As filed with the Securities and Exchange Commission on April 7, 2006
Registration No. 333-131659
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VONAGE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation) |
4813
(Primary Standard Industrial Classification Code Number) |
11-3547680
(I.R.S. Employer Identification No.) |
23 Main Street
Holmdel, New Jersey 07733
(732) 528-2600
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
John S. Rego
Executive Vice President and
Chief Financial Officer
Vonage Holdings Corp.
23 Main Street
Holmdel, New Jersey 07733
(732) 528-2600
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. o
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 2006
PROSPECTUS
Shares
Vonage Holdings Corp.
Common Stock
This is the initial public offering of shares of our common stock. All of the shares of common stock are being sold by us.
Prior to this offering, there has been no public market for our common stock. We currently expect the initial public offering price to be between $ and $ per share. We have applied to have the common stock listed on the under the symbol " ."
Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 9 to read about risk factors you should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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Per Share
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Total
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Public offering price | $ | $ | ||
Underwriting discount | $ | $ | ||
Proceeds, before expenses, to us | $ | $ |
We have granted the underwriters an option to purchase up to additional shares of common stock to cover over-allotments.
The underwriters expect to deliver the shares to purchasers on or about , 2006.
Citigroup | Deutsche Bank Securities | UBS Investment Bank |
Bear, Stearns & Co. Inc. | ||||
Piper Jaffray | Thomas Weisel Partners LLC |
Prospectus dated , 2006
You should rely only on information contained in this prospectus or in any related free writing prospectus filed with the Securities and Exchange Commission and used or referred to in an offering to you of these securities. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.
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Page
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Prospectus Summary | 1 | |
Risk Factors | 9 | |
Special Note Regarding Forward-Looking Statements | 24 | |
Use of Proceeds | 25 | |
Dividend Policy | 25 | |
Capitalization | 26 | |
Dilution | 28 | |
Selected Historical Financial Data | 30 | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 32 | |
Market and Industry Data | 60 | |
Industry Overview | 61 | |
Business | 66 | |
Regulation | 87 | |
Management | 96 | |
Information Concerning Our Founder, Chairman and Chief Strategist | 107 | |
Principal Stockholders | 109 | |
Certain Relationships and Related Party Transactions | 112 | |
Description of Convertible Notes | 114 | |
Description of Capital Stock | 116 | |
Shares Eligible for Future Sale | 119 | |
Material United States Federal Income Tax Consequences for Non-U.S. Holders | 121 | |
Underwriting | 124 | |
Notice to Prospective Investors | 127 | |
Legal Matters | 129 | |
Experts | 129 | |
Where You Can Find Additional Information | 130 | |
Index to Financial Statements | F-1 |
Until , 2006 ( days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
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The following summary is qualified in its entirety by the more detailed information and financial statements and notes appearing elsewhere in this prospectus. Before making an investment, prospective investors should read this entire prospectus carefully, especially the information set forth under the heading "Risk Factors."
Our Company
We are a leading provider of broadband telephone services with over 1.6 million subscriber lines as of April 1, 2006. Utilizing our innovative Voice over Internet Protocol, or VoIP, technology platform, we offer feature-rich, low-cost communications services that offer users an experience similar to traditional telephone services. While customers in the United States currently represent over 95% of our subscriber lines, we continue to expand internationally, having launched our service in Canada in November 2004 and in the United Kingdom in May 2005. Since our U.S. launch in October 2002, we have experienced rapid subscriber line growth. For example, we more than tripled our subscriber lines during 2005.
We offer our customers a variety of service plans, each of which has a fixed monthly fee. Each of our service plans includes a full suite of features typically offered by traditional telephone service providers, such as call waiting, caller ID and call forwarding. In addition, we offer several enhanced features at no additional charge that are not typically offered by traditional circuit-switched telephone service providers, such as area code selection, web- and e-mail-based voicemail and an account management website that allows customers to add or change their features online. We also offer a number of premium services for an additional fee, such as toll free numbers, fax numbers and virtual phone numbers. We offer low international per minute calling rates for calls to locations outside the United States, Puerto Rico and Canada. We believe the combination of these factors allows us to offer an attractive value proposition to our customers.
Our customers can make and receive calls using a standard telephone plugged into a portable Vonage-enabled device that can be used almost anywhere a broadband Internet connection is available. We transmit these calls using VoIP technology, which converts voice signals into digital data packets for transmission over the Internet. We provide our service by using our customers' existing broadband Internet connections, eliminating the need for us to build or lease costly "last-mile" connections. In addition, our network is based on internally developed software and industry-standard servers, rather than the more expensive switches used by traditional telephone service providers. This network design enables us to monitor, maintain and expand our network quickly and efficiently while realizing capital and operating cost savings.
We have invested heavily to build a strong brand that helps drive our subscriber growth. During 2005, we spent $243.4 million on marketing. We employ an integrated marketing strategy that includes extensive television, online, print and radio advertising, a customer referral program and a range of other promotions, all designed to build our brand, attract new customers and retain existing customers. For example, according to Nielsen//NetRatings, an independent Internet media and market research firm, we were the top advertiser on the Internet from January 2005 through the first quarter of 2006 based on estimated spending and impressions. We employ a broad distribution strategy and acquire customers through our websites, our toll free numbers and our presence in leading retail outlets, including Best Buy, Circuit City, CompUSA and RadioShack stores.
We have experienced rapid revenue growth since our inception. Our revenues were $18.7 million in 2003, $79.7 million in 2004, and $269.2 million in 2005. While our revenues have grown rapidly, we have experienced increasing net losses, primarily driven by our increase in marketing expenses. For the period from inception through December 31, 2005, our accumulated deficit was $382.3 million. For 2005, our net loss was $261.3 million, and our marketing expenses were $243.4 million. To grow our revenue and customer base and enhance awareness of our brand, we have chosen to spend significant amounts on our marketing activities, and we intend to continue to do so. While this strategy will have
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the effect of delaying or preventing us from generating net income in the near term, we believe that our focus on growth will better position us as a strong competitor in the long term. As of December 31, 2005, our debt consisted of $226.1 million of convertible notes, $21.9 million of derivatives embedded within convertible notes and $21.6 million of capital leases.
Our Market Opportunity
VoIP communications are carried as data packets and require a broadband Internet connection that has sufficient bandwidth to deliver the data uninterrupted. As a result, broadband penetration has been a key driver of VoIP's expansion to date. We believe that as broadband adoption becomes even more prevalent worldwide, consumers will increasingly look to use their high-speed Internet connections for more of their voice, video and data communications. Many independent market research analysts believe that the growth rate in new VoIP subscribers over the next few years will exceed the growth rate for new broadband subscribers. For example, several such analysts have estimated that the approximately 0.9 to 1.5 million U.S. or North American consumer VoIP users in 2004 will grow to between 8.2 and 15.3 million by the end of 2007. As a leading provider of broadband telephone services using VoIP, we believe we are well positioned to benefit from the growth expected in this marketplace. However, the VoIP market may not grow as expected, and our business might not benefit from any actual growth that does occur.
Our Strengths
We believe we have the following strengths:
Our Strategy
We believe that our strong brand identity and reputation for quality communications services are instrumental to building our customer base. Our core business strategy is to enhance our brand image
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and the quality of our services in order to attract new customers. As we build on our leading brand and above-mentioned strengths, we are pursuing the following additional business strategies:
Our Investors
Immediately prior to the completion of this offering, all outstanding shares of all series of our convertible preferred stock will automatically convert into shares of common stock. Upon completion of the offering, after giving effect to the conversion of our preferred stock into shares of common stock, affiliates of 3i Group plc, Bain Capital, LLC, Institutional Venture Partners, Meritech Capital Partners and New Enterprise Associates collectively will own shares of common stock, or % of our common stock. Jeffrey A. Citron, our principal stockholder, founder, Chairman and Chief Strategist, will own shares of common stock or % of our common stock. These financial sponsors and Mr. Citron had collectively invested an aggregate of $450.5 million in our company as of December 31, 2005.
E-911 Initiative
The U.S. Federal Communications Commission, or FCC, required us to provide enhanced emergency dialing capabilities, or E-911, to all of our U.S. customers by November 28, 2005. We are not currently in compliance with the FCC's order, although approximately 75% of our U.S. subscriber lines were E-911 compliant as of April 1, 2006. Additional progress is being made on a daily basis and we expect to provide E-911 capabilities to nearly all of our remaining subscriber lines within the year. We have requested a waiver from the FCC to provide us with the additional time needed to complete the roll-out. It is possible the FCC will deny our request and subject us to fines or penalties or order us to stop accepting new customers in certain areas until we have rolled out E-911 capability in those areas.
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Risk Factors
An investment in our common stock involves a high degree of risk. The following risks, as well as the other risks discussed in "Risk Factors," should be carefully considered before participating in this offering:
Corporate Information
We were incorporated in Delaware in May 2000 and changed our name to Vonage Holdings Corp. in February 2001. Our principal executive offices are located at 23 Main Street, Holmdel, NJ 07733. Our telephone number is (732) 528-2600. Our websites are http://www.vonage.com, http://www.vonage.ca and http://www.vonage.co.uk. Information contained on our websites or that can be accessed through our websites is not part of this prospectus, and investors should not rely on any such information in making the decision whether to purchase our common stock.
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Common stock offered by us | shares | |
Common stock outstanding after the offering |
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shares |
Over-allotment option |
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shares |
Use of proceeds |
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We estimate that the net proceeds from our sale of shares of our common stock in this offering will be approximately $ million. We intend to use these net proceeds to fund the expansion of our business, including funding marketing expenses and operating losses. |
Dividend policy |
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We do not intend to pay any cash dividends on our common stock. |
Directed share programs |
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We intend to reserve a portion of our common stock offered in this prospectus for sale to certain of our customers and other persons related to us. See "UnderwritingDirected Share Programs" for more information. |
Risk factors |
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Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 9 to read about risk factors you should consider before buying shares of our common stock. |
Proposed symbol |
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The number of shares of common stock outstanding after this offering excludes:
Except as otherwise indicated, all information in this prospectus assumes no exercise of the underwriters' over-allotment option and reflects the conversion of all outstanding shares of our preferred stock into a total of shares of common stock upon the closing of this offering and reflects a for stock split, which will take place immediately prior to the closing of this offering.
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Summary Consolidated Financial Data
The following table sets forth our summary consolidated financial data. The statement of operations data for the years ended December 31, 2003, 2004 and 2005 and the balance sheet data as of December 31, 2004 and 2005 are derived from our audited consolidated financial statements and related notes included in the back of this prospectus. The balance sheet data as of December 31, 2003 is derived from our audited consolidated financial statements and related notes not included in this prospectus.
The results included below and elsewhere in this prospectus are not necessarily indicative of our future performance. You should read this information together with "Capitalization," "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus.
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For the Years Ended
December 31, |
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2003
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2004
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2005
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(dollars in thousands)
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Statement of Operations Data: | |||||||||||
Operating Revenues: | |||||||||||
Telephony services | $ | 16,905 | $ | 75,864 | $ | 258,165 | |||||
Customer equipment and shipping | 1,817 | 3,844 | 11,031 | ||||||||
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18,722 | 79,708 | 269,196 | |||||||||
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Operating Expenses: | |||||||||||
Direct cost of telephony services | 8,556 | 23,209 | 84,050 | ||||||||
Direct cost of goods sold | 4,867 | 18,878 | 40,441 | ||||||||
Selling, general and administrative | 19,174 | 49,186 | 154,716 | ||||||||
Marketing(1) | 11,819 | 56,075 | 243,404 | ||||||||
Depreciation and amortization | 2,367 | 3,907 | 11,122 | ||||||||
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46,783 | 151,255 | 533,733 | |||||||||
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Loss from operations |
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(28,061 |
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(71,547 |
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(264,537 |
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Net loss | $ | (29,974 | ) | $ | (69,921 | ) | $ | (261,334 | ) | ||
Statement of Cash Flow Data: |
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Net cash used in operating activities | $ | (16,583 | ) | $ | (38,600 | ) | $ | (189,765 | ) | ||
Net cash used in investing activities | (4,933 | ) | (73,707 | ) | (154,638 | ) | |||||
Net cash provided by financing activities | 34,226 | 141,094 | 434,006 |
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December 31,
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2004
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2005
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Balance Sheet Data (at period end): | |||||||||||
Cash, cash equivalents and marketable securities | $ | 14,245 | $ | 105,768 | $ | 266,379 | |||||
Property and equipment, net | 9,325 | 16,290 | 103,638 | ||||||||
Total assets | 28,311 | 136,493 | 446,882 | ||||||||
Convertible notes(2) | | | 247,958 | ||||||||
Capital lease obligations | 5 | | 22,431 | ||||||||
Total liabilities | 14,038 | 51,045 | 426,940 | ||||||||
Total redeemable preferred stock | 51,409 | 192,521 | 388,427 | ||||||||
Total stockholders' equity (deficit) | (37,136 | ) | (107,073 | ) | (368,485 | ) |
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For the Years Ended
December 31, |
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2005
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Operating and Other Data (unaudited): | |||||||||||
Gross subscriber line additions(3) | 91,522 | 364,214 | 1,099,641 | ||||||||
Net subscriber line additions(4) | 77,936 | 304,849 | 878,472 | ||||||||
Subscriber lines(5)(6) | 85,717 | 390,566 | 1,269,038 | ||||||||
Average monthly customer churn(7) | 2.48 | % | 1.82 | % | 2.05 | % | |||||
Average monthly revenue per line(8) | $ | 33.37 | $ | 27.89 | $ | 27.03 | |||||
Average monthly telephony services revenue per line(9) | $ | 30.13 | $ | 26.55 | $ | 25.93 | |||||
Average monthly direct cost of telephony services per line(10) | $ | 15.25 | $ | 8.12 | $ | 8.44 | |||||
Marketing cost per gross subscriber line addition(11) | $ | 129.14 | $ | 153.96 | $ | 221.35 | |||||
Employees(5)(12) | 189 | 648 | 1,355 |
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and WiFi phones but do not include our virtual phone numbers or toll free numbers, which only allow inbound telephone calls to customers.
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Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should understand and carefully consider the risks below, as well as all of the other information contained in this prospectus and our financial statements and the related notes included elsewhere in this prospectus. Any of these risks could materially adversely affect our business, financial condition and results of operations and the trading price of our common stock, and you may lose all or part of your investment.
Risks Related to Our Business
We have incurred increasing quarterly losses since our inception, and we expect to continue to incur losses in the future.
We have incurred losses since our inception, and we expect to continue to incur losses in the future. For the period from our inception through December 31, 2005, our accumulated deficit was $382.3 million. Our quarterly net losses generally have increased each quarter from our inception through the quarter ended December 31, 2005, for which our net loss was $71.7 million. Initially, our net losses were driven principally by start-up costs and the costs of developing our technology. More recently, our net losses have been driven principally by marketing expense, which was $243.4 million for 2005. In order to grow our revenue and customer base, we have chosen to increase our marketing expenditures significantly. We are pursuing growth, rather than profitability, in the near term to capitalize on the current expansion of the broadband and VoIP markets and enhance the future value of our company. This strategy, however, may not be successful, and we may never achieve profitability. In the past, we projected that we would generate net income during future periods, but then generated a net loss. For example, in 2003, we projected that we would generate net income in the first quarter of 2005. However, we generated a net loss of $60.0 million during that quarter, in large part due to our decision to increase our marketing expense. We intend to continue to increase our marketing expense, and we may continue to generate net losses for the foreseeable future. In addition, we will always be required to incur some marketing expense in order to replace customers who terminate our service, or "churn." Further, marketing expense is not the only factor that may contribute to our net losses. For example, interest expense on our convertible notes of at least $16.3 million annually will contribute to our net losses. As a result, even if we significantly reduce our marketing expense, we may continue to incur net losses.
If we are unable to compete successfully, we could lose market share and revenue.
The telecommunications industry is highly competitive. We face intense competition from traditional telephone companies, wireless companies, cable companies and alternative voice communication providers. Our principal competitors are the traditional telephone service providers, namely AT&T, Inc. (formerly SBC Communications Inc.), BellSouth Corp., Citizens Communications Corp., Qwest Communications International Inc. and Verizon Communications, Inc., which provide telephone service based on the public switched telephone network. Some of these traditional providers also have added or are planning to add VoIP services to their existing telephone and broadband offerings. We also face, or expect to face, competition from cable companies, such as Cablevision Systems Corp., Charter Communications, Inc., Comcast Corporation, Cox Communications, Inc. and Time Warner Cable (a division of Time Warner Inc.), which have added or are planning to add VoIP services to their existing cable television, voice and broadband offerings. Further, wireless providers, including Cingular Wireless LLC, Sprint Nextel Corporation, T-Mobile USA Inc. and Verizon Wireless, offer services that some customers may prefer over wireline service. In the future, as wireless companies offer more minutes at lower prices, their services may become more attractive to customers as a replacement for wireline service. Some of these providers may be developing a dual mode phone that will be able to use VoIP where broadband access is available and cellular phone service elsewhere, which will pose additional competition to our offerings.
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Most traditional wireline and wireless telephone service providers and cable companies are substantially larger and better capitalized than we are and have the advantage of a large existing customer base. Because most of our target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract target customers away from their existing providers. Until recently, our target market has been composed largely of early adopters, or people who tend to seek out new technologies and services. Attracting customers away from their existing providers will become more difficult as the early adopter market becomes saturated and mainstream customers make up more of our target market. These competitors could focus their substantial financial resources to develop competing technology that may be more attractive to potential customers than what we offer. Our competitors' financial resources may allow them to offer services at prices below cost or even for free in order to maintain and gain market share or otherwise improve their competitive positions. Our competitors also could use their greater financial resources to offer VoIP services with more attractive service packages that include on-site installation and more robust customer service. In addition, because of the other services our competitors provide, they may choose to offer VoIP services as part of a bundle that includes other products, such as video, high speed Internet access and wireless telephone service, which we do not offer. This bundle may enable our competitors to offer VoIP service at prices with which we may not be able to compete or to offer functionality that integrates VoIP service with their other offerings, both of which may be more desirable to consumers. Any of these competitive factors could make it more difficult for us to attract and retain customers, cause us to lower our prices in order to compete and reduce our market share and revenues.
We also compete against established alternative voice communication providers, such as Skype (a service of eBay Inc.), and face competition from other large, well-capitalized Internet companies, such as America Online, Inc., Google Inc., Microsoft Corporation and Yahoo! Inc., which have recently launched or plan to launch VoIP-enabled instant messaging services. In addition, we compete with independent VoIP service providers. Some of these service providers may choose to sacrifice revenue in order to gain market share and have offered their services at lower prices or for free. In order to compete with such service providers, we may have to significantly reduce our prices, which would delay or prevent our profitability. See "BusinessCompetition."
Decreasing telecommunications prices may cause us to lower our prices to remain competitive, which could delay or prevent our future profitability.
Currently, our prices are lower than those of many of our competitors for comparable services. However, domestic and international telecommunications prices have decreased significantly over the last few years, and we anticipate that prices will continue to decrease. Users who select our service offerings to take advantage of our prices may switch to another service provider as the difference between prices diminishes or disappears, and we may be unable to use our price as a distinguishing feature to attract new customers in the future. Such competition or continued price decreases may require us to lower our prices to remain competitive, may result in reduced revenue, a loss of customers or a decrease in our subscriber line growth and may delay or prevent our future profitability.
If VoIP technology fails to gain acceptance among mainstream consumers, our ability to grow our business will be limited.
The market for VoIP services has only recently begun to develop and is rapidly evolving. We currently generate all of our revenue from the sale of VoIP services and related products to residential and small office or home office customers. Revenue generated from sales to residential customers will continue to account for most of our revenue for the foreseeable future. We believe that a significant portion of our revenue currently comes from consumers who are early adopters of VoIP technology. However, in order for our business to continue to grow and to become profitable, VoIP technology must gain acceptance among mainstream consumers, who tend to be less technically knowledgeable and more resistant to new technology or unfamiliar services. Because potential VoIP customers need to
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connect additional hardware at their location and take other technical steps not required for the use of traditional telephone service, mainstream consumers may be reluctant to use our service. If mainstream consumers choose not to adopt our technology, our ability to grow our business will be limited.
Certain aspects of our service are not the same as traditional telephone service, which may limit the acceptance of our services by mainstream consumers and our potential for growth.
Certain aspects of our service are not the same as traditional telephone service. Our continued growth is dependent on the adoption of our services by mainstream customers, so these differences are becoming increasingly important. For example:
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.
Our emergency and new E-911 calling services are different from those offered by traditional wireline telephone companies and may expose us to significant liability.
Both our emergency calling service and our new E-911 calling service are different, in significant respects, from the emergency calling services offered by traditional wireline telephone companies. In each case, those differences may cause significant delays, or even failures, in callers' receipt of the emergency assistance they need.
Traditional wireline telephone companies route emergency calls over a dedicated infrastructure directly to an emergency services dispatcher at the public safety answering point, or PSAP, in the caller's area. Generally, the dispatcher automatically receives the caller's phone number and actual location information. While our new E-911 service being deployed in the United States is designed to route calls in a fashion similar to traditional wireline services, our new E-911 capabilities are not yet available in all locations. In addition, the only location information that our E-911 service can transmit to a dispatcher at a PSAP is the information that our customers have registered with us. A customer's registered location may be different from the customer's actual location at the time of the call because customers can use their Vonage-enabled devices to make calls almost anywhere a broadband connection is available.
We are currently deploying E-911 service that is comparable to the emergency calling services provided to customers of traditional wireline telephone companies in the same area. For those customers located in an E-911 area, emergency calls are routed, subject to the limitations discussed
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below, directly to an emergency services dispatcher at the PSAP in the area of the customer's registered location. The dispatcher will have automatic access to the customer's telephone number and registered location information. However, if a customer places an emergency call using the customer's Vonage-enabled device in a location different from the one registered with us, the emergency call will be routed to a PSAP in the customer's registered location, not the customer's actual location at the time of the call. Every time a customer moves his or her Vonage-enabled device to a new location, the customer's registered location information must be updated and verified. Until that takes place, the customer will have to verbally advise the emergency dispatcher of his or her actual location at the time of the call and wait for the call to be transferred, if possible, to the appropriate local emergency response center before emergency assistance can be dispatched.
In some cases, even under our new 911 service, emergency calls may be routed to a PSAP in the area of the customer's registered location, but such PSAP will not be capable of receiving our transmission of the caller's registered location information and, in some cases, the caller's phone number. Where the emergency call center is unable to process the information, the caller is provided a service that is similar to the basic 911 services offered to some wireline telephone customers. In these instances, the emergency caller may be required to verbally advise the operator of their location at the time of the call and, in some cases, a call back number so that the call can be handled or forwarded to an appropriate emergency dispatcher.
The emergency calls of customers located in areas where we are currently unable to provide either E-911 or the basic 911 described above are either routed directly to the PSAP in the area of the customer's location or supported by a national call center that is run by a third-party provider and operates 24 hours a day, seven days a week. In these cases, a caller must provide the operator with his or her physical location and call back number. If a customer reaches the call center, the operator will coordinate connecting the caller to the appropriate PSAP or emergency services provider. Our E-911 service does not support the calls of our WiFi phone and SoftPhone users. The emergency calls of our WiFi phone and SoftPhone users are supported by the national call center.
If one of our customers experiences a broadband or power outage, or if a network failure were to occur, the customer will not be able to reach an emergency services provider.
Delays our customers encounter when making emergency services calls and any inability of the answering point to automatically recognize the caller's location or telephone number can have devastating consequences. Customers have attempted, and may in the future attempt, to hold us responsible for any loss, damage, personal injury or death suffered as a result. Some traditional phone companies also may be unable to provide the precise location or the caller's telephone number when their customers place emergency calls. However, traditional phone companies are covered by legislation exempting them from liability for failures of emergency calling services and we are not. This liability could be significant. In addition, we have lost, and may in the future lose, existing and prospective customers because of the limitations inherent in our emergency calling services. Any of these factors could cause us to lose revenues, incur greater expenses or cause our reputation or financial results to suffer.
Flaws in our technology and systems could cause delays or interruptions of service, damage our reputation, cause us to lose customers and limit our growth.
Although we have designed our service network to reduce the possibility of disruptions or other outages, our service may be disrupted by problems with our technology and systems, such as malfunctions in our software or other facilities and overloading of our network. Our customers have experienced interruptions in the past and may experience interruptions in the future as a result of these types of problems. Interruptions have in the past and may in the future cause us to lose customers and offer substantial customer credits, which could adversely affect our revenue and profitability. For example, during 2005 our service was significantly impaired on two separate occasions. In March 2005, a problem during a software upgrade to our call processing system caused most of our customers to
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experience intermittent service for several hours. In August 2005, one of our third-party carriers experienced an outage of approximately 90 seconds, which caused a failure in some of our gateways. As a result, during a period of several hours, approximately two out of three outbound calls from our customers to the public switched telephone network experienced an "all circuits busy" condition. We have since had other outages that affected smaller groups of customers at various times. In addition, because our systems and our customers' ability to use our services are Internet-dependent, our services may be subject to "hacker attacks" from the Internet, which could have a significant impact on our systems and services. If service interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting and retaining customers and our brand reputation and growth may suffer.
Our ability to provide our service is dependent upon third-party facilities and equipment, the failure of which could cause delays or interruptions of our service, damage our reputation, cause us to lose customers and limit our growth.
Our success depends on our ability to provide quality and reliable service, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Unlike traditional wireline telephone service or wireless service, our service requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer's Internet service provider and electric utility company, respectively, and not by us. The quality of some broadband Internet connections may be too poor for customers to use our services properly. In addition, if there is any interruption to a customer's broadband Internet service or electrical power supply, that customer will be unable to make or receive calls, including emergency calls, using our service. We also outsource several of our network functions to third-party providers. For example, we outsource the maintenance of our regional data connection points, which are the facilities at which our network interconnects with the public switched telephone network. If our third-party service providers fail to maintain these facilities properly, or fail to respond quickly to problems, our customers may experience service interruptions. Our customers have experienced such interruptions in the past and will experience interruptions in the future. In addition, our new E-911 service is currently dependent upon several third-party providers. Interruptions in service from these vendors could cause failures in our customers' access to E-911 services. Interruptions in our service caused by third-party facilities have in the past caused and may in the future cause us to lose customers, or cause us to offer substantial customer credits, which could adversely affect our revenue and profitability. If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers and our brand, reputation and growth will be negatively impacted.
We may not be able to maintain adequate customer care during periods of growth or in connection with our addition of new and complex Vonage-enabled devices, which could adversely affect our ability to grow and cause our financial results to be negatively impacted.
Good customer care is important to acquiring and retaining customers. At some points in the past, we have not been able to expand our customer care operations quickly enough to meet the needs of our greatly increased customer base, and the quality of our customer care has suffered. For example, in the first quarter of 2005, our customers experienced longer than acceptable hold times when they called us for assistance. In the future, as we broaden our Vonage-enabled device offerings and our customers build increasingly complex home networking environments, we will face additional challenges in training our customer care staff. We face a high turnover rate among our customer care employees. We continue to hire and train customer care representatives at a rapid rate in order to meet the needs of our growing customer base. If we are unable to hire, train and retain sufficient personnel to provide adequate customer care, we may experience slower growth, increased costs and higher churn levels, which would cause our financial results to be negatively impacted.
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If we are unable to improve our process for local number portability provisioning, our growth may be negatively impacted.
We support local number portability for our customers, which allows our customers to retain their existing telephone numbers when subscribing to our services. Transferring numbers is a manual process that in the past could have taken us 20 business days or longer, although we have taken steps to automate this process to reduce the delay. A new Vonage customer must maintain both Vonage service and the customer's existing telephone service during the transferring process. By comparison, transferring wireless telephone numbers among wireless service providers generally takes several hours, and transferring wireline telephone numbers among traditional wireline service providers generally takes a few days. The additional delay that we experience is due to our reliance on the telephone company from which the customer is transferring and to the lack of full automation in our process. Further, because we are not a regulated telecommunications provider, we must rely on the telephone companies, over whom we have no control, to transfer numbers. We also rely primarily on one third party who has contractual obligations to us to facilitate the transfer of customers' telephone numbers. Local number portability is considered an important feature by many potential customers, and if we fail to reduce related delays, we may experience increased difficulty in acquiring new customers.
A higher rate of customer terminations would negatively impact our business by reducing our revenue or requiring us to spend more money to grow our customer base.
Our rate of customer terminations, or average monthly customer churn, was 2.05% for 2005. During 2005, approximately 171,000 of our customers terminated. Our churn rate could increase in the future if customers are not satisfied with our service. Other factors, including increased competition from other providers, also influence our churn rate.
Because of churn, we have to acquire new customers on an ongoing basis just to maintain our existing level of customers and revenues. As a result, marketing expense is an ongoing requirement of our business. If our churn rate increases, we will have to acquire even more new customers in order to maintain our existing revenues. We incur significant costs to acquire new customers, and those costs are an important factor in determining our net losses and achieving future profitability. Therefore, if we are unsuccessful in retaining customers or are required to spend significant amounts to acquire new customers beyond those budgeted, our revenue could decrease and our net losses could increase.
We may require significant capital to pursue our growth strategy, but we may not be able to obtain additional financing on favorable terms or at all.
We intend to continue spending substantial amounts on marketing and product development in order to grow our business. We may need to obtain additional financing to pursue this business strategy, to respond to new competitive pressures or to respond to opportunities to acquire complementary businesses or technologies. Our significant losses to date may prevent us from obtaining additional funds on favorable terms or at all. For 2005, we recorded a net loss of $261.3 million. Because of these losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the capital markets. For example, we discussed a revolving credit facility with commercial banks in the summer of 2005. As a result of those discussions, we believe most commercial lenders will require us to very significantly reduce our loss from operations before they will lend us money. In addition, the terms of our outstanding convertible notes provide for additional shares to be issued upon conversion if we sell shares of our common stock after our initial public offering at a price that is less than the average trading price of our common stock over the 10-day period prior to any such sale, which might further limit our access to the capital markets. A failure to obtain additional financing could adversely affect our ability to grow and maintain our business.
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As a result of being a public company, we will incur increased costs that may place a strain on our resources or divert our management's attention from other business concerns.
As a public company, we will incur additional legal, accounting and other expenses that we do not incur as a private company. The Exchange Act will require us to file annual, quarterly and current reports with respect to our business and financial condition, which will require us to incur legal and accounting expenses. The Sarbanes-Oxley Act will require us to maintain effective disclosure controls and procedures and internal controls for financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. We expect the corporate governance rules and regulations of the SEC and the exchange on which we will list our common stock will increase our legal and financial compliance costs and make some activities more time consuming and costly. These requirements may place a strain on our systems and resources and may divert our management's attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. In addition, we are hiring and will continue to hire additional legal, accounting and financial staff with appropriate public company experience and technical accounting knowledge, which will increase our operating expenses in future periods.
We also expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
Our rapid growth has placed substantial demands on our management and operations. If we fail to hire and train additional personnel or improve our controls and procedures to respond to this growth, our business, operating results and financial position could be harmed.
Our business and operations have expanded rapidly since our inception in May 2000. For example, during the 12 months ended December 31, 2005, the number of our employees more than doubled, growing from 648 to 1,355, and we experienced high turn-over among our customer care employees. To support our expanded customer base effectively and meet our growth objectives for the future, we must continue to successfully hire, train, motivate and retain our employees. We expect that significant further expansion will be necessary. In addition, in order to manage our expanded operations, we will need to continue to improve our management, operational and financial controls and our reporting systems and procedures. All of these measures will require significant expenditures and will demand the attention of management. If we are not able to hire, train and retain the necessary personnel, or if these operational and reporting improvements are not implemented successfully, we may have to make significant additional expenditures and further draw management attention away from running our business to address these issues. The quality of our services could suffer, which could negatively affect our brand, operating results and financial position.
Because much of our potential success and value lies in our use of internally developed systems and software, if we fail to protect them, it could negatively affect us.
Our ability to compete effectively is dependent in large part upon the maintenance and protection of systems and software that we have developed internally. While we have several pending patent applications, we cannot patent much of the technology that is important to our business. In addition, our pending patent applications may not be successful. To date, we have relied on copyright, trademark and trade secret laws, as well as confidentiality procedures and licensing arrangements, to establish and protect our rights to this technology. We typically enter into confidentiality or license agreements with our employees, consultants, customers and vendors in an effort to control access to and distribution of technology, software, documentation and other information. Despite these precautions, it may be
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possible for a third party to copy or otherwise obtain and use this technology without authorization. Policing unauthorized use of this technology is difficult. The steps we take may not prevent misappropriation of the technology we rely on. In addition, effective protection may be unavailable or limited in some jurisdictions outside the United States, Canada and the United Kingdom. Litigation may be necessary in the future to enforce or protect our rights or to determine the validity and scope of the rights of others. That litigation could cause us to incur substantial costs and divert resources away from our daily business, which in turn could materially adversely affect our business.
We may be subject to damaging and disruptive intellectual property litigation.
We have been named as a defendant in three suits currently pending that relate to alleged patent infringement. See "BusinessLegal ProceedingsPatent Litigation." In addition, we have been subject to other infringement claims in the past and may be subject to infringement claims in the future. We may be unaware of filed patent applications and issued patents that could relate to our products and services. Intellectual property litigation could:
Parties making claims of infringement may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our services and could cause us to pay substantial damages. In the event of a successful claim of infringement, we may need to obtain one or more licenses from third parties, which may not be available at a reasonable cost, if at all. The defense of any lawsuit could result in time-consuming and expensive litigation, regardless of the merits of such claims, and could also result in damages, license fees, royalty payments and restrictions on our ability to provide our services, any of which could harm our business.
Our service requires an operative broadband connection, and if the adoption of broadband does not progress as expected, the market for our services will not grow and we may not be able to grow our business and increase our revenue.
Use of our service requires that the user be a subscriber to an existing broadband Internet service, most typically provided through a cable or digital subscriber line, or DSL, connection. Although the number of broadband subscribers worldwide has grown significantly over the last five years, this service has not yet been adopted by a majority of consumers. If the adoption of broadband services does not continue to grow, the market for our services may not grow. As a result, we may not be able to increase our revenue and become profitable.
Future disruptive new technologies could have a negative effect on our businesses.
VoIP technology, which our business is based upon, did not exist and was not commercially viable until relatively recently. VoIP technology is having a disruptive effect on traditional telephone companies, whose businesses are based on other technologies. We also are subject to the risk of future disruptive technologies. If new technologies develop that are able to deliver competing voice services at lower prices, better or more conveniently, it could have a material adverse effect on us.
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We are dependent on a small number of individuals, and if we lose key personnel upon whom we are dependent, our business will be adversely affected.
Many of the key responsibilities of our business have been assigned to a relatively small number of individuals. Our future success depends to a considerable degree on the vision, skills, experience and effort of our senior management, including Jeffrey Citron, our founder, Chairman and Chief Strategist, John Rego, our Chief Financial Officer, and Louis Mamakos, our Chief Technology Officer. In addition, we recently added Michael Snyder as our new Chief Executive Officer. We may add additional senior personnel in the future.
If we lose the services of any of our key employees, or if members of our management team do not work well together, it would have an adverse effect on our business. In particular, Mr. Citron has been the driving force in the development of our business to date, and he will continue to be in charge of our overall strategy and be closely involved with our technology. However, Mr. Citron could decide to resign as our Chairman and Chief Strategist, which could have a material adverse effect on us.
The past background of our founder, Chairman and Chief Strategist, Jeffrey A. Citron, may adversely affect our ability to enter into business relationships and may have other adverse effects on our business.
Prior to joining Vonage, Mr. Citron was associated with Datek Securities Corporation and Datek Online Holdings Corp., including as an employee of, and consultant for, Datek Securities and, later, as one of the principal executive officers and largest stockholders of Datek Online. Datek Online, which was formed in early 1998 following a reorganization of the Datek business, was a large online brokerage firm. Datek Securities was a registered broker-dealer that engaged in a number of businesses, including proprietary trading and order execution services. During a portion of the time Mr. Citron was associated with Datek Securities, the SEC alleged that Datek Securities, Mr. Citron and other individuals participated in an extensive fraudulent scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or SOES. Datek Securities (through its successor iCapital Markets LLC), Mr. Citron and other individuals entered into settlements with the SEC in 2002 and 2003, which resulted in extensive fines, bans from future association with securities brokers or dealers and enjoinments against future violations of certain U.S. securities laws. The NASD previously had imposed disciplinary action against Datek Securities, Mr. Citron and other individuals in connection with alleged violations of the rules and regulations regarding the SOES. These and other matters are discussed under "Information Concerning our Founder, Chairman and Chief Strategist."
There is a risk that some third parties will not do business with us, that some prospective investors will not purchase our securities or that some customers may be wary of signing up for service with us as a result of allegations against Mr. Citron and his past SEC and NASD settlements. We believe that some financial institutions and accounting firms have declined to enter into business relationships with us in the past, at least in part because of these matters. Other institutions and potential business associates may not be able to do business with us because of internal policies that restrict associations with individuals who have entered into SEC and NASD settlements. While we believe that these matters have not had a material impact on our business, they may have a greater impact on us when we become a public company, including by adversely affecting our ability to enter into commercial relationships with third parties that we need to effectively and competitively grow our business. Further, should Mr. Citron in the future be accused of, or be shown to have engaged in, additional improper or illegal activities, the impact of those accusations or the potential penalties from such activities could be exacerbated because of the matters discussed above. If any of these risks were to be realized, there could be a material adverse effect on our business or the market price of our common stock.
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Risks Related to Regulation
Set forth below are certain material risks related to regulation. For additional information about these and other regulatory risks we face, see "Regulation" in this prospectus.
Regulation of VoIP services is developing and therefore uncertain, and future legislative, regulatory or judicial actions could adversely impact our business and expose us to liability.
Our business has developed in an environment largely free from government regulation. However, the United States and other countries have begun to assert regulatory authority over VoIP and are continuing to evaluate how VoIP will be regulated in the future. Both the application of existing rules to us and our competitors and the effects of future regulatory developments are uncertain.
Future legislative, judicial or other regulatory actions could have a negative effect on our business. If we become subject to the rules and regulations applicable to telecommunications providers in individual states, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth.
Our international operations are also subject to regulatory risks, including the risk that regulations in some jurisdictions will prohibit us from providing our services cost-effectively or at all, which could limit our growth. Currently, there are several countries where regulations prohibit us from offering service. In addition, because customers can use our services almost anywhere that a broadband Internet connection is available, including countries where providing VoIP services is illegal, the governments of those countries may attempt to assert jurisdiction over us, which could expose us to significant liability and regulation.
The success of our business relies on customers' continued and unimpeded access to broadband service. Providers of broadband services may be able to block our services or charge their customers more for also using our services, which could adversely affect our revenue and growth.
Our customers must have broadband access to the Internet in order to use our service. Some providers of broadband access may take measures that affect their customers' ability to use our service, such as degrading the quality of the data packets we transmit over their lines, giving those packets low priority, giving other packets higher priority than ours, blocking our packets entirely or attempting to charge their customers more for also using our services.
It is not clear whether suppliers of broadband Internet access have a legal obligation to allow their customers to access and use our service without interference. As a result of recent decisions by the U.S. Supreme Court and the FCC, providers of broadband services are subject to relatively light regulation by the FCC. Consequently, federal and state regulators might not prohibit broadband providers from limiting their customers' access to VoIP or otherwise discriminating against VoIP providers. Interference with our service or higher charges for also using our service could cause us to lose existing customers, impair our ability to attract new customers and harm our revenue and growth. See "RegulationAccess to Networks."
These problems could also arise in international markets. For example, a Canadian cable provider recently began offering an optional Cdn$10 per month "quality of service premium" to customers who use third-party VoIP services over its facilities. However, customers who purchase VoIP services directly from this cable provider are not required to pay this additional fee.
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If we fail to comply with new FCC regulations requiring us to provide E-911 emergency calling services, we may be subject to fines or penalties, which could include disconnection of our service for certain customers or prohibitions on marketing of our services and accepting new customers in certain areas.
The FCC released an order on June 3, 2005 requiring us to notify our customers of any differences between our emergency calling services and those available through traditional telephone providers and obtain affirmative acknowledgments from our customers of those notifications. The rules also required us to offer by November 28, 2005 enhanced emergency calling services, or E-911, to all of our customers located in areas where E-911 service is available from their traditional wireline telephone company. E-911 service allows emergency calls from our customers to be routed directly to an emergency dispatcher in a customer's registered location and gives the dispatcher automatic access to the customer's telephone number and registered location information.
We have notified our customers of the differences between our emergency calling services and those available through traditional telephony providers and have received affirmative acknowledgement from substantially all of our customers. We also have taken steps to comply with the FCC's order by the November 28, 2005 deadline, but we are not currently in full compliance and do not expect to be in full compliance in the short term unless we are granted a waiver of the requirements by the FCC. As of April 1, 2006, we were not providing E-911 service to approximately 25% of our U.S. subscriber lines.
The consequences of failure to comply fully with the FCC's order currently are unclear. On November 7, 2005 the FCC's Enforcement Bureau issued a public notice stating that it would not require disconnection of existing customers to whom E-911 service cannot be provided by November 28, 2005, but it also stated that it expected VoIP providers to stop marketing and accepting new subscribers in areas where they cannot provide E-911 service after November 28, 2005. It is not clear whether the FCC will enforce this restriction or how it would do so. On November 28, 2005, we filed a petition for extension of time and limited waiver of certain of the enhanced emergency service requirements, including the limitations on marketing and accepting new customers. We are continuing to market our services and accept new customers in areas in which we do not provide E-911 service. The FCC has not acted on our petition, and we cannot predict whether the FCC will grant our petition or provide other relief. Should we be unable to obtain an extension of time to implement the requirements of the order, we may be subject to enforcement action by the FCC that could include monetary forfeitures, cease and desist orders and other penalties. We also may be required to stop serving customers to whom we cannot provide the E-911 service required by the FCC's rules and to stop marketing our services and accepting new customers in areas in which we cannot provide the E-911 service. Any of these actions could significantly harm our business. See "BusinessNetwork Operations" and "RegulationVoIP E-911 Matters" for further information on the FCC's E-911 requirements, our existing systems and our measures for compliance.
Sales taxes and 911-related fees will increase our customers' cost of using our services and could result in penalties being imposed on us.
There are numerous fees and taxes assessed on traditional telephone services that we believe have not been applicable to us and that we have not paid in the past. Currently, we only collect and remit sales taxes for customers with a billing address in New Jersey, where our corporate operations are conducted. However, as a result of sales tax initiatives in certain states and a sales tax agreement we have entered into with another state, we will begin collecting and remitting sales taxes in 19 additional states effective May 1, 2006. We also believe it is likely that we eventually will be required to collect and remit sales taxes in virtually all U.S. states that charge sales taxes. This will have the effect of decreasing any price advantage we may have.
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Some states have taken the position that we should have collected and remitted sales taxes in the past and have sought to collect those past sales taxes from us and impose fines, penalties or interest charges on us. We established a reserve of $9.9 million, as of December 31, 2005, for these matters. If our ultimate liability exceeds that amount, it could have a material adverse effect on us.
We began charging an Emergency 911 Cost Recovery fee of $0.99 per month on customers, effective March 7, 2006. This fee is designed to cover some of our costs associated with complying with E-911 regulation and our national 911 emergency call center. State and local governments may also assess fees to pay for emergency services in a customer's community. We expect to begin collecting these 911-related fees and remitting them to the appropriate authorities later this year. We expect this fee for most of our customers to be between approximately $0.50 to $1.50 per month, and as high as $3.00 for a limited number of our customers, depending on their location. This will also have the effect of decreasing any price advantage we may have.
We may be required to contribute to the Universal Service Fund, increasing our cost of providing services. If we collect those contributions from our customers, the cost advantage we offer customers would be reduced.
FCC regulations require providers of interstate telecommunications services, but not providers of information services, to contribute to the federal Universal Service Fund, or USF. Currently, we are not subject to direct contribution to the USF, although we do contribute indirectly to the USF through our purchase of telecommunications services from our suppliers. The FCC is considering a number of proposals that could alter the way that the USF is assessed. For instance, the FCC is considering an assessment based on the use of telephone numbers, in which case we would be required to contribute directly to the Universal Service Fund. In addition, the FCC may increase the contribution obligations of our suppliers, which would result in an increase in the surcharges those suppliers charge to us. We intend to collect from our customers any additional USF contributions we are required, directly or indirectly, to make. Many of our competitors are required to contribute directly to the USF and already collect those USF contributions from their customers.
Once we become a public company, we will need to comply with Section 404 of the Sarbanes-Oxley Act of 2002, and if we fail to achieve and maintain adequate internal controls over financial reporting, our business, results of operations and financial condition could be materially adversely affected.
As a public company, our systems of internal controls over financial reporting will be required to comply with the standards adopted by the Public Company Accounting Oversight Board. We are presently evaluating our internal controls for compliance. During the course of our evaluation, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities. We have commenced a review of our existing internal control structure and plan to hire additional personnel. Although our review is not complete, we have taken steps to improve our internal control structure by hiring dedicated, internal Sarbanes-Oxley Act compliance personnel to analyze and improve our internal controls, to be supplemented periodically with outside consultants as needed. However, we cannot be certain regarding when we will be able to successfully complete the procedures, certification and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm the market value of our common stock. Any failure to maintain effective internal controls also could impair our ability to manage our business and harm our financial results.
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Risks Related to this Offering
There is no existing market for our common stock, and we do not know if one will develop that will provide you with adequate liquidity. You may not be able to resell our common stock at or above the initial public offering price.
Currently there is no public market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market or otherwise or how liquid that market might become. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. You may not be able to resell our common stock at or above the initial public offering price.
As a new investor, you will experience immediate and substantial dilution.
The price you will pay in this offering for each share of our common stock will exceed the per share value attributed from our tangible assets less our total liabilities. Therefore, if we distributed our tangible assets to our stockholders following this offering, you would receive less value per share of common stock than you paid in this offering. Assuming an initial public offering price of $ per share (the mid-point of the range set forth on the cover page of this prospectus) the net tangible book value adjusted for the net proceeds of this offering at December 31, 2005 was approximately $ million, or approximately $ per share. Pro forma net tangible book value per share represents the amount of our total consolidated tangible assets less our total consolidated liabilities, divided by the total number of shares of common stock outstanding. Accordingly, if you purchase shares of our common stock in this offering you will suffer immediate dilution of $ per share in pro forma net tangible book value. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock and the losses we have incurred. You may suffer additional dilution to the extent outstanding options to purchase shares of our common stock are exercised or our convertible notes are converted into shares of our common stock. For more information, see "Dilution."
Our stock price may decline due to sales of shares by our other stockholders.
Sales of substantial amounts of our common stock, or the perception that these sales may occur, may adversely affect the price of our common stock and impede our ability to raise capital through the issuance of equity securities in the future. There will be shares of our common stock outstanding immediately after this offering. All shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act, subject to restrictions that may be applicable to our "affiliates," as that term is defined in Rule 144 under the Securities Act, and subject to the 180-day lock-up restrictions described in the "Underwriting" section of this prospectus. We expect a substantial portion of the shares sold in this offering, including through our proposed directed share programs, to be held by retail investors. In addition, immediately after this offering we expect that our existing investors will hold shares of our common stock and convertible notes that are convertible into shares of our common stock. Of these shares of common stock, shares may be sold into the public market after this offering pursuant to Rule 144 under the Securities Act, subject to volume limitations and other restrictions that may be applicable to some holders pursuant to that rule and subject to the 180-day lock-up restrictions applicable to holders of those shares. Substantially all of the shares held by our existing stockholders, as well as shares issuable upon conversion of our convertible notes, are subject to registration rights, and we believe these rights will be exercised. You should expect a significant number of these shares to be sold, which may decrease the price of shares of our common stock. Shares issuable upon exercise of our options also may be sold in the market in the future, subject to any restrictions on resale following underwritten
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offerings contained in our option agreements. We expect that many of these shares will be sold when these lock-ups expire. See "Shares Eligible for Future Sale."
In connection with this offering, we and our executive officers, directors, substantially all our stockholders and all of the holders of our convertible notes have entered into 180-day lock-up agreements with the underwriters of this offering. These lock-up agreements prohibit us and our executive officers, directors and such stockholders and holders of our convertible notes from selling or otherwise disposing of shares of common stock, except in limited circumstances. The terms of the lock-up agreements can be waived, at any time, by Citigroup Global Markets Inc., Deutsche Bank Securities Inc., and UBS Securities LLC, at their discretion, without prior notice or announcement, to allow us or our executive officers, directors, stockholders and holders of our convertible notes to sell shares of our common stock. If the terms of the lock-up agreements are waived, shares of our common stock will be available for sale in the public market sooner, which could reduce the price of our common stock. See "Shares Eligible for Future SaleLock-up Agreements."
Jeffrey A. Citron, our founder, Chairman, Chief Strategist and principal stockholder, will continue to exert significant influence over us.
After completion of this offering, Mr. Citron will beneficially own approximately % of our outstanding common stock. As a result, Mr. Citron will be able to exert significant influence over all matters presented to our stockholders for approval, including election and removal of our directors and change of control transactions. In addition, as our Chairman and Chief Strategist Mr. Citron has and will continue to have significant influence over our strategy. Mr. Citron's interests may not always coincide with the interests of other holders of our common stock.
The market price of our common stock may be volatile, which could cause the value of your investment to decline.
Securities markets experience significant price and volume fluctuations. This market volatility, as well as general economic conditions, could cause the market price of our common stock to fluctuate substantially. Many factors that are beyond our control may significantly affect the market price of our shares. These factors include:
Such factors may cause the market price of our common stock to decrease significantly. You may be unable to sell your shares of common stock at or above the initial public offering price.
Our certificate of incorporation, bylaws and convertible notes contain provisions that could delay or discourage a takeover attempt, which could prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
Certain provisions of our certificate of incorporation and bylaws may make it more difficult for, or have the effect of discouraging, a third party from acquiring control of us or changing our board of directors and management. See "Description of Capital StockAnti-Takeover Effects of Various
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Provisions of Delaware Law and Our Amended and Restated Certificate of Incorporation and Bylaws." These provisions include:
In addition, our convertible notes provide that, upon a change of control, holders may require us to redeem all or a portion of their convertible notes at a price equal to the principal amount of notes to be redeemed, plus any accrued and unpaid interest and potentially a premium.
Such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices. Any delay or prevention of, or significant payments required to be made upon, a change of control transaction or changes in our board of directors or management could deter potential acquirors or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements," which include information relating to future events, future financial performance, strategies, expectations, competitive environment and regulation. Words such as "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," and similar expressions, as well as statements in future tense, identify forward-looking statements. These forward-looking statements include, without limitation, statements regarding:
Forward-looking statements should not be read as a guarantee of future performance or results and will probably not be accurate indications of when such performance or results will be achieved. Forward-looking statements are based on information we have when those statements are made or our management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws.
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We expect that the net proceeds from our sale of shares of common stock in this offering will be approximately $ million, based on an estimated initial public offering price of $ per share (the mid-point of the range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 change in the initial public offering price per share would change the expected net proceeds by approximately $ million.
The primary purposes of the offering are to fund the expansion of our business, including funding marketing expenses and operating losses, and to create a public market for our common stock. In addition, we could use a portion of the proceeds of this offering to pursue acquisitions or to make strategic investments. Our management will have broad discretion in the allocation of the net proceeds of this offering. The amounts actually expended and the timing of such expenditures will depend on a number of factors, including our realization of the different elements of our growth strategy and the amount of cash generated by our operations. Pending their use to fund our expansion, the proceeds of the offering will be invested in short-term, interest-bearing securities.
In the past, we have not declared or paid cash dividends on our common stock, and we do not intend to pay any cash dividends on our common stock. Rather, we intend to retain future earnings (if any) to fund the operation and expansion of our business and for general corporate purposes. Subject to legal and contractual limits, our board of directors will make any decision as to whether to pay dividends in the future.
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The following table sets forth our cash, cash equivalents and marketable securities and capitalization as of December 31, 2005 on an actual basis and on a pro forma as adjusted basis, after giving effect to:
For purposes of the as adjusted column of the capitalization table below, we have assumed the gross proceeds from the offering will be $ million. A $ million change in the gross proceeds from this offering would change each of the cash, cash equivalents and marketable securities, total stockholders' equity (deficit) and total capitalization line items by approximately $ million.
You should read the information in this table in conjunction with "Use of Proceeds," "Dividend Policy," "Selected Historical Financial Information," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus.
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As of December 31, 2005
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Actual
|
As
adjusted |
|||||
|
(unaudited)
(in thousands, except par value) |
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Cash, cash equivalents and marketable securities | $ | 266,379 | $ | | |||
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|
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Total debt: | |||||||
Convertible notes | $ | 226,058 | $ | | |||
Derivatives embedded within convertible debt | 21,900 | | |||||
Capital lease obligations (current and long-term) | 22,431 | | |||||
|
|
||||||
Total debt | 270,389 | | |||||
|
|
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Redeemable Preferred Stock: | |||||||
Series E Redeemable Convertible Preferred Stock(1) | 195,736 | | |||||
Series D Redeemable Convertible Preferred Stock(2) | 102,722 | | |||||
Series C Redeemable Convertible Preferred Stock(3) | 38,090 | | |||||
Series B Redeemable Convertible Preferred Stock(4) | 14,489 | | |||||
Series A-2 Redeemable Convertible Preferred Stock(5) | 20,292 | | |||||
Series A-2 Convertible Redeemable Preferred Stock Warrant to purchase 900 shares, actual; | |||||||
converts into a warrant to purchase shares of common stock, proforma as adjusted | 1,557 | | |||||
Series A Redeemable Convertible Preferred Stock(6) | 15,968 | | |||||
Stock subscriptions receivable | (427 | ) | | ||||
|
|
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Total Redeemable Preferred Stock | 388,427 | | |||||
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26
27
If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after the completion of this offering.
Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock. Our net tangible book value at December 31, 2005 was $(368.5) million, or $(93.76) per share of common stock. Assuming that the shares of our common stock offered by us under this prospectus are sold at an initial public offering price of $ per share (the mid-point of the range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2005, would have been approximately $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares of common stock in this offering.
The following table illustrates this substantial and immediate per share dilution to new investors:
Assumed initial public offering price per share | $ | ||||||
Net tangible book value per share as of December 31, 2005 | $ | ||||||
Increase in net tangible book value per share attributable to new investors purchasing shares in this offering | |||||||
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Pro forma net tangible book value per share after this offering | |||||||
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Dilution per share to new investors | $ | ||||||
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The following table summarizes, as of December 31, 2005, on a pro forma basis after giving effect to this offering, the total number of shares of common stock purchased from us, the total consideration paid to us, assuming an initial public offering price of $ per share (before deducting the estimated underwriting discounts and commissions and offering expenses payable by us in this offering), and the average price per share paid by existing stockholders and by new investors purchasing shares in this offering:
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Shares Purchased
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Total Consideration
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Average
Price Per Share |
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Number
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Percent
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Amount
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Percent
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Existing stockholders | |||||||||||
New investors | |||||||||||
Total |
If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of common stock would be approximately $ and the dilution in pro forma net tangible book value per share of common stock to new investors would be $ .
A $1.00 change in the assumed public offering price of $ per share of our common stock would change our pro forma net tangible book value after giving effect to the offering by $ million, the pro forma net tangible book value per share of our common stock after giving effect to this offering by $ and the dilution in pro forma net tangible book value per share of our common stock to new investors in this offering by $ , assuming no change to the number of shares of common stock offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commission and other expenses of the offering. The pro forma information discussed above is illustrative only. Our net tangible book value following the completion
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of the offering is subject to adjustment based on the actual offering price of our common stock and other terms of this offering determined at pricing.
The discussion and tables above exclude the following:
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SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth our selected historical financial information. The statement of operations data for the years ended December 31, 2003, 2004 and 2005 and the balance sheet data as of December 31, 2004 and 2005 are derived from our audited consolidated financial statements and related notes included in the back of this prospectus. The statement of operations data for the years ended December 31, 2001 and 2002 and the balance sheet data as of December 31, 2001, 2002 and 2003 are derived from our audited consolidated financial statements and related notes not included in this prospectus.
The results included below and elsewhere in this prospectus are not necessarily indicative of our future performance. You should read this information together with "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus.
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For the Years Ended December 31,
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2001(1)
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2002
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2003
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2004
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2005
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(in thousands, except per share amounts) | ||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||
Operating Revenues: | ||||||||||||||||||
Telephony services | $ | | $ | 797 | $ | 16,905 | $ | 75,864 | $ | 258,165 | ||||||||
Customer equipment and shipping | | 174 | 1,817 | 3,844 | 11,031 | |||||||||||||
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| 971 | 18,722 | 79,708 | 269,196 | ||||||||||||||
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Operating Expenses: | ||||||||||||||||||
Direct cost of telephony services | | 1,599 | 8,556 | 23,209 | 84,050 | |||||||||||||
Direct cost of goods sold | | 855 | 4,867 | 18,878 | 40,441 | |||||||||||||
Selling, general and administrative | 6,846 | 7,846 | 19,174 | 49,186 | 154,716 | |||||||||||||
Marketing | 50 | 1,983 | 11,819 | 56,075 | 243,404 | |||||||||||||
Depreciation and amortization | 550 | 1,114 | 2,367 | 3,907 | 11,122 | |||||||||||||
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7,446 | 13,397 | 46,783 | 151,255 | 533,733 | ||||||||||||||
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Loss from operations |
|
|
(7,446 |
) |
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(12,426 |
) |
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(28,061 |
) |
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(71,547 |
) |
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(264,537 |
) |
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Net loss |
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$ |
(7,217 |
) |
$ |
(12,742 |
) |
$ |
(29,974 |
) |
$ |
(69,921 |
) |
$ |
(261,334 |
) |
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Net loss per common share calculation: | ||||||||||||||||||
Net loss | $ | (7,217 | ) | $ | (12,742 | ) | $ | (29,974 | ) | $ | (69,921 | ) | $ | (261,334 | ) | |||
Imputed dividend on preferred shares | | | | | (605 | ) | ||||||||||||
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Net loss attributable to common shareholders | $ | (7,217 | ) | $ | (12,742 | ) | $ | (29,974 | ) | $ | (69,921 | ) | $ | (261,939 | ) | |||
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Net loss per common share: |
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|
|
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Basic and diluted | $ | (2.03 | ) | $ | (3.20 | ) | $ | (7.55 | ) | $ | (18.36 | ) | $ | (67.72 | ) | |||
Weighted-average common shares outstanding: | ||||||||||||||||||
Basic and diluted | 3,558 | 3,981 | 3,970 | 3,808 | 3,868 | |||||||||||||
Statement of Cash Flow Data: |
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|
|
|
|
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||
Net cash used in operating activities | $ | (6,284 | ) | $ | (11,140 | ) | $ | (16,583 | ) | $ | (38,600 | ) | $ | (189,765 | ) | |||
Net cash used in investing activities | (2,812 | ) | (4,935 | ) | (4,933 | ) | (73,707 | ) | (154,638 | ) | ||||||||
Net cash provided by financing activities | 11,134 | 14,804 | 34,226 | 141,094 | 434,006 |
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December 31,
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|
2001 |
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2002 |
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2003 |
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2004 |
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2005 |
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(dollars in thousands) | |||||||||||||||||
Balance Sheet Data (at period end): | |||||||||||||||||
Cash, cash equivalents and marketable securities | $ | 2,806 | $ | 1,536 | $ | 14,245 | $ | 105,768 | $ | 266,379 | |||||||
Property and equipment, net | 2,892 | 5,262 | 9,325 | 16,290 | 103,638 | ||||||||||||
Total assets | 5,898 | 10,583 | 28,311 | 136,493 | 446,882 | ||||||||||||
Total long-term debt(2) | 104 | 31 | 5 | | 269,616 | ||||||||||||
Total liabilities | 886 | 2,952 | 14,038 | 51,045 | 426,940 | ||||||||||||
Total redeemable preferred stock | | 15,968 | 51,409 | 192,521 | 388,427 | ||||||||||||
Total stockholders' equity (deficit) | 5,012 | (8,337 | ) | (37,136 | ) | (107,073 | ) | (368,485 | ) |
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Historical Financial Data" and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under "Risk Factors," "Special Note Regarding Forward-Looking Statements" and elsewhere in this prospectus.
Overview
We are a leading provider of broadband telephone services with over 1.6 million subscriber lines as of April 1, 2006. Our services use Voice over Internet Protocol, or VoIP, technology, which enables voice communications over the Internet through the conversion and compression of voice signals into data packets. In order to use our service offerings, customers must have access to a broadband Internet connection with sufficient bandwidth (generally 60 kilobits per second or more) for transmitting those data packets.
We earn revenue and generate cash primarily through our broadband telephone service plans, each of which offers a different pricing structure based on a fixed monthly fee. We generate most of our revenue from those fees, substantially all of which we bill to our customers' credit cards one month in advance.
We have invested heavily in an integrated marketing strategy to build a strong brand awareness that supports our sales and distribution efforts. We acquire customers through a number of sales channels, including our websites, our toll free numbers and our presence in major retailers located in the United States, Canada and the United Kingdom with whom we have developed relationships. We also acquire a significant number of new customers through Refer-a-Friend, our online customer referral program.
We launched our service in the United States in October 2002, in Canada in November 2004 and in the United Kingdom in May 2005. Since our U.S. launch, we have experienced rapid revenue and subscriber line growth. Our revenue was $18.7 million in 2003, $79.7 million in 2004 and $269.2 million in 2005.
While our revenue has grown rapidly, we have incurred an accumulated deficit of $382.3 million from our inception through December 31, 2005. Although our net losses initially were driven primarily by start-up costs and the cost of developing our technology, more recently our net losses have been driven by our growth strategy. In order to grow our customer base and revenue, we have chosen to increase our marketing expenses significantly, rather than seeking to generate net income. We are pursuing growth, rather than profitability, in the near term to capitalize on the current expansion of the broadband and VoIP markets and to establish and maintain a leading position in the market for broadband telephone services. We incurred marketing expense of $243.4 million and a net loss of $261.3 million in 2005. We intend to continue to pursue growth because we believe it will position us as a strong competitor in the long term. This strategy, however, will result in further net losses, which generally have increased quarterly since our inception and amounted to $71.7 million for the quarter ended December 31, 2005.
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Trends in Our Industry and Business
A number of trends in our industry and business have a significant effect on our results of operations and are important to an understanding of our financial statements. These trends include:
Broadband adoption. The number of U.S. households with broadband Internet access has grown significantly. We expect this trend to continue. We benefit from this trend because our service requires a broadband Internet connection and our potential addressable market increases as broadband adoption increases.
Changing competitive landscape. We are facing increasing competition from other companies that offer multiple services such as cable television, voice and broadband Internet service. Several of these competitors are offering VoIP or other voice services as part of a bundle, in which they offer voice services at a lower price than we do to new subscribers. In addition, several of these competitors are working to develop new integrated offerings that we cannot provide and that could make their services more attractive to customers. These offerings could negatively affect our ability to acquire new customers or retain our existing customers.
Subscriber line growth. Since our launch, we have experienced rapid subscriber line growth. For example, we grew from 85,717 subscriber lines as of December 31, 2003 to 390,566 as of December 31, 2004, and last year more than tripled our subscriber lines to 1,269,038 as of December 31, 2005. We believe we will continue to add a significant number of subscriber lines in future periods; however, we do not expect to sustain our historical subscriber line growth rate on a percentage basis due to a combination of increased competition, a significantly larger and growing customer base and increasing saturation among our initial target customer base, which included many early adopters.
Average monthly customer churn. In 2005, we experienced an increase to our average monthly customer churn rate to 2.05% from 1.82% in 2004. We believe that our churn will fluctuate over time and may increase as we shift our marketing focus from early adopters to mainstream customers and acquire customers from new sources, such as outbound telemarketing, that historically have had a higher churn rate.
Average monthly revenue per line. Our average monthly revenue per line decreased to $27.03 in 2005 from $27.89 in 2004 as a result of our reduction in the price of our residential unlimited plan from $34.99 to $29.99 in May 2004 and to $24.99 in October 2004. Over the course of 2005, our average monthly revenue per line remained steady as there were no price reductions to any of our monthly plans. For 2006, we believe that our average monthly revenue per line will remain steady or slightly increase because we recently began charging customers an Emergency 911 Cost Recovery fee.
Average monthly direct cost of telephony services per line. In 2004, we were able to reduce our average monthly direct cost of telephony services per line from $12.06 for the three months ended March 31, 2004 to $7.73 for the three months ended December 31, 2004. These decreases were driven largely by reduced vendor pricing associated with our increased purchasing power and, to a lesser extent, cost savings associated with an increasing portion of calls between Vonage users, which have no termination costs associated with them. Our average monthly direct cost of telephony services per line increased from $7.83 for the three months ended March 31, 2005 to $8.50 for the three months ended December 31, 2005, and it might increase again in 2006. These increases have been driven by our costs of establishing compliance systems with respect to FCC regulations on E-911 services, by ongoing operating costs associated with providing E-911 services and by costs related to local number portability. In response to these increases, we began charging customers a $0.99 per month Emergency 911 Cost Recovery fee on March 7, 2006. We also expect to begin collecting sales tax from our customers in the near future and expect to charge our customers state and local 911 fees. This will
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have the effect of increasing the cost of our services to our customers, which will decrease any price advantage we may have.
Regulation. Our business has developed in an environment largely free from regulation. However, the United States and other countries have begun to examine how VoIP services should be regulated, and a number of initiatives could have an impact on our business. For example, the FCC has concluded that wireline broadband Internet access, such as DSL and Internet access provided by cable companies, is an information service and is subject to lighter regulation than telecommunications services. This order may give providers of wireline broadband Internet access the right to discriminate against our services, charge their customers an extra fee to use our service or block our service. We believe it is unlikely that this will occur on a widespread basis, but if it does it would have a material adverse effect on us. Other regulatory initiatives include the assertion of state regulatory authority over us, FCC rulemaking regarding emergency calling services and proposed reforms for the intercarrier compensation system. Complying with regulatory developments will impact our business by increasing our operating expenses, including legal fees, requiring us to make significant capital expenditures or increasing the taxes and regulatory fees we pay. For additional information about these and other regulatory risks we face, see "Regulation" elsewhere in this prospectus.
E-911 roll-out. As of April 1, 2006, we were providing E-911 services to approximately 75% of our U.S. subscriber lines. We expect to complete the E-911 roll-out to nearly all of our remaining subscriber lines within the year. If the FCC orders us to disconnect customers or stop accepting new customers in areas where we have not yet implemented E-911 capability, it would reduce our subscriber growth while we work to complete the roll-out. This would also result in an increase in our marketing cost per gross subscriber line addition, since most of our marketing programs are national in nature and we cannot significantly reduce our marketing costs in areas in which we could not accept new customers.
Operating Revenues
Operating revenues consists of telephony services revenue and customer equipment and shipping revenue.
Telephony services revenue. Substantially all of our operating revenues are telephony services revenue. In the United States, we offer two residential plans, "Residential Premium Unlimited" and "Residential Basic 500," and two small office and home office plans, "Small Business Unlimited" and "Small Business Basic." Each of our unlimited plans offers unlimited domestic calling, subject to certain restrictions, and each of our basic plans offers a limited number of calling minutes per month. Under our basic plans, we charge on a per minute basis when the number of calling minutes included in the plan is exceeded for a particular month. For all of our U.S. plans, we charge on a per minute basis for international calls to destinations other than Puerto Rico and Canada. These per minute fees are not included in our monthly subscription fees. We offer similar plans in Canada and the United Kingdom.
We derive most of our telephony services revenue from monthly subscription fees that we charge our customers under our service plans. We also offer residential fax service, virtual phone numbers, toll free numbers and other services, for each of which we charge an additional monthly fee. One business fax line is included with each of our two small office and home office plans, but we charge monthly fees for additional business fax lines. We automatically charge these fees to our customers' credit cards monthly in advance. We automatically charge the per minute fees not included in our monthly subscription fees to our customers' credit cards monthly in arrears unless they exceed a certain dollar threshold, in which case they are charged immediately.
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By collecting monthly subscription fees in advance and certain other charges immediately after they are incurred, we are able to reduce the amount of accounts receivable that we have outstanding, thus allowing us to have lower working capital requirements. Collecting in this manner also helps us mitigate bad debt exposure. If a customer's credit card is declined, we generally suspend international calling capabilities as well as the customer's ability to incur domestic usage charges in excess of their plan minutes. Historically, in most cases, we are able to correct the problem with the customer within the current monthly billing cycle. If the customer's credit card cannot be successfully processed during the current and subsequent month's billing cycle, we then terminate the account.
We also generate revenue by charging a fee for activating service. Through June 2005, we charged an activation fee to customers in the direct channel, that is where the customer purchases equipment directly from the Company. Beginning in July 2005, we also began charging an activation fee in the retail channel, that is where the customer purchases equipment from retail stores. Customer activation fees, along with the related costs for customer equipment in the direct channel and for rebates and retailer commissions in the retail channel up to but not exceeding the activation fee, are deferred and amortized over the estimated average customer relationship period. Through December 31, 2004, we estimated that this period would be 30 months based upon comparisons to other telecommunications companies. For 2005, the customer relationship period was reevaluated based on our experience to date and we now estimate it will be 60 months. We have applied the 60-month customer relationship period on a prospective basis beginning January 1, 2005.
In the United States, we charge a regulatory recovery fee on a monthly basis to defray the costs associated with regulatory compliance and related litigation and to cover taxes that we are charged by the suppliers of telecommunications services. We record this fee as revenue.
Prior to June 30, 2005, we generally charged a disconnect fee to customers who did not return their customer equipment to us upon termination of service, regardless of the length of time between activation and termination. On July 1, 2005, we changed our termination policy. We no longer accept returns of any customer equipment after 30 days, and we charge a disconnect fee to customers who terminate their service within one year of activation. Disconnect fees are recorded as revenue and are recognized at the time the customer terminates service.
Telephony services revenue is offset by the cost of certain customer acquisition activities, such as rebates and promotions.
Customer equipment and shipping revenue. Customer equipment and shipping revenue consists of revenue from sales of customer equipment to our wholesalers or directly to customers. In addition, customer equipment and shipping revenue includes the fees that we charge our customers for shipping any equipment to them.
Operating Expenses
Operating expenses consists of direct cost of telephony services, direct cost of goods sold, selling, general and administrative expense, marketing expense and depreciation and amortization.
Direct cost of telephony services. Direct cost of telephony services primarily consists of fees that we pay to third parties on an ongoing basis in order to provide our services. These fees include:
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Direct cost of goods sold. Direct cost of goods sold primarily consists of costs that we incur when a customer first subscribes to our service. These costs include:
Selling, general and administrative expense. Selling, general and administrative expense includes:
We anticipate an increase in our selling, general and administrative expense as we hire additional personnel to address our growing subscriber base and to handle the obligations of a public company. For 2006, we expect selling, general and administrative expense to increase between 45% and 55% over our selling, general and administrative expense of $154.7 million for 2005. We expect selling, general and administrative expense to decrease as a percentage of revenue in 2006.
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Marketing expense. Marketing expense consists of:
For 2006 we expect to spend between $360 million and $380 million for marketing expense, compared to $243.4 million in 2005. Because our marketing commitments are generally six weeks or less in duration, we are able to significantly reduce marketing expense relatively quickly if it becomes prudent to do so.
Depreciation and amortization expenses. Depreciation and amortization expenses include:
Other Income (Expense)
Other Income (Expense) consists of:
For 2006 and subsequent years through 2010, we will have annual interest expense on our convertible notes of at least $16.3 million unless the convertible notes are converted. This amount will increase if we pay interest in-kind on these notes.
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Key Operating Data
The following table contains certain key operating data that our management uses to measure the growth of our business and our operating performance:
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For the Years Ended
December 31, |
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|
2003
|
2004
|
2005
|
|||||||
Operating and Other Data (unaudited): | ||||||||||
Gross subscriber line additions | 91,522 | 364,214 | 1,099,641 | |||||||
Net subscriber line additions | 77,936 | 304,849 | 878,472 | |||||||
Subscriber lines(1) | 85,717 | 390,566 | 1,269,038 | |||||||
Average monthly customer churn | 2.48 | % | 1.82 | % | 2.05 | % | ||||
Average monthly revenue per line | $ | 33.37 | $ | 27.89 | $ | 27.03 | ||||
Average monthly telephony services revenue per line | $ | 30.13 | $ | 26.55 | $ | 25.93 | ||||
Average monthly direct cost of telephony services per line | $ | 15.25 | $ | 8.12 | $ | 8.44 | ||||
Marketing cost per gross subscriber line addition | $ | 129.14 | $ | 153.96 | $ | 221.35 | ||||
Employees(1) | 189 | 648 | 1,355 |
Gross subscriber line additions. Gross subscriber line additions for a particular period are calculated by taking the net subscriber line additions during that particular period and adding to that the number of subscriber lines that terminated during that period. This number does not include subscriber lines both added and terminated during the period, where termination occurred within the first 30 days after activation. The number does include, however, subscriber lines added during the period that are terminated within 30 days of activation but after the end of the period.
Net subscriber line additions. Net subscriber line additions for a particular period reflect the number of subscriber lines at the end of the period, less the number of subscriber lines at the beginning of the period.
Subscriber lines. Our subscriber lines include, as of a particular date, all subscriber lines from which a customer can make an outbound telephone call on that date. Our subscriber lines include fax lines and SoftPhones but do not include our virtual phone numbers or toll free numbers, which only allow inbound telephone calls to customers. Our subscriber lines increased by 304,849 lines for the year ended December 31, 2004, and further increased by 878,472 lines for the year ended December 31, 2005. The increase in our subscriber lines was directly related to an increase in our online advertising spending and our expansion to other media, such as television, that have a broader customer reach. The increase was also due to expanded distribution through a larger retail distribution network.
Average monthly customer churn. Average monthly customer churn for a particular period is calculated by dividing the number of customers that terminated during that period by the simple average number of customers during the period, and dividing the result by the number of months in the period. The simple average number of customers during the period is the number of customers on the first day of the period, plus the number of customers on the last day of the period, divided by two. Terminations, as used in the calculation of churn statistics, do not include customers terminated during the period if termination occurred within the first 30 days after activation. Our average monthly customer churn was 2.05% for the year ended December 31, 2005 and 1.82% for the year ended December 31, 2004. We monitor churn on a daily basis and use it as an indicator of the level of customer satisfaction. Other companies may calculate churn differently, and their churn data may not be directly comparable to ours. Customers who have been with us for a year or more tend to have a significantly lower churn rate than customers who have not. This means that during periods of rapid
38
customer growth, our churn rate is likely to increase. In addition, our churn will fluctuate over time and may increase as we shift our marketing focus from early adopters to mainstream customers and acquire customers from new sources, such as outbound telemarketing, that historically have had a higher churn rate. Also, our churn rate could be negatively affected by increased competition.
Average monthly revenue per line. Average monthly revenue per line for a particular period is calculated by dividing our total revenue for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. The simple average number of subscriber lines for the period is the number of subscriber lines on the first day of the period, plus the number of subscriber lines on the last day of the period, divided by two. Our average monthly revenue per line was $27.89 and $27.03 for the years ended December 31, 2004 and 2005, respectively. This decrease was primarily caused by reductions in the price of our residential unlimited plan, our most popular service plan during 2004. The price for this plan was reduced from $34.99 per month to $29.99 per month in May 2004 and to $24.99 per month in October 2004. Each price reduction applied to existing customers as well as new customers. We lowered our prices as we sought to attract a significant stream of new customers to our residential unlimited plan and migrate existing customers from our lower priced residential basic plan to this higher priced plan.
Average monthly telephony services revenue per line. Average monthly telephony services revenue per line for a particular period is calculated by dividing our total telephony services revenue for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. Our average monthly telephony services revenue per line was $26.55 and $25.93 for the years ended December 31, 2004 and 2005, respectively. This decrease was primarily caused by reductions in the price of our residential unlimited plan, our most popular service plan during 2004, as discussed above under "Average monthly revenue per line." During 2005, our average monthly telephony services revenue per line remained steady as there were no price reductions to any of our calling plans. For 2006, we believe that our average monthly telephony services revenue per line will remain steady or slightly increase because we have recently imposed an Emergency 911 Cost Recovery fee on customers.
Average monthly direct cost of telephony services per line. Average monthly direct cost of telephony services per line for a particular period is calculated by dividing our direct cost of telephony services for that period by the simple average number of subscriber lines for the period, and dividing the result by the number of months in the period. We use the average monthly direct cost of telephony services per 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 from $7.83 for the three months ended March 31, 2005 to $8.50 for the three months ended December 31, 2005, and it might increase again in 2006. These increases have been driven by our costs of establishing compliance systems with respect to FCC regulations on E-911 services, by ongoing operating costs associated with providing E-911 services and by costs related to local number portability.
Marketing cost per gross subscriber line addition. Marketing cost per gross subscriber line addition is calculated by dividing our marketing expense for a particular period by the number of gross subscriber line additions during the period. Marketing expense does not include the cost of certain customer acquisition activities, such as rebates and promotions, which are accounted for as an offset to revenues, or customer equipment subsidies, which are accounted for as direct cost of goods sold. As a result, it does not represent the full cost to us of obtaining a new customer. Our marketing cost per gross subscriber line addition has increased in recent periods and may continue to increase in 2006 for several reasons. We will increase our advertising spending and have added advertising in more expensive media with a broader reach, such as television, to enhance our brand awareness. In addition, we believe it is generally more expensive to acquire mainstream consumers than early adopters of new technologies and we have increased our focus on more mainstream consumers.
39
When we increase our total marketing expense, we generally experience, over the short term, a significant increase in marketing cost per gross subscriber line addition. However, we track the efficiency of our marketing programs and make adjustments on how we allocate our funds. These adjustments can result in a subsequent slight decrease in marketing cost per gross subscriber line addition after the initial increase in marketing expense.
Other Operating Data . In addition to traditional metrics for evaluating financial performance, we also closely monitor the results from operations from existing customers, prior to our marketing expense and net equipment subsidy associated with attracting new customers. While we have incurred substantial and increasing net losses over the prior three year period, we have been successful in increasing the income resulting from operations prior to the inclusion of the marketing expense and net equipment subsidy. These excluded items remain largely in our discretionary control.
