Vonage 2010 Annual Report Download - page 63

V
O
NA
G
EH
O
LDIN
GS CO
RP
.
N
OTES TO CONSOLIDATED FINANCIAL STATEMENT
S
(
In thousands, except per share amounts
)
NATURE OF OPERATIONS
Vonage Holdings
C
orp.
(
“Vonage”, “
C
ompany”, “we”,
“our”, “us”
)
is incor
p
orated as a Delaware cor
p
oration. W
e
are a leadin
g
provider of low-cost communications services
connectin
g
people throu
g
h broadband devices worldwide
.
While customers in the United
S
tates re
p
resented 94% of
our subscriber lines at December 31, 2010, we also bil
l
customers in
C
anada and the United Kin
g
dom
.
SIGNIFICANT ACCOUNTING POLICIES
Principles of
C
onsolidation
T
he consolidated
f
inancial statements include th
e
accounts of Vonage and its wholly-owned subsidiaries. Al
l
i
ntercompan
yb
a
l
ances an
d
transact
i
ons
h
ave
b
een e
li
m
i-
nate
di
n conso
lid
at
i
on
.
U
se of Estimates
O
ur consolidated financial statements are
p
re
p
ared i
n
con
f
ormity with accountin
g
principles
g
enerally accepted i
n
t
he United States, which require mana
g
ement to make
estimates and assum
p
tions that a
ff
ect the amounts
r
e
p
orted and disclosed in the consolidated
f
inancial state-
ments and the accompanyin
g
notes. Actual results coul
d
di
ff
er materially
f
rom these estimates
.
On an on
g
oin
g
basis, we evaluate our estimates, includ-
i
ng the
f
ollowing
:
>
t
hose related to the average period o
f
service to a
customer (the “customer life”) used to amortize deferre
d
revenue and de
f
erred customer acquisition costs asso
-
c
i
ate
d
w
i
t
h
customer act
i
vat
i
on
;
>
t
he useful lives of propert
y
and equipment, softwar
e
costs, an
di
ntang
ibl
e assets
;
>
assumptions used for the purpose of determining share-
based compensation and the fair value of our stock war
-
rant using the Black-
S
choles option pricing mode
l
(
“Model”
)
, and various other assumptions that w
e
believed to be reasonable. The ke
y
inputs for this Model
are our stoc
k
pr
i
ce at va
l
uat
i
on
d
ate, exerc
i
se pr
i
ce, t
he
dividend
y
ield, risk-free interest rate, life in
y
ears, and
h
istorical volatilit
y
of our common stock
;
>assum
p
tions used to determine the fair value of th
e
embedded conversion o
p
tion within our
p
rior 20% senior
secured third lien notes due 2015
(
“
C
onvertible Notes”
)
u
sin
g
the Monte
C
arlo simulation model. The key inputs
are maturity date, risk-free interest rate, our stock price a
t
valuation date, and historical volatility of our commo
n
stock; an
d
>
assumptions used to determine the fair value of th
e
embedded make-whole premium feature within our prio
r
senior secured first lien credit facilit
y(
the “First Lie
n
S
enior Facilit
y
”
)
and our prior senior secured second lien
credit facilit
y(
the “
S
econd Lien
S
enior Facilit
y
”
).
W
e
b
ase our est
i
mates on
hi
stor
i
ca
l
exper
i
ence, ava
il
-
able market information, a
pp
ro
p
riate valuation method
-
olo
g
ies, and on various other assumptions that we believed
t
o be reasonable, the results of which form the basis for
makin
g
jud
g
ments about the carryin
g
values of assets and
l
i
ab
iliti
es.
R
evenue
R
ecogn
i
t
i
on
O
perating revenues consist of telephony services
r
evenues and customer equipment
(
which enables our tel-
ephony services
)
and shipping revenues. The point in tim
e
at w
hi
c
h
revenues are recogn
i
ze
di
s
d
eterm
i
ne
di
n accor
d
-
ance with
S
taff Accounting Bulletin No. 104, Revenu
e
Recognition, and Financial Accounting
S
tandards Boar
d
(
“FA
S
B”
)
Accounting
S
tandards
C
odification
(
“A
SC
”
)
605
,
“
R
evenue
R
ecogn
i
t
i
o
n
.
”
Telephon
y
Services Revenu
e
S
ubstantially all of our operatin
g
revenues are teleph-
ony services revenues, which are derived primarily
f
rom
monthly subscription
f
ees that customers are char
g
e
d
under our service plans. We also derive telephony service
s
r
evenues
f
rom
p
er minute
f
ees
f
or international calls i
f
not
covered under a plan and
f
or any callin
g
minutes in excess
o
f
a customer’s monthly plan limits. Monthly subscriptio
n
f
ees are automatically char
g
ed to customers’ credit cards,
debit cards or electronic check payments (“ECP”) i
n
advance and are reco
g
nized over the
f
ollowin
g
month whe
n
s
ervices are provided. Revenues generated
f
rom interna
-
t
ional calls i
f
not covered under a plan and
f
rom customers
excee
di
ng a
ll
ocate
d
ca
ll
m
i
nutes un
d
er
li
m
i
te
d
m
i
nute p
l
an
s
are recogn
i
ze
d
as serv
i
ces are prov
id
e
d
,t
h
at
i
s, as m
i
nutes
are use
d,
an
d
are
bill
e
d
to a customer
’
s cre
di
t car
d
s
,d
e
bit
cards or ECP in arrears. As a result of our multiple billin
g
c
y
cles each month, we estimate the amount o
f
revenues
earned
f
rom international calls i
f
not covered under a pla
n
and from customers exceeding allocated call minutes under
l
imited minute plans but not billed from the end of each bill
-
i
ng cycle to the end of each reporting period and record
th
ese amounts as accounts rece
i
va
bl
e.
Th
ese est
i
mates are
b
ase
d
pr
i
mar
ily
upon
hi
stor
i
ca
l
m
i
nutes an
dh
ave
b
ee
n
cons
i
stent w
i
t
h
our actua
l
resu
l
ts.
F-
8
VO
NA
G
E ANN
U
AL REP
O
RT 2010
N
ote 1
.
Basis of Presentation and
S
ignificant Accounting Policie
s