Vonage 2012 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    ...flat-rate unlimited calling to more than 60 countries with the launch of our Vonage World service. And, we were the first to provide easy-to-use enhanced features like voice-to-text translation and mobile extension services at no extra cost. These strategic shifts have resulted in new customers with...

  • Page 3
    ... International callers are attracted to our flagship Vonage World plan and to our expanding number of country-specific calling plans. Targeting the substantial market opportunities for customers calling Mexico and Southeast Asia, we were the first provider to offer unlimited calling to mobile phones...

  • Page 4
    ... 4G wireless data networks. For users calling phones without the app, Vonage Mobile provides ultra-competitive international calling rates that can be billed through iTunes2 or Google Play 3. While currently a relatively small contributor to overall revenues, we have continued to increase the number...

  • Page 5
    ... Street, Holmdel, New Jersey (Address of principal executive offices) 07733 (Zip Code) Registrant's telephone number, including area code: (732) 528-2600 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
    ... and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits, Financial Statement Schedules Signatures Index to Financial Statements 2 8 16 16 17 19 20 22 24 38 38 39 39 40 41 41 41 41 41 43 46 F-1 FORWARD-LOOKING STATEMENTS VONAGE ANNUAL REPORT 2012

  • Page 7
    ... inquiries into our business practices; fraudulent use of our name or services; our ability to maintain data security; our dependence upon key personnel; our dependence on our customers' existing broadband connections; differences between our service and traditional phone services, including our 911...

  • Page 8
    ... flat-rate, unlimited calling to over 60 countries with the launch of our Vonage World service, and we were the first to provide easy-to-use, enhanced features, like voice-to-text translation and mobile Extension services, at no extra cost. These strategic shifts have resulted in new customers with...

  • Page 9
    ..., including India, Mexico, and China, and unlimited calling to mobile phones in certain of those countries. In addition, the Vonage World offer includes unlimited Vonage Visual Voicemail, which is "readable voicemail" delivered via email or SMS text message, Vonage Extensions, which extends the plan...

  • Page 10
    ... routing information for delivery of calls to a PSAP or emergency service providers in the United States. Local Number Portability. Our system allows our telephone replacement customers to port telephone numbers, which allows new customers to retain their existing telephone numbers when subscribing...

  • Page 11
    ... community sales team presence in 2012 and now operate in over 35 markets across 20 states and Canada. 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...

  • Page 12
    ... to significant new competition. In connection with our increasing emphasis on the international long distance market, we face competition from low-cost international calling cards and VoIP providers in addition to traditional telephone companies, cable companies, and wireless companies. EMPLOYEES...

  • Page 13
    ... on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the Securities and Exchange Commission. 7 VONAGE ANNUAL REPORT 2012

  • Page 14
    ...or offer additional features that may cause us to incur additional costs without commensurate price increases. In connection with our increasing emphasis on the international long distance market, we face competition from low-cost international calling cards, digital calling cards and VoIP providers...

  • Page 15
    ... and register new customers on the network, also influence our churn rate. We will have similar issues with customers for Vonage Mobile and other services for mobile and other Internet connected devices as that business develops. As we continue to emphasize the international long distance market, we...

  • Page 16
    ... with acquisitions or joint venture opportunities could harm our operating results. As we expand our international operations into new geographies, we will be increasingly subject to risks that are inherent in operating abroad, including country-specific market and competitive risks, currency...

  • Page 17
    ..., and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, storage, and transmission of this information is critical to our operations and business strategy. As seen in our industry and others, these activities have been...

  • Page 18
    ...both our comprehensive online account management website and our toll free number. Our customer support is currently provided via United States based employees as well as third party partners located in the United States, Philippines, Costa Rica, Chile, Mexico, and India. We offer support in English...

  • Page 19
    ... required to credit significant amounts to customers. Third parties also have used our communications services without paying, including by submitting fraudulent credit card information. This has resulted in our incurring the cost of providing the services, including incurring call termination fees...

  • Page 20
    ... > > > > > If customers do not accept the differences between our service and traditional telephone service, they may choose to remain with their current telephone service provider or may choose to return to service provided by traditional telephone companies. 14 VONAGE ANNUAL REPORT 2012 > >

  • Page 21
    ... charges imposed by regulatory authorities in countries to which customers make calls, such as India where regulatory authorities have been petitioned by local providers to consider termination rate increases. As we attract additional international long distance callers, we will be more affected...

