation fees and thus the corresponding cost deferral for customers who signed up for our residential unlimited plan or our Vonage World plan. Selling, general and administrative. Selling, general...

  • Page 44
    ... requirements, lower marketing expenditures, and overall tighter controls on costs partially offset by higher cost of telephony services attributable to increased international minutes used in connection with our Vonage World plan. Changes in working capital requirements include changes in accounts...

  • Page 45
    ... to our corporate headquarters in Holmdel, New Jersey that expire in 2017. Operating lease obligations. At December 31, 2010, future commitments for operating leases included $6,274 for co-location facilities in the United States that accommodate a portion of our network equipment through 2013...

  • Page 46
    ... service plans. We also derive telephony services revenues from per minute fees for international calls and for any calling minutes in excess of a customer's monthly plan limits. Monthly subscription fees are automatically charged to customers' credit cards, debit cards or electronic check payments...

  • Page 47
    ... the total United States net operating losses were subject to an annual base limitation of $39,374. Share-Based Compensation Inventory Inventory consists of the cost of customer equipment and is stated at the lower of cost or market, with cost determined using the average cost method. We provide an...

  • Page 48
    ... and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons 41

  • Page 49
    ...31, 2010, our internal control over financial reporting is effective based on those criteria. Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting. This report appears on page F-3. Management's Report on Internal Control...

  • Page 50
    ... hereby incorporated by reference. ITEM 14. Principal Accountant Fees and Services The discussion under the heading "Proposal No. 2 - Ratification of Independent Registered Public Accounting Firm" in our Proxy Statement for the 2011 Annual Meeting of Stockholders is hereby incorporated by reference...

  • Page 51
    ... Plan (Per Non-Executive Director Compensation Program)(12)* Vonage Holdings Corp. 401(k) Retirement Plan(1)* Lease Agreement, dated March 24, 2005, between 23 Main Street Holmdel Associates LLC and Vonage USA Inc.(1) Amended and Restated Employment Agreement dated November 5, 2009 between Vonage...

  • Page 52
    ... as Vonage Network Inc.) (16) License and Managed Services Agreement, dated December 23, 2009 between Vonage Network LLC and Amdocs Software Systems Limited and Amdocs, Inc.(18) First Amending Agreement to License and Managed Services Agreement, dated December 22, 2010 between Vonage Network LLC and...

  • Page 53
    ... of 1933, as amended or the Securities Exchange Act of 1934, as amended. Management contract or compensatory plan or arrangement. * (b) Financial Statement Schedule Report of Independent Registered Public Accounting Firm Schedule II - Valuation and Qualifying Accounts. 46 VONAGE ANNUAL REPORT 2010

  • Page 54
    ... of Independent Registered Public Accounting Firm Board of Directors and Stockholders Vonage Holdings Corp. Holmdel, New Jersey 07733 The audits referred to in our report dated February 16, 2011 relating to the consolidated financial statements of Vonage Holdings Corp., which is contained in Item...

  • Page 55
    ...in the city of Holmdel, State of New Jersey, on February 16, 2011. VONAGE HOLDINGS CORP. Dated: February 16, 2011 By: /S/ BARRY ROWAN Barry Rowan Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act...

  • Page 56
    ...STATEMENTS Page Report of Independent Registered Public Accounting Firm-BDO USA, LLP Report of Independent Registered Public Accounting Firm-BDO USA, LLP Consolidated Balance Sheets as of December 31, 2010 and 2009 Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and...

  • Page 57
    ...OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Vonage Holdings Corp. Holmdel, New Jersey We have audited the accompanying consolidated balance sheets of Vonage Holdings Corp. as of December 31, 2010 and 2009, and the related consolidated statements of operations...

  • Page 58
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Vonage Holdings Corp. Holmdel, New Jersey We have audited Vonage Holdings Corp.'s (the "Company") internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ...

  • Page 59
    ..., net of current portion in accrued expenses Total liabilities Commitments and Contingencies Stockholders' Deficit Common stock, par value $0.001 per share; 596,950 shares authorized at December 31, 2010 and December 31, 2009; 223,454 and 201,628 shares issued at December 31, 2010 and December 31...

  • Page 60
    ... and shipping 2010 $ 872,934 12,108 885,042 Operating Expenses: Direct cost of telephony services (excluding depreciation and amortization of $18,725, $18,958, and $20,254, respectively) Direct cost of goods sold Selling, general and administrative Marketing Depreciation and amortization 2009 $864...