Employees. Employees represent the number of personnel that are on our payroll and exclude temporary or outsourced labor. One challenge we face in enhancing the efficiency of our selling, general and administrative expense is our high turn-over among our customer care employees.
Results of Operations
Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004
The following table sets forth, as a percentage of consolidated operating revenues, our consolidated statements of operations for the periods indicated:
|
For the Years Ended
December 31, |
||||
---|---|---|---|---|---|
|
2004
|
2005
|
|||
Operating Revenues: | |||||
Telephony services | 95 | % | 96 | % | |
Customer equipment and shipping | 5 | 4 | |||
|
|
||||
100 | 100 | ||||
|
|
||||
Operating Expenses: |
|
|
|
|
|
Direct cost of telephony services | 29 | 31 | |||
Direct cost of goods sold | 24 | 15 | |||
Selling, general and administrative | 62 | 58 | |||
Marketing | 70 | 90 | |||
Depreciation and amortization | 5 | 4 | |||
|
|
||||
190 | 198 | ||||
|
|
||||
Loss from operations | (90 | ) | (98 | ) | |
|
|
||||
Other Income (Expense): |
|
|
|
|
|
Interest income | 1 | 1 | |||
Interest expense | | | |||
Change in fair value of derivatives embedded within convertible notes | | | |||
Other, net | | | |||
Debt conversion expense | | | |||
|
|
||||
1 | 1 | ||||
|
|
||||
Loss before income tax |
|
(89 |
) |
(97 |
) |
Income tax |
|
1 |
|
|
|
|
|
||||
Net loss | (88 | )% | (97 | )% | |
|
|
40
Telephony Services Revenue and Direct Cost of Telephony Services
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2004
|
2005
|
||||||||||
Telephony services revenue | $ | 75,864 | $ | 258,165 | $ | 182,301 | 240 | % | ||||
Direct cost of telephony services | 23,209 | 84,050 | 60,841 | 262 | ||||||||
|
|
|
||||||||||
Telephony services gross margin | $ | 52,655 | $ | 174,115 | $ | 121,460 | 231 | % | ||||
|
|
|
||||||||||
Telephony services gross margin
percentage |
69% | 67% | ||||||||||
|
|
Telephony services revenue. The increase in telephony services revenue of $182.3 million, or 240%, was primarily due to an increase of $147.5 million in monthly subscription fees resulting from an increased number of subscriber lines, which grew from 390,566 at December 31, 2004 to 1,269,038 at December 31, 2005. The growing number of subscriber lines also generated additional activation fee revenue of $3.6 million, increased revenue of $20.4 million from a higher volume of international calling, $4.5 million from customers exceeding their plan minutes and $11.5 million in regulatory fees collected from customers. Also, add-on features to our service plans generated an increase of $7.4 million and we had a $4.5 million increase in the fees we charge for disconnecting our service. The increase in revenue from additional subscriber lines was partially offset by customer credits, rebates and other promotional items of $17.6 million and reductions in the monthly price for our residential unlimited plan from $34.99 to $29.99 in May 2004 and to $24.99 in October 2004. We believe that telephony services revenue will increase in 2006, as we expect an increase in the number of subscribers. However, we might not experience the same rapid growth as in prior years.
Direct cost of telephony services. The increase in direct cost of telephony services of $60.8 million, or 262%, was primarily due to the increase in the number of subscriber lines and the further expansion of our network, which increased the costs that we pay other phone companies for terminating phone calls by $37.8 million, including $3.0 million for establishing compliance systems for E-911 services and for E-911 call processing. Also, our network costs for co-locating in other carriers' facilities, for leasing phone numbers, routing calls on the Internet, transferring calls to and from the Internet to the public switched telephone network and porting phone numbers increased by $23.0 million for the year ended December 31, 2005. These increases were offset in part by reduced vendor pricing.
Customer Equipment and Shipping Revenue and Direct Cost of Goods Sold
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2004
|
2005
|
||||||||||
Customer equipment and shipping revenue | $ | 3,844 | $ | 11,031 | $ | 7,187 | 187 | % | ||||
Direct cost of goods sold | 18,878 | 40,441 | 21,563 | 114 | ||||||||
|
|
|
||||||||||
Customer equipment and shipping gross margin | $ | (15,034 | ) | $ | (29,410 | ) | $ | (14,376 | ) | 96 | % | |
|
|
|
Customer equipment and shipping revenue. Our customer equipment and shipping revenue increased by $7.2 million, or 187%, primarily due to an increase in the number of new customers subscribing to our services, resulting in incremental shipping revenue of $5.4 million. Customer equipment sales increased by $1.8 million, as we began to offer our direct customers the option of upgrading their customer equipment at the time of customer sign-up for an additional fee in the fourth quarter of 2005. We expect that customer equipment and shipping revenue will increase as a result of customer equipment upgrades.
41
Direct cost of goods sold. The increase in direct cost of goods sold of $21.6 million, or 114%, was due largely to the increase in the number of new customers subscribing to our services, which resulted in additional costs of $9.7 million associated with our provision of customer equipment and $3.5 million in additional amortization of customer equipment. In addition, as part of a promotion during the first part of 2005, we waived the activation fee for certain customers, which resulted in us expensing the entire customer equipment cost of approximately $2.9 million. Typically, we defer a portion of the customer equipment expense to the extent of activation fee revenue, and we amortize the revenue and costs equally over the estimated life of the customer. In the absence of an activation fee, the entire customer equipment cost is expensed immediately. See "Critical Accounting Policies and Estimates." Also, the costs of shipping customer equipment increased by $5.5 million for the 2005 compared to 2004.
Selling, General and Administrative
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2004
|
2005
|
||||||||||
Selling, general and administrative | $ | 49,186 | $ | 154,716 | $ | 105,530 | 215 | % |
Selling, general and administrative. The increase in selling, general and administrative expenses of $105.5 million, or 215%, was primarily due to an increase in the number of our employees, which grew to 1,355 full time employees at December 31, 2005 from 648 at December 31, 2004, and an increase in outsourced labor. This increase resulted in higher wages, employee-related benefits and fees for recruitment of new employees of $53.8 million. As a result of our high turn-over among our customer care employees, we have experienced an increase in training and recruiting costs. Also, we experienced an increase in rent, facilities and other administrative expenses of $9.4 million partially for maintenance of two facilities in November and December 2005 as we moved to our new headquarters. In addition, we had an increase of $18.4 million in legal, consulting and other professional expenses as we address regulatory matters and related litigation, E-911 compliance, network development and Sarbanes-Oxley compliance. As we continued to add customers, our credit card fees increased by $7.6 million, and other customer-related expenses, such as our customer help number and retail store support, increased by $5.9 million. We also increased by $8.0 million, compared to 2004, our expense for what we believe we potentially might owe for sales taxes. While selling, general and administrative expenses have increased, they have decreased as a percentage of revenue from 62% in 2004 to 58% in 2005. For 2006, we believe that selling, general and administrative expenses will increase as we expect an increase in the number of our employees and outsourced labor. We also expect additional costs associated with our new headquarters and being a public company, and we expect an increase in credit card fees as the number of our subscribers and revenues grow. However, we expect these expenses to decrease as a percentage of revenue.
Marketing
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2004
|
2005
|
||||||||||
Marketing | $ | 56,075 | $ | 243,404 | $ | 187,329 | 334 | % |
Marketing. The increase in marketing expense of $187.3 million, or 334%, was primarily due to an increase in online advertising spending and our expansion to other media, such as television, that have a broader customer reach. The increase in costs relating to advertising was $152.4 million, or 81% of
42
the total marketing expense increase. We also had increased costs of $9.9 million in telemarketing fees, $8.3 million for advertising agency fees, $2.6 million for marketing development fund fees and $3.3 million in connection with our Refer-a-Friend program. In addition, we had increased costs of $8.9 million related to our retail channel, which was launched toward the end of the second quarter of 2004 and has since grown significantly. The increased costs consist of advertisements and in-store placement fees as well as activation commissions to retailers, which increased as the number of subscribers from the retail channel increased. For 2006, we will continue to incur a significant amount of marketing costs as we pursue our growth strategy of increasing our revenue and subscriber base.
Depreciation and Amortization
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2004
|
2005
|
||||||||||
Depreciation and amortization | $ | 3,907 | $ | 11,122 | $ | 7,215 | 185 | % |
Depreciation and amortization. The increase in depreciation and amortization of $7.2 million, or 185%, was primarily due to an increase in capital expenditures for the continued expansion of our network, system enhancements for customer care and computer equipment for our new employees.
Other Income (Expense)
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2004
|
2005
|
||||||||||
Interest income | $ | 1,135 | $ | 4,347 | $ | 3,212 | 283 | % | ||||
Interest expense | (5 | ) | (1,159 | ) | (1,154 | ) | * | |||||
Change in fair value of derivatives embedded within convertible notes | | 66 | 66 | * | ||||||||
Other, net | 21 | (441 | ) | (462 | ) | * | ||||||
|
|
|
||||||||||
$ | 1,151 | $ | 2,813 | $ | 1,662 | 144 | % | |||||
|
|
|
Interest income. The increase in interest income of $3.2 million was primarily due to an increase in cash, cash equivalents and marketable securities from our convertible preferred stock offerings.
Interest expense. The increase in interest expense of $1.2 million was primarily related to two weeks of interest on our convertible notes that were issued in December 2005. Interest expense will increase significantly in 2006 as we will incur a full year of interest expense on our convertible notes.
Other, net. The increase in other, net was primarily due to the loss on the disposal of property and equipment relating to our relocation to our new headquarters.
Provision for Income Taxes
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2004
|
2005
|
||||||||||
Income tax benefit | $ | 475 | $ | 390 | $ | (85 | ) | (18 | )% |
43
Provision for income taxes. We had net losses for financial reporting purposes, which created deferred tax assets that can be used to offset future income taxes. Recognition of deferred tax assets will require generation of future taxable income. There can be no assurance that we will generate earnings in future years. Therefore, we established a valuation allowance for all of our deferred tax assets, which was $149.3 million as of December 31, 2005.
We participated in the State of New Jersey's corporation business tax benefit certificate transfer program, which allows certain high technology and biotechnology companies to transfer unused New Jersey net operating loss carryovers to other New Jersey corporation business taxpayers. During 2003 and 2004, we submitted an application to the New Jersey Economic Development Authority, or EDA, to participate in the program and the application was approved. The EDA then issued a certificate certifying our eligibility to participate in the program. The program requires that a purchaser pay at least 75% of the amount of the surrendered tax benefit. For tax years 2002, 2003 and 2004, we sold approximately $451, $2,437, $6,207 respectively of our New Jersey State net operating loss carryforwards for a recognized benefit of approximately $221 in 2003 and $475 in 2004. Although we cannot participate in this program for net operating losses derived in 2005 due to program cap limits, the EDA did approve during 2005 an additional sale of 2002 and 2003 net operating losses in the amount of $5,101 that resulted in a benefit of $390. Collectively, all transactions represent approximately 82% of the surrendered tax benefit each year and have been recognized in the year received.
We had net operating loss carryforwards for U.S. federal and state tax purposes of approximately $320.0 million and $305.8 million, respectively, expiring at various times from the years ending 2020 through 2025. In addition, we had net operating loss carryforwards for Canadian tax purposes of $21.2 million expiring in 2011 and 2012. We also had net operating loss carryforwards for U.K. tax purposes of $6.4 million with no expiration date.
Net Loss
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2004
|
2005
|
||||||||||
Net loss | $ | (69,921 | ) | $ | (261,334 | ) | $ | (191,413 | ) | 274 | % |
Because the increases in expenses exceeded the increases in revenues described above, our net loss increased by $191.4 million, or 274%, to $261.3 million for 2005 from $69.9 million for 2004.
44
Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003
The following table sets forth, as a percentage of consolidated operating revenues, our consolidated statements of operations for the periods indicated.
|
For the Years Ended
December 31, |
||||
---|---|---|---|---|---|
|
2003
|
2004
|
|||
Operating Revenues: | |||||
Telephony services | 90 | % | 95 | % | |
Customer equipment and shipping | 10 | 5 | |||
|
|
||||
100 | 100 | ||||
|
|
||||
Operating Expenses: |
|
|
|
|
|
Direct cost of telephony services | 46 | 29 | |||
Direct cost of goods sold | 26 | 24 | |||
Selling, general and administrative | 102 | 62 | |||
Marketing | 63 | 70 | |||
Depreciation and amortization | 13 | 5 | |||
|
|
||||
250 | 190 | ||||
|
|
||||
Loss from operations | (150 | ) | (90 | ) | |
|
|
||||
Other Income (Expense): |
|
|
|
|
|
Interest income | 1 | 1 | |||
Interest expense | (4 | ) | | ||
Other, net | | | |||
Debt conversion expense | (8 | ) | | ||
|
|
||||
(11 | ) | 1 | |||
Loss before income tax benefit |
|
(161 |
) |
(89 |
) |
Income tax benefit |
|
1 |
|
1 |
|
|
|
||||
Net loss | (160 | )% | (88 | )% | |
|
|
Telephony Services Revenue and Direct Cost of Telephony Services
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2003
|
2004
|
||||||||||
Telephony services revenue | $ | 16,905 | $ | 75,864 | $ | 58,959 | 349 | % | ||||
Direct cost of telephony services | 8,556 | 23,209 | 14,653 | 171 | ||||||||
|
|
|
||||||||||
Telephony services revenue gross margin | $ | 8,349 | $ | 52,655 | $ | 44,306 | 531 | % | ||||
|
|
|
||||||||||
Telephony services revenue gross margin percentage | 49 | % | 69 | % | ||||||||
|
|
Telephony services revenue. The increase in telephony services revenue of $59.0 million, or 349%, was primarily related to an increase in monthly subscription fees of $44.6 million resulting from an increased number of subscriber lines, which grew from 85,717 at December 31, 2003 to 390,566 at December 31, 2004. The growing number of subscriber lines also generated additional activation fee revenue of $2.0 million and increased revenue of $7.4 million from a higher volume of international calling. The increase in revenue from additional subscriber lines was partially offset by reductions in the
45
monthly price for our residential unlimited plan from $39.99 to $34.99 in September 2003, to $29.99 in May 2004 and to $24.99 in October 2004.
Direct cost of telephony services. The increase in direct cost of telephony services of $14.7 million, or 171%, was primarily due to the increase in the number of subscriber lines. As our customers made more calls, the costs that we pay other phone companies for terminating phone calls increased by $10.0 million. Also, our network costs for co-locating in other carriers' facilities, leasing phone numbers, routing calls on the Internet and transferring calls to and from the Internet to the public switched telephone network increased by $5.4 million. These increases were offset in part by decreased prices from our vendors. While these costs have increased, they have decreased as a percentage of revenue from 46% for 2003 to 29% for 2004. In addition, our telephony services revenue gross margin percentage improved to 69% for 2004 from 49% for 2003.
Customer Equipment and Shipping Revenue and Direct Cost of Goods Sold
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2003
|
2004
|
||||||||||
Customer equipment and shipping revenue | $ | 1,817 | $ | 3,844 | $ | 2,027 | 112 | % | ||||
Direct cost of goods sold |
|
|
4,867 |
|
|
18,878 |
|
|
14,011 |
|
288 |
|
|
|
|
||||||||||
Customer equipment and shipping revenue gross margin | $ | (3,050 | ) | $ | (15,034 | ) | $ | (11,984 | ) | (393 | )% | |
|
|
|
Customer equipment and shipping revenue. The increase in customer equipment and shipping revenue of $2.0 million, or 112%, was primarily due to an increase in the number of new customers subscribing to our services, resulting in incremental shipping revenue of $1.8 million and an increase of $0.2 million for sales of customer equipment.
Direct cost of goods sold. The increase in direct cost of goods sold of $14.0 million, or 288%, was due in part to the increase in the number of new customers subscribing to our services, which resulted in additional costs associated with our provision of customer equipment. For five months in 2004, we sold customer equipment directly to retailers, which contributed $2.0 million to direct cost of goods sold.
Selling, General and Administrative
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2003
|
2004
|
||||||||||
Selling, general and administrative | $ | 19,174 | $ | 49,186 | $ | 30,012 | 157 | % |
Selling, general and administrative. The increase in selling, general and administrative expense of $30.0 million, or 157%, was primarily due to an increase in the number of our employees, which grew to 648 full-time employees in 2004 from 189 in 2003. This increase resulted in higher wages, employee-related benefits and fees for recruitment of new employees of $18.5 million. In addition, we had an increase in legal fees of $2.9 million as we addressed regulatory matters and related litigation and an increase in accounting, consulting and other professional fees of $1.9 million. Our credit card fees also increased by $2.1 million as we continued to add customers. While these costs have increased, they decreased as a percentage of revenue from 102% in 2003 to 62% in 2004.
46
Marketing
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2003
|
2004
|
||||||||||
Marketing | $ | 11,819 | $ | 56,075 | $ | 44,256 | 374 | % |
Marketing. The increase in marketing expense of $44.3 million, or 374%, was primarily due to the increased costs related to online, television, print and radio advertising of $41.5 million, or 94% of the total marketing expense increase. We also had increased costs of $0.5 million in telemarketing fees and $1.3 million in connection with our Refer-a-Friend program. In addition, we launched our retail channel in the second quarter of 2004, which added $0.8 million to the increase in our marketing costs. The increased costs consist of fixed costs, including newspaper insert advertisements and in-store placement fees, and commissions to retailers, which increase as the number of subscribers from the retail channel increase.
Depreciation and Amortization
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2003
|
2004
|
||||||||||
Depreciation and amortization | $ | 2,367 | $ | 3,907 | $ | 1,540 | 65 | % |
Depreciation and amortization. The increase in depreciation and amortization of $1.5 million, or 65%, was primarily due to an increase in capital expenditures for the continued expansion of our network and computer equipment for our new employees.
Other Income (Expense)
(dollars in thousands)
|
For the Years Ended
December 31, |
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
|||||||||
|
2003
|
2004
|
||||||||
Interest income | $ | 96 | $ | 1,135 | $ | 1,039 | ||||
Interest expense | (678 | ) | (5 | ) | (673 | ) | ||||
Other, net | 5 | 21 | 16 | |||||||
Debt conversion expense | (1,557 | ) | | (1,557 | ) | |||||
|
|
|
||||||||
$ | (2,134 | ) | $ | 1,151 | $ | 3,285 | ||||
|
|
|
Interest income. The increase in interest income and other of $1.0 million was primarily due to higher cash, cash equivalents and marketable securities balances in 2004 compared to 2003 as a result of additional proceeds from convertible preferred stock offerings we completed in 2004.
Interest expense. The decrease in interest expense of $0.7 million was primarily due to the absence of any notes payable in 2004 due to the debt conversion into shares of our preferred stock.
Debt conversion expense. In 2003, we received $20.0 million in proceeds from loans by our principal stockholder and Chairman. In connection with the loans, we issued warrants to our principal stockholder and Chairman to purchase shares of our preferred stock. In September 2003, the conversion of the note payable resulted in a debt conversion expense of $1.6 million.
47
Provision for Income Taxes
(dollars in thousands)
|
For the Years Ended
December 31, |
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
$
Change |
%
Change |
||||||||||
|
2003
|
2004
|
||||||||||
Income tax benefit | $ | 221 | $ | 475 | $ | 254 | 115 | % |
Provision for income taxes. We had net losses for financial reporting purposes, which created deferred tax assets that can be used to offset future income taxes. Recognition of deferred tax assets will require generation of future taxable income. There can be no assurance that we will generate earnings in future years. Therefore, we established a valuation allowance for all of our deferred tax assets, which were approximately $46.3 million and $18.4 million as of December 31, 2004 and 2003, respectively.
During 2003 and 2004, the New Jersey Economic Development Authority issued certificates certifying our eligibility to participate in the State of New Jersey's corporation business tax benefit certificate transfer program and the amount of New Jersey net operating loss carryovers we had available to transfer of $42.6 million in 2003 and $49.7 million in 2004. During 2003 and 2004, we sold approximately $2.4 million and $6.2 million, respectively, of our New Jersey net operating loss carryforwards for approximately $0.2 million and $0.5 million, respectively, which represented approximately 82% of the surrendered tax benefit each year, and recognized a tax benefit for that amount. We cannot participate in this program for 2005 as the program caps have been reached.
We had net operating loss carryforwards for U.S. federal and state tax purposes of approximately $101.4 million and $92.3 million, respectively, expiring at various times from the years ending 2020 through 2024. In addition, we had net operating loss carryforwards for Canadian tax purposes of $1.9 million expiring in 2011.
Net Loss
(dollars in thousands)
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For the Years Ended
December 31, |
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Change |
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2004
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Net loss | $ | (29,974 | ) | $ | (69,921 | ) | $ | (39,947 | ) | 133 | % |
Because of the increase in expenses in excess of the increases in revenue described above, our net loss increased by $39.9 million, or 133%, to $69.9 million for 2004 from $30.0 million for 2003.
48
Quarterly Results of Operations
The following table sets forth quarterly statement of operations data. We derived this data from our unaudited consolidated financial statements, which we believe have been prepared on substantially the same basis as our audited consolidated financial statements. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.
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For the Quarters Ended
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Mar. 31,
2004 |
June 30,
2004 |
Sep. 30,
2004 |
Dec. 31,
2004 |
Mar. 31,
2005 |
June 30,
2005 |
Sep. 30,
2005 |
Dec. 31,
2005 |
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Operating Revenues: | ||||||||||||||||||||||||||
Telephony services | $ | 10,601 | $ | 15,250 | $ | 21,822 | $ | 28,191 | $ | 38,583 | $ | 57,539 | $ | 71,158 | $ | 90,885 | ||||||||||
Customer equipment and shipping | 871 | 824 | 1,023 | 1,126 | 2,127 | 1,896 | 2,713 | 4,295 | ||||||||||||||||||
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11,472 | 16,074 | 22,845 | 29,317 | 40,710 | 59,435 | 73,871 | 95,180 | |||||||||||||||||||
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Operating Expenses: |
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Direct cost of telephony services(1) | 3,917 | 5,008 | 6,558 | 7,726 | 12,108 | 17,719 | 24,514 | 29,709 | ||||||||||||||||||
Direct cost of goods sold | 3,326 | 3,973 | 4,841 | 6,738 | 11,588 | 9,241 | 9,622 | 9,990 | ||||||||||||||||||
Selling, general and administrative | 8,554 | 10,694 | 12,848 | 17,090 | 20,553 | 33,225 | 45,030 | 55,908 | ||||||||||||||||||
Marketing | 5,571 | 11,711 | 14,018 | 24,775 | 55,436 | 61,937 | 58,906 | 67,125 | ||||||||||||||||||
Depreciation and amortization | 797 | 895 | 1,001 | 1,214 | 1,610 | 2,266 | 3,150 | 4,096 | ||||||||||||||||||
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22,165 | 32,281 | 39,266 | 57,543 | 101,295 | 124,388 | 141,222 | 166,828 | |||||||||||||||||||
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Loss from operations | (10,693 | ) | (16,207 | ) | (16,421 | ) | (28,226 | ) | (60,585 | ) | (64,953 | ) | (67,351 | ) | (71,648 | ) | ||||||||||
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Other income (expense): |
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Interest income | 151 | 134 | 294 | 556 | 578 | 1,335 | 1,356 | 1,078 | ||||||||||||||||||
Interest expense | (1 | ) | (1 | ) | (1 | ) | (2 | ) | | | (1 | ) | (1,158 | ) | ||||||||||||
Derivatives embedded within convertible debt, at estimated fair value | | | | | | | | 66 | ||||||||||||||||||
Other, net | 1 | 1 | (1 | ) | 20 | 5 | (5 | ) | 1 | (442 | ) | |||||||||||||||
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151 | 134 | 292 | 574 | 583 | 1,330 | 1,356 | (456 | ) | ||||||||||||||||||
Loss before income tax benefit | (10,542 | ) | (16,073 | ) | (16,129 | ) | (27,652 | ) | (60,002 | ) | (63,623 | ) | (65,995 | ) | (72,104 | ) | ||||||||||
Income tax benefit (expense) | | | | 475 | | | | 390 | ||||||||||||||||||
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Net loss | $ | (10,542 | ) | $ | (16,073 | ) | $ | (16,129 | ) | $ | (27,177 | ) | $ | (60,002 | ) | $ | (63,623 | ) | $ | (65,995 | ) | $ | (71,714 | ) | ||
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Net loss per common share calculation: | ||||||||||||||||||||||||||
Net loss | $ | (10,542 | ) | $ | (16,073 | ) | $ | (16,129 | ) | $ | (27,177 | ) | $ | (60,002 | ) | $ | (63,623 | ) | $ | (65,995 | ) | $ | (71,714 | ) | ||
Imputed dividend on preferred shares | | | | | | | | (605 | ) | |||||||||||||||||
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Net loss attributable to common shareholders | $ | (10,542 | ) | $ | (16,073 | ) | $ | (16,129 | ) | $ | (27,177 | ) | $ | (60,002 | ) | $ | (63,623 | ) | $ | (65,995 | ) | $ | (72,319 | ) | ||
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Net loss per common share: | ||||||||||||||||||||||||||
Basic and diluted | $ | (2.78 | ) | $ | (4.23 | ) | $ | (4.24 | ) | $ | (7.10 | ) | $ | (15.67 | ) | $ | (16.56 | ) | $ | (17.07 | ) | $ | (18.42 | ) | ||
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Weighted-average common shares outstanding: | ||||||||||||||||||||||||||
Basic and diluted | 3,798 | 3,798 | 3,808 | 3,827 | 3,829 | 3,843 | 3,866 | 3,927 | ||||||||||||||||||
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49
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For the Quarters Ended
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Mar. 31,
2004 |
June 30,
2004 |
Sep. 30,
2004 |
Dec. 31,
2004 |
Mar. 31,
2005 |
June 30,
2005 |
Sep. 30,
2005 |
Dec. 31,
2005 |
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(unaudited)
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Operating Data: | |||||||||||||||||||||||||
Gross subscriber line additions | 54,702 | 75,060 | 97,558 | 136,894 | 280,123 | 262,310 | 282,176 | 275,032 | |||||||||||||||||
Net subscriber line additions | 45,133 | 63,151 | 81,614 | 114,951 | 249,333 | 207,950 | 213,937 | 207,252 | |||||||||||||||||
Subscriber lines(1) | 130,850 | 194,001 | 275,615 | 390,566 | 639,899 | 847,849 | 1,061,786 | 1,269,038 | |||||||||||||||||
Average monthly customer churn | 2.67 | % | 2.27 | % | 2.07 | % | 1.80 | % | 1.70 | % | 2.08 | % | 2.26 | % | 1.90 | % | |||||||||
Average monthly revenue per line | $ | 35.31 | $ | 32.99 | $ | 32.43 | $ | 29.34 | $ | 26.34 | $ | 26.63 | $ | 25.79 | $ | 27.22 | |||||||||
Average monthly telephony services revenue per line | $ | 32.63 | $ | 31.30 | $ | 30.98 | $ | 28.21 | $ | 24.96 | $ | 25.78 | $ | 24.84 | $ | 26.00 | |||||||||
Average monthly direct cost of telephony services per line | $ | 12.06 | $ | 10.28 | $ | 9.31 | $ | 7.73 | $ | 7.83 | $ | 7.94 | $ | 8.56 | $ | 8.50 | |||||||||
Marketing cost per gross subscriber line additions | $ | 101.85 | $ | 156.03 | $ | 143.69 | $ | 180.97 | $ | 197.90 | $ | 236.12 | $ | 208.76 | $ | 244.06 | |||||||||
Employees(1) | 273 | 399 | 502 | 648 | 1,045 | 1,397 | 1,393 | 1,355 |
Telephony services revenue has increased each quarter corresponding with the increase in our subscriber lines. This increase in subscriber lines has been driven by our increase in marketing, which accelerated in the second half of 2004 and has continued during 2005 as we attempt to capitalize on the current expansion of the broadband and VoIP markets and to establish and maintain a leading position in the market for broadband telephone services. Direct cost of goods sold has also increased each quarter with the exception of the second quarter of 2005 as we have added an increasing number of customers each quarter. In the second quarter of 2005 we added fewer subscriber lines than the first quarter of 2005, which resulted in lower direct cost of goods sold in the second quarter of 2005. In addition, as part of a promotion during the first quarter of 2005, we waived the activation fee for certain customers, which resulted in higher expense in the first quarter of 2005 as we expensed the entire customer equipment cost. Typically, we defer a portion of the customer equipment expense to the extent of activation fee revenue, and we amortize the revenue and costs equally over the estimated life of the customer. In the absence of an activation fee, the entire customer equipment was expensed immediately. Selling, general and administrative costs have also increased each quarter as we have added employees primarily in the customer care area to support our growing subscriber lines. We have also had an increase in credit card fees as we have expanded our revenues and an increase in legal fees as we have raised capital and addressed regulatory matters and litigation.
Average monthly telephony services revenue per line has decreased over time. This reflects our lowering of our residential unlimited plan prices as we realized operating efficiencies that reduced our per-customer cost of providing service. We also sought to attract a significant stream of new customers to our residential unlimited plan and migrate existing customers from our lower priced plan to this higher priced plan. The price for this plan was reduced from $39.99 per month to $34.99 per month in September 2003, to $29.99 per month in May 2004 and to $24.99 per month in October 2004. In addition, in the first quarter of 2005, as part of a promotion we waived the first month's fee for certain customers and issued a higher volume of customer credits due to delays in local number portability and a service outage. During the second half of 2005, we also ran a promotion waiving the first month's fee. Average monthly direct cost of telephony services per line has also decreased through December 31, 2004 as we have realized operating efficiencies and we have obtained reduced vendor pricing associated with our increased purchasing power. Our average monthly direct cost of telephony services per line increased for the first three quarters of 2005, when compared to the prior quarter, decreased in the fourth quarter of 2005 but may increase again in future quarters. The increase was driven by our costs of establishing compliance systems with respect to FCC regulations on E-911 services, by ongoing operating costs associated with providing E-911 services and by costs related to local number portability. Marketing cost per gross subscriber line addition has fluctuated over time but has increased
50
in recent periods for several reasons. We have increased our online advertising spending and have added advertising in more expensive media with a broader reach, such as television, to enhance our brand awareness. In addition, we believe it is generally more expensive to acquire mainstream consumers than early adopters of new technologies, and we have increased our focus on more mainstream customers. Over the near term, we expect our marketing cost per gross subscriber line addition to stabilize as we diversify our marketing spend and our newer markets mature.
Liquidity and Capital Resources
Overview
The following table sets forth a summary of our cash flows for the periods indicated:
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For the Years Ended December 31,
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2003
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2004
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2005
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(dollars in thousands)
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Net cash used in operating activities | $ | (16,583 | ) | $ | (38,600 | ) | $ | (189,765 | ) | |
Net cash used in investing activities | (4,933 | ) | (73,707 | ) | (154,638 | ) | ||||
Net cash provided by financing activities | 34,226 | 141,094 | 434,006 |
We have incurred significant operating losses since our inception. As a result, we have generated negative cash flows from operations, and had an accumulated deficit of $382.3 million at December 31, 2005. Our primary sources of funds have been proceeds from private placements of our preferred stock, a private placement of our convertible notes, operating revenues and borrowings under notes payable from our principal stockholder and Chairman, which were subsequently converted into shares of our preferred stock. Through the issuance of preferred stock, we raised proceeds, net of expenses, of $195.7 million in 2005. We also raised proceeds, net of expenses, of $240.3 million in December 2005 and January 2006 in a private placement of our convertible notes. We are using the proceeds from the sale of our convertible notes for working capital and other general corporate purposes, including to fund operating losses.
Historically, our principal uses of cash have been to fund operating losses, which were initially driven by start-up costs and the costs of developing our technology and, more recently, have been driven by marketing expense. We anticipate incurring significant net losses in the future as we seek to grow our customer base, which will require significant marketing expense. For 2006, we expect to spend between $360 million and $380 million for marketing expense, compared to $243.4 million in 2005. Because our marketing commitments generally are six weeks or less in duration, we are able to adjust marketing expense relatively quickly if desirable. Therefore, we do not believe our significant and growing marketing expense will impair our liquidity. We believe that revenue and cash on hand will fund our expected marketing expense for the next twelve months.
Similarly, we may make expenditures to expand into foreign markets. The associated costs include legal, regulatory and administrative start-up costs, capital expenditures and marketing expense, which result in operating losses. However, the capital expenditures are relatively modest, because our technology platform does not require a significant amount of equipment or software. Legal, regulatory and administrative start-up costs for new markets in Canada and the United Kingdom have not been material to our overall business, and we do not expect them to be in the future as we enter other new markets. We intend to expand into new markets only when we believe that doing so will not impair our liquidity.
We expect our cash on hand and the proceeds from this offering to fund our net losses and capital expenditures at least through the end of 2007.
To the extent we change our plans, or if our expectations are wrong, we may need to seek additional funding by accessing the equity or debt capital markets. In addition, although we do not
51
currently anticipate any acquisitions, we may need to seek additional funding if an attractive acquisition opportunity is presented to us. However, our significant losses to date may prevent us from obtaining additional funds on favorable terms or at all. Because of our historic net losses and our limited tangible assets, we do not fit traditional credit lending criteria, which, in particular, could make it difficult for us to obtain loans or to access the debt capital markets. For example, we discussed a revolving credit facility with commercial banks in the summer of 2005. As a result of those discussions, we believe most commercial lenders will require us to very significantly reduce our loss from operations before they will lend us money. In addition, the terms of our outstanding convertible notes provide for additional shares to be issued upon conversion if we sell shares of our common stock after our initial public offering at a price that is less than the average trading price of our common stock over the 10-day period prior to any such sale, which might limit our access to the capital markets.
Interest will accrue on our convertible notes at a rate of 5% per annum and be payable quarterly in arrears. The interest rate will increase upon certain events, including if we decide to pay interest in kind rather than in cash, upon a failure to comply with the registration rights agreement with the holders of the convertible notes and upon certain events of default. The notes are convertible into shares of our common stock. The convertible notes provide for customary events of default.
See "Description of Convertible Notes" and "Description of Capital StockRegistration Rights for Shares of Common Stock Issuable upon Conversion of Our Convertible Notes."
Capital expenditures. Capital expenditures are mainly for the purchase of network equipment and computer hardware as we continue to expand our network. We continue to invest heavily in networking equipment, technology, corporate facilities and information technology infrastructure. We expect our capital expenditures for 2006 to be approximately $40.0 million, of which $9.9 million in leasehold improvements is for the completion of our new headquarters in Holmdel, New Jersey.
Comparison of 2004 to 2005
Cash used in operating activities for 2005 was $189.8 million resulting from a net loss of $261.3 million, offset by adjustments for non-cash items of $12.5 million and $59.0 million provided by working capital and other activities. Adjustments for non-cash items consisted primarily of $11.1 million of depreciation and amortization. Working capital activities primarily consisted of a net increase in accounts payable and accrued expenses of $76.2 million which primarily related to the increase in our marketing and payroll expenses. This was offset by a use of cash for inventory of $15.1 million related to the purchase of customer equipment.
Cash used in operating activities in 2004 was $38.6 million and consisted of net loss of $69.9 million, offset by adjustments for non-cash items of $5.1 million and $26.2 million provided by working capital and other activities. Adjustments for non-cash items consisted of $3.9 million of depreciation and amortization. Working capital activities primarily consisted of a net increase in accounts payable and accrued expenses of $27.1 million which primarily related to the increase in our marketing and payroll expenses.
Cash used in investing activities for 2005 of $154.6 million was attributable to net maturities and sales of marketable securities of $71.1 million, capital expenditures of $76.2 million and an increase of restricted cash of $7.3 million. The restricted cash includes cash collateralization of letters of credit for our Holmdel, New Jersey headquarters facility. Cash from our equity and debt offerings in 2005 was invested in marketable securites, pending use to fund our loss from operations.
Cash used in investing activities in 2004 of $73.7 million was attributable to net purchases of marketable securities of $62.7 million and capital expenditures of $10.9 million.
52
Cash provided by financing activities for 2005 of $434.0 million was primarily attributable to net proceeds from the issuance of preferred stock for $195.7 million and proceeds from our convertible notes, net of issuance costs, of $238.2 million.
Cash provided by financing activities in 2004 of $141.1 million was due primarily to proceeds from our preferred stock offerings, net of costs.
Comparison of 2003 and 2004
Cash used in operating activities in 2004 was $38.6 million and consisted of net loss of $69.9 million, offset by adjustments for non-cash items of $5.1 million and $26.2 million provided by working capital and other activities. Adjustments for non-cash items consisted of $3.9 million of depreciation and amortization. Working capital activities primarily consisted of a net increase in accounts payable and accrued expenses of $27.1 million which primarily related to the increase in our marketing and payroll expenses.
Cash used in operating activities in 2003 was $16.6 million and consisted of net loss of $30.0 million, offset by adjustments for non-cash items of $4.6 million and $8.8 million provided by working capital and other activities. Adjustments for non-cash items primarily included $2.4 million of depreciation and amortization and $1.6 million for debt conversion expense. Working capital activities primarily consisted of a net increase in accounts payable and accrued expenses of $8.1 million and consisted primarily of marketing and payroll expenses.
Cash used in investing activities in 2004 of $73.7 million was attributable to net purchases of marketable securities of $62.7 million and capital expenditures of $10.9 million.
Cash used in investing activities in 2003 of $4.9 million was attributable to capital expenditures of $6.4 million offset by the release of restricted cash of $1.5 million.
Cash provided by financing activities in 2004 of $141.1 million was due primarily to net proceeds from our preferred stock offerings. Costs related to these offerings were approximately $3.5 million.
Cash provided by financing activities in 2003 of $34.2 million was due to proceeds from the issuance of preferred stock offerings of $14.1 million. Costs related to these offerings were approximately $0.9 million. In addition, we received proceeds from loans from our Chairman and principal stockholder of $20.0 million, which were subsequently converted into shares of our preferred stock.
53
Contractual Obligations and Other Commercial Commitments
The table below summarizes our contractual obligations at December 31, 2005, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
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Payments Due by Period
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Less than 1 year
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13
years |
45
years |
More than 5 years
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(unaudited)
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Contractual Obligations: | ||||||||||||||||
Convertible notes | $ | 247,872 | $ | | $ | | $ | 247,872 | $ | | ||||||
Interest related to convertible notes(1) | 61,970 | 12,394 | 24,788 | 24,788 | | |||||||||||
Capital lease obligations | 49,074 | 3,825 | 7,934 | 8,061 | 29,254 | |||||||||||
Operating lease obligations | 2,677 | 1,146 | 1,011 | 520 | | |||||||||||
Purchase obligations | 143,704 | 83,508 | 57,976 | 2,220 | | |||||||||||
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Total contractual obligations | $ | 505,297 | $ | 100,873 | $ | 91,709 | $ | 283,461 | $ | 29,254 | ||||||
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Other Commercial Commitments: | ||||||||||||||||
Standby letters of credit | $ | 7,000 | $ | 7,000 | $ | | $ | | $ | | ||||||
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Total contractual obligations and other commercial commitments | $ | 512,297 | $ | 107,873 | $ | 91,709 | $ | 283,461 | $ | 29,254 | ||||||
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Convertible Notes and Related Interest Expense. During December 2005, we sold $247.9 million of convertible notes due 2010 in a private placement. We may, at our option, pay interest on the convertible notes in cash or in kind. The table above assumes interest is paid in cash. The terms of the convertible notes are described under "Description of Convertible Notes."
Capital Lease Obligations. At December 31, 2005, we had capital lease obligations of $49.1 million, including $6.0 million for space to be taken in early 2006, related to our corporate headquarters in Holmdel, New Jersey that expire in 2017 and $0.4 million for office equipment that expires in 2007.
Operating Lease Obligations. At December 31, 2005, future commitments for operating leases included $1.3 million for co-location facilities in the United States that accommodate a portion of our network equipment through 2008 and $1.4 million for office space leased for our Toronto, Canada office through 2010.
Purchase Obligations. At December 31, 2005, future commitments for purchase obligations in the above table represent non-cancelable contractual obligations. These include $9.9 million in fees for the completion of construction for our new corporate headquarters in Holmdel, New Jersey as well as $30.7 million in fees through 2008 related to the provision of our E-911 services. Also, purchase obligations include $0.6 million in fees to retail stores that sell our product; $6.0 million for advertising agency fees related to advertising our product in various media outlets including online, television and radio; $16.5 million for inbound sales support through 2007; $12.2 million in fees for local number portability through 2009, so that new customers can retain their existing phone numbers; $57.1 million for the purchase of customer equipment through 2007; $5.1 million for sponsorship through 2007 of an auto racing team in the Indianapolis 500 race; $1.4 million for direct mail for customer welcome kits; $2.8 million paid to several vendors for telemarketing fees and $1.2 million for hosting and transport services through 2006.
54
Summary of Critical Accounting Policies and Estimates
Our significant accounting policies are summarized in Note 1 to our financial statements. The following describes our critical accounting policies and estimates:
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates.
On an ongoing basis, we evaluate our estimates, including those related to estimated customer life, used to determine the appropriate amortization period for deferred revenue and deferred costs associated with customer activation fees and the useful lives of property and equipment, among others, as well as our estimates of the value of common stock for the purpose of determining stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue Recognition
Operating revenues consist of telephony services revenue and customer equipment (which enables our telephony services) and shipping revenue. The point in time at which revenue is recognized is determined in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, and Emerging Issues Task Force Consensus No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products).
Substantially all of our operating revenues are telephony services revenue, which is derived primarily from monthly subscription fees that customers are charged under our service plans. We also derive telephony services revenue 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 in advance and are recognized over the following month when services are provided. Revenue generated from international calls and from customers exceeding allocated call minutes under limited minute plans are recognized as services are provided, that is, as minutes are used, and are billed to a customer's credit card in arrears. As a result of our multiple billing cycles each month, we estimate the amount of revenue earned from international calls and from customers exceeding allocated call minutes under limited minute plans but not billed from the end of each billing cycle to the end of each reporting period. These estimates are based primarily upon historical minutes and have been consistent with our actual results.
We also generate revenue by charging a fee for activating service. Through June 2005, we charged an activation fee to customers in the direct channel. Beginning in July 2005, we also began charging an activation fee in the retail channel. Customer activation fees, along with the related costs for customer equipment in the direct channel and for rebates and retailer commissions in the retail channel up to but not exceeding the activation fee, are deferred and amortized over the estimated average customer relationship period. Through December 31, 2004, this estimated customer relationship period was deemed to be 30 months based upon comparisons to other telecommunications companies as we did not have an operating history. For 2005, the estimated customer relationship period was reevaluated based upon our experience and determined to be 60 months. We have applied the 60-month customer relationship period on a prospective basis beginning January 1, 2005.
We also provide rebates to customers who purchase their customer equipment from retailers and satisfy minimum service period requirements. These rebates are recorded as a reduction of revenue
55
over the service period based upon the estimated number of customers that will ultimately earn and claim the rebates.
Derivative Instruments
We do not hold or issue derivative instruments for trading purposes. However, our convertible notes contain embedded derivatives that require separate valuation from the convertible notes. We recognize these derivatives as liabilities in our balance sheet and measure them periodically at their estimated fair value, and recognize changes in their estimated fair value in earnings in the period of change.
With the assistance of a third party, we estimate the fair value of our embedded derivatives using available market information and appropriate valuation methodologies. These embedded derivatives derive their value primarily based on changes in the volatility of our common stock. Over the life of the convertible notes, given the lack of historical volatility in the price of our common stock, changes in the estimated fair value of the embedded derivatives could have a material effect on our results of operations. Furthermore, we have estimated the fair value of these embedded derivatives using theoretical models based on the estimated volatility in the price of other comparable companies' common stock over the past year.
Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we may eventually pay to settle these embedded derivatives.
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 inventory allowance for customer equipment that has been returned by customers but may not be able to be re-issued to new customers or returned to the manufacturer for credit.
Income Taxes
We recognize deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using tax rates in effect for the year the differences are expected to reverse. We have recorded a valuation allowance on the assumption that we will not generate taxable income.
Net Operating Loss Carryforwards
As of December 31, 2005, our net operating loss carryforwards for U.S. federal tax purposes were approximately $320.0 million. As a general rule, net operating losses that we generate can be carried forward for a period of up to twenty years and can be used to offset our future taxable income. However, if we do not use our net operating loss allowance under Section 382 of the Internal Revenue Code in a particular year, these net operating losses can be carried forward for a period of up to twenty years from the year of origination.
More particularly, under Section 382, if a corporation undergoes an "ownership change" (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation's ability to use its pre-change of control net operating loss carryforwards and other pre-change tax attributes against its post-change income may be limited. This Section 382 limitation is applied annually so as to limit the use of our pre-change net operating loss carryforwards to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate plus certain additional amounts on account of our net
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unrealized built-in gain. Upon reviewing our changes in equity ownership over the past three years, we believe a change of control occurred due to the issuance of Series E of our Preferred Stock at the end of April 2005 and it is possible that this offering of our common stock, perhaps along with other changes in our equity ownership that have occurred since April 2005, will cause us to undergo another ownership change under the Internal Revenue Code that could result in a further limitation. For purposes of illustration, at present, we estimate in general terms that as a result of the April 2005 ownership change, up to approximately $171 million of our total U.S net operating losses will be subject to an annual limitation of approximately $40 million. In addition, we believe we may be able to increase our base Section 382 limitation for net unrealized built-in gains for the first five years following an ownership change.
Stock-Based Compensation
We account for stock-based compensation using the intrinsic value method prescribed in APB No. 25, Accounting Stock Issued to Employees, or APB 25, and related interpretations. We recognize non-cash compensation expense for stock options by measuring the excess, if any, of the estimated fair value of our common stock at the date of grant over the amount an employee must pay to acquire the stock, and amortizing the excess on a straight-line basis over the vesting period of the applicable stock options.
Under APB 25, the full costs to us and our stockholders of granting stock options are not reflected on our statement of operations, because APB 25 assumes that an option with an exercise price equal to the market value of stock on the date of grant has no value. Moreover, since there is no market price for our stock, we have used assumptions which could have been incorrect.
We will adopt SFAS No. 123 (revised), Share-Based Payment , or SFAS 123R, on January 1, 2006. The impact on our financial statements of adopting SFAS 123R will depend on the level of stock-based payments we grant in the future and the value of the exercise price. However, had we adopted SFAS 123R in prior periods, the impact would have approximated the impact of SFAS 123 as described in Note 1 to our financial statements, subject to adjustment for volatility.
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Instruments (FAS 155). FAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. This statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. We will evaluate the impact of FAS 155 on our consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (FAS 154), a replacement of APB No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements . FAS 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting of a change in accounting principle. This statement establishes that, unless impracticable, retrospective application is the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. It also requires the reporting of an error correction which involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We believe the adoption of FAS 154 will not have a material effect on our consolidated financial statements.
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On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS 123R), which replaces FAS 123, Accounting for Stock-Based Compensation , and supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees . We will adopt FAS 123R on January 1, 2006, using the "modified prospective" transition method. FAS 123R requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost must be recognized in the income statement over the vesting period of the award. Under the "modified prospective" transition method, awards that are granted, modified or settled beginning at the date of adoption will be measured and accounted for in accordance with FAS 123R. In addition, expense must be recognized in the statement of income for unvested awards that were granted prior to the date of adoption. The expense will be based on the fair value determined at the grant date.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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The data included in this prospectus regarding industry size, growth and relative industry position are based on a variety of sources, including company research, third-party studies and surveys, industry and general publications and estimates based on our knowledge and experience in the industry in which we operate. These sources include publications by ABI Research, Forrester Research, Inc., Frost & Sullivan, Gartner, Inc., IDC, Nielsen//Net Ratings, TeleGeography Research and Yankee Group. Our estimates have been based on information obtained from our clients, suppliers, trade and business organizations and other contacts in the industry. We believe these estimates to be reliable as of the respective date of each report and as of the date of this prospectus. However, this information may prove to be inaccurate. In particular, projections of the future are likely to turn out to have been inaccurate, and those inaccuracies may be material. For example, a 1998 U.S. Department of Commerce report, "The Emerging Digital Economy" stated that Internet traffic was doubling every 100 days. This was widely cited and business decisions were based on it, even though it was probably wrong at the time and it was not a sustainable trend. Market and industry data could be wrong due to the method by which sources may have obtained their data or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. In addition, we do not know all of the assumptions regarding general economic conditions or growth that were used in preparing the forecasts from other sources cited herein.
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This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under "Risk Factors," "Special Note Regarding Forward-Looking Statements" and "Market and Industry Data" and elsewhere in this prospectus.
U.S. Residential Wireline Communications Market
According to independent market research firm Gartner, Inc., or Gartner, there were 119.2 million U.S. residential telephone access lines in service, representing $67.2 billion of local, long distance and related revenues, in 2004. (1) According to Gartner, this represents an overall decline in residential access lines and revenue from a peak of 128.2 million lines and $77.1 billion of local and long distance revenues in 2000 (2) , the result of increased competition, changes in technology, industry consolidation and other factors.
Residential wireline communications services historically have been offered to consumers by a variety of operators, including traditional local and long distance telephone providers such as AT&T (formerly SBC Communications), BellSouth, Citizens Communications Corp., Qwest, Sprint Nextel and Verizon. However, the competition for residential consumers has increased significantly. In recent years, many cable television service providers added telephone service to their offerings. Improvements in wireless technology have allowed a number of wireless communications providers, many of which are owned by traditional telephone operators, to capture a share of the residential telephone service market, as many former wireline customers have begun to make wireless their sole telephone service. Most recently, improvements in Voice over Internet Protocol, or VoIP, networks, which allow for the transmission of voice signals as digital data over a broadband Internet connection and in many cases require only modest capital investment to build, have created even more competition in the market. A new group of competitors, including start-up companies and existing cable, telephone and Internet providers, now use VoIP to offer telephone service to residential customers.
The Growth in Broadband Adoption in the Home
VoIP communications are carried as data packets and require a broadband Internet connection that has sufficient bandwidth to deliver the data uninterrupted. As a result, broadband penetration has been a key driver of VoIP's expansion to date. As the Internet has become a bigger part of people's lives and advanced applications have come to require greater bandwidth, broadband use has become more widespread. International Data Corporation, or IDC, estimates that the number of U.S. households using broadband Internet access will grow from 30 million, or 28% of total U.S. households, at the end of 2004 to 69 million, or 61% of total U.S. households, by the end of 2009. (3) Currently, residential broadband consumers access the Internet principally through cable modems and digital subscriber lines, or DSL, which IDC estimates accounted for approximately 58% and 39% of 2004 consumer broadband subscribers in the United States, respectively. (4) However, an increasing array of alternative broadband access technologies, such as wireless broadband and broadband over power lines, is becoming available. The availability of these alternatives is expected to further encourage future broadband deployment and penetration both in the United States and worldwide.
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The following graph illustrates IDC's estimates of the growth in the number of consumer broadband subscribers and the penetration of broadband in U.S. households:
Source: IDC, "U.S. Broadband Services 2005-2009 Forecast", October, 2005,
(#34134); "Internet Commerce Market Model", Version 10.1, July 2005.
Independent industry analysts expect the worldwide broadband market to experience similar trends to those experienced in the United States. For example, IDC forecasts that the worldwide broadband market will grow from 146 million subscribers at the end of 2004 to 317 million by the end of 2009. These reports cite Europe and Asia in particular as areas that have attractive growth prospects. IDC estimates that European broadband subscriptions, which were 40 million at the end of 2004, will grow to 92 million by the end of 2009. IDC also estimates broadband subscriptions in the Asia/Pacific region, which were 61 million at the end of 2004, will grow to 116 million by the end of 2009. (5)
We believe the rapid deployment of broadband access in the United States and abroad will continue to enable the accelerated adoption of VoIP communications.
VoIP Communications and Providers
One of the outgrowths from the rapid deployment of broadband connectivity in the United States and abroad has been the accelerated adoption of VoIP. Independent industry analysts have noted that the historical adoption of VoIP to date indicates that it may follow a future growth trajectory equal to or greater than that of the expansion of broadband access to the Internet.
VoIP is a technology that enables voice communications over the Internet through the conversion of voice signals into data packets. The data packets are transmitted over the Internet and converted back into voice signals before reaching their recipient. The Internet has always used packet-switched technology to transmit information between two communicating terminals. For example, packet switching allows a personal computer to download a page from a web server or to send an e-mail message to another computer. VoIP allows for the transmission of voice signals over these same packet switched networks and, in doing so, provides an alternative to traditional telephone networks.
VoIP technology presents several advantages over the technology used in traditional wireline telephone networks that enable VoIP providers to operate with lower capital expenditures and operating costs while offering both traditional and innovative service features. Traditional networks, which require that each user's telephone be connected to a central office circuit switch, are expensive to build and maintain. In contrast, VoIP networks route calls over the Internet using either softswitches or software, both of which are less expensive than circuit switches. In addition, traditional wireline
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networks use dedicated circuits that allot fixed bandwidth to a call throughout its duration, whether or not the full bandwidth is being used throughout the call to transmit voice signals. VoIP networks use bandwidth more efficiently, allocating it instead based on usage at any given moment. VoIP technology also presents the opportunity to offer customers attractive features that traditional telephone networks cannot easily support, such as online call management and self-provisioning (the ability for customers to change or add service features online).
Traditional telephone companies originally avoided the use of VoIP networks for transmitting voice signals due to the potential for data packets to be delayed or lost, preventing real-time transmission of the voice data and leading to poor sound quality. While a delay of several seconds in downloading a webpage or receiving an e-mail generally is acceptable to a user, a delay of more than a millisecond during a live, two-way voice conversation is not satisfactory. Original VoIP services, which were pioneered in the mid-1990s, were typically only PC-to-PC, requiring two personal computers to be in use at the same time. Early international calling card services, which allowed users to dial abroad for significantly discounted rates, also relied on a form of VoIP technology. These initial VoIP services often suffered from dropped calls, transmission delays and poor sound quality because of bandwidth limitations. As a result, VoIP initially developed a poor reputation for service quality relative to traditional fixed line telephone service. Subsequent increases in bandwidth, driven by increased broadband penetration, and improvements in packet switching, signaling, and compression technology have significantly enhanced the quality and reliability of VoIP calls.
Today, VoIP technology is used in the backbone of many traditional telephone networks, and VoIP services are offered to residential and business users by a wide array of service providers, including established telephone service providers. These VoIP providers include traditional local and long distance phone companies (such as AT&T, BellSouth, Qwest and Verizon), established cable companies (such as Cablevision, Charter Communications, Comcast, Cox and Time Warner Cable), competitive telephone companies (such as Time Warner Telecom), Internet service providers (such as AOL, Earthlink and MSN) and alternative voice communications providers (such as Vonage and Skype).
While all of these companies provide residential VoIP communications services, each group provides those services over a different type of network, resulting in important differences in the characteristics and features of the VoIP communications services that they offer. Traditional wireline telephone companies offering VoIP services to consumers do so using their existing broadband DSL networks. Similarly, cable companies offering VoIP communications services use their existing cable broadband networks. Because these companies own and control the broadband network over which the VoIP traffic is carried between the customer and public switched telephone network, they have the advantage of controlling a substantial portion of the call path and therefore being better able to control call quality. In addition, many of these providers are able to offer their customers additional bandwidth dedicated solely to the customer's VoIP service, further enhancing call quality and preserving the customer's existing bandwidth for other uses. However, these companies typically have high capital expenditures and operating costs in connection with their networks. In addition, depending on the structure of their VoIP networks, the VoIP services provided by some of these companies can only be used from the location at which the broadband line they provide is connected.
Like traditional telephone companies and cable companies offering VoIP services, alternative voice communications providers, such as Vonage, also connect their VoIP traffic to the public switched telephone network so that their customers can make and receive calls to and from non-VoIP users. Unlike traditional telephone companies and cable companies, however, alternative voice communications providers do not own or operate a private broadband network. Instead, the VoIP services offered by these providers use the customer's existing broadband connection to carry call traffic from the customer to their VoIP networks. These companies do not control the "last mile" of the broadband connection, and, as a result, they have less control over call quality than traditional
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telephone or cable companies do. However, these companies have the operating advantage of low capital expenditure requirements and operating costs.
A third group of VoIP providers, such as America Online, Google, Microsoft, Skype (a service of eBay) and Yahoo!, generally offers or has announced intentions to offer VoIP services principally on a PC-to-PC basis. These providers generally carry their VoIP traffic for the most part over the public Internet, with the result that VoIP services are often offered for free, but can only be used with other users of that provider's services. Many of these providers offer a premium service that allows customers to dial directly into a public switched telephone network. In addition, while no special adapters or gateways are required, often customers must use special handsets, headsets or embedded microphones through their computers, rather than traditional telephone handsets.
As the availability of broadband and VoIP becomes more widespread, and as the public becomes familiar with the advantages of VoIP over traditional voice telephony, independent industry analysts believe that VoIP will become increasingly attractive to mainstream consumers.
Market Opportunity for VoIP
Many independent industry analysts expect the market for VoIP-based communication services in the United States to expand dramatically from its current size. Several analysts have estimated compound annual growth rates for the U.S. or North American residential VoIP markets in the range of 61% to 100% over the period from 2004 to 2009. For example, the following independent market research and consulting firms have projected near-term growth in U.S. or North American VoIP households as follows:
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Estimates
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Date
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20042009
CAGR |
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Analyst
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2004
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2005
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2006
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2007
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2008
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2009
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||||||||||
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(in millions)
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|
|||||||||||||
01/06 | TeleGeography Research(1) | 1.3 | 4.5 | 7.9 | 11.6 | 15.0 | 17.4 | 68% | ||||||||
3Q05 | ABI Research(2) | 1.0 | 2.3 | 5.1 | 9.6 | 15.9 | 24.4 | 91% | ||||||||
07/05 | Forrester Research, Inc.(3) | 0.9 | 2.8 | 5.0 | 8.2 | 9.8 | 11.5 | 66% | ||||||||
07/05 | Gartner, Inc.(4) | 1.0 | 2.4 | 5.6 | 10.7 | 19.5 | 32.1 | 100% | ||||||||
06/05 | Yankee Group(5) | 1.1 | 3.3 | 8.4 | 15.3 | 21.8 | 28.5 | 92% | ||||||||
06/05 | Frost & Sullivan(6) | 1.5 | 5.0 | 8.2 | 11.2 | 14.0 | 16.5 | 61% | ||||||||
03/05 | IDC(7) | 1.0 | 3.1 | 6.3 | 11.7 | 19.4 | 27.5 | 95% |
Each of the firms above may use different methodologies and may include different factors in deriving its estimates. These estimates generally do not include PC-to-PC VoIP traffic that is not carried over the public switched telephone network.
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Independent industry analysts also expect the consumer VoIP market to experience significant growth abroad. For example, Gartner forecasts that the worldwide VoIP market will grow from an estimated 9.4 million subscribers at the end of 2004 to 74.1 million by the end of 2009, representing a 51.0% compound annual growth rate. (6) Europe and Asia in particular represent large and growing markets. Gartner estimates that there were 1.1 million VoIP subscribers in Europe at the end of 2004 and projects that there will be 12.6 million at the end of 2009, representing a 62.2% compound annual growth rate. Gartner estimates that there were 7.1 million VoIP subscribers in Asia at the end of 2004 and projects that there will be 24.1 million by the end of 2009, representing a 27.8% compound annual growth rate. (6)
While projecting dramatic growth for this market, industry analysts have also noted a number of challenges to achieving this strong growth. Until recently, VoIP providers have tended to focus on selling their services to early adopters, people who generally seek out new types of technologies and services. As the early adopter market becomes saturated, VoIP providers must attract mainstream consumers to their services if they are going to continue to grow. Mainstream consumers tend to be more resistant to new technology or unfamiliar services. Fundamental differences between VoIP and traditional telephone networks, such as network unavailability in the event of a power outage and the lack of a traditional E-911 service, may deter mainstream consumers from adopting VoIP in their homes. In addition, lingering perceptions of poor call quality may dissuade consumers from switching to VoIP from traditional telephone service. Analysts have also emphasized that the VoIP industry will need to move away from marketing VoIP on the basis of its low price, and instead begin to distinguish VoIP from traditional telephone service on the basis of innovative features, in order to combat price erosion and maintain healthy revenues in the industry. This will be especially important as the regulation governing VoIP becomes more developed, since increasing regulation may impose additional operating costs and taxes on VoIP providers that may increase their costs of doing business and, ultimately, reduce their ability to undercut the pricing of traditional telephone services. This has occurred in the past.
Analysts have also noted several challenges facing independent VoIP providers in particular. Traditional telephone companies and cable companies pose significant competitive challenges to these VoIP-only companies, since they have the advantages of a large existing customer base, the potential to offer VoIP as part of an attractive bundle of services, and significant financial resources that could support lower pricing and greater marketing activities. Because independent VoIP providers do not control the broadband Internet connection over which their services are provided, these companies do not have full control over the quality of their VoIP calls and are vulnerable to interference with their services by broadband access providers with whom they may compete. Because they are not regulated telecommunications carriers, VoIP-only companies also lack direct access to new telephone numbers and to the resources that facilitate local number portability, features that are important in attracting new customers and maintaining customer satisfaction. However, many analysts note that independent VoIP providers have already established a strong footprint in the VoIP communications market.
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Overview
We are a leading provider of broadband telephone services with over 1.6 million subscriber lines as of April 1, 2006. Utilizing our innovative Voice over Internet Protocol, or VoIP, technology platform, we offer feature-rich, low-cost communications services that offer users an experience similar to traditional telephone services. While customers in the United States currently represent over 95% of our subscriber lines, we continue to expand internationally, having launched our service in Canada in November 2004 and in the United Kingdom in May 2005. Since our initial launch in October 2002, we have experienced rapid subscriber line growth. For example, we more than tripled our subscriber lines during 2005.
We offer our customers a variety of service plans, each of which has a fixed monthly fee. Each of our service plans includes a full suite of features typically offered by traditional circuit-switched telephone service providers, such as call waiting, caller ID and call forwarding. In addition, we offer several enhanced features at no additional charge that are not typically offered by traditional telephone service providers, such as area code selection, web- and e-mail-based voicemail and an account management website that allows customers to add or change their features online. We also offer a number of premium services for an additional fee, such as toll free numbers, fax numbers and virtual phone numbers. We offer low international per minute calling rates for calls to locations outside the United States, Puerto Rico, and Canada. We believe the combination of these factors allows us to offer an attractive value proposition to our customers.
Our customers can make and receive calls using a standard telephone plugged into a portable Vonage-enabled device almost anywhere a broadband Internet connection is available. We transmit these calls using VoIP technology, which converts voice signals into digital data packets for transmission over the Internet. We provide our service by using our customers' existing broadband Internet connections, eliminating the need for us to build or lease costly "last-mile" networks. In addition, our network is based on internally developed software and industry standard servers, rather than the more expensive circuit switches used by traditional telephone service providers. This network design enables us to monitor, maintain and expand our network quickly and efficiently while realizing capital and operating cost savings.
We have invested heavily to build a strong brand that helps drive our subscriber growth. We employ an integrated marketing strategy that includes extensive television, online, direct mail, telemarketing, print and radio advertising, a customer referral program and a range of other promotions, all designed to build our brand, attract new subscribers and retain existing customers. For example, according to Nielsen//NetRatings, an independent Internet media and market research firm, we were the top advertiser on the Internet from January 2005 through the first quarter of 2006 based on estimated spending and impressions. We employ a broad distribution strategy and acquire customers through our websites, our toll free numbers and our presence in leading retail outlets, including Best Buy, Circuit City, CompUSA and RadioShack stores.
Our Strengths
We believe we have the following strengths:
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Strategy Leadership, which was awarded in recognition of our strong marketing and brand development activities. We believe our strong brand recognition has enhanced our ability to sell our services through direct and retail distribution channels, allowing us to capitalize on growing market demand for broadband and VoIP.
Our technology platform is scaleable, meaning that we require only modest capital investments in physical plant, and, as the needs of our growing customer base increase, we can augment our capacity at a low incremental cost. Our platform also allows us to enter new markets rapidly and offer our services at attractive prices. Our development team continuously works to enhance our technology, develop new features and maintain our leadership position in broadband telephone services.
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efforts. We believe that this customer loyalty provides us with an important platform for continuing to grow our business.
Our Strategy
We believe that our strong brand identity and reputation for quality communications services are instrumental to building our customer base. Our core business strategy is to enhance our brand image and the quality of our services in order to attract new customers. As we build on our leading brand and our above-mentioned strengths, we are pursuing the following additional business strategies:
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variety of attractive equipment alternatives to further drive mainstream adoption of our service. Additionally, we intend to grow our existing relationships and develop new relationships with major retailers in order to enhance and reinforce the Vonage brand in mainstream consumers' minds and reach them in a familiar sales environment. For example, we have expanded the number of third-party field personnel who visit thousands of stores every month on our behalf to promote Vonage product knowledge, to check on product placement and availability and to drive in-store sales efforts. We also plan to offer a wider variety of attractive equipment alternatives to help continue to drive mainstream adoption of our services.
Service Offerings
We offer our broadband telephone services to customers through a variety of service plans with different pricing structures. All of our service plans include an array of both basic and enhanced features, and customers have the opportunity to purchase a number of premium features at an additional fee. In order to access our service, a customer need only connect a standard touch-tone telephone to a broadband Internet connection through a small Vonage-enabled device. After connecting the device, our customers can use a standard telephone to make and receive calls.
Plans
Within the United States, we currently offer two residential calling plans and two calling plans that cater to small offices or home offices. Each plan offers calling within the United States and to Puerto Rico and Canada, plus a package of enhanced services and features, for a fixed monthly fee. In
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addition, we offer low international calling rates for calls to locations outside the United States, Puerto Rico and Canada. Our primary U.S. service plans are as follows:
Monthly Plans
|
Monthly Minutes Within the
U.S., Puerto Rico and Canada |
Monthly Fee
|
|||
---|---|---|---|---|---|
Residential Premium Unlimited | Unlimited minutes | $ | 24.99 | ||
Residential Basic 500 |
|
500 minutes included (3.9¢ per additional minute) |
|
$ |
14.99 |
Small Business Unlimited |
|
Unlimited minutes + dedicated fax line with 500 minutes of outgoing service included (3.9¢ per additional fax minute) |
|
$ |
49.99 |
Small Business Basic |
|
1,500 minutes included + dedicated fax line with 500 minutes of outgoing service included (3.9¢ per additional minute) |
|
$ |
39.99 |
We also offer other plans, including Residential Fax Service, Business Fax and SoftPhone, which are described below. As of December 31, 2005, approximately 88% of our U.S. subscriber lines were for residential service, and approximately 68% of those residential subscriber lines were the premium unlimited plan. We offer similar plans in Canada and the United Kingdom.
In addition to our current small business plans, which target the small office and home office market, we are currently testing new business plans that will serve small companies with up to 100 lines. We do not expect to launch these new business plans in the near term.
Basic Features
Each of the above-referenced plans provides a number of our basic features, including:
Call Waiting | Caller ID Block (*67) | International Call Block | ||
Caller ID with Name | Call Forwarding | Repeat Dialing | ||
3-Way Calling | Call Return (*69) | Do Not Disturb |
Enhanced Features
All of our calling plans include a wide range of enhanced features at no additional charge to our customers, such as:
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We also offer a number of premium services for additional costs. These services include:
Devices
We believe that our ability to offer a variety of devices with enhanced features and capabilities differentiates our service offering from that of many of our competitors. Our plug-and-play Vonage-enabled devices permit our customers to take their equipment to different locations where broadband service is available as well as switch to different Internet service providers and continue to make and receive calls on their Vonage phone numbers. We offer our customers a range of equipment alternatives for their Vonage-enabled devices based upon our relationships with leading technology companies.
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Network Operations
Our network operations are conducted by our wholly owned subsidiary, Vonage Networks, Inc., which holds our networking equipment and employs the personnel who develop our technology.
How Vonage Calls Work
When our customer picks up the telephone and makes a call, our equipment and network transmit the call through the following process:
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If someone who does not have Vonage service calls a Vonage customer, the call is routed over the public switched telephone network to a gateway at one of our regional data connection points, where the analog signal is converted into digital data packets, and we route the call over the Internet through our call processing center to our customer.
Our scaleable network architecture and centrally managed technology platform are designed to provide customers with the familiar functions and ease of use associated with traditional telephone service while allowing us to maintain and upgrade our network without significant capital expenditure and to provide our services at a low cost. Our network is based on internally developed software, rather than the expensive circuit switches and softswitches used by other telephone service providers. We have also developed a number of software systems, such as our web-based billing system, that provide our customers with valuable features while simultaneously enabling us to manage our business more efficiently.
Core Network Elements
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regional data connection points, 23 of which are in the United States. Our interconnections with the public switched telephone network are made pursuant to agreements we have with several telecommunications providers, and our equipment at connection points is typically housed in small co-location facilities in which we lease space from other telecommunications providers. As we expand, we launch additional regional data connection points to reduce our network transport and other costs. This method of connecting to the public switched telephone network allows us to expand capacity quickly, as necessary to meet call volume, and to provide redundancy within our network.
Other Key Systems
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In some cases, even under our new 911 service, emergency calls may be routed to a PSAP in the area of the customer's registered location, but such PSAP will not be capable of receiving our transmission of the caller's registered location information and, in some cases, the caller's phone number. Where the emergency call center is unable to process the information, the caller is provided a service that is similar to the basic 911 services offered to some wireline telephone customers and some wireless customers. In these instances, the emergency caller may be required to verbally advise the operator of their location at the time of the call and, in some cases, a call back number so that the call can be handled or forwarded to an appropriate emergency dispatcher.
The emergency calls of customers located in areas where we currently do not provide either E-911 or the basic 911 described above are either routed directly to the PSAP in the area of the customer's location or supported by a national call center that is run by a third party provider and operates 24 hours a day, seven days a week. In these cases, a caller must provide the operator with his or her physical location and call back number. If a customer reaches the call center, the operator will coordinate connecting the caller to the appropriate PSAP or emergency services provider. Our E-911 service does not support the calls of our WiFi phone and SoftPhone users. The emergency calls of our WiFi phone and SoftPhone users are supported by the national call center.
Technology and Development
We conduct substantial ongoing technology development to continually strengthen our network platform and enhance the communications services we offer to our customers. We seek to hire talented and innovative engineers and software programmers to solve challenging problems in areas such as distributed computing and high availability systems. For example, through our patent-pending SIP-thru-NAT SM technology, we have developed the ability to provide VoIP phone service to a customer whose Vonage-enabled device is located behind a network firewall without requiring any manual configuration.
Key technology initiatives include the following:
Cost-Effective Scaleability
Our rapid growth requires us to quickly and efficiently scale our operations to meet increased call volume, while continuing to ensure call quality and service reliability. We continue to research new hardware and software technologies that will further enable us to grow. We also identify and use commercial products and systems from vendors, such as Oracle, Cisco and IBM, where appropriate.
Customer Equipment Alternatives
We believe that our customers desire a wide array of equipment alternatives for accessing our services. As a result of our development efforts with Texas Instruments, Vonage-certified chipsets and reference designs can be incorporated in computing and telephony devices. Another equipment alternative is a wireless handset that was developed by UTStarcom using its own technology. This wireless handset, which was released in the second half of 2005, is an integrated phone and adapter
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employing WiFi technology that allows customers to use Vonage phone service while roaming throughout an enterprise campus, home or public WiFi network. We continue to pursue additional strategic relationships with leading semiconductor chip manufacturers, similar to our existing relationship with Texas Instruments.
Service Features
We have developed a variety of service features that we offer to our customers in addition to the basic local and long-distance voice services we provide. We continue to develop and offer new service features we believe our customers will find attractive.
Marketing
Our marketing objective is to acquire customers cost-effectively while continuing to build brand image and awareness. We target both the residential and small office and home office market segments, and our advertising themes promote product value, attractive features and simplicity of use.
We employ an integrated marketing strategy consisting of extensive television, online, direct mail and telemarketing, print and radio advertising, a customer referral program and a range of other promotions, all designed to build our brand, attract subscribers and retain existing customers. Our strategy is designed to drive customer acquisition through all of our sales channels. We monitor the results of our marketing efforts closely in a number of ways, including the cost of acquiring new subscriber lines, to evaluate which approaches produce the best results and deploy our marketing resources accordingly.
A majority of our marketing budget is used for our extensive online advertising campaign. We use banner advertisements, search engine key words and text links. Our advertising placement emphasizes large Internet portals and ad networks, such as Yahoo!, Google and MSN. According to Nielsen//NetRatings, an independent Internet media and market research firm, we were the top advertiser on the Internet from January 2005 through the first quarter of 2006 based on estimated spending and impressions. Our online advertisements link directly to our website, where customers can immediately subscribe to our services.
In late December 2004, we launched a television advertising campaign in conjunction with our existing Internet and print commercials to extend the reach of our brand awareness. Our television campaigns have been successful, as measured by the increase in our customer growth after introduction of the campaigns. They are generally 30-second spots that run on national cable and network stations. We have been able to optimize our television advertisement purchases through the strategic purchase of specific time slots when possible.
We believe the scale of our advertising program has given us greater purchasing power than many of our competitors and has enabled us to negotiate favorable pricing arrangements. Unlike our regional competitors, we are able to leverage national advertising campaigns. We are opportunistic in our purchase of available advertising slots and keep part of our budget in reserve to take advantage of last-minute opportunities. This approach often provides significant cost savings, enabling us to reach a greater number of potential customers more cost-efficiently.
We augment these marketing efforts with Refer-a-Friend, our online customer referral program. Under this program, existing customers can use the Vonage website to send e-mails to their friends that describe our service offerings and track their responses. In return for referring a new customer, both the new and the existing customer receive a service credit. Approximately 16% of the net subscriber line additions through our direct sales channel, representing 13% of our net subscriber line additions, during 2005 resulted from customer referrals.
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Sales and Distribution
Direct Sales
The primary sales channel for our service historically has been online direct sales. Customers can subscribe to our services at our websites, http://www.vonage.com, http://www.vonage.ca and http://www.vonage.co.uk, or through our toll free number. We complement this sales channel with outbound telephone direct sales. In 2005, approximately 79% of our net subscriber line additions were added through our direct sales channel.
Retail Sales
In addition to our direct sales channel, we have experienced strong growth driven through our retail channel. Our service currently is available at the outlets of leading national and regional retailers, including Best Buy, Circuit City, CompUSA and RadioShack. We believe that the availability of our devices through premier retailers enhances and reinforces the Vonage brand with consumers and that the retail channel increases our ability to acquire mainstream consumers by reaching them in a familiar and interactive shopping environment. By working with manufacturers to have Vonage-certified VoIP chipsets installed in a variety of common communications devices, such as cordless phones, we believe we will expand our presence beyond electronics stores into general interest retailers. As there is limited space in the stores of leading retailers, we believe our presence in them provides us with a competitive advantage in new subscriber line acquisitions. We also benefit from the co-marketing of our service with broadband Internet connectivity, customer equipment and home networking equipment by some of our retailers.
We believe that we provide an attractive VoIP offering for national retail chains and that retailers give our displays prominence in their selling space and direct most customer inquiries about VoIP to our service. In addition, because our service offering in the United States is national, our retail product offerings have greater appeal to large regional and national chains than the offerings of cable operators and local telephone companies, which are regional. In our ongoing effort to reach more customers and build our brand, we continually build our retail relationships and work to increase our retail store presence. We currently are negotiating with several major retailers to expand our retail sales network.
We have seen a significant increase in retail sales, which accounted for 21% of our net subscriber line additions in 2005, and we anticipate further growth from our retail sales relationships. The following table lists our major retail sales relationships, each of which has been in place since at least December 2004:
Amazon.com | Fry's | Sam's Club | ||
Best Buy |
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J&R Music World |
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Staples |
Buy.com |
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Office Depot |
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Staples Business Depot (Canada) |
Circuit City |
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RadioShack |
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The Source by Circuit City (Canada) |
CompUSA |
|
|
|
|
In addition, we recently launched a retail presence through WalMart, Target.com, London Drugs (Canada), Best Buy/Future Shop (Canada), Office Depot (Canada), CompuSmart (Canada), Staples (UK), Comet (UK), Maplin (UK) and broadbandbuyer.co.uk (UK).
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Customer Service
We offer our customers support 24 hours a day, seven days a week through both our online account management website and our toll free number. We believe that many customers use our online account management website first when they have a question or problem with their service and that many of them are able to resolve their concerns online without needing to speak to a customer care representative.
Our customers can manage almost all aspects of their accounts online. This capability both empowers our customers through self-service and reduces our customer care expenses. Through our comprehensive real-time online account management website, customers can:
Customers also can access a library of frequently asked questions we have posted on our account management website to troubleshoot common service issues and can send further questions or problems to customer care by e-mail.
Customers who cannot or do not wish to resolve their questions through our website can contact a live customer care representative through our toll free number. We staff our customer care hotline through a combination of our own employees and outsourced customer care representatives. Customer calls are handled by one of three tiers of trained responders, based on the nature and complexity of the customer's question or problem. We also have a separate team of Vonage employees dedicated to resolving customers' complex local number portability issues that could not be handled by our outsourced personnel.
We are continuously expanding and improving our customer care team in order to support the rapid growth of our business. All new customer care representatives are trained through an established program developed and led by Vonage employees. We also offer continuing training programs for our existing employees, which employees can use to improve their skills and advance to new positions in our company.
We also continue to evaluate our customer care systems and invest in new applications to improve our responsiveness. For example, in March 2005 we upgraded our call center technology, which expanded our call center capacity and improved our call and staff management capability. Within one week, the average wait time on our customer care hotline decreased by 36%.
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Billing
All customer billing is automated through our website, and notifications of credit card charges are distributed by e-mail. We automatically collect all fees from our customers' credit cards. Subscription fees are collected monthly in advance, and per minute fees for international calls and domestic calls in excess of included minutes are collected monthly in arrears. If these fees exceed a certain dollar threshold, they are charged to the customer's credit card immediately. By collecting fees in this manner, we are able to reduce the amount of accounts receivable that we have outstanding, thus allowing us to have lower working capital requirements. Collecting in this manner also helps us mitigate bad debt exposure. If a customer's credit card is declined and it cannot be successfully processed during the current and subsequent month's billing cycle, we will then terminate the account.