  • Page 22
    ...current market price for their shares. > > > ITEM 1B. Unresolved Staff Comments Not applicable. ITEM 2. Properties The following is a summary of our offices and locations: Location Holmdel, New Jersey London, United Kingdom Atlanta, Georgia Tel Aviv, Israel Business Use Corporate Headquarters...

  • Page 23
    ... of trade secrets, and tortious interference with business expectancy. On August 16, 2012, OpinionLab filed an amended complaint, adding Vonage Marketing LLC and Vonage Holdings Corp. as defendants, and alleging that Vonage's products and services are covered by United States Patent Nos. 6,421,724...

  • Page 24
    ... service and ICC. The FCC order provides that VoIP originated calls will be subject to interstate access charges for long distance calls and reciprocal compensation for local calls that terminate to the public switched telephone network ("PSTN"). It also subjected PSTN originated traffic directed...

  • Page 25
    ITEM 4. Mine Safety Disclosures Not Applicable. 19 VONAGE ANNUAL REPORT 2012

  • Page 26
    ... that such information be treated as soliciting material or specifically incorporate such information by reference into a document filed under the Securities Act or the Exchange Act. Stock Performance Graph The graph below compares the cumulative total return of 20 VONAGE ANNUAL REPORT 2012

  • Page 27
    ..., Vonage's Board of Directors discontinued this share repurchase program effective at the close of business on February 12, 2013 with $16,682 remaining, and authorized a new program to repurchase up to $100,000 of the Company's outstanding shares by December 31, 2014. 21 VONAGE ANNUAL REPORT 2012

  • Page 28
    ... included elsewhere in this Annual Report on Form 10-K. For the Years Ended December 31, (In thousands, except per share amounts) Statement of Operations Data: Revenues Operating Expenses: Direct cost of telephony services (1) Direct cost of goods sold Selling, general and administrative Marketing...

  • Page 29
    ...Flow Data: Net cash provided by operating activities Net cash (used in) provided by investing activities Net cash used in financing activities Balance Sheet Data (at period end): Cash, cash equivalents and marketable securities Property and equipment, net Total deferred tax assets, including current...

  • Page 30
    ... flat-rate, unlimited calling to over 60 countries with the launch of our Vonage World service, and we were the first to provide easy-to-use, enhanced features, like voice-to-text translation and mobile Extension services, at no extra cost. These strategic shifts have resulted in new customers with...

  • Page 31
    ...do not include our virtual phone numbers or toll free numbers, which only allow inbound telephone calls to customers. Subscriber lines decreased by 15,071 from 2,374,887 as of December 31, 2011 to 2,359,816 as of December 31, 2012. This decrease was partially attributable to the removal of unlimited...

  • Page 32
    ...the United States and Puerto Rico, unlimited international calling to over 60 countries including India, Mexico, and China, subject to certain restrictions, and free voicemail to text messages with Vonage Visual Voicemail. Each of our unlimited plans other than Vonage World offers unlimited domestic...

  • Page 33
    ...to provide 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 50% of our total direct cost of telephony services for 2012 and...

  • Page 34
    ... for the periods indicated: For the Years Ended December 31, 2012 Revenues Operating Expenses: Direct cost of telephony services (excluding depreciation and amortization) Direct cost of goods sold Selling, general and administrative Marketing Depreciation and amortization Loss from abandonment of...

  • Page 35
    ... 2010, and a reduction in international minutes of use revenue of $2,248 primarily due to customers moving, as expected, to our fixed rate Vonage World plan. In addition, there was an increase in rebates and credits issued to subscribers of $2,889 and a decrease in additional features revenue...

  • Page 36
    ... Change 2011 vs. 2010 (2)% 2012 compared to 2011 Selling, general and administrative. Selling expense increased by $9,831 including $4,286 due to the expansion of the number of community sales teams, $2,189 due to an increase in the number of retail outlets with assisted selling, and $3,256 related...

  • Page 37
    ...2011. In addition, adjustments were recorded for discrete period items related to stock compensation and changes to our state effective tax rate. The provision also includes the federal alternative minimum tax in 2012 and 2011 and state and local income taxes in 2012, 2011, and 2010. We are required...

  • Page 38
    ... the program. The program requires that a purchaser pay at least 75% of the amount of the surrendered tax benefit. In tax years 2010, 2011, and Net Income (Loss) 2012, we sold approximately, $2,194, $0, and $0, respectively, of our New Jersey State net operating loss carry forwards for a recognized...

