Vonage 2010 Annual Report Download - page 78

V
O
NA
G
EH
O
LDIN
GS CO
RP
.
N
OTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(
In thousands, except per share amounts
)
Li
a
bili
t
i
es:
F
or t
h
e
Y
ear
E
n
d
e
d
D
ecem
b
er
3
1,
20
1
0
F
or t
h
e
Y
ear
E
n
d
e
d
D
ecem
b
er
3
1,
2009
B
eg
i
nn
i
ng
b
a
l
ance
$
25
,
050 $ 32
,
720
I
ncrease in value
f
or notes converted 7
,
308 34
,
68
2
F
air value adjustment for notes converted
(
32,358
)(
57,050
)
T
ota
l
unrea
li
ze
dl
oss
i
n earn
i
ng
s
–14
,
69
8
E
n
di
ng
b
a
l
anc
e
$
–$25
,
05
0
T
he following table sets forth a summary of changes in the fair value of our make-whole premiums for as o
f
December 31
,
2010 and December 31
,
2009
:
Li
ab
iliti
es
:
F
o
rth
e
Y
ea
rEn
ded
December 31
,
2
0
1
0
F
o
rth
e
Y
ea
rEn
ded
D
ecember 31
,
2
009
B
e
g
innin
g
balance
$
–
$
–
I
n
c
r
ease
in v
a
l
ue
91,686
–
F
air value ad
j
ustment for make-whole
p
remium
p
aid
(
91,686
)–
T
otal unrealized loss in earnin
gs
––
E
n
di
ng
b
a
l
anc
e
$
–
$–
We estimated the fair value of the make-whole
p
re-
mi
u
m
sas
th
ed
iff
e
r
e
n
ce be
tw
ee
nth
ees
tim
a
t
ed
v
a
l
ue of
t
he First Lien
S
enior Facilit
y
and
S
econd Lien
S
enior
Facility with and without the make-whole premiums.
S
ince
t
here was no current observable market for valuin
g
the
make-whole premiums, we determined the value usin
g
a
s
cenario analysis that incorporated the settlement alter
-
n
a
tiv
es a
v
a
il
ab
l
e
t
o
th
e deb
th
o
l
de
r
s
in
co
nn
ec
ti
o
n wit
h
t
he make-whole premiums. The scenario analysis valu-
ation model combined ex
p
ected cash out
f
lows with
market-based assum
p
tions and estimated o
f
the
p
roba
-
b
ility o
f
each scenario occurrin
g
. The
f
air value o
f
the Firs
t
Lien Senior Facility and Second Lien Senior Facility with
-
out the make-whole premiums was estimated usin
ga
p
resent value model. The
p
resent value model combined
ex
p
ected cash out
f
lows with market-based assum
p
tion
s
r
e
g
ardin
g
available interest rates, credit spread relative t
o
our credit ratin
g
, and liquidity. Our analysis was premise
d
on the assum
p
tion that the holder would act in a manner
t
hat maximizes the potential return, or “payo
ff
,” at an
y
g
iven point in time. Included in this premise was th
e
assum
p
tion that the holder would com
p
are the
p
otentia
l
r
eturn associated with each available alternative, includ
-
i
n
g
, as speci
f
ied in the terms o
f
the contract, holdin
g
the
debt instrument. As a com
p
onent o
f
this, we incor
p
orated
a mar
k
et part
i
c
i
pant cons
id
erat
i
on as to our capac
i
ty t
o
f
ul
f
ill the contractual obli
g
ations associated with eac
h
alternative, includin
g
our ability to
f
ul
f
ill any cash settle
-
ment obli
g
ation associated with payment o
f
the make
-
whole premiums, as well as the our abilit
y
to re
f
inance th
e
First Lien Senior Facilit
y
and Second Lien Senior Facilit
y.
T
hrough June 30, 2010, we estimated the fair value
of the make-whole premiums to have nominal fair value.
During the third quarter of 2010, due to our improved
financial condition and favorable credit market conditions
,
we entered into
f
ormal negotiations with the admin
-
i
strat
i
ve agent, w
h
o was a
l
so t
h
epr
i
mary
l
en
d
er, regar
d
-
i
ng repurchasing the First Lien
S
enior Facility and
S
econd
Lien
S
enior Facilit
y
. In addition, unlike the
C
onsolidate
d
Excess
C
ash Flow
(
as defined in the
C
redit Doc
-
u
mentation
)
offer in April 2010 that was full
y
accepted an
d
allowed us to prepa
y
, without premium, specifie
d
amounts, holders did not full
y
accept our
C
onsolidated
Excess
C
ash Flow offer in July 2010, indicating our abilit
y
t
o cont
i
nue to repay
d
e
b
t at par was no
l
onger
lik
e
l
y.
We
also determined that we could obtain financing at accept-
a
bl
e terms, w
hi
c
h
a
l
ong w
i
t
h
our ex
i
st
i
ng cas
h
on
h
an
d
,
would be sufficient to repurchase the First Lien
S
enior
Facility and
S
econd Lien
S
enior Facility including any
amounts
d
ue pursuant to t
h
ema
k
e-w
h
o
l
e prem
i
ums.
Based upon these factors and our valuation anal
y
sis, th
e
First Lien
S
enior Facilit
y
and the
S
econd Lien
S
enior
F
ac
ili
t
y
ma
k
e-w
h
o
l
e prem
i
ums were est
i
mate
d
to
h
ave
a
fair value of
$
60,000 as of September 30, 2010 and had
a
n
ominal fair value as of December 31
,
2009. This valu
e
was increased in the fourth
q
uarter of 2010 to
$
91,686 to
reflect the actual value that was ultimatel
y
paid in
D
ece
m
be
r2
0
1
0
.
Althou
g
h mana
g
ement believed its valuation method
s
were a
pp
ro
p
riate and consistent with other market
p
artic-
i
pants, the use o
f
di
ff
erent methodolo
g
ies or assumption
s
to de
t
e
rmin
e
th
efa
ir v
a
l
ue of ce
rt
a
in
f
in
a
n
c
i
a
lin
s
tr
u
m
e
nt
s
cou
l
d
h
a
v
e
r
esu
lt
ed
in
ad
i
ffe
r
e
nt
fa
ir v
a
l
ue
m
easu
r
e
m
e
n
t
at the reportin
g
date
.
F
-23