Intellectual Property
We believe that our technological position depends primarily on the experience, technical competence and the creative ability of our engineering and technology staff. We review our technological developments with our technology staff and business units to identify the features of our core technology that provides us with a technological or commercial advantage and file patent applications as necessary to protect these features in the United States and internationally. Our company policies require our employees to assign their intellectual property rights to us and to treat all technology as our confidential information. We have filed several patent applications to protect our technology, which are all currently pending.
In addition to developing technology, we evaluate the licensing and acquisition of intellectual property of others in order to identify technology that provides us with a technological or commercial advantage.
We are the owner of numerous trademarks and service marks and have applied for registration of our trademarks and service marks in the United States and abroad to establish and protect our brand names as part of our intellectual property strategy. Some of our registered marks include Vonage®, Redefining Communications®, Vonage Digital Voice® and Vonage The Broadband Phone Company®. These registered marks have a duration of five years from the date they are registered.
We endeavor to protect our internally developed systems and maintain our trademarks and service marks. Typically, we enter into confidentiality or license agreements with our employees, consultants, customers and vendors in an effort to control access to and distribution of our technology, software, documentation and other information.
Competition
We face strong competition from incumbent telephone companies, cable companies, alternative voice communication providers and wireless companies. Because most of our target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract these customers away from their existing providers. This will become more difficult as the early adopter market becomes saturated and mainstream customers make up more of our target market. We believe that the principal competitive factors affecting our ability to attract and retain customers are price, call quality, reliability, customer service, and enhanced services and features.
Incumbent telephone companies
The incumbent telephone companies are our primary competitors and have historically dominated their regional markets. These competitors include AT&T (formerly SBC Communications), BellSouth, Qwest Communications and Verizon Communications as well as rural incumbents, such as Citizens
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Communications. AT&T and BellSouth have announced their intention to merge. These competitors are substantially larger and better capitalized than we are and have the advantage of a large existing customer base. Many of their customers either do not have a broadband Internet connection or are very satisfied with their current service. In addition, many users of traditional phone service who might otherwise switch to our service do not have the ability to cancel their traditional phone service without also losing their broadband DSL service. While a majority of broadband users today subscribe to cable modem service, recent trends suggest that DSL providers are gaining broadband market share. Others are not willing to install a Vonage-enabled device, accept the limitations of our emergency calling service, forgo service during power outages or trust a new company such as Vonage with a vital service. Before subscribing to our service, a substantial majority of our new customers must first decide to terminate their service from their incumbent telephone company or pay for our service in addition to their existing service.
The incumbent phone companies own networks that include a last mile connection to substantially all of our existing and potential customers as well as the places our customers call. As a result, the vast majority of the calls placed by a Vonage customer are carried over the "last mile" by an incumbent phone company, and we indirectly pay access charges to these competitors for each of these calls. In contrast, traditional wireline providers do not pay us when their customers call our customers. Their "last mile" connections may enable these competitors to bundle phone service with Internet access and, potentially, television at prices we find difficult to compete with.
We currently charge prices that are significantly lower than prices charged by the incumbent phone companies, which has facilitated our rapid growth. The incumbent phone companies have significant overhead expenses, which have resulted in the high prices they charge. However, their marginal cost to complete each additional call on their networks is negligible. This could lead them to decrease the prices they charge, which would have an adverse effect on our ability to attract and retain their customers. We also currently compete successfully with the incumbent phone companies on the basis of the features we offer that they do not (such as area code selection and virtual phone numbers) and features we offer at no extra charge. The incumbent phone companies might be able to improve their offerings in these areas, which would also have an adverse effect on our ability to attract and retain customers. Furthermore, the incumbent phone companies could offer broadband communications through subsidiaries that are not burdened with their overhead and legacy equipment. Given their ability to offer DSL last mile connections, this would significantly enhance their ability to compete with us on the basis of price and features.
The incumbent phone companies, as well as the cable companies, are well-financed and have large legal departments. They have long-standing relationships with regulators, legislators, lobbyists and the media. This can be an advantage for them because legislative, regulatory or judicial developments in our rapidly evolving industry and public perception could have a material effect on the value of our stock.
Cable companies
These competitors include companies such as Cablevision, Comcast, Cox Communications and Time Warner Cable. Cable companies have made and are continuing to make substantial investments in delivering last mile broadband Internet access to their customers. As a result, they can be expected to compete intensely for the money that their customers spend for phone service over that connection. They provide Internet access and cable television to most of our existing and potential customers. This allows them to engage in highly targeted, low-cost direct marketing and may enhance their image as trusted providers of services.
Cable companies are using their existing customer relationships to bundle services. For example, they bundle Internet access, cable television and phone service with an implied price for the phone
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service that may be significantly below ours. In addition to their existing bundling capabilities, Advance/Newhouse Communications, Comcast, Cox Communications and Time Warner Cable announced on November 2, 2005 that they will form a joint venture with Sprint Nextel which will enable these cable companies to offer wireless services as a fourth element of their bundle of service offerings. We believe this joint venture will further enhance the competitive offering of cable companies.
Many cable companies send technicians to customers' premises to initiate service. Although this is expensive, it also can be more attractive to customers than installing their own router. In addition, these technicians may install an independent source of power, which can give customers assurance that their phone service will not be interrupted during power outages.
Cable companies are able to advertise on their local access channels with no significant out-of-pocket cost and through mailings in bills with little marginal cost. They also receive advertising time as part of their relationships with television networks, and they are able to use this time to promote their telephone service offerings.
Cable companies' ownership of Internet connections to our customers could enable them to detect and interfere with the completion of our customers' calls. These companies may degrade the quality of, give low priority to or block entirely the information packets and other data we transmit over their lines. In addition, these companies may attempt to charge their customers more for using our services. This could also apply to phone companies that connect our customers to the Internet.
We believe our ability to successfully compete with cable companies is enhanced by the features we offer that cable companies do not offer (such as portable service and wide choice of area codes) and because our national presence makes us more attractive to national retail outlets and allows us to more efficiently purchase national advertising.
Wireless telephone companies
We also compete with wireless phone companies, such as Cingular Wireless LLC, Sprint Nextel Corporation, T-Mobile USA, Inc. and Verizon Wireless. Some consumers use wireless phones, instead of VoIP phones, as a replacement for a wireline phone. Also, wireless phone companies increasingly are providing wireless broadband Internet access to their customers and may in the future offer VoIP to their customers. We believe some of these companies are developing a dual mode phone that will be able to use VoIP where broadband access is available and cellular phone service elsewhere. Wireless telephone companies have a strong retail presence and have significant financial resources.
Alternative voice communication providers
Many alternative voice communication providers are smaller companies with limited resources that seek to offer a primary line replacement service. These providers have not achieved customer penetration or market traction comparable to ours.
In addition to these competitors, we also compete with companies that offer computer-based VoIP services. These computer-based VoIP services typically are not marketed as a primary line replacement, but because they offer their users the ability to call and be called from any phone using a dedicated phone number, they may be used to replace traditional phone service. We believe that Skype (a service of eBay), in particular, has a large group of users, many of whom may potentially use Skype as their only phone service. With Skype, however, the ability to make and receive calls over the public switched telephone network is a feature that costs extra and which only a fraction of Skype users purchase, as compared to Skype's free service that has a larger market penetration.
We may also increasingly face competition from large, well-capitalized Internet companies, such as America Online, Google, Microsoft and Yahoo!, which have launched or plan to launch VoIP-enabled instant messaging services. While not all of these competitors currently offer the ability to call or be
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called from anyone not using their service, in the future they may integrate such capabilities into their service offerings. In addition, a continuing trend toward consolidation of telecommunications companies and the formation of strategic alliances within the telecommunications industry, as well as the development of new technologies, could give rise to significant new competition.
Legal Proceedings
From time to time, we may become party to litigation and subject to claims, normally those incident to the ordinary course of our business.
IPeria, Inc. On October 10, 2003, we terminated our contract with IPeria, Inc., our former voicemail vendor. Under the terms of the contract, we were permitted to terminate the contract for any reason. On April 12, 2004, IPeria filed a complaint against Vonage in the Superior Court for the County of Suffolk, Massachusetts. IPeria asserted a number of different claims, including breach of contract, copyright infringement, breach of implied covenant of good faith and fair dealing, negligent misrepresentations, fraud and unfair and deceptive trade practices. In support of these claims, IPeria essentially alleges that it provided voicemail services to Vonage consistent with the terms of the contract and that Vonage failed to pay for those services in violation of the contract. The complaint seeks payment of $619,000 plus accrued interest that IPeria asserts it is owed on the contract and treble damages.
We answered IPeria's complaint on May 10, 2004 and denied all material allegations. In addition, we asserted counterclaims against IPeria. Specifically, we alleged that IPeria assured us that its voicemail system would meet minimum performance and scaleability standards, and that the voicemail system failed to meet those standards. We are seeking payment of all damages we suffered as the result of IPeria's failures, treble damages and attorneys' fees.
Discovery in this matter began in June 2004 and has now been completed. On December 1, 2005, IPeria filed a motion for summary judgment, and on December 2, 2005, we filed a motion for summary judgment on IPeria's copyright and unfair trade practices claims. IPeria subsequently dismissed its copyright claim. Oppositions to the motions for summary judgment were served on January 23, 2006, and replies were submitted on February 8, 2006. Oral argument on the motions took place on February 16, 2006, and the court has now taken the motions under advisement. We contested liability in this matter and expect to continue to defend the case vigorously. We have engaged in settlement discussions on this matter and, in any event, we believe an unfavorable outcome would not have a material adverse effect on our results of operations and cash flows in the period in which the matter is resolved. We have recorded a reserve to cover the potential exposure relating to this litigation, which reserve was not material to our financial statements.
Joshua B. Tanzer. On October 18, 2005, Joshua B. Tanzer commenced a suit against Vonage in the United States District Court for the Southern District of New York seeking damages of approximately $14.24 million and has subsequently sent us a letter increasing his claim to $26.75 million. Mr. Tanzer claims that damages are due with respect to our sale of Series D Convertible Preferred Stock and Series E Convertible Preferred Stock and convertible notes pursuant to the terms of an engagement letter governing Nanes Delorme Capital Management's services in connection with our placement of Series B and C Convertible Preferred Stock. Mr. Tanzer's complaint further seeks a declaratory judgment that he is entitled to be paid additional fees in connection with any future private placements of our securities. The engagement letter states that Mr. Tanzer was "associated" with Nanes Delorme and was a registered representative of that firm. We believe that our obligations with respect to Mr. Tanzer and Nanes Delorme were completely performed at the conclusion of the Series C offering, and no further amount is owed to Mr. Tanzer or Nanes Delorme on account of the Series D, Series E or convertible note offerings. We filed our answer to the complaint on December 7, 2005 and denied all material allegations. On February 17, 2006, we filed
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counterclaims against Tanzer and a third-party complaint against Nanes Delorme. Among other things we seek the return of all fees paid to Nanes Delorme. On March 13, 2006, Nanes filed an answer and is seeking declaratory judgment regarding the parties' respective rights and obligations under the engagement letter and damages of approximately $14.25 million in payment of investment banking fees related to our sale of Series D and Series E Preferred Stock. On April 5, 2006, we filed our answer to Nanes Delorme's counterclaim. We intend to defend this matter vigorously and believe an unfavorable outcome would not have a material adverse effect on our results of operations and cash flows in the period in which the matter is resolved. Based upon prior settlement discussions, we have recorded a reserve to cover the potential exposure relating to this litigation, which reserve was not material to our financial statements. The amount was recorded as an offset against the Series D Preferred Stock as these fees relate to the placement of those securities.
Shaw Communications Inc. and Shaw Cablesystems G.P. On March 27, 2006, Shaw Communications Inc. and Shaw Cablesystems G.P. (collectively "Shaw") filed a Statement of Claim with the Court of the Queen's Bench of Alberta, Judicial Centre of Calgary. The Statement of Claim alleges that certain statements attributed to Vonage Canada regarding Shaw's "Quality of Service Enhancement" fee are false, misleading and defamatory and have interfered with Shaw's relations with its customers. Shaw is seeking an injunction, damages and attorney's fees. We believe Shaw's claims have no merit and intend to vigorously defend the lawsuit.
Threatened Lawsuit. We received a letter from three stockholders, threatening a lawsuit against us, Mr. Citron, Morton David, a member of our board of directors, and a former member of our board of directors. These stockholders purchased our common stock in 2001. They allege that our subsequent issuances of preferred stock illegally diluted their investments in our common stock. The letter was accompanied by a proposed complaint and press release which the letter states would respectively be filed and issued if the three stockholders' claims are not settled. We intend to vigorously contest all claims if the stockholders do in fact commence legal action, and it is not possible at this time to predict the outcome of any such litigation.
State Attorney General Proceedings. Several state attorneys general have initiated investigations and, in two states, have commenced litigation concerning our marketing disclosures and advertising. We are cooperating with those investigations and are pursuing joint settlement negotiations with the attorneys general of Florida, Illinois, Massachusetts, Texas and Michigan and separate negotiations with the attorneys general of Connecticut and New Jersey. While these complaints seek awards of damages and penalties, no particular amounts have been specified at this time other than with respect to New Jersey.
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Federal Trade Commission Investigation. On August 31, 2005, the Federal Trade Commission, or FTC, issued a Civil Investigative Demand to us which requested information regarding our 911 service and complaints or notices pertaining to that service, our residential unlimited calling plan and our compliance and our telemarketing vendors' compliance with the FTC's Telemarketing Sales Rule including, but not limited to, the requirement to refrain from telemarketing to persons who appear on the National Do Not Call Registry. No formal action has been filed against Vonage at this time. We are unable at this time to predict the outcome of the FTC's investigation, whether a formal action will be filed against Vonage, to assess the likelihood of a favorable or unfavorable outcome in that event, or to estimate the amount of liability in the event of an unfavorable outcome.
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Patent Litigation.
With respect to the patent litigation identified above, we believe that we have meritorious defenses against the claims. However, we might not ultimately prevail in these actions. Whether or not we ultimately prevail, litigation could be time-consuming and costly and injure our reputation. If any of the plaintiffs prevail in their respective actions, we may be required to negotiate royalty or license agreements with respect to the patents at issue, and may not be able to enter into such agreements on acceptable terms, if at all. Any limitation on our ability to provide a service or product could cause us to lose revenue-generating opportunities and require us to incur additional expenses. These potential costs and expenses, as well as the need to pay additional damages awarded in the favor of the plaintiffs could materially adversely affect our business.
We also are involved in certain other threatened and pending legal proceedings and, from time to time, receive subpoenas or civil investigative demands from governmental agencies for information that may be pertinent to their confidential investigations. Although the results of litigation claims and investigations cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors.
Property
We recently relocated our headquarters to Holmdel, New Jersey to a 350,000 square foot facility, of which we currently occupy 306,250 square feet under a renewable lease that expires in 2017. We will pay approximately $3.5 million in 2006, the first full year of occupancy, increasing each year to $4.7 million in 2016, the last full year of occupancy. We estimate the cost of renovating our new headquarters to be $49.8 million, $8.8 million of which will be reimbursed by our landlord. Our Canadian office is located in Mississauga, Ontario and includes approximately 19,000 square feet, which will increase to approximately 28,500 square feet between April and August of 2006. Our leases with
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respect to this office expire in 2009 and 2010. Our United Kingdom office is located in London and includes approximately 535 square feet. This lease is a month-to-month lease.
Our Corporate Legal Structure
We were incorporated in Delaware in May 2000 as MIN-X.COM, Inc. and changed our name to Vonage Holdings Corp. in February 2001. We conduct our operations primarily through five distinct subsidiaries: Vonage America Inc., Vonage Marketing Inc., Vonage Networks Inc., Vonage Canada Corp. and Vonage Limited, our U.K. subsidiary.
Each of Vonage America Inc., Vonage Canada Corp. and Vonage Limited has a separate operating budget and management team. Vonage America Inc., through Vonage Marketing Inc., conducts brand building, advertising and promotional strategies in the United States. Vonage Canada Corp. and Vonage Limited are responsible for coordinating these activities in Canada and the United Kingdom, respectively. As of December 31, 2005, Vonage America had over 95% of our subscriber lines.
Vonage Networks is responsible for the operational and developmental aspects of our service, completing all calls to or from our customers, features and new products. Its assets largely consist of network equipment and its employees are largely technical personnel. When we make agreements with traditional telephone companies to terminate our customers' calls, or when we purchase network equipment, we generally do it through Vonage Networks.
Employees
As of December 31, 2005, we had 1,355 employees. None of our employees is subject to a collective bargaining agreement.
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Overview of Regulatory Environment
Traditional telephone service historically has been subject to extensive federal and state regulation, while Internet services generally have been subject to less regulation. Because some elements of VoIP resemble the services provided by traditional telephone companies and others resemble the services provided by Internet service providers, the VoIP industry has not fit easily within the existing framework of telecommunications law and until recently has developed in an environment largely free from regulation.
The Federal Communications Commission, or FCC, the U.S. Congress and various regulatory bodies in the states and in foreign countries have begun to assert regulatory authority over VoIP providers and are continuing to evaluate how VoIP will be regulated in the future. In addition, while some of the existing regulation concerning VoIP is applicable to the entire industry, many rulings are limited to individual companies or categories of service. As a result, both the application of existing rules to us and our competitors and the effects of future regulatory developments are uncertain.
Jurisdiction over Vonage's VoIP Services
On November 12, 2004, the FCC declared that our service is subject to federal regulation and preempted the Minnesota Public Utilities Commission, or MPUC, from imposing certain of its regulations on us. The FCC's decision was based on its conclusion that our service is interstate in nature and cannot be separated into interstate and intrastate components. While this ruling does not exempt us from all state oversight of our service, it effectively prevents state telecommunications regulators from imposing certain burdensome and inconsistent market entry requirements and certain other state utility rules and regulations on our service.
The MPUC, the state public utility commissions of California, New York and Ohio, and the National Association of State Utility Consumer Advocates appealed the FCC's November 12, 2004 order. California has since withdrawn its appeal. The appeals have been consolidated in the United States Court of Appeals for the Eighth Circuit. Briefing has been completed, and oral argument was held on January 12, 2006.
The New York State Public Service Commission, or NYPSC, also attempted to assert regulatory authority over our services. On September 10, 2003, Frontier Telephone of Rochester, Inc. filed a complaint with the NYPSC, alleging that our provision of service violated New York law. In response, the NYPSC initiated a generic proceeding to examine VoIP issues. The NYPSC later ruled that our service was subject to its jurisdiction and ordered us to file a tariff and an application for authority to offer communications services in New York. However, on July 16, 2004, we obtained a preliminary injunction from the United States District Court for the Southern District of New York preventing the NYPSC from enforcing its order until the conclusion of further proceedings. The District Court's order noted that we were likely to succeed on the merits of our claim that we were exempt from regulation by the NYPSC. On December 20, 2004, we filed a motion for a permanent injunction. On December 14, 2005, the District Court denied that motion. However, the court stated that its preliminary injunction would remain in place until the FCC concludes its ongoing rulemaking regarding the regulatory classification of VoIP services, which is discussed below.
In addition to these proceedings, we have received inquiries regarding our service from various state telecommunications regulators. We also are aware of a number of proceedings, informal investigations and complaints not directed at us but concerning various forms of VoIP in several other states. If the FCC's November 12, 2004 order is overturned or modified, we could become subject to state rules and regulations that apply to providers of traditional telephony services. This could require us to incur litigation and compliance costs, restructure our service offerings, exit certain markets or raise the price of our service, or could otherwise have a material adverse effect on our business.
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Regulatory Classification of VoIP Services
On February 12, 2004, the FCC initiated a rulemaking proceeding concerning the provision of voice and other services and applications utilizing Internet Protocol technology. As part of this proceeding, the FCC is considering whether VoIP services like ours should be classified as information services or telecommunications services. We believe our service should be classified as an information service. If the FCC decides to classify VoIP services like ours as telecommunications services, we could become subject to rules and regulations that apply to providers of traditional telephony services. This could require us to restructure our service offering or raise the price of our service, or could otherwise significantly harm our business.
While the FCC has not reached a decision on the classification of VoIP services like ours, it has ruled on the classification of specific VoIP services offered by other VoIP providers. The FCC has drawn distinctions among different types of VoIP services, and has concluded that some VoIP services are telecommunications services while others are information services. The FCC's conclusions in those proceedings do not determine the classification of our service, but they likely will inform the FCC's decision regarding VoIP services like ours.
VoIP E-911 Matters
On June 3, 2005, the FCC released an order and notice of proposed rulemaking concerning VoIP emergency services. The order set forth two primary requirements for providers of "interconnected VoIP services" such as ours, meaning VoIP services that can be used to send or receive calls to or from users on the public switched telephone network.
First, the order requires us to notify our customers of the differences between the emergency services available through us and those available through traditional telephony providers. We also must receive affirmative acknowledgment from all of our customers that they understand the nature of the emergency services available through our service. On September 27, 2005, the FCC's Enforcement Bureau released an order stating that the Enforcement Bureau will not pursue enforcement actions against VoIP providers, like us, that have received affirmative acknowledgement from at least 90% of their subscribers. We are required to file a report with the FCC when we receive affirmative acknowledgments from 100% of our customer base. We have received affirmative acknowledgment from substantially all of our customers that they understand the nature of the emergency services available through our service, and thus we are substantially in compliance with the first aspect of the FCC's June 3, 2005 order.
Second, the order requires us to provide enhanced emergency dialing capabilities, or E-911, to all of our customers by November 28, 2005. Under the terms of the order, we are required to use the dedicated wireline E-911 network to transmit customers' 911 calls, callback number and customer-provided location information to the emergency authority serving the customer's specified location.
On November 7, 2005, the FCC's Enforcement Bureau issued a Public Notice with respect to that requirement. The Public Notice indicated that providers who have not fully complied with the enhanced emergency dialing capabilities requirement are not required to discontinue the provision of services to existing clients, but that the FCC expects that such providers will discontinue marketing their services and accepting new customers in areas in which the providers cannot offer enhanced emergency dialing capabilities.
We also have taken steps to comply with the enhanced emergency service rules, but we were unable to comply with all of the requirements of the FCC's order by the November 28, 2005 deadline, are not currently in full compliance and do not expect to be in full compliance in the short term unless we are granted a waiver of the requirements by the FCC. For approximately 25% of our customers, we are currently unable to provide E-911 coverage. On November 28, 2005, we filed a petition for extension of time and limited waiver of certain of the enhanced emergency service requirements, including the limitations on marketing and accepting new customers. The FCC has not acted on our
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petition, and we cannot predict whether the FCC will grant our petition or provide other relief. Should we be unable to obtain an extension of time to implement the requirements of the order, we may be subject to enforcement action by the FCC that could include monetary forfeitures, cease and desist orders, and other penalties. Although we are not currently required to do so, we may also be required to stop serving those customers to whom we cannot provide the required enhanced emergency dialing capabilities and may be required to stop marketing our services or accepting new customers in areas in which we cannot provide these capabilities. Any of these penalties could materially harm our business. As of April 1, 2006, approximately 75% of our U.S. subscriber lines were E-911 compliant. Additional progress is being made on a daily basis, and we expect to provide E-911 capabilities to nearly all of our remaining subscriber lines within the year.
The FCC's June 3, 2005 order also included a notice of proposed rulemaking that considers, among other things, whether interconnected VoIP providers like us must transition to an emergency services system that would enable interconnected VoIP providers to establish the location of their customers without the customer providing location information. The comment period closed September 12, 2005. We do not know when the FCC may take further action in this proceeding. If the FCC adopts additional regulatory obligations, implementing systems to comply with the obligations could be time consuming and expensive.
See "Fees and Taxes" for a discussion of fees we may collect in the future in connection with providing E-911.
Access to Networks
Our customers must have broadband access to the Internet in order to use our service. Some providers of broadband access may have previously taken measures that interfere with their customers' ability to use our service. The extent of the legal obligation of providers of broadband access to allow their customers to use our service without interference, without imposing additional costs, and without degradation of service quality is not clear. If broadband providers interfere with our services, there will be a material adverse affect on us.
The Wireline Broadband Internet Access Services Proceeding
On September 23, 2005, the FCC released an order concluding that wireline broadband Internet access, such as digital subscriber line, or DSL, is an information service, not a telecommunications service, and thus is subject to lighter regulation than the FCC applies to telecommunications services. This order may give providers of wireline broadband Internet access services the right to limit their customers' access to VoIP and Internet services, including our service, or otherwise discriminating against providers of VoIP services such that our service becomes less attractive to customers. However, because telecommunications carriers that provide wireline broadband Internet access services will remain subject to Title II of the Telecom Act, their ability to engage in discriminatory and anticompetitive behavior may be limited by other provisions of law.
To facilitate a smooth transition to this new regulatory regime, the FCC's September 23, 2005 order requires facilities-based wireline broadband Internet access service providers to continue providing their wireline broadband transmission offerings on the same terms and conditions for one year from the effective date of the order.
The same day as the September 23, 2005 order, the FCC released a policy statement expressing its position that consumers should have access to the Internet and Internet-based services like ours. The FCC stated that consumers should be able to access content, connect equipment and run applications of their choice. The policy statement also reaffirms that consumers are entitled to competition among network service, application and content providers. The document is only a statement of policy and is not independently enforceable, and the ability and willingness of the FCC to protect access to these services is unclear. However, we believe the policy statement indicates that the FCC may protect
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consumers' access to VoIP services like ours. In that regard, as a condition to the FCC's October 31, 2005 approval of the mergers of Verizon and MCI and SBC and AT&T, the FCC required each of the merged companies to commit to conducting business in a manner that comports with the policy statement for two years from the merger closing dates.
Bundling of DSL and Voice Services by Incumbent Telephone Companies
In March 2005, the FCC ruled that state public utility commissions cannot require that incumbent telecommunications carriers permit competing carriers to provide voice service to retail customers over the same copper wires used by the incumbent carriers to provide DSL service. As a result of this ruling, many incumbent carriers no longer permit retail customers to purchase DSL as a stand-alone service. This ruling makes our service much less attractive to customers who obtain broadband Internet access through an incumbent telecommunications carrier because the incumbent carrier can require them to buy voice service together with DSL. While some incumbent carriers continue to make DSL available on a stand-alone basis, they have no legal obligation to do so and could discontinue such offerings at any time. However, in connection with its approval of the mergers of SBC and AT&T and Verizon and MCI, the FCC required each of the merged companies to offer DSL to consumers without requiring them also to purchase voice service for two years from the start dates. These conditions could make our service more attractive to our customers who obtain broadband Internet access through the merged entities. In addition to the FCC's requirements, some states imposed conditions on their approvals of the mergers that require the merged companies to offer standalone DSL.
The FCC's Consent Decree with the Madison River Companies
In February 2005, we filed a complaint with the FCC alleging that the Madison River Companies were improperly blocking our VoIP traffic on its DSL network. The FCC investigated our complaint and, in March 2005, entered into a consent decree with the Madison River Companies. While admitting to no wrongdoing, the Madison River Companies agreed to pay $15,000 to the United States Treasury and agreed not to block ports used for VoIP applications or otherwise prevent customers from accessing VoIP applications. The consent decree is scheduled to expire on September 3, 2007, but it could expire sooner under certain limited circumstances.
We believe the consent decree, like the FCC's September 23, 2005 policy statement and the condition imposed by the FCC on the mergers of SBC and AT&T and Verizon and MCI, indicates that the FCC is willing to take action to ensure that providers of wireline broadband Internet access services do not improperly deny consumers access to VoIP and other Internet applications. However, the consent decree is limited by its terms to the Madison River Companies, and the FCC has not prohibited all broadband Internet access service providers from engaging in similar behavior. Moreover, the consent decree relies on a section of the Telecom Act that applies only to telecommunications common carriers, and it is unclear whether the FCC has the legal authority to prohibit other broadband Internet access service providers from engaging in similar behavior. Finally, because the consent decree predates the FCC's September 23, 2005 order that wireline broadband Internet access service is an information service, it is unclear whether the FCC would be willing or able to prohibit similar conduct by other providers in the future.
The Supreme Court's Brand X Decision
On June 27, 2005, the United States Supreme Court issued a decision in National Cable and Telecommunications Association v. Brand X , upholding an FCC ruling that cable modem service is an information service and not a telecommunications service. Under this decision, providers of cable modem service may be able to restrict or interfere with their customers' access to and use of our service.
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Assistance to Law Enforcement
The Communications Assistance for Law Enforcement Act, or CALEA, requires certain communications service providers to assist law enforcement agencies in conducting lawfully authorized electronic surveillance. On September 23, 2005, the FCC released an order concluding that CALEA applies to VoIP providers that, like us, offer services that allow users to receive calls from, and make calls to, the public switched telecommunications network. The FCC established a deadline of May 14, 2007 for VoIP providers to comply with the requirements of CALEA. The order did not address the specific standards to be imposed on us. We have already begun to implement a CALEA-like capability for our service voluntarily, and we believe that we will be able to comply with the new requirements. However, if the FCC requires us to implement capabilities that differ from those we currently deploy, we may face technical obstacles or may incur additional expense in order to comply.
Universal Service Fund
FCC regulations require providers of interstate telecommunications services, but not providers of information services, to contribute to the federal Universal Service Fund, or USF. USF contributions are currently calculated as a percentage of interstate and international revenue. Currently, we are not required to contribute directly to the USF, although we do contribute indirectly to the USF through our purchase of telecommunications services from our suppliers. If VoIP services like ours are considered telecommunications services, we may be required to contribute directly to the USF. In addition, the FCC is considering a number of proposals that could alter the way that the USF is assessed. For instance, the FCC is considering an assessment based on the use of telephone numbers. In the future, we may be required to contribute directly to the USF or may face additional costs due to an increase in the contribution obligations of our suppliers.
Intercarrier Compensation
The FCC is currently seeking comment concerning proposed reforms of the intercarrier compensation system, which is a set of FCC rules and regulations by which telecommunications carriers compensate each other for the use of their respective networks. These rules and regulations affect the prices we pay to our suppliers for access to the facilities and services that they provide to us, such as termination of calls by our customers onto the public switched telephone network.
Access to Telephone Numbers and Local Number Portability
Our service and features depend on our ability to assign to customers the phone numbers they want. FCC regulations affect our ability to do this and the cost at which we can do it.
Access to New Telephone Numbers
Current FCC rules prohibit VoIP providers from directly obtaining telephone numbers from the entities that control them, which are the North American Numbering Plan Administrator and the Pooling Administrator. Instead, VoIP providers must obtain numbers indirectly through licensed telecommunications carriers. SBC Internet Services, Inc., an unlicensed VoIP provider, filed a petition with the FCC seeking limited waiver of rules that limit the direct assignment of telephone numbers to licensed telecommunications carriers. The FCC granted SBC Internet Services' petition and stated that it will provide similar relief in response to petitions from other similarly-situated VoIP providers. We filed a petition requesting similar relief in March 2005. Our petition remains pending.
Local Number Portability
We currently offer "local number portability," a service that allows customers to move their existing telephone numbers from another provider to our service. Only regulated telecommunications providers have access to the centralized number databases that facilitate this process. Because we are not a regulated telecommunications provider, we must rely on telecommunications providers to process
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our local number portability requests. If our waiver petition is granted, we will have the ability to process number porting requests directly. We are also working with industry groups to advocate for a more efficient local number portability process.
California Public Utility Commission Area Code Relief Petition
On September 9, 2005, the FCC granted, in part, a petition from the California Public Utilities Commission, or CPUC, seeking authority to implement a specialized area code overlay in California that may require VoIP providers, among others, to assign telephone numbers only from designated area codes. The FCC's order allows the CPUC to determine what services will be required to assign numbers from the designated area codes. The CPUC has not yet done so, however, should it determine that VoIP providers must assign telephone numbers from the designated area codes, we could be placed at a competitive disadvantage compared to traditional telecommunications providers because our ability to offer telephone numbers from a variety of California area codes would be limited. Also, future customers may not be able to transfer their existing telephone numbers to our service. These results could have a material adverse effect on our business. A number of parties have filed petitions for reconsideration of the FCC's order that could result in the modification of the FCC's conclusion.
Other FCC Proceedings That Could Affect VoIP Services
On February 12, 2004, the FCC opened a broad rulemaking proceeding concerning VoIP and other IP-based services. The rulemaking includes a myriad of issues relating to VoIP services. For example, the FCC is seeking comment in this proceeding on whether to subject VoIP services to disability access requirements set out in the Telecom Act, the potential application of certain consumer protection rules that currently apply only to telecommunications carriers and other issues relating to use and assignment of numbering resources, universal service requirements, intercarrier compensation arrangements, and the impact of the proliferation of VoIP services on rural carriers. The outcome of this proceeding may affect the way we operate our business.
There also are several recent or ongoing FCC proceedings initiated by various persons that relate to VoIP and other Internet services. Certain of the FCC's conclusions in these proceedings could have an indirect effect on the VoIP industry generally and on our business.
State Regulatory Status
A number of states have begun to analyze the appropriate regulation of VoIP services; however, the FCC's November 12, 2004 ruling with respect to the Minnesota Public Utilities Commission has at present largely preempted state public utility commission regulation of our services. Several states have appealed the FCC's order. Based on the outcome of those appeals, we could become subject to additional regulation by state public utility commissions.
Federal Legislative Activities
The United States Congress may consider various pieces of legislation in its current session that could amend the Telecom Act and could affect our business. These bills propose, among other things, to deregulate advanced Internet communications services such as IP networks and the applications provided over such networks and require all Internet telephone providers to provide certain 911 services similar to those already required under the FCC's order. We do not know whether any of these proposals will become law.
Fees and Taxes
There are numerous fees and taxes assessed on traditional telephone services that we believe have not been applicable to us and that we have not paid in the past. Currently, we only collect and remit sales taxes for customers with a billing address in New Jersey, where our corporate operations are conducted. However, as a result of a sales tax initiative in certain states and a sales tax agreement we
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have entered into with another state, we will begin collecting and remitting sales taxes in 19 additional states effective May 1, 2006. We also believe it is likely that we will be eventually required to collect and remit sales taxes in virtually all U.S. states that charge sales taxes. This will have the effect of decreasing any price advantage we may have.
Some states have taken the position that we should have collected and remitted sales taxes in the past and are seeking to collect those past sales taxes from us and to impose fines, penalties or interest charges on us. In addition to sales taxes, there are various state, municipal and local taxes and fees that are applicable to traditional telephone companies that we believe are not and should not be applicable to us. If, contrary to our belief, we are or become subject to these taxes or fees, we will be required to pay or collect and remit them, which would decrease any price advantage we may have when we compete for customers in those areas. In addition, we could be required to pay these taxes or fees, and related charges, retroactively. We have recorded a reserve of $0.9 million for the year ended December 31, 2004 and an additional $9.0 million for the year ended December 31, 2005 as our best estimate of our potential tax exposure should there be any retroactive assessments. If our ultimate liability exceeds that amount, if could have a material adverse effect on us.
In addition, we may be required to pay increased fees to state and other authorities in connection with E-911. We began charging an Emergency 911 Cost Recovery fee of $0.99 per month on customers, effective March 7, 2006. This fee is designed to cover some of our costs associated with complying with E-911 regulation and our national 911 emergency call center. State and local governments may also assess fees to pay for emergency services in a customer's community. We expect to begin collecting these 911-related fees and remitting them to the appropriate authorities later this year. Calls to 911 are answered by public safety agencies supported by state and local fees on traditional telephone companies. A handful of states address how VoIP providers should contribute to support public safety agencies, and in these states we have begun to remit fees to the appropriate state agencies. We have also recently contacted authorities in many of the other states to discuss how we can financially contribute to their 911 system. Although it is too early to predict how much we will be asked to pay, we expect this fee for most of our customers to be between approximately $0.50 to $1.50 per month, and as high as $3.00 for a limited number of our customers, depending on their location. These 911 fees will also have the effect of decreasing any price advantage we may have.
International Regulation
The regulation of VoIP services is evolving throughout the world. The introduction and proliferation of VoIP services have prompted many countries to reexamine their regulatory policies. Some countries do not regulate VoIP services, others have taken a light-handed approach to regulation, and still others regulate VoIP services the same as traditional telephony. In some countries, VoIP services are prohibited. Several countries have recently completed or are actively holding consultations on how to regulate VoIP providers and services. We currently provide VoIP services internationally in Canada and the United Kingdom.
Canada
On April 12, 2004, we began offering VoIP services in Canada through our subsidiary, Vonage Canada Corp.
Classification and Regulation of VoIP Services. The Telecommunications Act governs the regulation of providers of telecommunications services in Canada. Because we do not own or operate transmission facilities in Canada, we are considered a telecommunications service provider rather than a telecommunications common carrier. Telecommunications service providers are subject to less regulation than telecommunications common carriers, but do have to comply with various regulatory requirements depending on the nature of their business.
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Shortly before we launched our service in Canada, the Canadian regulator, the CRTC, commenced a proceeding to review the regulatory framework for voice communications services using Internet Protocol. On May 12, 2005, the CRTC stated that VoIP services permitting users to make local calls over the public switched telephone network generally will be regulated by the same rules that apply to traditional local telephone services. Because we are not a telecommunications common carrier, we will not be subject to such regulation. Under the CRTC's decision, however, we are required to register as a local VoIP reseller in order to obtain access to certain services from other telecommunications providers. We registered as a reseller on May 26, 2005.
The CRTC's May 12, 2005 decision provided that VoIP providers who are registered as local VoIP resellers will be able to obtain numbers and portability from Canadian local exchange carriers, but will not be able to obtain numbers directly from the Canadian Numbering Administrator or to have direct access to the local number portability database. The CRTC's decision also identified other obligations of VoIP providers, such as contributing to a national service fund, complying with consumer protection, data and privacy requirements and providing access for the disabled. The details of these requirements have been referred to industry groups for further study. Certain aspects of the decision are the subject of pending appeals by other Canadian VoIP providers. We do not know what requirements will ultimately be imposed nor the potential cost that compliance may entail. The CRTC found that it is technically feasible for VoIP providers to support special services for hearing-impaired customers.
Provision of 911 Services. On April 4, 2005, the CRTC released a ruling requiring certain providers of VoIP services, like us, to provide interim access to emergency services at a level comparable to traditional basic 911 service by July 3, 2005 or such later date as the CRTC may approve on application by a service provider. Under the interim solution adopted by the regulator for the provision of VoIP 911 services, customers of local VoIP services who dial 911 will generally be routed to a call center, where agents answer the call, verbally determine the location of the caller, and transfer the call to the appropriate emergency services agency.
VoIP service providers were also required to notify their customers about any limitations on their ability to provide 911 services in a manner to be determined. We participated with other members of the industry in making a recommendation to the CRTC on such specific requirements, and the recommendation has been endorsed by the regulator. As a result, beginning on January 18, 2006, Vonage began to include certain disclosures pertaining to 911 call delivery in its advertisements and terms of service using language approved by the CRTC.
United Kingdom
On January 6, 2005, we began offering VoIP services in the United Kingdom through our subsidiary, Vonage Limited.
In the United Kingdom, VoIP services like ours are electronic communications services and are regulated by the Communications Act (2003). Under the Communications Act, communications providers operate under general terms and conditions, called General Conditions of Entitlement, rather than obtaining individual licenses. Some of the General Conditions of Entitlement, such as those requiring the provision of access to emergency services, apply only to communications providers of Publicly Available Telephone Services. We are evaluating whether our service may be considered a Publicly Available Telephone Service and the possible effect on our business of being designated as a provider of a Publicly Available Telephone Service. Designation as a Publicly Available Telephone Service will result in heightened regulatory oversight of our service in the United Kingdom, but, as discussed below, also will confer certain advantages.
On September 6, 2004, Ofcom, the United Kingdom's communications regulator, issued a consultation and interim guidance note that set out Ofcom's interim position on the application of the United Kingdom's regulatory framework to services like ours. Ofcom has adopted the term "New Voice Services" to refer to services, like ours, that use VoIP technology. The September 6, 2004 interim
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guidance note allows providers of New Voice Services to enter the market and offer customers access to emergency services by dialing 999 or 112 without complying with the other rules applicable to providers of Publicly Available Telephone Services. On December 20, 2004, Ofcom issued a clarification of its September 6, 2004 interim guidance note with respect to number portability. Ofcom stated that New Voice Service providers were eligible for number portability only if they provided a Publicly Available Telephone Service. We intend to assert that our service is a Publicly Available Telephone Service, but if our service is not so designated and customers cannot port their numbers to us, we may be at a competitive disadvantage.
On February 22, 2006, Ofcom issued a new consultation concerning the regulation of VoIP services. Among a number of other issues, Ofcom is considering modification of the regulatory obligations imposed on VoIP providers, procedures for investigating any allegations that VoIP providers are failing to meet emergency services or network reliability standards, and to make number portability more readily available to VoIP service providers. We cannot predict when Ofcom will release a ruling in this proceeding or how its conclusions may affect our business.
General Condition of Entitlement No. 14 applies to us as a provider of a New Voice Service. That condition requires each communications provider to put in place a Code of Practice for its residential and small business customers that includes complaint handling and dispute resolution procedures. In conjunction with Ofcom's consultation on New Voice Services, we have been working with other providers and Ofcom to develop appropriate procedures for New Voice Services providers. Ofcom has approved our Code of Practice. As part of the approval process, we have become a member of the dispute resolution scheme administered by the United Kingdom's Office of the Telecommunications Ombudsman.
As a New Voice Service provider, we have the right to obtain telephone numbers from Ofcom in accordance with the United Kingdom National Numbering Plan. We are also subject to general consumer protection conditions regarding contracts, billing and other interactions with customers.
Other International Markets
We are exploring the legal and regulatory requirements for offering our services in various other international markets. We are considering offering service in several countries, and we have received a Service Based Operator (Individual) license to provide IP Telephony Services in Singapore. We currently offer customers the ability to obtain telephone numbers from France, Italy, Mexico, the Republic of Ireland and Spain, and we may also make this offer in a number of other countries. Each country has a different regulatory regime, and these differences likely will continue for the foreseeable future. Moreover, the applicable requirements could change as competition develops. Changes in communications laws, policies or regulations in the countries in which we operate could affect our operations and financial condition.
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Directors, Executive Officers and Other Key Employees
Our executive officers and directors and their ages as of June 1, 2006 are:
Name
|
Age
|
Position
|
||
---|---|---|---|---|
Jeffrey A. Citron | 35 | Director, Chairman and Chief Strategist | ||
Michael Snyder |
|
53 |
|
Director and Chief Executive Officer |
John S. Rego |
|
44 |
|
Executive Vice President and Chief Financial Officer |
Louis A. Mamakos |
|
46 |
|
Executive Vice President and Chief Technology Officer |
Sharon A. O'Leary |
|
48 |
|
Executive Vice President and Chief Legal Officer |
Betsy S. Atkins |
|
50 |
|
Director |
Peter Barris |
|
54 |
|
Director |
Morton David |
|
69 |
|
Director |
Orit Gadiesh |
|
55 |
|
Director |
J. Sanford Miller |
|
57 |
|
Director |
Hugh Panero |
|
49 |
|
Director |
Governor Thomas J. Ridge |
|
60 |
|
Director |
John J. Roberts |
|
61 |
|
Director |
Harry Weller |
|
36 |
|
Director |
Our other key employees and their ages are:
Name
|
Age
|
Position
|
||
---|---|---|---|---|
Michael Tribolet | 37 | Executive Vice President | ||
C. William (Bill) Rainey |
|
54 |
|
President, Vonage Canada |
Kerry Ritz |
|
47 |
|
Managing Director, Vonage Limited (UK) |
Directors and Executive Officers
Jeffrey A. Citron, Director, Chairman and Chief Strategist. Jeffrey A. Citron was our Chairman and Chief Executive Officer from January 2001 through February 2006. He resigned from his position as Chief Executive Officer and became our Chief Strategist in February 2006. In 1995, Mr. Citron founded The Island ECN, a computerized trading system designed to automate the order execution process. Mr. Citron became the Chairman and CEO of Datek Online Holdings Corp. in February 1998 and departed The Island ECN and Datek in October 1999. Mr. Citron did not attend college. For more information about Mr. Citron, see "Information Regarding Our Founder, Chairman and Chief Strategist."
Michael Snyder, Director and Chief Executive Officer. Michael Snyder joined Vonage in February 2006 as our Chief Executive Officer and is responsible for the day-to-day management and operations of our business. Mr. Snyder joined our board of directors in March 2006. From 1997 to
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February 2006, Mr. Snyder served as President of ADT Security Services, Inc., a subsidiary of Tyco International Ltd. Mr. Snyder joined ADT in 1977 and served in various positions prior to 1997.
John S. Rego, Executive Vice President and Chief Financial Officer. John S. Rego joined Vonage as Chief Financial Officer in July 2002 and manages accounting, finance, business development, planning, taxation, facilities and investor relations. From 2001 to 2002, Mr. Rego served as Vice President of Finance for business operations at RCN Corporation. From 1998 to 2000, Mr. Rego served in a variety of corporate and operational finance positions at Winstar Communications, including Vice President of Finance for the SME, Internet, Web Hosting and Professional Services divisions. Additionally, Mr. Rego spent over 14 years in practice as a certified public accountant with international CPA firms.
Louis A. Mamakos, Executive Vice President and Chief Technology Officer. Louis A. Mamakos has been our Chief Technology Officer since July 2004 and oversees all technology functions at Vonage, which include new product and services development, supervision of all research projects and integration of all technology-based activities into Vonage's corporate strategy. Prior to joining Vonage, Mr. Mamakos served as a Fellow for Hyperchip, Inc., a start-up that built scaleable, high-performance core routers, from July 2002 to May 2004. Prior to Hyperchip, Mr. Mamakos held various engineering and architecture positions at UUNET Technologies, now known as MCI, from 1993 to May 2002. Prior to UUNET Technologies, Mr. Mamakos spent nearly 12 years as Assistant Manager for Network Infrastructure at the University of Maryland, College Park.
Sharon A. O'Leary, Executive Vice President and Chief Legal Officer. Sharon A. O'Leary joined Vonage in August 2005 as Chief Legal Officer. From 2002 to 2005, Ms. O'Leary served as Senior Vice President, General Counsel and Secretary of TeleTech Holdings Inc. From 2000 to 2002, she was Senior Vice President and General Counsel for LoneTree Capital, a venture capital firm. From 1998 to 2000, Ms. O'Leary was Vice PresidentLaw with MediaOne Group, where she managed the general corporate securities, antitrust, litigation, risk management, human resources and public relations advice areas of the law department. From 1987 to 1998, Ms. O'Leary held various commercial transactions positions within the legal department of U S WEST, with the exception of a four-year break from 1993 to 1997 when she was a Partner with the law firm of Browning, Kaleczyc, Berry & Hoven, managing its mergers and acquisitions practice.
Betsy S. Atkins, Director. Betsy S. Atkins joined our board of directors in July 2005. Ms. Atkins has served as Chief Executive Officer of Baja Ventures, an independent venture capital firm focused on the technology and life sciences industry, since 1994 and previously served as Chairman and Chief Executive Officer of NCI, Inc., a functional food/nutraceutical company, from 1991 through 1993. Ms. Atkins was a co-founder of Ascend Communications Corporation in 1989, where she served as a Director until its acquisition by Lucent Technologies in 1999. Ms. Atkins served as a Presidential Appointee to the Pension Benefit Guaranty Corp. board from 2001 to 2003. Ms. Atkins currently serves on the boards of directors of Chico's FAS, Inc., Polycom, Inc. and Reynolds American, Inc. and previously served on the boards of directors of Lucent Technologies, HealthSouth Corporation, McDATA Corporation, UTStarcom Inc., Paychex, Inc., SunPower Corporation and Wilmington Trust Corporation. She is a Faculty Member of the National Association of Corporation Directors and a member on the British Telecom Advisory Board, the Nasdaq Nominating Committee and the Council on Foreign Relations.
Peter Barris, Director. Peter Barris joined our board of directors in September 2004. Mr. Barris has served as Managing General Partner of New Enterprise Associates, LLC, or NEA, since 1999. He has been with NEA since 1992, and he serves as either an executive officer or General Partner of various NEA entities. Mr. Barris serves on the boards of directors of the Mid-Atlantic Venture
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Association, the National Venture Capital Association and Venture Philanthropy Partners and is a Member of the Board of Trustees of Northwestern University, the Board of Overseers of the Tuck School at Dartmouth College and the Board of Advisors of the Tuck's Center for Private Equity and Entrepreneurship at Dartmouth College.
Morton David, Director. Morton David joined our board of directors in August 2001. Mr. David served as the Chairman and Chief Executive Officer of Franklin Computer Corporation (later Franklin Electronic Publishers, Inc.) from 1983 to 1998. Mr. David currently serves on the board of directors of Sharper Image Corporation and previously served on the board of directors of Datek Online Holdings Corp. from 1998 until its acquisition by Ameritrade Holdings in 2002.
Orit Gadiesh, Director. Orit Gadiesh joined our board of directors in August 2005. Ms. Gadiesh has served as Chairman of Bain & Company, a global strategy consulting firm, since 1993. Ms. Gadiesh also serves on the boards of directors of WPP Group plc, The Peres Institute for Peace and the Federal Reserve Bank of Boston. She is a Member of the Council on Foreign Relations, a Member of the Board of Governors of the World Economic Forum and a Trustee for Eisenhower Fellowships. Ms. Gadiesh is also an active board or council member at the Harvard Business School visiting committee, the Kellogg School, the Harvard Medical School Advisory Council for Cell Biology and Pathology and the International Advisory Board at HEC (Haute Ecole Commerciale) in France.
J. Sanford Miller, Director. J. Sanford (Sandy) Miller joined our board of directors in November 2003. Mr. Miller is a General Partner in Institutional Venture Partners (IVP), which he joined in April 2006. Prior to joining IVP Mr. Miller was a Senior Partner at 3i, which he joined in 2001. Prior to joining 3i, Mr. Miller co-founded Thomas Weisel Partners in 1998, where he was a Member of the Executive Committee, Chief Administrative and Strategic Officer and Co-Director of Investment Banking. From 1990 to 1998, Mr. Miller was a Senior Partner at Montgomery Securities, where he led the technology and healthcare groups. Previously, he was a Managing Director and ran the technology and healthcare investment banking divisions in San Francisco for Merrill Lynch from 1987 to 1990. Mr. Miller is a College Trustee at the University of Virginia and serves on the Management Board of the Stanford Graduate School of Business. Mr. Miller is our Lead Director.
Hugh Panero, Director. Hugh Panero joined our board of directors in January 2006. Mr. Panero has been the President and Chief Executive Officer of XM Satellite Radio Holdings Inc. since 1998, where he also serves on the board of directors. From 1993 to 1998, Mr. Panero was President and Chief Executive Officer of Request Television, and from 1982 to 1993 Mr. Panero held several positions with Time Warner Cable of New York City, including Vice President of Marketing.
Governor Thomas J. Ridge, Director. Governor Thomas J. Ridge joined our board of directors in August 2005. From January 2003 to January 2005, Governor Ridge served as the Secretary of the United States Department of Homeland Security. From 2001 through 2002, Governor Ridge served as the Special Assistant to the President for Homeland Security, an Executive Office created by President Bush in October 2001. Governor Ridge served as Governor of the Commonwealth of Pennsylvania for two terms from 1995 through 2001 and was a member of the U.S. House of Representatives from 1983 through 1995. Governor Ridge currently serves on the boards of directors of The Home Depot, Inc. and Exelon Corporation.
John J. Roberts, Director. John J. Roberts joined our board of directors in August 2004. Mr. Roberts served as Global Managing Partner for PricewaterhouseCoopers LLP from 1998 until his retirement in June 2002. From 1994 to 1998, Mr. Roberts served as Chief Operating Officer of Coopers & Lybrand, which merged with Price Waterhouse in 1998. He currently serves on the boards of directors and audit committees of Armstrong Holdings, Inc., Safeguard Scientifics, Inc. and the
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Pennsylvania Real Estate Investment Trust. He is a Member of the American Institute of Certified Public Accountants.
Harry Weller, Director. Harry Weller joined our board of directors in November 2003. Mr. Weller joined NEA in 2002 as a Partner and serves as Assistant Vice President of NEA Development Corp. From 1998 to 2001, NEA, Mr. Weller served as a Partner at FBR Technology Venture Partners.
Other Key Employees
Michael Tribolet, Executive Vice President. Michael Tribolet has served as Executive Vice President since 2003 and is responsible for leading all aspects of sales, marketing, public relations, customer care and meeting operating budgets for Vonage America Inc. He previously served as Executive Vice President of Operations and managed system operations, system applications, carrier relations, network operations, logistics and quality assurance. Mr. Tribolet has more than 15 years experience in multi-national operations management. Most recently, Mr. Tribolet served as Vice President of Operations at Dialpad Communications from 2000 to 2003. Prior to Dialpad, Mr. Tribolet served as President at Data Products International from 1993 to 2000, where he created CyberVault and oversaw the build-out of several Internet telephony services.
C. William (Bill) Rainey, President, Vonage Canada. Bill Rainey has served as President of Vonage Canada since June 2004 and is responsible for sales, marketing, public relations, customer care and meeting operating budgets for Vonage Canada Corp. Prior to joining Vonage, Mr. Rainey served as Senior Vice President Commercial Services at GT Group Telecom, a national Toronto based telecommunications company, from 1999 to 2002.
Kerry Ritz, Managing Director, Vonage Limited. Kerry Ritz joined Vonage as Managing Director in January 2005 and is responsible for sales, marketing, public relations, customer care and meeting operating budgets for Vonage Limited, our U.K. subsidiary. From 2000 to 2003, Mr. Ritz served as Director of Customer Strategy at 3, Europe's first wireless 3G operation owned by Hutchison Whampoa Ltd, and was responsible for business and marketing strategy, device development, product strategy and international development.
Board Committees
The standing committees of our board of directors consist of an audit committee, a compensation committee and a nominating and governance committee.
Audit Committee
The audit committee oversees our financial reporting process on behalf of the board of directors and reports to the board of directors the results of these activities, including the systems of internal controls established by management and the board of directors, our audit and compliance process and financial reporting. The audit committee, among other duties, engages the independent public accountants, pre-approves all audit and non-audit services provided by the independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, considers the compatibility of any non-audit services provided by the independent public accountants with the independence of such auditors and reviews the independence of the independent public accountants. Mr. Roberts (Chairman), Governor Ridge, Mr. David and Mr. Miller currently serve on our audit committee. The board of directors has determined that audit committee members must meet the independence standards for audit committees of companies listed on .
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Each member of the audit committee meets the standards for financial knowledge for companies listed on . In addition, the board of directors has determined that Mr. Roberts is qualified as an audit committee financial expert within the meaning of SEC regulations.
Nominating and Governance Committee
The nominating and governance committee is responsible for identifying and recommending director nominees, recommending directors to serve on our various committees, implementing our corporate governance guidelines and developing self-evaluation methodology to be used by our board of directors and its committees to assess board effectiveness. Ms. Atkins (Chairman), Ms. Gadiesh, Governor Ridge and Mr. Weller currently serve on our nominating and governance committee.
Compensation Committee
The compensation committee reviews and recommends compensation and benefit plans for our officers and directors, including non-employee directors, reviews base salary and incentive compensation for each executive officer, reviews and approves corporate goals and objectives relevant to our CEO's compensation, administers our incentive compensation program for key executive and management employees and reviews and approves employee benefit plans. Mr. David (Chairman), Ms. Atkins, Mr. Barris, Mr. Panero and Mr. Miller currently serve on our compensation committee.
Code of Business Conduct
Our board of directors has adopted a code of business conduct which establishes the standards of ethical conduct applicable to all directors, officers and employees of our company. The code addresses, among other things, conflicts of interest, compliance with disclosure controls and procedures and internal control over financial reporting, corporate opportunities and confidentiality requirements. The audit committee is responsible for applying and interpreting our code of business conduct in situations where questions are presented to it.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is an executive officer or employee of our company. None of our executive officers serves as a member of the compensation committee of any entity that has one or more executive officers serving on our compensation committee.
Director Compensation
Our directors who are not officers or employees of our company receive an annual retainer fee of $10,000, and receive $2,500 for attendance at each regular board meeting. Our audit committee chairman receives an additional annual retainer of $10,000.
On the date they commence service on our board of directors, newly elected directors receive an option to purchase 350,000 shares of our common stock at an exercise price not less than the fair market value of our common stock on the date of grant. Beginning December 1 and the 1st day of the last month of each quarter, directors who are not officers or employees of our company are awarded options to purchase 25,000 shares of our common stock at an exercise price not less than the fair market value of our common stock on the date of grant. Directors' stock options vest in equal monthly installments over a period of four years and vest in full upon a change in control.
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We reimburse all directors for reasonable and necessary expenses they incur in performing their duties as directors of our company. Directors who are officers or employees of our company do not receive any additional compensation for serving as directors, except for reimbursement of their expenses in fulfilling their duties.
Executive Compensation
The following table summarizes, for the fiscal year ended December 31, 2005, the compensation paid to or earned by our Chief Executive Officer and our three other executive officers serving in such capacity as of December 31, 2005.
|
Annual Compensation
|
Long-Term
Compensation Awards |
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Other
Annual Compensation(1) |
Securities
Underlying Options |
All Other
Compensation(2) |
||||||||||
Jeffrey A. Citron
Director, Chairman and Chief Strategist(3) |
2005 | $ | 400,000 | $ | 540,000 | $ | 62,500 | 11,000,000 | $ | 15,899 | ||||||
John S. Rego Executive Vice President and CFO |
|
2005 |
|
$ |
235,096 |
|
$ |
240,000 |
|
$ |
|
|
769,000 |
|
$ |
15,899 |
Louis A. Mamakos Chief Technology Officer |
|
2005 |
|
$ |
196,154 |
|
$ |
130,000 |
|
$ |
|
|
500,000 |
|
$ |
12,540 |
Sharon A. O'Leary Chief Legal Officer |
|
2005 |
|
$ |
117,479 |
|
$ |
100,000 |
|
$ |
|
|
500,000 |
|
$ |
|
Option Grants in the Last Completed Fiscal Year
The following table sets forth information regarding grants of options on April 1, 2005 and August 1, 2005 to purchase shares of our common stock to our named executive officers during the fiscal year ended December 31, 2005.
|
Individual Grants
|
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Name
|
Number of
Securities Underlying Options Granted(1) |
Percent of Total
Options Granted to Employees in Fiscal Year |
Exercise Price
($/Share) |
Expiration Date(2)
|
Grant Date Present
Value(3) |
||||||
Jeffrey A. Citron |
1,000,000
10,000,000 |
4.3
43.5 |
%
% |
$2.65
$3.15 |
4/1/2015
8/1/2015 |
$
$ |
0.85
1.01 |
||||
John S. Rego |
519,000
250,000 |
2.3
1.1 |
%
% |
$2.65
$3.15 |
4/1/2015
8/1/2015 |
$
$ |
0.85
1.01 |
||||
Louis A. Mamakos |
250,000
250,000 |
1.1
1.1 |
%
% |
$2.65
$3.15 |
4/1/2015
8/1/2015 |
$
$ |
0.85
1.01 |
||||
Sharon A. O'Leary | 500,000 | 2.2 | % | $3.15 | 8/1/2015 | $ | 1.01 |
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Fiscal Year-End Option Values
The following table provides information concerning exercisable and unexercisable options held by our named executive officers for the year ended December 31, 2005. There were no option exercises by the named executive officers during the year ended December 31, 2005.
|
Number of Securities
Underlying Unexercised Options at Fiscal Year-End |
Value of Unexercised
In-the-Money Options at Fiscal Year-End(1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
Name
|
||||||||||
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
|||||||
Jeffrey A. Citron | 3,898,095 | 13,293,142 | $ | $ | ||||||
John S. Rego | 357,333 | 986,667 | $ | $ | ||||||
Louis A. Mamakos | 100,000 | 550,000 | $ | $ | ||||||
Sharon A. O'Leary | 41,667 | 458,333 | $ | $ |
Employment Agreements
Jeffrey A. Citron
Effective February 8, 2006, we entered into an amended and restated employment agreement with Mr. Citron providing for his employment as our Chairman and Chief Strategist. As Chairman and Chief Strategist, Mr. Citron will have responsibility for our overall strategy, technology matters, employee culture and public relations, and such other responsibilities, powers and authority as the Board may assign to him from time to time. The term of Mr. Citron's agreement, which will end on December 31, 2008, will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. In addition, in the event of a change in control as defined under our 2001 Stock Incentive Plan, the term will be extended to the first anniversary of such event, subject to automatic annual renewals as described above.
Under his employment agreement, Mr. Citron is entitled to receive an annual base salary of at least $600,000. Mr. Citron also is eligible to receive an annual discretionary performance-based bonus in accordance with our annual bonus program for senior executives. Annual bonus payments under the program generally are related to the achievement of revenue and income (loss) from operations before depreciation and amortization targets, as well as personal contribution, with a target annual bonus equal to 100% of Mr. Citron's annual base salary.
Under his agreement, we also will provide Mr. Citron with, and pay the cost of premium payments on, a term life insurance policy that provides for a death benefit of at least $1.5 million. The agreement also provides that, with respect to reasonable business-related airline expenses, Mr. Citron will be eligible for air travel reimbursement based on the cost of a first-class ticket on a commercial airline to and from the applicable business destinations and that any additional business-related airline expenses incurred, directly or indirectly, by Mr. Citron with respect to other employees shall be paid in accordance with our travel policy.
During the term of his employment agreement, if we terminate Mr. Citron's employment without cause or he resigns with good reason and, in each case, Mr. Citron provides us with a general release of claims, he will be entitled to a prorated annual bonus for the year of termination, an amount equal to two times the sum of his annual base salary and annual bonus for the prior year, the payment of premiums for group health continuation coverage for a period of 18 months, 100% accelerated vesting and exercisability of the unvested portion of any equity-based awards or other long-term incentive
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compensation without regard to the satisfaction of any performance criteria, and the right to exercise each stock option for 12 months following termination of employment or, if earlier, until the expiration of the original maximum term of such option. In the event of Mr. Citron's death or disability during the term of his employment agreement, he will receive the same termination benefits as described above in the case of a termination without cause or resignation for good reason, except that he or his estate will receive a payment equal to one times, rather than two times, his salary and prior year's bonus.
Immediately prior to a change in control, all unvested equity-based or other long-term incentive awards held by Mr. Citron will fully vest and become exercisable without regard to the satisfaction of any performance criteria. Mr. Citron also will be grossed up for any excise taxes payable by him under the Internal Revenue Code's "golden parachute" tax rules.
Under the terms of Mr. Citron's employment agreement, he has agreed not to disclose any confidential information concerning our business. In addition, Mr. Citron has agreed not to solicit or to interfere with our relationship with any of our employees, officers or representatives or to solicit any of our customers, clients, suppliers, licensees or other business relations until three years following termination of his employment. Furthermore, Mr. Citron has entered into our form noncompetition agreement pursuant to which he has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or corporation engaged in any business) that directly competes with our business until three years following termination of his employment.
Michael Snyder
Effective February 8, 2006, we entered into an agreement with Michael Snyder providing for his employment, commencing as of February 27, 2006, as Chief Executive Officer for an initial term of two years. The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. In the event of a change in control, the term will also be automatically extended until the first anniversary of the change of control, subject to automatic annual renewals as described above. As Chief Executive Officer, Mr. Snyder reports to the Board and is responsible for the day-to-day management and operation of our business, including the supervision of our finance, legal and human resource functions and the business activities of our principal operating units in the United States, United Kingdom and Canada. Under his employment agreement, Mr. Snyder is entitled to receive an annual base salary of $500,000, subject to review by our compensation committee. Mr. Snyder also is eligible to receive an annual discretionary performance- based bonus in accordance with our annual bonus program for senior executives. Annual bonus payments under the program generally are related to the achievement of revenue and income (loss) from operations before depreciation and amortization targets, as well as personal contribution.
Mr. Snyder was granted a sign-on bonus in the form of options to acquire 2,500,000 shares of our common stock at a price per share equal to the then fair market value of a share of our common stock.
During the term of his employment agreement, if we terminate Mr. Snyder's employment without cause or he resigns with good reason and, in each case, Mr. Snyder provides us with a general release of claims, he will be entitled to a prorated annual bonus for the year of termination, an amount equal to two times his base salary and up to $50,000 of outplacement services. If Mr. Snyder's employment is terminated by reason of death or disability, he will be entitled to a prorated annual bonus for the year of termination and an amount equal to his base salary for one year (reduced by the net amount of any disability benefits received by Mr. Snyder under our group disability policy). In the event of a change in control, Mr. Snyder's outstanding stock options will vest in full.
Under the terms of Mr. Snyder's employment agreement, he has agreed not to disclose any confidential information concerning our business. In addition, Mr. Snyder has agreed not to solicit or to interfere with our relationship with any of our employees, officers or representatives or to interfere with our relationship with any of our customers, clients, suppliers, licensees or other business relations
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until 12 months following termination of his employment. Furthermore, Mr. Snyder has entered into our form noncompetition agreement pursuant to which he has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or corporation engaged in any business) that directly competes with our business until 12 months following termination of his employment.
John S. Rego
Effective August 1, 2005, we entered into an employment agreement with Mr. Rego providing for his employment as our Chief Financial Officer for an initial term of two years. The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. In the event of a change in control, the term will also be automatically extended until the first anniversary of the change of control. Under his employment agreement, Mr. Rego is entitled to receive an annual base salary of $250,000, subject to review by our compensation committee and our Chief Executive Officer. On January 18, 2006, our compensation committee raised Mr. Rego's salary to $300,000, effective March 15, 2006. Mr. Rego also is eligible to receive an annual discretionary performance-based bonus in accordance with our annual bonus program for senior executives. Annual bonus payments under the program generally are related to the achievement of revenue and income (loss) from operations before depreciation and amortization targets, as well as personal contribution.
During the term of his employment agreement, if we terminate Mr. Rego's employment without cause or he resigns with good reason and, in each case, Mr. Rego provides us with a general release of claims, he will be entitled to a prorated annual bonus for the year of termination and an amount equal to his base salary for the longer of one year and the remainder of the term. If Mr. Rego's employment is terminated by reason of death or disability, he will be entitled to a prorated annual bonus for the year of termination and an amount equal to his base salary for one year (reduced by the net amount of any disability benefits received by Mr. Rego under our group disability policy). In the event of a termination of Mr. Rego's employment without cause or for good reason, in each case, on or after a change in control, Mr. Rego's outstanding stock options will vest in full.
Under the terms of Mr. Rego's employment agreement, he has agreed not to disclose any confidential information concerning our business. In addition, Mr. Rego has agreed not to solicit or to interfere with our relationship with any of our employees, officers or representatives or to solicit any of our customers, clients, suppliers, licensees or other business relations until 12 months following termination of his employment. Furthermore, Mr. Rego has entered into our form noncompetition agreement pursuant to which he has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or corporation engaged in any business) that directly competes with our business until 12 months following termination of his employment.
Louis A. Mamakos
Effective August 1, 2005, we entered into an employment agreement with Mr. Mamakos providing for his employment as our Chief Technology Officer for an initial term of two years. The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. Under his employment agreement, Mr. Mamakos is entitled to receive an annual base salary of $200,000, subject to review by our compensation committee and our Chief Executive Officer. On January 18, 2006, our compensation committee raised Mr. Mamakos' salary to $220,000, effective March 15, 2006. Mr. Mamakos is also eligible to receive an annual discretionary performance-based bonus in accordance with our annual bonus program for senior executives. Annual bonus payments under the program generally are related to the achievement of revenue and income (loss) from operations before depreciation and amortization targets, as well as personal contribution.
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During the term of his employment agreement, if we terminate Mr. Mamakos' employment without cause or he resigns with good reason and, in each case, Mr. Mamakos provides us with a general release of claims, he will be entitled to a prorated annual bonus for the year of termination and an amount equal to his base salary for the longer of one year and the remainder of the term. If Mr. Mamakos' employment is terminated by reason of death or disability, he will be entitled to a prorated annual bonus for the year of termination and an amount equal to his base salary for one year (reduced by the net amount of any disability benefits received by Mr. Mamakos under our group disability policy).
Under the terms of Mr. Mamakos' employment agreement, he has agreed not to disclose any confidential information concerning our business. In addition, Mr. Mamakos has agreed not to solicit or to interfere with our relationship with any of our employees, officers or representatives or to interfere with our relationship with any of our customers, clients, suppliers, licenses or other business relationships until 12 months following termination of his employment. Futhermore, Mr. Mamakos has entered into our form noncompetition agreement pursuant to which he has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or corporation engaged in any business) that directly competes with our business until 12 months following termination of his employment.
Sharon A. O'Leary
Effective August 8, 2005, we entered into an employment agreement with Ms. O'Leary providing for her employment as our Chief Legal Officer for an initial term of two years. The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. In the event of a change in control, the term will also be automatically extended until the first anniversary of the change of control. Under her employment agreement, Ms. O'Leary is entitled to receive an annual base salary of $250,000, subject to review by our compensation committee and our Chief Executive Officer. On January 18, 2006, our compensation committee raised Ms. O'Leary's salary to $290,000, effective March 15, 2006. Ms. O'Leary also is eligible to receive an annual discretionary performance-based bonus in accordance with our annual bonus program for senior executives. Annual bonus payments under the program generally are related to the achievement of revenue and income (loss) from operations before depreciation and amortization targets, as well as personal contribution, with a minimum bonus of $100,000 payable for 2005. In addition, Ms. O'Leary will receive an annual benefits stipend beginning in 2006, in a net amount of $2,200, to pay the premium on disability insurance.
During the term of her employment agreement, if we terminate Ms. O'Leary's employment without cause or she resigns with good reason and, in each case, Ms. O'Leary provides us with a general release of claims, she will be entitled to a prorated annual bonus for the year of termination and an amount equal to her base salary for the longer of one year and the remainder of the term. If Ms. O'Leary's employment is terminated by reason of death or disability, she will be entitled to a prorated annual bonus for the year of termination and an amount equal to her base salary for one year (reduced by the net amount of any disability benefits received by Ms. O'Leary under our group disability policy). In the event of a termination of Ms. O'Leary's employment without cause or for good reason, in each case, on or after a change in control, Ms. O'Leary's outstanding stock options will vest in full.
Under the terms of Ms. O'Leary's employment agreement, she has agreed not to disclose any confidential information concerning our business. In addition, Ms. O'Leary has agreed not to solicit or to interfere with our relationship with any of our employees, officers or representatives or to interfere with our relationship with any of our customers, clients, suppliers, licensees or other business relations until 12 months following termination of her employment. Furthermore, Ms. O'Leary has entered into our form noncompetition agreement pursuant to which she has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or
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corporation engaged in any business) that directly competes with our business until 12 months following termination of her employment.
Stock Incentive Plan
Our 2001 Stock Incentive Plan is administered by the compensation committee and provides for the granting of options or restricted stock awards to our employees, directors and consultants. The objectives of the plan include attracting and retaining the best personnel, providing for additional performance incentives, and promoting our success by providing our employees, directors and consultants the opportunity to acquire stock. There are 79,202,000 shares authorized for options grants or restricted stock grants under the plan, as amended. Our Board has authority to amend, modify, suspend or terminate the plan, except as would adversely affect participants' rights to outstanding awards without their consent.
The number and kind of shares available for awards under our 2001 Stock Incentive Plan and any outstanding awards under the plan, as well as the exercise price of outstanding options, will be subject to adjustment in the event of certain reorganizations, recapitalizations, reclassifications, stock dividends, stock splits or business combinations in which we are the surviving corporation. In the event of a business combination in which we are not the surviving corporation, or in the event of a sale of all or substantially all of our property, and the surviving corporation does not assume our obligations under the plan, the plan will terminate and all unvested stock options granted under the plan will expire.
Stock options granted under our 2001 Stock Incentive Plan may be nonstatutory stock options or may qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. The term of the stock options granted pursuant to the plan may not exceed ten years. Awards of stock options are made pursuant to a written award agreement that contains the terms of each grant. Stock options granted under the plan typically vest in annual or monthly installments over a four-year period and will vest as to 50% of the shares subject to the stock option upon a participant's termination of employment without cause or for good reason during the 180-day period following a change in control.
A change in control is defined, generally, to mean any of the following events:
All stock options under our 2001 Stock Incentive Plan have been granted at or above the fair market value of our common stock, as determined by our board of directors, at the date of grant. As of September 1, 2005, we have not made any awards of restricted stock under the plan.
Option Grants in Fiscal 2006
On January 18, 2006, our compensation committee approved the grant of stock options, as of March 15, 2006, to our executive officers to purchase an aggregate of 1,400,000 shares of our common stock at an exercise price equal to the fair market value on that date. Mr. Rego received stock options to purchase 700,000 shares. Ms. O'Leary received stock options to purchase 300,000 shares. Mr. Mamakos received stock options to purchase 400,000 shares.
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INFORMATION CONCERNING OUR FOUNDER, CHAIRMAN AND CHIEF STRATEGIST
There are numerous factors about the past of our Founder, Chairman and Chief Strategist, Jeffrey A. Citron, that you should consider before investing in our common stock.
Past SEC actions against Mr. Citron and others. Prior to joining Vonage, Mr. Citron was associated with Datek Securities Corporation and Datek Online Holdings Corp., including as an employee of, and consultant for, Datek Securities and, later, as one of the principal executive officers and largest stockholders of Datek Online. Mr. Citron originally joined Datek Securities in 1989 at the age of 18 at the invitation of Sheldon Maschler (another principal executive officer and large stockholder of Datek and long-time friend of Mr. Citron's family). Datek Online, which was formed in early 1998 following a reorganization of the Datek business, was a large online brokerage firm. Datek Securities was a registered broker-dealer that engaged in a number of businesses, including proprietary trading and order execution services. During a portion of the time that Mr. Citron was associated with Datek Securities, the SEC alleged that Datek Securities, Mr. Maschler, Mr. Citron and certain other individuals participated in an extensive fraudulent scheme involving improper use of the Nasdaq Stock Market's Small Order Execution System, or SOES. In January 2003, Mr. Maschler, Mr. Citron and others entered into settlement agreements with the SEC to resolve charges that they had improperly used SOES from 1993 until early 1998, when Datek Securities' day-trading operations were sold to Heartland Securities Corporation. Mr. Maschler and others, but not Mr. Citron, were alleged to have continued such improper use until June 2001 at Heartland Securities. SOES, an automated trading system, was restricted by NASD rules to individual customers, and brokerage firms such as Datek Securities were prohibited from using SOES to trade for their own accounts. The SEC alleged that Mr. Citron and the other defendants accessed the SOES system to execute millions of unlawful proprietary trades, generating tens of millions of dollars in illegal profits. The complaint further alleged that these defendants hid their fraudulent use of the SOES system from regulators by allocating the trades to dozens of nominee accounts, creating fictitious books and records, and filing false reports with the SEC. To settle the charges, Mr. Maschler, Mr. Citron and the other individuals paid $70 million in civil penalties and disgorgements of profits, of which Mr. Citron paid $22.5 million in civil penalties. These fines were among the largest fines ever collected by the SEC against individuals. In addition, Mr. Citron was enjoined from future violations of certain provisions of the U.S. securities laws, including the antifraud provisions set forth in Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act. Mr. Citron also agreed to accept an SEC order that permanently bars him from association with any securities broker or dealer. Mr. Maschler and the other individuals and corporations agreed to similar restrictions. Mr. Citron settled theses charges without admitting or denying the allegations in the SEC's complaint. The SEC reached a separate settlement with Datek Securities (through its successor iCapital Markets LLC) in January 2002, which resulted in a censure and a civil penalty of $6.3 million.
Past NASD disciplinary action. In 1994, Datek Securities, Mr. Maschler, Mr. Citron and others associated with Datek Securities were the subject of an administrative complaint by the NASD for violating NASD rules governing SOES between November 1991 and February 1993. The complaint also alleged improper supervision of subordinates responsible for entry of SOES orders. Datek Securities, Mr. Citron and the other individuals settled the charges in January 1997. Pursuant to the settlement, Mr. Citron paid a fine of $20,000 and was suspended from any association (other than as a computer consultant) with Datek Securities for 20 days.
Past association with Robert E. Brennan. During the late 1990s, Mr. Citron was an acquaintance of Robert E. Brennan, having been introduced to Brennan by Mr. Maschler in 1996. In that year, Mr. Citron purchased real estate and an airplane from entities associated with Brennan. Mr. Citron also socialized with Brennan and vacationed with Brennan in early 1999. Brennan previously owned First Jersey Securities, a securities brokerage firm that ceased doing business in 1985 after civil actions
106
were brought by the SEC. In 1995, Brennan was fined $75.0 million by the SEC for massive securities fraud, including fraud relating to penny stock sales by First Jersey Securities. Brennan also was permanently barred from the securities business and enjoined from violations of the U.S. securities laws. In 2002, Brennan was convicted of bankruptcy fraud, money laundering, and obstruction of justice and was sentenced to a total of 12 years in federal prison. Mr. Citron has never been implicated in any of these actions, complaints or findings against Brennan and has not had material business or personal dealings with Brennan since 1999.
Impact of these matters on our company. There is a risk that some third parties will not do business with us, that some prospective investors will not purchase our securities or that some customers may be wary of signing up for service with us as a result of the past SEC and NASD settlements and related allegations against Mr. Citron, as well as his past association with Mr. Maschler or Brennan. We believe that some financial institutions and accounting firms have declined to enter into business relationships with us in the past, at least in part because of these matters. Other institutions and potential business associates may not be able to do business with us because of internal policies that restrict associations with individuals who have entered into SEC and NASD settlements. While we believe that these matters have not had a material impact on our business, they may have a greater impact on us after we become a public company, including by adversely affecting our ability to enter into commercial relationships with third parties that we need to effectively and competitively grow our business. Further, should Mr. Citron in the future be accused of, or be shown to have engaged in additional improper or illegal activities, the impact of those accusations or the potential penalties from such activities could be exacerbated because of the matters discussed above. If any of these risks were to be realized, there could be a material adverse effect on our business or the market price of our common stock.