  • Page 61
    ... Discount on notes payable Extinguishment of notes Debt related costs Proceeds from subscription receivable, net Proceeds from directed share program, net Proceeds from exercise of stock options Net cash used in financing activities Effect of exchange rate changes on cash Net change in cash and...

  • Page 62
    ... expense Share-based award activity y Premium attributed to notes payable y Directed share program g transactions, net Stock subscription receivable payments y Comprehensive loss: Change in unrealized loss on available-for-sale investments Foreign g currency y translation adjustment Net loss Total...

  • Page 63
    ... telephony services revenues from per minute fees for international calls if not covered under a plan and for any calling minutes in excess of a customer's monthly plan limits. Monthly subscription fees are automatically charged to customers' credit cards, debit cards or electronic check payments...

  • Page 64
    ... and international phone calls on the public switched telephone network. In addition, these costs include the cost to lease phone numbers, to co-locate in other telephone companies' facilities, to provide enhanced emergency dialing capabilities to transmit 911 calls, and to provide local number...

  • Page 65
    ... of our corporate headquarters has been accounted for as a capital lease and is included in property and equipment. Network equipment and computer hardF-10 VONAGE ANNUAL REPORT 2010 Facility Exit and Restructuring Costs In June 2009, we announced the closing of our office facility in Canada. The...

  • Page 66
    ... liabilities using available market information and appropriate valuation methodologies. Restricted Cash and Letters of Credit Our credit card processors had established reserves to cover any exposure that they may have as we collect revenue in advance of providing services to our customers, which...

  • Page 67
    ... average number of common shares outstanding during a reported period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including warrants, stock options, and restricted stock units under our 2001 Stock Incentive Plan and...

  • Page 68
    ... 31, 2010 Purchased License Internal developed Less: accumulated amortization Property and equipment, net $ 55,808 909 37,696 94,413 (58,897) $ 35,516 December 31, 2009 $ 34,191 909 37,259 72,359 (36,819) $ 35,540 The total expected future annual amortization of software is as follows: 2011 2012...

  • Page 69
    ... 31, 2009 $ 7,350 - 10,500 97 53 18,000 25,700 $43,700 Accrued expenses December 31, 2010 Compensation and related taxes and temporary labor Marketing Taxes and fees Litigation Telecommunications Other accruals Customer credits Professional fees Accrued interest Inventory Credit card fees Accrued...

  • Page 70
    ... December 31, 2010 and 2009 and $52 for the year ended December 31, 2008. Annual amortization will be approximately $70. Note 4. Supplemental Income Statement Account Information Amounts included in telephony services revenue December 31, 2010 USF fees Disconnect fee Initial activation fees $66,292...

  • Page 71
    ... from foreign exchange transactions $(19) December 31, 2009 $46 December 31, 2008 $(315) Note 5. Income Taxes The following table summarizes deferred taxes resulting from differences between financial accounting basis and tax basis of assets and liabilities. 2010 Current assets and liabilities...

  • Page 72
    ... taxes Effective tax rate (34%) 2% 0% 0% 32% 0% 2009 (34%) 35% 2% 0% (1%) 2% 2008 (34%) 0% (4%) (1%) 40% 1% As of December 31, 2010, we had net operating loss carry forwards for United States federal and state tax purposes of $885,431 and $849,567, respectively, expiring at various times from years...

  • Page 73
    ... in the program. The program requires that a purchaser pay at least 75% of the amount of the surrendered tax benefit. In tax years 2008, 2009, and 2010, we sold approximately, $10,051, $0, and $2,194, respectively, of our New Jersey State net operating loss carry forwards for a recognized...

  • Page 74
    ...carried forward $1,072 of unamortized discount, which will be amortized to interest expense over the life of the debt using the effective interest method in addition to the $6,000 of original issue discount in connection with the Credit Facility. The amortization for the year ended December 31, 2010...

  • Page 75
    ... Second Lien Senior Facility less $4,655 required to prepay amounts under the First Lien Senior Facility prepayment offer. While certain holders of loans under the Second Lien Senior Facility waived their right to receive the prepayment as permitted under the Credit F-20 VONAGE ANNUAL REPORT 2010

  • Page 76
    ... statement of operations in the period of change. The fair value of the embedded derivative was determined using the Monte Carlo simulation model. The key inputs in the model were maturity date, risk-free interest rate, current share price and historical volatility of our common stock. In accordance...