  • Page 39
    ...shares outstanding: Basic Diluted Operating Data: Gross subscriber line additions Change in net subscriber line Subscriber lines at end of period Average monthly customer churn Average monthly operating revenues per line $ Average monthly direct costs of telephony services per line $ Marketing costs...

  • Page 40
    ...United States subsidiaries and were secured by substantially all of the assets of each borrower and each of the guarantors. Use of Proceeds We used $100,000 of the net available proceeds of the 2011 Credit Facility, plus $31,000 of cash on hand, to retire all of the debt 34 VONAGE ANNUAL REPORT 2012

  • Page 41
    ..., accounts payable, accrued and other liabilities, and deferred revenue and costs. Cash used for working capital increased by $5,704 during the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily due to the timing of payments. Cash provided by operating activities...

  • Page 42
    ...provide voice termination services, provide voicemail to text transcription services, provide local inbound services, process our credit card billings, provide E-911 services to our customers, assist us with local number portability, license patents to us, sell us communication devices, sell us data...

  • Page 43
    ... per minute fees for international calls if not covered under a plan, including applications for mobile devices and other stand-alone products, and for any calling minutes in excess of a customer's monthly plan limits. Monthly subscription fees are automatically charged to customers' credit cards...

  • Page 44
    ... About Market Risk Credit Facility, at our option, bear interest at: > We are exposed to financial market risks, including changes in currency exchange rates and interest rates. Foreign Exchange Risk We sell our products and services in the United States, Canada, and the United Kingdom. Changes in...

  • Page 45
    ...limitation, controls 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...

  • Page 46
    ...and at a rate equal to the rate applicable to base rate loans plus 2%, in the case of all other amounts. The 2013 Credit Facility provides greater flexibility to us in funding acquisitions and restricted payments, such as stock buybacks, than the 2011 Credit Facility. 40 VONAGE ANNUAL REPORT 2012

  • Page 47
    .... 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 2013 Annual Meeting of Stockholders is hereby incorporated by reference. 41 VONAGE ANNUAL REPORT 2012

  • Page 48
    ... such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ BDO USA, LLP Woodbridge, New Jersey February 13, 2013 42 VONAGE ANNUAL REPORT 2012

  • Page 49
    ... Restated By-laws of Vonage Holdings Corp.(9) Form of Certificate of Vonage Holdings Corp. Common Stock(3) Tax Benefits Preservation Plan, dated as of June 7, 2012, by and between Vonage Holdings Corp. and American Stock Transfer & Trust Company, LLC, as Rights Agent, including as Exhibit A the form...

  • Page 50
    ... Inc. and Nortel Networks Limited(8) Credit Agreement, dated as of July 29, 2011 among Vonage Holdings Corp. and Vonage America Inc., as borrowers, various lenders, JPMorgan Chase Bank, N.A., as Administrative Agent, and RBS Citizens, N.A., as Syndication Agent.(17) 44 VONAGE ANNUAL REPORT 2012

  • Page 51
    ... of 1934, as amended. Management contract or compensatory plan or arrangement. (b) Exhibits Filed Herewith Refer to (a)(3) above. (c) Financial Statement Schedule Report of Independent Registered Public Accounting Firm Schedule II - Valuation and Qualifying Accounts. 45 VONAGE ANNUAL REPORT 2012

  • Page 52
    ... the city of Holmdel, State of New Jersey, on February 13, 2013. VONAGE HOLDINGS CORP. Dated: February 13, 2013 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 53
    ...13, 2013 Director February 13, 2013 Director February 13, 2013 Director February 13, 2013 Director February 13, 2013 Director February 13, 2013 Director February 13, 2013 Director February 13, 2013 Director February 13, 2013 Director February 13, 2013 47 VONAGE ANNUAL REPORT 2012

  • Page 54
    ... 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, 2012 and 2011 Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010...

  • Page 55
    ...America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vonage Holdings Corp.'s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued...

  • Page 56
    ... INDEPENDENT ACCOUNTING FIRM Board of Directors and Stockholders Vonage Holdings Corp. Holmdel, New Jersey REGISTERED PUBLIC We have audited Vonage Holdings Corp.'s (the "Company") internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control...