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The following table shows information regarding the beneficial ownership of our common stock as of February 28, 2006 and as adjusted to give effect to this offering by:
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Shares of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of the date of this prospectus are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
Unless otherwise indicated, each of the stockholders listed below has sole voting and investment power with respect to the shares beneficially owned. Except as indicated below, the address for each stockholder, director or named executive officer is 23 Main Street, Holmdel, New Jersey 07733.
This table assumes 413,924,791 shares of common stock outstanding as of February 28, 2006, including 3,946,566 shares of common stock, 49,196,648 shares issuable upon conversion of the senior secured convertible notes, 1,440,000 shares issuable upon exercise of common stock warrants, 7,547,009 shares issuable upon exercise of stock options, 344,594,568 shares issuable upon conversion of preferred stock and 7,200,000 shares issuable upon the exercise of preferred stock warrants.
|
|
Percentage Beneficially Owned
|
|||||
---|---|---|---|---|---|---|---|
Name of Beneficial Owner
|
Amount and Nature of
Beneficial Ownership |
Before
Offering |
After
Offering |
||||
Beneficial Owners of 5% or More | |||||||
Jeffrey A. Citron(1) | 149,951,549 | 36 | % | ||||
Affiliates of Bain Capital, LLC(2) | 33,662,930 | 8 | % | ||||
Meritech Capital Partners(3) | 41,838,538 | 10 | % | ||||
New Enterprise Associates(4) | 81,564,808 | 20 | % | ||||
3i(5) | 36,143,674 | 9 | % | ||||
Directors and Named Executive Officers |
|
|
|
|
|
|
|
Jeffrey A. Citron(1) | 149,951,549 | 36 | % | ||||
Michael Snyder(6) | 104,167 | * | |||||
John S. Rego(7) | 571,093 | * | |||||
Louis A. Mamakos(8) | 149,217 | * | |||||
Sharon A. O'Leary(9) | 83,332 | * | |||||
Betsy S. Atkins(10) | 67,706 | * | |||||
Peter Barris(11) | 81,564,808 | 20 | % | ||||
Morton David(12) | 5,170,729 | 1 | % | ||||
Orit Gadiesh(13) | 60,415 | * | |||||
J. Sanford Miller(5) | 36,143,674 | 9 | % | ||||
Hugh Panero(14) | 29,167 | | |||||
Governor Thomas J. Ridge(15) | 60,415 | * | |||||
John J. Roberts(16) | 173,434 | * | |||||
Harry Weller(17) | 81,564,808 | 20 | % | ||||
All directors and executive officers as a group (13 persons) |
|
274,372,407 |
|
66 |
% |
|
|
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entities referred to above, except to the extent of its pecuniary interest therein. The address for 3i is 91 Waterloo Road, London, SE1 8XP, United Kingdom. As of April 1, 2006, J. Sanford Miller left 3i and joined Institutional Venture Partners.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Registration Rights for Holders of Our Currently Outstanding Convertible Preferred Stock
In April 2005, we and the holders of all series of our convertible preferred stock entered into the third amended and restated investors' rights agreement. Holders of our convertible preferred stock include Jeffrey Citron, our principal stockholder, founder, Chairman and Chief Strategist, New Enterprise Associates, 3i Group plc, Meritech Capital Partners and Bain Capital, LLC, each a holder of more than 5% of our voting capital stock.
Under this agreement, holders of our convertible preferred stock have "piggyback" registration rights. These rights entitle them to participate in this offering, subject to the certain exceptions and limitations. Pursuant to this agreement, we are also required to file and have effective, by the date any lock-up agreement entered into in connection with this offering expires, a registration statement on Form S-1 pursuant to Rule 415 under the Securities Act covering the resale of all shares of common stock issued or issuable upon the conversion of the shares of our Series B, C, D and E convertible preferred stock, and cause such registration statement to remain effective and available for use until April 27, 2007. If requested by the holders of our convertible preferred stock, we will effect, subject to certain terms and conditions, a registration statement on Form S-3, if it is available, to facilitate the sale and distribution of the shares of common stock issued or issuable upon the conversion of their shares of convertible preferred stock. Further, the holders of our convertible preferred stock have the right to demand of us, subject to certain terms and conditions, that we register the shares of common stock issued or issuable upon the conversion of their shares of convertible preferred stock by April 1, 2007 or 120 days after this offering, whichever is earlier, under the Securities Act.
Registration Rights for Shares of Common Stock Issuable upon Conversion of Our Convertible Notes
On December 16, 2005, in connection with our sale of convertible notes, we entered into a registration rights agreement with the holders of the convertible notes pursuant to which we agreed to provide certain registration rights with respect to the shares of common stock issuable upon conversion of the convertible notes. Holders of our convertible notes include Mr. Citron and affiliates of New Enterprise Associates, Bain Capital, LLC and Meritech Capital Partners, each a holder of more than 5% of our voting capital stock.
Under this agreement, we are required to file a registration statement covering the resale of all shares of common stock issued or issuable upon the conversion of the convertible notes within 90 calendar days after the consummation of this offering. We are required to use reasonable best efforts to have such registration statement declared effective within 180 days of the consummation of this offering.
If the registration statement is not filed with the SEC or not declared effective before the applicable deadline, then we are obligated to pay to each of the holders of the convertible notes an amount in cash equal to 1% of the principal amount of the convertible notes on the day that such deadline has not been met and an amount in cash equal to 2% of the principal amount of convertible notes on every 30th day thereafter until the failure is cured.
Business Travel on Aircraft Owned by New World Aviation, Inc.
Certain of our employees have traveled for business on aircraft owned by New World Aviation, Inc., a corporation wholly owned by Mr. Citron and his wife. In 2004 and 2005, we paid New World Aviation $0.2 million and $0.1 million, respectively, for travel by our employees, including Mr. Citron. Mr. Citron's employment agreement provides that, with respect to reasonable business-related airline expenses, Mr. Citron will be eligible for air travel reimbursement based on the cost of a first-class ticket on a commercial airline to and from the applicable business destinations and that any
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additional business-related airline expenses incurred, directly or indirectly, by Mr. Citron with respect to other employees shall be paid in accordance with our travel policy.
Purchase of Routers from Force10 Networks, Inc.
We purchase routers from Force10 Networks, Inc. on an as-needed basis. In 2004 and 2005, we paid Force10 Networks $0 and $1.1 million, respectively, under the contract. Affiliates of New Enterprise Associates, a holder of more than 5% of our voting capital stock, own an approximate 24% interest in Force10 Networks. In addition, an affiliate of Meritech Capital Partners II L.P., also a holder of more than 5% of our voting capital stock, owns a 6.8% interest in Force10 Networks. An employee of Meritech Capital Partners and an employee of New Enterprise Associates serve on the Board of Directors of Force10 Networks.
Notes Payable
On April 17, 2002, we borrowed $2.0 million from Mr. Citron pursuant to a loan agreement. The loan was due on April 17, 2003 with interest payable at a rate of 8% per annum. In addition, a warrant exercisable to purchase approximately 1.4 million shares of our common stock at an exercise price of $0.25 per share was granted to Mr. Citron. During July 2002, the loan was converted into Series A Preferred Stock. On four dates between January and July 2003, we borrowed an aggregate of $20.0 million from Mr. Citron pursuant to loan agreements. The loans were due in July and September 2003 with interest payable at a rate of 8% per annum. In addition, Mr. Citron was granted five-year warrants to purchase an aggregate of $3.6 million value of Series A-2 Preferred Stock at the strike price equal to the stock price paid by Series B Preferred Stock investors. During September 2003, the loans were converted into Series A-2 Preferred Stock. For more information, see Note 8 to our consolidated financial statements.
Loans with Directors and Executive Officers
In August and November 2002, John Rego, our Chief Financial Officer, borrowed $10,500 from us pursuant to a loan agreement for his purchase of Series A preferred stock. Mr. Rego repaid the loan in October 2005.
In July and November 2002, Morton David, a member of our Board of Directors, borrowed $675,000 from us pursuant to two loan agreements for his purchase of Series A convertible preferred stock. These loans were repaid in July 2003 and August 2004.
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DESCRIPTION OF CONVERTIBLE NOTES
In December 2005 and January 2006, we issued $249.9 million aggregate principal amount of convertible notes due December 1, 2010. The principal terms of the convertible notes are as follows:
Optional Repurchase
The holders may require us to repurchase all or any portion of the convertible notes on December 16, 2008 at a price in cash equal to 100% of the principal amount of the convertible notes plus any accrued and unpaid interest and late charges.
Interest
We may, at our option, pay interest on the convertible notes in cash or in kind. If paid in cash, interest will accrue at a rate of 5% per annum and be payable quarterly in arrears. If paid in kind, the interest will accrue at a rate of 7% per annum and be payable quarterly in arrears.
Upon an event of default (as defined below), the interest rate will be the greater of the interest rate then in effect or 15% per annum. If interest on the convertible notes is not paid in full on any interest payment date, the principal amount of the convertible notes will be increased for subsequent interest accrual periods by an amount that reflects the accretion of the unpaid interest at an annual rate equal to the interest rate then in effect plus 2%, calculated on a quarterly basis, from, and including, the first day of the relevant interest accrual period.
Redemption
After the completion of this offering, we may redeem any or all of the convertible notes at any time on the later of June 16, 2007 or the first anniversary of the completion of this offering, provided that, among other things, the common stock has traded at a price greater than 150% of the conversion price of the convertible notes for 20 consecutive trading days. The convertible notes shall be redeemed at a price equal to 100% of the principal amount plus accrued and unpaid interest and any late charges, plus the aggregate net present value of the remaining scheduled interest payments, if any, calculated as provided in the convertible notes.
We also may redeem any or all of the convertible notes at any time after December 16, 2008 at a price equal to 100% of the principal amount plus accrued and unpaid interest and any late charges, subject to certain conditions.
Following a change of control (as defined in the convertible notes) the holders of the convertible notes may require us to redeem the convertible notes at a price equal to 100% of the principal amount plus accrued and unpaid interest and late charges. In addition, upon conversions in connection with certain fundamental transactions, including certain changes of control, holders of the convertible notes will be entitled to receive a make-whole premium as calculated in the convertible notes. As defined in the convertible notes, changes of control generally include (1) a consolidation or merger with or into another person (other than pursuant to a migratory merger solely for the purpose of changing jurisdictions), (2) a sale, assignment, transfer, conveyance or other disposition of all our property or assets to another person, (3) being the subject of a purchase, tender or exchange offer that is accepted by the holders of more than 50% of the outstanding shares of common stock, and (4) the consummation of a stock purchase agreement or other business combination with another person whereby such person acquires more than 50% of the outstanding shares of common stock.
Conversion
The convertible notes may, at the option of the holder, be converted into shares of our common stock at any time. Prior to the completion of this offering, the conversion price for the convertible
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notes will be $5.08, subject to certain adjustments in the event that a registration statement relating to an initial public offering is not filed on a timely basis or declared effective by the SEC prior to December 16, 2006 and for stock dividends, stock splits or similar transactions. Immediately following the completion of this offering, the conversion price will be the lesser of (1) the conversion price in effect immediately prior to the completion of this offering and (2) 90% of the public offering price of the common stock as set forth in the final prospectus relating to this offering, subject to certain minimum conversion prices as described in the convertible notes. The conversion price also is subject to certain anti-dilution adjustments as described in the convertible notes.
Events of Default
Events of default under the terms of the convertible notes include:
Following an event of default, the convertible notes will become due and payable, either automatically or upon declaration by holders of more than 25% of the aggregate principal amount of convertible notes.
Pass-Through Dividends
After our completion of this offering, dividends will not be paid to holders of convertible notes, but the conversion price will be subject to anti-dilution adjustments based in part on distributions to holders of our common stock.
Anti-dilution Adjustments
The formula for adjusting the conversion rate on the conversion date and number of shares of our common stock to be delivered are subject to customary anti-dilution adjustments if certain events occur.
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Our certificate of incorporation will be amended and restated prior to the consummation of this offering. The following description of the material terms of our capital stock contained in the amended and restated certificate of incorporation is only a summary. You should read it together with our amended and restated certificate of incorporation and our amended and restated bylaws, which are included as exhibits to the registration statement of which this prospectus is a part.
General
Our authorized capital stock currently consists of 596,949,644 shares of common stock and 43,980,888 shares of preferred stock. All shares of our capital stock have a par value of $0.001 per share.
Common Stock
Each holder of our common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative rights. Subject to preferences to which holders of our convertible preferred stock may be entitled, holders of our common stock will be entitled to receive ratably the dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. If there is a liquidation, dissolution or winding up of our company, holders of our common stock would be entitled to share in our assets remaining after the payment of liabilities, and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of our convertible preferred stock.
Holders of our common stock will have no preemptive or conversion rights or other subscription rights, and there will be no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of our common stock will be fully paid and non-assessable. The rights, preferences and privileges of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate in the future.
Registration Rights for Holders of Our Currently Outstanding Convertible Preferred Stock
Immediately prior to the completion of this offering, we expect that all outstanding shares of all series of our convertible preferred stock will be converted into shares of common stock according to the formula set forth in our current certificate of incorporation.
In April 2005, we and the holders of all series of our convertible preferred stock entered into the third amended and restated investors' rights agreement, which is included as an exhibit to the registration statement of which this prospectus is a part.
Under this agreement, we are required to file and have effective, by the date any lock-up agreement entered into in connection with this offering expires, a registration statement on Form S-1 pursuant to Rule 415 under the Securities Act covering the resale of all shares of common stock issued or issuable upon the conversion of the shares of our Series B, C, D and E convertible preferred stock, and to cause such registration statement to remain effective and available for use until April 27, 2007. If requested by the holders of our Series B, C, D or E convertible preferred stock, we will effect, subject to certain terms and conditions, a registration statement on Form S-3, if it is available, to facilitate the sale and distribution of the shares of common stock issued or issuable upon the conversion of their shares of Series B, C, D and E convertible preferred stock. Further, the holders of our convertible preferred stock have the right to demand of us, subject to certain terms and conditions, that we register the shares of common stock issued or issuable upon the conversion of their shares of convertible preferred stock after April 1, 2007 or 120 days after this offering, whichever is earlier, under the Securities Act. Finally, if we propose to register any of our capital stock under the Securities
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Act, the holders of all series of our convertible preferred stock will be entitled to customary "piggyback" registration rights.
Registration Rights for Shares of Common Stock Issuable upon Conversion of Our Convertible Notes
On December 16, 2005, in connection with our sale of convertible notes, we entered into a registration rights agreement with the holders of the convertible notes pursuant to which we agreed to provide certain registration rights with respect to the shares of common stock issuable upon conversion of the convertible notes.
Under this agreement, we are required to file a registration statement covering the resale of all shares of common stock issued or issuable upon the conversion of the convertible notes within 90 calendar days after the consummation of this offering. We are required to use reasonable best efforts to have such registration statement declared effective within 180 days of the consummation of this offering.
If the registration statement is not filed with the SEC or not declared effective before the applicable deadline, then we are obligated to pay to each of the holders of the convertible notes an amount in cash equal to 1% of the principal amount of the convertible notes on the day that such deadline has not been met and an amount in cash equal to 2% of the principal amount of convertible notes on every 30th day thereafter until the failure is cured.
Anti-Takeover Effects of Various Provisions of Delaware Law and Our Amended and Restated Certificate of Incorporation and Bylaws
Provisions of the Delaware General Corporation Law, or the DGCL, and our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, are expected to discourage types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.
Delaware Anti-Takeover Statute. We will be subject to Section 203 of the DGCL, an anti-takeover statute. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years following the time the person became an interested stockholder, unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior to the determination of interested stockholder status did own) 15 percent or more of a corporation's voting stock. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
No Cumulative Voting. The DGCL provides that stockholders are denied the right to cumulate votes in the election of directors unless our amended and restated certificate of incorporation provides otherwise. Our amended and restated certificate of incorporation does not provide for cumulative voting.
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Stockholder Action by Written Consent; Calling of Special Meeting of Stockholders. Our organizational documents permit stockholder action by written consent so long as a minimum number of stockholders sign such written consent. Under our amended and restated certificate of incorporation, special meetings of our stockholders may be called only by a majority of our board of directors, by the chairman of the board of directors, by the President or any Vice President or by holders of not less than fifty percent (50%) of the then outstanding shares of any series of our preferred stock.
Limitations on Liability and Indemnification of Officers and Directors. The DGCL authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors' fiduciary duties as directors. Our organizational documents include provisions that indemnify, to the fullest extent allowable under the DGCL, the personal liability of directors or officers for monetary damages for actions taken as a director or officer of our company, or for serving at our request as a director or officer or another position at another corporation or enterprise, as the case may be. Our organizational documents also provide that we must indemnify and advance reasonable expenses to our directors and officers, subject to our receipt of an undertaking from the indemnitee as may be required under the DGCL. We will also be expressly authorized to carry directors' and officers' insurance to protect our company, our directors, officers and certain employees for some liabilities.
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent that, in a class action or direct suit, we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.
Authorized but Unissued Shares. Our authorized but unissued shares of common stock and preferred stock will be available for future issuance without your approval. We may use additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Amendments to Organizational Documents. The DGCL provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless either a corporation's certificate of incorporation or bylaws require a greater percentage. Our amended and restated certificate of incorporation and amended and restated bylaws provide that the affirmative vote of holders of the majority of the stock issued and outstanding and entitled to vote (in accordance with our amended and restated certificate of incorporation) will be required to amend or repeal our bylaws.
Listing
We have applied to have our common stock listed on under the symbol " ."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options or conversion of our convertible notes, in the public market following this offering, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
Prior to this offering, there was no public market for our common stock. Upon completion of the offering, we will have outstanding an aggregate of shares of our common stock. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless those shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act.
The remaining shares of common stock will be "restricted securities," as defined in Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 and 144(k) promulgated under the Securities Act, which rules are summarized below. Upon expiration of the lock-up agreements described under "Lock-Up Agreements," 180 days after the date of this prospectus, all of these shares will be eligible for sale in the public market pursuant to Rule 144 or Rule 144(k). We expect that many of these shares will be sold when these lock-ups expire.
Subject to the lock-up agreements described in "Underwriting" and the provisions of Rules 144 and 144(k), shares will be available for sale in the public market as follows:
Number of Shares
|
Date
|
|
---|---|---|
After the date of this prospectus. | ||
After 180 days from the date of this prospectus. |
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
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Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchase shares of our common stock from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144.
Lock-up Agreements
All of our officers and directors, substantially all of our stockholders and all of the holders of our convertible notes have entered into lock-up agreements under which they have agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock held by them or any securities convertible into or exercisable or exchangeable for shares of our common stock for a period of at least 180 days from the date of this prospectus without the prior written consent of Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC. Assuming an initial public offering price of $ , after giving effect to the conversion of our preferred stock and our convertible notes, shares of our common stock will be subject to these lock-up agreements.
Options
Upon completion of this offering, stock options to purchase a total of shares of our common stock will be outstanding. These stock options have a weighted average exercise price of $ and a weighted average of years until expiration.
Following this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering approximately shares of our common stock issued or issuable upon the exercise of stock options, subject to outstanding options or reserved for issuance under our employee and director stock benefit plans. Accordingly, shares registered under the registration statement will, subject to Rule 144 provisions applicable to affiliates, be available for sale in the open market, except to the extent that the shares are subject to vesting restrictions or the contractual restrictions described above.
Registration Rights
Upon completion of this offering, the holders of shares of our common stock will have rights to require or participate in the registration of those shares under the Securities Act. For a detailed description of certain of these registration rights, see "Description of Capital StockRegistration Rights for Holders of Our Currently Outstanding Convertible Preferred Stock" and "Description of Capital StockRegistration Rights for Shares of Common Stock Issuable upon Conversion of Our Convertible Notes."
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS
Subject to the limitations set forth below, the following is a discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of our common stock applicable to "Non-U.S. Holders." As used herein, a Non-U.S. Holder means a beneficial owner of our common stock that is not a U.S. person or a partnership for U.S. federal income tax purposes, and that will hold shares of our common stock as capital assets (i.e., generally, for investment). For U.S. federal income tax purposes, a U.S. person includes:
If a partnership (or an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Persons who are partners in partnerships holding shares of our common stock should consult their tax advisors.
This discussion does not consider specific facts and circumstances that may be relevant to a particular Non-U.S. Holder's tax position and does not consider U.S. state and local or non-U.S. tax consequences. It also does not consider Non-U.S. Holders subject to special tax treatment under the U.S. federal income tax laws (including partnerships or other pass-through entities, banks and insurance companies, dealers in securities, holders of our common stock held as part of a "straddle," "hedge," "conversion transaction" or other risk-reduction transaction, controlled foreign corporations, passive foreign investment companies, companies that accumulate earnings to avoid U.S. federal income tax, foreign tax-exempt organizations, former U.S. citizens or residents and persons who hold or receive common stock as compensation). This discussion is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, or the Code, applicable Treasury regulations, administrative pronouncements of the U.S. Internal Revenue Service, or the IRS, and judicial decisions, all as in effect on the date hereof, and all of which are subject to change, possibly on a retroactive basis, and different interpretations. The authorities on which this discussion is based are subject to various interpretations, and any views expressed within this discussion are not binding on the IRS or the courts. No assurance can be given that the IRS or the courts will agree with the tax consequences described in this prospectus.
This discussion is included herein as general information only. Each prospective Non-U.S. Holder is urged to consult its tax advisor with respect to the U.S. federal, state, local and non-U.S. income, estate and other tax consequences of holding and disposing of our common stock.
U.S. Trade or Business Income
For purposes of this discussion, dividend income and gain on the sale or other taxable disposition of our common stock will be considered to be "U.S. trade or business income" if such income or gain is (i) effectively connected with the conduct by a Non-U.S. Holder of a trade or business within the United States and (ii) in the case of a Non-U.S. Holder that is eligible for the benefits of an income tax treaty with the United States, attributable to a permanent establishment (or, for an individual, a fixed base) maintained by the Non-U.S. Holder in the United States. Generally, U.S. trade or business
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income is not subject to U.S. federal withholding tax (provided the Non-U.S. Holder complies with applicable IRS certification and disclosure requirements); instead, U.S. trade or business income is subject to U.S. federal income tax on a net income basis at regular U.S. federal income tax rates in the same manner as a U.S. person. Any U.S. trade or business income received by a Non-U.S. Holder that is a corporation also may be subject to a "branch profits tax" at a 30% rate, or at a lower rate prescribed by an applicable income tax treaty, under specific circumstances.
Dividends
If, contrary to our intended policy of not paying dividends, as described under "Dividend Policy," we make a distribution of cash or property on our common stock, any such distributions of cash or property that we pay on our common stock will be taxable as dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). A Non-U.S. Holder generally will be subject to U.S. federal withholding tax at a 30% rate, or at a reduced rate prescribed by an applicable income tax treaty, on any dividends received in respect of our common stock. If the amount of a distribution exceeds our current and accumulated earnings and profits, such excess first will be treated as a tax-free return of capital to the extent of the Non-U.S. Holder's tax basis in our common stock, and thereafter will be treated as capital gain. In order to obtain a reduced rate of U.S. federal withholding tax under an applicable income tax treaty, a Non-U.S. Holder will be required to provide a properly executed IRS Form W-8BEN (or appropriate substitute or successor form) certifying its entitlement to benefits under the treaty. A Non-U.S. Holder of our common stock that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS. A Non-U.S. Holder should consult its own tax advisor regarding its possible entitlement to benefits under an income tax treaty.
The U.S. federal withholding tax does not apply to dividends that are U.S. trade or business income, as defined above, of a Non-U.S. Holder who provides a properly executed IRS Form W-8ECI (or appropriate substitute or successor form), certifying that the dividends are effectively connected with the Non-U.S. Holder's conduct of a trade or business within the United States.
Dispositions of Our Common Stock
A Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax in respect of any gain on a sale or other disposition of our common stock unless:
In general, a corporation is a USRPHC if the fair market value of its "U.S. real property interests" equals or exceeds 50% of the sum of the fair market value of its worldwide (domestic and foreign) real property interests and its other assets used or held for use in a trade or business. For this purpose, real property interests include land, improvements and associated personal property. We believe that we currently are not a USRPHC. In addition, based on our financial statements and current expectations regarding the value and nature of our assets and other relevant data, we do not anticipate becoming a USRPHC. If we become a USRPHC, a Non-U.S. Holder nevertheless will not be subject to U.S. federal income tax if our common stock is regularly traded on an established securities market, within the meaning of applicable Treasury regulations, and the Non-U.S. Holder does
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not hold more than five percent of our outstanding common stock, directly or indirectly, during the five-year testing period for USRPHC status identified above. We expect that our common stock will be listed on and may be regularly traded on an established securities market in the United States so long as it is so listed.
U.S. Federal Estate Tax
Shares of our common stock owned or treated as owned by an individual who is a Non-U.S. Holder at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes, and may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding Requirements
We must annually report to the IRS and to each Non-U.S. Holder any dividend income that is subject to U.S. federal withholding tax, or that is exempt from such withholding tax pursuant to an income tax treaty. Copies of these information returns also may be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides. Under certain circumstances, the Code imposes a backup withholding obligation (currently at a rate of 28%) on certain reportable payments. Dividends paid to a Non-U.S. Holder of our common stock generally will be exempt from backup withholding if the Non-U.S. Holder provides a properly executed IRS Form W-8BEN (or appropriate substitute or successor form) or otherwise establishes an exemption.
The payment of the proceeds from the disposition of common stock to or through the U.S. office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the owner certifies as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption, provided that the broker does not have actual knowledge or reason to know that the holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The payment of the proceeds from the disposition of common stock to or through a non-U.S. office of a non-U.S. broker will not be subject to information reporting or backup withholding unless the non-U.S. broker has certain types of relationships with the United States, referred to as a U.S. related person. In the case of the payment of the proceeds from the disposition of our common stock to or through a non-U.S. office of a broker that is either a U.S. person or a U.S. related person, the Treasury regulations require information reporting (but not the backup withholding) on the payment unless the broker has documentary evidence in its files that the owner is a Non-U.S. Holder and the broker has no knowledge to the contrary. Non-U.S. Holders should consult their own tax advisors on the application of information reporting and backup withholding to them in their particular circumstances (including upon their disposition of our common stock).
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder may be allowed as a refund or credit against the Non-U.S. Holder's U.S. federal income tax liability, if any, if the Non-U.S. Holder timely provides the required information to the IRS.
122
Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC are acting as joint bookrunning managers for this offering and as representatives of the underwriters named below. Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each underwriter named below has agreed to purchase, and we have agreed to sell to that underwriter, the number of shares set forth opposite such underwriter's name.
Underwriter
|
Number of
Shares |
||
---|---|---|---|
Citigroup Global Markets Inc. | |||
Deutsche Bank Securities Inc. | |||
UBS Securities LLC | |||
Bear, Stearns & Co. Inc. | |||
Piper Jaffray & Co. | |||
Thomas Weisel Partners LLC | |||
|
|||
Total | |||
|
The underwriting agreement provides that the obligations of the underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all of the shares (other than those covered by the over-allotment option described below) if they purchase any of the shares.
The underwriters propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not to exceed $ per share. The underwriters may allow, and dealers may reallow, a concession not to exceed $ per share on sales to other dealers. If all of the shares are not sold at the initial public offering price, Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC may change the public offering price and other selling terms. Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC have advised us that the underwriters do not intend sales to discretionary accounts to exceed five percent of the total number of shares of our common stock offered by them.
We have granted the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares of common stock at the initial public offering price less the underwriting discount. The underwriters may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional shares approximately proportionate to that underwriter's initial purchase commitment.
We, our officers and directors, substantially all of our stockholders and all of the holders of our convertible notes have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock. If we release earnings results or announce material news during the last 17 days of the lock-up period, or if prior to the expiration of the lock-up period we announce that we will release earnings during the 15-day period following the last day of the lock-up period, then the lock-up period automatically will be extended until the end of the 18-day period beginning with the earnings release or material news announcement. Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC in their sole discretion may release any of the securities subject to these lock-up agreements at any time without notice.
123
Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the shares was determined by negotiation between us and Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC. Among the factors considered in determining the initial public offering price were our record of operations, our current financial condition, our future prospects, the markets in which we operate, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company. The prices at which the shares will sell in the public market after this offering may be lower, however, than the initial public offering price. Furthermore, an active trading market in our common stock may not develop or continue after this offering.
We have applied for the listing of our common stock on under the symbol " ."
The following table shows the underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of common stock.
|
No Exercise
|
Full Exercise
|
||||
---|---|---|---|---|---|---|
Per share | $ | $ | ||||
Total | $ | $ |
In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of common stock in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. "Covered" short sales are sales of shares made in an amount up to the number of shares represented by the underwriters' over-allotment option. In determining the source of shares to close out the covered syndicate short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Transactions to close out the covered syndicate short position involve either purchases of the common stock in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters also may make "naked" short sales of shares in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of shares in the open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when an underwriter repurchases shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a decline in the market price of the common stock. They may also cause the price of the common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.
We estimate that the total expenses of this offering will be $ .
Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they have received or may receive customary fees and expenses.
124
Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC acted as placement agents in connection with the private placement of our convertible notes in December 2005. In connection with that transaction, we agreed to reimburse the placement agents for reasonable out-of-pocket expenses incurred by the placement agents and to pay the fees and expenses of counsel to the placement agents.
One of our directors, J. Sanford Miller, is a co-founder and shareholder of Thomas Weisel Partners, one of the underwriters of this offering.
An affiliate of Citigroup Global Markets Inc. purchased $15,000,000 aggregate principal amount of our convertible notes in the private placement. The terms of the convertible notes are described under "Description of Convertible Notes." The convertible notes will remain outstanding following this offering.
In connection with this offering, one or more of the underwriters or securities dealers may distribute prospectuses electronically. Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC will allocate shares to underwriters that may make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.
Sales of shares made outside of the United States may be made by affiliates of the underwriters.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities.
Directed Share Programs
We intend to request that the underwriters reserve a portion of the common stock offered in this prospectus for sale to certain of our customers at the initial public offering price. Customers may be eligible to participate if:
Our employees and employees of the underwriters and their affiliates do not have any additional information and have been instructed not to discuss either the initial public offering or this program. Therefore, you should not call us or employees of the underwriters or their affiliates about the initial public offering or the directed share program. As it becomes available, further information about how to participate in the directed share program will be available only at (888) 830-1790 or ipoinfo.vonage.com.
The directed share program will be centrally administered. Participants will have an opportunity to open brokerage accounts later in the process and should not contact brokers to open accounts for this now.
We also intend to request that the underwriters reserve additional shares of common stock offered in this prospectus for sale to other persons related to us at the initial public offering price in a separate directed share program.
The number of shares available for sale to the public will be reduced to the extent our customers or other persons related to us purchase the reserved shares. Any shares not so purchased will be offered by the underwriters to the general public on the same basis as other shares offered in this prospectus.
125
NOTICE TO PROSPECTIVE INVESTORS
European Economic Area
In relation to each member state of the European Economic Area that has implemented the Prospectus Directive (each, a relevant member state), with effect from and including the date on which the Prospectus Directive is implemented in that relevant member state (the relevant implementation date), an offer of the common stock described in this prospectus may not be made to the public in that relevant member state prior to the publication of a prospectus in relation to the common stock that has been approved by the competent authority in that relevant member state or, where appropriate, approved in another relevant member state and notified to the competent authority in that relevant member state, all in accordance with the Prospectus Directive, except that, with effect from and including the relevant implementation date, an offer of securities may be offered to the public in that relevant member state at any time:
Each purchaser of common stock described in this prospectus located within a relevant member state will be deemed to have represented, acknowledged and agreed that it is a "qualified investor" within the meaning of Article 2(1)(e) of the Prospectus Directive.
For purposes of this provision, the expression an "offer to the public" in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe the securities, as the expression may be varied in that member state by any measure implementing the Prospectus Directive in that member state, and the expression "Prospectus Directive" means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state.
The sellers of the common stock have not authorized and do not authorize the making of any offer of common stock through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of the common stock as contemplated in this prospectus. Accordingly, no purchaser of the common stock, other than the underwriters, is authorized to make any further offer of the common stock on behalf of the sellers or the underwriters.
United Kingdom
This prospectus is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors within the meaning of Article 2(1)(e) of the Prospectus Directive ("Qualified Investors") that are also (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"). This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that is not a relevant persons should not act or rely on this document or any of its contents.
126
France
Neither this prospectus nor any other offering material relating to the common stock described in this prospectus has been submitted to the clearance procedures of the Autorité des Marchés Financiers or by the competent authority of another member state of the European Economic Area and notified to the Autorité des Marchés Financiers . The common stock has not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. Neither this prospectus nor any other offering material relating to the common stock has been or will be
Such offers, sales and distributions will be made in France only
The common stock may be resold directly or indirectly, only in compliance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French Code monétaire et financier .
Switzerland
Shares of our common stock may be offered in Switzerland only on the basis of a non-public offering. This prospectus does not constitute an issuance prospectus according to articles 652a or 1156 of the Swiss Federal Code of Obligations or a listing prospectus according to article 32 of the Listing Rules of the Swiss exchange. The shares of our common stock may not be offered or distributed on a professional basis in or from Switzerland and neither this prospectus nor any other offering material relating to shares of our common stock may be publicly issued in connection with any such offer or distribution. The shares have not been and will not be approved by any Swiss regulatory authority. In particular, the shares are not and will not be registered with or supervised by the Swiss Federal Banking Commission, and investors may not claim protection under the Swiss Investment Fund Act.
127
The validity of the securities offered in this prospectus and certain legal matters are being passed upon for us by Shearman & Sterling LLP, New York, New York. Certain legal matters have been passed upon for us by Bingham McCutchen LLP, Washington, D.C., special FCC regulatory counsel. Certain legal matters will be passed upon on behalf of the underwriters by Cravath, Swaine & Moore LLP, New York, New York.
The consolidated financial statements of Vonage Holdings Corp. and subsidiaries as of December 31, 2004 and 2005 and for the years then ended included in this prospectus and the related consolidated financial statement schedules included elsewhere in the registration statement have been audited by BDO Seidman, LLP, an independent registered public accounting firm, as stated in their reports appearing herein and elsewhere in the registration statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Vonage Holdings Corp. and subsidiaries for the year ended December 31, 2003 included in this prospectus and the related consolidated financial statement schedules included elsewhere in the registration statement have been audited by Amper, Politziner & Mattia P.C., an independent registered public accounting firm, as stated in their reports appearing herein and elsewhere in the registration statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
Changes in Accountants
On March 1, 2004, we dismissed Amper, Politziner & Mattia P.C., as our independent registered public accounting firm previously engaged as the principal accountant to audit our financial statements. We re-engaged Amper, Politziner & Mattia P.C. on June 30, 2004, and dismissed the firm again on April 21, 2005. Amper, Politziner & Mattia P.C.'s report on our financial statements for the year ended December 31, 2003 did not contain any adverse opinion or disclaimer of opinion and was not otherwise qualified or modified as to uncertainty, audit scope or accounting principles.
Each decision to dismiss Amper, Politziner & Mattia P.C. was approved by our audit committee. During the 2003 fiscal year and the subsequent interim period preceding Amper, Politziner & Mattia P.C.'s dismissal, there were no reportable events or disagreements with Amper, Politziner & Mattia P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Amper, Politziner & Mattia P.C., would have caused it to make reference to the subject matter of the disagreements in connection with its report.
Amper, Politziner & Mattia P.C. was provided with a copy of the foregoing disclosure. A copy of Amper, Politziner & Mattia P.C.'s letter, dated April 6, 2006, stating their agreement with such disclosure is included as an exhibit to the registration statement of which this prospectus is a part.
Following Amper, Politziner & Mattia P.C.'s dismissal, we engaged BDO Seidman, LLP as a our independent registered public accounting firm effective April 22, 2005. Our audit committee authorized and approved the engagement of BDO Seidman, LLP. During the 2003 fiscal year, and the subsequent interim period prior to engaging BDO Seidman, LLP, neither we nor anyone on our behalf consulted BDO Seidman, LLP regarding either (1) the application of accounting principles to a specified transaction regarding us, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or (2) any matter regarding us that was a reportable event.
128
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement under the Securities Act of 1933, as amended, referred to as the Securities Act, with respect to the shares of our common stock offered by this prospectus. This prospectus, filed as a part of the registration statement, does not contain all the information set forth in the registration statement or the exhibits and schedules thereto as permitted by the rules and regulations of the SEC. For further information about us and our common stock, you should refer to the registration statement. This prospectus summarizes provisions that we consider material of certain contracts and other documents to which we refer you. Because the summaries may not contain all the information that you may find important, you should review the full text of those documents. We have included copies of those documents as exhibits to the registration statement.
The registration statement and the exhibits thereto filed with the SEC may be inspected, without charge, and copies may be obtained at prescribed rates, at the public reference room maintained by the SEC at 100 F Street NE, Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-888-SEC-0330. The registration statement and other information filed by us with the SEC are also available at the SEC's website at http://www.sec.gov.
As a result of the offering, we and our stockholders will become subject to the proxy solicitation rules, annual and periodic reporting requirements, restrictions of stock purchases and sales by affiliates and other requirements of the Exchange Act. We are not currently subject to those requirements. We will furnish our stockholders with annual reports containing audited financial statements certified by independent auditors and quarterly reports containing unaudited financial statements for the first three quarters of each fiscal year.
129
|
Page
|
|
---|---|---|
Report of Independent Registered Public Accounting FirmBDO Seidman, LLP | F-2 | |
Report of Independent Registered Public Accounting FirmAmper, Politziner & Mattia P.C. |
|
F-3 |
Consolidated Balance Sheets as of December 31, 2004 and 2005 |
|
F-4 |
Consolidated Statements of Operations for the years ended December 31, 2003, 2004 and 2005 |
|
F-5 |
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005 |
|
F-6 |
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2003, 2004 and 2005 |
|
F-7 |
Notes to Consolidated Financial Statements |
|
F-8 |
F-1
REPORT 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, 2004 and 2005 and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vonage Holdings Corp. at December 31, 2004 and 2005, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
Woodbridge, New Jersey
March 24, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Vonage Holdings Corp.
We have audited the accompanying statements of operations, cash flows and stockholders' deficit of Vonage Holdings Corp. for the year ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Vonage Holdings Corp. for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
We have also audited the financial statement schedule listed in the Index at Item 16(b) for the year ended December 31, 2003. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ AMPER, POLITZINER & MATTIA P.C.
October 6,
2004
Edison, New Jersey
F-3
VONAGE HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
|
December 31,
|
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2004
|
2005
|
|||||||
Assets | |||||||||
Assets |
|
|
|
|
|
|
|
||
Current assets: | |||||||||
Cash and cash equivalents | $ | 43,029 | $ | 132,549 | |||||
Marketable securities | 62,739 | 133,830 | |||||||
Accounts receivable, net of allowance of $60 and $210, respectively | 2,695 | 7,435 | |||||||
Inventory, net of allowance of $1,239 and $732, respectively | 1,190 | 15,687 | |||||||
Deferred customer acquisition costs, current | 4,918 | 6,125 | |||||||
Prepaid expenses and other current assets | 1,857 | 8,228 | |||||||
|
|
||||||||
Total current assets | 116,428 | 303,854 | |||||||
Property and equipment, net of accumulated depreciation |
|
|
16,290 |
|
|
103,638 |
|
||
Deferred customer acquisition costs, non-current | 3,469 | 19,899 | |||||||
Deferred financing costs, net | | 9,577 | |||||||
Restricted cash | 182 | 7,453 | |||||||
Due from related parties | 71 | 75 | |||||||
Other assets | 53 | 2,386 | |||||||
|
|
||||||||
Total assets | $ | 136,493 | $ | 446,882 | |||||
|
|
||||||||
Liabilities and Stockholders' Deficit |
|
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
|
|
||
Current liabilities: | |||||||||
Accounts payable | $ | 11,295 | $ | 16,467 | |||||
Accrued expenses | 26,189 | 98,035 | |||||||
Deferred revenue, current portion | 9,672 | 20,449 | |||||||
Current maturities of capital lease obligations | 5 | 773 | |||||||
|
|
||||||||
Total current liabilities | 47,161 | 135,724 | |||||||
Convertible notes |
|
|
|
|
|
226,058 |
|
||
Derivatives embedded within convertible notes, at estimated fair value | | 21,900 | |||||||
Deferred revenue, net of current portion | 3,776 | 21,600 | |||||||
Capital lease obligations, net of current maturities | 21,658 | ||||||||
Other liabilities | 108 | | |||||||
|
|
||||||||
Total liabilities | 51,045 | 426,940 | |||||||
|
|
||||||||
Commitments and Contingencies |
|
|
|
|
|
|
|
||
Redeemable Preferred Stock |
|
|
|
|
|
|
|
||
Series A Redeemable Convertible Preferred Stock, par value $0.001 per share; authorized 8,000 shares, 8,000 shares issued and outstanding (liquidation preference $16,000) | 15,968 | 15,968 | |||||||
Series A-2 Redeemable Convertible Preferred Stock, par value $0.001 per share; authorized 6,067 shares, 5,167 shares issued and outstanding (liquidation preference $20,667) | 20,292 | 20,292 | |||||||
Series A-2 Redeemable Convertible Preferred Stock Warrant to purchase 900 shares | 1,557 | 1,557 | |||||||
Series B Redeemable Convertible Preferred Stock, par value $0.001 per share; authorized 3,750 shares, 3,750 shares issued and outstanding (liquidation preference $16,200) | 14,489 | 14,489 | |||||||
Series C Redeemable Convertible Preferred Stock, par value $0.001 per share; authorized 8,000 shares, 8,000 shares issued and outstanding (liquidation preference $43,200) | 38,090 | 38,090 | |||||||
Series D Redeemable Convertible Preferred Stock, par value $0.001 per share; authorized 8,729 shares, 8,729 shares issued and outstanding (liquidation preference $113,389) | 102,722 | 102,722 | |||||||
Series E Redeemable Convertible Preferred Stock, par value $0.001 per share; authorized 9,435 shares, 9,429 shares issued and outstanding (liquidation preference $215,924) | | 195,736 | |||||||
Stock subscription receivable | (597 | ) | (427 | ) | |||||
|
|
||||||||
Total redeemable preferred stock | 192,521 | 388,427 | |||||||
|
|
||||||||
Stockholders' Deficit |
|
|
|
|
|
|
|
||
Common stock, par value $0.001 per share; authorized 396,950 shares in 2004, 596,950 shares in 2005; issued 4,495 and 4,598 shares at December 31, 2004 and 2005, respectively, and 3,827 and 3,930 shares outstanding at December 31, 2004 and 2005, respectively | 4 | 5 | |||||||
Additional paid-in capital | 13,948 | 14,791 | |||||||
Stock subscription receivable | (37 | ) | (37 | ) | |||||
Accumulated deficit | (120,345 | ) | (382,284 | ) | |||||
Treasury stock, at cost, 668 shares at December 31, 2004 and 2005 | (619 | ) | (619 | ) | |||||
Deferred compensation | | (167 | ) | ||||||
Accumulated other comprehensive loss | (24 | ) | (174 | ) | |||||
|
|
||||||||
Total stockholders' deficit | (107,073 | ) | (368,485 | ) | |||||
|
|
||||||||
Total liabilities, redeemable preferred stock and stockholders' deficit | $ | 136,493 | $ | 446,882 | |||||
|
|
The accompanying notes are an integral part of these financial statements
F-4
VONAGE HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
For the Years Ended
December 31, |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2003
|
2004
|
2005
|
||||||||
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Telephony services | $ | 16,905 | $ | 75,864 | $ | 258,165 | |||||
Customer equipment and shipping | 1,817 | 3,844 | 11,031 | ||||||||
|
|
|
|||||||||
18,722 | 79,708 | 269,196 | |||||||||
|
|
|
|||||||||
Operating Expenses: | |||||||||||
Direct cost of telephony services | 8,556 | 23,209 | 84,050 | ||||||||
Direct cost of goods sold | 4,867 | 18,878 | 40,441 | ||||||||
Selling, general and administrative | 19,174 | 49,186 | 154,716 | ||||||||
Marketing | 11,819 | 56,075 | 243,404 | ||||||||
Depreciation and amortization | 2,367 | 3,907 | 11,122 | ||||||||
|
|
|
|||||||||
46,783 | 151,255 | 533,733 | |||||||||
|
|
|
|||||||||
Loss from operations |
|
|
(28,061 |
) |
|
(71,547 |
) |
|
(264,537 |
) |
|
|
|
|
|||||||||
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest income | 96 | 1,135 | 4,347 | ||||||||
Interest expense | (678 | ) | (5 | ) | (1,159 | ) | |||||
Change in fair value of derivatives embedded within convertible notes | | | 66 | ||||||||
Other, net | 5 | 21 | (441 | ) | |||||||
Debt conversion expense | (1,557 | ) | | | |||||||
|
|
|
|||||||||
(2,134 | ) | 1,151 | 2,813 | ||||||||
Loss before income tax benefit |
|
|
(30,195 |
) |
|
(70,396 |
) |
|
(261,724 |
) |
|
Income tax benefit |
|
|
221 |
|
|
475 |
|
|
390 |
|
|
|
|
|
|||||||||
Net loss |
|
$ |
(29,974 |
) |
$ |
(69,921 |
) |
$ |
(261,334 |
) |
|
|
|
|
|||||||||
Net loss per common share calculation: | |||||||||||
Net loss | $ | (29,974 | ) | $ | (69,921 | ) | $ | (261,334 | ) | ||
Imputed dividend on preferred shares | | | (605 | ) | |||||||
|
|
|
|||||||||
Net loss attributable to common shareholders | $ | (29,974 | ) | $ | (69,921 | ) | $ | (261,939 | ) | ||
|
|
|
|||||||||
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted | $ | (7.55 | ) | $ | (18.36 | ) | $ | (67.72 | ) | ||
|
|
|
|||||||||
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted | 3,970 | 3,808 | 3,868 | ||||||||
|
|
|
The accompanying notes are an integral part of these financial statements
F-5
VONAGE HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
For the Years Ended
December 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003
|
2004
|
2005
|
|||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (29,974 | ) | $ | (69,921 | ) | $ | (261,334 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 2,367 | 3,907 | 11,122 | |||||||||
Change in estimated fair value of embedded derivatives within convertible notes | | | (66 | ) | ||||||||
Accretion on convertible notes | | | 152 | |||||||||
Debt conversion expense | 1,557 | | ||||||||||
Accrued interest | 671 | (186 | ) | 113 | ||||||||
Allowance for doubtful accounts | | 60 | 150 | |||||||||
Allowance for obsolete inventory | 24 | 1,215 | 625 | |||||||||
Amortization of deferred financing costs | | | 75 | |||||||||
Loss on disposal of fixed assets | | | 438 | |||||||||
Deferred compensation | | | 15 | |||||||||
Other | (6 | ) | 66 | (108 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (326 | ) | (2,100 | ) | (4,888 | ) | ||||||
Inventory | 144 | (1,289 | ) | (15,130 | ) | |||||||
Prepaid expenses and other current assets | 57 | (1,518 | ) | (5,765 | ) | |||||||
Deferred customer acquisition costs | (2,404 | ) | (5,765 | ) | (17,618 | ) | ||||||
Due from related parties | | 15 | 18 | |||||||||
Other assets | 52 | (27 | ) | (2,333 | ) | |||||||
Accounts payable | 6,721 | 3,016 | 5,119 | |||||||||
Accrued expenses | 1,404 | 24,103 | 71,085 | |||||||||
Deferred revenue | 3,130 | 9,824 | 28,565 | |||||||||
|
|
|
||||||||||
Net cash used in operating activities | (16,583 | ) | (38,600 | ) | (189,765 | ) | ||||||
|
|
|
||||||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures | (6,430 | ) | (10,867 | ) | (76,261 | ) | ||||||
Purchase of marketable securities | | (68,798 | ) | (295,341 | ) | |||||||
Maturities and sales of marketable securities | | 6,050 | 224,249 | |||||||||
(Increase) decrease in restricted cash | 1,497 | (92 | ) | (7,285 | ) | |||||||
|
|
|
||||||||||
Net cash used in investing activities | (4,933 | ) | (73,707 | ) | (154,638 | ) | ||||||
|
|
|
||||||||||
Cash flows from financing activities: | ||||||||||||
Principal payments on capital lease obligations | (158 | ) | (26 | ) | (177 | ) | ||||||
Proceeds from notes issuance | 20,000 | | 247,872 | |||||||||
Debt issuance costs | | | (9,652 | ) | ||||||||
Proceeds from preferred stock issuance, net | 14,110 | 140,820 | 195,736 | |||||||||
Proceeds from subscription receivable, net | 675 | 300 | 170 | |||||||||
Purchase of treasury stock | (403 | ) | | | ||||||||
Proceeds from exercise of stock options | 2 | | 57 | |||||||||
|
|
|
||||||||||
Net cash provided by financing activities | 34,226 | 141,094 | 434,006 | |||||||||
|
|
|
||||||||||
Effect of exchange rate changes on cash | | (3 | ) | (83 | ) | |||||||
|
|
|
||||||||||
Net change in cash and cash equivalents | 12,710 | 28,784 | 89,520 | |||||||||
Cash and cash equivalents, beginning of period | 1,535 | 14,245 | 43,029 | |||||||||
|
|
|
||||||||||
Cash and cash equivalents, end of period | $ | 14,245 | $ | 43,029 | $ | 132,549 | ||||||
|
|
|
||||||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid during the periods for: | ||||||||||||
Interest | $ | 678 | $ | 5 | $ | 203 | ||||||
|
|
|
||||||||||
Income taxes | $ | | $ | | $ | | ||||||
|
|
|
||||||||||
Non-cash transactions during the periods for: | ||||||||||||
Note payable converted to preferred stock | $ | 20,000 | $ | | $ | | ||||||
|
|
|
||||||||||
Capital lease obligations | $ | | $ | | $ | 22,603 | ||||||
|
|
|
||||||||||
Deferred compensation | $ | | $ | | $ | 182 | ||||||
|
|
|
The accompanying notes are an integral part of these financial statements
F-6
VONAGE HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(In thousands)
|
Common
Stock |
Additional
Paid-in Capital |
Stock
Subscription Receivable |
Deferred
Compensation |
Accumulated
Deficit |
Treasury
Stock |
Accumulated
Other Comprehensive Loss |
Total
|
||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2002 | $ | 4 | $ | 13,938 | $ | (637 | ) | $ | (5 | ) | $ | (20,450 | ) | $ | (216 | ) | $ | | $ | (7,366 | ) | |||||
Stock option exercises |
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
Stock subscription receivable payments | 600 | 600 | ||||||||||||||||||||||||
Purchase of treasury stock, at cost | (403 | ) | (403 | ) | ||||||||||||||||||||||
Amortization of non-employee stock options | 5 | 5 | ||||||||||||||||||||||||
Net loss | (29,974 | ) | (29,974 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at December 31, 2003 | 4 | 13,940 | (37 | ) | | (50,424 | ) | (619 | ) | | (37,136 | ) | ||||||||||||||
Stock option exercises |
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
Comprehensive loss: | ||||||||||||||||||||||||||
Change in unrealized gain (loss) on available-for-sale investments | (9 | ) | (9 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment | (15 | ) | (15 | ) | ||||||||||||||||||||||
Net loss | (69,921 | ) | (69,921 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total comprehensive loss | | | | | (69,921 | ) | | (24 | ) | (69,945 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at December 31, 2004 | 4 | 13,948 | (37 | ) | | (120,345 | ) | (619 | ) | (24 | ) | (107,073 | ) | |||||||||||||
Stock option exercises | 1 | 56 | 57 | |||||||||||||||||||||||
Issuance of stock options for compensation | 182 | (182 | ) | | ||||||||||||||||||||||
Amortization of deferred compensation | 15 | 15 | ||||||||||||||||||||||||
Beneficial conversion feature of Series E preferred stock | 605 | (605 | ) | | ||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||
Change in unrealized gain (loss) on available-for-sale investments | 10 | 10 | ||||||||||||||||||||||||
Foreign currency translation adjustment | (160 | ) | (160 | ) | ||||||||||||||||||||||
Net loss | (261,334 | ) | (261,334 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total comprehensive loss | | | | | (261,334 | ) | | (150 | ) | (261,484 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at December 31, 2005 | $ | 5 | $ | 14,791 | $ | (37 | ) | $ | (167 | ) | $ | (382,284 | ) | $ | (619 | ) | $ | (174 | ) | $ | (368,485 | ) | ||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements
F-7
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
(In thousands, except per share amounts)
Note 1. Basis of Presentation and Significant Accounting Policies
Nature of Operations
Vonage Holdings Corp. (the "Company") is incorporated as a Delaware corporation. The original Certificate of Incorporation was filed in May 2000 as MIN-X.COM, INC., the Company's original name, which was changed in February 2001 to Vonage Holdings Corp. The Company is a provider of broadband Voice over Internet Protocol ("VoIP") services to residential and small and home office customers. The Company launched service in the United States in October 2002, in Canada in November 2004 and in the United Kingdom in May 2005.
The Company has incurred significant operating losses since inception. As a result, the Company has generated negative cash flows from operations, and has an accumulated deficit at December 31, 2005. The Company's primary source of funds to date has been through the issuance of equity and debt securities, including net proceeds from the issuance of preferred equity securities of $195,736, and net proceeds from the issuance of debt securities of $238,220, in 2005.
Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to the average period of service to a customer (the "customer relationship period") used to amortize deferred revenue and deferred customer acquisition costs associated with customer activation, the useful lives of property and equipment, the value of common stock for the purpose of determining stock-based compensation and the value of embedded derivatives in the convertible notes. The Company bases its estimates on historical experience, and in certain cases third party expertise, and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue Recognition
Operating revenues consists of telephony services revenue and customer equipment (which enables the Company's telephony services) and shipping revenue. The point in time at which revenue is recognized is determined in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition , and Emerging Issues Task Force Consensus No. 01-9, Accounting for Consideration Given by a Vendor to
F-8
a Customer (Including a Reseller of the Vendor's Products) (EITF No. 01-9). Revenue is recorded as follows:
Telephony Services Revenue
Substantially all of the Company's operating revenues are telephony services revenue, which is derived primarily from monthly subscription fees that customers are charged under the Company's service plans. The Company also derives telephony services revenue 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 in advance and are recognized over the following month when services are provided. Revenue generated from international calls and from customers exceeding allocated call minutes under limited minute plans is recognized as services are provided, that is, as minutes are used, and is billed to a customer's credit card in arrears. The Company estimates the amount of revenue earned but not billed from international calls and from customers exceeding allocated call minutes under limited minute plans from the end of each billing cycle to the end of each reporting period and records these amounts in accounts receivable. These estimates are based primarily upon historical minutes and have been consistent with the Company's actual results.
The Company also provides rebates to customers who purchase their customer equipment from retailers and satisfy minimum service period requirements. These rebates are recorded as a reduction of revenue over the minimum service period based upon the estimated number of customers that will ultimately earn and claim the rebates.
The Company also generates revenue by charging a fee for activating service. Through June 2005, the Company charged an activation fee to customers in the direct channel (customer equipment provided by the Company). Beginning in July 2005, the Company also began charging an activation fee in the retail channel. Customer activation fees, along with the related incremental direct customer acquisition costs for customer equipment (deferred product costs) in the direct channel and for rebates and retailer commissions in the retail channel, up to but not exceeding the activation fee, are deferred and amortized over the estimated average customer relationship period. Through December 31, 2004, this period was 30 months based upon comparisons to other telecommunications companies as the Company did not have a sufficient operating history. For 2005, the customer relationship period was reevaluated based on the Company's experience to date and is estimated to be 60 months. The Company has applied the 60-month customer relationship period on a prospective basis beginning January 1, 2005.
In the United States, the Company charges a regulatory recovery fee on a monthly basis to defray the costs associated with regulatory compliance and related litigation and to cover taxes that the Company is charged by the suppliers of telecommunications services. The Company records these regulatory recovery fees as revenue as billed.
Prior to June 30, 2005, the Company generally charged a disconnect fee to customers who did not return their customer equipment to the Company upon disconnection of service regardless of how long they were a customer. On July 1, 2005, the Company changed its disconnect policy and only accepts
F-9
return of the customer equipment within 30 days of activation and a disconnect fee is charged if the customer disconnects their service within one year of activation. These disconnect fees are recorded at the time the customer disconnects service. Disconnect fee revenue amounted to $299, $1,556 and $6,031 in 2003, 2004 and 2005, respectively.
Customer Equipment and Shipping Revenue
Customer equipment and shipping revenue consists of revenue from sales of customer equipment to wholesalers or directly to customers for replacement devices, or beginning in the fourth quarter of 2005, for upgrading their device at the time of customer sign-up for which the Company charges an additional fee. In addition, customer equipment and shipping revenue includes the fees that customers are charged for shipping their customer equipment to them.
For a portion of 2004, customer equipment and shipping revenue included sales to retailers. Customer equipment and shipping revenue was reduced for payments to retailers and rebates to customers who purchased their customer equipment through these retailers, who purchased the customer equipment from the Company, to the extent of customer equipment and shipping revenue. In the latter part of 2004, the retailers began purchasing the customer equipment directly from the manufacturers.
Direct Cost of Telephony Services
Direct cost of telephony services consists primarily of direct costs that the Company pays to third parties in order to provide telephony services. These costs include access and interconnection charges that the Company pays to other telephone companies to terminate domestic 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 portability. These costs also include taxes that the Company pays on telecommunications services from our suppliers. These costs do not include indirect costs such as depreciation and amortization, payroll and facilities costs. The Company's presentation of direct cost of telephony services may not be comparable to other similar companies.
Direct Cost of Goods Sold
Direct cost of goods sold consists primarily of costs that the Company incurs when a customer signs up for the Company's 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, these costs include the amortization of deferred product costs, the cost of shipping and handling for customer equipment, the installation manual that accompanies the customer equipment and the cost of equipment that the company provides to customers as product promotions.
Shipping and Handling
Revenue relating to shipping and handling is included in customer equipment and shipping revenue and amounted to $812, $2,604 and $8,049 in 2003, 2004, and 2005, respectively. Costs related
F-10
to shipping and handling are included in direct cost of goods sold and amounted to $695, $2,421 and $7,913 in 2003, 2004, and 2005, respectively.
Advertising Costs
Advertising costs, which are included in marketing expense, are expensed as incurred and amounted to $10,961, $52,472 and $204,875 for 2003, 2004 and 2005, respectively.
Development Expenses
Costs associated with the development of new services and changes to existing services are charged to operations as incurred and are included in selling, general and administrative expense.
Cash, Cash Equivalents and Marketable Securities
The Company maintains cash with several investment grade financial institutions. The Company invests its excess cash in money market funds and in highly liquid debt instruments of U.S. corporations, municipalities and the U.S. government and its agencies. All highly liquid investments with stated maturities of three months or less from date of purchase are classified as cash equivalents. Interest income was $96, $1,135 and $4,347 in 2003, 2004 and 2005, respectively.
Management determines the appropriate classification of its investments in debt and marketable equity securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company's debt and marketable equity securities have been classified and accounted for as available for sale. The Company may or may not hold securities with stated maturities until maturity. In response to changes in the availability of and the yield on alternative investments as well as liquidity requirements, the Company may sell these securities prior to their stated maturities. These securities are carried at fair value, with the unrealized gains and losses reported as other comprehensive income (loss). Any realized gains or losses on the sale of marketable securities are determined on a specific identification method, and such gains and losses are reflected as a component of interest income or expense.
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. The Company provides an inventory allowance for customer equipment that has been returned by customers but may not be able to be re-issued to new customers or returned to the manufacturer for credit.
Property and Equipment
Property and equipment includes acquired assets and those accounted for under capital leases and consists principally of network equipment and computer hardware, furniture, software and leasehold improvements. In addition, the lease of the Company's new corporate headquarters has been accounted for as a capital lease and is included in property and equipment as of December 31, 2005. Network
F-11
equipment and computer hardware and furniture are stated at cost with depreciation provided using the straight-line method over the estimated useful lives of the related assets, which range from three to five years. Software is depreciated over three years to five years. Leasehold improvements are amortized over their estimated useful life of the related assets or the life of the lease, whichever is shorter. The cost of renewals and substantial improvements is capitalized while the cost of maintenance and repairs is charged to operating expenses as incurred.
The Company's network equipment and computer hardware, which consists of routers, gateways and servers that enable the Company's telephony services, is subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives or the carrying value of these assets, or both.
Restricted Cash and Letters of Credit
The Company reports the collateralization of certain letters of credit as restricted cash. The amount of collateralized letters of credit primarily related to lease deposits for the Company's offices were $83 and $7,210 in 2004 and 2005, respectively, with corresponding restricted cash of $182 and $7,453 at December 31, 2004 and 2005, respectively.
Long-Lived Assets
The Company reviews the carrying values of its property and equipment for possible impairment whenever circumstances indicate the carrying amount of an asset may not be recoverable. An impairment loss is recognized to the extent the sum of the undiscounted estimated future cash flow expected to result from the use of the asset is less than the carrying value. No impairments have been incurred to date.
Deferred Financing Costs
Costs incurred in raising debt are deferred and amortized as interest expense over the term of the related debt. The Company issued convertible notes in December 2005 and incurred issuance costs of $9,652 which are being amortized over the life of the notes using the straight-line method. Amortization expense related to these costs is included in interest expense in the consolidated statements of operations and was $75 for the year ended December 31, 2005. Accumulated amortization of deferred financing costs was $75 at December 31, 2005.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The Company records a valuation allowance to reduce the deferred tax assets to the amount that the Company estimates is more likely than not to be realized.
F-12
Foreign Currency
Generally, the functional currency of the Company's non-U.S. subsidiaries is the local currency. The financial statements of these subsidiaries are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs and expenses. Translation gains and losses are deferred and recorded in accumulated other comprehensive loss as a component of stockholders' equity. The Company recorded $15 and $160 of net translation losses in 2004 and 2005, respectively. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. There were no gains and losses resulting from foreign exchange transactions in 2003. The Company recognized $3 and $3 of net losses resulting from foreign exchange transactions for 2004 and 2005, respectively.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive items. Other comprehensive items include foreign currency translation adjustments and unrealized losses on available for sale investments. Assets and liabilities of foreign operations are translated at the period-end exchange rate and revenue and expense amounts are translated at the average rates of exchange prevailing during the period.
Certain Risks and Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, marketable securities and accounts receivable. Cash equivalents consist of money market instruments and U.S. government notes. Marketable securities consist primarily of money market instruments, U.S. corporate bonds, auction rate securities and U.S. government notes. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States. By collecting subscription fees in advance, the Company is able to minimize its accounts receivable and bad debt exposure. If a customer's credit card is declined, we generally suspend international calling capabilities as well as their ability to incur domestic usage charges in excess of their plan minutes. If the customer's credit card cannot be successfully processed during the current and subsequent month's billing cycle, the Company will terminate the account. In addition, the Company automatically charges any per minute fees to its customers' credit cards monthly in arrears. To further mitigate the Company's bad debt exposure a customer's credit card will be charged in advance of their monthly billing if their international calling or overage charges exceed a certain dollar threshold.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash and cash equivalents, marketable securities, accounts receivable and accounts payable, approximate fair value because of their short maturities. The carrying amounts of the Company's capital leases approximate fair value of these obligations based upon management's best estimates of interest rates that would be available for similar debt obligations at December 31, 2004 and 2005. Embedded derivatives in convertible notes are stated
F-13
at fair value based upon an independent third party evaluation. The convertible notes are carried at estimated fair value which excludes the initial estimated value of the embedded derivatives in the convertible notes.
Reclassification
Certain reclassifications have been made to prior year's financial statements in order to conform to current year's presentation.
Derivative Instruments
The Company does not hold or issue derivative instruments for trading purposes. However, the Company's convertible notes contain embedded derivatives relating to certain conversion features that require separate valuation from the convertible notes. The Company recognizes these derivatives as liabilities in its balance sheet and measures them periodically at their estimated fair value, and recognizes changes in their estimated fair value in earnings in the period of change.
The Company, with the assistance of an independent third party, estimates the fair value of its embedded derivatives using available market information and appropriate valuation methodologies. These embedded derivatives derive their value primarily based on changes in the volatility of the Company's common stock. Over the life of the convertible notes, given the lack of historical volatility of the Company's common stock, changes in the estimated fair value of the embedded derivatives could have a material effect on our results of operations. Furthermore, the Company has estimated the fair value of these embedded derivatives using theoretical models based on the estimated volatility of its common stock over the past year using a basket of comparable public companies' volatilities.
Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company may eventually pay to settle these embedded derivatives.
Beneficial conversion feature
When the Company issues debt or equity which is convertible into common stock at a discount from the common stock market price at the date the debt or equity is issued, a beneficial conversion feature for the difference between the closing price and the conversion price multiplied by the number of shares issuable upon conversion is recognized. The beneficial conversion feature is presented as a discount to the related debt or equity, with an offsetting amount increasing additional paid in capital.
Loss per share
Basic and diluted loss per common share is calculated by dividing loss to common stockholders by the weighted average number of common shares outstanding during the period. The effects of potentially dilutive common shares, including shares issued under the Company's 2001 Stock Incentive Plan using the treasury stock method and the Company's convertible preferred stock (that convert on an 8-to-1 basis) using the if-converted method, have been excluded from the calculation of diluted loss per common share because of their anti-dilutive effects.
F-14
The following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:
|
For the Years Ended
December 31, |
|||||
---|---|---|---|---|---|---|
|
2003
|
2004
|
2005
|
|||
Redeemable preferred stock as if converted at 8 to 1 | 135,336 | 269,168 | 344,600 | |||
Common stock warrants | 1,440 | 1,440 | 1,440 | |||
Redeemable preferred stock warrants as if converted at 8 to 1 | 7,200 | 7,200 | 7,200 | |||
Convertible notes | | | 48,794 | |||
Employee stock options | 5,295 | 16,484 | 37,445 | |||
|
|
|
||||
149,271 | 294,292 | 439,479 | ||||
|
|
|
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") allows a company to adopt a fair value based method of accounting of its stock-based compensation plans or continue to follow the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." The Company accounts for stock-based compensation in accordance with the provisions of APB No. 25, and complies with the disclosure provision of SFAS No. 123. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the estimated fair value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.
In accordance with SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure," the Company must disclose the effect on net loss and net loss per common share had the Company applied the fair value recognition provisions of SFAS No. 123. The pro forma information
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regarding net loss and net loss per share, which has not been tax effected as the Company has reported net losses for each period, is as follows:
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For the Years Ended
December 31, |
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2003
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2004
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2005
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Net loss attributable to common shareholders, as reported | $ | (29,974 | ) | $ | (69,921 | ) | $ | (261,939 | ) | ||
Add stock-based employee compensation included in net loss under intrinsic method | | | 15 | ||||||||
Deduct total stock-based employee compensation expense determined under fair value based method for all awards | (211 | ) | (879 | ) | (7,521 | ) | |||||
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Net loss, pro forma | $ | (30,185 | ) | $ | (70,800 | ) | $ | (269,445 | ) | ||
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Net loss per common share: | |||||||||||
As reportedbasic and diluted | $ | (7.55 | ) | $ | (18.36 | ) | $ | (67.72 | ) | ||
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Pro formabasic and diluted | $ | (7.60 | ) | $ | (18.59 | ) | $ | (69.66 | ) | ||
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Weighted-average common shares outstanding: | |||||||||||
Basic and diluted | 3,970 | 3,808 | 3,868 | ||||||||
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The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model (minimum method) with the following weighted-average assumptions:
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For the Years Ended
December 31, |
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2003
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2004
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2005
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Risk-free interest rate | 4.09 | % | 4.12 | % | 4.36 | % | |
Expected stock price volatility | 0 | % | 0 | % | 0 | % | |
Dividend yield | 0 | % | 0 | % | 0 | % | |
Expected life (in years) | 8.80 | 8.88 | 8.83 |
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 155, Accounting for Certain Hybrid Instruments ("FAS 155"). FAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifuracate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. This statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company will evaluate the impact of FAS 155 on its consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections ("FAS 154"), a replacement of APB No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements . FAS 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting of a change in accounting
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principle. This statement establishes that, unless impracticable, retrospective application is the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. It also requires the reporting of an error correction which involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company believes the adoption of FAS 154 will not have a material effect on its consolidated financial statements.
On December 16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS 123R), which replaces FAS 123, Accounting for Stock-Based Compensation , and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees . The Company will adopt FAS 123R on January 1, 2006, using the "modified prospective" transition method. FAS 123R will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost must be recognized in the income statement over the vesting period of the award. Under the "modified prospective" transition method, awards that are granted, modified or settled beginning at the date of adoption will be measured and accounted for in accordance with FAS 123R. In addition, expense must be recognized in the statement of income for unvested awards that were granted prior to the date of adoption. The expense will be based on the fair value determined at the grant date. The adoption of FAS 123R will have a material effect on the Company's consolidated financial statements.
Note 2. Cash, Cash Equivalents and Marketable Securities
Cash, cash equivalents and marketable securities consist of the following:
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December 31,
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2004
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2005
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Cash and cash equivalents | $ | 43,029 | $ | 132,549 | ||||
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Marketable securities: | ||||||||
Commercial paper | 2,478 | | ||||||
U.S. corporate bonds | 11,094 | 8,314 | ||||||
Auction rate securities | 41,700 | 107,025 | ||||||
U.S. government notes | 7,467 | 18,491 | ||||||
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Total marketable securities | $ | 62,739 | $ | 133,830 | ||||
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Total cash, cash equivalents and marketable securities | $ | 105,768 | $ | 266,379 | ||||
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The Company has not experienced any realized gains or losses on its investments in the periods presented. The Company had a gross unrealized loss of $9 at December 31, 2004 and a gross unrealized gain of $1 at December 31, 2005. There was a gross unrealized loss of $9 for the year ended December 31, 2004 and a gross unrealized gain of $10 for the year ended December 31, 2005.
F-17
The following table summarizes the estimated fair value of the Company's securities held in marketable securities classified by the stated maturity date of the security:
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December 31,
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2004
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2005
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Due within one year | $ | 62,739 | $ | 133,830 |
Note 3. Property and Equipment
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December 31,
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2004
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2005
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Building (under capital lease) | $ | | $ | 22,830 | |||
Network equipment and computer hardware | 17,880 | 58,917 | |||||
Software | 2,543 | 4,667 | |||||
Leased equipment | 191 | 371 | |||||
Leasehold improvements | 1,192 | 25,216 | |||||
Furniture | 882 | 5,895 | |||||
Software licenses | 970 | 909 | |||||
Vehicles | | 190 | |||||
Construction in progress | 346 | 352 | |||||
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24,004 | 119,347 | ||||||
Less: accumulated depreciation and amortization | (7,714 | ) | (15,709 | ) | |||
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Net property and equipment | $ | 16,290 | $ | 103,638 | |||
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Related depreciation and amortization expense was $2,367, $3,907 and $11,122 in 2003, 2004 and 2005, respectively. Included in depreciation and amortization expense for 2005 was $157 related to capital leases. Interest cost on the debt related to the capital lease for the Company's new headquarters was capitalized during the pre-occupancy period in the amount of $1,731 for 2005. Construction in progress is related to the Company's relocation of its headquarters to Holmdel, New Jersey (see Note 10).
In addition in connection with the Company's relocation of its headquarters to Holmdel, New Jersey, the Company incurred costs for the renovation of the facility. The landlord will reimburse $8,750, of these costs of which $7,656 was applied for at December 31, 2005 and $4,981 was received in 2005 and $761 was received in 2006. This $7,656 was recorded as a reduction to leasehold improvements at December 31, 2005.
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Note 4. Accrued Expenses
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December 31,
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2004
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2005
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Marketing | $ | 15,186 | $ | 41,094 | ||
Compensation and related taxes and temporary labor | 3,818 | 11,374 | ||||
Telecommunications | 770 | 15,133 | ||||
Professional fees | 1,138 | 3,151 | ||||
Litigation | 1,050 | 1,050 | ||||
Taxes and fees | 1,593 | 11,094 | ||||
Customer credits | 1,089 | 1,729 | ||||
Inventory | 358 | 2,926 | ||||
Costs related to new headquarters | | 3,882 | ||||
Credit card fees | 276 | 1,097 | ||||
Accrued interest | | 729 | ||||
Other accruals | 911 | 4,776 | ||||
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$ | 26,189 | $ | 98,035 | |||
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Note 5. Income Taxes
The following table summarizes deferred taxes resulting from differences between financial accounting basis and tax basis of assets and liabilities.
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December 31,
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2004
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2005
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Current assets and liabilities: | ||||||||
Deferred revenue | $ | 1,984 | $ | 6,134 | ||||
Accounts receivable and inventory allowances | 519 | 377 | ||||||
Accrued expenses | 3,070 | 7,847 | ||||||
Capital leases | | 385 | ||||||
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5,573 | 14,743 | |||||||
Valuation allowance | (5,573 | ) | (14,743 | ) | ||||
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Net current deferred tax asset | $ | | $ | | ||||
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Non-current assets and liabilities: |
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Depreciation and amortization | $ | (1,048 | ) | $ | (2,709 | ) | ||
Amortization of start-up costs | 1,065 | 518 | ||||||
Net operating loss carryforward | 40,678 | 136,739 | ||||||
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40,695 | 134,548 | |||||||
Valuation allowance | (40,695 | ) | (134,548 | ) | ||||
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Net non-current deferred tax asset | $ | | $ | | ||||
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F-19
The Company has net losses for financial reporting purposes. Recognition of deferred tax assets will require generation of future taxable income. There can be no assurance that the Company will generate sufficient taxable income in future years. Therefore, the Company established a valuation allowance on net deferred tax assets of $46,268 and $149,291 as of December 31, 2004 and 2005, respectively.
The components of loss before income tax benefit are as follows:
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For the Years Ended
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2003
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2004
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2005
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United States | $ | (30,195 | ) | $ | (68,535 | ) | $ | (236,342 | ) | |
Foreign | | (1,861 | ) | (25,382 | ) | |||||
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Total | $ | (30,195 | ) | $ | (70,396 | ) | $ | (261,724 | ) | |
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The components of the income tax benefit are as follows:
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For the Years Ended
December 31, |
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2003
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2004
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2005
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Current: | ||||||||||
State and local taxes | $ | 221 | $ | 475 | $ | 390 | ||||
Foreign | | | | |||||||
Federal | | | | |||||||
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$ | 221 | $ | 475 | $ | 390 | |||||
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Deferred: |
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State and local taxes | $ | | $ | | $ | | ||||
Foreign | | | | |||||||
Federal | | | | |||||||
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$ | | $ | | $ | | |||||
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$ | 221 | $ | 475 | $ | 390 | |||||
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The reconciliation between the U.S. statutory federal income tax rate and the effective rate is as follows:
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For the Years Ended December 31,
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2003
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2004
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2005
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U.S. Federal statutory tax rate | (34 | )% | (34 | )% | (34 | )% | ||
State and local taxes | (6 | ) | (6 | ) | (6 | ) | ||
Sale of net operating loss carryforwards | (1 | ) | (1 | ) | (1 | ) | ||
Valuation reserve for income taxes | 40 | 40 | 40 | |||||
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Effective tax rate | (1 | )% | (1 | )% | (1 | )% | ||
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F-20
As of December 31, 2005, the Company has net operating loss carryforwards for U.S. federal and state tax purposes of $320,023 and $305,827, respectively, expiring at various times from years ending 2020 through 2025. In addition, the Company has net operating loss carryforwards for Canadian tax purposes of $21,189 expiring through 2012. The Company also has net operating loss carryforwards for United Kingdom tax purposes of $6,425 with no expiration date.
Under Section 382 of the Internal Revenue Code, if a corporation undergoes an "ownership change" (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation's ability to use its pre-change of control net operating loss carry forward and other pre-change tax attributes against its post-change income may be limited. The Section 382 limitation is applied annually so as to limit the use of the Company's pre-change net operating loss carry forwards to an amount that generally equals the value of the Company's stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. In addition, the Company may be able to increase the base Section 382 limitation amount during the first five years following the ownership change to the extent it realizes built-in gains during that time period. A built-in gain generally is gain or income attributable to an asset that was held at the date of the ownership change and that had a fair market value in excess of the tax basis at the date of the ownership change. Section 382 provides that any unused Section 382 limitation amount can be carried forward and aggregated with the following year's available net operating losses. Due to the cumulative impact of the Company's equity issuances over the past three years, a change of ownership occurred upon the issuance of the Company's Series E Preferred Stock at the end of April 2005. As a result, $171,147 of the total U.S net operating losses will be subject to an annual base limitation of $39,374. As noted above, the Company believes it may be able to increase the base Section 382 limitation for built-in gains during the first five years following the ownership change.
The Company participated in the State of New Jersey's corporation business tax benefit certificate transfer program (the "Program"), which allows certain high technology and biotechnology companies to transfer unused New Jersey net operating loss carryovers to other New Jersey corporation business taxpayers. During 2003 and 2004, the Company submitted an application to the New Jersey Economic Development Authority (the "EDA") to participate in the Program and the application was approved. The EDA then issued a certificate certifying the Company's eligibility to participate in the Program. The program requires that a purchaser pay at least 75% of the amount of the surrendered tax benefit. For tax years 2002, 2003 and 2004, the Company sold approximately $451, $2,437 and $6,207, respectively, of its New Jersey State net operating loss carryforwards for a recognized benefit of approximately $221 in 2003 and $475 in 2004. Although the Company cannot participate in this program for net operating losses derived in 2005 due to program limits being reached, the EDA did approve during 2005 an additional sale of 2002 and 2003 net operating losses in the amount of $5,101 that resulted in a benefit of $390. Collectively, all transactions represent approximately 82% of the surrendered tax benefit each year and have been recognized in the year received.
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Note 6. Convertible Notes
In December 2005 and January 2006, the Company issued $249,900 aggregate principal amount of convertible notes due December 1, 2010 (the "Notes") with an effective interest rate of 7.1%. The Company plans to use the proceeds from the offering of the Notes to fund the expansion of its business and other working capital requirements.
The holders may require the Company to repurchase all or any portion of the Notes on December 16, 2008 at a price in cash equal to 100% of the principal amount of the Notes plus any accrued and unpaid interest and late charges.