  • Page 77
    ... 2009 and a summary of changes in the fair value of our embedded conversion option for the year ended December 31, 2010 and December 31, 2009: December 31, 2009 Maturity date Risk-free interest rate Price of common stock Volatility October 31, 2015 2.95% $1.40 109.3% F-22 VONAGE ANNUAL REPORT 2010

  • Page 78
    ... without the make-whole premiums. Since there was no current observable market for valuing the make-whole premiums, we determined the value using a scenario analysis that incorporated the settlement alternatives available to the debt holders in connection with the make-whole premiums. The scenario...

  • Page 79
    ... employees, including executive officers, outside consultants, and non-employee directors. Vesting periods for share-based awards are generally four years for both plans. Awards granted under each plan expire in five or 10 years from the effective date of grant. As of April 2010, the Company began...

  • Page 80
    ...and promoting our success by providing employees the opportunity to acquire stock. In management's opinion, all stock options were granted with an exercise price at or above the fair market value of our common stock at the date of grant with the exception of a grant in 2005 for 125 shares. Initially...

  • Page 81
    .... The weighted average grant date fair market value of stock options granted was $1.35, $1.44, and $1.85 for the years ended December 31, 2010, 2009 and 2008. F-26 VONAGE ANNUAL REPORT 2010 Total share-based compensation expense recognized for the years ended December 31, 2010, 2009, and 2008 was...

  • Page 82
    ... over each of the next five years and thereafter: December 31, 2010 Capital Operating Leases Leases 2011 2012 2013 2014 2015 Thereafter Total minimum payments required Less amounts representing interest Minimum future payments of principal Current portion Long-term portion 4,118 4,200 4,284 4,369...

  • Page 83
    ... have stand-by letters of credit totaling $7,885 and $18,000, as of December 31, 2010 and 2009, respectively. End-User Commitments We are obligated to provide telephone services to our registered end-users. The costs related to the potential utilization of minutes sold are expensed as incurred. Our...

  • Page 84
    ... that Vonage's products and services are covered by a patent held by Ceres, United States Patent No. 5,774,526, entitled "Reconfigurable On-Demand Telephone and Data Line System." The suit also named numerous other companies as defendants, including AT&T, Inc., Cablevision Systems Corporation...

  • Page 85
    ...Internet service providers to block or discriminate against Vonage service. Also explicitly applying net neutrality rules to wireless broadband Internet service could create greater opportunities for VoIP applications that run on wireless broadband Internet service. In F-30 VONAGE ANNUAL REPORT 2010

  • Page 86
    ..., use, and ad valorem taxes), fees or surcharges ("Taxes") on the charges to our customers for our services, except that we historically complied with the New Jersey sales tax. We have received inquiries or demands from a number of state and municipal taxing and 911 agencies seeking payment of Taxes...

  • Page 87
    ... to be in a single reporting segment and operating unit structure. Information about our operations by geographic location is as follows: For the Years Ended December 31, 2010 2009 2008 Revenue: United States Canada United Kingdom $842,758 30,748 11,536 $885,042 December 31, 2010 Long-lived assets...

  • Page 88
    ... sets forth the reviewed consolidated quarterly financial information for 2010 and 2009: For the Quarter Ended March 31, Year Ended 2010 Revenue Net income (loss) Net income (loss) per common share: Basic Diluted Year Ended 2009 Revenue Net income (loss) Net income (loss) per common share: Basic...

  • Page 89
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  • Page 90
    ...'s ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 16, 2011 /s/ Marc P. Lefar Marc...

  • Page 91
    ... material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 16, 2011 /s/ Barry L. Rowan Barry L. Rowan Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer

  • Page 92
    ... Exchange Act of 1934 and that information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Vonage Holdings Corp. Date: February 16, 2011 /s/ Barry L. Rowan Barry L. Rowan Executive Vice President, Chief Financial Officer...

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  • Page 96
    ... New York, NY 10038 Phone: (800) 937-5449 or: (718) 921-8124 (International) Website: http://www.amstock.com Vonage, Vonage Logo Design, the V & Dot Logo, Vonage World, and Vonage Mobile are trademarks and service marks of Vonage Marketing LLC. (1) Wi-Fi is a registered certification mark of Wi-Fi...

  • Page 97
    23 Main Street Holmdel, NJ 07733 vonage.com