  • Page 57
    ... equivalents Accounts receivable, net of allowance of $753 and $591, respectively Inventory, net of allowance of $268 and $269, respectively Deferred customer acquisition costs, current Deferred tax assets, current Prepaid expenses and other current assets Total current assets Property and equipment...

  • Page 58
    ... (In thousands, except per share amounts) Revenues Operating Expenses: Direct cost of telephony services (excluding depreciation and amortization of $15,115, $15,824, and $18,725, respectively) Direct cost of goods sold Selling, general and administrative Marketing Depreciation and amortization Loss...

  • Page 59
    ... currency translation adjustment Total other comprehensive income Comprehensive income (loss) $ 335 335 36,962 $ 872 872 409,916 $ 909 909 (82,756) $ 2012 36,627 $ 2011 409,044 $ 2010 (83,665) The accompanying notes are an integral part of these financial statements F-6 VONAGE ANNUAL REPORT 2012

  • Page 60
    ... Share-based expense Changes in operating assets and liabilities: Accounts receivable Inventory Prepaid expenses and other current assets Deferred customer acquisition costs Other assets Accounts payable Accrued expenses Deferred revenue Other liabilities Net cash provided by operating activities...

  • Page 61
    ...2011 Stock option exercises Share-based expense Share-based award activity Common stock repurchases Foreign currency translation adjustment Net income Balance at December 31, 2012 $ $ Common Stock 202 1 $ Additional... are an integral part of these financial statements F-8 VONAGE ANNUAL REPORT 2012

  • Page 62
    ... provider of low-cost communications services connecting people through cloud-connected devices worldwide. Customers in the United States represented 93% of our subscriber lines for our broadband telephone replacement services at December 31, 2012, with the balance primarily in Canada and the United...

  • Page 63
    ... credit. Direct Cost of Goods Sold Direct cost of goods sold consists primarily of costs that we incur when a customer signs up for our service. These costs include the cost of customer equipment for customers who subscribe through the direct sales channel in excess of activation fees. In addition...

  • Page 64
    ...of the determination. In the fourth quarter of 2011, we released $325,601 of valuation allowance (see Note 5. Income Taxes). We periodically review this conclusion, which requires significant management judgment. In the future, if available evidence changes our conclusion that it is more likely than...

  • Page 65
    ... loss per share because of their anti-dilutive effects: For the Years Ended December 31, 2012 Common stock warrant Convertible notes Restricted stock units Employee stock options - - 2,468 32,746 35,214 2011 63 - 655 21,482 22,200 2010 514 10,421 2,332 35,729 48,996 F-12 VONAGE ANNUAL REPORT 2012

  • Page 66
    ... order to conform to the current year's presentation. The reclassifications had no impact on net earnings previously reported. Note 2. Supplemental Balance Sheet Account Information Prepaid expenses and other current assets December 31, 2012 6,599 $ 6,092 1,503 389 639 265 15,487 December 31, 2011...

  • Page 67
    VONAGE HOLDINGS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) (In thousands, except per share amounts) The total expected future annual amortization of software is as follows: 2013 2014 2015 2016 2017 Total $ 9,129 6,164 4,005 213 49 19,560 $ F-14 VONAGE ANNUAL REPORT 2012

  • Page 68
    ... 31, 2011 14,773 $ 10,017 17,440 5,063 9,642 7,776 2,109 2,289 7 128 282 69,526 $ Compensation and related taxes and temporary labor Marketing Taxes and fees Litigation and settlements Telecommunications Other accruals Customer credits Professional fees Accrued interest Inventory Credit card fees...

  • Page 69
    ...,292 Amounts included in direct cost of goods sold December 31, 2012 Shipping and handling cost $ 7,064 $ 2011 7,624 $ 2010 8,390 Amounts included in selling, general and administrative expense December 31, 2012 Advertising costs $ 2,053 $ 2011 - $ 2010 - Amounts included in marketing December 31...

  • Page 70
    ...Amounts included in interest expense December 31, 2012 Debt related costs amortization $ 1,235 $ 2011 1,391 $ 2010 1,402 Amounts included in other expense, net December 31, 2012 Net losses resulting from foreign exchange transactions $ (11) $ 2011 (328) $ 2010 (19) F-17 VONAGE ANNUAL REPORT 2012

  • Page 71
    ... and liabilities: Property and equipment Research and development and alternative minimum tax credit Stock option compensation Capital leases Net operating loss carryforwards Valuation allowance Deferred tax assets, net, non-current $ 13,806 370 1,771 15,947 December 31, 2011 $ 15,663 314 3,569...