The Company may, at its option, pay interest on the Notes in cash or in kind. If paid in cash, interest will accrue at a rate of 5% per annum and be payable quarterly in arrears. If paid in kind, the interest will accrue at a rate of 7% per annum and be payable quarterly in arrears. Interest paid in kind will increase the principal amount outstanding and will thereafter accrue interest during each period. The first interest payment was made on March 1, 2006. The Company elected to pay this interest in kind.
Upon an event of default, the interest rate will be the greater of the interest rate then in effect or 15% per annum. If interest on the Notes is not paid in full on any interest payment date, the principal amount of the Notes will be increased for subsequent interest accrual periods by an amount that reflects the accretion of the unpaid interest at an annual rate equal to the interest rate then in effect plus 2%, calculated on a quarterly basis, from, and including, the first day of the relevant interest accrual period. If a registration statement relating to a Qualified IPO (as defined below) has not been declared effective by the SEC prior to December 16, 2006, there will be a 1% coupon step-up, and if the Company has not consummated a Qualified IPO prior to December 16, 2007, the coupon will become the greater of the rate then in effect and 10%.
A "Qualified IPO" means the Company's sale of its shares of Common Stock in a firm commitment, fully underwritten public offering conducted in the United States through a nationally recognized investment banking firm at a public offering price per share of at least $10.00 (regardless of the number of shares outstanding at the time of the offering) and with gross proceeds to the Company of more than $200,000, upon which the Common Stock is listed on the New York Stock Exchange or American Stock Exchange or quoted on the Nasdaq National Market.
After the completion of a Qualified IPO, the Company may redeem any or all of the Notes at any time on the later of June 16, 2007 or the first anniversary of the Qualified IPO, provided that, among other things, the Common Stock has traded at a price greater than 150% of the then applicable conversion price of the Notes for 20 consecutive trading days. The Notes shall be redeemed at a price equal to 100% of the principal amount plus accrued and unpaid interest and any late charges, plus the aggregate net present value of the remaining scheduled interest payments through December 16, 2008, if any, calculated as provided in the Notes.
The Company also may redeem any or all of the Notes at any time after December 16, 2008 at a price equal to 100% of the principal amount plus accrued and unpaid interest and any late charges, subject to certain conditions.
F-22
Following a change of control (as defined in the Notes) the holders of the Notes may require the Company to redeem the Notes at a price equal to 100% of the principal amount plus accrued and unpaid interest and late charges. In addition, upon conversions in connection with certain transactions, including certain changes of control, holders of the Notes will be entitled to receive a make-whole premium as calculated in the Notes.
The Notes may, at the option of the holder, be converted into shares of Common Stock at any time. Prior to the completion of the Company's initial public offering, the conversion price for the Notes will be $5.08, subject to certain adjustments for stock dividends, stock splits or similar transactions and to downward adjustment in the event that a registration statement relating to a Qualified IPO is not filed on a timely basis or not declared effective by the SEC prior to December 16, 2006. Immediately following the completion of the Company's initial public offering, the conversion price will be the lesser of (1) the conversion price in effect immediately prior to the completion of the initial public offering and (2) 90% of the initial public offering price of the Common Stock, subject to certain minimum conversion prices. The conversion price also is subject to certain customary anti-dilution adjustments.
Following an event of default, the Notes will become due and payable, either automatically or upon declaration by holders of more than 25% of the aggregate principal amount of Notes.
The Company has agreed to file resale shelf registration statements covering the shares of Common Stock issuable upon conversion of the Notes within 90 calendar days after the initial public offering and use reasonable best efforts to have such registration statement be declared effective within 180 calendar days after the initial public offering. The Company will pay the holders of the Notes a fee of 1% of the principal amount of the Notes on the day that this timetable has not been met and a fee of 2% of the principal amount of the Notes every 30th day thereafter until the failure is cured.
The conversion features that allow for downward adjustment to the conversion price in the event that a registration statement relating to a Qualified IPO is not filed on a timely basis or not declared effective by the SEC prior to December 16, 2006 and the potential adjustment to the conversion price immediately following the completion of the Company's initial public offering represent embedded derivatives that require separate valuation from the Notes. The Company estimated that the embedded derivatives had an initial estimated fair value of approximately $21,800 at December 16, 2005 based upon the Notes issued for $246,000. An incremental $1,872 of Notes were issued through December 31, 2005 and an initial estimated fair value of approximately $166 was attributed to the embedded derivatives for those issuances for an aggregate initial fair value of embedded derivatives of $21,966. The initial fair value of the embedded derivatives has been recorded as a long-term liability with a corresponding reduction in the amount of the Notes. The Notes will be accreted for this amount with a corresponding amount recorded as interest expense each month over the life of the Notes using the effective interest method. Through December 31, 2005, the Company recorded $152 for amortization of discount attributable to the embedded derivatives. In addition, the fair value of the embedded derivatives will be valued of each reporting date with any change being recorded as a gain or loss in the statement of operations. The estimated fair value of the embedded derivatives at December 31,
F-23
2005 was approximately $21,900. The change in the estimated fair value of $66 was recorded in other income.
Note 7. Preferred Stock
The Company's Certificate of Incorporation, as amended, authorizes 43,981 shares of Preferred Stock at $0.001 par value. The authorized shares are designated as follows: 8,000 as Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock"), 6,067 as Series A-2 Redeemable Convertible Preferred Stock ("Series A-2 Preferred Stock"), 3,750 as Series B Redeemable Convertible Preferred Stock ("Series B Preferred Stock"), 8,000 as Series C Redeemable Convertible Preferred Stock ("Series C Preferred Stock"), 8,729 as Series D Redeemable Convertible Preferred Stock ("Series D Preferred Stock") and 9,435 as Series E Redeemable Convertible Preferred Stock ("Series E Preferred Stock"). Each security is convertible into eight shares of Common Stock and automatically converts to Common Stock subject to certain conditions. With regard to the conversion prices for each series of preferred stock described below, the statement subject to adjustment shall mean subject to adjustment for stock dividends, combinations, splits, recapitalizations and similar transactions. Holders of the Series A Preferred Stock, Series A-2 Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock have the right to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock, on an as if converted basis. A description of each security is as follows:
Series A Redeemable Convertible Preferred Stock
During the period from July 2002 through November 2002, the Company issued 8,000 shares of Series A Preferred Stock at $2.00 per share for a total of approximately $15,968, net of expenses. The Company's principal stockholder and Chairman acquired 7,127 shares of Series A Preferred Stock. The Company received gross cash proceeds of approximately $12,211 from the sale of shares and the balance was paid by converting a $2,000 note payable and accrued interest of approximately $43. The conversion of the note payable and related warrants resulted in a debt conversion expense of $360, which is recorded in other income (expense). The relative fair value of the warrants was calculated using the Black-Scholes valuation method and is recorded as additional paid-in capital. The remaining shares were issued to employees and directors of the Company for gross cash of approximately $770 and stock subscription receivables of $972. The stock subscription receivables are secured limited recourse promissory notes with interest at 4.6% per annum and are due through various dates between October 20, 2003 and November 25, 2007. As of December 31, 2005, the stock subscription receivables are $427.
Upon issuance and subject to certain provisions each holder of Series A Preferred Stock ("Series A") shall be entitled at any time to convert each share of Series A into non-assessable shares of Common Stock computed by multiplying the number of shares of preferred stock to be converted by $2.00, subject to adjustment, and dividing the result by $0.25, subject to adjustment.
In addition, subject to certain provisions, at any time after January 16, 2010, the Company, upon the request of any holder of shares of Series A Preferred Stock, is required to redeem the requested
F-24
number of shares at the Redemption Price. The Redemption Price for each share shall be a cash payment equal to the fair market value, which is defined as the price that would be paid for a share of Series A Preferred Stock in an arm's-length sale to a third party, without taking into account any minority discount, of a share of Series A Preferred Stock. In no event shall the Company redeem any shares of Series A Preferred Stock unless there are no shares of Series A-2 Preferred Stock outstanding.
The holders of the Series A Preferred Stock shall be entitled to receive, on a non-cumulative basis, dividends if, as and when paid to holders of the Common Stock. The dividend payable on each share of the Series A Preferred Stock shall be determined on an as-converted basis. In addition, the holders are entitled to receive the liquidation preference of $2.00 per share, plus any declared but unpaid dividends on the Series A Preferred Stock.
Series A-2 Redeemable Convertible Preferred Stock
During September 2003, the Company issued 5,167 shares of Series A-2 Preferred Stock at $4.00 per share for a total of $20,292, net of expenses. The Company's principal stockholder and Chairman acquired all of the Series A-2 Preferred Stock, by converting a $20,000 note payable and accrued interest of $671.
Upon issuance and subject to certain provisions each holder of Series A-2 Preferred Stock shall be entitled at any time to convert each share of Series A-2 Preferred Stock into non-assessable shares of Common Stock computed by multiplying the number of shares of preferred stock to be converted by $4.00, subject to adjustment, and dividing the result by $0.50 subject to adjustment.
In addition, subject to certain provisions, at any time after January 16, 2010, the Company, upon the request of any holder of shares of Series A-2 Preferred Stock, is required to redeem the requested number of shares at the Redemption Price. The Redemption Price for each share shall be a cash payment equal to the fair market value, which is defined as the price that would be paid for a share of Series A-2 Preferred Stock in an arm's-length sale to a third party, without taking into account any minority discount, of a share of Series A-2 Preferred Stock. In no event shall the Company redeem any shares of Series A-2 Preferred Stock unless there are no shares of Series B Preferred Stock outstanding.
The holders of the Series A-2 Preferred Stock shall be entitled to receive, on a non-cumulative basis, dividends if, as and when paid to holders of the Common Stock. The dividend payable on each share of the Series A-2 Preferred Stock shall be determined on an as-converted basis. In addition, the holders are entitled to receive the liquidation preference of $4.00 per share, plus any declared but unpaid dividends on the Series A-2 Preferred Stock.
Series A-2 Redeemable Convertible Preferred Stock Warrant
In connection with $20,000 of notes payable from the Company's principal stockholder and Chairman, the Company included aggregate warrants to purchase $3,600 of value of Series A-2 Preferred Stock at the strike price equal to the stock price paid by Series B Preferred Stock investors
F-25
(see Note 9). At the time these notes payable were converted into Series A-2 Preferred Stock, the Company issued a warrant to purchase 900 shares of Series A-2 Preferred Stock at an exercise price of $4.00 per share, which equaled the fair market value at that date. In addition, the Company determined the relative fair value of the warrants was $1,557 using the Black-Scholes valuation method. This amount was recorded in 2003 as debt conversion expense and as an increase to Series A-2 Redeemable Convertible Preferred Stock Warrant.
Series B Redeemable Convertible Preferred Stock
In November 2003, the Company issued 3,750 shares of Series B Preferred Stock at $4.00 per share for a total of $14,489, net of expenses.
Upon issuance and subject to certain provisions each holder of Series B Preferred Stock shall be entitled, at any time, to convert each share of Series B Preferred Stock into non-assessable shares of Common Stock computed by multiplying the number of shares of preferred stock to be converted by $4.00, subject to adjustment, and dividing the result by $0.50, subject to adjustment.
In addition, subject to certain provisions, at any time after January 16, 2010, the Company, upon the request of any holder of shares of Series B Preferred Stock, is required to redeem the requested number of shares at the Redemption Price. The Redemption Price for each share shall be a cash payment equal to the fair market value, which is defined as the price that would be paid for a share of Series B Preferred Stock in an arm's-length sale to a third party, without taking into account any minority discount, of a share of Series B Preferred Stock. In no event shall the Company redeem any shares of Series B Preferred Stock unless there are no shares of Series C Preferred Stock outstanding.
The holders of the Series B Preferred Stock shall be entitled to receive, on a non-cumulative basis, dividends if, as and when paid to holders of the Common Stock. The dividend payable on each share of the Series B Preferred Stock shall be determined on an as-converted basis. In addition, the holders are entitled to receive the liquidation preference of $4.32 per share, plus any declared but unpaid dividends on the Series B Preferred Stock.
Series C Redeemable Convertible Preferred Stock
During the period from January 2004 through March 2004, the Company issued 8,000 shares of Series C Preferred Stock at $5.00 per share for a total of $38,090, net of expenses.
Upon issuance and subject to certain provisions each holder of Series C Preferred Stock shall be entitled, at any time, to convert each share of Series C Preferred Stock into non-assessable shares of Common Stock computed by multiplying the number of shares of preferred stock to be converted by $5.00, subject to adjustment, and dividing the result by $0.63, subject to adjustment.
In addition, subject to certain provisions, at any time after January 16, 2010, the Company, upon the request of any holder of shares of Series C Preferred Stock, is required to redeem the requested number of shares at the Redemption Price. The Redemption Price for each share shall be a cash payment equal to the fair market value, which is defined as the price that would be paid for a share of Series C Preferred Stock in an arm's-length sale to a third party, without taking into account any
F-26
minority discount, of a share of Series C Preferred Stock. In no event shall the Company redeem any shares of Series C Preferred Stock unless there are no shares of Series D Preferred Stock outstanding.
The holders of the Series C Preferred Stock shall be entitled to receive, on a non-cumulative basis, dividends if, as and when paid to holders of the Common Stock. The dividend payable on each share of the Series C Preferred Stock shall be determined on an as-converted basis. In addition, the holders are entitled to receive the liquidation preference of $5.40 per share, plus any declared but unpaid dividends on the Series C Preferred Stock.
Series D Redeemable Convertible Preferred Stock
During the period from August 2004 through October 2004, the Company issued 8,729 shares of Series D Preferred Stock at $12.03 per share for a total of $102,722, net of expenses.
Upon issuance and subject to certain provisions each holder of Series D Preferred Stock shall be entitled, at any time, to convert each share of Series D Preferred Stock into non-assessable shares of Common Stock computed by multiplying the number of shares of preferred stock to be converted by $12.03, subject to adjustment, and dividing the result by $1.50, subject to adjustment.
In addition, subject to certain provisions, at any time after January 16, 2010, the Company, upon the request of any holder of shares of Series D Preferred Stock, is required to redeem the requested number of shares at the Redemption Price. The Redemption Price for each share shall be a cash payment equal to the fair market value, which is defined as the price that would be paid for a share of Series D Preferred Stock in an arm's-length sale to a third party, without taking into account any minority discount, of a share of Series D Preferred Stock. In no event shall the Company redeem any shares of Series D Preferred Stock unless there are no shares of Series E Preferred Stock outstanding.
The holders of the Series D Preferred Stock shall be entitled to receive, on a non-cumulative basis, dividends if, as and when paid to holders of the Common Stock. The dividend payable on each share of the Series D Preferred Stock shall be determined on an as-converted basis. In addition, the holders are entitled to receive the liquidation preference of $12.99 per share, plus any declared but unpaid dividends on the Series D Preferred Stock.
Series E Redeemable Convertible Preferred Stock
During the period from April 2005 through September 2005, the Company issued 9,429 shares of Series E Preferred Stock at $21.20 per share for a total of $195,736, net of expenses.
Upon issuance and subject to certain provisions each holder of Series E Preferred Stock shall be entitled, at any time, to convert each share of Series E Preferred Stock into non-assessable shares of Common Stock computed by multiplying the number of shares of preferred stock to be converted by $21.20, subject to adjustment, and dividing the result by $2.65, subject to adjustment.
In addition, subject to certain provisions, at any time after January 16, 2010, the Company, upon the request of any holder of shares of Series E Preferred Stock, is required to redeem the requested number of shares at the Redemption Price. The Redemption Price for each share shall be a cash
F-27
payment equal to the fair market value, which is defined as the price that would be paid for a share of Series E Preferred Stock in an arm's-length sale to a third party, without taking into account any minority discount, of a share of Series E Preferred Stock.
The holders of the Series E Preferred Stock shall be entitled to receive, on a non-cumulative basis, dividends if, as and when paid to holders of the Common Stock. The dividend payable on each share of the Series E Preferred Stock shall be determined on an as-converted basis. In addition, the holders are entitled to receive the liquidation preference of $22.90 per share, plus any declared but unpaid dividends on the Series E Preferred Stock.
For Series E Preferred Stock issued subsequent to July 15, 2005, which represented approximately 1% of the Series E Preferred Stock issued, the Company believes that holders of approximately 125 shares, or approximately 1,000 on an as-if converted basis, received a beneficial conversion feature as the fair market value of the Company's common stock increased during the Series E issuance period. As such, under Emerging Issues Task Force Consensus No. 98-05, " Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios ", the Company has recorded the intrinsic value of the beneficial conversion feature on an as-if converted basis as a charge to retained earnings with the offset to additional paid-in capital in its consolidated balance sheet in the amount of $605 in 2005.
Note 8. Employee Benefit Plans
2001 Stock Incentive Plan
In February 2001 the Company adopted the 2001 Stock Incentive Plan, which is an amendment and restatement of the 2000 Stock Incentive Plan of MIN-X.COM, INC. The plan provides for the granting of options or restricted stock awards to officers, directors and employees of the Company. The objectives of the plan include attracting and retaining personnel, providing for additional performance incentives, and promoting the success of the Company by providing employees the opportunity to acquire stock. The Company accounts for stock options pursuant to APB No. 25 and accordingly, no compensation expense is recognized when the exercise price is equivalent to the fair market value of the stock at the date of grant. During 2004, the Company increased the number of shares authorized for issuance pursuant to options or restricted stock awards from 12,000 to 21,009 shares under the plan, as amended. During 2005, the number of shares authorized for issuance pursuant to options or restricted stock awards was increased from 21,009 to 79,202. At December 31, 2005, 8,866 shares were subject to exercisable options or restricted stock awards under the 2001 Stock Option Plan. In management's opinion, all stock options were granted with an exercise price at or above the fair market value of the Company's common stock at the date of grant with the exception of a grant in 2005 for 350 shares. This grant resulted in deferred compensation of $182 which is being amortized over the vesting period. Amortization of $15 was recorded through December 31, 2005. Subsequent to December 31, 2005, the granting of stock options will be accounted for under FAS 123(R). Stock options generally vest over a four-year period and expire ten years after the grant date.
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Stock option activity was as follows:
|
Number of
Options |
Range of
Exercise Prices |
Weighted
Average Exercise Price |
||||
---|---|---|---|---|---|---|---|
Balance at December 31, 2002 | 3,700 | $0.25$12.50 | $ | 0.47 | |||
Granted |
|
2,176 |
|
$0.25$0.50 |
|
$ |
0.49 |
Exercised | (6 | ) | |||||
Canceled | (575 | ) | |||||
|
|||||||
Balance at December 31, 2003 | 5,295 | $0.25$12.50 | $ | 0.48 | |||
Granted |
|
11,989 |
|
$0.63$1.50 |
|
$ |
0.74 |
Exercised | (28 | ) | |||||
Canceled | (772 | ) | |||||
|
|||||||
Balance at December 31, 2004 | 16,484 | $0.25$12.50 | $ | 0.66 | |||
Granted |
|
23,328 |
|
$2.65$5.08 |
|
$ |
3.12 |
Exercised | (103 | ) | |||||
Canceled | (2,264 | ) | |||||
|
|||||||
Balance at December 31, 2005 | 37,445 | $0.25$12.50 | $ | 2.10 | |||
|
At December 31, 2005, 41,620 options were available for future grant under the plan.
Following is a summary of the status of stock options outstanding at December 31, 2005:
|
Outstanding Options
|
Exercisable Options
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Exercise Price
Range |
Number
|
Weighted
Average Remaining Contractual Life |
Weighted
Average Exercise Price |
Number
|
Weighted
Average Exercise Price |
|||||||
$0.00$1.25 | 14,314 | 7.9 | $ | 0.54 | 6,604 | $ | 0.46 | |||||
$1.25$2.50 | 1,087 | 8.5 | $ | 1.53 | 302 | $ | 1.62 | |||||
$2.50$3.75 | 20,797 | 9.5 | $ | 3.03 | 1,906 | $ | 2.98 | |||||
$3.75$5.00 | 1,155 | 9.8 | $ | 4.58 | 17 | $ | 4.44 | |||||
$5.00$6.25 | 49 | 10.0 | $ | 5.08 | ||||||||
$6.25$7.50 | 4 | 5.4 | $ | 7.50 | 4 | $ | 7.50 | |||||
$7.50$8.75 | ||||||||||||
$8.75$10.00 | 2 | 5.5 | $ | 10.00 | 2 | $ | 10.00 | |||||
$10.00$11.25 | ||||||||||||
$11.25$12.50 | 37 | 6.0 | $ | 12.50 | 31 | $ | 12.50 | |||||
|
|
|||||||||||
37,445 | 8.8 | $ | 2.10 | 8,866 | $ | 1.09 | ||||||
|
|
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Retirement Plan
In March 2001, the Company established a 401(k) Retirement Plan (the "Retirement Plan") available to employees who meet the plan's eligibility requirements. Participants may elect to contribute a percentage of their compensation to the Retirement Plan up to a statutory limit. The Company may make a contribution to the Retirement Plan in the form of a matching contribution. The employer matching contribution was 100% of each employee's contributions in each year, not to exceed $5 in 2003 and $6 in 2004 and 2005. The Company's expense related to the Retirement Plan was $133, $270 and $709 in 2003, 2004 and 2005, respectively.
Note 9. Related Party Transactions
Notes Payable
On April 17, 2002, the Company's principal stockholder and Chairman loaned the Company $2,000, which included a warrant to purchase 1,440 shares of Common Stock at an exercise price of $0.25 per share. The loan was due on April 17, 2003 with interest at 8% per annum. During July 2002, the loan was converted into Series A Preferred Stock.
On January 28, 2003, the Company's principal stockholder and Chairman loaned the Company $5,000, which included a five-year warrant to purchase $900 value of Series A-2 Preferred Stock at the strike price equal to the stock price paid by Series B Preferred Stock investors. The loan was due July 28, 2003 with interest at 8% per annum. During September 2003, the loan was converted into Series A-2 Preferred Stock.
On March 31, 2003, the Company's principal stockholder and Chairman loaned the Company $5,000, which included a five-year warrant to purchase $900 value of Series A-2 Preferred Stock at the strike price equal to the stock price paid by Series B Preferred Stock investors. The loan was due September 2003 with interest at 8% per annum. During September 2003, the loan was converted into Series A-2 Preferred Stock.
On May 30, 2003, the Company's principal stockholder and Chairman loaned the Company $5,000, which included a five-year warrant to purchase $900 value of Series A-2 Preferred Stock at the strike price equal to the stock price paid by Series B Preferred Stock investors. The loan was due September 2003 with interest at 8% per annum. During September 2003, the loan was converted into Series A-2 Preferred Stock.
On July 31, 2003, the Company's principal stockholder and Chairman loaned the Company $5,000, which included a five-year warrant to purchase $900 value of Series A-2 Preferred Stock at the strike price equal to the stock price paid by Series B Preferred Stock investors. The loan was due September 2003 with interest at 8% per annum. During September 2003, the loan was converted into Series A-2 Preferred Stock.
F-30
Due from Related Parties
Included in due from related parties is interest earned on the outstanding principal balance of the Company's stock subscription receivable arising from the issuance of common stock and preferred stock to certain executives and officers of the Company.
Note 10. Commitments and Contingencies
Capital Leases
Assets financed under capital lease agreements are included in property and equipment in the consolidated balance sheet and related depreciation and amortization expense is included in the consolidated statements of operations.
On March 24, 2005, the Company entered into a new office lease for its new headquarters in Holmdel, New Jersey. The Company took possession of a portion of the office space at the inception of the lease, another portion on August 1, 2005 and will take over the remainder of the office space in early 2006. The overall lease term is twelve (12) years and five (5) months. In connection with the lease, the Company has a letter of credit which requires $7,000 of cash as collateral, which is classified as restricted cash. The gross amount of the building recorded under capital leases totaled $22,232 as of December 31, 2005 and accumulated depreciation was approximately $142 as of December 31, 2005.
On November 5, 2005, the Company entered into a new lease for office equipment for a lease term of two (2) years. The gross amount of the equipment recorded under this lease was $371 and accumulated depreciation was $15 at December 31, 2005.
Operating Leases
The Company has entered into various non-cancelable operating lease agreements for certain of its existing office and telecommunications co-location space in the U.S. and for international subsidiaries with original lease periods expiring between 2005 and 2009. The Company is committed to pay a portion of the buildings' operating expenses as determined under the agreements.
F-31
At December 31, 2004 and 2005, future payments under capital leases and minimum payments under non-cancelable operating leases are as follows over each of the next five years and thereafter:
|
December 31, 2004
|
December 31, 2005
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Capital
Leases |
Operating
Leases |
Capital
Leases |
Operating
Leases |
||||||||
2006 | $ | 5 | $ | 1,948 | 3,491 | $ | 1,146 | |||||
2007 | | 568 | 3,540 | 547 | ||||||||
2008 | | 148 | 3,425 | 464 | ||||||||
2009 | | 97 | 3,492 | 320 | ||||||||
2010 | | 97 | 3,561 | 200 | ||||||||
Thereafter | | | 25,597 | | ||||||||
|
|
|
|
|||||||||
Total minimum payments required | 5 | $ | 2,858 | 43,106 | $ | 2,677 | ||||||
|
|
|||||||||||
Less amounts representing interest | | (20,675 | ) | |||||||||
|
|
|||||||||||
Minimum future payments of principal |
|
|
5 |
|
|
|
|
|
22,431 |
|
|
|
Current portion | 5 | 773 | ||||||||||
|
|
|||||||||||
Long-term portion | $ | | $ | 21,658 | ||||||||
|
|
The future payments for the additional space expected to be taken in early 2006 under this lease for the next five years and thereafter are as follows:
2006 | $ | 334 | ||
2007 | 480 | |||
2008 | 489 | |||
2009 | 499 | |||
2010 | 509 | |||
Thereafter | 3,657 | |||
|
||||
Total minimum payments required |
|
|
5,968 |
|
Less amounts representing interest | (3,316 | ) | ||
|
||||
Minimum future payments of principal |
|
$ |
2,652 |
|
|
Rent expense was $533, $1,282 and $1,698 for 2003, 2004 and 2005, respectively.
F-32
Stand-by Letters of Credit
The Company had stand-by letters of credit totaling $83 and $7,210, as of December 31, 2004 and 2005, respectively.
End-User Commitments
The Company is obligated to provide telephone services to its registered end-users. The costs related to the potential utilization of minutes sold are expensed as incurred. The Company's obligation to provide this service is dependent on the proper functioning of systems controlled by third-party service providers. The Company does not have a contractual service relationship with some of these providers.
Vendor Commitments
In connection with the Company's relocation of its headquarters to Holmdel, New Jersey, the Company has committed approximately $11,000 for the remaining renovation of the facility. The landlord will reimburse $1,094 of these expenditures.
The Company has historically entered into various agreements with retailers for newspaper insert advertisements, product placement and other marketing-related initiatives. The Company is in the process of negotiating additional 2006 commitments.
The Company had an oral agreement in place with its advertising agency for 2005 which requires a payment of $500 per month. After December 31, 2005, this arrangement shall continue indefinitely in full force and effect unless terminated by either party upon at least ninety (90) days' prior written notice to the other party.
The Company has engaged several vendors to assist with local number portability, which allows customers to keep their existing phone number when switching to the Company's service. The Company has committed to pay these vendors a minimum of $4,560 in 2006, $3,220 in 2007, $2,220 in 2008 and $2,220 in 2009.
The Company has engaged several vendors to assist with provision of E-911 services. The Company has committed to pay these vendors up to $9,930 in 2006, $10,080 in 2007 and $10,660 in 2008.
The Company has engaged a vendor to assist with inbound sales inquiries. The Company has committed to pay this vendor $13,183 in 2006 and $3,296 in 2007, subject to adjustments. After April 9, 2007, this arrangement shall continue in full force and effect unless terminated by either party upon at least ninety (90) days' prior written notice to the other party.
The Company is committed to purchasing a minimum number of communication devices to maintain its current pricing structure. If the Company fails to meet certain criteria the purchase price of these devices will be increased. Historically, the Company has met these criteria to maintain the current pricing structure.
F-33
The Company is committed to purchasing hosting and transport services from one of its vendors with a minimum purchase commitment of $150 per month through August 12, 2006. The Company is in the process of renegotiating this contract.
Litigation
On October 10, 2003, the Company terminated its contract with its former voicemail vendor. Under the terms of the contract, the Company can terminate for any reason. On November 7, 2003, the former voicemail vendor filed a petition to compel mediation against the Company in the U.S. District Court for the District of Massachusetts. The petition sought to compel the Company to mediate a contractual dispute between the parties relating to the contract. Following unsuccessful mediation efforts, in April 2004, the former voicemail vendor commenced an action against the Company in the Superior Court of Suffolk County, Massachusetts (2004 Civil 01585) arising out of the Company's termination of a contract between the parties. The former voicemail vendor has asserted claims for breach of contract, copyright infringement, and related theories. The Company has filed an answer and a counterclaim, and discovery in this matter began in September 2004 and was substantially completed on May 31, 2005. On December 1, 2005, the former voicemail vendor served the Company with a Motion for Summary Judgment, and on December 2, 2005, the Company served the former voicemail vendor with a motion for Summary Judgment on the former voicemail vendor's copyright and Unfair Trade Practices claims. The former voicemail vendor subsequently dismissed its copyright claim. Oppositions to the Motions for Summary Judgment were served on January 23, 2006, and Replies were submitted on February 8, 2006. Oral argument on the Motions took place on February 16, 2006. The Company has engaged in settlement discussions in this matter. The Company has recorded a reserve to cover the potential exposure relating to this litigation, which reserve was not material to the financial statements.
The Company has been invoiced for the sum of $4,000 from the individual who assisted in the placement of the Series B and Series C Preferred Stock. In addition, on October 18, 2005, this individual commenced a suit against the Company seeking damages of approximately $14,240. By letter dated January 11, 2006, the individual informed the Company of his belief that he is entitled to an additional $12,500 million, which makes his total claim $26,750, as a result of an additional securities placement by the Company at the end of 2005. The individual claims this amount as due with respect to the Company's sale of Series D Convertible Preferred Stock, Series E Convertible Preferred Stock and Senior Unsecured Convertible Notes, under the terms governing this individual's services in connection with placement of Series B and Series C Convertible Preferred Stock. His complaint further seeks a declaratory judgment that he is entitled to be paid additional fees in connection with any future private placements of the Company's securities. Although this individual did not perform any services in connection with the Company's Series D, Series E or convertible note offerings, the individual claims the amounts are due under the terms of his engagement letter. In addition, the party to the engagement letter covering these services was not the individual but a different securities firm. The engagement letter recites that the individual was "associated" with the securities firm and was a registered representative of that firm. The Company believes that the claim asserted by this individual does not belong to him. The Company filed an answer denying the allegations in the individual's
F-34
complaint on December 7, 2005 and filed its First Amended Answer and Counterclaims and Third-Party Complaint against the securities firm on February 17, 2006. The Company's legal counsel and the individual were discussing the possibility of settlement of the claim prior to the suit being filed but could not reach agreement due to the refusal of the "associated" securities firm to release the Company from any and all claims related to this matter. Based upon prior settlement discussions, the Company has recorded a reserve to cover the potential exposure relating to this litigation, which reserve was not material to the financial statements. The amount was recorded as an offset against the Series D Preferred Stock as these fees relate to the placement of those securities.
The Attorneys General of several states have initiated investigations and, in two states, have commenced litigation concerning our marketing disclosures and advertising, including alleging that the Company has engaged in deceptive trade practices by failing to adequately notify customers of certain limitations in the Company's 911 service. The Company has entered into settlement negotiations with certain of these states and in response to these complaints the Company has made its Terms of Service more user-friendly, made 911 information more prominent and accessible on the website, added 911 disclosures and made 911 activation mandatory for all new customers. The accompanying financial statements do not contain adjustments for this litigation as management believes it is not probable that the states would prevail in the suit and the amount, if any, the states would be entitled to is not reasonably estimable.
On May 11, 2005, the Division of Marketing Practices of the Federal Trade Commission (the "FTC") issued an informal request for the production of documents to the Company, seeking advertising and other materials related to: (1) the Company's provision of "unlimited" calling plans and its policies regarding the monitoring of customers on such plans to determine whether their service usage is consistent with residential or business patterns; and (2) the Company's 911 dialing service. The Company produced most of the requested documents on June 10, 2005. The Company supplemented its response on July 15, 2005 in response to questions raised by FTC staff attorneys. On August 31, 2005, the FTC issued a Civil Investigative Demand which requested additional information which the Company expects to provide by the end of February. No formal action has been filed against the Company at this time. The Company is unable at this time to predict whether a formal action will be filed against the Company, to assess the likelihood of a favorable or unfavorable outcome in that event, or to estimate the amount of liability in the event of an unfavorable outcome. As such no amounts have been recorded in the accompanying financial statements.
On April 15, 2005 the Company received a letter from an attorney in Florida on behalf of a family who claimed that they were unable to reach a 911 operator in connection with the death of their child. A complaint, summons and related discovery requests, filed in the United States District Court for the Middle District of Florida, were served on the Company on June 20, 2005. The claims were for the child's alleged wrongful death as well as for allegedly fraudulent misrepresentations, negligent misrepresentations, information negligently supplied for the guidance of others and intentional infliction of emotional distress. The Company has reached a settlement with the plaintiffs within the estimated reserve recorded.
F-35
The Company is subject to various patent infringement proceedings and claims. The Company believes that the ultimate resolution of these matters will not have a material adverse effect upon the Company's consolidated financial statements.
The Company is subject to various legal proceedings and claims arising in the ordinary course of business, which are related to industry-wide legal issues. The Company believes that the ultimate resolution of these matters will not have a material adverse effect upon the Company's consolidated financial statements.
Regulation
Telephony services are subject to a broad spectrum of state and federal regulations. Because of the uncertainty over whether VoIP should be treated as a telecommunications or information service, the Company has been involved in a substantial amount of state and federal regulatory activity. However, implementation and interpretation of the existing laws and regulations is ongoing and is subject to litigation by various federal and state agencies and courts. Due to the nature of the technology in use, there is no guarantee that regulation or new interpretations of existing regulations will not emerge at any time.
On June 3, 2005, the Federal Communications Commission ("FCC") released its VoIP E-911 order (the "Order"). Pursuant to the Order, the Company was required (i) to notify its customers of the differences between the emergency services available through the Company and those available through traditional telephony providers and to receive affirmative acknowledgment from all of its customers that they understand the nature of the emergency services available through our service and (ii) to provide E-911 services to 100% of its subscribers by November 28, 2005. The Company has received affirmative acknowledgment from substantially all of its customers that they understand its emergency services and therefore it is substantially in compliance with the first aspect of the Order. It has also taken steps to comply with the enhanced emergency services rules, but was unable to comply with all of the requirements of the Order by the November 28, 2005 deadline. Consequently, the Company is not currently in full compliance and does not expect to be in full compliance in the short term unless it is granted a waiver of the requirements by the FCC. On November 28, 2005, the Company filed a petition for extension of time and limited waiver of certain of the enhanced emergency service requirements. To the extent the waiver is necessary and not granted, the Company would be at risk of an enforcement action including fines, penalties and/or an order to cease and desist selling and marketing the Company's services in certain areas where E-911 service is unavailable.
State and Municipal Taxes
Currently, the Company does not collect or remit state or municipal taxes (such as sales and use, excise and ad valorem taxes), fees or surcharges ("Taxes") on the charges to the Company's customers for its services, except that the Company collects and remits New Jersey sales tax. The Company has received inquiries or demands from a number of state and municipal taxing and 911 agencies seeking payment of Taxes that are applied to or collected from the customers of providers of traditional public switched telephone network services. The Company has consistently maintained that these Taxes do not
F-36
apply to its service for a variety of reasons depending on the statute or rule that establishes such obligations. However, as of December 31, 2005, the Company was in the process of discussing the applicability of sales and other taxes with numerous states and may proactively enter into discussions with additional states as conditions warrant. In addition, a few states address how VoIP providers should contribute to support public safety agencies, and in those states the Company will begin to remit fees to appropriate state agencies. The Company has also contacted authorities in each of the other states to discuss how it can financially contribute to the 911 system. The Company does not know how all these discussions will be resolved, but there is a possibility that it will be required to pay or collect and remit some or all of these Taxes in the future. Additionally, some of these Taxes could apply to the Company retroactively. As such, the Company has recorded a reserve of $960 for the year ended December 31, 2004 and an additional $8,940 for the year ended December 31, 2005 as its best estimate of the potential tax exposure should there be any retroactive assessments. The potential tax exposure could be greater than the Company's reserves.
Employment Agreements
Chief Executive Officer
Effective June 1, 2004, the Company entered into an employment agreement with the Company's principal stockholder providing for employment as the Company's President and Chief Executive Officer ("CEO") and as Chairman of the Company's Board of Directors for an initial term of three years. The term will automatically renew for additional one-year periods, unless either party gives notice at least 60 days prior to the end of the then-current term. Under the employment agreement, the CEO is entitled to receive an annual base salary, subject to review by the Company's Compensation Committee. The CEO also is eligible to receive an annual discretionary performance-based bonus in accordance with the Company's annual bonus program for senior executives, with a minimum annual bonus of 37.5% and a target annual bonus equal to 100% of the CEO's annual base salary, with a minimum bonus of 75% of annual base salary for 2004. Under this agreement, the Company also will provide the CEO with, and pay the cost of premium payments on, a term life insurance policy that provides for a death benefit of at least $1,500. The agreement also provides that, with respect to reasonable business-related airline expenses, the CEO will be eligible for air travel reimbursement based on the cost of a first-class ticket on a commercial airline to and from the applicable business destinations and that any additional business-related airline expenses incurred, directly or indirectly, by the CEO with respect to other employees shall be paid in accordance with the Company's travel policy.
During the term of this employment agreement, if the Company terminates the CEO's employment without cause or due to the CEO becoming disabled or he resigns with good reason and, in each case, the CEO provides the Company with a general release of claims, the CEO will be entitled to an amount equal to three times the sum of the CEO's annual base salary in effect on the termination date and three times the annual bonus for the prior year, and the cost of group health continuation coverage for a period of 18 months. If the CEO's employment is terminated by reason of death, the CEO's estate will be entitled to the cost of group health continuation coverage for a period of 18 months. In the event of a termination of the CEO's employment without cause or due to the
F-37
CEO becoming disabled or for good reason or by reason of death, or in the event of a change in control, the CEO's outstanding stock options and other long-term incentive awards will vest in full.
Under the terms of the CEO's employment agreement, the CEO has agreed not to disclose any confidential information concerning the Company's business. In addition, the CEO has agreed not to solicit or to interfere with the Company's relationship with any of its employees, officers or representatives or to solicit any of its customers, clients, suppliers, licensees or other business relations until nine months following termination of his employment. Furthermore, the CEO has also entered into a noncompetition agreement pursuant to which the CEO has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or corporation engaged in any business) that directly competes with the Company's business until nine month following termination of the CEO's employment.
The Company negotiated a new agreement with the CEO on February 8, 2006 (See Note 13).
Chief Financial Officer
Effective August 1, 2005, the Company entered into an employment agreement with the Chief Financial Officer ("CFO") providing for employment as the Company's CFO for an initial term of two years. The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. In the event of a change in control, the term will also be automatically extended until the first anniversary of the change of control. Under this employment agreement, the CFO is entitled to receive an annual base salary, subject to review by the Compensation Committee and the Company's Chief Executive Officer. The CFO also is eligible to receive an annual discretionary performance-based bonus in accordance with the Company's annual bonus program for senior executives.
During the term of the CFO's employment agreement, if the Company terminates the CFO's employment without cause or he resigns with good reason and, in each case, the CFO provides the Company with a general release of claims, the CFO will be entitled to a prorated annual bonus for the year of termination and an amount equal to his base salary for the longer of one year or the remainder of the term. If the CFO's employment is terminated by reason of death or disability, the CFO will be entitled to a prorated annual bonus for the year of termination and an amount equal to the CFO's base salary for one year (reduced by the net amount of any disability benefits received by the CFO under the Company's group disability policy). In the event of a termination of the CFO's employment without cause or for good reason, in each case, on or after a change in control, the CFO's outstanding stock options will vest in full.
Under the terms of the CFO's employment agreement, he has agreed not to disclose any confidential information concerning the Company's business. In addition, the CFO has agreed not to solicit or to interfere with the Company's relationship with any of its employees, officers or representatives or to solicit any of the Company's customers, clients, suppliers, licensees or other business relations until 12 months following termination of the CFO's employment. Furthermore, the CFO has entered into the Company's form noncompetition agreement pursuant to which the CFO has agreed not to engage in, become interested in, enter into employment with or provide services to any
F-38
business (or any person, firm or corporation engaged in any business) that directly competes with the Company's business until 12 months following termination of the CFO's employment.
Chief Technology Officer
Effective August 1, 2005, the Company entered into an employment agreement with the Chief Technology Officer ("CTO") providing for employment as the Company's CTO for an initial term of two years. The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. Under this employment agreement, the CTO is entitled to receive an annual base salary, subject to review by the Compensation Committee and the Chief Executive Officer. The CTO is also eligible to receive an annual discretionary performance-based bonus in accordance with the Company's annual bonus program for senior executives.
During the term of the CTO's employment agreement, if the Company terminates the CTO's employment without cause or he resigns with good reason and, in each case, the CTO provides the Company with a general release of claims, the CTO will be entitled to a prorated annual bonus for the year of termination and an amount equal to his base salary for the longer of one year or the remainder of the term. If the CTO's employment is terminated by reason of death or disability, the CTO will be entitled to a prorated annual bonus for the year of termination and an amount equal to the CTO's base salary for one year (reduced by the net amount of any disability benefits received by the CTO under the Company's group disability policy).
Under the terms of the CTO's employment agreement, he has agreed not to disclose any confidential information concerning the Company's business. In addition, the CTO has agreed not to solicit or to interfere with the Company's relationship with any of its employees, officers or representatives or to solicit any of the Company's customers, clients, suppliers, licensees or other business relations until 12 months following termination of the CTO's employment. Furthermore, the CTO has entered into the Company's form noncompetition agreement pursuant to which the CTO has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or corporation engaged in any business) that directly competes with the Company's business until 12 months following termination of the CTO's employment.
Chief Legal Officer
Effective August 8, 2005, the Company entered into an employment agreement with the Chief Legal Officer ("CLO") providing for employment as the Company's CLO for an initial term of two years. The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. In the event of a change in control, the term will also be automatically extended until the first anniversary of the change of control. Under the CLO's employment agreement, the CLO is entitled to receive an annual base salary, subject to review by the Company's Compensation Committee and the Company's Chief Executive Officer. The CLO also is eligible to receive an annual discretionary performance-based bonus in accordance with the
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Company's annual bonus program for senior executives, with a minimum bonus of $100 payable for 2005.
During the term of the CLO's employment agreement, if the Company terminates the CLO's employment without cause or the CLO resigns with good reason and, in each case, the CLO provides the Company with a general release of claims, the CLO will be entitled to a prorated annual bonus for the year of termination and an amount equal to the CLO's base salary for the longer of one year or the remainder of the term. If the CLO's employment is terminated by reason of death or disability, the CLO will be entitled to a prorated annual bonus for the year of termination and an amount equal to the CLO's base salary for one year (reduced by the net amount of any disability benefits received by the CLO under the Company's group disability policy). In the event of a termination of the CLO's employment without cause or for good reason, in each case, on or after a change in control, the CLO's outstanding stock options will vest in full.
Under the terms of the CLO's employment agreement, the CLO has agreed not to disclose any confidential information concerning the Company's business. In addition, the CLO has agreed not to solicit or to interfere with the Company's relationship with any of its employees, officers or representatives or to interfere with the Company's relationship with any of its customers, clients, suppliers, licensees or other business relations until 12 months following termination of the CLO's employment. Furthermore, the CLO has entered into the Company's form noncompetition agreement pursuant to which the CLO has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or corporation engaged in any business) that directly competes with the Company's business until 12 months following termination of the CLO's employment.
Note 11. Geographic Information
The Company's chief operating decision-makers review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and marketing expenses by geographic region for purposes of allocating resources and evaluating financial performance. Accordingly, the Company considers itself to be in a single reporting segment and operating unit structure.
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Information about the Company's operations by geographic location is as follows:
|
For the Years Ended
December 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2003
|
2004
|
2005
|
|||||||
Revenue: | ||||||||||
United States | $ | 18,722 | $ | 78,709 | $ | 260,613 | ||||
Canada | | 999 | 7,601 | |||||||
United Kingdom | | | 982 | |||||||
|
|
|
||||||||
$ | 18,722 | $ | 79,708 | $ | 269,196 | |||||
|
|
|
|
December 31,
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2003
|
2004
|
2005
|
|||||||
Long-lived assets: | ||||||||||
United States | $ | 9,325 | $ | 16,123 | $ | 102,225 | ||||
Canada | | 167 | 1,357 | |||||||
United Kingdom | | | 55 | |||||||
|
|
|
||||||||
$ | 9,325 | $ | 16,290 | $ | 103,638 | |||||
|
|
|
Note 12. Quarterly Financial Information (Unaudited)
The following table sets forth the reviewed consolidated quarterly financial information for 2004 and 2005:
|
For the Quarter Ended
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Total
|
||||||||||||
Year Ended 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue | $ | 11,472 | $ | 16,074 | $ | 22,845 | $ | 29,317 | $ | 79,708 | |||||||
Net loss | (10,542 | ) | (16,073 | ) | (16,129 | ) | (27,177 | ) | (69,921 | ) | |||||||
Net loss attributable to common shareholders | (10,542 | ) | (16,073 | ) | (16,129 | ) | (27,177 | ) | (69,921 | ) | |||||||
Net loss per common share: | |||||||||||||||||
Basic and diluted | $ | (2.78 | ) | $ | (4.23 | ) | $ | (4.24 | ) | $ | (7.10 | ) | |||||
Year Ended 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue | $ | 40,710 | $ | 59,435 | $ | 73,871 | $ | 95,180 | $ | 269,196 | |||||||
Net loss | (60,002 | ) | (63,623 | ) | (65,995 | ) | (71,714 | ) | (261,334 | ) | |||||||
Net loss attributable to common shareholders | (60,002 | ) | (63,623 | ) | (65,995 | ) | (72,319 | ) | (261,939 | ) | |||||||
Net loss per common share: | |||||||||||||||||
Basic and diluted | $ | (15.67 | ) | $ | (16.56 | ) | $ | (17.07 | ) | $ | (18.42 | ) |
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Note 13. Subsequent Events (Unaudited)
Initial Public Offering
On February 8, 2006, the Company filed an initial registration statement on Form S-1 with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 to offer shares of its common stock. Costs related to the Company's initial public offering in the amount of $1,895 are recorded in other assets in the December 31, 2005 consolidated balance sheet and upon a successful completion of the initial public offering will be charged against the proceeds of the offering.
New Chief Executive Officer
Effective February 8, 2006, the Company entered into an agreement with the Company's new Chief Executive Officer ("CEO") providing for employment as CEO on February 27, 2006, for an initial term of two years. The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. In the event of a change in control, the term will also be automatically extended until the first anniversary of the change of control. The CEO will report to the Chairman and the Board and will have responsibility for the day-to-day management and operation of the Company's business, including the supervision of its finance, legal and human resource functions and the business activities of its principal operating units in the United States, United Kingdom and Canada. Under the employment agreement, the CEO is entitled to receive an annual base salary subject to review by the Company's compensation committee. The CEO also is eligible to receive an annual discretionary performance-based bonus in accordance with the Company's annual bonus program for senior executives.
On February 27, 2006, the CEO was granted a sign-on bonus in the form of options to acquire 2,500,000 shares of the Company's common stock at a price per share equal to the then fair market value of a share of the Company's common stock.
During the term of the employment agreement, if the Company terminates the CEO's employment without cause or resigns with good reason and, in each case, the CEO provides the Company with a general release of claims, the CEO will be entitled to a prorated annual bonus for the year of termination and an amount equal to two times his base salary. If the CEO's employment is terminated by reason of death or disability, the CEO will be entitled to a prorated annual bonus for the year of termination and an amount equal to the CEO's base salary for one year (reduced by the net amount of any disability benefits received under the Company's group disability policy). In the event of a change in control, the CEO's outstanding stock options will vest in full.
Under the terms of the CEO's employment agreement, the CEO has agreed not to disclose any confidential information concerning the Company's business. In addition, the CEO has agreed not to solicit or to interfere with the Company's relationship with any of its employees, officers or representatives or to interfere with the Company's relationship with any of its customers, clients, suppliers, licensees or other business relations until 12 months following termination of the CEO's employment. Furthermore, the CEO has entered into the Company's form noncompetition agreement pursuant to which the CEO has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or corporation engaged in any business)
F-42
that directly competes with the Company's business until 12 months following termination of the CEO's employment.
New Employment Agreement
Effective February 8, 2006, the Company entered into a new employment agreement with the Company's principal stockholder providing for employment as the Company's Chairman of the Company's Board of Directors and Chief Strategist through December 31, 2008. The term will automatically renew for additional one-year periods, unless either party gives notice at least 90 days prior to the end of the then-current term. Under the employment agreement, the Chairman and Chief Strategist is entitled to receive an annual base salary, subject to review by the Company's Compensation Committee. The Chairman and Chief Strategist also is eligible to receive an annual discretionary performance-based bonus in accordance with the Company's annual bonus program for senior executives with a target annual bonus equal to 100% of the Chairman and Chief Strategist's annual base salary. Under this agreement, the Company also will provide the Chairman and Chief Strategist with, and pay the cost of premium payments on, a term life insurance policy that provides for a death benefit of at least $1,500. The agreement also provides that, with respect to reasonable business-related airline expenses, the Chairman and Chief Strategist will be eligible for air travel reimbursement based on the cost of a first-class ticket on a commercial airline to and from the applicable business destinations and that any additional business-related airline expenses incurred, directly or indirectly, by the Chairman and Chief Strategist with respect to other employees shall be paid in accordance with the Company's travel policy.
During the term of this employment agreement, if the Company terminates the Chairman and Chief Strategist's employment without cause or due to the Chairman and Chief Strategist becoming disabled or he resigns with good reason and, in each case, the Chairman and Chief Strategist provides the Company with a general release of claims, the Chairman and Chief Strategist will be entitled to an amount equal to two times the sum of the Chairman and Chief Strategist's annual base salary in effect on the termination date, two times the annual bonus for the prior year, the pro rata portion of the Chairman and Chief Strategist's bonus in the year the termination occurs and the cost of group health continuation coverage for a period of 18 months. Also, upon termination, 100% of the Chairman and Chief Strategist's unvested stock incentive awards will vest and will be exercisable for a twelve-month period. If the Chairman and Chief Strategist's employment is terminated by reason of death or disability, the CEO's estate will be entitled to (i) an amount equal to the Chairman and Chief Strategist's prior year bonus plus the pro rata portion of the Chairman and Chief Strategist's bonus in the year of termination, (ii) twelve months of the Chairman and Chief Strategist's annual salary plus the pro rata portion of the Chairman and Chief Strategist's annual salary in the year of termination, (iii) the cost of group health continuation coverage for a period of 18 months after termination, and (iv) 100% of the Chairman and Chief Strategist's unvested stock incentive awards will vest and will be exercisable for a twelve-month period after termination.
Under the terms of the Chairman and Chief Strategist's employment agreement, the Chairman and Chief Strategist has agreed not to disclose any confidential information concerning the Company's business. In addition, the Chairman and Chief Strategist has agreed not to solicit or to interfere with
F-43
the Company's relationship with any of its employees, officers or representatives or to solicit any of its customers, clients, suppliers, licensees or other business relations until three years following termination of his employment. Furthermore, the Chairman and Chief Strategist has also entered into a noncompetition agreement pursuant to which the Chairman and Chief Strategist has agreed not to engage in, become interested in, enter into employment with or provide services to any business (or any person, firm or corporation engaged in any business) that directly competes with the Company's business until three years following termination of the Chairman and Chief Strategist's employment.
Vendor Commitments
The Company has entered into an agreement to provide sponsorship for an auto racing team in the Indianapolis 500 race. The Company has committed to pay a minimum of $4,100 in 2006 and $1,000 in 2007 for this sponsorship. The amounts for 2007 and 2008 will increase dependent upon whether the Company decides to continue its sponsorship.
The Company is committed to purchasing 1,030 communication devices, including telephones and routers, from several vendors and has agreed to pay $29,610 in 2006 and $27,500 in 2007.
The Company has engaged several vendors to provide telemarketing services. The Company has committed to pay these vendors $2,784 in 2006.
The Company has engaged a vendor to provide direct mail services and has committed to pay this vendor $1,393 in 2006.
Capital Lease
On January 19, 2006, the Company took possession of the remaining space in its Holmdel, New Jersey facility (see Note 10).
Threatened Lawsuit
The Company received a letter from three stockholders, threatening a lawsuit against the Company and its principal stockholder and Chairman. These stockholders purchased the Company's common stock in 2001. They allege that the Company's subsequent issuances of preferred stock illegally diluted their investments in the Company's common stock. The letter was accompanied by a proposed complaint and press release which the letter states would respectively be filed and issued if the three stockholders' claims are not settled. Although the Company believes all claims made by the stockholders against the Company are without merit and the Company intends vigorously to contest them if the stockholders do in fact commence legal action, it is not possible at this time to predict the outcome of any such litigation.
State and Municipal Taxes
As a result of changes in certain states' statutes as part of a streamlined sales tax incentive and a sales tax agreement the Company has entered into with one other state, the Company will begin collecting and remitting sales taxes in these states effective May 1, 2006.
F-44
Shares
Vonage Holdings Corp.
Common Stock
Joint Book-Running Managers | ||||
Citigroup |
|
Deutsche Bank Securities |
|
UBS Investment Bank |
Bear, Stearns & Co. Inc. | ||||
Piper Jaffray |
|
|
|
Thomas Weisel Partners LLC |
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated costs and expenses to be incurred in connection with the issuance and distribution of the securities registered under this Registration Statement, other than underwriting discounts and commissions. All amounts are estimates except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee. The following expenses will be borne solely by the registrant.
Securities and Exchange Commission registration fee | $ | 26,750 | ||
National Association of Securities Dealers, Inc. filing fee | 25,500 | |||
listing fees | ||||
Blue Sky fees and expenses | ||||
Printing and engraving expenses | ||||
Legal fees and expenses | ||||
Accounting fees | ||||
Transfer Agent's fees | ||||
Miscellaneous expenses | ||||
|
||||
Total | $ | |||
|
Item 14. Indemnification of Directors and Officers.
We are incorporated under the laws of the State of Delaware. Section 145 of the General Corporation Law of the State of Delaware (the "Delaware Law") provides that a Delaware corporation may indemnify any persons who were, are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation's best interests and, for any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
A Delaware corporation may indemnify officers and directors against expenses (including attorneys' fees) in connection with the defense or settlement of an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such officer or director actually and reasonably incurred.
In accordance with Section 102(b)(7) of the Delaware Law, the Amended and Restated Certificate of Incorporation of Vonage Holdings Corp. (the "Company") contains a provision to limit the personal liability of the directors of the Company for violations of their fiduciary duty. This provision eliminates each director's liability to the Company or its stockholders for monetary damages except (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Law providing for liability of directors for unlawful payment of dividends
II-1
or unlawful stock purchases or redemptions or (iv) for any transaction from which a director derived an improper personal benefit. In addition, our amended and restated bylaws provide for indemnification of directors, officers, employees and agents to the fullest extent permitted by Delaware Law and authorizes the Company to purchase and maintain insurance to protect itself and any director, officer, employee or agent of the Company or another business entity against any expense, liability or loss, regardless of whether the Company would have the power to indemnify such person under the Company's bylaws or Delaware Law.
The underwriting agreement with the underwriters will provide for the indemnification of the directors and officers of the Company and certain controlling persons against specified liabilities, including liabilities under the Securities Act.
The Company maintains directors and officers liability insurance, which covers directors and officers against certain claims or liabilities arising out of the performance of their duties.
Item 15. Recent Sales of Unregistered Securities.
The following sets forth information regarding unregistered securities sold by the registrant since January 1, 2002.
The issuance of securities described above in paragraphs (1) through (6) were exempt from registration under the Securities Act of 1933 in reliance on Section 4(2) of the Securities Act of 1933 as
II-2
transactions by an issuer not involving any public offering. The issuance of securities described above in paragraph (7) is exempt from registration under the Securities Act of 1933 in reliance on Regulation D and Section 4(2) of the Securities Act of 1933. The purchasers of the securities in these transactions represented that they were accredited investors or qualified institutional buyers and they were acquiring the securities for investment only and not with a view toward the public sale or distribution thereof. Such purchasers received written disclosures that the securities had not been registered under the Securities Act of 1933 and that any resale must be made pursuant to a registration statement or an available exemption from registration. All purchasers either received adequate financial statement or non-financial statement information about the registrant or had adequate access, through their relationship with the registrant, to financial statement or non-financial statement information about the registrant. The sale of these securities was made without general solicitation or advertising.
The issuance of securities described above in paragraph (8) is exempt from registration under the Securities Act of 1933 in reliance on Rule 701 of the Securities Act of 1933 pursuant to compensatory benefit plans approved by the registrant's board of directors.
All certificates representing the securities issued in these transactions described in this Item 15 included appropriate legends setting forth that the securities had not been offered or sold pursuant to a registration statement and describing the applicable restrictions on transfer of the securities. There were no underwriters employed in connection with any of the transactions set forth in this Item 15.
Item 16. Exhibits and Financial Statement Schedules.
Exhibit No.
|
Description of Exhibit
|
|
---|---|---|
1.1 |
* |
Form of Underwriting Agreement |
3.1 |
* |
Amended and Restated Certificate of Incorporation of Vonage Holdings Corp. |
3.2 |
* |
Amended and Restated By-Laws of Vonage Holdings Corp. |
4.1 |
* |
Form of certificate of Vonage Holdings Corp. common stock |
4.2 |
|
Form of Senior Unsecured Convertible Note |
5.1 |
* |
Opinion of Shearman & Sterling LLP |
10.1 |
|
2001 Stock Incentive Plan of Vonage Holdings Corp. |
10.2 |
|
Form of Incentive Stock Option Agreement under the 2001 Stock Incentive Plan |
10.3 |
|
Form of Nonqualified Stock Option Agreement for Employees under the 2001 Stock Incentive Plan |
10.4 |
|
Form of Nonqualified Stock Option Agreement for Outside Directors under the 2001 Stock Incentive Plan |
10.5 |
|
Vonage Holdings Corp. 401(k) Retirement Plan |
10.6 |
|
Lease Agreement, dated March 24, 2005, between 23 Main Street Holmdel Associates LLC and Vonage USA Inc. |
10.7 |
|
Amended and Restated Employment Agreement, dated February 8, 2006, between Vonage Holdings Corp. and Jeffrey A. Citron |
II-3
10.8 |
|
Employment Agreement, dated February 7, 2006, between Vonage Holdings Corp. and Michael Snyder |
10.9 |
|
Employment Agreement, dated August 1, 2005, between Vonage Holdings Corp. and John S. Rego |
10.10 |
|
Employment Agreement, dated August 1, 2005, between Vonage Holdings Corp. and Louis A. Mamakos |
10.11 |
|
Employment Agreement, dated August 8, 2005, between Vonage Holdings Corp. and Sharon O'Leary |
10.12 |
* |
Third Amended and Restated Investors' Rights Agreement, dated April 27, 2005, among Vonage Holdings Corp. and the signatories thereto |
10.13 |
|
[Reserved] |
10.14 |
|
Registration Rights Agreement, dated December 16, 2005, among Vonage Holdings Corp. and the signatories thereto |
10.15 |
* |
Agreement for Services, dated April 27, 2005, between Vonage Networks Inc. and Intrado Inc. and Amendment No. 1 thereto |
10.16 |
* |
Master Service Agreement, dated July 15, 2004, between Vonage Holdings Corp. and Level 3 Communications, LLC |
10.17 |
* |
Master Sales Agreement, dated June 8, 2005, between Vonage Networks Inc. and TeleCommunication Systems, Inc. |
16.1 |
|
Letter from Amper, Politziner & Mattia P.C. |
21.1 |
|
List of Subsidiaries of Vonage Holdings Corp. |
23.1 |
* |
Consent of Shearman & Sterling LLP (included in Exhibit 5.1) |
23.2 |
|
Consent of BDO Seidman, LLP, independent registered public accounting firm |
23.3 |
|
Consent of Amper, Politziner & Mattia P.C., independent registered public accounting firm |
24.1 |
** |
Powers of Attorney (included in signature page of the Registration Statement on Form S-1 (Registration No. 333-131659)) |
24.2 |
|
Power of Attorney for Michael Snyder |
Report of Independent Registered Public Accounting Firm
Schedule IIValuation and Qualifying Accounts.
II-4
Report of Independent Registered Public Accounting Firm
Board
of Directors and Stockholders
Vonage Holdings Corp.
Holmdel, N.J. 07733
The audits referred to in our report to Vonage Holdings Corp., dated March 24, 2006, which is contained in the Prospectus constituting part of this Registration Statement, included the audits of the schedule listed under Item 16(b) for the years ended December 31, 2004 and 2005. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits.
In our opinion, such schedule presents fairly, in all material respects, the information set forth therein for the years ended December 31, 2004 and 2005.
/s/ BDO Seidman, LLP
Woodbridge, New Jersey
March 24, 2006
II-5
Schedule II
Vonage Holdings Corp.
Schedule of Valuation and Qualifying Accounts
|
|
Additions
|
|
|
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance at
Beginning of Period |
Charged to
Revenue |
Charged to
Expense |
Less
Deductions |
Balance at
End of Period |
||||||||||
Allowance for Doubtful Accounts | |||||||||||||||
Year ended December 31, 2005 | $ | 60 | $ | 150 | $ | | $ | | $ | 210 | |||||
Year ended December 31, 2004 | | 60 | | | 60 | ||||||||||
Year ended December 31, 2003 | | | | | | ||||||||||
Inventory Obsolescence |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 | $ | 1,239 | $ | | $ | 625 | $ | (1,132 | ) | $ | 732 | ||||
Year ended December 31, 2004 | 24 | | 1,215 | | 1,239 | ||||||||||
Year ended December 31, 2003 | | | 24 | | 24 | ||||||||||
Valuation Allowance for Deferred Tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 | $ | 46,268 | $ | | $ | 103,023 | $ | | $ | 149,291 | |||||
Year ended December 31, 2004 | 18,351 | | 27,917 | | 46,268 | ||||||||||
Year ended December 31, 2003 | 7,938 | | 10,413 | | 18,351 |
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or not material, or the information called for thereby is otherwise included in the financial statements and therefore has been omitted.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
II-6
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Holmdel, State of New Jersey, on April 7, 2006.
VONAGE HOLDINGS CORP. | ||||||
|
|
By: |
|
/s/ JOHN S. REGO |
||
Name: | John S. Rego | |||||
Title: | Executive Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated on April 7, 2006.
Signature
|
Title
|
|
---|---|---|
|
|
|
/s/
MICHAEL SNYDER
Michael Snyder |
Director and
Chief Executive Officer (principal executive officer) |
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/s/ JOHN S. REGO John S. Rego |
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Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) |
* Jeffrey A. Citron |
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Director, Chairman and Chief Strategist |
* Betsy S. Atkins |
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Director |
* Peter Barris |
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Director |
* Morton David |
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Director |
* Orit Gadiesh |
|
Director |
II-7
* J. Sanford Miller |
|
Director |
* Hugh Panero |
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Director |
* Governor Thomas J. Ridge |
|
Director |
* John J. Roberts |
|
Director |
* Harry Weller |
|
Director |
*By: |
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/s/ JOHN S. REGO John S. Rego Attorney-in-fact |
|
|
|
|
II-8
Exhibit 4.2
[FORM OF SENIOR UNSECURED CONVERTIBLE NOTE]
THE NOTES WILL BE ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR U.S. FEDERAL INCOME TAX PURPOSES. THE ISSUE PRICE FOR EACH NOTE WILL BE 100% OF THE PRINCIPAL AMOUNT OF SUCH NOTE AND THE INITIAL ISSUANCE DATE FOR THE NOTES IS DECEMBER 16, 2005. THE COMPARABLE YIELD FOR THE NOTES IS 12% PER ANNUM, COMPOUNDED QUARTERLY (WHICH WILL BE TREATED AS THE YIELD TO MATURITY FOR U.S. FEDERAL INCOME TAX PURPOSES). FOR INFORMATION REGARDING THE YIELD TO MATURITY ON THE NOTES, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT ON THE NOTES, AND THE PROJECTED PAYMENT SCHEDULE FOR THE NOTES, HOLDERS SHOULD CONTACT VONAGE HOLDINGS CORP., 23 MAIN STREET, HOLMDEL, NJ 07733, ATTENTION: DIRECTOR OF TAX.
NEITHER THE ISSUANCE AND SALE OF THIS NOTE NOR ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS. THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THIS NOTE OR THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE UNDER THE SECURITIES ACT, OR (B) AN OPINION OF COUNSEL (SELECTED BY THE HOLDER AND REASONABLY ACCEPTABLE TO THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY BE OFFERED FOR SALE, SOLD, ASSIGNED OR TRANSFERRED PURSUANT TO AN EXEMPTION FROM REGISTRATION; PROVIDED THAT SUCH OPINION OF COUNSEL SHALL NOT BE REQUIRED IN CONNECTION WITH ANY SUCH SALE, ASSIGNMENT OR TRANSFER TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT IS A HOLDER OF ADDITIONAL NOTES (AS SUCH TERM IS DEFINED IN THIS NOTE) OR AN AFFILIATE OF THE HOLDER OF THIS NOTE, OR (II) THE HOLDER PROVIDES THE COMPANY WITH ASSURANCE (REASONABLY SATISFACTORY TO THE COMPANY) THAT SUCH NOTE OR THE SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION OF THE NOTE CAN BE SOLD, ASSIGNED OR TRANSFERRED PURSUANT TO RULE 144; PROVIDED HOWEVER, THAT PRIOR TO AN EFFECTIVE REGISTRATION (AS SUCH TERM IS DEFINED IN THIS NOTE) IN NO EVENT (I) MAY THIS NOTE BE OFFERED FOR SALE, SOLD, ASSIGNED OR TRANSFERRED TO A COMPETITOR (AS SUCH TERM IS DEFINED IN THIS NOTE) OR (II) WILL THIS NOTE BE MADE ELIGIBLE FOR CLEARANCE AND SETTLEMENT THROUGH THE DEPOSITARY TRUST COMPANY. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING, WITHOUT LIMITATION, SECTIONS 3(c)(iii) AND 18(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE. THIS NOTE HAS BEEN ISSUED PURSUANT TO THE SUBSCRIPTION AGREEMENT (AS SUCH TERM IS DEFINED IN THIS NOTE), SECTION 8.1 OF WHICH CONTEMPLATES CERTAIN RESTRICTIONS ON SALES, PURCHASES, HEDGING TRANSACTIONS AND CERTAIN OTHER TRANSACTIONS RELATING TO THE COMPANY'S SECURITIES. ANY ASSIGNEE OR TRANSFEREE OF THIS NOTE SHALL BE SUBJECT TO THE RESTRICTIONS SET FORTH IN SECTION 8.1 OF THE SUBSCRIPTION AGREEMENT. NOTWITHSTANDING THE FOREGOING, THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION OF THIS NOTE MAY BE PLEDGED TO A PERSON (OTHER THAN A COMPETITOR) IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING AN AGREEMENT SECURED BY SUCH SECURITIES.
Vonage Holdings Corp.
Senior Unsecured Convertible Note
Issuance Date:
December 16, 2005
No. [ ] |
Principal: U.S. $[ ]
(subject to Section 3(c)(iii) hereof) |
FOR VALUE RECEIVED, Vonage Holdings Corp., a Delaware corporation (the " Company "), hereby promises to pay to [NAME OF BUYER] or registered assigns (" Holder ") the amount set out above as the Principal (as reduced pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the " Principal ") when due, whether upon the Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (" Interest ") on any outstanding Principal at the Interest Rate (as defined below), from December 16, 2005 (the " Initial Issuance Date ") until the same becomes due and payable, whether upon an Interest Date (as defined below), the Maturity Date, acceleration, conversion, redemption or otherwise (in each case, in accordance with the terms hereof). This Senior Unsecured Convertible Note (including all Senior Unsecured Convertible Notes issued in exchange, transfer or replacement hereof, this " Note ") is one of an issue of Senior Unsecured Convertible Notes issued pursuant to the Subscription Agreement (as defined below) (collectively, the " Notes " and such other Senior Unsecured Convertible Notes, the " Additional Notes "). Certain capitalized terms used herein are defined in Section 28.
(1) MATURITY. On the Maturity Date, the Holder shall surrender the Note to the Company and the Company shall pay to the Holder an amount in cash representing all outstanding Principal, accrued and unpaid Interest and accrued and unpaid Late Charges (as defined below), if any. The " Maturity Date " shall be December 1, 2010.
(2) INTEREST; INTEREST RATE. Interest on this Note shall commence accruing on the Initial Issuance Date and shall be computed on the basis of a 360-day year comprised of twelve 30-day months and shall be payable in arrears on the first day of each March, June, September and December (the period of such accruing interest being referred to as an " Interest Period ") during the period beginning on the Initial Issuance Date and ending on, and including, the Maturity Date (each, an " Interest Date ") with the first Interest Date being March 1, 2006. Interest shall be payable on each Interest Date for the applicable Interest Period, to the record holder of this Note on the applicable Interest Date, entirely in cash (" Cash Interest ") or, at the option of the Company, entirely by increasing the amount of Principal outstanding under this Note (" Accreted Interest ") and such Accreted Interest shall thereafter accrue Interest during each Interest Period at the Interest Rate, provided that the Interest which accrued during any Interest Period shall be payable as Accreted Interest if, and only if, the Company delivers written notice of such election (each, an " Interest Election Notice ") to each holder of the Notes at least twenty (20) Business Days prior to the applicable Interest Date (each, an " Interest Election Date "). Prior to the payment of Interest on an Interest Date, Interest on this Note shall accrue at the Interest Rate and be payable by way of inclusion of the Interest in the Conversion Amount in accordance with Section 3(b)(i). If an Event of Default occurs and such Event of Default is subsequently cured, the adjustment referred to in Section 28(xxi)(5) shall cease to be effective as of the date of such cure; provided that the Interest as calculated at such increased rate during the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such Event of Default through and including the date of cure of such Event of Default. All payments of Interest on the Notes shall be made on a pro rata basis in accordance with each holder's percentage ownership of then outstanding Notes.
(3) CONVERSION OF NOTES. This Note shall be convertible into shares of Common Stock, on the terms and conditions set forth in this Section 3.
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(a) Conversion Right. At any time or times on or after the date first set forth above as the Issuance Date (the " Issuance Date "), the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable shares of Common Stock in accordance with Section 3(c), at the Conversion Rate (as defined below). The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock in excess of one half of one share, the Company shall round such fraction of a share of Common Stock up to the nearest whole share. The Company shall pay any and all stock transfer, stamp, documentary and similar taxes (excluding any taxes on the income or gain of the Holder) that may be payable with respect to the issuance and delivery of shares of Common Stock to the Holder upon conversion of any Conversion Amount.
(b) Conversion Rate. The number of shares of Common Stock issuable upon conversion of any Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the " Conversion Rate ").
(i) " Conversion Amount " means the sum of (A) the portion of the Principal to be converted, redeemed or otherwise with respect to which this determination is being made, (B) accrued and unpaid Interest with respect to such Principal and (C) accrued and unpaid Late Charges with respect to such Principal and Interest.
(ii) " Conversion Price " means, as of any Conversion Date (as defined below) or other date of determination that is (x) prior to an Effective Registration, the Pre-IPO Conversion Price and (y) from and after an Effective Registration, the Post-IPO Conversion Price, each subject to adjustment as provided herein (including, without limitation, adjustment pursuant to Section 7).
(iii) " Effectiveness Failure Pre-IPO Conversion Price " means in the event that a registration statement under the Securities Act relating to a Qualified IPO is not declared effective by the SEC prior to the first anniversary of the Initial Issuance Date, (x) if no adjustment has previously been made to the Pre-IPO Conversion Price as a result of the application of the provisions set forth in the definition of Filing Failure Pre-IPO Conversion Price, $4.83 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction), or (y) otherwise, $4.57 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction); provided that if the Conversion Price in effect prior to the application of clause (x) or (y), as the case may be, is less than the amount specified in such clause, then the Effectiveness Failure Pre-IPO Conversion Price shall be such Conversion Price in lieu of the amount specified in such clause (x) or (y), as the case may be.
(iv) " Filing Failure Pre-IPO Conversion Price " means in the event that the Company fails to file a registration statement under the Securities Act with the SEC relating to a Qualified IPO prior to the date that is six months after the Initial Issuance Date, $4.83 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction); provided that if the Conversion Price in effect prior to the application of the foregoing sentence is less than the amount specified in such sentence, then the Filing Failure Pre-IPO Conversion Price shall be such Conversion Price in lieu of the amount specified in such sentence.
(v) " Initial Pre-IPO Conversion Price " means $5.08 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction).
(vi) " Post-IPO Conversion Price " means, from and after an Effective Registration, the lesser of (x) the Conversion Price in effect immediately prior to the Effective Registration and
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(y) the product of (A) 0.90 and (B) the public offering price of the Common Stock as set forth in the final prospectus contained in the registration statement relating to such Effective Registration; provided, however, that notwithstanding anything otherwise to the contrary, the Post-IPO Conversion Price shall not equal an amount less than 50% of the Pre-IPO Conversion Price in effect immediately prior to the Effective Registration.
(vii) " Pre-IPO Conversion Price " means the lowest of (x) the Initial Pre-IPO Conversion Price and, if applicable, (y) the Filing Failure Pre-IPO Conversion Price and (z) the Effectiveness Failure Pre-IPO Conversion Price.
(c) Mechanics of Conversion.
(i) Optional Conversion. To convert any Conversion Amount into shares of Common Stock on any date (a " Conversion Date "), the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit I (the " Conversion Notice ") to the Company and (B) if required by Section 3(c)(iii), cause this Note to be delivered to the Company as soon as practicable on or following such date. On or before 4:00 p.m., New York Time, on the first (1 st ) Business Day following the date of receipt of a Conversion Notice, the Company shall transmit by facsimile a confirmation of receipt of such Conversion Notice to the Holder (at the facsimile number provided in the Conversion Notice) and the Company's transfer agent, if any (the " Transfer Agent "). On or before 4:00 p.m., New York Time, on the third (3 rd ) Business Day following the date of receipt of a Conversion Notice (the " Share Delivery Date "), the Company shall (X) if the Transfer Agent, if any, is participating in the Depository Trust Company (" DTC ") Fast Automated Securities Transfer Program, credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder's or its designee's balance account with DTC through its Deposit/Withdrawal at Custodian system or (Y) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program or if the foregoing is not applicable, issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled. If this Note is physically surrendered for conversion as required by Section 3(c)(iii) and the outstanding Principal of this Note is greater than the Principal portion of the Conversion Amount being converted, then the Company shall as soon as practicable and in no event later than three (3) Business Days after receipt of this Note and at its own expense, issue and deliver to the holder a new Note (in accordance with Section 18(d)), representing the outstanding Principal not converted. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.
(ii) Company's Failure to Timely Convert. If, at any time, the Company shall fail to issue a certificate to the Holder or, from and after an Effective Registration, fail to credit the Holder's balance account with DTC for the number of shares of Common Stock to which the Holder is entitled, in each case, upon conversion of any Conversion Amount on or prior to the date which is five (5) Business Days after the Conversion Date (a " Conversion Failure "), then (A) the Company shall pay damages to the Holder for each day of such Conversion Failure in an amount equal to 1.5% of the product of (I) the sum of the number of shares of Common Stock not issued to the Holder on or prior to the Share Delivery Date and to which the Holder is entitled, and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date and (B) the Holder, upon written notice to the Company, may void its Conversion Notice with respect to, and retain or
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have returned, as the case may be, any portion of this Note that has not been converted pursuant to such Conversion Notice; provided that the voiding of a Conversion Notice shall not affect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to this Section 3(c)(ii) or otherwise. In lieu of the foregoing, if within three (3) Business Days after the Company's receipt of the facsimile copy of a Conversion Notice the Company shall fail to issue and deliver a certificate to the Holder or, from and after an Effective Registration, fail to credit the Holder's balance account with DTC for the number of shares of Common Stock to which the Holder is entitled, in each case, upon the Holder's conversion of any Conversion Amount, and if on or after such three (3) Business Day period the Holder purchases (in an open market transaction or in an arm's length transaction at market prices) shares of Common Stock to deliver in satisfaction of a sale by the Holder of Common Stock issuable upon such conversion that the Holder anticipated receiving from the Company (a " Buy-In "), then the Holder may elect to require the Company to, within three (3) Business Days after the Holder's request and in the Holder's discretion, either (i) pay cash to the Holder in an amount equal to the Holder's total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the " Buy-In Price "), at which point the Company's obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) from and after an Effective Registration, promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock times (B) the Closing Bid Price on the Conversion Date.
(iii) Book-Entry. Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless (A) the full Conversion Amount represented by this Note is being converted or (B) the Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting physical surrender and reissue of this Note. The Holder and the Company shall maintain records showing the Principal, Interest and Late Charges converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note upon conversion.
(iv) Pro Rata Conversion; Disputes. In the event that the Company receives a Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company can convert some, but not all, of such portions of the Notes submitted for conversion, the Company, subject to Section 3(d), shall convert from each holder of Notes electing to have Notes converted on such date a pro rata amount of each such holder's portion of its Notes submitted for conversion based on the principal amount of Notes submitted for conversion on such date by such holder relative to the aggregate principal amount of all Notes submitted for conversion on such date. In the event of a dispute between the Company and any holders of Notes that are subject to any such Conversion Notice or among any holders of Notes that are subject to any such Conversion Notice as to the number of shares of Common Stock issuable to the Holder in connection with a conversion of this Note, the Company shall issue to the Holder the number of shares of Common Stock not in dispute and resolve such dispute in accordance with Section 23.
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(d) Limitations on Conversions. From and after an Effective Registration and other than in connection with a Fundamental Transaction, the Company shall not effect any conversion of this Note, and the Holder of this Note shall not have the right to convert any portion of this Note pursuant to Section 3(a), to the extent that after giving effect to such conversion, the Holder (together with the Holder's affiliates) would beneficially own in excess of 9.99% (the " Maximum Percentage ") of the number of shares of Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted portion of this Note beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any Additional Notes or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes of this Section 3(d)(i), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-KSB, Form 10-K, Form 10-QSB, Form 10-Q or Form 8-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. For any reason at any time, upon the written request of the Holder, the Company shall within three (3) Business Days confirm orally or in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. By written notice to the Company, the Holder may increase or decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified in such notice; provided that (i) any such increase or decrease will not be effective until the sixty-first (61st) day after such notice is delivered to the Company, and (ii) any such increase or decrease will apply only to the Holder and not to any other holder of Notes. The Holder may elect to have the provisions of this Section 3(d) rendered inapplicable to this Note, such Holder and any subsequent holder of the Note by executing on or prior to the Issuance Date a notice of such election, which may be in the form attached hereto as Exhibit II . Notwithstanding anything in this Section 3(d) to the contrary, it is agreed and understood that the limitation on conversions contained in this Section 3(d) shall in no way limit any of the Company's rights under Sections 8(a) and 8(c) of this Note.
(4) RIGHTS UPON EVENT OF DEFAULT.
(a) Event of Default. Each of the following events shall constitute an " Event of Default ":
(i) the Company's failure to pay to the Holder any amount of Principal when and as due under this Note (including, without limitation, the Company's failure to pay any Redemption Price or Make-Whole Premium);
(ii) the Company's failure to pay to the Holder any amount of Interest, Late Charges or other amounts (other than the amounts specified in clause (i) above but including, without limitation, any payment required by Section 15) when and as due under this Note or any other
6
Transaction Document if such failure continues for a period of at least thirty (30) Business Days;
(iii) (A) any acceleration prior to maturity of any Indebtedness referred to in clause (a) or (b) of the definition thereof of the Company or any of its Subsidiaries which individually or in the aggregate is equal to or greater than $5,000,000 principal amount of Indebtedness and, prior to the consummation of a Qualifying IPO, any payment default thereunder (following the expiration of all applicable grace periods);
(iv) the Company or any of its Material Subsidiaries, pursuant to or within the meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law for the relief of debtors (collectively, " Bankruptcy Law "), (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official (a " Custodian "), (D) makes a general assignment for the benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as they become due;
(v) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that is not vacated, set aside or reversed within sixty (60) days that (A) is for relief against the Company or any of its Material Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or any of its Material Subsidiaries or (C) orders the liquidation of the Company or any of its Material Subsidiaries;
(vi) a final judgment or judgments for the payment of money aggregating in excess of $5,000,000 are rendered against the Company or any of its Subsidiaries and which judgments are not, within sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such stay; provided, however, that any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be included in calculating the $5,000,000 amount set forth above so long as the Company provides the Holder a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder) to the effect that such judgment is covered by insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity within sixty (60) days of the issuance of such judgment;
(vii) the Company breaches any covenant or agreement or materially breaches any representation or warranty in any Transaction Document, and such breach continues for a period of at least thirty (30) days after written notice thereof from one or more Holders to the Company; or
(viii) any Event of Default (as defined in the Additional Notes) occurs with respect to any Additional Notes.
(b) Rights Upon Event of Default. Promptly after the occurrence of an Event of Default with respect to this Note or any Additional Note, the Company shall deliver written notice thereof (an " Event of Default Notice ") to the Holder. If an Event of Default with respect to the Company described in Sections 4(a)(iv) or 4(a)(v) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. If any Event of Default described in Sections 4(a)(i), 4(a)(ii), 4(a)(iii) or 4(a)(vi) through 4(a)(viii) has occurred and is continuing, holders of not less than 25% of the aggregate Principal amount of the Notes then outstanding may at any time at its or their option, by notice or notices to the Company (an " Event of Default Payment Notice "), declare all the Notes then outstanding to be immediately due and payable. Upon any Notes becoming due and payable under this Section 4(b), whether automatically or by declaration, such Notes will forthwith mature and the greater of (x) the entire unpaid Principal, plus all
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accrued and unpaid Interest and Late Charges, and (y) from and after an Effective Registration, the product of (A) the Conversion Rate with respect to such Conversion Amount in effect at such time of the Event of Default and (B) the Closing Sale Price of the Common Stock on the date immediately preceding such Event of Default, shall become immediately due and payable (the " Event of Default Price "). Payments required by this Section 4(b) shall be made in accordance with the provisions of Section 12.
(5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.
(a) Assumption. The Company shall not enter into or be party to a Fundamental Transaction unless (i) the Successor Entity assumes in writing all of the obligations of the Company under this Note and the other Transaction Documents in accordance with the provisions of this Section 5(a) pursuant to written agreements on or prior to such Fundamental Transaction, including the agreement to deliver to each holder of Notes in exchange for such Notes a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Notes, including, without limitation, having a principal amount and interest rate equal to the principal amounts and the interest rates of the Notes held by such holder (the " Successor Note ") and (ii) from and after an Effective Registration, the Successor Entity is a publicly traded corporation whose common stock or equivalent equity security is listed for trading or quoted on a U.S. national securities exchange or quotation system or on an internationally recognized securities exchange outside the United States or which will be so listed or quoted when issued or exchanged in connection with such Fundamental Transaction. Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note referring to the "Company" shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note with the same effect as if such Successor Entity had been named as the Company herein, until such time as the Successor Note is delivered. Upon consummation of a Reclassification or Fundamental Transaction as a result of which holders of Common Stock shall be entitled to receive stock, securities, cash, assets or any other property with respect to or in exchange for such Common Stock, the Company or Successor Entity, as the case may be, shall deliver to the Holder confirmation that there shall be issued upon conversion or redemption of this Note at any time after the consummation of such Reclassification or Fundamental Transaction, in lieu of the shares of Common Stock (or other securities, cash, assets or other property) issuable upon the conversion or redemption of the Notes prior to such Reclassification or Fundamental Transaction, such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights) which the Holder would have been entitled to receive upon the happening of such Reclassification or Fundamental Transaction had this Note been converted immediately prior to such Reclassification or Fundamental Transaction, as adjusted in accordance with the provisions of this Note. The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations on the conversion or redemption of this Note.
(b) Redemption upon Change of Control. No sooner than fifteen (15) days nor later than ten (10) days prior to the consummation of a Change of Control (but from and after an Effective Registration, not prior to the public announcement of such Change of Control), the Company shall deliver written notice thereof to the Holder (a " Change of Control Notice "). If at any time during the period (the " Change of Control Measuring Period ") beginning after the Holder's receipt of a Change of Control Notice and ending on the date of the consummation of such Change of Control (or, in the event a Change of Control Notice is not delivered at least ten (10) days prior to a Change of Control, at any time on or after the date which is ten (10) days prior to a Change of Control and ending ten (10) days after the consummation of such Change of Control), the Holder
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may require the Company to redeem all or any portion of this Note (" Optional Change of Control Redemption ") by delivering written notice thereof (" Optional Change of Control Redemption Notice ") to the Company, which Optional Change of Control Redemption Notice shall indicate the Conversion Amount the Holder is electing to redeem. An Optional Change of Control Redemption required by this Section 5 shall be made in accordance with the provisions of Section 12. The portion of this Note subject to redemption pursuant to this Section 5 shall be redeemed by the Company at a price (the " Change of Control Redemption Price ") equal to: (1) in the case of a Change of Control Notice delivered prior to an Effective Registration, 110% of the Conversion Amount being redeemed; or (2) in the case of a Change of Control Notice delivered from and after an Effective Registration, the Conversion Amount being redeemed. In addition to the foregoing, at the time of the consummation of any such Change of Control, the Company shall pay to the Holder an amount in cash equal to the Present Value of Interest (if any) for any Conversion Amount converted pursuant to the provisions of Section 3 hereof during the Change of Control Measuring Period. Notwithstanding anything to the contrary in this Section 5, until the Change of Control Redemption Price (together with any interest thereon) is paid in full, the Conversion Amount submitted for redemption under this Section 5(b) (together with any interest thereon) may be converted, in whole or in part, by the Holder into shares of Common Stock pursuant to Section 3.
(c) Conversion in the Event of a Fundamental Transaction. Following an Effective Registration, in the event of a Fundamental Transaction as a result of which holders of Common Stock shall be entitled to receive stock, securities, cash, assets or any other property with respect to or in exchange for such Common Stock and in which less than 90% of the consideration for the Common Stock consists of publicly-traded equity securities (a " Cash Buy-Out "), each Holder shall receive from the Company upon conversion of its Notes pursuant to Section 3, in addition to the amounts described therein, the Make-Whole Premium (in cash or shares of Common Stock (valued as described in the definition of "Make Whole Premium" below) or a combination thereof, at the option of the Company). If the Cash Buy-Out constitutes a Change of Control, each Holder may, in lieu of converting its Note, require the Company to redeem all or any portion of its Note pursuant to Section 5(b).
The " Make-Whole Premium " for each $1,000 in Principal amount of the Notes converted will equal the excess, if any, of (a) the average of the Closing Trading Prices of each $1,000 in Principal amount of the Notes for the ten (10) trading days immediately prior to the public announcement of the Cash Buy-Out, less (b) the product of (x) the average of the closing prices of the Common Stock for the ten (10) Trading Days immediately prior to the public announcement of the Cash Buy-Out and (y) the applicable Conversion Rate for a Conversion Amount of $1,000.
The " Closing Trading Price " of $1,000 in Principal amount of the Notes for purposes of calculating the Make-Whole Premium on any date of determination means the secondary fair market value of $1,000 in Principal amount of the Notes as determined by the Company's board of directors, acting in good faith, on the basis of a valuation of the secondary fair market value of the Notes from at least one independent, reputable investment bank of national standing, with at least $5,000,000,000 in assets, selected by the Company, which valuation shall not take into account (x) any discount due to the illiquidity of the Notes or (y) any of the restrictions imposed by Section 8.1 of the Subscription Agreement.
(d) Public Acquirer Fundamental Transaction. Notwithstanding the provisions of Section 5(c), in the event of a Public Acquirer Fundamental Transaction (as defined below) following an Effective Registration, the Company may at its option, in lieu of paying the Make-Whole Premium pursuant to the first paragraph of Section 5(c) upon conversion of the Notes pursuant to Section 3, elect to adjust the Conversion Rate such that from and after the effective date of such Public Acquirer Fundamental Transaction, each Holder will be entitled to
9
convert its Notes into a number of shares of Public Acquirer Common Stock (as defined below) by adjusting the Conversion Rate in effect immediately before the Public Acquirer Fundamental Transaction by a fraction (i) the numerator of which will be (x) in the case of a share exchange, consolidation, merger or binding share exchange, pursuant to which the Common Stock is converted into cash, securities or other property, the average fair market value at the time of such Public Acquirer Fundamental Transaction of all cash and any other consideration (as determined by the Company's board of directors) paid or payable per share of Common Stock or (y) in the case of any other Public Acquirer Fundamental Transaction, the average of the closing prices of the Common Stock for the five Trading Days immediately prior to but excluding the effective date of such Public Acquirer Fundamental Transaction, and (ii) the denominator of which will be the average of the closing prices of the Public Acquirer Common Stock for the five trading days commencing on the trading day next succeeding the effective date of such Public Acquirer Fundamental Transaction.
" Public Acquirer Fundamental Transaction " means an event constituting a Fundamental Transaction that would otherwise obligate the Company to pay the Make-Whole Premium pursuant to the first paragraph of Section 5(c) upon conversion of the Notes pursuant to Section 3, and the acquirer (or any entity that is a parent of, or a directly or indirectly wholly-owned subsidiary of, the acquirer) has a class of common stock or equivalent equity security listed for trading or quoted on an Eligible Market or which will be so listed or quoted when issued or exchanged in connection with such Fundamental Transaction (the " Public Acquirer Common Stock "). Upon a Public Acquirer Fundamental Transaction, if the Company makes the election described in the first paragraph of this Section 5(d), Holders may convert their Notes pursuant to Section 3 at the adjusted Conversion Rate described in the first paragraph of this Section 5(d), but will not be entitled to any Make-Whole Premium. The Company shall notify each Holder of its election not later than ten (10) days prior to the consummation of the applicable Fundamental Transaction (but in no event prior to the public announcement of such Fundamental Transaction) by delivering written notice thereof to such Holder. If the Public Acquirer Fundamental Transaction constitutes a Change of Control, each Holder may, in lieu of converting its Note, require the Company to redeem all or any portion of its Note pursuant to Section 5(b).
(e) Redemption of Illiquid Consideration After Conversion. Following the Company's entry into a definitive agreement relating to a Fundamental Transaction at any time prior to an Effective Registration, the Company will notify each Holder not later than the 10 th day following the effective date of such Fundamental Transaction of the determination by the Company's board of directors, made in good faith, of the fair market value of the Illiquid Consideration at the time of such Fundamental Transaction, and each Holder shall have the right, exercisable for thirty (30) days following the delivery of such notice, to require the Company to redeem all or any part of the Illiquid Consideration received upon conversion of its Notes for cash in the amount of such fair market value; provided that such notice shall specify in reasonable detail the basis for such determination. In the event that the Holder disagrees with such determination of fair market value, the Holder may require that such fair market value be determined in accordance with the provisions of Section 23.
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(6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.
(a) Purchase Rights . If the Company at any time, or from time to time, grants, issues or sells any (i) Options, (ii) Convertible Securities or (iii) rights to purchase stock, warrants, securities or other property, pro rata to all record holders of any class of Common Stock (the " Purchase Rights "), then the person who is the Holder as of the Stock Record Date (as defined below) will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without taking into account any limitations or restrictions on the convertibility of this Note) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (the " Stock Record Date ").
(b) Other Corporate Events . In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Reclassification or Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a " Corporate Event "), the Company shall make appropriate provision to ensure that the Holder will thereafter have the right to receive upon a conversion of this Note, (i) in the event that the Common Stock remains outstanding after any such Corporate Event, in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event (without taking into account any limitations or restrictions on the convertibility of this Note) or (ii) in the event that the Common Stock is no longer outstanding after any such Corporate Event, in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of shares of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event (without taking into account any limitations or restrictions on the convertibility of this Note). The provisions of this Section shall apply similarly and equally to successive Corporate Events and shall be applied without regard to any limitations on the conversion or redemption of this Note. Notwithstanding this Section (6)(b), in no event shall the Company be obligated to distribute any Purchase Rights pursuant to this Section (6)(b) if and to the extent that it has distributed such Purchase Rights to the Holder pursuant to Section (6)(a).
(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.
(a) Adjustment of Conversion Price upon Issuance of Common Stock . If, on or after the Subscription Date and prior to the consummation of a Qualified IPO, the Company at any time, or from time to time, issues or sells, or in accordance with this Section 7(a) is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding shares of Common Stock issued or sold or deemed to have been issued or sold by the Company with respect to Options to acquire up to 25,000,000 shares of Common Stock (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction) that may be awarded after the Subscription Date and prior to the consummation of a Qualified IPO by the Company solely to employees, officers, consultants, suppliers and directors for services provided to the Company) for a consideration per share (the " New Issuance Price ") less than a price (the " Pre-Qualified IPO Applicable Price ") equal to the Conversion Price in effect immediately prior to such issue or sale (the foregoing issuance, a " Pre-Qualified IPO Dilutive Issuance "), then immediately after such Pre-Qualified IPO Dilutive Issuance, the Conversion Price then in effect shall be reduced to an
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amount equal to the New Issuance Price, provided that no such reduction shall be made unless and until either (i) the aggregate gross proceeds to the Company from such issuances, sales and deemed sales exceeds $25 million or (ii) the aggregate number of shares so issued, sold or deemed sold exceeds 2.00% of the total number of shares of Common Stock outstanding on a fully-diluted basis on the Subscription Date; provided further that, prior to a Qualified IPO, the Conversion Price shall not be reduced, as a result of the application of the provisions of this Section 7(a), below $2.54 (as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction). If, on or after the consummation of a Qualified IPO, the Company at any time, or from time to time, issues or sells, or in accordance with this Section 7(a) is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding shares of Common Stock issued or sold or deemed to have been issued or sold by the Company in each case solely in connection with any Excluded Security) for a consideration per share less than a price (the " Post-Qualified IPO Applicable Price ") equal to the Market Price then in effect (the foregoing issuance, a " Post-Qualified IPO Dilutive Issuance "), then immediately after such Post-Qualified IPO Dilutive Issuance, the Conversion Price then in effect shall be reduced to an amount equal to the product of (i) the Conversion Price in effect immediately prior to such issuance or sale and (ii) the quotient determined by dividing (A) the sum of (1) the product derived by multiplying the Post-Qualified IPO Applicable Price and the number of shares of Common Stock Deemed Outstanding immediately prior to such Post-Qualified IPO Dilutive Issuance plus (2) the consideration, if any, received by the Company upon such Post-Qualified IPO Dilutive Issuance, by (B) the product derived by multiplying (1) the Post-Qualified IPO Applicable Price by (2) the number of shares of Common Stock Deemed Outstanding immediately after such Post-Qualified IPO Dilutive Issuance. Notwithstanding anything to the contrary in this Section 7(a), for purposes of this Section 7(a) shares of Common Stock issued or sold by the Company on or after the Subscription Date in connection with the exercise of Options that were awarded by the Company prior to the Subscription Date shall not constitute, or be deemed to constitute, shares of Common Stock issued or sold by the Company on or after the Subscription Date and shall not result in an adjustment to the Conversion Price pursuant to this Section 7(a); provided that on or after the Subscription Date the exercise prices of such Options are not decreased and the number of shares issuable upon exercise of such Options is not increased (other than as a result of any stock dividend, stock split, stock combination, reclassification or similar transaction). For purposes of determining the adjusted Conversion Price under this Section 7(a), the following shall be applicable:
(i) Issuance of Options . If, on or after the Subscription Date, the Company at any time, or from time to time, in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Pre-Qualified IPO Applicable Price or the Post-Qualified IPO Applicable Price, as the case may be, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 7(a)(i), the "lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock (A) upon granting or sale of the Option, (B) upon exercise of the Option and (C) upon conversion or exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock or of such
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Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange or exercise of such Convertible Securities.
(ii) Issuance of Convertible Securities . If, on or after the Subscription Date, the Company at any time, or from time to time, in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon the conversion, exchange or exercise thereof is less than the Pre-Qualified IPO Applicable Price or the Post-Qualified IPO Applicable Price, as the case may be, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance of sale of such Convertible Securities for such price per share. For the purposes of this Section 7(a)(ii), the "price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock (A) upon the issuance or sale of the Convertible Security and (B) upon the conversion or exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock upon conversion or exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this Section 7(a), no further adjustment of the Conversion Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Rate of Conversion . If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time on or after the Subscription Date, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 7(a)(iii), if the terms of any Option or Convertible Security that was outstanding as of the Subscription Date are changed in the manner described in the immediately preceding sentence on or after the Subscription Date, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be made (x) pursuant to this Section (7)(a)(iii) if an adjustment of the Conversion Price has been or is to be made pursuant to other provisions of this Section 7(a) in connection therewith or (y) if such adjustment would result in an increase of the Conversion Price then in effect.
(iv) Calculation of Consideration Received . In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for the fair market value thereof. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Closing Sale Price of such securities on the date of receipt. If any Common Stock, Options or Convertible Securities are issued to the
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owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the Required Holders. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation, then such dispute shall be resolved pursuant to Section 23.
(v) Record Date . If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.
(b) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock; Stock Dividends . If, on or after the Subscription Date, the Company at any time, or from time to time, subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time on or after the Subscription Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased. Any adjustment under this Section 7(b) shall become effective at the close of business on the date the subdivision or combination becomes effective or, in the case of a stock dividend or distribution, the date of such event. In the case of stock dividends and distributions prior to a Qualified IPO, Holders will be entitled to the participation rights described in Section 15 and will not be entitled to any adjustment under this Section 7(b).
(c) (i) Adjustment of Conversion Price upon Cash Dividends and Distributions . If, prior to a Qualified IPO, the Company at any time, or from time to time, pays a dividend or makes a distribution consisting exclusively of cash to the record holders of any class of Common Stock, then Holders will have the participation rights described in Section 15 and will not be entitled to any adjustment under this Section 7(c)(i). If, on or after a Qualified IPO, the Company at any time, or from time to time, pays a dividend or makes a distribution in cash to the record holders of any class of Common Stock, then immediately after the close of business on the day that the Common Stock trades ex-distribution, the Conversion Price then in effect shall be reduced to an amount equal to the product of (i) the Conversion Price in effect immediately prior to such dividend or distribution and (ii) the quotient determined by dividing (A) the Closing Sale Price of the Common Stock on the day that the Common Stock trades ex-distribution by (B) the sum of (1) the Closing Sale Price of the Common Stock on the day that the Common Stock trades ex-distribution plus (2) the amount per share of such dividend or distribution. The Company shall not be required to give effect to any adjustment in the Conversion Price pursuant to this Section 7(c) unless and until the net effect of one or more adjustments (each of which shall be carried forward until counted toward an adjustment), determined in accordance with this Section 7(c), shall have resulted in a change of the Conversion Price by at least 1%, and when the cumulative net effect of more than one adjustment so determined shall be to change the Conversion Price by at least 1%, such change in the Conversion Price shall thereon be given effect.
(ii) Adjustment of Conversion Price upon Distributions of Capital Stock, Indebtedness or Other Non-Cash Assets . If, prior to a Qualified IPO, the Company at any time, or from time
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to time, distributes any shares of capital stock of the Company (other than Common Stock), evidences of indebtedness or other non-cash assets (including securities of any person other than the Company but excluding (1) dividends or distributions paid exclusively in cash, (2) dividends or distributions referred to in Section 7(b) and (c) Purchase Rights referred to in Section 6(a)) to the record holders of any class of Common Stock, then Holders will have the participation rights described in Section 15 and will not be entitled to any adjustment under this Section 7(c)(ii). If, on or after a Qualified IPO, the Company at any time, or from time to time, distributes any shares of capital stock of the Company (other than Common Stock), evidences of indebtedness or other non-cash assets (including securities of any person other than the Company but excluding (1) dividends or distributions paid exclusively in cash or (2) dividends or distributions referred to in Section 7(b)) to the record holders of any class of Common Stock, then the Conversion Price then in effect shall be reduced to an amount equal to the product of (A) the Conversion Price then in effect and (B) a fraction of which the numerator shall be the Closing Sale Price share of the Common Stock on the record date fixed for determination of stockholders entitled to receive such distribution less the fair market value on such record date (as determined by the Board of Directors) of the portion of the capital stock, evidences of indebtedness or other non-cash assets so distributed applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock outstanding on the record date) and of which the denominator shall be the Closing Sale Price per share of the Common Stock on such record date. Notwithstanding the foregoing, if the securities distributed by the Company to the record holders of any class of Common Stock consist of capital stock of, or similar equity interests in, a Subsidiary or other business unit, the Conversion Price shall be decreased so that the same shall be equal to the rate determined by multiplying the Conversion Price in effect on the record date with respect to such distribution by a fraction the numerator of which shall be the average Closing Sale Price of one share of Common Stock over the Spinoff Valuation Period and of which the denominator shall be the sum of (x) the average Closing Sale Price of one share of Common Stock over the ten consecutive Trading Day period (the " Spinoff Valuation Period ") commencing on and including the fifth Trading Day after the date on which "ex-dividend trading" commences on the Common Stock on the Eligible Market or such other national or regional exchange or market on which the Common Stock is then listed or quoted and (y) the average Closing Sale Price over the Spinoff Valuation Period of the portion of the securities so distributed applicable to one share of Common Stock, such adjustment to become effective immediately prior to the opening of business on the fifteenth Trading Day after the date on which "ex-dividend trading" commences.
(d) Other Events; Other Dividends and Distributions . If any event occurs of the type contemplated by the provisions of this Section 7 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's board of directors shall make in good faith an adjustment in the Conversion Price so as to protect the rights of the Holder under this Note; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 7.
(e) Notice of Adjustment . Whenever the Conversion Price is adjusted pursuant to this Section 7, the Company shall promptly mail notice of such adjustment to each Holder, which notice shall set forth the Conversion Price after adjustment, the date on which such adjustment became effective and a brief statement of the facts resulting in such adjustment.
(8) COMPANY'S RIGHT OF REDEMPTION.
(a) Call Redemption . Following the consummation of a Qualified IPO, if at any time from and after the later of (x) the date that is eighteen months after the Initial Issuance Date and
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(y) the first anniversary of the consummation of a Qualified IPO (such later date being the " Call Redemption Eligibility Date "), (i) the Weighted Average Price of the shares of Common Stock exceeds 150% of the Conversion Price then in effect for each of any twenty (20) consecutive Trading Days ending on or after the Call Redemption Eligibility Date (such twenty (20) consecutive Trading Day period being the " Call Redemption Measuring Period ") and (ii) the Equity Conditions shall have been satisfied or waived in writing by the Holder during the applicable Equity Conditions Measuring Period, the Company shall have the right to redeem all or any portion of the Conversion Amount then remaining under this Note, as designated in the Call Redemption Notice, as of the Call Redemption Date (a " Call Redemption "). The portion of this Note subject to redemption pursuant to this Section 8(a) shall be redeemed by the Company at a price equal to the sum of (x) the Conversion Amount being redeemed and (y) the Present Value of Interest applicable to such Conversion Amount (the " Call Redemption Price ") on the date specified by the Company in the Call Redemption Notice (the " Call Redemption Date "), which date shall not be less than thirty (30) nor more than sixty (60) days after the Call Redemption Notice Date. The Company may exercise its right to require redemption under this Section 8(a) by delivering within not more than five (5) Trading Days following the end of such Call Redemption Measuring Period a written notice thereof to all of the holders of Notes and the Transfer Agent (the " Call Redemption Notice " and the date such notice is sent is referred to as the " Call Redemption Notice Date "). The Company may deliver no more than four Call Redemption Notices hereunder and each such Call Redemption Notice shall be irrevocable. The Call Redemption Notice shall state the aggregate Conversion Amount of the Notes which the Company has elected to be subject to Call Redemption from all of the holders of the Notes pursuant to this Section 8(a) (and analogous provisions under the Additional Notes) and the Present Value of Interest to be paid to such holders on the Call Redemption Date. All Conversion Amounts converted by the Holder after the Call Redemption Notice Date shall reduce the Conversion Amount of this Note required to be redeemed on the Call Redemption Date and the Holder shall be entitled to receive from the Company, on the applicable Conversion Date, an amount in cash equal to the Present Value of Interest of any such Conversion Amount in addition to the shares of Common Stock issuable upon the conversion of such Conversion Amount. Redemptions made pursuant to this Section 8(a) shall be made in accordance with Section 12.
(b) Pro Rata Redemption Requirement . If the Company elects to cause a redemption of all or any portion of the Conversion Amount of this Note pursuant to Section 8(a), then it must simultaneously take the same action with respect to the Additional Notes and the payment in respect of such redemption shall be made on a pro rata basis in accordance with each holder's percentage ownership of then outstanding Notes.
(c) Additional Call Redemption . If at any time from and after the third anniversary of the Initial Issuance Date (the " Additional Call Redemption Eligibility Date "), the Equity Conditions shall have been satisfied or waived in writing by the Holder during the applicable Equity Conditions Measuring Period, the Company shall have the right to redeem all or any portion of the Conversion Amount then remaining under this Note, as designated in the Additional Call Redemption Notice, as of the Additional Call Redemption Date (an "Additional Call Redemption "). The portion of this Note subject to redemption pursuant to this Section 8(c) shall be redeemed by the Company at a price equal to the Conversion Amount being redeemed (the " Additional Call Redemption Price ") on the date which is not less than thirty (30) nor more than sixty (60) days after its delivery of a Additional Call Redemption Notice (the " Additional Call Redemption Date "). The Company may exercise its right to require redemption under this Section 8(c) by delivering a written notice thereof to all of the holders of Notes and the Transfer Agent (the " Additional Call Redemption Notice " and the date such notice is sent is referred to as the " Additional Call Redemption Notice Date "). The Company may deliver no more than four (4) Additional Call Redemption Notices hereunder and each such Additional Call Redemption
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Notice shall be irrevocable. The Additional Call Redemption Notice shall state the aggregate Conversion Amount of the Notes which the Company has elected to be subject to Additional Call Redemption from all of the holders of the Notes pursuant to this Section 8(c) (and analogous provisions under the Additional Notes). All Conversion Amounts converted by the Holder after the Additional Call Redemption Notice Date shall reduce the Conversion Amount of this Note required to be redeemed on the Additional Call Redemption Date. Redemptions made pursuant to this Section 8(c) shall be made in accordance with Section 12.
(d) Pro Rata Redemption Requirement. If the Company elects to cause a redemption of all or any portion of the Conversion Amount of this Note pursuant to Section 8(c), then it must simultaneously take the same action with respect to the Additional Notes and the payment in respect of such redemption shall be made on a pro rata basis in accordance with each holder's percentage ownership of then outstanding Notes.
(9) HOLDER'S RIGHT OF OPTIONAL REDEMPTION. Not earlier than the date that is ninety (90) days prior to the third anniversary of the Initial Issuance Date, and not later than the date which is forty (40) days prior to the third anniversary of the Initial Issuance Date, the Company shall deliver written notice to the Holder informing the Holder that the Holder shall have the right, in its sole discretion, to require that the Company redeem all or any portion of this Note (a " Holder Optional Redemption ") on the third anniversary of the Initial Issuance Date. The Holder shall have the right to exercise the Holder Optional Redemption by delivering written notice thereof (a " Holder Optional Redemption Notice ") to the Company at any time prior to and including the date which is thirty (30) days prior to the third anniversary of the Initial Issuance Date. The Holder Optional Redemption Notice shall indicate the Conversion Amount the Holder is electing to have redeemed. The portion of this Note subject to redemption pursuant to this Section 9 shall be redeemed by the Company in cash at a price equal to the Conversion Amount being redeemed (the " Holder Optional Redemption Price " and, collectively with the Event of Default Price, the Change of Control Redemption Price, the Call Redemption Price and the Additional Call Redemption Price, the " Redemption Prices " and, each a " Redemption Price "). The Company shall promptly inform in writing all holders of Additional Notes in accordance with Section 12(b) if a Holder Optional Redemption Notice has been received by the Company. Redemptions required by this Section 9 shall be made in accordance with the provisions of Section 12. The Holder may deliver one Holder Optional Redemption Notice hereunder, which shall be irrevocable.
(10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will not, by amendment of its Certificate of Incorporation, Bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all of the provisions of this Note and take all action as may be required to protect the rights of the Holder of this Note.
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(11) RESERVATION OF AUTHORIZED SHARES.
(a) Reservation. The Company shall initially reserve out of its authorized and unissued shares of Common Stock a number of shares of Common Stock for each of the Notes equal to 120% of the Conversion Rate with respect to the Conversion Amount of each such Note as of the applicable Issuance Date. So long as any of the Notes are outstanding, the Company shall take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Notes, 120% of the number of shares of Common Stock as shall from time to time be necessary to effect the conversion of all of the Notes then outstanding; provided that at no time shall the number of shares of Common Stock so reserved be less than the number of shares required to be reserved by the previous sentence (without regard to any limitations on conversions) (the " Required Reserve Amount "). The initial number of shares of Common Stock reserved for conversions of the Notes and each increase in the number of shares so reserved shall be allocated pro rata among the holders of the Notes based on the Principal amount of the Notes held by each holder at the Closing (as defined in the Subscription Agreement) or increase in the number of reserved shares, as the case may be (the " Authorized Share Allocation "). In the event that a holder shall sell or otherwise transfer any of such holder's Notes, each transferee shall be allocated a pro rata portion of such holder's Authorized Share Allocation. Any shares of Common Stock reserved and allocated to any Person which ceases to hold any Notes shall be allocated to the remaining holders of Notes, pro rata based on the outstanding Principal amount of the Notes then held by such holders.
(b) Insufficient Authorized Shares. If at any time while any of the Notes remain outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes at least a number of shares of Common Stock equal to the Required Reserve Amount (an " Authorized Share Failure "), then the Company shall take all action commercially reasonable necessary to increase the Company's authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount for the Notes then outstanding. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than seventy-five (75) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the approval of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its commercially reasonable efforts to solicit its stockholders' approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal.
(12) PAYMENT OF EVENT OF DEFAULT PRICE/HOLDER'S REDEMPTIONS.
(a) Mechanics. The Company shall deliver the applicable Event of Default Price or Holder Optional Redemption Price to the Holder (x) in the case of an Event of Default under Section 4(a)(iv) or 4(a)(v), immediately, (y) in the case of any other Event of Default, within five (5) Business Days after the Company's receipt of the Event of Default Payment Notice and (z) in the case of a Holder Optional Redemption, on the third anniversary of the Initial Issuance Date or, if such day is not a Business Day, the next succeeding Business Day, as the case may be. If the Holder has submitted an Optional Change of Control Redemption Notice in accordance with Section 5(b), the Company shall deliver the applicable Change of Control Redemption Price to the Holder concurrently with the consummation of the applicable Change of Control if such notice is received on or prior to the third (3 rd ) Business Day preceding the consummation of such Change of Control and otherwise within five (5) Business Days after the Company's receipt of such notice. The Company shall deliver the Call Redemption Price to the Holder on or before the Call Redemption Date. The Company shall deliver the Additional Call Redemption Price to the Holder
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on or before the Additional Call Redemption Date. In the event of a redemption of less than all of the Conversion Amount of this Note, the Company shall promptly cause to be issued and delivered to the Holder a new Note (in accordance with Section 18(d)) representing the outstanding Principal which has not been redeemed. In the event that the Company receives an Event of Default Payment Notice, Holder Optional Redemption Notice or Optional Change of Control Redemption Notice (each a " Redemption Notice ") and does not pay the applicable Redemption Price to the Holder within the time period required, at any time thereafter and until the Company pays such unpaid Redemption Price in full, the Holder shall have the option, in lieu of redemption, to require the Company to promptly return to the Holder all or any portion of this Note representing the Conversion Amount that was submitted for redemption and for which the applicable Redemption Price (together with any Late Charges thereon) has not been paid by delivery of a written notice (a " Redemption Voiding Notice ") to the Company at any time prior to such payment in full. Upon the Company's receipt of such Redemption Voiding Notice, (x) the Redemption Notice to which such Redemption Voiding Notice applies shall be null and void with respect to such Conversion Amount, (y) the Company shall immediately return this Note, or issue a new Note (in accordance with Section 18(d)) to the Holder representing such Conversion Amount and (z) the Conversion Price of this Note or such new Notes shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the Redemption Notice is voided and (B) the lowest Closing Bid Price of the Common Stock during the period beginning on and including the date on which the Redemption Notice is delivered to the Company and ending on and including the date on which the Redemption Notice is voided. The Holder's delivery of a Redemption Voiding Notice and exercise of its rights following such notice shall not affect the Company's obligations to make any payments of Late Charges which have accrued prior to the date of such notice with respect to the Conversion Amount subject to such notice.
(b) Redemption by Other Holders. Upon the Company's receipt of notice from any of the holders of the Additional Notes for redemption or repayment as a result of an event or occurrence substantially similar to the events or occurrences described in Section 4(b), Section 5(b) or Section 9 (each, an " Other Redemption Notice "), the Company shall promptly forward to the Holder by facsimile a copy of such notice. If the Company receives a Redemption Notice and one or more Other Redemption Notices during the seven (7) Business Day period beginning on and including the date which is three (3) Business Days prior to the Company's receipt of the Holder's Redemption Notice and ending on and including the date which is three (3) Business Days after the Company's receipt of the Holder's Redemption Notice and the Company is unable to redeem all Principal, interest and other amounts designated in such Redemption Notice and such Other Redemption Notices received during such seven (7) Business Day period, then the Company shall redeem a pro rata amount from each holder of the Notes (including the Holder) based on the Principal amount of the Notes submitted for redemption pursuant to such Redemption Notice and such Other Redemption Notices received by the Company during such seven Business Day period.
(13) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this Note, except as required by law, including, but not limited to, the General Corporation Law of the State of Delaware, and as expressly provided in this Note or any other Transaction Documents.
(14) ADDITIONAL INDEBTEDNESS; LIENS.
(a) Incurrence of Indebtedness. Prior to the earlier of the consummation of (x) a Qualified IPO and (y) an Eligible Fundamental Transaction, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than (i) the Indebtedness evidenced by this Note and the Additional Notes and (ii) Permitted Indebtedness.
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(b) Existence of Liens. Prior to the earlier of the consummation of (x) a Qualified IPO and (y) an Eligible Fundamental Transaction, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by the Company or any of its Subsidiaries (collectively, " Liens ") other than Permitted Liens.
(c) Restricted Payments. Prior to the earlier of the consummation of (x) a Qualified IPO and (y) an Eligible Fundamental Transaction, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any payments on, by the payment of cash, property or otherwise (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), or make any dividend or other distribution in respect of, any shares of its capital stock, other than (i) dividends and distributions which give rise to payments under Section 15, (ii) dividends and distributions from a Subsidiary of the Company to the Company or another Subsidiary of the Company and (ii) the repurchase, redemption or other acquisition or retirement for value of any shares of its capital stock or Options held by any current or former officer, consultant, supplier, director or employee of the Company or any of its Subsidiaries pursuant to any equity subscription agreement, stock option agreement, shareholders' agreement or similar agreement; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired shares of capital stock or Options may not exceed $5,000,000 in any twelve-month period.
(15) PARTICIPATION. Prior to a Qualified IPO, the Holder, as the holder of this Note, shall be entitled to receive such dividends paid and distributions made to the holders of Common Stock to the same extent as if the Holder had converted this Note into shares of Common Stock (without regard to any limitations on conversion herein or elsewhere) prior to the record date for such dividends and distributions. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common Stock. From and after a Qualified IPO, the Holder shall not be entitled to any payments under the first sentence of this Section 15, but shall continue to be entitled to benefit from any adjustments to the Conversion Price contemplated by Sections 7(b), 7(c) and 7(d).
(16) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. The affirmative vote at a meeting duly called for such purpose, or the written consent without a meeting, of the Required Holders shall be required for any change or amendment to this Note or the Additional Notes; provided, however, that no such change or amendment, as applied to any particular holder of Notes, shall, without the written consent of that particular holder, (i) reduce the Interest Rate, extend the time for payment of Interest or change the manner or rate of accrual of Interest on the Notes, including, without limitation, modifying the definition contained in Section 28(xxi), (ii) reduce the amount of Principal, or extend the Maturity Date, of the Notes, (iii) make any change that impairs or adversely affects the conversion rights of the Notes (including, without limitation, the provisions contained in Sections 3, 5(c), 7 and 11 hereof), (iv) reduce any of the Redemption Prices, or amend or modify in any manner adverse to the holders of the Notes the Company's obligation to make such payments, whether through an amendment or waiver of provisions in the covenants, definitions or otherwise; (v) modify the provisions with respect to the right of the holders of the Notes to cause the Company to redeem the Notes pursuant to Sections 4(b), 5(b), 8 and 9 herein and the analogous provisions of the Additional Notes (including, without limitation, modifying Section 4(a) hereof or any of the definitions contained in Section 28(iv) and (xvi) and, in each case, the analogous provisions of the Additional Notes); (vi) make any Interest or Principal on the Notes payable other than as set forth herein and in the Additional Notes; (vii) impair the right of any holder of Notes to receive payment of Principal or Interest or other payments due under the Notes, if any, on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder; (viii) change the ranking of this Note or any Additional Notes in a manner adverse to the holder thereof; or (ix) modify
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any of the provisions of, or impair the right of any holder of Notes under, Section 6, this Section 16, Section 17, Section 19 and Section 24(b) hereof or the analogous provisions of the Additional Notes. Neither the Company nor any of its Subsidiaries will, directly or indirectly, pay or cause to be paid any consideration, whether by way of Interest, fees or otherwise, to any holder for or as inducement to any consent, waiver or amendment of any of the terms or provisions of the Notes unless such consideration is offered to be paid or is paid to all holders (on a pro rata basis in accordance with each holder's percentage ownership of then outstanding Notes). So long as any Notes remain outstanding, at no time shall the Company or any of its Subsidiaries, directly or indirectly, purchase or offer to purchase any of the outstanding Notes or exchange or offer to exchange for any consideration (including, without limitation, for cash, securities, property or otherwise) any outstanding Notes unless the Company or such Subsidiary, as applicable, purchases, offers to purchase, exchanges or offers to exchange the outstanding Notes of all of the holders for the same consideration (on a pro rata basis in accordance with each holder's percentage ownership of then outstanding Notes) and on identical terms.
(17) TRANSFER. This Note and the shares of Common Stock issuable upon conversion of this Note may not be offered for sale, sold, transferred or assigned (i) in the absence of (a) an effective registration statement for this Note or the shares of Common Stock issuable upon conversion of this Note, or (b) an opinion of counsel (selected by the holder and reasonably acceptable to the Company), in a form reasonable acceptable to the Company, that this Note and the shares of Common Stock issuable upon conversion of this Note may be offered for sale, sold, assigned or transferred pursuant to an exemption from registration; provided that such opinion of counsel shall not be required in connection with any such sale, assignment or transfer to an institutional accredited investor that is a holder of Additional Notes or an affiliate of the Holder, or (ii) the Holder provides the Company with assurance (reasonably satisfactory to the Company) that such Note or the shares of Common Stock issuable upon the conversion of the Note can be sold, assigned or transferred pursuant to Rule 144; provided , however , that prior to an Effective Registration in no event (x) may this Note be offered for sale, sold, assigned or transferred to a Competitor, or (y) will this Note be made eligible for clearance and settlement through the Depositary Trust Company. This Note has been issued pursuant to the Subscription Agreement, Section 8.1 of which contemplates certain restrictions on sales, purchases, hedging transactions and certain other transactions relating to the Company's securities. Any assignee or transferee of this Note shall be subject to the restrictions set forth in Section 8.1 of the Subscription Agreement . Notwithstanding the foregoing, this Note and the shares of Common Stock issuable upon the conversion of this Note may be pledged to a Person (other than a Competitor) in connection with a bona fide margin account or other loan or financing an agreement secured by such securities.
(18) REISSUANCE OF THIS NOTE.
(a) Transfer. This Note is issued in registered form pursuant to Treasury Regulations section 1.871-14(c)(1). The Company (or its agent) will maintain a record of the holders of the Notes, and of Principal and Interest thereon as required by that regulation. The Note may be transferred or otherwise assigned only by surrender of this Note and issuance of a new Note in accordance with this Section 18, and neither this Note nor any interests therein may be sold, transferred or assigned to any Person except upon satisfaction of the conditions specified in this Section 18. If this Note is to be transferred or assigned, the Holder shall surrender this Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Note (in accordance with Section 18(d)), registered as the Holder may request, representing the outstanding Principal being transferred by the Holder and, if less than the entire outstanding Principal is being transferred, a new Note (in accordance with Section 18(d)) to the Holder representing the outstanding Principal not being transferred. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of
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Section 3(c)(iii) following conversion or redemption of any portion of this Note, the outstanding Principal represented by this Note may be less than the Principal stated on the face of this Note.
(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with Section 18(d)) representing the outstanding Principal.
(c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes (in accordance with Section 18(d) and in Principal amounts of at least $100,000) representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.
(d) Issuance of New Notes. Whenever the Company is required to issue a new Note pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii) shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or in the case of a new Note being issued pursuant to Section 18(a) or Section 18(c), the Principal designated by the Holder which, when added to the principal represented by the other new Notes issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv) shall have the same rights and conditions as this Note, and (v) shall represent accrued Interest and Late Charges on the Principal and Interest of this Note, from the Initial Issuance Date.
(19) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder's right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.
(20) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors' rights and involving a claim under this Note, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, attorneys' fees and disbursements.
(21) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the Company and the initial holders of this Note and shall not be construed against any person as the
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drafter hereof. The headings of this Note are for convenience of reference and shall not form part of, or affect the interpretation of, this Note.
(22) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.
(23) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the Closing Bid Price, the Closing Sale Price, the Weighted Average Price, the fair market value of Illiquid Consideration, or, for purposes of Section 7(a)(iv), the fair value of consideration other than cash or securities, or the arithmetic calculation of the Conversion Rate or the Redemption Price, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within one (1) Business Day of receipt, or deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon such determination or calculation within one (1) Business Day of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within one Business Day submit via facsimile (a) the disputed determination of the Closing Bid Price, the Closing Sale Price, the Weighted Average Price, the fair market value of Illiquid Consideration, or, for purposes of Section 7(a)(iv), the fair value of consideration other than cash or securities to an independent, reputable investment bank selected by the Company or (b) the disputed arithmetic calculation of the Conversion Rate or the Redemption Price to the Company's independent, outside accountant. The Company, at the Company's expense, shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than five (5) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.
(24) NOTICES; PAYMENTS.
(a) Notices. Whenever notice is required to be given under this Note, unless otherwise provided herein, such notice shall be given in accordance with the Subscription Agreement. The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Note, including in reasonable detail a description of such action and the reason therefore. Without limiting the generality of the foregoing, the Company will give written notice to the Holder of any adjustment of the Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment.
(b) Payments. Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, such payment shall be made in lawful money of the United States of America by a check drawn on the account of the Company and sent via overnight courier service to such Person at such address as previously provided to the Company in writing (which address, in the case of each of the initial holders of this Note, shall initially be as set forth on the Schedule of Buyers attached to the Subscription Agreement); provided that the Holder may elect to receive a payment of cash via wire transfer of immediately available funds by providing the Company with prior written notice setting out such request and the Holder's wire transfer instructions. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day and, in the case of any Interest Date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of Interest due on such date. Any amount of Principal or other amounts due under the this Note or the Transaction Documents, other than Interest, which is not paid when due shall result in a late charge being incurred and payable by the Company in an amount equal to interest
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on such amount at the rate of fifteen percent (15%) per annum from the date such amount was due until the same is paid in full (" Late Charge ").
(25) CANCELLATION. After all Principal, accrued Interest and other amounts at any time owed on this Note have been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.
(26) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives demand, notice, presentment, protest and all other demands and notices (other than the notices expressly provided for in this Note) in connection with the delivery, acceptance, default or enforcement of this Note and the Subscription Agreement.
(27) GOVERNING LAW. This Note shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Note shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York.
(28) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have the following meanings:
(i) " Approved Stock Plan " means any employee benefit plan which has been approved by the board of directors of the Company and which satisfies the stockholder approval requirements for equity compensation plans of the Eligible Market on which the Common Stock is then listed or quoted, pursuant to which the Company's securities may be issued to any employee, consultant, supplier, officer or director for services provided to the Company.
(ii) " Bloomberg " means Bloomberg Financial Markets.
(iii) " Business Day " means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.
(iv) " Change of Control " means any Fundamental Transaction other than (A) a Fundamental Transaction in which the beneficial owners of the Company's then outstanding voting securities immediately prior to such transaction beneficially own securities representing fifty percent (50%) or more of the aggregate voting power of then outstanding voting securities of the resulting or acquiring corporation (or any parent thereof), or their equivalent if other than a corporation, in such transaction, or (B) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company.
(v) " Closing Bid Price " and " Closing Sale Price " mean, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price, as the case may be, then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported in the "pink sheets" by Pink
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Sheets LLC (formerly the National Quotations Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 23. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.
(vi) " Common Stock " means the shares of the Company's common stock, par value $0.01 per share, and any other securities of the Company which may be issued or issuable with respect to, in exchange for, or in substitution of, such shares of common stock (including without limitation, by way of recapitalization, reclassification, reorganization, merger or otherwise).
(vii) " Common Stock Deemed Outstanding " means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 7(a)(i) and 7(a)(ii) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding any Common Stock owned or held by or for the account of the Company or issuable upon conversion of the Notes.
(viii) " Competitor " means any company, however organized, conducting business anywhere in the world directly or indirectly as a provider of telecommunications, Internet, cable television or Voice over Internet Protocol services to consumers or small businesses.
(ix) " Contingent Obligation " means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto
(x) " Convertible Securities " means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.
(xi) " Effective Registration " means the Company's initial sale of its shares of Common Stock in a firm commitment, fully underwritten public offering conducted in the United States through a nationally recognized investment banking firm and pursuant to a registration statement under the Securities Act, in connection with which the Common Stock is registered pursuant to Section 12 or Section 15 of the Exchange Act.
(xii) " Eligible Fundamental Transaction " means a Fundamental Transaction pursuant to which a Successor Entity assumes the obligations of the Company under this Note in accordance with Section 5(a) and, upon consummation of such Fundamental Transaction, such Successor Entity (or its Parent Entity) has (x) outstanding debt that is rated investment grade by at least one nationally recognized statistical rating organization or (y) an investment grade issuer credit rating from at least one nationally recognized statistical rating organization.
(xiii) " Eligible Market " means The New York Stock Exchange, Inc., the American Stock Exchange or the Nasdaq National Market.
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(xiv) " Equity Conditions " means that each of the following conditions is satisfied: (a) on each day during the period of thirty (30) Trading Days ending on and including the Call Redemption Date or the Additional Call Redemption Date, as the case may be (the " Equity Conditions Measuring Period "), either (1) a Registration Statement filed pursuant to the Registration Rights Agreement shall be effective and available for the resale of all remaining Registrable Securities in accordance with the terms of the Registration Rights Agreement and there shall not have been any Blackout Periods (as defined in the Registration Rights Agreement) or (2) all shares of Common Stock issuable upon conversion of the Notes shall be eligible for sale without restriction pursuant to Rule 144(k) and any applicable state securities laws and without the need for registration under any applicable federal or state securities laws; (b) on each day during the Equity Conditions Measuring Period, there shall not have occurred either (1) the public announcement of a pending, proposed or intended Fundamental Transaction which has not been abandoned, terminated or consummated or (2) an Event of Default or an event that with the passage of time or giving of notice would constitute an Event of Default; and (c) the Company otherwise shall have been in material compliance with and shall not have materially breached any provision, covenant, representation or warranty of any Transaction Document.
(xv) " Exchange Act " means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
(xvi) " Excluded Securities " means any Common Stock issued or issuable: (a) in connection with any Approved Stock Plan; (b) upon conversion of the Notes; (c) pursuant to a bona fide firm commitment underwritten public offering with a nationally recognized underwriter which generates gross proceeds to the Company of at least $100,000,000 (other than an "at-the-market offering" as defined in Rule 415(a)(4) under the Securities Act (unless such offering is executed on an "agency" basis pursuant to which an underwriter makes unsolicited sales of Common Stock solely through the principal security exchange or trading market of the Common Stock, in which case such equity sales would be permitted) and "equity lines"); and (d) upon conversion of any Options or Convertible Securities set forth or referred to on Schedule 3.2(f) to the Subscription Agreement and which are outstanding on the day immediately preceding the Subscription Date, provided that the terms of such Options or Convertible Securities are not amended, modified or changed on or after the Subscription Date.
(xvii) " Fundamental Transaction " means (1) that the Company shall, directly or indirectly, in one or more related transactions, (a) consolidate or merge with or into (whether or not the Company is the surviving corporation) another Person, or (b) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company to another Person, or (c) be the subject of a purchase, tender or exchange offer that is accepted by the holders of more than the 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (d) consummate a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than the 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock purchase agreement or other business combination), or (2) if at any time prior to a Qualified IPO, Jeffrey A. Citron shall cease to be the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of shares of Common Stock not subject to any Lien in an amount equal to not less than 10% of the outstanding shares of Common Stock.
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(xviii) " GAAP " means United States generally accepted accounting principles, consistently applied.
(xix) "Illiquid Consideration" means any non-cash consideration issuable upon conversion of the Notes following a Fundamental Transaction that does not have a readily-ascertainable market value.
(xx) " Indebtedness " of any Person means, without duplication (a) all indebtedness for borrowed money, (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services including, without limitation, "capital leases" in accordance with GAAP (other than trade payables entered into in the ordinary course of business), (c) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (f) all monetary obligations under any leasing or similar arrangement which, in connection with GAAP, consistently applied for the periods covered thereby, is classified as a capital lease, (g) any amount raised by acceptance under any acceptance credit facility; (h) receivables sold or discounted (other than within the framework of factoring, securitization or similar transaction where recourse is only to such receivables or proceeds); (i) any derivative transaction; (j) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, standby or documentary letter of credit or any other instrument issued by a bank or financial institution (excluding commercial letters of credit issued in the ordinary course of business); (k) all indebtedness referred to in clauses (a) through (j) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (n) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (k) above.
(xxi) " Interest Rate " means five percent (5%) per annum, subject to increase as provided below and elsewhere in this Note:
(1) In the event that the Company has not consummated a Qualified IPO prior to the second anniversary of the Initial Issuance Date, then from and after the second anniversary of the Initial Issuance Date through the date on which a Qualified IPO is consummated, a rate per annum equal to the greater of (x) the Interest Rate otherwise then in effect and (y) ten percent (10%) per annum;
(2) In the event that the Company fails to file a registration statement with the SEC relating to a Qualified IPO prior to the date that is six months after the Initial Issuance Date, then from and after the date that is six months after the Initial Issuance Date through the date on which such a registration statement is filed, a rate per annum equal to the Interest Rate otherwise then in effect plus one (1) percentage point;
(3) In the event that a registration statement relating to a Qualified IPO is not declared effective by the SEC prior to the first anniversary of the Initial Issuance Date, then from and after the first anniversary of the Initial Issuance Date through the date on which such a registration statement is declared effective by the SEC, a rate per annum equal to the Interest Rate otherwise then in effect plus one (1) percentage point;
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(4) In the case of calculating any Accreted Interest, the Interest Rate otherwise then in effect plus two (2) percentage points; and
(5) From and after the occurrence of an Event of Default, the greater of (x) the Interest Rate otherwise then in effect and (y) fifteen percent (15%) per annum.
(xxii) " Market Price " means the arithmetic average of the Weighted Average Price for the Common Stock for the preceding ten (10) Trading Days.
(xxiii) " Material Subsidiary " means (a) such Subsidiaries identified as Material Subsidiaries in Schedule 3.3 of the Subscription Agreement or (b) any "Significant Subsidiary," existing from time to time, as such term is defined in Rule 1-02 of Regulation S-X of the Securities Act.
(xxiv) " Options " means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.
(xxv) " Parent Entity " of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Parent Entity, the Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.
(xxvi) " Permitted Indebtedness " means (a) Indebtedness of up to $50,000,000 in aggregate principal amount at any one time outstanding with respect to one or more senior secured capital leases (and any refinancings thereof) entered into or to be entered into and all fees and other amounts (including, without limitation, any reasonable out-of-pocket costs, enforcement expenses (including reasonable out-of-pocket legal fees and disbursements), collateral protection expenses and other reimbursement or indemnity obligations relating thereto) payable by the Company under or in connection therewith, and (b) obligations incurred in the normal course of business under (i) interest rate swap agreements (whether from fixed to floating or from floating to fixed), interest rate cap agreements, interest rate collar agreements and other agreement or arrangements designed to protect the Company or its Subsidiaries against fluctuations in interest rates or interest rate risk in respect of Indebtedness of the Company or its Subsidiaries, and (ii) agreements or arrangements designed to protect the Company and its Subsidiaries against fluctuations in currency exchange rates.
(xxvii) " Permitted Liens " means (a) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (b) any statutory Lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent, (c) any Lien created by operation of law, such as materialmen's liens, mechanics' liens and other similar liens, arising in the ordinary course of business with respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (d) any Lien arising out of pledges or deposits under workers' compensation laws, unemployment insurance and other social security legislation, (e) any Lien created by or resulting from any litigation or legal proceeding which is being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (f) utility easements, building restrictions and similar encumbrances against real property, (g) other Liens incidental to the normal conduct of the business of the Company or the ownership of its property, which are not incurred in connection with the incurrence of Indebtedness and which do not in the aggregate materially impair the use of such property in the operation of the business, (h) any existing Lien at the time of the issuance of the Notes, (i) any Lien in property or in rights relating thereto to secure any rights granted with respect
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to such property in connection with the provision of all or a part of the purchase price or cost of the construction of such property, (j) the extension, renewal or replacement of any Lien permitted by paragraphs (h) and (i) in respect of the same property, (i) Liens incurred in connection with any Permitted Indebtedness and (l) Liens securing the Company's obligations under the Notes.
(xxviii) " Person " means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.
(xxix) " Present Value of Interest " means the aggregate net present value of the remaining scheduled payments of interest, if any, that, but for the redemption or conversion of this Note, would have accrued under this Note at the Interest Rate during the period from the applicable conversion or redemption date, as the case may be, through the third anniversary of the Initial Issuance Date, calculated at 102% of the yield to maturity of United States Treasury notes with a one-year maturity, as published in the Wall Street Journal (eastern edition) on the date which is three (3) Business Days before any applicable conversion or redemption date.
(xxx) " Principal Market " means the principal stock exchange or trading market for the Common Stock, if any.
(xxxi) " Qualified IPO " means the Company's sale of its shares of Common Stock in a firm commitment, fully underwritten public offering conducted in the United States through a nationally recognized investment banking firm and pursuant to a registration statement under the Securities Act, the public offering price of which was not less than $10.00 per share, the gross proceeds of which to the Company (before underwriting discounts, commissions and fees) exceed $200,000,000 and after which the shares of Common Stock are listed or quoted on an Eligible Market.
(xxxii) "Reclassification" means any reclassification or change of shares of Common Stock issuable upon conversion of the Notes (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination).
(xxxiii) " Registration Rights Agreement " means that certain registration rights agreement dated as of the Initial Issuance Date by and among the Company and the initial holders of Notes made a party thereto on the Initial Issuance Date, or after the Initial Issuance Date and on or prior to December 31, 2005 pursuant to Section 2.1(c) of the Subscription Agreement, relating to, among other things, the registration of the resale of the Common Stock issuable upon conversion of the Notes.
(xxxiv) " Required Holders " means the holders of Notes representing at least a majority of the aggregate Principal amount of the Notes then outstanding.
(xxxv) " Rule 144(k) " means Rule 144(k) promulgated under the Securities Act and any successor provision thereto.
(xxxvi) " SEC " means the United States Securities and Exchange Commission.
(xxxvii) " Securities Act " means the Securities Act of 1933, as amended.
(xxxviii) " Subscription Agreement " means that certain subscription agreement dated as of the Subscription Date by and among the Company and the initial holders of the Notes made a party thereto on the Subscription Date, or after the Subscription Date and on or prior to December 31, 2005 pursuant to Section 2.1(c) of such Subscription Agreement, pursuant to which the Company issues Notes to such initial holders.
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(xxxix) " Subscription Date " means December 15, 2005.
(xl) " Subsidiary " means with respect to any Person, any corporation, association or other business entity of which more than 50% of the total voting power of equity entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees or other governing body thereof is at the time owned or controlled by such Person (regardless of whether such equity is owned directly or through one or more other Subsidiaries of such Person or a combination thereof).
(xli) " Successor Entity " means the Person, which may be the Company, formed by, resulting from or surviving any Fundamental Transaction or the person with which such Fundamental Transaction shall have been made, provided that from and after an Effective Registration, if such Person is not a publicly traded entity whose common stock or equivalent equity security is quoted or listed for trading on an Eligible Market, Successor Entity shall mean such Person's Parent Entity, if any.
(xlii) " Trading Day " means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded; provided that "Trading Day" shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).
(xliii) " Transaction Documents " means the Subscription Agreement, the Registration Rights Agreement and any other documents or agreements executed in connection with the transactions contemplated hereunder or thereunder.
(xliv) " Weighted Average Price " means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market during the period beginning at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg through its "Volume at Price" functions, or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or such other time as such market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the "pink sheets" by Pink Sheets LLC (formerly the National Quotations Bureau, Inc.). If the Weighted Average Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 23. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance Date set out above.
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EXHIBIT I
VONAGE HOLDINGS CORP.
CONVERSION NOTICE
Reference is made to the Convertible Note (the " Note ") issued to the undersigned by Vonage Holdings Corp. (the " Company "). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of the Note indicated below into shares of Common Stock par value $.01 per share (the " Common Stock ") of the Company, as of the date specified below.
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Please issue the Common Stock into which the Note is being converted in the following name and to the following address: |
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EXHIBIT II
VONAGE HOLDINGS CORP.
NOTICE OF SECTION 3(d) ELECTION
Reference is made to the Convertible Note (the " Note ") issued to the undersigned by Vonage Holdings Corp. (the " Company "). In accordance with and pursuant to Section 3(d) of the Note, the undersigned Holder (as defined in the Note) hereby elects that Section 3(d) of the Note shall not apply to the Note purchased by the Holder and shall in no way have any applicability to the undersigned Holder or to any subsequent holder of such Note.
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VONAGE HOLDINGS CORP. |
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Exhibit 10.1
VONAGE HOLDINGS CORP.
2001 STOCK INCENTIVE PLAN
(WITH ALL AMENDMENTS THROUGH APRIL 20, 2005)
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reduction in the Optionees title, compensation, duties and/or responsibilities or
relocation of the place of Optionees employment to a location more than 30 miles distant from its location at the time the Change of Control of the Company occurred,
vest and become exercisable to the extent of one-half the number of shares (rounded up to the next whole share) covered thereby. A Change of Control of the Company shall occur or be deemed to have occurred only if any of the following events takes place:
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The effective date of the Plan is May 1, 2000, the date on which it was approved (as the Min-X.com, Inc. Stock Incentive Plan) by the Board and stockholders of the Company. No option may be granted under the Plan after the tenth anniversary of such effective date. Subject to the foregoing, options may be granted under the Plan at any time subsequent to such effective date, provided , however , that (a) no Incentive Option will be exercised or exercisable unless the stockholders of the Company approve the Plan not later than one year from such effective date, and (b) all Incentive Options, if any, issued prior to the date of such stockholders approval will contain a reference to such condition.
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The right of first refusal in favor of the Company referred to in Sections 6(e) and 7(d) hereof (FRR) shall operate as follows:
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Exhibit 10.2
VONAGE HOLDINGS CORP.
INCENTIVE STOCK OPTION AGREEMENT
Under the 2001 Stock Incentive Plan
VONAGE HOLDINGS CORP. (the Company ), a Delaware corporation, hereby grants, effective as of ________, 200__ (the Effective Date ), to ________ (the Optionee ) the right and option (the Option ) to purchase up to ________ shares of its Common Stock, $0.001 par value per share, at a price of $_____ per share, subject to the following terms and conditions.
termination by the Company without Cause, or
termination by the Optionee as a consequence of either of the following actions taken by the Company without the Optionees consent:
reduction in the Optionees title, compensation, duties and/or responsibilities or
relocation of the place of Optionees employment to a location more than 30 miles distant from its location at the time the Change of Control of the Company occurred,
vest and become exercisable to the extent of one-half the number of shares (rounded up to the next whole share) covered thereby. A Change of Control of the Company shall occur or be deemed to have occurred only if any of the following events takes place:
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Military or sick leave will not be deemed a termination of employment provided that it does not exceed the longer of 90 days or the period during which the absent employees reemployment rights are guaranteed by statute or by contract.
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IN WITNESS WHEREOF , the Company and the Optionee have executed and delivered this Agreement as of the Effective Date.
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VONAGE HOLDINGS CORP. |
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Exhibit 10.3
VONAGE HOLDINGS CORP.
NONQUALIFIED STOCK OPTION AGREEMENT
Under the 2001 Stock Incentive Plan
VONAGE HOLDINGS CORP. (the Company ), a Delaware corporation, hereby grants, effective as of __________ 200___ (the Effective Date ), to ______ (the Optionee ) the right and option (the Option ) to purchase up to ______ shares of its Common Stock, $0.001 par value per share, at a price of $__ per share, subject to the following terms and conditions.
termination by the Company without Cause, or
termination by the Optionee as a consequence of either of the following actions taken by the Company without the Optionees consent:
reduction in the Optionees title, compensation, duties and/or responsibilities or
relocation of the place of Optionees employment to a location more than 30 miles distant from its location at the time the Change of Control of the Company occurred,
vest and become exercisable to the extent of one-half the number of shares (rounded up to the next whole share) covered thereby. A Change of Control of the Company shall occur or be deemed to have occurred only if any of the following events takes place:
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Military or sick leave will not be deemed a termination of employment provided that it does not exceed the longer of 90 days or the period during which the absent employees reemployment rights are guaranteed by statute or by contract.
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IN WITNESS WHEREOF , the Company and the Optionee have executed and delivered this Agreement as of the Effective Date.
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VONAGE HOLDINGS CORP. |
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Exhibit 10.4
VONAGE HOLDINGS CORP.
NONQUALIFIED STOCK OPTION AGREEMENT
Under the 2001 Stock Incentive Plan
VONAGE HOLDINGS CORP. (the Company) , a Delaware corporation, hereby grants, effective as of , 20 (the Effective Date ), to , (the Optionee ) the right and option (the Option ) to purchase up to shares of its Common Stock, $0.001 par value per share, at a price of $ per share, subject to the following terms and conditions.
1. Relationship to Plan. The Option is granted pursuant to the Companys 2001 Stock Incentive Plan, as amended (the Plan), and is in all respects subject to the terms and conditions of the Plan, a copy of which has been provided to the Optionee (the receipt of which the Optionee hereby acknowledges). Capitalized terms used and not otherwise defined in this Agreement are used as defined in the Plan. The Optionee hereby accepts the Option subject to all the terms and provisions of the Plan (including without limitation provisions relating to expiration and termination of the Option and adjustment of the number of shares subject to the Option and the exercise price therefor). The Optionee further agrees that all decisions under and interpretations of the Plan by the Company will be final, binding, and conclusive upon the Optionee and his or her successors, permitted assigns, heirs, and legal representatives.
2. Vesting. The Option vests and becomes exercisable as to 1/48 (2.08333%) of the Shares on the first day of each calendar month following the month that includes the date hereof provided that the Optionee continues to serve as a director of the Company or a Subsidiary (as defined in the Plan) on the applicable vesting date; and provided further that if a Change of Control of the Company becomes effective while the Optionee continues to serve as a director of the Company, the Option shall at once become fully vested and exercisable as to the entire number of shares covered thereby. A Change of Control of the Company shall occur or be deemed to have occurred only if any of the following events takes place:
3. Termination of Option . The Option will terminate on the earlier of (a) the tenth anniversary of the date hereof, and (b) if the Optionees service as a director of the Company terminates for any reason, the applicable date determined from the following table:
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Twelve months thereafter |
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total and permanent disability of Optionee (as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended) |
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Twelve months thereafter |
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Termination for any reason other than death, disability, or Cause |
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Termination for Cause |
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Upon termination of service |
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4. Lock-Up Agreement . The Optionee agrees that if the Company at any time or from time to time deems it necessary or desirable to make any registered public offering(s) of shares of Common Stock, then upon the Companys request, the Optionee will not sell, make any short sale of, loan, grant any option for the purchase of, pledge, or otherwise encumber or otherwise dispose of any of the shares of Common Stock issued or issuable upon exercise of the Option during such period (not to exceed 180 days) commencing on the effective date of the registration statement relating to any such offering as the Company may request, except with the prior written consent of the Company.
5. Methods of Exercise . Except as may otherwise be agreed by the Optionee and the Company, the Option will be exercisable only by a written notice in form and substance acceptable to the Company, specifying the number of shares to be purchased and accompanied by payment in cash of the aggregate purchase price for the shares for which the Option is being exercised.
6. Characterization of Option for Tax Purposes. The Option is intended not to qualify as an incentive stock option under the Internal Revenue Code of 1986, as amended, and will be subject to different tax treatment than accorded incentive stock options (including the possibility of income tax withholding in accordance with the Plan).
7. Company Right of First Refusal . The Optionee understands and acknowledges that the Company has a right of first refusal respecting any sale, transfer or other disposition by the Optionee of the shares covered by the Option, as more fully set forth in Section 12 of the Plan.
8. Compliance with Laws. The obligations of the Company to sell and deliver Shares upon exercise of the Option are subject to all applicable laws, rules, and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by government agencies as may be deemed necessary or appropriate by the Board or the relevant committee of the Board. If so required by the Board or such committee, no shares will be delivered upon the exercise of the Option until the Optionee has given the Company a satisfactory written statement that he is purchasing such shares for investment, and not with a view to the sale or distribution of any such shares, and with respect to such other matters as the Board may deem advisable in order to assure compliance with applicable securities laws. All shares issued upon exercise of the Option will bear appropriate restrictive legends.
9. General. The Optionee may not transfer, assign, or encumber any of his or her rights under this Agreement without the prior written consent of the Company, and any attempt to do so will be void. This Agreement will be governed by and interpreted and construed in accordance with the internal laws of the State of Delaware (without reference to principles of conflicts or choice of law); provided that in the event that the Company is party to a merger or consolidation in which the surviving or resulting corporation is not a Delaware corporation, then this agreement thereafter will be governed by and interpreted and construed in accordance with the internal laws of the state of incorporation of such surviving or resulting corporation (without reference to principles of conflicts or choice of law). The captions of the sections of this Agreement are for reference only and will not affect the interpretation or construction of this
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Agreement. This Agreement will bind and inure to the benefit of the parties and their respective successor, permitted assigns, heirs, devisees, and legal representatives.
IN WITNESS WHEREOF , the Company and the Optionee have executed and delivered this Agreement as of the Effective Date.
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Exhibit 10.5
THE CORPORATEPLAN
FOR RETIREMENT SM 100
(PROFIT SHARING/401(K) PLAN)
A FIDELITY PROTOTYPE PLAN
Non-Standardized Adoption Agreement No. 001
For use With
Fidelity Basic Plan Document No. 10
Plan Number: 26175 |
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The CORPORATEplan for Retirement SM 100 |
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Non-Std PS Plan |
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10/09/2003 |
© 2003 FMR Corp.
All rights reserved.
ADOPTION AGREEMENT
ARTICLE 1
NON-STANDARDIZED PROFIT SHARING/401(K) PLAN
1.01 PLAN INFORMATION
This is the Vonage 401(k) Retirement Plan (the Plan)
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The Administrator is the agent for service of legal process for the Plan.
This is (check one):
The original effective date of the Plan: 3/1/2001
1.02 EMPLOYER
Address: 2147 Route 27
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Michael Porta |
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1.03 TRUSTEE
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Fidelity Management Trust Company |
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1.04 COVERAGE
All Employees who meet the conditions specified below shall be eligible to participate in the Plan :
Note: The Plan may not cover employees who are residents of Puerto Rico. These employees are automatically excluded from the eligible class, regardless of the Employers selection under this Subsection 1.04(c).
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Note: The Employer should exercise caution when excluding employees from participation in the Plan. Exclusion of employees may adversely affect the Plans satisfaction of the minimum coverage requirements, as provided in Code Section 410(b).
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1.05 COMPENSATION
Compensation for purposes of determining contributions shall be as defined in Section 5.02, modified as provided below.
Note: If the Employer selects Option (2), (3), (4), (5), or (6) with respect to Nonelective Employer Contributions, Compensation must be tested to show that it meets the requirements of Code Section 414(s) or 401(a)(4). These exclusions shall not apply for purposes of the Top Heavy requirements in Section 15.03, or for allocating non-safe harbor Nonelective Employer Contributions if the Integrated Formula is elected in Subsection 1.11(b)(2).
Note: If the initial Plan Year of a new Plan consists of fewer than 12 months from the Effective Date in Subsection 1.01(g)(1) through the end of the initial Plan Year, Compensation for purposes of determining the amount of contributions, other than non-safe harbor Nonelective Employer Contributions, under the Plan shall be the period from such Effective Date through the end of the initial year. However, for purposes of determining the amount of non-safe harbor Nonelective Employer Contributions and for other Plan purposes, where appropriate, the full 12-consecutive-month period ending on the last day of the initial Plan Year shall be used.
1.06 TESTING RULES
Note: Restrictions apply on elections to change testing methods that are made after the end of the GUST remedial amendment period.
Note: Effective for determination years beginning on or after January 1, 1998, if the Employer elects Option 1.06(c)(1) and/or 1.06(d)(1), such election(s) must apply consistently to all retirement plans of the Employer for determination years that begin with or within the same calendar year (except that Option 1.06(c)(1), Calendar Year Determination, shall not apply to calendar year plans).
1.07 DEFERRAL CONTRIBUTIONS
Note: For Limitation Years beginning prior to 2002, the percentage elected above must be less than 25% in order to satisfy the limitation on annual additions under Code Section 415 if other types of contributions are provided under the Plan.
Note: Notwithstanding the provisions of Subsection 1.07(a)(1)(B), if Option 1.10(a)(3), Safe Harbor Matching Employer Contributions, or 1.11(a)(3), Safe Harbor Formula, with respect to Nonelective Employer Contributions is checked, the Plan provides that an Active Participant may change his salary reduction agreement percentage for the Plan Year within a reasonable period (not fewer than 30 days) of receiving the notice described in Section 6.10.
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Note: A Participants contributions under Subsection 1.07(a)(2) and/or (3) may not cause the Participant to exceed the percentage limit specified by the Employer in Subsection 1.07(a)(1) for the full Plan Year. If the Administrator anticipates that the Plan will not satisfy the ADP and/or ACP test for the year, the Administrator may reduce the rate of Deferral Contributions of Participants who are Highly Compensated Employees to an amount objectively determined by the Administrator to be necessary to satisfy the ADP and/or ACP test.
1.08 EMPLOYEE CONTRIBUTIONS (AFTER-TAX CONTRIBUTIONS)
1.09 QUALIFIED NONELECTIVE CONTRIBUTIONS
1.10 MATCHING EMPLOYER CONTRIBUTIONS (Only if Option 1.07(a), Deferral Contributions is checked)
Note: Effective for Plan Years beginning on or after January 1, 1999, if the Employer elected Option 1.11(a)(3), Safe Harbor Formula, with respect to Nonelective Employer Contributions and meets the requirements for deemed satisfaction of the ADP test in Section 6.10 for a Plan Year, the Plan will also be deemed to satisfy the ACP test with respect to Matching Employer Contributions if Matching Employer Contributions hereunder meet the requirements in Section 6.11.
____% of the first ___% of the Active Participants Compensation contributed to the Plan.
____% of the next ___% of the Active Participants Compensation contributed to the Plan,
____% of the next ___% of the Active Participants Compensation contributed to the Plan.
Note: The percentages specified above for basic Matching Employer Contributions may not increase as the percentage of Compensation contributed increases.
(i) o Deferral Contributions in excess of ___% of the Participants Compensation for the period in question shall not be considered for non-discretionary Matching Employer Contributions.
10
Note: If the Employer elected a percentage limit in (i) above and requested the Trustee to account separately for matched and unmatched Deferral Contributions made to the plan, the non-discretionary Matching Employer Contributions allocated to each Participant must be computed, and the percentage limit applied, based upon each payroll period.
(ii) o Matching Employer Contributions for each Participant for each Plan Year shall be limited to $_______.
Note: If the Employer elected Option 1.10(a)(3), Safe Harbor Matching Employer Contributions, above and wants to be deemed to have satisfied the ADP test for Plan Years beginning on or after January 1, 1999, the additional Matching Employer Contribution must meet the requirements of Section 6.10. In addition to the foregoing requirements, if the Employer elected either Option 1.10(a)(3), Safe Harbor Matching Employer Contributions, or Option 1.11(a)(3), Safe Harbor Formula, with respect to Nonelective Employer Contributions, and wants to be deemed to have satisfied the ACP test with respect to Matching Employer Contributions for the Plan Year, the Deferral Contributions matched may not exceed the limitations in Section 6.11.
The Contribution Period for additional Matching Employer Contributions described Subsection 1.10(b) in the Plan Year.
Note: If Option (2), (3), (4), or (5) above is selected, then Matching Employer Contributions can only be funded by the Employer after the Plan Year ends. Matching Employer Contributions funded during the Plan Year shall not be subject to the eligibility requirements of Option (2), (3), (4), or (5). If Option (2), (3), (4), or (5) is adopted during a Plan Year, as applicable, such Option shall not become effective until the first day of the next Plan Year.
Note: Qualified Matching Contributions may not be excluded in applying the ACP test for a Plan Year if the Employer elected Option 1.10(a)(3), Safe Harbor Matching Employer Contributions, or Option 1.11(a)(3), Safe Harbor Formula, with respect to Nonelective Employer Contributions, and the ADP test is deemed satisfied under Section 6.10 for such Plan Year.
1.11 NONELECTIVE EMPLOYER CONTRIBUTIONS
Note: An Employer may elect both a fixed formula and a discretionary formula. If both are selected, the discretionary formula shall be treated as an additional Nonelective Employer Contribution and allocated separately in accordance with the allocation formula selected by the Employer.
Note: An Employer that has elected the Safe Harbor formula in Subsection 1.11(a)(3) above may not take Nonelective Employer Contributions made to satisfy the safe harbor into account in applying the integrated allocation formula described above.
Integration level means the Social Security taxable wage base for the Plan Year, unless the Employer elects a lesser amount in (A) or (B) below.
Permitted disparity limit means the percentage provided by the following table:
The Integration Level is ___% of the Taxable Wage Base |
|
The Permitted Disparity Limit is |
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|
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20% or less |
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5.7% |
More than 20%, but not more than 80% |
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4.3% |
More than 80%, but less than 100% |
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5.4% |
100% |
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5.7% |
Note: An Employer who maintains any other plan that provides for Social Security Integration (permitted disparity) may not elect Option 1.11(b)(2).
Note: If Option (2), (3), (4), or (5) above is selected then Nonelective Employer Contributions can only be funded by the Employer after the Plan Year ends. Nonelective Employer Contributions funded during the Plan Year shall not be subject to the eligibility requirements of Option (2), (3), (4), or (5). If Option (2), (3), (4), or (5) is adopted during a Plan Year, such Option shall not become effective until the first day of the next Plan Year.
1.12 EXCEPTIONS TO CONTINUING ELIGIBILITY REOUIREMENTS
o Death, Disability, and Retirement Exception to Eligibility Requirements - Active Participants who do not meet any last day or Hours of Service requirement under Subsection 1.10(d) or 1.11(c) because they become disabled, as defined in Section 1.14, retire, as provided in Subsection 1.13(a), (b), or (c), or die shall nevertheless receive an allocation of Nonelective Employer and/or Matching Employer Contributions. No Compensation shall be imputed to Active Participants who become disabled for the period following their disability.