  • Page 72
    ... of 2011. We still maintain a full valuation allowance against our United Kingdom net deferred tax assets as we are unable to conclude that it is more likely than not that some or all of the related United Kingdom net deferred tax assets will be realized. In the future, if available evidence changes...

  • 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 2010, 2011, and 2012, we sold approximately, $2,194, $0, and $0, respectively, of our New Jersey State net operating loss carry forwards for a recognized benefit of...

  • Page 74
    ..., by our other United States subsidiaries and are secured by substantially all of the assets of each borrower and each of the guarantors. Use of Proceeds We used $42,500 of the net available proceeds of the 2013 Credit Facility to retire all of the debt under our 2011 Credit Facility. Remaining...

  • Page 75
    ... fee to holders of the 2010 Credit Facility. We also incurred $2,697 of fees in connection with the 2011 Credit Facility, which is amortized to interest expense over the life of the debt using the effective interest method. The amortization for the year ended December 31, 2012 and December 31, 2011...

  • Page 76
    ... 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 2010 Credit Facility. The accumulated amortization as of December 31, 2011 was $7,072, including acceleration of $6,081. The amortization for...

  • Page 77
    ..., which was an increase in value of $7,308 from the fair value of the conversion feature as of December 31, 2009. This change in fair value was recorded as income within other income (expense), net for the year ended December 31, 2010. The aggregate fair value of the common stock issued by us in the...

  • Page 78
    ...F-25 VONAGE ANNUAL REPORT 2012 $ $ 2010 - 91,686 (91,686) - - assumption that the holder would compare the potential return associated with each available alternative, including, as specified in the terms of the contract, holding the debt instrument. As a component of this, we incorporated a market...

  • Page 79
    ... Company's outstanding shares by December 31, 2014. The specific timing and amount of repurchases will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases will be made using our...

  • Page 80
    ... year; F-27 VONAGE ANNUAL REPORT 2012 Based upon a June 2010 amendment to the plan, the maximum number of shares of our common stock that are authorized for issuance under our 2006 Incentive Plan is 66,400 shares. Shares issued under the plan may be authorized and unissued shares or may be issued...

  • Page 81
    ... using the ratable single-option approach on an accrual basis and are amortized using an accelerated amortization schedule. Our current policy is to issue new shares to settle the exercise of stock options and prospectively, the vesting of restricted stock units. F-28 VONAGE ANNUAL REPORT 2012

  • Page 82
    ... office and telecommunications co-location space in the United States and for international subsidiaries with original lease periods expiring between 2013 and 2015. We are committed to pay a portion of the buildings' operating expenses as determined under the agreements. F-29 VONAGE ANNUAL REPORT...

  • Page 83
    ...provide voice termination services, provide voicemail to text transcription services, provide local inbound services, process our credit card billings, provide E-911 services to our customers, assist us with local number portability, license patents to us, sell us communication devices, sell us data...

  • Page 84
    ... service and ICC. The FCC order provides that VoIP originated calls will be subject to interstate access charges for long distance calls and reciprocal compensation for local calls that terminate to the public switched telephone network ("PSTN"). It also subjected PSTN originated traffic directed...

  • Page 85
    ..., we are now collecting and remitting sales taxes in certain of those states including a number of states that have changed their statutes to expressly include VoIP. In addition, many states address how VoIP providers should contribute to support public safety agencies, and in those states...

  • Page 86
    ... share amounts) Information about our operations by geographic location is as follows: December 31, 2012 Revenue: United States Canada United Kingdom $ 804,870 32,570 11,674 $ 849,114 December 31, 2012 Long-lived assets: United States Canada United Kingdom Israel $ 85,331 - 1,032 411 86,774 $ 2011...

  • Page 87
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant'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...

  • Page 88
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant'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...

  • Page 89
    ...-Oxley Act of 2002, that the Annual Report of Vonage Holdings Corp. on Form 10-K for the annual period ended December 31, 2012 fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents...

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  • Page 93
    ... Stock Transfer Agent Information American Stock Transfer & Trust Company c/o Vonage Holdings Corp. 59 Maiden Lane, Plaza Level New York, NY 10038 Phone: or: (800) 937-5449 (718) 921-8124 (International) A copy of the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange...

  • Page 94
    23 Main Street Holmdel, NJ 07733 vonage.com