16
1.13 RETIREMENT
Note: If this Option is elected, Participants who are employed by the Employer or a Related Employer on the date they reach Early Retirement Age shall be 100% vested in their Accounts under the Plan.
Note: If this Option is elected, Participants who are employed by the Employer or a Related Employer on the date they become disabled shall be 100% vested in their Accounts under the Plan.
1.14 DEFINITION OF DISABLED
A Participant is disabled if he/she (check the appropriate box(es)):
1.15 VESTING
A Participants vested interest in Matching Employer Contributions and/or Nonelective Employer Contributions, other than Safe Harbor Matching Employer and/or Safe Harbor Nonelective Employer Contributions elected in Subsection 1.10(a)(3) or 1.11(a)(3), shall be based upon his years of Vesting Service and the schedule selected below.
17
Note: The vesting schedule selected below applies only to Nonelective Employer Contributions and Matching Employer Contributions other than safe harbor contributions under Option 1.11(a)(3) or Option 1.10(a)(3). Safe Harbor contributions under Options 1.11(a)(3) and 1.10(a)(3) are always 100% vested immediately.
Years of Vesting Service |
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Applicable Vesting Schedule(s) |
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C |
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D |
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E |
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0 |
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0 |
% |
0 |
% |
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% |
1 |
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0 |
% |
0 |
% |
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% |
2 |
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0 |
% |
20 |
% |
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% |
3 |
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100 |
% |
40 |
% |
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% |
4 |
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100 |
% |
60 |
% |
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% |
5 |
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100 |
% |
80 |
% |
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% |
6 or more |
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100 |
% |
100 |
% |
__ |
% |
Note: A schedule elected under E above must be at least as favorable as one of the schedules in C or D above.
1.16 PREDECESSOR EMPLOYER SERVICE
o Service for purposes of eligibility in Subsection 1.04(b) and vesting in Subsection 1.15(a) of this Plan shall include service with the following predecessor employer(s):
18
1.17 PARTICIPANT LOANS
Participant loans (check one):
1.18 IN-SERVICE WITHDRAWALS
Participants may make withdrawals prior to termination of employment under the following circumstances (check the appropriate box(es)):
1.19 FORM OF DISTRIBUTIONS
Subject to Section 13.01, 13.02 and Article 14, distributions under the Plan shall be paid as provided below . (Check the appropriate box(es).):
(I) o A married Participant who elects an annuity form of payment shall receive a qualified joint and ___% (at least 50%) survivor
20
annuity. An unmarried Participant shall receive a single life annuity, unless a different form of payment is specified below:
(II) o Other annuity form(s) of payment. Please complete Subsection (a) of the Forms of Payment Addendum describing the other annuity form(s) of payment available under the Plan.
____________________________________
1.20 TIMING OF DISTRIBUTIONS
Distribution shall be made to an eligible Participant from his vested interest in his Account as soon as reasonably practicable following the date the Participants application for distribution is received by the Administrator, but in no event later than his Required Beginning Date, as defined in Subsection 2.01(ss).
1.21 TOP HEAVY STATUS
Note: The minimum Employer contribution may be less than the percentage indicated in Subsection 1.21(c) above to the extent provided in Section 15.03.
|
Years of Vesting Service |
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Vesting Percentage |
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Must be at Least |
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0 |
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0% |
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1 |
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0% |
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2 |
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20% |
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3 |
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40% |
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4 |
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60% |
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5 |
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80% |
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6 or more |
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100% |
1.22 CORRECTION TO MEET 415 REQUIREMENTS UNDER MULTIPLE DEFINED CONTRIBUTION PLANS
If the Employer maintains other defined contribution plans, annual additions to a Participants Account shall be limited as provided in Section 6.12 of the Plan to meet the requirements of Code Section 415, unless the Employer elects otherwise below and
23
completes the 415 Correction Addendum describing the order in which annual additions shall be limited among the plans.
1.23 INVESTMENT DIRECTION
Participant Accounts shall be invested in accordance with the investment directions provided to the Trustee by each Participant for allocating his entire Account among the Options listed in the Service Agreement.
1.24 RELIANCE ON OPINION LETTER
An adopting Employer may rely on the opinion letter issued by the Internal Revenue Service as evidence that this Plan is qualified under Code Section 401 only to the extent provided in Announcement 2001-77, 2001-30 I.R.B. The Employer may not rely on the opinion letter in certain other circumstances or with respect to certain qualification requirements, which are specified in the opinion letter issued with respect to this Plan and in Announcement 2001-77. In order to have reliance in such circumstances or with respect to such qualification requirements, application for a determination letter must be made to Employee Plans Determinations of the Internal Revenue Service. Failure to fill out the Adoption Agreement properly may result in disqualification of the Plan.
This Adoption Agreement may be used only in conjunction with Fidelity Basic Plan Document No 10. The Prototype Sponsor shall inform the adopting Employer of any amendments made to the Plan or of the discontinuance or abandonment of the prototype plan document.
1.25 PROTOTYPE INFORMATION:
|
Name of Prototype Sponsor: |
Fidelity Management & Research Company |
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Address of Prototype Sponsor: |
82 Devonshire Street
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Questions regarding this prototype document may be directed to the following telephone number: 1-800-343-9184.
24
EXECUTION PAGE
(Fidelitys Copy)
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be executed this 3 rd day of December, 2004.
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Employer: |
VONAGE |
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By: |
/s/ John Rego |
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Title: |
CFO |
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Employer: |
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By: |
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Title: |
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Accepted by: |
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Fidelity Management Trust Company, as Trustee |
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By: |
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Date: |
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Title |
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25
EXECUTION PAGE
(Employers Copy)
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be executed this 18 th day of November, 2004.
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Employer: |
VONAGE |
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By: |
/s/ John Rego |
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Title: |
CFO |
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Employer: |
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By: |
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Title: |
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Accepted by: |
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Fidelity Management Trust Company, as Trustee |
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By: |
/s/ Delphia D. Lawrence |
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Date: |
11/22/04 |
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Title |
Authorized Signatory |
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26
AMENDMENT EXECUTION PAGE
This page is to be completed in the event the Employer modifies any prior election(s) or makes a new election(s) in this Adoption Agreement. Attach the amended page(s) of the Adoption Agreement to this execution page.
The following section(s) of the Plan are hereby amended effective as of the date(s) set forth below:
Section Amended |
Page |
Effective Date |
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IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed this ______ day of ______________, _____.
Employer: |
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Employer: |
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By: |
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By: |
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Title: |
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Title |
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Accepted by: |
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Fidelity Management Trust Company, as Trustee |
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By: |
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Date: |
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Title: |
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27
ADDENDUM
Re: SPECIAL EFFECTIVE DATES
for
Plan Name : Vonage 401(k) Retirement Plan
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(1) |
Name of merged plan: |
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Effective date: |
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(2) |
Name of merged plan: |
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Effective date: |
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(3) |
Name of merged plan: |
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Effective date: |
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28
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(4) |
Name of merged plan: |
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Effective date: |
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(5) |
Name of merged plan: |
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Effective date: |
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29
ADDENDUM
Re: SAFE HARBOR MATCHING EMPLOYER CONTRIBUTION
for
Plan Name : Vonage 401(k) Retirement Plan
Note : Matching Employer Contributions made under this Option must be 100% vested when made and may only be distributed because of death, disability, separation from service, age 59 1/2, or termination of the Plan without the establishment of a successor plan. In addition, each Plan Year, the Employer must provide written notice to all Active Participants of their rights and obligations under the Plan.
Note : If the Employer selects this formula and does not elect Option 1.10(b), Additional Matching Employer Contributions, Matching Employer Contributions will automatically meet the safe harbor contribution requirements for deemed satisfaction of the ACP test. (Employee Contributions must still be tested.)
____% of the first ____% of the Active Participants Compensation contributed to the plan,
____% of the first ____% of the Active Participants Compensation contributed to the plan,
____% of the first ____% of the Active Participants Compensation contributed to the plan.
Note : To satisfy the safe harbor contribution requirement for the ADP test, the percentages specified above for Matching Employer Contributions may not increase as the percentage of Compensation contributed increases, and the aggregate amount of Matching Employer Contributions at such rates must at least equal the aggregate amount of
30
Matching Employer Contributions which would be made under the percentages described in (a)(1) of this Addendum.
Note : To satisfy the safe harbor contribution requirement for the ACP test, the Deferral Contributions matched cannot exceed 6% of a Participants Compensation.
31
ADDENDUM
Re: SAFE HARBOR NONELECTIVE EMPLOYER CONTRIBUTION
for
Plan Name : Vonage 401(k) Retirement Plan
Note : An Employer that has selected Subsection (a)(2) above must amend the Plan by electing (A) below and completing the Amendment Execution Page no later than 30 days prior to the end of each Plan Year for which safe harbor Nonelective Employer Contributions are being made.
Note : Safe Harbor Nonelective Employer Contributions must be 100% vested when made and may only be distributed because of death, disability, separation from service, age 59 1/2, or termination of the Plan without the establishment of a successor plan. In addition, each Plan Year, the Employer must provide written notice to all Active Participants of their rights and obligations under the Plan.
ADDENDUM
Re: PROTECTED IN-SERVICE WITHDRAWALS
for
Plan Name : Vonage 401(k) Retirement Plan
ADDENDUM
Re: FORMS OF PAYMENT
for
Plan Name : Vonage 401(k) Retirement Plan
Straight life annuity
Single Life Annuity with Installment refund
Fixed period annuities for any period of whole months which is not less than 60
and does not exceed the Life Expectancy of the member where the Life Expectancy
is no recalculated
Single life annuities with certain periods of 5, 10 or 15 years
Survivorship life annuities with installment refund and survivor percentages of
66 2/3% or 100%
_______________________________________
________________________________________________
ADDENDUM
Re: 415 CORRECTION
for
Plan Name : Vonage 401(k) Retirement Plan
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36
ADDENDUM
Re: 416 CONTRIBUTION
for
Plan Name : Vonage 401(k) Retirement Plan
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37
THE CORPORATE PLAN FOR RETIREMENT SM 100 (PROFIT SHARING/ 401 (K) PLAN)
ADDENDUM TO ADOPTION AGREEMENT
FIDELITY BASIC PLAN DOCUMENT No. 10
RE: ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 (EGTRRA) AMENDMENTS for
Plan Name : Vonage 401(k) Retirement Plan
PREAMBLE
Adoption and Effective Date of Amendment . This amendment of the Plan is adopted to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This amendment is intended as good faith compliance with the requirements of EGTRRA and is to be construed in accordance with EGTRRA and guidance issued thereunder. Except as otherwise provided below, this amendment shall be effective as of the first day of the first plan year beginning after December 31, 2001.
Supersession of Inconsistent Provisions . This amendment shall supersede the provisions of the Plan to the extent those provisions are inconsistent with the provisions of this amendment.
(a) Catch-up Contributions . The Employer must select either (1) or (2) below to indicate whether eligible Participants age 50 or older by the end of a calendar year will be permitted to make catch-up contributions to the Plan, as described in Section 5.03(b)(1):
(1) þ Catch-up contributions shall apply effective January 1, 2002, unless a later effective date is specified herein,
(2) o Catch-up contributions shall not apply.
Note : The Employer must not select (a)(1) above unless all plans of all employers treated, with the Employer, as a single employer under subsections (b), (c), (m), or (o) of Code Section 414 also permit catch up contributions (except a plan maintained by the Employer that is qualified under Puerto Rico law), as provided in Code Section 414(v)(4) and IRS guidance issued thereunder. The effective date applicable to catch-up contributions must likewise be consistent among all plans described immediately above, to the extent required in Code Section 414(v)(4) and IRS guidance issued thereunder.
(b) Plan Limit on Elective Deferral for Plans Permitting Catch-up Contributions . This Section (b) is inapplicable if the Plan converted to this Fidelity document from any other document effective after April 1, 2002.
For Plans that permit catch-up contributions beginning on or before April 1, 2002, pursuant to (a)(1) above, the 60% Plan Limit described in Section 5.03(b)(2) shall apply
38
beginning April 1, 2002, unless (b)(1) or (b)(2) is selected below. For Plans that permit catch up contributions beginning after April 1, 2002, pursuant to (a)(1) above, the Plan Limit set out in Section 1.07(a)(1) shall continue to apply unless and until the Employers election in (b)(2) below, if any, provides for a change in the Plan Limit.
(1)
o
The Plan Limit set out in Section
1.07(a)(1) shall continue to apply on and
after
April 1, 2002.
(2)
o
The Plan Limit set out in Section
l.07(a)(1) shall continue to apply until
_____________
(cannot be before April 1, 2002), and the Plan Limit after
that date
shall be ______% of Compensation each payroll period.
(c) Matching Employer Contributions on Catch-up Contributions . The Employer must select the box below only if the Employer selected (a)(1) above, and the Employer wants to provide Matching Employer Contributions on catch-up contributions. In that event, the same rules that apply to Matching Employer Contributions on Deferral Contributions other than catch-up contributions will apply to Matching Employer Contributions on catch-up contributions.
o Notwithstanding anything in 2.01(l) to the contrary, Matching Employer Contributions under Section 1.10 shall apply to catch-up contributions described in Section 5.03(b)(1).
(d) Rollovers of After-Tax Employee Contributions to the Plan . The Employer must mark the box below only if the Employer does not want the Plan to accept Participant Rollover Contributions of qualified plan after-tax employee contributions, as described in Section 5.06, which would otherwise be effective for distributions after December 31, 2001:
o Participant Rollover Contributions or direct rollovers of qualified plan after-tax employee contributions shall not be accepted by the Plan at any time.
(e) Application of the Same Desk Rule . The Employer must mark the box below only if the Employer wants to discontinue the application of the same desk rule set forth in Section 12.01(a).
þ Effective for distributions from the Plan after December 31, 2001, or such later date as specified herein ________, a Participants elective deferrals, qualified nonelective contributions and qualified matching contributions, if applicable, and earnings attributable to such amounts shall be distributable, upon a severance from employment as described in Section 12.01(b), effective only for severances occurring after ______________ (or, if no date is entered, regardless of when the severance occurred).
39
Amendment Execution
(Fidelitys Copy)
IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed this _____ day of __________________, ____.
Employer : |
_________________________ |
|
Employer : |
__________________________ |
By: |
_________________________ |
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By: |
__________________________ |
Title: |
_________________________ |
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Title: |
__________________________ |
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Accepted by : Fidelity Management Trust Company, as Trustee |
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By: |
_________________________ |
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Date: |
__________________________ |
Title: |
_________________________ |
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40
Amendment Execution
(Employers Copy)
IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed this 18 th day of November, 2004.
Employer: |
VONAGE |
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Employer: |
__________________________ |
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By: |
/s/ John Rego |
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By: |
__________________________ |
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Title: |
CFO |
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Title: |
__________________________ |
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||
Accepted by: Fidelity Management Trust Company, as Trustee |
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|||||
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By: s/ Delphia D. Lawrence |
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Date: |
11/22/04 |
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Delphia D. Lawrence |
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Title: Authorized Signatory |
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41
Amendment Execution
(Employers Copy)
IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed this _____ day of __________________, ____.
Employer: |
_________________________ |
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Employer: |
__________________________ |
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By: |
_________________________ |
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By: |
__________________________ |
Title: |
_________________________ |
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Title: |
__________________________ |
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Accepted by: Fidelity Management Trust Company, as Trustee |
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By: |
_________________________ |
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Date: |
__________________________ |
Title: |
_________________________ |
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42
AMENDMENT EXECUTION PAGE
This page is to be completed in the event the Employer modifies any prior election(s) or makes a new election(s) in this Adoption Agreement. Attach the amended page(s) of the Adoption Agreement to this execution page.
The following section(s) of the Plan are hereby amended effective as of the date(s) set forth below:
Section Amended |
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Page |
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Effective Date |
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1.07 |
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01/01/2006 |
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IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed this 14 th day of November, 2005.
Employer: |
Vonage Holdings Corp |
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Employer: |
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By: |
/s/ Michael Porta |
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By: |
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Title: |
Director of Human Resources |
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Title |
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Accepted by: |
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Fidelity Management Trust Company, as Trustee |
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By: |
Trinidad Salinas |
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Date: |
12/5/05 |
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Trinidad Salinas |
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Title: |
Authorized Signatory |
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43
1.07 DEFERRAL CONTRIBUTIONS
Note: For Limitation Years beginning prior to 2002, the percentage elected above must be less than 25% in order to satisfy the limitation on annual additions under Code Section 415 if other types of contributions are provided under the Plan.
Note: Notwithstanding the provisions of Subsection 1.07(a)(1)(B), if Option 1.10(a)(3), Safe Harbor Matching Employer Contributions, or 1.11(a)(3), Safe Harbor Formula, with respect to Nonelective Employer Contributions is checked, the Plan provides that an Active Participant may change his salary reduction agreement percentage for the Plan Year within a reasonable period (not fewer than 30 days) of receiving the notice described in Section 6.10.
Note: A Participants contributions under Subsection 1.07(a)(2) and/or (3) may not cause the Participant to exceed the percentage limit specified by the Employer in Subsection 1.07(a)(1) for the full Plan Year. If the Administrator anticipates that the Plan will not satisfy the ADP and/or ACP test for the year, the Administrator may reduce the rate of Deferral Contributions of Participants who are Highly Compensated Employees to an amount objectively determined by the Administrator to be necessary to satisfy the ADP and/or ACP test.
45
AMENDMENT EXECUTION PAGE
This page is to be completed in the event the Employer modifies any prior election(s) or makes a new election(s) in this Adoption Agreement. Attach the amended page(s) of the Adoption Agreement to this execution page.
The following section(s) of the Plan are hereby amended effective as of the date(s) set forth below:
Section Amended |
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Page |
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Effective Date |
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1.19(c) |
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10/28/2005 |
1.19(d) |
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10/28/2005 |
Addendum re: Forms of Payment, (a) |
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10/28/2005 |
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IN WITNESS WHEREOF, the Employer has caused this Amendment to be executed this 26th day of October, 2005.
Employer: |
Vonage Holdings Corp |
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Employer: |
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By: |
/s/ Michael Porta |
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By: |
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Title: |
Director of Human Resources |
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Title: |
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Accepted by: |
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Fidelity Management Trust Company, as Trustee |
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By: |
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Date: |
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Title: |
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1.19 FORM OF DISTRIBUTIONS
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(I) o A married Participant who elects an annuity form of payment shall receive a qualified joint and ___% ( at least 50% ) survivor annuity. An unmarried Participant shall receive a single life annuity, unless a different form of payment is specified below:
(II) o Other annuity form(s) of payment. Please complete Subsection (a) of the Forms of Payment Addendum describing the other annuity form(s) of payment available under the Plan.
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ADDENDUM
Re: FORMS OF PAYMENT
for
Plan Name : VONAGE
(a) The following optional forms of annuity will continue to be offered under the Plan:
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Exhibit 10.6
LEASE
Lessor
23 MAIN STREET HOLMDEL ASSOCIATES LLC
to:
VONAGE USA INC.
Lessee
Building:
23 Main Street
Holmdel, New Jersey
TABLE OF CONTENTS
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Page |
1. |
DESCRIPTION: |
5 |
2. |
TERM: |
5 |
3. |
FIXED BASIC RENT: |
5 |
4. |
USE AND OCCUPANCY: |
5 |
5. |
CARE AND REPAIR OF PREMISES/ENVIRONMENTAL COMPLIANCE: |
6 |
6. |
ALTERATIONS, ADDITIONS OR IMPROVEMENTS: |
10 |
7. |
ACTIVITIES INCREASING FIRE INSURANCE RATES: |
11 |
8. |
ASSIGNMENT AND SUBLEASE: |
11 |
9. |
COMPLIANCE WITH RULES AND REGULATIONS: |
16 |
10. |
DAMAGES TO BUILDING: |
16 |
11. |
EMINENT DOMAIN: |
19 |
12. |
INSOLVENCY OF LESSEE: |
20 |
13. |
LESSORS REMEDIES ON DEFAULT: |
20 |
15. |
SUBORDINATION OF LEASE: |
25 |
16. |
SECURITY DEPOSIT: |
25 |
17. |
RIGHT TO CURE LESSEES/LESSORS BREACH: |
26 |
18. |
MECHANICS LIENS: |
28 |
19. |
RIGHT TO INSPECT AND REPAIR: |
28 |
20. |
SERVICES TO BE PROVIDED BY LESSOR/LESSORS EXCULPATION: |
28 |
21. |
INTERRUPTION Of SERVICES OR USE: |
31 |
22. |
ELECTRICITY/GAS: |
31 |
23. |
ADDITIONAL RENT: |
32 |
24. |
ESTOPPEL: |
41 |
25. |
HOLDOVER TENANCY: |
41 |
26. |
RIGHT TO SHOW PREMISES: |
41 |
27. |
LESSORS WORK - LESSEES DRAWINGS: |
42 |
28. |
WAIVER OF TRIAL BY JURY: |
42 |
29. |
LATE CHARGE: |
42 |
30. |
LESSEES INSURANCE: |
42 |
31. |
NO OTHER REPRESENTATIONS: |
45 |
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32. |
QUIET ENJOYMENT: |
45 |
33. |
INDEMNITY: |
45 |
34. |
ARTICLE HEADINGS: |
45 |
35. |
APPLICABILITY TO HEIRS AND ASSIGNS: |
46 |
36. |
PARKING: |
46 |
37. |
LESSORS LIABILITY FOR LOSS OF PROPERTY: |
46 |
38. |
PARTIAL INVALIDITY: |
46 |
39. |
LESSEES BROKER: |
46 |
40. |
PERSONAL LIABILITY: |
47 |
41. |
NO OPTION: |
47 |
42. |
DEFINITIONS: |
47 |
43. |
LEASE COMMENCEMENT: |
48 |
44. |
NOTICES: |
48 |
45. |
ACCORD AND SATISFACTION: |
49 |
46. |
EFFECT OF WAIVERS: |
49 |
47. |
LEASE CONDITION: |
49 |
48. |
MORTGAGEES NOTICE AND OPPORTUNITY TO CURE: |
49 |
49. |
LESSORS RESERVED RIGHT: [INTENTIONALLY OMITTED] |
50 |
50. |
CORPORATE AUTHORITY: |
50 |
51. |
LESSEES EXPANSION/RELOCATION: |
50 |
52. |
MISCELLANEOUS: |
50 |
53. |
PURCHASE CONTINGENCY: |
52 |
54. |
RENEWAL OPTION: |
52 |
55. |
SIGNAGE: |
55 |
56. |
GENERATOR: |
55 |
ii
LEASE, is made the 24 th day of March, 2005 between 23 MAIN STREET HOLMDEL ASSOCIATES LLC (Lessor) whose address is c/o Mack-Cali Realty Corporation, 11 Commerce Drive, Cranford, New Jersey 07016 and VONAGE USA INC. whose address is 2147 Route 27, Edison, New Jersey 08817.
PREAMBLE
BASIC LEASE PROVISIONS AND DEFINITIONS
In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have only the meanings set forth in this section, unless such meanings are expressly modified, limited or expanded elsewhere herein.
1. ADDITIONAL RENT shall mean all sums payable by Lessee hereunder in addition to Fixed Basic Rent payable by Lessee to Lessor pursuant to the provisions of the Lease.
2. BUILDING shall mean 23 Main Street, Holmdel, New Jersey.
3. COMMENCEMENT DATE is the day after the day that Lessor shall close on the purchase of the Premises. The ADDITIONAL PREMISES COMMENCEMENT DATE shall be the later of (i) the date Lessor makes the Additional Premises available to Lessee and (ii) one (1) year anniversary of the Commencement Date.
4. DEMISED PREMISES OR PREMISES shall be deemed to be 350,000 gross rentable square feet constituting the entire Building, and deemed to be consisting of 262,500 gross rentable square feet of the Building (Initial Premises) and 87,500 gross rentable square feet of the Building (Additional Premises) shown on Exhibit A attached hereto and made a party hereof, together with the Property (as defined herein). The Demised Premises shall not be deemed to include the Additional Premises until the Additional Premises Commencement Date. Prior to the Additional Premises Commencement Date, Lessee shall permit the occupants of the Additional Premises to utilize four (4) parking spaces for each 1,000 gross rentable square foot of the Additional Premises in the Building without charge. Thereafter, the Demised Premises shall include all parking areas and spaces at the Property.
5. EXHIBITS shall be the following, attached to this Lease and incorporated herein and made a part hereof.
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Rent Rider |
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Exhibit A |
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Location of Premises |
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Exhibit A-1 |
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Property |
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Exhibit B |
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Rules and Regulations |
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Exhibit C |
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Lessees Work |
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Exhibit D |
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Permitted Encumbrances |
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Exhibit E |
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Commencement Date Agreement |
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Exhibit F |
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Letter of Credit Form |
1
6. EXPIRATION DATE shall be midnight on the day before the twelfth (12 th ) anniversary of the Rent Commencement Date plus the number of days, if any, to have the lease expire on the end of a calendar month, unless extended or modified pursuant to any option contained herein.
7. FIXED BASIC RENT shall be calculated in accordance with the Rent Rider attached hereto and made a part hereof and shall include Lessors good faith estimated budget of anticipated hard and soft costs associated with the purchase and lease of the Building and Property. Notwithstanding the estimated budget set forth on the Rent Rider, the Fixed Basic Rent will be calculated using Lessors actual costs for the categories set forth on the budget. Lessee shall have no obligation to pay Fixed Basic Rent and Additional Rent pursuant to Article 23 hereof applicable to the Initial Premises until the fifth (5 th ) month anniversary of the Commencement Date (the Rent Commencement Date) as more fully set forth on the Rent Rider. Lessee shall have no obligation to pay Fixed Basic Rent and Additional Rent pursuant to Article 23 hereof applicable to the Additional Premises until the fifth (5 th ) month anniversary of the Additional Premises Commencement Date (the Additional Premises Rent Commencement Date) as more fully set forth on the Rent Rider. Upon final determination of the Fixed Basic Rent, Lessor shall deliver to Lessee a statement of Lessors calculation of the Fixed Basic Rent certified by Lessor as true and correct. Lessee shall be responsible for the payment of all utilities applicable to the Premises on the Commencement Date with respect to both the Initial Premises and Additional Premises.
8. LESSEES BROKER shall mean Grubb & Ellis Company.
9. LESSEES PERCENTAGE shall be 75% for the period commencing on the Commencement Date through and including the day prior to the Additional Premises Commencement Date and 100% for the period commencing on the Additional Premises Commencement Date through and including the Expiration Date.
10. PARKING SPACES shall mean a total of four (4) unassigned spaces for each 1,000 gross rentable square feet of the Premises.
11. PERMITTED USE shall be general office use and such ancillary uses as are incidental thereto, including, but not limited to, data center, cafeteria, child day care, fitness center, product assembly and packaging (Permitted Uses) and such other uses consented to by Lessor (which consent Lessor shall not unreasonably withhold, condition or delay) and as may be permitted by applicable zoning laws, rules, regulations and ordinances. Subject to the Permitted Uses, Lessor shall be permitted to restrict Lessee from using the Premises for uses other than the Permitted Uses, if, in Lessors reasonable judgment, such uses would impair (i) the value of the Premises, (ii) the physical integrity of the Building or (iii) the reputation of the Building, Lessor or any affiliate of Lessor.
12. PROPERTY shall be as shown on Exhibit A-1.
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13. SECURITY DEPOSIT shall be SEVEN MILLION AND 00/100 DOLLARS ($7,000,000.00).
Lessee shall deliver to Lessor an irrevocable negotiable letter of credit issued by and drawn upon such commercial bank selected by Lessee and acceptable to Lessor (at its sole discretion) (JP Morgan Chase Bank shall be deemed acceptable to Lessor) and in form and content acceptable to Lessor (also at its sole discretion) (the form attached hereto as Exhibit F shall be deemed acceptable to Lessor) for the account of Lessor, in the sum of SEVEN MILLION AND 00/100 DOLLARS ($7,000,000.00). Said letter of credit shall be for a term of not less than one (1) year and shall be automatically renewed by the bank (without notice from Lessor) (i.e. an evergreen letter of credit), until Lessor shall be required to return the security to Lessee pursuant to the terms of this Lease but in no event earlier than thirty (30) days after the Expiration Date, and any renewed letter of credit shall be delivered to Lessor no later than thirty (30) days prior to the expiration of the letter of credit then held by Lessor. If any portion of the security deposit shall be utilized by Lessor in the manner permitted by this Lease, Lessee shall, within ten (10) business days after written request by Lessor, replenish the security account by depositing with Lessor, in cash or by letter of credit, an amount equal to that utilized by Lessor. Failure of Lessee to comply with the provisions of this Article in all material respects shall constitute a material breach of this Lease and Lessor shall be entitled to present the letter of credit then held by it for payment (without notice to Lessee). If the cash security is converted into a letter of credit, the provisions with respect to letters of credit shall apply (with the necessary changes in points of detail) to such letter of credit deposit. In the event of a bank failure or insolvency affecting the letter of credit, Lessee shall replace same within twenty (20) days after being requested in writing to do so by Lessor.
Provided that this Lease is in full force and effect, Lessee has complied with each of its obligations under this Lease in all material respects and Lessee has not been in default under this Lease beyond applicable notice and cure periods at any time during the immediately preceding twelve (12) month period, then commencing on the fifth (5 th ) year anniversary of the Rent Commencement Date and on each annual anniversary of the Rent Commencement Date thereafter (each such date being a Reduction Date), the security deposit shall be reduced by ONE MILLION AND 00/100 DOLLARS ($1,000,000.00).
Provided that (i) this Lease is in full force and effect, (ii) Lessee has complied with each of its obligations under this Lease in all material respects, (iii) Lessee has a net worth of at least FIVE HUNDRED MILLION AND 00/100 DOLLARS ($500,000,000.00) and (iv) a credit rating of at least BBB with a positive outlook (or an equivalent shadow rating), then Lessor shall return the entire Security Deposit required hereunder promptly after the written request of Lessee and no Security Deposit shall be required under this Lease.
Any monetary default by Lessee under this Lease beyond applicable notice and grace periods shall be deemed a failure by Lessee to comply with its obligations under this Lease in a material respect.
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14. TENANTS North American Industry Classification (NAICS) Number is _____.
15. TERM shall mean the period commencing on the Commencement Date and ending on the Expiration Date, unless extended pursuant to any option contained herein.
END OP PREAMBLE
4
W I T N E S S E T H
For and in consideration of the covenants herein contained, and upon the terms and conditions herein set forth, Lessor and Lessee agree as follows:
Lessor hereby leases to Lessee, and Lessee hereby hires from Lessor, the Premises as defined in the Preamble as shown on the plan or plans, initialed by the parties hereto, marked Exhibit A attached hereto and made part of this Lease in the Building as defined in the Preamble (hereinafter called the Building), and that certain parcel of land (hereinafter called Property) as described on Exhibit A-1 attached hereto and made part of this Lease, together, with the nonexclusive right to use the Common Areas with Lessor and other lessees, subject however, to the Permitted Encumbrances set forth in Exhibit D hereto.
The Premises are leased for a term to commence on the Commencement Date, and to end at 12:00 midnight on the Expiration Date, all as defined in the Preamble.
The Lessee shall pay to the Lessor during the Term commencing on the Rent Commencement Date or Additional Premises Rent Commencement Date, as the case may be, the Fixed Basic Rent as defined in the Preamble (hereinafter called Fixed Basic Rent) payable in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The Fixed Basic Rent shall accrue at the rate set forth in the Rent Rider attached hereto and made a part hereof and shall be payable, in advance, on the first day of each calendar month during the Term at the Monthly Installments as defined in the Preamble, except that a proportionately lesser sum may be paid for the first month of the Term of this Lease if the Term commences on a day other than the first day of the month, in accordance with the provisions of this Lease herein set forth. Lessor acknowledges receipt from Lessee of the first monthly installment by check, subject to collection, for Fixed Basic Rent for the first month of the Lease Term. Lessee shall pay Fixed Basic Rent, and any Additional Rent as hereinafter provided, to Lessor at Lessors above stated address, or at such other place as Lessor may designate in writing, without demand and without counterclaim, deduction or set off.
The Lessee shall use and occupy the Premises for the Permitted Uses. Such Permitted Uses shall not permit or cause any effluent, pollution or other condition that is by law, noxious or offensive. Lessor represents and warrants that use of the Premises for general office purposes is consistent with the Certificate of Use and Occupancy to be issued by the local public authority. It being a reasonable consideration of this Lease, that the use of the Premises shall be limited, to those uses as otherwise hereinbefore specified, and
5
Lessee may not use the Premises for manufacturing. Lessee shall not operate the Building in a manner that compromises the physical integrity of the Building or the Building Systems beyond normal wear and tear or the uses contemplated herein. The Lessee shall not use or occupy or permit the Premises to be used or occupied, nor do or permit anything to be done in or on the Building Area, in a manner which will in any way violate any certificate of occupancy affecting the Premises unless Lessee shall, at its own cost and expense, obtain such amendments to the existing certificate of occupancy or as required to permit such other use.
In addition to the foregoing, Lessee shall have the exclusive right to utilize the helipad located at the Property, provided that such use is in accordance with all laws and requirements of governmental authorities. Lessee shall obtain, at its sole cost and expense, any governmental permits and approvals required in connection with the use of the helipad. Lessor shall cooperate with Lessee in Lessees efforts to obtain such permits and approvals, provided that Lessor shall have no obligation to expend any monies in connection therewith. Lessor shall provide the maintenance of the helipad at Lessees sole cost and expense so long as Lessee elects to continue use of the helipad.
Notwithstanding anything contained herein to the contrary, Lessor shall make all repairs to the structure of the Building (which for purposes hereof, shall mean the footings, foundations, structural parts of the exterior walls (excluding windows
6
and glass) facade and structural steel of the Building). To the extent that the costs of such structural repairs are capitalized in accordance with generally accepted accounting principles, the cost shall be borne by Lessor; otherwise, the costs of such repairs shall be included in Operating Costs pursuant to Article 23 hereof.
To the extent that the cost of any repairs by Lessor to the heating, ventilation and air conditioning system are capitalized in accordance with generally accepted accounting principles, such costs shall be amortized over the lesser of (1) ten (10) years or (2) the useful life of the repair, and the cost shall be included in Operating Costs in each Lease Year for such portion of the amortization period which occurs during the Term. The cost of any repairs to the heating, ventilation and air conditioning system that are not capitalized in accordance with generally accepted accounting principles shall be included in Operating Costs for the year incurred.
Lessor shall make all repairs to the roof of the Building. The cost of roof repairs shall be included in Operating Costs pursuant to Article 23 hereof; provided, however, that if such costs are capitalized in accordance with generally accepted accounting principles, the following paragraph shall apply. Any roof replacement shall be deemed a capital expenditure and shall be capitalized in accordance with generally accepted accounting principles.
All costs (other than structural repair costs (which are the sole responsibility of Lessor if such costs are capitalized in accordance with generally accepted accounting principles), HVAC repair costs and Lessees Legal Compliance Waste Water Treatment Costs, as defined herein), including those required by laws and requirements of any governmental or quasi-governmental authority (except as set forth herein), that are capitalized in accordance with generally accepted accounting principles shall be included in Operating Costs for the year incurred; provided, however, if such capital expenditures for any one calendar year exceeds $175,000.00, then (i) Lessee shall pay Lessor the initial $175,000.00 of such capital expenditures in the year incurred and (ii) the balance in subsequent year(s), provided that the sum of all costs for capital repairs for which Lessee shall be responsible hereunder shall not exceed $175,000.00 in any Lease Year. Notwithstanding the foregoing, Lessees share of the cost of capital expenditures with respect to the roof only shall not exceed in the aggregate $350,000.00.
Notwithstanding the foregoing, if the waste water treatment system requires a modification, alteration, repair or replacement to comply with any change in any law or requirement of governmental or quasi-governmental authority, then the cost of such modification, alteration, repair or replacement shall be shared by Lessor and Lessee as follows: Lessor shall bear sixty-six and 67/100 percent (66.67%) of the cost and Lessee shall bear thirty-three and 33/100 percent (33.33%) of the cost. In any event, Lessees share of such cost shall not exceed in the aggregate One Hundred Thousand and 00/100 Dollars ($100,000.00). The costs of any modifications, alterations, repairs or replacements to the waste water treatment system, other than to comply with a change in any law or requirement
7
of governmental or quasi-governmental authority shall be subject to the other provisions of this Article 5 (i.e., if not capitalized in accordance with generally accepted accounting principles, the cost would be included in Operating Costs in the year incurred and if capitalized in accordance with generally accepted accounting principles, it would be governed by the immediately preceding paragraph).
Notwithstanding the foregoing, Lessee shall have no obligation to pay any capital costs arising during the last year of the Term; provided, however, that any capital costs incurred by Lessor during the Term (i) to comply with any law or requirement of any governmental or quasi-governmental authority necessitated by Lessees use (other than ordinary office use) or particular manner of use or (ii) by reason of Lessees use of the Premises (other than the Permitted Uses) or Lessees particular manner of use of the Premises or (iii) resulting from Lessees negligence or willful misconduct shall be entirely borne by Lessee in the year incurred without any amortization and without being subject to any cap or included in any capital expenditures subject to a cap. The term repairs shall include replacements, restorations, and/or renewals when necessary. All repairs made by Lessor shall be substantially equal in quality and workmanship to the original work. Except as specifically set forth herein, in no event shall Lessor have any obligation to make any repairs, replacements or alterations to the Property, Building or Premises at Lessors expense, it being the intention of the parties hereto that Lessee assume the actual and reasonable cost of all of the repair and maintenance obligations therein.
All payments by Lessee under this Section 5(a) shall be made within thirty (30) days after Lessees receipt of an invoice therefor. Any capital expenditures that are payable by Lessee hereunder over a period of more than one (1) year shall include interest at the annual rate of two (2) percentage points above the prime rate at the time of expenditure of JP Morgan Chase Bank (or its successor) but in no event to exceed ten percent (10%) per annum (Interest Rate). This interest factor shall be in addition to any annual or lifetime cap on capital expenditure payments for which Lessee is responsible hereunder.
ENVIRONMENTAL
8
Lessee shall: (i) promptly, upon learning thereof, notify Lessor of any violation of, or non-compliance with, potential violation of or non-compliance with, or liability or potential liability under, any Environmental Law concerning the Premises, (ii) promptly make (and deliver to Lessor copies of) all reports or notices that Lessee is required to make under any Environmental Law concerning the Premises and maintain in current status all permits and licenses required under any Environmental Law concerning the Premises, (iii) immediately comply with any orders, actions or demands of any Governmental Authority (as herein defined) with respect to the discharge, clean-up or removal of Hazardous Materials at or from the Demised Premises due to a breach of a covenant set forth in Section 5(b) above, (iv) pay when due the cost of removal of, treatment of, or the taking of remedial action with respect to, any Hazardous Material on the Premises which is required by an Environmental Law due to a breach of a covenant set forth in Section 5(b), (v) keep the Premises free of any lien imposed pursuant to any Environmental Law in respect of a breach of a covenant set forth in Section 5(b), (vi) from time to time, upon the request of Lessor, execute such affidavits, certificates and statements concerning Lessees knowledge and belief concerning the presence of Hazardous Materials on the Premises and (vii) otherwise comply with all Environmental Laws concerning the Premises. In no event shall any of Lessees remedial action relating to subsections (iii), (iv) or (v) above, involve engineering or institutional controls, a groundwater classification exception area or well restriction area and Lessees remedial action shall meet the standard remediation standards for soil, surface water, groundwater and drinking water for commercial office establishments. Promptly upon completion of all required investigatory and remedial activities, Lessee shall, at Lessees own expense, to Lessors satisfaction, restore the affected areas of the Premises, the Building or the Property, as the case may be, from any damage or condition caused by the investigatory or remedial work.
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If Lessor shall grant its consent to the making of a Structural Alteration, then the same shall (i) be performed at the sole cost and expense of Lessee, (ii) be performed in a good and workmanlike manner, and in compliance with all applicable legal requirements (including existing zoning requirements), insurance requirements and Environmental Laws, (iii) be consistent with the Permitted Use, (iv) not in any way render the Premises other than a complete, self containing operating unit, (v) be performed in accordance with plans and specifications approved prior to the commencement of any work by the appropriate Governmental Authorities and by Lessor, which consent shall not be
10
unreasonably withheld or delayed (and if no response is given by Lessor within ten (10) business days after Lessors receipt of Lessees request, together with all applicable documentation, e.g., plans and specifications, same shall be deemed given), and (vi) be performed under the supervision of a licensed architect approved by Lessor and in accordance with Exhibit C, as may be amended from time to time.
Intentionally omitted.
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In the event Lessee desires to assign this Lease or sublease all or part of the Premises to any other party, the terms and conditions of such assignment or sublease shall be communicated to the Lessor in writing prior to the effective date of any such sublease or assignment, solely with respect to any sublease or assignment, which its terms, including any options to renew, covers that remainder of the Term or expires within the twelve (12) month period immediately preceding the Expiration Date, prior to such effective date, the Lessor shall have the option, exercisable in writing to the Lessee, to: (i) recapture in the case of subletting, that portion of the Premises to be sublet or all of the Premises in the case of an assignment (Recapture Space) so that such prospective sublessee or assignee shall then become the sole Lessee of Lessor hereunder, or (ii) recapture the Recapture Space for Lessors own use and the within Lessee shall be fully released from any and all obligations hereunder with respect to the Recapture Space.
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Lessor, however, shall not in any event be obligated to consent to the assignment of this Lease unless: (i) in the reasonable judgment of Lessor the proposed assignee is of a character and financial worth such as is in keeping with the standards of Lessor in those respects for the Premises, or the assignee can otherwise secure and guaranty the payment to Lessor of all Fixed Basic Rent and Additional Rent and any other amounts due from Lessee pursuant to this Lease in a manner reasonably satisfactory to Lessor; (ii) the nature of the proposed assignees business and its reputation are in keeping with the character of the Premises and the use thereof; (iii) the purpose for which the proposed assignee intends to use the Premises assigned to it are uses expressly permitted by and not expressly prohibited by this Lease; (iv) no Event of Default shall have occurred and be continuing; and (v) Lessee shall reimburse Lessor for all reasonable costs that may be incurred by Lessor in connection with the said assignment, including the costs of making investigations as to the acceptability of a proposed assignee and legal costs incurred in connection with the granting of any requested consent.
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Notwithstanding anything contained herein, Lessee shall have the right, without being required to obtain the consent of Lessor or being subject to Lessors
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recapture rights hereunder, to permit portions of the Premises to be used under so-called desk sharing arrangements by persons or entities which are an Affiliate of Lessee or have a business relationship with Lessee, other than landlord-tenant or sublandlord-subtenant (any such person or entity, a User), and which User shall only use desk space in the Premises for the purposes permitted by this Lease, and subject to and in compliance with the following terms and conditions:
Lessee shall observe and comply with the rules and regulations hereinafter set forth in Exhibit B attached hereto and made a part hereof. Lessee acknowledges that the rules and regulations attached as Exhibit B are applicable while Lessee is the sole tenant in the Building. At such time(s) that Lessee is not the sole tenant in the Building, Lessor may prescribe such reasonable rules and regulations that Lessor deems necessary. The Rules and Regulations shall be prescribed and enforced in a non-discriminatory manner. Lessee shall not place a load upon any floor of the Premises exceeding the floor load which it was designed to carry and which is allowed by law. Such installations shall be placed and maintained by Lessee, at Lessees expense, in settings sufficient, in Lessees reasonable judgement, to absorb and prevent vibration, noise and annoyance.
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(a) Termination . If (i) all of the Premises are taken in a condemnation, or (ii) a portion of the Premises are taken in condemnation and Lessee determines in good faith that it will be economically unfeasible to operate its business in any facility that could be reconstructed on the remaining portion of the Premises, this Lease will terminate and all obligations under it will cease as of the date upon which possession is taken by the condemnor. Upon such termination, the Fixed Basic Rent and Additional Rent will be apportioned and paid in full by Lessee to Lessor to that date, all Fixed Basic Rent and Additional Rent prepaid beyond that date will be repaid by Lessor to Lessee, and Lessee will comply with subsection (e). lf, after a partial condemnation of the Premises, Lessee remains in possession of the remaining portion of the Premises after the date on which the condemnor takes possession of the portion of the Premises taken in condemnation, then Lessee shall be deemed a holdover tenant pursuant to Article 25 hereof for such period commencing thirty (30) days after the date upon which the condemnor took possession of the condemned portion of the Premises. If Lessor disputes any determination by Lessee that it will be economically unfeasible to operate its business in any facility that could be reconstructed on the remaining portion of the Premises, upon request of either party, the matter will be submitted to arbitration in accordance with the rules of the American Arbitration Association (AAA) at the office of the AAA nearest the Building.
(b) Partial Condemnation . If there is a partial condemnation and this Lease has not been terminated pursuant to subsection (a), Lessor will promptly restore the Building and other improvements on the Property to a condition and size as nearly comparable as reasonably possible to their condition and size immediately prior to the taking; the time of restoration will be extended for time lost due to Force Majeure, provided that Lessor diligently pursues such restoration during such Force Majeure period. Lessor shall retain the proceeds of any condemnation award recovered. In that event, there will be an equitable abatement of the Fixed Basic Rent and Additional Rent, commencing from and after the date on which the condemnor takes possession.
(c) Award . If a condemnation affecting Lessee occurs, Lessee will have the right to make a claim against the condemnor for removal expenses, business dislocation damages and moving expenses to the extent that such claims or payments do not reduce the sums payable by the condemnor to Lessor. Lessee waives all claims against Lessor and all other claims against the condemnor, and Lessee assigns to Lessor all claims against the condemnor including, without limitation, all claims for leasehold damages and diminution in value of Lessees leasehold.
(d) Temporary Taking . If the temporary use of the whole or any part of the Premises shall be taken at any time during the Term by the condemnation or eminent domain, the
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Term shall not be reduced or affected in any way and Lessee shall continue to pay in full the Fixed Basic Rent and Additional Rent, but Lessee shall be entitled to, and shall, receive the entire award for such taking. If the period of occupation and use by the sovereign shall extent beyond the termination of this Lease and any renewals thereof, the award for such taking shall be apportioned between Lessor and Lessee as of the date of such termination.
Intentionally omitted.
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then and in any such event (hereinafter sometimes called an Event of Default) Lessor may give written notice (Termination Notice) to Lessee specifying such Event of Default or Events of Default and stating that this Lease and the Term shall expire and terminate on the date specified in the Termination Notice, which shall be at least ten (10) days after the giving of the Termination Notice, and on the date specified therein this Lease and the Term and all rights of Lessee under this Lease shall expire and terminate, it being the intention of the Lessor and Lessee hereby to create conditional limitations, and Lessee shall remain liable as provided in this Article 13 and in accordance with those provisions of this Lease
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which are specifically stated herein to survive the expiration or other termination of this Lease.
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Whether or not Lessor shall have collected any monthly deficiencies aforesaid, Lessor shall be entitled to recover from Lessee on demand, as and for liquidated damages, a lump sum payment equal to the amount by which the Fixed Basic Rent and Additional Rent payable hereunder for the period which otherwise would have constituted the unexpired portion of the Term (due account being taken of amounts, if any, collected under clause [3] of Section 13(a), and conclusively presuming the Additional Rent to be the same as was payable for the year immediately preceding such termination or re-entry and thereafter increasing by five (5%) percent per annum) exceeds the then rental value of the Premises for the same period both discounted at a rate equal to then applicable Treasury Rate to present value. If the Premises or any part thereof be reset by Lessor for the unexpired portion of the Term, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed prima facie to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. Nothing herein contained shall limit or prejudice the right of the Lessor to prove for and obtain as damages by reason of such termination an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater or less than the
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amount of liquidated damages referred to above (due account to be taken, however, of the amounts, if any, collected under this Section 13).
This Lease shall, at Lessors option, or at the option of any holder of any underlying lease or holder of any mortgage or trust deed (hereinafter sometimes collectively referred to as Senior Encumbrances), be subject and subordinate to any such underlying leases and to any such mortgage or trust deed which may now or hereafter affect the real property of which the Premises form a part, and also to all renewals, modifications, consolidations and replacements of said underlying leases and said first mortgage or trust deed, provided that Lessor shall obtain a customary, commercially reasonable non-disturbance agreement from the holder of any such underlying lease, mortgage or trust deed. Lessor shall cause to be included in such non-disturbance agreement a provision that recognizes Lessors obligation to apply insurance proceeds toward restoration of the Building and the Premises and does not otherwise alter any of the terms of this Lease. Any expenses charged by the mortgagee in connection with the obtaining of the aforesaid agreement shall be paid by Lessor. Although no instrument or act on the part of Lessee shall be necessary to effectuate such subordination, Lessee will, nevertheless, execute and deliver such further commercially reasonable instruments confirming such subordination of this Lease as may be desired by the holders of said mortgage or trust deed or by any of the Lessors under such underlying leases. If any underlying lease to which this Lease is subject terminates, Lessee shall, on timely request, attorn to the owner of the reversion.
Lessee shall deposit with Lessor on or before March 17, 2005, TIME BEING OF THE ESSENCE , the Security Deposit as defined in the Preamble for the full and faithful performance of Lessees obligations under this Lease, including without limitation, the surrender of possession of the Premises to Lesser as herein provided. If Lessor applies
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any part of said Security Deposit to cure any default of Lessee, Lessee shall, on demand, deposit with Lessor the amount so applied so that Lessor shall have the full Security Deposit on hand at all times during the Term of this Lease. In the event a bona fide sale, subject to this Lease, Lessor shall have the right to transfer the Security Deposit to the vendee, and Lessor shall be considered released by Lessee from all liability for the return of the Security Deposit; and Lessee agrees to look solely to the new lessor for the return of the Security Deposit, and it is agreed that this shall apply to every transfer or assignment made of the Security Deposit to the new lessor. Provided this Lease is not in default, the Security Deposit (less any portions thereof used, applied or retained by Lessor in accordance with the provisions of this Article 16), shall be returned to Lessee after the expiration or sooner termination of this Lease and after delivery of the entire Premises to Lessor in accordance with the provisions of this Lease. Lessee covenants that it will not assign or encumber or attempt to assign or encumber the Security Deposit and Lessor shall not be bound by any such assignment, encumbrance or attempt thereof.
In the event of the insolvency of Lessee, or in the event of the entry of a judgement in any court against Lessee which is not discharged within thirty (30) days after entry, or in the event a petition is filed by or against Lessee under any chapter of the bankruptcy laws of the State of New Jersey or the United States of America, then in such event, Lessor may require the Lessee to deposit additional security in an amount which in Lessors sole judgement would be sufficient to adequately assure Lessees performance of all of its obligations under this Lease including all payments subsequently accruing. Failure of Lessee to deposit the security required by this Article 16 within ten (10) days after Lessors written demand shall constitute a material breach of this Lease by Lessee.
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Lessee shall, within thirty (30) days after notice from Lessor, discharge or satisfy by bonding or otherwise any mechanic liens for materials or labor claimed to have been furnished to the Premises on Lessees direction. If Lessee shall fail to cause such lien to be discharged within the period aforesaid, then, in addition to any other right or remedy, Lessor may, but shall not be obligated to, discharge the same by bonding proceedings, if permitted by law (and if not so permitted, by deposit in court). Any amount so paid by Lessor, including all costs and expenses paid by Lessor in connection therewith shall constitute Additional Rent payable by Lessee under this Lease and shall be paid by Lessee to Lessor on demand.
Lessor may enter the Premises at any reasonable time on reasonable notice to Lessee (except that no notice need be given in case of emergency) provided that a representative of Lessee is present (provided that Lessee shall make such representative available to Lessor) for the purpose of inspection or the making of structural repairs, replacements or additions in, to, on and about the Premises or the Building, or such other repairs, replacements or additions as required by this Lease or required to safeguard the Building or Property. Lessee shall have no claims or cause of action against Lessor by reason thereof. When performing work within the Premises, Lessor shall use commercially reasonable efforts to minimize interference with Lessees use and occupancy of the Premises. In no event shall Lessee have any claim against Lessor for interruption of Lessees business, however occurring, including but not limited to that arising from the negligence of Lessor, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Premises and/or the Building, including the structural and non-structural portions thereof.
Subject to intervening laws, ordinances, regulations and executive orders, Lessor agrees as part of Operating Costs, to furnish the following:
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In addition to the services to be performed by Lessor under this Lease, Lessor, at Lessees sole cost and expense, shall provide complete management of the Property and Building, excluding providing child care center operations, fitness center, security and food services; it being understood, that Lessee shall contract for such services directly with contractors reasonably acceptable to Lessor and the cost of all such services shall be borne solely by Lessee. All services to be provided by Lessor or at the direction of Lessor shall be awarded to qualified third party service providers who were the low bidders pursuant to a commercially reasonable competitive bidding process. Lessee shall have the right, exercisable
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at Lessees reasonable discretion, to disapprove of any service provider and, upon providing notice to Lessor of such disapproval, Lessor shall re-bid the job and promptly retain a replacement service provider pursuant to a commercially reasonable bidding process. Notwithstanding the foregoing, Lessee agrees that Lessor shall have the right to engage the services of janitorial contractors using union personnel, although such contractor may not be the lowest bidder; although it will be the lowest bidder of the union janitorial contractors. Lessee shall pay Lessor, as Additional Rent, a management fee in an amount equal to two and one-half percent (2.5%) multiplied by the sum of the following: (i) Fixed Basic Rent; (ii) Additional Rent not reimbursable to Lessee (i.e., such Additional Rent that is not subject to refund to Lessee); and (iii) base building utility cost (which for purposes hereof shall be deemed $1.00 per rentable square foot of the Premises per annum). If Lessor reasonably believes that the base building utility costs exceeds $1.00 per rentable square foot per annum, then Lessor shall cause a survey to be performed by an independent engineer to determine the base building utility cost. If the survey determines that the base building utility cost exceeds $1.00 per rentable square foot per annum, then Lessee shall pay a management fee based upon such determination and Lessee shall pay the cost of the survey. If the survey determines that the base building utility cost does not exceed $1.00 per rentable square foot per annum, then there shall be no adjustment to the management fee and Lessor shall pay the cost of the survey. Such management fee shall be payable in installments in the same manner as the Additional Rent pursuant to Article 23 hereof, mutatis mutandis . The base building utility cost shall mean all utility and energy costs, including any fuel surcharges or adjustments with respect thereto, incurred for electricity, water, sewer, gas and other utilities, not to include the electricity supplied to the lights and outlets of Lessee occupied or to be occupied office space in the Building (as opposed to what would typically be considered common areas in a multi-tenanted building).
(b) Lessee shall provide its own security service at its sole cost and expense. Lessor or any third party tenant may provide security services for such third (3rd) party tenant and the cost thereof shall not be included in Operating Costs. If Lessee fails to provide reasonably adequate security, Lessor shall have the right to do so, at Lessees sole cost and expense.
Notwithstanding any provisions of this Lease, Lessor shall not be liable for failure to furnish any of the aforesaid services when such failure is due to Force Majeure, as hereinafter defined. Lessor shall not be liable, under any circumstances, including, but not limited to, that arising from the negligence of Lessor, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Premises and/or the Building, including the structural and non-structural portions thereof, for loss of or injury to Lessee or to property, however occurring, through or in connection with or incidental to the furnishings of, or failure to furnish, any of the aforesaid services or for any interruption to Lessees business, however occurring. Nothing contained herein shall be deemed
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a waiver of Lessees right of constructive eviction if Lessor fails to perform its obligations under this Lease or a waiver of Lessors default under this Lease.
Interruption or curtailment of any service maintained in the Building or at the Property, if caused by Force Majeure, as hereinafter defined, shall not entitle Lessee to any claim against Lessor or to any abatement in rent, and shall not constitute a constructive or partial eviction, unless Lessor fails to take measures as may be reasonable under the circumstances to restore the service without undue delay. If the Premises are rendered untenantable in whole or in part, for a period of five (5) consecutive business days or thirty (30) days in any calendar year, by (i) the making of repairs, replacements or additions, other than those made with Lessees consent or caused by misuse or neglect by Lessee, or Lessees agents, servants, visitors or licensees, (ii) Lessors failure to make any repairs or perform any obligation which is Lessors responsibility, or (iii) Lessors failure to supply any service or utility required to be supplied by Lessor, there shall be a proportionate abatement of Fixed Basic Rent and Additional Rent from and after said fifth (5th) consecutive business day or thirty-first (31 st ) day in any calendar year and continuing for the period of such untenantability. In no event, shall Lessee be entitled to claim a constructive eviction from the Premises unless Lessee shall first have notified Lessor in writing of the condition or conditions giving rise thereto.
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Lessor shall cause electricity and gas to be supplied to the Building and to permit Lessee to receive electricity for Lessees use of the Premises, including the heating, ventilation and air conditioning (HVAC) system. Lessee shall pay for Lessees separate supply of electric current and gas energy by direct application to, and arrangement with, the public utility companies servicing the Building. Lessee shall have the right to negotiate with the supplier or suppliers of electricity and gas or require Lessor to obtain electricity and gas from alternate suppliers selected by Lessee. The applicable utility company shall provide such meters used to measure such electricity and gas service. Lessee shall pay all charges with respect to consumption of electricity and gas applicable to the Premises. If, pursuant to a Legal Requirement or the policies or operating practices of the public utility company servicing the Building, Lessee is no longer permitted to obtain electrical energy or gas directly from the public utility company, Lessor will furnish electrical energy and/or gas to the Premises either, at Lessors option, on a check-metering basis or a rent inclusion basis. Lessor shall give Lessee notice at least thirty (30) days prior to the date on which Lessor shall commence furnishing electrical energy and/or gas to the Premises (unless such notice is not feasible under the circumstances, in which event Lessor will give Lessee such notice as is given to Lessor by the public utility company), which notice will shall confirm Lessor will so furnish electrical energy and/or gas to the Premises at the cost Lessor charged by the public utility company. If any utilities cannot be separately metered or assessed or are only partially separately metered or assessed and are used in common with other lessees of the Building, Lessee will pay to Lessor an equitable apportionment of such charges for utilities used in common with other lessees of the Building, based on the square footage of floor space leased to each lessee using such common facilities, the average electrical or gas consumption of each lessee and other pertinent considerations, in addition to Lessees payment of the partially separately metered charges. Lessee shall defend, indemnify and hold Lessor harmless from and reimburse Lessor for all liability, damages, costs, fees, expenses, penalties and charges (including, but not limited to, attorneys fees and disbursements) incurred in connection with (i) Lessees failure to pay for any electricity or gas provided to Lessee hereunder or (ii) misuse or neglect by Lessee of the meters(s) and equipment supplying the electricity or gas.
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It is expressly agreed that Lessee will pay in addition to the fixed Basic Rent provided in Article 3 above, Additional Rent equal to Lessees Percentage (as defined in the Preamble) of the cost for each of the categories of expenses set forth in this Article 23.
For purposes of this Article 23, a Lease Year shall mean the Calendar Year, except that the First Lease Year shall commence on the Commencement Date and end on December 31 of such Calendar Year and the Last Lease Year shall end upon the expiration of the Term.
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Whether capital expenditures shall be included in Operating Costs shall be determined in accordance with Article 5 hereof.
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Repair and Maintenance Expenses shall mean all costs and expenses incurred by Lessor for replacement, repair and maintenance of all or any part of the Building and Property (except to the extent set forth in Article 5 hereof).
a. At any time hereafter and from time to time, Lessor shall furnish to Lessee a statement (Lessors Statement) setting forth (i) Lessors actual Operating Costs, Repair and Maintenance Expenses and Common Utility Expenses and/or actual Taxes for a period which shall have expired only if a final statement has not been previously rendered, and/or (ii) Lessors reasonable estimate of Operating Costs, Repair and Maintenance Expenses and Common Utility Expenses and/or Taxes for the current period. Within thirty (30) days next following rendition of each such Lessors Statement, Lessee shall pay to Lessor the entire amount, if any, shown on such Lessors Statement as being due with respect to any period which shall have expired. In addition, Lessee shall pay to Lessor, on the first day of each month following rendition of each such Lessors Statement, on account of the estimated Additional Rent thereafter payable, a proportionate sum of the total Additional Rent shown upon such Lessors Statement as being Lessors reasonable estimate for the current period on an annual basis (it being agreed that Lessors estimate shall in any event be deemed reasonable if it is based on actual Operating Costs, Repair and Maintenance Expenses and Common Utility Expenses (or any one or more items thereof) and/or actual Taxes for a period which shall have expired
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immediately prior thereto, so that one month prior to the end of such period, Lessees Percentage share of the increase shall be paid in full, and Lessee shall continue to pay Additional Rent on such basis until receipt of a subsequent Lessors Statement. Such Additional Rent shall be due and payable at the same time as each monthly installment of Fixed Basic Rent.
1. A reconciliation shall be made upon each Lessors Statement as follows: Within ninety (90) days following the end of each annual period, Lessor shall deliver to Lessee Lessors Statement for that period; Lessee shall be debited with any Operating Costs, Repair and Maintenance Expenses and Common Utility Expenses and/or actual Taxes payable as shown on such Lessors Statement, and credited with the aggregate of the total amount, if any, paid by Lessee in accordance with the provisions of the preceding paragraph on account of the estimated Additional Rent, for the period or item in question, and, within thirty (30) days next following rendition of such Lessors Statement, Lessee shall pay Lessor the amount of any net debit balance shown thereon a Lessor shall apply against the next ensuing installments of Fixed Basic Rent and Additional Rent the net credit balance shown thereon, or at the Expiration Date, any balance due Lessee shall be paid to Lessee. Lessors failure to provide Lessors Statement within such ninety (90) day period shall not prevent Lessor from submitting a statement thereafter and collecting the Additional Rent set forth therein (subject to Section 23(f).b.2. below) or otherwise be deemed a release of Lessees obligation to pay Additional Rent for such annual period.
2. Without limiting the preceding provisions of Section 23(f)(a), it is understood that Lessor shall furnish a Lessors Statement, for each calendar year falling wholly or partially within the Term.
b. 1. Lessors failure to render Lessors Statements with respect to any period shall not prejudice Lessors right to render a Lessors Statement with respect to that or any subsequent period, except Lessor shall not have the right to deliver a Lessors Statement more than one (1) year after the end of an annual period. The obligations of Lessor and Lessee under the provisions of this Section with respect to Additional Rent shall survive the expiration or any sooner termination of the Term.
2. Each final Lessors Statement for any annual period shall be conclusive and binding upon Lessee unless within one (1) year after receipt of such Lessors Statement, Lessee shall notify Lessor that it disputes the reasonableness or correctness of Lessors Statement, specifying to the extent known by Lessee the respects in which Lessors Statement is claimed to be unreasonable or
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incorrect. Pending the determination of such dispute by agreement or otherwise, Lessee shall pay Additional Rent in accordance with the applicable Lessors Statement, and such payment will be without prejudice to Lessees position. If the dispute shall be finally determined in Lessees favor by arbitration pursuant to this Section, Lessor shall forthwith pay Lessee the amount of Lessees overpayment of Additional Rent resulting from compliance with Lessors Statement, together with the cost of any audit conducted by Lessee (but such audit cost shall be paid by Lessor only if Lessees overpayment exceeded 5% of the amount actually due).
3. Lessee shall have the right, at its sole cost and expense, to audit Lessors books and records for any portion of Lessors Statement. Lessees right under the provisions of this Section 23 may be exercised only once for any Lessors Statement and if Lessee fails to audit within said one-year period, then in such event, Lessees rights as provided herein with respect to that particular Lessors Statement shall be deemed waived.
4. (i) Lessee acknowledges that Lessor maintains its records for the Property at the offices of its managing agent as it may change from time to time, and Lessee agrees that any review of records as provided for in this Section 23 shall take place at the offices of Lessors managing agent, which may change from time to time, provided that at all times copies shall be in the United States. Lessee acknowledges and agrees that any records reviewed by it shall constitute confidential information of Lessor which shall not be disclosed to anyone other than the Lessees accountants, attorneys and advisors, and the principals of Lessee, or if required by law or in connection with any litigation or arbitration, and disclosure or dissemination of such information shall be deemed a material breach of this Lease and Lessor shall be entitled to all its remedies at law or in equity.
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(b) In no event shall the arbitrator enlarge upon, or alter or amend, this Lease or Lessors or Lessees rights as provided in this Lease, it being understood that the sole issue for determination by the arbitrator shall be the single issue of fact as to the reasonableness and/or correctness of the Disputed Item. The arbitrator shall be certified public accountants who are disinterested and are currently practicing in the Union County, New Jersey area with at least ten (10) years experience in evaluating and auditing common area maintenance charges.
(c) Except as otherwise provided in the following sentence, the fees and expenses of an arbitration proceeding shall be borne by the losing party. The fees of respective counsel engaged by the parties the fees and expenses of expert witnesses and other witnesses called and the cost of transcripts shall be borne by the parties engaging such counsel or calling such witness or ordering such transcripts.
c. Lessee shall pay and discharge, or cause to be paid and discharged, the following items, regardless of to whom or how incurred, all taxes and assessments, if any, which shall or may during the Term be charged, levied, assessed or imposed upon, or become a lien upon, the personal property of Lessee used in the operation of the Demised Premises and which, if not paid by Lessee, would be collectible from Lessor.
d. Lessor, at Lessees request and at Lessees sole cost and expense, shall, in a timely manner, for each relevant period during the Term, for each Tax applicable to the Property, seek the largest reduction of the assessed
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valuation of the Property available to Lessor by the commencement and diligent prosecution of the appropriate tax reduction proceeding.
Lessor and Lessee agree at any time and from time to time, within twenty (20) days after request by the other, to execute, acknowledge and deliver a statement certifying to the requesting party or any party it designates (i) the Commencement Date, the Rent Commence Date and the Expiration Date hereunder, (ii) that this Lease is unmodified and in full force and effect (or if there have been modifications, that the Lease is in full force and effect as modified and stating the modifications), (iii) the dates to which the Fixed Basic Rent and Additional Rent have been paid, (iv) whether or not to the knowledge of the signer of such statement (a) the other party is in default in keeping, observing or performing any term, covenant, agreement, provision, condition or limitation contained in this Lease and, if in default, specifying each such default, (b) either party is holding any funds under this Lease in which the other has an interest (and, if so, specifying the party holding such funds and the nature and amount thereof), and (c) there is any amount then due and payable to either party to the other and (v) to the knowledge of the signer of such statement, any other factual statement in connection with this Lease, it being intended that any such statement delivered pursuant to this Section may be relied upon by Lessor or Lessee and any party with whom it is dealing.
If Lessee holds possession of the Premises after the Expiration Date of this Lease, Lessee shall become a tenant from month to month under the provisions herein provided, but at one hundred fifty percent (150%) of the monthly Fixed Basic Rent for the last month of the Term plus the Additional Rent, for the first six (6) months of Lessees holding over and two hundred percent (200%) of the monthly Fixed Basic Rent for the last month of the Term thereafter, plus the Additional Rent, which shall continue as provided in the Lease which sum shall be payable in advance on the first day of each month, and without the requirement for demand or notice by Lessor to Lessee demanding delivery of possession of said Premises, and such tenancy shall continue until terminated by Lessor, or until Lessee shall have given to Lessor, at least thirty (30) days prior to the intended date of termination, a written notice of intent to terminate such tenancy, which termination data must be as of the end of a calendar month Lessees obligations under this Section shall survive the expiration or sooner termination of the Lease. The time limitations described in this Article shall not be subject to extension for Force Majeure.
Lessor may show the Premises to prospective purchasers and mortgagees; and during the twelve (12) months prior to termination of this Lease, to prospective tenants, during Building Hours on reasonable notice to Lessee, during reasonable times and on the condition that Lessor is accompanied by a representative of Lessee, Lessee shall make such representative available to Lessor upon reasonable notice.
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Lessee shall accept the Premises as is. Such term shall mean in the same condition and repair in which the prior tenant vacated such space, and Lessee shall be responsible for any demolition and removal of any improvements existing in the Premises in connection with the prior tenants occupancy, and all other work as may be necessary to convert the Premises to Lessees requirements and to comply with any and all requirements of Governmental Authority, except as specifically set forth herein. Lessor shall not be responsible for performing any work with respect to such space, except that Lessor shall perform such work in the Building as may be required to deliver the Building to Lessee in good operating condition and such other work as Lessor shall determine is reasonably necessary upon review of the due diligence materials Lessor has prepared or caused to be prepared for the Premises. Lessor shall deliver copies of the due diligence materials to Lessee. The cost of such work shall be included in the calculations set forth in the Rent Rider attached hereto and in the determination of the Fixed Basic Rent. Any work, changes or improvements made to such space shall be performed at Lessees expense in accordance with the terms of this Lease, including Exhibit C attached hereto and made a part hereof.
To the extent such waiver is permitted by law, the parties waive trial by jury in any action or proceeding brought in connection with this Lease or the Premises.
Anything in this Lease to the contrary notwithstanding, at Lessors option, Lessee shall pay a Late Charge of five percent (5%) of any installment of Fixed Basic Rent or Additional Rent paid more than ten (10) days after the due date thereof, to cover the extra expense involved in handling delinquent payments, said Late Charge to be considered Additional Rent. The amount of the Late Charge to be paid by Lessee shall be reassessed and added to Lessees obligations for each successive monthly period until paid.
Notwithstanding anything in this Article to the contrary, Lessor shall waive a Late Charge one time during each Lease Year provided, however, the installment of Fixed Basic Rent or Additional Rent so due is paid by the twentieth (20th) day of the month. Payment received subsequent to the twentieth (20th) of the month during these grace periods shall require a Late Charge to be reassessed and added to Lessees obligations hereunder.
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It is understood and agreed that the insurer will give to Lessor (or any successor Lessor), c/o Mack-Cali Realty Corporation, 11 Commerce Drive, Cranford, New Jersey, thirty (30) days prior written notice of any material change in or cancellation of this policy.
and (iv) shall be written on an occurrence basis and not on a claims made basis.
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No representations or promises shall be binding on the parties hereto except those representations and promises contained herein or in some future writing signed by the party making such representation(s) or promise(s).
Lessor covenants that if, and so long as, Lessee pays Fixed Basic Rent, and any Additional Rent as herein provided, and performs Lessees covenants hereof, Lessor shall do nothing to affect Lessees right to peaceably and quietly have, hold and enjoy the Premises for the Term herein mentioned, subject to the provisions of this Lease.
Subject to Section 30f of this Lease, Lessee shall indemnify and save harmless Lessor and its agents against and from: (a) any and all claims (i) arising from (x) the conduct or management by Lessee, its subtenants, licensees, its or their employees, agents, contractors or invitees on the Premises or of any business therein, or (y) any work or thing whatsoever done, or any condition created (other than by Lessor for Lessors or Lessees account) in or about the Premises during the Term of this Lease or during the period of time, if any, prior to the Commencement Date that Lessee may have been given access to the Premises, or (ii) arising from any negligent or otherwise wrongful act or omission of Lessee or any of its subtenants or licensees or its or their employees, agents, contractors or invitees, and (b) all costs, expenses and liabilities incurred in or in connection with each such claim, action or proceeding brought thereon. In case any action or proceeding be brought against Lessor by reason of any such claim, Lessee, upon notice from Lessor, shall resist and defend such action or proceeding.
Subject to Section 30f of this Lease, Lessor shall indemnify and save harmless Lessee and its agents against and from: (a) any and all claims (i) arising from (x) the conduct of management by Lessor, its employees, agents, contractors or invitees, or their employees, agents, contractors or invitees on the Premises, or (y) any work or thing whatsoever done, or any condition created (other than by Lessee) in or about the Premises during the Term of this Lease, or (ii) arising from any negligent or otherwise wrongful act or omission of Lessor or any of its employees, agents, contractors, or invitees, or their employees, agents, contractors or invitees, and (b) all costs, expenses and liabilities incurred in or in connection with each such claim, action or proceeding brought thereon. In case any action or proceeding be brought against Lessee by reason of any such claim, Lessor, upon notice from Lessee, shall resist and defend such action or proceeding.
The article headings in this Lease and position of its provisions are intended for convenience only and shall not be taken into consideration in any construction or interpretation of this Lease or any of its provisions.
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The provisions of this Lease shall apply to, bind and inure to the benefit of Lessor and Lessee, and their respective heirs, successors, legal representatives and assigns. It is understood that the term Lessor as used in this Lease means only the owner, a mortgagee in possession or a term lessee of the Building, so that in the event of any sale of the Building or of any lease thereof, or if a mortgagee shall take possession of the Premises, the Lessor herein shall be and hereby is entirely freed and relieved of all covenants and obligations of Lessor hereunder accruing thereafter, and it shall be deemed without further agreement that the purchaser, the term lessee of the Building, or the mortgagee in possession has assumed and agreed to carry out any and all covenants and obligations of Lessor hereunder.
Lessees occupancy of the Premises shall include the use of the outside parking spaces only as set forth in the Preamble, all of which will be unassigned The parking spaces may be used only by the Lessee and invitees of Lessee at any and all times. Prior to the Additional Premises Commencement Date, Lessee shall comply with such reasonably prescribed rules and regulations of Lessor with respect to the parking areas.
Lessor shall not be liable for any loss of property from any cause whatsoever, including but not limited to theft or burglary from the Premises, and any such loss arising from the negligence of Lessor, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Premises and/or the Building, including the structural and non-structural portions thereof, and Lessee covenants and agrees to make no claim for any such loss at any time.
If any of the provisions of this Lease, or the application thereof to any person or circumstances, shall to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.
Lessor and Lessee each represents and warrant to the other party that the broker, as defined in the Preamble is the sole broker with whom each party has negotiated in bringing about this Lease and each party agrees to indemnify and hold the other party and Lessors mortgagee(s) harmless from any and all claims of other brokers and expenses in connection therewith arising out of or in connection with the negotiation of or the entering into this Lease by Lessor and Lessee. In no event shall Lessors mortgagee(s) have any obligation to any broker involved in this transaction.
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Notwithstanding anything to the contrary provided in this Lease, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Lease by Lessor, that there shall be absolutely no personal liability on the part of Lessors constituent members (to include but not be limited to, officers, directors, partners and trustees) their respective successors, assigns or any mortgagee in possession (for the purposes of this Article, collectively referred to as Lessor), with respect to any of the terms, covenants and conditions of this Lease, and that Lessee shall look solely to the equity of Lessor in the Building for the satisfaction of each and every remedy of Lessee in the event of any breach by Lessor of any of the terms, covenants and conditions of this Lease to be performed by Lessor, such exculpation of liability to be absolute and without any exceptions whatsoever.
Notwithstanding anything to the contrary provided in this Lease, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Lease by Lessee, that there shall be absolutely no personal liability on the part of Lessees officers, directors, partners, shareholders and trustees and their respective successor with respect to any of the terms, covenants and conditions of this Lease.
The submission of this Lease Agreement for examination does not constitute a reservation of, or option for, the Premises, and this Lease Agreement becomes effective as a Lease Agreement only upon execution and delivery thereof by Lessor and Lessee.
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Notwithstanding anything contained herein to the contrary, except as provided in Section 27, if Lessor cannot deliver possession of the Initial Premises or Additional Premises, as provided for in Article 27(a), to Lessee at the commencement of the agreed Term as set forth in Article 2, this Lease shall not be void or voidable, nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom, but in that event, the Term shall be for the full term as specified above to commence from and after the date Lessor shall have delivered possession of the Initial Premises or Additional Premises to Lessee, as the case may be, or from the date Lessor would have delivered possession of the Initial Premises or Additional Premises to Lessee, as the case may be, but for Lessees failure to timely supply to Lessor such drawings and/or information required by Exhibit B or for any other reason attributable to Lessee (herein the Commencement Date) and to expire on the Expiration Date, unless extended by Lessee pursuant to the exercise of its Renewal Options pursuant to Article 54 hereof, and if requested by Lessor, Lessor and Lessee shall, by a writing signed by the parties, ratify and confirm said Commencement and Expiration Dates and Additional Premises Commencement Date.
Any notice by either party to the other shall be in writing and shall be deemed to have been duly given only if delivered personally or sent by registered mail, certified mail or
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nationally recognized overnight delivery service return receipt requested in a postage paid envelope addressed, if to Lessee, at the above described Building; if to Lessor, at Lessors address as set forth above; or, to either at such other address as Lessee or Lessor, respectively, may designate in writing. Notice shall be deemed to have been duly given, if delivered personally, on delivery thereof, and if mailed, upon a partys receipt or rejection as evidenced by a bill of lading, return receipt or upon delivery if personally served.
No payment by Lessee or receipt by Lessor of a lesser amount than the rent and additional charges payable hereunder shall be deemed to be other than a payment on account of the earliest stipulated Fixed Basic Rent and Additional Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment for Fixed Basic Rent or Additional Rent be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to Lessors right to recover the balance of such Fixed Basic Rent and Additional Rent or pursue any other remedy provided herein or by law.
No failure by Lessor to insist upon the strict performance of any covenant, agreement, term or condition of this Lease, or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent by Lessor during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No consent, or waiver, express or implied, by Lessor to or of any breach of any covenant, condition or duty of Lessee be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty, unless in writing signed by Lessor.
Intentionally omitted.
Lessee agrees to give any mortgagees and/or trust deed holders, by registered mail, a copy of any notice of default served upon Lessor, provided that, prior to such notice, Lessee has been notified in writing (by way of notice of assignment of rents and leases or otherwise) of the address of such mortgagees and/or trust deed holders. Lessee further agrees that, if Lessor shall have failed to cure such default within the time provided for in this Lease, then the mortgagees and/or trust deed holders shall have an additional thirty (30) days within which to cure such default, or if such default cannot be cured within that time, then such additional time as may be necessary (but not to exceed ninety (90) days), if within such thirty (30) days, any mortgagee and/or trust deed holder has commenced and is diligently pursuing the remedies necessary to cure such default, in which event this Lease shall not be terminated while such remedies are diligently pursued to completion.
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If Lessee is a corporation, Lessee represents and warrants that this Lease and has been duly authorized and approved by the corporations Board of Directors. The undersigned officers and representatives of the corporation represent and warrant that they are officers of the corporation with authority to execute this Lease on behalf of the corporation, and within fifteen (15) days of execution hereof, Lessee will provide Lessor with a corporate resolution confirming the aforesaid. Lessee hereby warrants and covenants to and for the benefit of Lessor as follows: (a) Lessee and each of its subsidiaries, predecessors, agents, direct and indirect owners and their respective affiliates has at all applicable times been, is now and will in the future be, in compliance with U.S. Executive Order 13224 and no action, proceeding, investigation, charge, claim, report or notice has been filed, commenced or threatened against any of them alleging any failure to so comply; (b) neither Lessee nor any Guarantor or any of their respective agents, subsidiaries or other affiliates has, after due investigation and inquiry, knowledge or notice of any fact, event, circumstance, situation or condition which could reasonably be expected to result in (i) any action, proceeding, investigation, charge, claim, report or notice being filed, commenced or threatened against any of them alleging any failure to comply with the Order, or (ii) the imposition of any civil or criminal penalty against any of them for any failure to so comply; (c) the names, addresses, and in the case of entities, jurisdiction of formation or organization, as the case may be, of Lessee and each Guarantor and the predecessors, agents, subsidiaries, direct and indirect owners, and affiliates of each of them are set forth on the attached Exhibit H (titled Executive Order 13224 Compliance Information), and none of them are included in the United States Treasury Departments Office of Foreign Assets Control list; and (d) prior to any changes in direct or indirect ownership of Lessee or any Guarantor, Lessee shall give written notice to Lessor signed by Lessee and each Guarantor (i) advising Lessor in reasonable detail as to the proposed ownership change, and (ii) affirming that the representations and warranties herein contained will remain true and correct.
Lessor represents and warrants that the corporate officer set forth below has the authority to enter into this Lease.
Intentionally omitted.
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In no event shall the Lessee pay less than the sum of TWELVE AND 50/100 DOLLARS ($12.50) per hour per pod for such overtime air conditioning or heating service.
Building Hours Monday through Friday, 8:00 a.m. to 6:00 p.m., and Saturdays, 8:00 a.m. to 1:00 p.m., but excluding Building holidays as reasonably determined by Lessor from time to time.
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This Lease is contingent upon Lessor acquiring the Property and Building within forty-five (45) days after the date of execution and delivery of this Lease by Lessor and Lessee. If Lessor fails to acquire the Property and Building within such forty-five (45) day period, then this Lease shall be null and void and of no further force or effect and neither party shall have further liability to the other.
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If the two appraisers are appointed by the parties as stated in the immediately preceding paragraph, they shall meet promptly and attempt to determine the fair market rent. If they are unable to agree within forty-five (45) days after the appointment of the second appraiser, they shall attempt to select a third person meeting the qualifications stated in the immediately preceding paragraph within fifteen (15) days after the last day the two appraisers are given to determine the fair market rent. If they are unable to agree on the third person to act as appraiser within said fifteen (15) day period, the third person shall be appointed by the American Arbitration Association (the Association), upon the application of Lessor or Lessee to the office of the Association nearest the Building. The person appointed to act as appraiser by the Association shall be required to meet the qualifications stated in the immediately preceding paragraph. Each of the parties shall bear fifty percent (50%) of the cost of appointing the third person and of paying the third persons fees. The third person, however selected, shall be required to take an oath similar to that described above.
The third appraiser shall conduct such hearing and investigations as he may deem appropriate and shall, within thirty (30) days after the date of his appointment, determine the fair market rent by selecting the fair market rent determined by either the appraiser selected by Lessor or the appraiser selected by Lessee. The third appraiser shall have no discretion other than to choose the fair market rent determined by one of the other two appraisers by the process commonly known as baseball arbitration.
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Notwithstanding the foregoing, in no event shall (i) the Fixed Basic Rent during the First Renewal Term be less than the Fixed Basic Rent during the last year of the initial Term of this Lease and (ii) the Fixed Basic Rent during the Second Renewal Term be less than the Fixed Basic Rent during the last year of the First Renewal Term.
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Lessor shall, at Lessees sole cost and expense, include Lessees name and any other names designated by Lessee on the entrance doors to the Building. The Building shall be named for Lessee or, at Lessees option, any affiliate of Lessee and a sign to that effect, reasonably acceptable to Lessor and Lessee shall, at Lessees option, be placed on the front of the Building and at the vehicular entrance of the Property. The rights of Lessee contained in this Section shall also apply to any subtenant of all or substantially all of the Premises. Except for the signs provided in this Section (a) no other identification signs shall be placed by Lessor outside or on the Building or in the lobby of the Building (other than names on the lessee directory or entrance doors to lessee space) and (b) Lessee shall not place or suffer to be placed or maintain any sign, awning or canopy upon or outside the Premises or in the Building; nor shall Lessee place at the store front any sign, decoration, lettering or advertising matter of any kind without first obtaining Lessors written approval and consent in each instance. All signs shall be of a size, color and design as is reasonably approved in writing by Lessor and maintained by Lessor in good condition, repair and appearance at all times, according to Lessors standards and the laws of the municipality having jurisdiction over such signs. If Lessor shall deem it necessary to remove any sign in order to paint or to make any repairs, alterations or improvements in or upon the Premises or any part thereof, Lessor shall have the right to do so, provided the same be removed and replaced at Lessors cost and expense unless having been occasioned by fault of Lessee. Lessor shall have the right, with or without notice to Lessee, to remove any signs (paper or otherwise) installed by Lessee in violation of this paragraph and to charge Lessee the cost of such removal without liability to Lessee for such removal. Notwithstanding the foregoing, from and after the Additional Premises Commencement Date, Lessees rights hereunder shall only be in effect during such time that Lessee leases at least eighty percent (80%) of the entire Building. At such time that Lessee does not lease at least eighty percent (80%) of the entire Building, Lessor shall promulgate such reasonable signage rules and regulations as Lessor deems necessary.
Lessor acknowledges that Lessee, at its sole cost and expense, may install an emergency generator outside of the Building or on the roof of the Building, the exact location of which to be subject to Lessors prior approval, which approval shall not be unreasonably withheld, conditioned or delayed. Lessee, at its sole cost, shall be responsible for obtaining any governmental approvals necessary with respect to the installation and operation of the generator. Lessor shall have no obligation to perform any maintenance or repairs with respect to the generator, the cost of which shall be borne solely by Lessee.
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If the generator shall be located on the roof of the Building, the generator shall be properly screened to Lessors reasonable satisfaction. Lessor make no representation of the suitability of the roof of the Building for the installation thereof. If Lessors structural engineer deems it advisable that there be structural reinforcement of the roof in connection with the installation of the generator, Lessor shall perform same at Lessees cost and expense and Lessee shall not perform any such installation prior to the completion of any such structural reinforcement. Lessee, at its sole cost and expense, shall promptly repair any and all damage to the rooftop or to any other part of the Building caused by the installation, maintenance and repair, operation or removal of the generator. Lessee shall be responsible for all costs and expense for repairs of the roof which result from Lessees use of the roof for the construction, installation, maintenance, repair, operation and use of the generator. All installations made by Lessee on the rooftop or in any other part of the Building pursuant to the provisions of this Article 56 shall be at the sole risk of Lessee, and neither Lessor, nor any agent or employee of Lessor, shall be responsible or liable for any injury or damage to, or arising out of, the generator. Lessees indemnity under Article 33 shall apply with respect to the installation, maintenance, operations, presence or removal of the generator by Lessee. If the installation of the generator on the rooftop or act or omission relating thereto should revoke, negate or in any material manner impair or limit any roof warranty or guaranty obtained by Lessor, then Lessee shall reimburse Lessor for any loss or damage sustained incurred by Lessor as a result of such impairment or limitation.
EACH PARTY AGREES that it will not raise or assert as a defense to any obligation under the Lease or make any claim that the Lease is invalid or unenforceable due to any failure of this document to comply with ministerial requirements including, but not limited to, requirements for corporate seals, attestations, witnesses, notarizations, or other similar requirements, and each party hereby waives the right to assert any such defense or make any claim of invalidity or unenforceability due to any of the foregoing.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written.
LESSOR: |
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LESSEE: |
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23 MAIN STREET HOLMDEL ASSOCIATES LLC |
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VONAGE USA INC. |
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By: |
Mack-Cali Texas Property L.P., sole member |
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Mack-Cali Sub XVII, Inc., general partner |
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/s/ Mitchell E. Hersh |
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/s/ John Rego |
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Mitchell E.
Hersh
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Name:
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Exhibit 10.7
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the Agreement ), amended and restated effective as of February 8, 2006, by and between VONAGE HOLDINGS CORP., a Delaware corporation (the Company ), and Jeffrey A. Citron (the Executive ).
WHEREAS, the Company and the Executive entered into an employment agreement, dated as of September 1, 2005 (the Prior Agreement ); and
WHEREAS, the Company and the Executive desire to provide for the continued employment of the Executive and to amend and restate the Prior Agreement with this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties agree as follows:
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To the Company:
2147 Route 27
Edison, N.J. 08817 or
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23 Main Street
Holmdel, N.J. 07722, whichever is the last address on record for the Company
Attention: General Counsel
With a copy to:
Shearman & Sterling
LLP
599 Lexington Avenue
New York, N.Y. 10022
Attention: John J. Cannon, III
To the Executive:
818 Linden Lane
Brielle, N.J. 08730 or the Executives last address on record with the Company
All such notices shall be conclusively deemed to be received and shall be effective (i) if sent by hand delivery, upon receipt or (ii) if sent by electronic mail or facsimile, upon confirmation of receipt by the sender of such transmission.
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and the Executive has executed this Agreement, as of the day and year first written above.
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VONAGE HOLDINGS CORP. |
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/s/ Mort David |
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Mort David |
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Chairperson, Compensation Committee |
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ACCEPTED AND AGREED |
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/s/ Jeffrey A. Citron |
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Jeffrey A. Citron |
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Dated: |
February 8, 2006 |
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12
Exhibit 10.8
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the Agreement ), dated as of February 7, 2006, by and between VONAGE HOLDINGS CORP., a Delaware corporation (the Company ), and Michael Snyder (the Executive ).
WHEREAS, the Company has determined that it is in the best interests of the Company and its shareholders to enter into an employment agreement with the Executive and the Executive is willing to serve as an employee of the Company, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties agree as follows:
1. Employment and Duties .
(a) General . The Executive shall serve as Chief Executive Officer of the Company, reporting to the Companys Board of Directors (the Board ). The Company shall take all necessary and appropriate action to obtain stockholder consent to (i) increase the number of directors on the Board, and (ii) elect Executive as a director on the Board. The Executive shall have responsibility for the day-to-day management and operation of the business of the Company, including the supervision of the Companys finance, legal, and human resources functions, as well as the business activities of Vonage America, Vonage Limited (UK) and Vonage Canada. The Executive shall also perform such other duties as the Board may from time to time require consistent with the general level and type of duties and responsibilities customarily associated with such position. The officers performing the functions supervised by the Executive shall report directly to the Executive or his designee. Executive expressly acknowledges that the Companys Chairman and Chief Strategist is responsible for the Companys overall strategy, as well as all technology and employee culture and public relations matters, and such other duties as the Board may from time to time require. The Executive agrees that, to the best of his ability and experience, he shall at all times conscientiously perform all of the duties of his position. The Executives principal place of employment shall be the principal offices of the Company, currently located in the Holmdel, New Jersey area; provided , however , that the Executive understands and agrees that he shall be required to travel from time to time for business reasons.
(b) Exclusive Services . For so long as the Executive is employed by the Company, the Executive shall devote his full-time working time to his duties hereunder, shall faithfully serve the Company, shall in all respects conform to and comply with the lawful and good faith directions and instructions given to him by the Board and shall use his best efforts to promote and serve the interests of the Company. Further, the Executive shall not, directly or indirectly, render services to any other person or organization without the consent of the Board or otherwise engage in activities that would interfere significantly with the faithful performance of his duties hereunder. Notwithstanding the foregoing, the Executive may serve on (i) corporate boards, with the Boards prior consent, or (ii) civic or charitable boards or engage in charitable activities
without remuneration therefore, provided that such activities do not contravene the first sentence of this Section 1(b). Additionally, notwithstanding the foregoing, the Executive may manage his personal investments, and serve as an executor, trustee, or in a similar fiduciary capacity in connection therewith, provided that such activities do not contravene the first sentence of this Section 1(b).
2. Term of Employment . The term of this Agreement (the Term ) shall commence as of February 27, 2006 (the Effective Date ) and shall terminate on the second anniversary of the Effective Date; provided , however , that the Term shall be automatically extended without further action of either party for additional one-year periods, unless written notice of either partys intention not to extend has been given to the other party at least 90 days prior to the expiration of the then-effective Term. Notwithstanding anything to the contrary herein, in the event of a Change of Control of the Company (as such term is defined in the Companys 2001 Stock Incentive Plan (as amended through April 20, 2005) (the Stock Incentive Plan ), as it may be amended from time to time), the Term shall be automatically extended without further action of either party for an additional one-year period from the date of such Change of Control, subject to further automatic renewals as provided above.
3. Compensation and Other Benefits . Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to the Executive during the Term as compensation for services rendered hereunder:
(a) Base Salary . The Company shall pay to the Executive an annual base salary (the Base Salary ) at the rate of $500,000, payable in substantially equal installments at such intervals as may be determined by the Company in accordance with its ordinary payroll practices as applicable to senior executives as established from time to time. The Base Salary shall be reviewed by the Compensation Committee of the Board in good faith, based upon the Executives performance, not less often than annually, but shall not be reduced below $500,000.
(b) Sign-On Bonus . Effective as of the Effective Date, the Executive shall be granted a one-time sign-on bonus of 2,500,000 stock options (the Options ) to purchase shares of the Companys common stock at a price per share equal to the fair market value of the common stock as of the Effective Date as determined in good faith by the Board, pursuant to the terms of the Stock Option Plan and the corresponding stock option agreement. Notwithstanding anything to the contrary in the Stock Option Plan or any stock option agreement, upon the Change of Control of the Company, all outstanding Options granted by the Company to the Executive shall become fully vested and immediately exercisable on the date of such Change of Control.
(c) Annual Cash Bonus . For each fiscal year during the Term, the Executive shall be eligible to receive an annual lump sum discretionary performance-based bonus in accordance with the Companys annual bonus program, as applicable to senior executives as in effect from time to time. The amount, if any, of the Executives annual bonus shall be determined by the Compensation Committee of the Board. The bonus shall be prorated for any year in which the Executives employment is terminated due to: (i) the Executives resignation for Good Reason; (ii) the Companys termination of the Executives employment without Cause; or (iii) the Executives death or disability (as defined in Section 4(c) below). If the Executives employment with the Company is terminated by the Company for Cause or the Executive resigns
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from his employment other than for Good Reason prior to the end of the fiscal year for which the bonus is payable, the Executive shall not receive any portion of such bonus.
(d) Equity Incentive Compensation . During the Term, the Executive shall be eligible to participate in the Companys equity compensation plans and programs generally applicable to senior executives of the Company as in effect from time to time, including without limitation, the Stock Incentive Plan.
(e) Employee Benefit Plans . The Executive shall be entitled to participate in all employee welfare, pension, and fringe benefit plans, programs and arrangements of the Company, in accordance with their respective terms, as may be amended from time to time, and on a basis no less favorable than that made available to other senior executives of the Company.
(f) Expenses . The Company shall reimburse the Executive for reasonable travel and other business-related expenses incurred by the Executive in the fulfillment of his duties hereunder upon presentation of written documentation thereof, in accordance with the applicable expense reimbursement policies and procedures of the Company as in effect from time to time.
(g) Vacation . The Executive shall be entitled to 20 days paid time off for each fiscal year during the Term. If Executive does not use any portion of the allotted paid time off in any fiscal year, Executive shall be entitled to add any and all unused paid time off to the paid time off permitted under this Agreement for the following fiscal year.
(h) Other Benefits and Perquisites . The Executive shall be entitled to such other benefits and perquisites as may be available generally to other senior executives of the Company, including reasonable temporary living, commuting and moving expenses.
4. Termination of Employment .
(a) Termination for Cause; Resignation Without Good Reason .
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(b) Termination Without Cause; Resignation for Good Reason .
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(c) Termination Due to Death or Disability . The Executives employment with the Company shall terminate automatically on the Executives death. In the event of the Executives disability, the Company shall be entitled to terminate his employment. In the event of termination of the Executives employment by reason of Executives death or disability, the Company shall pay to the Executive (or his estate, as applicable), (i) a pro-rata portion of the Executives bonus for the year in which the termination of employment occurs on the date such bonus would have been payable to the Executive had he remained employed by the Company; (ii) the Executives Base Salary through and including the date of termination; (iii) an amount equal to 12 months of the Executives Base Salary (at the rate in effect on the date the Executives employment is terminated) payable in substantially equal installments over a 12-month period; provided , however , that if the Executive is receiving short-term or long-term disability benefits pursuant to a Company policy, such installments shall be reduced (but in no event to an amount below zero) by the tax-adjusted amount of disability payments, excluding any supplemental disability benefits funded through employee contributions, received by the Executive during the period corresponding with each installment; and (iv) the Other Accrued Compensation and Benefits. For purposes of this Agreement, disability means that the Executive (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income
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replacement benefit for a period of not less than three months under an accident and health plan covering employees of the Company.
(d) Notice of Termination . Any termination of employment by the Company or the Executive shall be communicated by a written Notice of Termination to the other party hereto given in accordance with Section 21 of this Agreement. In the event of a termination by the Company for Cause, or resignation by the Executive for Good Reason, the Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executives employment under the provision so indicated and (iii) specify the date of termination, which date shall not be more than 30 days after the giving of such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executives or the Companys rights hereunder. In the event of a termination by the Company without Cause, or resignation by the Executive other than for Good Reason, the Notice of Termination shall specify the date of termination, which date shall not be less than 30 days after the giving of such notice.
(e) Resignation from Directorships and Officerships . The termination of the Executives employment for any reason shall constitute the Executives resignation from (i) any director, officer, or employee position the Executive has with the Company Group, and (ii) all fiduciary positions (including as a trustee) the Executive holds with respect to any employee benefit plans or trusts established by the Company. The Executive agrees that this Agreement shall serve as written notice of resignation in this circumstance.
(f) Reduction of Payments if Reduction Would Result in Greater After-Tax Amount . Notwithstanding anything herein to the contrary, in the event that the Executive receives any payments or distributions, whether payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, that constitute parachute payments within the meaning of Section 280G of the Code, and the net after-tax amount of the parachute payment is less than the net after-tax amount if the aggregate payment to be made to the Executive were three times the Executives base amount (as defined in Section 280G(b)(3) of the Code) less $1.00, then the aggregate of the amounts constituting the parachute payment shall be reduced to an amount that shall equal three times the Executives base amount, less $1.00. The determinations to be made with respect to this Section 4(f) shall be made by a certified public accounting firm designated by the Company and reasonably acceptable to the Executive.
5. Confidentiality .
(a) Confidential Information . The Executive agrees to enter into and be subject to the Companys Employee Confidentiality and Innovations Agreement substantially in the form attached hereto as Exhibit A.
(b) Exclusive Property . The Executive confirms that all Confidential Information (as defined in the Employee Confidentiality and Innovations Agreement) is and shall remain the
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exclusive property of the Company Group. All business records, papers and documents kept or made by the Executive relating to the business of the Company Group shall be and remain the property of the Company Group. Upon the request and at the expense of the Company Group, the Executive shall promptly make all disclosures, execute all instruments and papers, and perform all acts reasonably necessary to vest and confirm in the Company Group, fully and completely, all rights created or contemplated by this Section 5(b).
6. Noncompetition . The Executive agrees to enter into and be subject to the Companys Noncompete Agreement substantially in the form attached as Exhibit B.
7. Non-Solicitation . The Executive agrees that for a period commencing on the Effective Date and ending 12 months following the Executives termination of employment with the Company (the Restricted Period ), the Executive shall not, directly or indirectly: (a) interfere with or attempt to interfere with the relationship between any person who is, or was during the then-most recent 12-month period, an employee, officer, representative or agent of the Company Group, or solicit, induce or attempt to solicit or induce any of them to leave the employ of any member of the Company Group or violate the terms of their respective contracts, or any employment arrangements, with such entities; or (b) induce or attempt to induce any customer, client, supplier, licensee or other business relation of any member of the Company Group to cease doing business with any member of the Company Group, or in any way interfere with the relationship between any member of the Company Group and any customer, client, supplier, licensee or other business relation of any member of the Company Group. As used herein, the term indirectly shall include, without limitation, the Executives permitting the use of the Executives name by any competitor of any member of the Company Group to induce or interfere with any employee or business relationship of any member of the Company Group.
8. Certain Remedies .
(a) Injunctive Relief . Without intending to limit the remedies available to the Company Group, including, but not limited to, those set forth in Section 12 hereof, the Executive agrees that a breach of any of the covenants contained in Sections 5 through 7 of this Agreement may result in material and irreparable injury to the Company Group for which there is no adequate remedy at law, that it shall not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, any member of the Company Group shall be entitled to seek a temporary restraining order or a preliminary or permanent injunction, or both, without bond or other security, restraining the Executive from engaging in activities prohibited by the covenants contained in Sections 5 through 7 of this Agreement or such other relief as may be required specifically to enforce any of the covenants contained in this Agreement. Such injunctive relief in any court shall be available to the Company Group in lieu of, or prior to or pending determination in, any arbitration proceeding.
(b) Extension of Restricted Period . In addition to the remedies the Company may seek and obtain pursuant to Section 12, the Restricted Period shall be extended by any and all periods during which the Executive shall be found by a court possessing personal jurisdiction over him to have been in violation of the covenants contained in Sections 5 through 7 of this Agreement.
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9. Defense of Claims . The Executive agrees that, during the Term, and for a period of six months after termination of the Executives employment, upon request from the Company, the Executive shall cooperate with the Company in connection with any matters the Executive worked on during his employment with the Company and any related transitional matters. In addition, the Executive agrees to cooperate with the Company in the defense of any claims or actions that may be made by or against the Company Group that affect the Executives prior areas of responsibility, except if the Executives reasonable interests are adverse to the Company Group in such claim or action. The Company agrees to promptly reimburse the Executive for all of the Executives reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply with the Executives obligations under this Section 9.
10. Nondisparagement . The Executive agrees to refrain from (i) making, directly or indirectly, any derogatory comments concerning the Company Group or any current or former officers, directors, employees or shareholders thereof or (ii) taking any other action with respect to the Company Group which is reasonably expected to result, or does result in, damage to the business or reputation of the Company Group or any of its current or former officers, directors, employees or shareholders. Notwithstanding anything to the contrary contained herein, nothing in this Agreement shall prohibit or restrict the Executive from, truthfully and in good faith: (i) making any disclosure of information required by law; (ii) providing information to, or testifying or otherwise assisting in any investigation or proceeding brought by, any federal regulatory or law enforcement agency or legislative body, any self-regulatory organization, or the Companys designated legal, compliance or human resources officers; or (iii) filing, testifying, participating in or otherwise assisting in a proceeding relating to an alleged violation of any federal, state or municipal law relating to fraud, or any rule or regulation of the Securities and Exchange Commission or any self-regulatory organization.
11. Source of Payments . All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets shall be made, to assure payment. The Executive shall have no right, title or interest whatsoever in or to any investments which the Company may make to aid the Company in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company.
12. Arbitration . Any dispute or controversy arising under or in connection with this Agreement or otherwise in connection with the Executives employment by the Company that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in New Jersey in accordance with the rules of the American Arbitration Association before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by the Executive, or if such two individuals cannot promptly agree on the selection of the arbitrator, who shall be selected by the American Arbitration Association. Notwithstanding anything to the contrary contained herein, the arbitrator shall allow for discovery sufficient to adequately arbitrate any claims, including access to essential documents and witnesses. The award of the arbitrator with respect to such dispute or controversy shall be in writing with sufficient explanation to allow for such meaningful judicial review as is permitted
8
by law, and that such decision shall be enforceable in any court of competent jurisdiction and shall be binding on the parties hereto. The remedies available in arbitration shall be identical to those allowed at law. The arbitrator shall be entitled to award to the prevailing party in any arbitration or judicial action under this Agreement reasonable attorneys fees and any costs of the arbitration payable by such party, consistent with applicable law. The Company and the Executive each shall pay its or his own attorneys fees and costs in any such arbitration and shall each pay one-half of the arbitrators fees and any other costs of such arbitration.
13. Nonassignability: Binding Agreement .
(a) By the Executive . This Agreement and any and all of the Executives rights, duties, obligations or interests hereunder shall not be assignable or delegable by the Executive.
(b) By the Company . This Agreement and any and all of the Companys rights, duties, obligations or interests hereunder shall not be assignable by the Company, except as incident to a reorganization, merger or consolidation, or transfer of all or substantially all of the Companys assets.
(c) Binding Effect . This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any successors to or permitted assigns of the Company, and the Executives heirs and the personal representatives of the Executives estate.
14. Withholding . Any payments made or benefits provided to the Executive under this Agreement shall be reduced by any applicable withholding taxes or other amounts required to be withheld by law or contract.
15. Amendment; Waiver . This Agreement may not be modified, amended or waived in any manner, except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement.
16. Governing Law . All matters affecting this Agreement, including the validity thereof, are to be governed by, and interpreted and construed in accordance with, the laws of the State of New Jersey applicable to contracts executed in and to be performed in that State.
17. Survival of Certain Provisions . The rights and obligations set forth in Sections 4(b) and 4 (c) and Sections 5 through 12 hereof shall survive any termination or expiration of this Agreement.
18. Entire Agreement; Supersedes Previous Agreements . This Agreement, together with the (i) Employee Confidentiality and Innovations Agreement, and (ii) Noncompete Agreement, contains the entire agreement and understanding of the parties hereto with respect to the matters covered herein and supersedes all prior or contemporaneous negotiations, commitments, agreements and writings with respect to the subject matter hereof, all such other negotiations, commitments, agreements and writings shall have no further force or effect, and the parties to any such other negotiation, commitment, agreement or writing shall have no further rights or obligations thereunder.
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19. Counterparts . This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.
20. Headings . The headings of sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
21. Notices . All notices or communications hereunder shall be in writing, addressed as follows:
To the Company:
23 Main Street
Holmdel, N.J. 07722
Attention: Chief Legal Officer
To the Executive:
Michael Snyder
1130 Cocoanut Road
Boca Raton, Florida 33432 or the Executives last address on record with the
Company
All such notices shall be conclusively deemed to be received and shall be effective (i) if sent by hand delivery, upon receipt, or (ii) if sent by electronic mail or facsimile, upon confirmation of receipt by the sender of such transmission, or (iii) if sent by courier or certified or registered U.S. mail, upon receipt.
22. Severability . In the event that any court having jurisdiction shall determine that any restrictive covenant or other provision contained in this Agreement shall be unreasonable or unenforceable in any respect, then such covenant or other provision shall be deemed limited to the extent that such other court deems it reasonable or enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such covenant or other provision wholly unenforceable, the remaining covenants and other provisions of this Agreement shall nevertheless remain in full force and effect.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and the Executive has executed this Agreement, as of the day and year first written above.
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VONAGE HOLDINGS CORP. |
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By: |
/s/ Jeffrey Citron |
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Name: Jeffrey Citron |
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Title: Chairman of the
Board and Chief
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ACCEPTED AND AGREED: |
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/s/ Michael Snyder |
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Michael Snyder |
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Dated: |
3-30-06 |
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11
Exhibit 10.9
EMPLOYMENT AGREEMENT (the " Agreement "), dated as of August 1, 2005, by and between VONAGE HOLDINGS CORP., a Delaware corporation (the " Company "), and John S. Rego (the " Executive ").
WHEREAS, the Company has determined that it is in the best interests of the Company and its shareholders to enter into an employment agreement with the Executive and the Executive is willing to serve as an employee of the Company, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties agree as follows:
1. Employment and Duties. (a) General. The Executive shall serve as Chief Financial Officer of the Company, reporting to Jeffrey Citron, Chief Executive Officer. The Executive shall have such duties and responsibilities, commensurate with the Executive's position, as may be assigned to the Executive from time to time by the Chief Executive Officer of the Company. The Executive's principal place of employment shall be the principal offices of the Company, currently located in the Edison, New Jersey area; provided, however , that the Executive understands and agrees that he shall be required to travel from time to time for business reasons.
(b) Exclusive Services. For so long as the Executive is employed by the Company, the Executive shall devote his full time working time to his duties hereunder, shall faithfully serve the Company, shall in all respects conform to and comply with the lawful and good faith directions and instructions given to him by the Chief Executive Officer and shall use his best efforts to promote and serve the interests of the Company. Further, the Executive shall not, directly or indirectly, render services to any other person or organization without the consent of the Company or otherwise engage in activities that would interfere significantly with the faithful performance of his duties hereunder. Notwithstanding the foregoing, the Executive may serve on (i) corporate boards, with the Board's prior consent or (ii) civic or charitable boards or engage in charitable activities without remuneration therefor, provided that such activities do not contravene the first sentence of this Section 1(b).
2. Term of Employment. The Executive's employment under this Agreement shall commence as of August 1, 2005 (the " Effective Date ") and shall terminate on the earlier of (i) the second anniversary of the Effective Date and (ii) the termination of the Executive's employment under this Agreement; provided, however , that the Term (as defined below) of the Executive's employment shall be automatically extended without further action of either party for additional one-year periods, unless written notice of either party's intention not to extend has been given to the other party at least 90 days prior to the expiration of the then effective Term. Notwithstanding anything to the contrary herein, in the event of a Change in Control of the Company (as such term is defined in the Company's 2001 Stock Incentive Plan (as amended through April 20, 2005) (the " Stock Incentive Plan "), as it may be amended from time to time, the Term under this Agreement shall be automatically extended without further action of either party for an additional one-year period from the date of such Change in Control, subject to further automatic renewals as provided above. The period from the Effective Date until the termination of the Executive's employment under this Agreement is referred to as the " Term ".
3. Compensation and Other Benefits. Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to the Executive during the Term as compensation for services rendered hereunder:
(a) Base Salary. The Company shall pay to the Executive an annual base salary (the " Base Salary ") at the rate of $250,000, payable in substantially equal installments at such intervals as may be
1
determined by the Company in accordance with its ordinary payroll practices as established from time to time. The Base Salary shall be reviewed by the Compensation Committee of the Board of Directors (the " Board ") and the Chief Executive Officer in good faith, based upon the Executive's performance, not less often than annually.
(b) Annual Cash Bonus. For each fiscal year during the Term, the Executive shall be eligible to receive an annual discretionary performance-based bonus in accordance with the Company's annual bonus program, as applicable to senior executives as in effect from time to time. The amount, if any, of the Executive's annual bonus shall be determined by the Compensation Committee of the Board upon the recommendation of the Chief Executive Officer. The bonus shall be prorated for any year in which the Executive's employment is terminated due to (i) the Executive's resignation for Good Reason (as defined in Section 4(a)(iii) below); (ii) the Company's termination of the Executive's employment without Cause (as defined in Section 4(a)(ii) below); or (iii) the Executive's death or disability (as defined in Section 4(c) below). If the Executive's employment with the Company is terminated by the Company for Cause or the Executive resigns from his employment other than for Good Reason prior to the scheduled payout of the bonus due for a fiscal year, the Executive shall not receive any portion of such bonus.
(c) Equity Incentive Compensation. During the Term, the Executive shall be eligible to participate in the Company's equity compensation plans and programs generally applicable to senior executives of the Company as in effect from time to time, including without limitation, the Stock Incentive Plan. Notwithstanding anything to the contrary in the Stock Option Plan or any stock option agreement, upon the (i) Company's termination of the Executive's employment without Cause or (ii) Executive's resignation from employment for Good Reason, in either case on or following a Change in Control of the Company, all outstanding Options granted by the Company to the Executive shall become fully vested and immediately exercisable on the date of such termination or resignation, as the case may be.
(d) Employee Benefit Plans. The Executive shall be entitled to participate in all employee welfare, pension and fringe benefit plans, programs and arrangements of the Company, in accordance with their respective terms, as may be amended from time to time, and on a basis no less favorable than that made available to other senior executives of the Company.
(e) Expenses. The Company shall reimburse the Executive for reasonable travel and other business-related expenses incurred by the Executive in the fulfillment of his duties hereunder upon presentation of written documentation thereof, in accordance with the applicable expense reimbursement policies and procedures of the Company as in effect from time to time.
(f) Vacation. The Executive shall be entitled to 15 vacation days for each fiscal year during the Term.
(g) Other Benefits and Perquisites. The Executive shall be entitled to such other benefits and perquisites as may be available generally to other senior executives of the Company.
4. Termination of Employment. (a) Termination for Cause; Resignation Without Good Reason. (i) If, prior to the expiration of the Term, the Company terminates the Executive's employment for Cause or if the Executive resigns from his employment hereunder other than for Good Reason, the Executive shall only be entitled to payment of any unpaid Base Salary through and including the date of termination or resignation and any other amounts or benefits required to be paid or provided by law or under any plan, program, policy or practice of the Company (the " Other Accrued Compensation and Benefits "). The Executive shall have no further right to receive any other compensation or benefits after such termination or resignation of employment.
(ii) For purposes of this Agreement, " Cause " shall mean termination of the Executive's employment due to: (A) any act or omission that constitutes a breach by the Executive of any of his
2
obligations under this Agreement; (B) the willful and continued failure or refusal of the Executive (not as a consequence of illness, accident or other disability) to satisfactorily perform the duties reasonably required of him as an employee of the Company; (C) the Executive's conviction of, or plea of nolo contendere to, (x) any felony or (y) another crime involving dishonesty or moral turpitude or which could reflect negatively upon the Company or otherwise impair or impede its operations; (D) the Executive's engaging in any misconduct, negligence, act of dishonesty, violence or threat of violence (including any violation of federal securities laws) that is injurious to the Company or any of its subsidiaries or affiliates (collectively, the " Company Group "); (E) the Executive's material breach of a written policy of the Company or the rules of any governmental or regulatory body applicable to the Company; (F) the diverting or usurping of a corporate opportunity of the Company Group by the Executive; (G) the Executive's refusal to follow the lawful directions of the Company; or (H) the Executive's willful failure to comply with any of the material terms of this Agreement or any other willful misconduct by the Executive which is materially injurious to the financial condition or business reputation of the Company Group); provided, however , that no event or condition described in clauses (A), (B) or (H) shall constitute Cause unless (i) the Company first gives the Executive written notice of its intention to terminate his employment for Cause and the grounds for such termination and (ii) such grounds for termination (if susceptible to correction) are not corrected by the Executive within 15 days of his receipt of such notice (or, in the event that such grounds cannot be corrected within such 15 day period, the Executive has not taken all reasonable steps within such 15 day period to correct such grounds as promptly as practicable thereafter).
(iii) For purposes of this Agreement, " Good Reason " shall mean termination of employment with the Company by the Executive because of the occurrence of any of the following events without the Executive's prior written consent: (A) a decrease in the Executive's Base Salary or a failure by the Company to pay material compensation due and payable to the Executive in connection with his employment; (B) a material diminution of the responsibilities, positions or titles of the Executive from those set forth in this Agreement including without limitation, ceasing to be the most senior financial officer of a company (whether the Company or its ultimate parent) following a Change in Control; (C) the Company requiring the Executive to be based at any office or location more than 50 miles from the Edison, New Jersey area; (D) the Company's delivery of a notice of non-renewal of the Term following a Change in Control of the Company; or (E) a material breach by the Company of any term or provision of this Agreement; provided, however , that no event or condition described in clauses (A) through (E) shall constitute Good Reason unless (x) the Executive gives the Company written notice of his intention to terminate his employment for Good Reason and the grounds for such termination and (y) such grounds for termination (if susceptible to correction) are not corrected by the Company within 15 days of its receipt of such notice (or, in the event that such grounds cannot be corrected within such 15 day period, the Company has not taken all reasonable steps within such 15 day period to correct such grounds as promptly as practicable thereafter).
(b) Termination without Cause; Resignation for Good Reason. (i) If, prior to the expiration of the Term, the Executive's employment is terminated by the Company without Cause, or if the Executive resigns from his employment hereunder for Good Reason, the Company shall pay the Executive (A) a pro-rata portion of his bonus for the year in which the termination of employment occurs on the date such bonus would have been payable to the Executive had he remained employed by the Company; (B) an amount equal to the greater of the Executive's Base Salary (at the rate in effect on the date the Executive's employment is terminated) for (x) the remainder of the Term or (y) a one-year period following the Executive's termination of employment as described in this Section 4(b), payable in substantially equal installments over the lesser of (aa) a six-month period or (bb) such shorter period that is the longest period permissible in order for the payments not to be considered "nonqualified deferred compensation" under Section 409A of the Internal Revenue Code of 1986, as amended, (the " Code "), or any regulations, rulings or other regulatory guidance issued thereunder; and (C) the Other Accrued Compensation and Benefits. The Executive shall have no further rights under this Agreement
3
or otherwise to receive any other compensation or benefits after such termination or resignation of employment.
(ii) The Company shall not be required to make the payments and provide the benefits provided for under Section 4(b)(i) (including the Other Accrued Compensation and Benefits), unless the Executive executes and delivers to the Company, a release substantially in the form attached as Exhibit A and the release has become effective and irrevocable in its entirety.
(iii) If, following a termination of employment without Cause or a resignation for Good Reason, the Executive breaches the provisions of Section 5 or 7 hereof, the Executive shall not be eligible, as of the date of such breach, for the payments and benefits described in Section 4(b)(i), and any and all obligations and agreements of the Company with respect to such payments shall thereupon cease.
(c) Termination Due to Death or Disability. The Executive's employment with the Company shall terminate automatically on the Executive's death. In the event of the Executive's disability the Company shall be entitled to terminate his employment. In the event of termination of the Executive's employment by reason of Executive's death or disability, the Company shall pay to the Executive (or his estate, as applicable), (i) a pro-rata portion of the Executive's bonus for the year in which the termination of employment occurs on the date such bonus would have been payable to the Executive had he remained employed by the Company; (ii) the Executive's Base Salary through and including the date of termination; (iii) an amount equal to 12 months of the Executive's Base Salary (at the rate in effect on the date the Executive's employment is terminated) payable in substantially equal installments over a 12-month period; provided, however , that if the Executive is receiving short-term or long-term disability benefits pursuant to a Company policy, such installments shall be reduced (but in no event to an amount below zero) by the tax-adjusted amount of disability payments, excluding any supplemental disability benefits funded through employee contributions, received by the Executive during the period corresponding with each installment; and (iv) the Other Accrued Compensation and Benefits. For purposes of this Agreement, " disability " means that the Executive (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefit for a period of not less than three months under an accident and health plan covering employees of the participant's employer.
(d) Notice of Termination. Any termination of employment by the Company or the Executive shall be communicated by a written " Notice of Termination " to the other party hereto given in accordance with Section 21 of this Agreement. In the event of a termination by the Company for Cause, or resignation by the Executive for Good Reason, the Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specify the date of termination, which date shall not be more than 30 days after the giving of such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Resignation from Directorships and Officerships. The termination of the Executive's employment for any reason shall constitute the Executive's resignation from (i) any director, officer or employee position the Executive has with the Company Group and (ii) all fiduciary positions (including as a trustee) the Executive holds with respect to any employee benefit plans or trusts established by the
4
Company. The Executive agrees that this Agreement shall serve as written notice of resignation in this circumstance.
(f) Reduction of Payments if Reduction Would Result in Greater After-Tax Amount. Notwithstanding anything herein to the contrary, in the event that the Executive receives any payments or distributions, whether payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, that constitute "parachute payments" within the meaning of Section 280G of the Code, and the net after-tax amount of the parachute payment is less than the net after-tax amount if the aggregate payment to be made to the Executive were three times the Executive's "base amount" (as defined in Section 280G(b)(3) of the Code) less $1.00, then the aggregate of the amounts constituting the parachute payment shall be reduced to an amount that shall equal three times the Executive's base amount, less $1.00. The determinations to be made with respect to this Section 4(f) shall be made by a certified public accounting firm designated by the Company and reasonably acceptable to the Executive.
5. Confidentiality. (a) Confidential Information. The Executive agrees to enter into and be subject to the Company's Employee Confidentiality and Innovations Agreement substantially in the form attached hereto as Exhibit B.
(b) Exclusive Property. The Executive confirms that all Confidential Information (as defined in the Employee Confidentiality and Innovations Agreement) is and shall remain the exclusive property of the Company Group. All business records, papers and documents kept or made by the Executive relating to the business of the Company Group shall be and remain the property of the Company Group. Upon the request and at the expense of the Company Group, the Executive shall promptly make all disclosures, execute all instruments and papers and perform all acts reasonably necessary to vest and confirm in the Company Group, fully and completely, all rights created or contemplated by this Section 5(b).
6. Noncompetition. The Executive agrees to enter into and be subject to the Company's Noncompete Agreement substantially in the form attached as Exhibit C.
7. Non-Solicitation. The Executive agrees that for a period commencing on the Effective Date and ending 12 months following the Executive's termination of employment with the Company (the " Restricted Period "), the Executive shall not, directly or indirectly, (a) interfere with or attempt to interfere with the relationship between any person who is, or was during the then most recent 12-month period, an employee, officer, representative or agent of the Company Group, or solicit, induce or attempt to solicit or induce any of them to leave the employ of any member of the Company Group or violate the terms of their respective contracts, or any employment arrangements, with such entities; or (b) induce or attempt to induce any customer, client, supplier, licensee or other business relation of any member of the Company Group to cease doing business with any member of the Company Group, or in any way interfere with the relationship between any member of the Company Group and any customer, client, supplier, licensee or other business relation of any member of the Company Group. As used herein, the term "indirectly" shall include, without limitation, the Executive's permitting the use of the Executive's name by any competitor of any member of the Company Group to induce or interfere with any employee or business relationship of any member of the Company Group.
8. Certain Remedies. (a) Injunctive Relief. Without intending to limit the remedies available to the Company Group, including, but not limited to, those set forth in Section 12 hereof, the Executive agrees that a breach of any of the covenants contained in Sections 5 through 7 of this Agreement may result in material and irreparable injury to the Company Group for which there is no adequate remedy at law, that it shall not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, any member of the Company Group shall be entitled to seek a temporary restraining order or a preliminary or permanent injunction, or both, without bond or other
5
security, restraining the Executive from engaging in activities prohibited by the covenants contained in Sections 5 through 7 of this Agreement or such other relief as may be required specifically to enforce any of the covenants contained in this Agreement. Such injunctive relief in any court shall be available to the Company Group in lieu of, or prior to or pending determination in, any arbitration proceeding.
(b) Extension of Restricted Period. In addition to the remedies the Company may seek and obtain pursuant to Section 12, the Restricted Period shall be extended by any and all periods during which the Executive shall be found by a court possessing personal jurisdiction over him to have been in violation of the covenants contained in Sections 5 through 7 of this Agreement.
9. Defense of Claims. The Executive agrees that, during the Term, and for a period of six months after termination of the Executive's employment, upon request from the Company, the Executive shall cooperate with the Company in connection with any matters the Executive worked on during his employment with the Company and any related transitional matters. In addition, the Executive agrees to cooperate with the Company in the defense of any claims or actions that may be made by or against the Company Group that affect the Executive's prior areas of responsibility, except if the Executive's reasonable interests are adverse to the Company Group in such claim or action. The Company agrees to promptly reimburse the Executive for all of the Executive's reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply with the Executive's obligations under this Section 9.
10. Nondisparagement. The Executive agrees to refrain from (i) making, directly or indirectly, any derogatory comments concerning the Company Group or any current or former officers, directors, employees or shareholders thereof or (ii) taking any other action with respect to the Company Group which is reasonably expected to result, or does result in, damage to the business or reputation of the Company Group or any of its current or former officers, directors, employees or shareholders.
11. Source of Payments. All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets shall be made, to assure payment. The Executive shall have no right, title or interest whatsoever in or to any investments which the Company may make to aid the Company in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company.
12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement or otherwise in connection with the Executive's employment by the Company that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in New Jersey in accordance with the rules of the American Arbitration Association before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by the Executive, or if such two individuals cannot promptly agree on the selection of the arbitrator, who shall be selected by the American Arbitration Association.
13. Nonassignability; Binding Agreement. (a) By the Executive. This Agreement and any and all rights, duties, obligations or interests hereunder shall not be assignable or delegable by the Executive.
(b) By the Company. This Agreement and all of the Company's rights and obligations hereunder shall not be assignable by the Company except as incident to a reorganization, merger or consolidation, or transfer of all or substantially all of the Company's assets.
(c) Binding Effect. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any successors to or assigns of the Company and the Executive's heirs and the personal representatives of the Executive's estate.
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14. Withholding. Any payments made or benefits provided to the Executive under this Agreement shall be reduced by any applicable withholding taxes or other amounts required to be withheld by law or contract.
15. Amendment; Waiver. This Agreement may not be modified, amended or waived in any manner, except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement.
16. Governing Law. All matters affecting this Agreement, including the validity thereof, are to be governed by, and interpreted and construed in accordance with, the laws of the State of New Jersey applicable to contracts executed in and to be performed in that State.
17. Survival of Certain Provisions. The rights and obligations set forth in Sections 5 through 12 hereof shall survive any termination or expiration of this Agreement.
18. Entire Agreement; Supersedes Previous Agreements. This Agreement, together with the (i) Employee Confidentiality and Innovations Agreement and (ii) Noncompete Agreement, contains the entire agreement and understanding of the parties hereto with respect to the matters covered herein and supersedes all prior or contemporaneous negotiations, commitments, agreements and writings with respect to the subject matter hereof, all such other negotiations, commitments, agreements and writings shall have no further force or effect, and the parties to any such other negotiation, commitment, agreement or writing shall have no further rights or obligations thereunder.
19. Counterparts. This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.
20. Headings. The headings of sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
21. Notices. All notices or communications hereunder shall be in writing, addressed as follows:
To the Company:
2147
Route 27
Edison, N.J. 08817 or
23
Main Street
Holmdel, N.J. 07722, whichever is the last address on record for the Company
Attention: Jeffrey Citron, Chief Executive Officer
With a copy to:
Shearman
& Sterling LLP
599 Lexington Avenue
New York, New York 10022
Attention: John J. Cannon, III
To the Executive:
7
Lost Trail
Lawrenceville, N.J. 08648 or the Executive's last address on record with the Company
All such notices shall be conclusively deemed to be received and shall be effective (i) if sent by hand delivery, upon receipt or (ii) if sent by electronic mail or facsimile, upon confirmation of receipt by the sender of such transmission.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and the Executive has executed this Agreement, as of the day and year first written above.
VONAGE HOLDINGS CORP. | |||
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By: |
/s/ SHARON O'LEARY Name: Sharon O'Leary Title: Chief Legal Officer |
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8/16/05 |
ACCEPTED AND AGREED: | ||||
/s/ JOHN S. REGO John S. Rego |
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Dated: |
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8/01/05 |
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8
Exhibit 10.10
EMPLOYMENT AGREEMENT (the " Agreement "), dated as of August 1, 2005, by and between VONAGE HOLDINGS CORP., a Delaware corporation (the " Company "), and Louis Mamakos (the " Executive ").
WHEREAS, the Company has determined that it is in the best interests of the Company and its shareholders to enter into an employment agreement with the Executive and the Executive is willing to serve as an employee of the Company, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties agree as follows:
1. Employment and Duties. (a) General. The Executive shall serve as Chief Technology Officer of the Company, reporting to Jeffrey Citron, Chief Executive Officer. The Executive shall have such duties and responsibilities, commensurate with the Executive's position, as may be assigned to the Executive from time to time by the Chief Executive Officer of the Company. The Executive's principal place of employment shall be the principal offices of the Company, currently located in the Edison, New Jersey area; provided, however , that the Executive understands and agrees that he shall be required to travel from time to time for business reasons.
(b) Exclusive Services. For so long as the Executive is employed by the Company, the Executive shall devote his full-time working time to his duties hereunder, shall faithfully serve the Company, shall in all respects conform to and comply with the lawful and good faith directions and instructions given to him by the Chief Executive Officer and shall use his best efforts to promote and serve the interests of the Company. Further, the Executive shall not, directly or indirectly, render services to any other person or organization without the consent of the Company or otherwise engage in activities that would interfere significantly with the faithful performance of his duties hereunder. Notwithstanding the foregoing, the Executive may serve on (i) corporate boards, with the Board's prior consent or (ii) civic or charitable boards or engage in charitable activities without remuneration therefor, provided that such activities do not contravene the first sentence of this Section 1(b).
2. Term of Employment. The Executive's employment under this Agreement shall commence as of August 1, 2005 (the " Effective Date ") and shall terminate on the earlier of (i) the second anniversary of the Effective Date and (ii) the termination of the Executive's employment under this Agreement; provided, however , that the Term (as defined below) of the Executive's employment shall be automatically extended without further action of either party for additional one-year periods, unless written notice of either party's intention not to extend has been given to the other party at least 90 days prior to the expiration of the then effective Term. The period from the Effective Date until the termination of the Executive's employment under this Agreement is referred to as the " Term ".
3. Compensation and Other Benefits. Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to the Executive during the Term as compensation for services rendered hereunder:
(a) Base Salary. The Company shall pay to the Executive an annual base salary (the " Base Salary ") at the rate of $200,000, payable in substantially equal installments at such intervals as may be determined by the Company in accordance with its ordinary payroll practices as established from time to time. The Base Salary shall be reviewed by the Compensation Committee of the Board of Directors (the " Board ") in good faith, based upon the Executive's performance, not less often than annually.
(b) Bonus. For each fiscal year during the Term, the Executive shall be eligible to receive an annual discretionary performance-based bonus in accordance with the Company's annual bonus
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program as applicable to senior executives of the Company as in effect from time to time. The amount, if any, of the Executive's annual bonus shall be determined by the Compensation Committee of the Board upon the recommendation of the Chief Executive Officer. The bonus shall be prorated for any year in which the Executive's employment is terminated due to (i) the Executive's resignation for Good Reason (as defined in Section 4(a)(iii) below); (ii) the Company's termination of the Executive's employment without Cause (as defined in Section 4(a)(ii) below); or (iii) the Executive's death or disability (as defined in Section 4(c) below). If the Executives employment with the Company is terminated by the Company for Cause or the Executive resigns from his employment other than for Good Reason prior to the scheduled payout of the bonus due for a fiscal year, the Executive shall not receive any portion of such bonus.
(c) Equity Incentive Compensation. During the Term, the Executive shall be eligible to participate in the Company's equity compensation plans and programs generally applicable to senior executives of the Company as in effect from time to time, including without limitation, the Company's 2001 Stock Incentive Plan (as amended through April 20, 2005).
(d) Employee Benefit Plans. The Executive shall be entitled to participate in all employee welfare, pension and fringe benefit plans, programs and arrangements of the Company, in accordance with their respective terms, as may be amended from time to time, and on a basis no less favorable than that made available to other senior executives of the Company.
(e) Expenses. The Company shall reimburse the Executive for reasonable travel and other business-related expenses incurred by the Executive in the fulfillment of his duties hereunder upon presentation of written documentation thereof, in accordance with the applicable expense reimbursement policies and procedures of the Company as in effect from time to time.
(f) Vacation. The Executive shall be entitled to 15 vacation days for each fiscal year during the Term.
(g) Other Benefits and Perquisites. The Executive shall be entitled to such other benefits and perquisites as may be available generally to other senior executives of the Company.
4. Termination of Employment. (a) Termination for Cause; Resignation Without Good Reason. (i) If, prior to the expiration of the Term, the Company terminates the Executive's employment for Cause (as defined in Section 4(a)(ii) below) or if the Executive resigns from his employment hereunder other than for Good Reason (as defined in Section 4(a)(iii) below), the Executive shall only be entitled to payment of any unpaid Base Salary through and including the date of termination or resignation and any other amounts or benefits required to be paid or provided by law or under any plan, program, policy or practice of the Company (the " Other Accrued Compensation and Benefits "). The Executive shall have no further right to receive any other compensation or benefits after such termination or resignation of employment.
(ii) For purposes of this Agreement, " Cause " shall mean termination of the Executive's employment due to: (A) any act or omission that constitutes a breach by the Executive of any of his obligations under this Agreement; (B) the willful and continued failure or refusal of the Executive (not as a consequence of illness, accident or other disability) to satisfactorily perform the duties reasonably required of him as an employee of the Company; (C) the Executive's conviction of, or plea of nolo contendere to, (x) any felony or (y) another crime involving dishonesty or moral turpitude or which could reflect negatively upon the Company or otherwise impair or impede its operations; (D) the Executive's engaging in any misconduct, negligence, act of dishonesty, violence or threat of violence (including any violation of federal securities laws) that is injurious to the Company or any of its subsidiaries or affiliates (collectively, the " Company Group "); (E) the Executive's material breach of a written policy of the Company or the rules of any governmental or regulatory body applicable to the Company; (F) the diverting or usurping of a corporate opportunity of the Company Group by the
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Executive; (G) the Executive's refusal to follow the lawful directions of the Company; or (H) the Executive's willful failure to comply with any of the material terms of this Agreement or any other willful misconduct by the Executive which is materially injurious to the financial condition or business reputation of the Company Group); provided, however , that no event or condition described in clauses (A), (B) or (H) shall constitute Cause unless (i) the Company first gives the Executive written notice of its intention to terminate his employment for Cause and the grounds for such termination and (ii) such grounds for termination (if susceptible to correction) are not corrected by the Executive within 15 days of his receipt of such notice (or, in the event that such grounds cannot be corrected within such 15-day period, the Executive has not taken all reasonable steps within such 15-day period to correct such grounds as promptly as practicable thereafter).
(iii) For purposes of this Agreement, " Good Reason " shall mean termination of employment with the Company by the Executive because of the occurrence of any of the following events without the Executive's prior written consent: (A) a decrease in the Executive's Base Salary or a failure by the Company to pay material compensation due and payable to the Executive in connection with his employment; (B) a material diminution of the responsibilities, positions or titles of the Executive from those set forth in this Agreement; (C) the Company requiring the Executive to be based at any office or location more than 50 miles from the Edison, New Jersey area; or (D) a material breach by the Company of any term or provision of this Agreement; provided, however , that no event or condition described in clauses (A) through (D) shall constitute Good Reason unless (x) the Executive gives the Company written notice of his intention to terminate his employment for Good Reason and the grounds for such termination and (y) such grounds for termination (if susceptible to correction) are not corrected by the Company within 15 days of its receipt of such notice (or, in the event that such grounds cannot be corrected within such 15-day period, the Company has not taken all reasonable steps within such 15-day period to correct such grounds as promptly as practicable thereafter).
(b) Termination without Cause; Resignation for Good Reason. (i) If, prior to the expiration of the Term, the Executive's employment is terminated by the Company without Cause, or if the Executive resigns from his employment hereunder for Good Reason, the Company shall pay the Executive (A) a pro-rata portion of his bonus for the year in which the termination of employment occurs on the date such bonus would have been payable to the Executive had he remained employed by the Company; (B) an amount equal to the greater of the Executive's Base Salary (at the rate in effect on the date the Executive's employment is terminated) for (x) the remainder of the term or (y) a one-year period following the Executive's termination of employment as described in this Section 4(b) payable in substantially equal installments over the lesser of (aa) a six-month period or (bb) such shorter period that is the longest period permissible in order for the payments not to be considered "nonqualified deferred compensation" under Section 409A of the Internal Revenue Code of 1986, as amended, (the " Code "), or any regulations, rulings or other regulatory guidance issued thereunder; and (C) the Other Accrued Compensation and Benefits. The Executive shall have no further rights under this Agreement or otherwise to receive any other compensation or benefits after such termination or resignation of employment.
(ii) The Company shall not be required to make the payments and provide the benefits provided for under Section 4(b)(i) (including the Other Accrued Compensation and Benefits), unless the Executive executes and delivers to the Company, a release substantially in the form attached as Exhibit A and the release has become effective and irrevocable in its entirety.
(iii) If, following a termination of employment without Cause or a resignation for Good Reason, the Executive breaches the provisions of Section 5 or 7 hereof, the Executive shall not be eligible, as of the date of such breach, for the payments and benefits described in Section 4(b)(i), and any and all obligations and agreements of the Company with respect to such payments shall thereupon cease.
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(c) Termination Due to Death or Disability. The Executive's employment with the Company shall terminate automatically on the Executive's death. In the event of the Executive's disability the Company shall be entitled to terminate his employment. In the event of termination of the Executives employment by reason of Executive's death or disability, the Company shall pay to the Executive (or his estate, as applicable), (i) a pro-rata portion of the Executive's bonus for the year in which the termination of employment occurs on the date such bonus would have been payable to the Executive had he remained employed by the Company; (ii) the Executive's Base Salary through and including the date of termination; (iii) an amount equal to 12 months of the Executive's Base Salary (at the rate in effect on the date the Executive's employment is terminated) payable in substantially equal installments over a 12-month period; provided, however , that if the Executive is receiving short-term or long-term disability benefits pursuant to a Company policy, such installments shall be reduced (but in no event to an amount below zero) by the tax-adjusted amount of disability payments excluding any supplemental disability benefits funded through employee contributions, received by the Executive during the period corresponding with each installment; and (iv) the Other Accrued Compensation and Benefits. For purposes of this Agreement, " disability " means that the Executive (a) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefit for a period of not less than three months under an accident and health plan covering employees of the participant's employer.
(d) Notice of Termination. Any termination of employment by the Company or the Executive shall be communicated by a written " Notice of Termination " to the other party hereto given in accordance with Section 21 of this Agreement. In the event of a termination by the Company for Cause, or resignation by the Executive for Good Reason, the Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specify the date of termination, which date shall not be more than 30 days after the giving of such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Resignation from Directorships and Officerships. The termination of the Executive's employment for any reason shall constitute the Executive's resignation from (i) any director, officer or employee position the Executive has with the Company Group and (ii) all fiduciary positions (including as a trustee) the Executive holds with respect to any employee benefit plans or trusts established by the Company. The Executive agrees that this Agreement shall serve as written notice of resignation in this circumstance.
(f) Reduction of Payments if Reduction Would Result in Greater After-Tax Amount. Notwithstanding anything herein to the contrary, in the event that the Executive receives any payments or distributions, whether payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, that constitute "parachute payments" within the meaning of Section 280G of the Code, and the net after-tax amount of the parachute payment is less than the net after-tax amount if the aggregate payment to be made to the Executive were three times the Executive's "base amount" (as defined in Section 280G(b)(3) of the Code) less $1.00, then the aggregate of the amounts constituting the parachute payment shall be reduced to an amount that shall equal three times the Executive's base amount, less $1.00. The determinations to be made with respect to this Section 4(f)
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shall be made by a certified public accounting firm designated by the Company and reasonably acceptable to the Executive.
5. Confidentiality. (a) Confidential Information. The Executive agrees to enter into and be subject to the Company's Employee Confidentiality and Innovations Agreement substantially in the form attached hereto as Exhibit B.
(b) Exclusive Property. The Executive confirms that all Confidential Information (as defined in the Employee Confidentiality and Innovations Agreement) is and shall remain the exclusive property of the Company Group. All business records, papers and documents kept or made by the Executive relating to the business of the Company Group shall be and remain the property of the Company Group. Upon the request and at the expense of the Company Group, the Executive shall promptly make all disclosures, execute all instruments and papers and perform all acts reasonably necessary to vest and confirm in the Company Group, fully and completely, all rights created or contemplated by this Section 5(b).
6. Noncompetition. The Executive agrees to enter into and be subject to the Company's Noncompete Agreement substantially in the form attached as Exhibit C.
7. Non-Solicitation. The Executive agrees that for a period commencing on the Effective Date and ending 12 months following the Executive's termination of employment with the Company (the " Restricted Period "), the Executive shall not, directly or indirectly, (a) interfere with or attempt to interfere with the relationship between any person who is, or was during the then most recent 12-month period, an employee, officer, representative or agent of the Company Group, or solicit, induce or attempt to solicit or induce any of them to leave the employ of any member of the Company Group or violate the terms of their respective contracts, or any employment arrangements, with such entities; or (b) induce or attempt to induce any customer, client, supplier, licensee or other business relation of any member of the Company Group to cease doing business with any member of the Company Group, or in any way interfere with the relationship between any member of the Company Group and any customer, client, supplier, licensee or other business relation of any member of the Company Group. As used herein, the term " indirectly " shall include, without limitation, the Executive's permitting the use of the Executive's name by any competitor of any member of the Company Group to induce or interfere with any employee or business relationship of any member of the Company Group.
8. Certain Remedies. (a) Injunctive Relief. Without intending to limit the remedies available to the Company Group, including, but not limited to, those set forth in Section 12 hereof, the Executive agrees that a breach of any of the covenants contained in Sections 5 through 7 of this Agreement may result in material and irreparable injury to the Company Group for which there is no adequate remedy at law, that it shall not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, any member of the Company Group shall be entitled to seek a temporary restraining order or a preliminary or permanent injunction, or both, without bond or other security, restraining the Executive from engaging in activities prohibited by the covenants contained in Sections 5 through 7 of this Agreement or such other relief as may be required specifically to enforce any of the covenants contained in this Agreement. Such injunctive relief in any court shall be available to the Company Group in lieu of, or prior to or pending determination in, any arbitration proceeding.
(b) Extension of Restricted Period. In addition to the remedies the Company may seek and obtain pursuant to Section 12, the Restricted Period shall be extended by any and all periods during which the Executive shall be found by a court possessing personal jurisdiction over him to have been in violation of the covenants contained in Sections 5 through 7 of this Agreement.
9. Defense of Claims. The Executive agrees that, during the Term, and for a period of six months after termination of the Executive's employment, upon request from the Company, the
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Executive shall cooperate with the Company in connection with any matters the Executive worked on during his employment with the Company and any related transitional matters. In addition, the Executive agrees to cooperate with the Company in the defense of any claims or actions that may be made by or against the Company Group that affect the Executive's prior areas of responsibility, except if the Executive's reasonable interests are adverse to the Company Group in such claim or action. The Company agrees to promptly reimburse the Executive for all of the Executive's reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply with the Executive's obligations under this Section 9.
10. Nondisparagement. The Executive agrees to refrain from (i) making, directly or indirectly, any derogatory comments concerning the Company Group or any current or former officers, directors, employees or shareholders thereof or (ii) taking any other action with respect to the Company Group which is reasonably expected to result, or does result in, damage to the business or reputation of the Company Group or any of its current or former officers, directors, employees or shareholders.
11. Source of Payments. All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets shall be made, to assure payment. The Executive shall have no right, title or interest whatsoever in or to any investments which the Company may make to aid the Company in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company.
12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement or otherwise in connection with the Executive's employment by the Company that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in New Jersey in accordance with the rules of the American Arbitration Association before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by the Executive, or if such two individuals cannot promptly agree on the selection of the arbitrator, who shall be selected by the American Arbitration Association.
13. Nonassignability; Binding Agreement. (a) By the Executive. This Agreement and any and all rights, duties, obligations or interests hereunder shall not be assignable or delegable by the Executive.
(b) By the Company. This Agreement and all of the Company's rights and obligations hereunder shall not be assignable by the Company except as incident to a reorganization, merger or consolidation, or transfer of all or substantially all of the Company's assets.
(c) Binding Effect. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any successors to or assigns of the Company and the Executive's heirs and the personal representatives of the Executive's estate.
14. Withholding. Any payments made or benefits provided to the Executive under this Agreement shall be reduced by any applicable withholding taxes or other amounts required to be withheld by law or contract.
15. Amendment Waiver. This Agreement may not be modified, amended or waived in any manner, except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement.
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16. Governing Law. All matters affecting this Agreement, including the validity thereof, are to be governed by, and interpreted and construed in accordance with, the laws of the State of New Jersey applicable to contracts executed in and to be performed in that State.
17. Survival of Certain Provisions. The rights and obligations set forth in Sections 5 through 12 hereof shall survive any termination or expiration of this Agreement.
18. Entire Agreement; Supersedes Previous Agreements. This Agreement, together with the (i) Employee Confidentiality and Innovations Agreement and (ii) Noncompete Agreement, contains the entire agreement and understanding of the parties hereto with respect to the matters covered herein and supersedes all prior or contemporaneous negotiations, commitments, agreements and writings with respect to the subject matter hereof, all such other negotiations, commitments, agreements and writings shall have no further force or effect, and the parties to any such other negotiation, commitment, agreement or writing shall have no further rights or obligations thereunder.
19. Counterparts. This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.
20. Headings. The headings of sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
21. Notices. All notices or communications hereunder shall be in writing, addressed as follows:
To the Company:
2147
Route 27
Edison, N.J. 08817 or
23 Main Street
Holmdel, N.J. 07722, whichever is the last address on record for the Company
Attention: Jeffrey Citron, Chief Executive Officer
With a copy to:
Shearman
& Sterling LLP
599 Lexington Avenue
New York, New York 10022
Attention: John J. Cannon, III
To the Executive:
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Bennington Drive
Lawrenceville, New Jersey 08648 or the Executive's last address on record with the Company
All such notices shall be conclusively deemed to be received and shall be effective (i) if sent by hand delivery, upon receipt or (ii) if sent by electronic mail or facsimile, upon confirmation of receipt by the sender of such transmission.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and the Executive has executed this Agreement, as of the day and year first written above.
VONAGE HOLDINGS CORP. | |||
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By: |
/s/ JOHN S. REGO Name: John S. Rego Title: Chief Financial Officer |
ACCEPTED AND AGREED: |
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/s/ LOUIS MAMAKOS Louis Mamakos |
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Dated: |
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14 Sept 2005 |
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Exhibit 10.11
EMPLOYMENT AGREEMENT (the " Agreement "), dated as of August 8, 2005, by and between VONAGE HOLDINGS CORP., a Delaware corporation (the " Company "), and Sharon O'Leary (the " Executive ").
WHEREAS, the Company has determined that it is in the best interests of the Company and its shareholders to enter into an employment agreement with the Executive and the Executive is willing to serve as an employee of the Company, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the parties agree as follows:
1. Employment and Duties. (a) General. The Executive shall serve as the Chief Legal Officer of the Company, reporting to Jeffrey Citron, Chief Executive Officer. The Executive shall have such duties and responsibilities, commensurate with the Executive's position, as may be assigned to the Executive from time to time by the Chief Executive Officer of the Company. The Executive's principal place of employment shall be the principal offices of the Company, currently located in the Edison, New Jersey area; provided, however , that the Executive understands and agrees that she shall be required to travel from time to time for business reasons.
(b) Exclusive Services. For so long as the Executive is employed by the Company, the Executive shall devote her full-time working time to her duties hereunder, shall faithfully serve the Company, shall in all respects conform to and comply with the lawful and good faith directions and instructions given to her by the Chief Executive Officer and shall use her best efforts to promote and serve the interests of the Company. Further, the Executive shall not, directly or indirectly, render services to any other person or organization without the consent of the Company or otherwise engage in activities that would interfere significantly with the faithful performance of her duties hereunder. Notwithstanding the foregoing, the Executive may serve on (i) corporate boards, with the Board's prior consent or (ii) civic or charitable boards or engage in charitable activities without remuneration therefor, provided that such activities do not contravene the first sentence of this Section 1(b).
2. Term of Employment. The Executive's employment under this Agreement shall commence as of August 8, 2005 (the " Effective Date ") and shall terminate on the earlier of (i) the second anniversary of the Effective Date and (ii) the termination of the Executive's employment under this Agreement; provided, however , that the Term (as defined below) of the Executive's employment shall be automatically extended without further action of either party for additional one-year periods, unless written notice of either party's intention not to extend has been given to the other party at least 90 days prior to the expiration of the then effective Term. Notwithstanding anything to the contrary herein, in the event of a Change in Control of the Company (as such term is defined in the Company's 2001 Stock Incentive Plan (as amended through April 20, 2005) (the " Stock Incentive Plan "), as it may be amended from time to time, the Term under this Agreement shall be automatically extended without further action of either party for an additional one-year period from the date of such Change in Control, subject to further automatic renewals as provided above. The period from the Effective Date until the termination of the Executive's employment under this Agreement is referred to as the " Term ".
3. Compensation and Other Benefits. Subject to the provisions of this Agreement, the Company shall pay and provide the following compensation and other benefits to the Executive during the Term as compensation for services rendered hereunder:
(a) Base Salary. The Company shall pay to the Executive an annual base salary (the " Base Salary ") at the rate of $250,000, payable in substantially equal installments at such intervals as may be
1
determined by the Company in accordance with its ordinary payroll practices as established from time to time. The Base Salary shall be reviewed by the Compensation Committee of the Board of Directors (the " Board ") and the Chief Executive Officer in good faith, based upon the Executive's performance, not less often than annually.
(b) Sign-On Bonus. Effective as of the Effective Date, the Executive shall be granted a one-time sign-on bonus of 500,000 stock options (the " Options ") to purchase shares of the Company's common stock at a price per share equal to the fair market value of the common stock as of the Effective Date as determined by the Board, pursuant to the terms of the Stock Option Plan and the corresponding stock option agreement. Notwithstanding anything to the contrary in the Stock Option Plan or any stock option agreement, upon the (i) Company's termination of the Executive's employment without Cause (as defined in Section 4(a)(ii) below) or (ii) Executive's resignation from employment for Good Reason (as defined in Section 4(a)(iii) below), in either case on or following a Change in Control of the Company, all outstanding Options granted by the Company to the Executive shall become fully vested and immediately exercisable on the date of such termination or resignation, as the case may be.
(c) Annual Cash Bonus. For each fiscal year during the Term, the Executive shall be eligible to receive an annual discretionary performance-based bonus targeted at 65% of her Base Salary in accordance with the Company's annual bonus program, as applicable to senior executives as in effect from time to time. The amount, if any, of the Executive's annual bonus shall be determined by the Compensation Committee of the Board upon the recommendation of the Chief Executive Officer; provided, however , that the Executive's annual bonus for fiscal year 2005 shall be at least $100,000. The bonus shall be prorated for any year in which the Executive's employment is terminated due to (i) the Executive's resignation for Good Reason; (ii) the Company's termination of the Executive's employment without Cause; or (iii) the Executive's death or disability (as defined in Section 4(c) below). If the Executive's employment with the Company is terminated by the Company for Cause or the Executive resigns from her employment other than for Good Reason prior to the scheduled payout of the bonus due for a fiscal year, the Executive shall not receive any portion of such bonus.
(d) Equity Incentive Compensation. During the Term, the Executive shall be eligible to participate in the Company's equity compensation plans and programs generally applicable to senior executives of the Company as in effect from time to time, including without limitation, the Stock Incentive Plan.
(e) Employee Benefit Plans. The Executive shall be entitled to participate in all employee welfare, pension and fringe benefit plans, programs and arrangements of the Company, in accordance with their respective terms, as may be amended from time to time, and on a basis no less favorable than that made available to other senior executives of the Company. The Executive will be paid a benefits stipend in January of each year, beginning in 2006. This stipend, in the amount net amount of $2,200.00 will be used to pay the annual premium for disability insurance as agreed.
(f) Expenses. The Company shall reimburse the Executive for reasonable travel and other business-related expenses incurred by the Executive in the fulfillment of her duties hereunder upon presentation of written documentation thereof, in accordance with the applicable expense reimbursement policies and procedures of the Company as in effect from time to time.
(g) Vacation. The Executive shall be entitled to 15 vacation days for each fiscal year during the Term.
(h) Other Benefits and Perquisites. The Executive shall be entitled to such other benefits and perquisites as may be available generally to other senior executives of the Company.
4. Termination of Employment. (a) Termination for Cause; Resignation Without Good Reason. (i) If, prior to the expiration of the Term, the Company terminates the Executive's employment for Cause or if the Executive resigns from his employment hereunder other than for Good
2
Reason, the Executive shall only be entitled to payment of any unpaid Base Salary through and including the date of termination or resignation and any other amounts or benefits required to be paid or provided by law or under any plan, program, policy or practice of the Company (the " Other Accrued Compensation and Benefits ,"). The Executive shall have no further right to receive any other compensation or benefits after such termination or resignation of employment.
(ii) For purposes of this Agreement, " Cause " shall mean termination of the Executive's employment due to: (A) any act or omission that constitutes a breach by the Executive of any of her obligations under this Agreement; (B) the willful and continued failure or refusal of the Executive (not as a consequence of illness, accident or other disability) to satisfactorily perform the duties reasonably required of her as an employee of the Company; (C) the Executive's conviction of, or plea of nolo contendere to, (x) any felony or (y) another crime involving dishonesty or moral turpitude or which could reflect negatively upon the Company or otherwise impair or impede its operations; (D) the Executive's engaging in any misconduct, negligence, act of dishonesty, violence or threat of violence (including any violation of federal securities laws) that is injurious to the Company or any of its subsidiaries or affiliates (collectively, the " Company Group "); (E) the Executive's material breach of a written policy of the Company or the rules of any governmental or regulatory body applicable to the Company; (F) the diverting or usurping of a corporate opportunity of the Company Group by the Executive; (G) the Executive's refusal to follow the lawful directions of the Company; or (H) the Executive's willful failure to comply with any of the material terms of this Agreement or any other willful misconduct by the Executive which is materially injurious to the financial condition or business reputation of the Company Group); provided, however , that no event or condition described in clauses (A), (B) or (H) shall constitute Cause unless (i) the Company first gives the Executive written notice of its intention to terminate her employment for Cause and the grounds for such termination and (ii) such grounds for termination (if susceptible to correction) are not corrected by the Executive within 15 days of her receipt of such notice (or, in the event that such grounds cannot be corrected within such 15-day period, the Executive has not taken all reasonable steps within such 15-day period to correct such grounds as promptly as practicable thereafter).
(iii) For purposes of this Agreement, " Good Reason " shall mean termination of employment with the Company by the Executive because of the occurrence of any of the following events without the Executive's prior written consent: (A) a decrease in the Executive's Base Salary or a failure by the Company to pay material compensation due and payable to the Executive in connection with her employment; (B) a material diminution of the responsibilities, positions or titles of the Executive from those set forth in this Agreement including without limitation, ceasing to be the most senior legal officer of a company (whether the Company or its ultimate parent) following a Change in Control; (C) the Company requiring the Executive to be based at any office or location more than 50 miles from the Edison, New Jersey area; (D) the Company's delivery of a notice of non-renewal of the Term following a Change in Control of the Company; or (E) a material breach by the Company of any term or provision of this Agreement; provided, however , that no event or condition described in clauses (A) through (E) shall constitute Good Reason unless (x) the Executive gives the Company written notice of her intention to terminate her employment for Good Reason and the grounds for such termination and (y) such grounds for termination (if susceptible to correction) are not corrected by the Company within 15 days of its receipt of such notice (or, in the event that such grounds cannot be corrected within such 15-day period, the Company has not taken all reasonable steps within such 15-day period to correct such grounds as promptly as practicable thereafter).
(b) Termination without Cause, Resignation for Good Reason. (i) If, prior to the expiration of the Term, the Executive's employment is terminated by the Company without Cause, or if the Executive resigns from her employment hereunder for Good Reason, the Company shall pay the Executive (A) a pro-rata portion of her bonus for the year in which the termination of employment occurs on the date such bonus would have been payable to the Executive had she remained employed by the Company;
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(B) an amount equal to the greater of the Executive's Base Salary (at the rate in effect on the date the Executive's employment is terminated) for (x) the remainder of the Term or (y) a one-year period following the Executive's termination of employment as described in this Section 4(b), payable in substantially equal installments over the lesser of (aa) a six-month period or (bb) such shorter period that is the longest period permissible in order for the payments not to be considered "nonqualified deferred compensation" under Section 409A of the Internal Revenue Code of 1986, as amended, (the " Code "), or any regulations, rulings or other regulatory guidance issued thereunder; and (C) the Other Accrued Compensation and Benefits. The Executive shall have no further rights under this Agreement or otherwise to receive any other compensation or benefits after such termination or resignation of employment.
(ii) The Company shall not be required to make the payments and provide the benefits provided for under Section 4(b)(i) (including the Other Accrued Compensation and Benefits), unless the Executive executes and delivers to the Company, a release substantially in the form attached as Exhibit A and the release has become effective and irrevocable in its entirety.
(iii) If, following a termination of employment without Cause or a resignation for Good Reason, the Executive breaches the provisions of Section 5 or 7 hereof, the Executive shall not be eligible, as of the date of such breach, for the payments and benefits described in Section 4(b)(i), and any and all obligations and agreements of the Company with respect to such payments shall thereupon cease.
(c) Termination Due to Death or Disability. The Executive's employment with the Company shall terminate automatically on the Executive's death. In the event of the Executive's disability the Company shall be entitled to terminate her employment. In the event of termination of the Executive's employment by reason of Executive's death or disability, the Company shall pay to the Executive (or her estate, as applicable), (i) a pro-rata portion of the Executive's bonus for the year in which the termination of employment occurs on the date such bonus would have been payable to the Executive had she remained employed by the Company; (ii) the Executive's Base Salary through and including the date of termination; (iii) an amount equal to 12 months of the Executive's Base Salary (at the rate in effect on the date the Executive's employment is terminated) payable in substantially equal installments over a 12-month period; provided, however , that if the Executive is receiving short-term or long-term disability benefits pursuant to a Company policy, such installments shall be reduced (but in no event to an amount below zero) by the tax-adjusted amount of disability payments, excluding any supplemental disability benefits funded through employee contributions, received by the Executive during the period corresponding with each installment; and (iv) the Other Accrued Compensation and Benefits. For purposes of this Agreement, " disability " means that the Executive (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefit for a period of not less than three months under an accident and health plan covering employees of the participant's employer.
(d) Notice of Termination. Any termination of employment by the Company or the Executive shall be communicated by a written " Notice of Termination " to the other party hereto given in accordance with Section 21 of this Agreement. In the event of a termination by the Company for Cause, or resignation by the Executive for Good Reason, the Notice of Termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) specify the date of termination, which date shall not be more than 30 days after the giving of such notice. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude
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the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Resignation from Directorships and Officerships. The termination of the Executive's employment for any reason shall constitute the Executive's resignation from (i) any director, officer or employee position the Executive has with the Company Group and (ii) all fiduciary positions (including as a trustee) the Executive holds with respect to any employee benefit plans or trusts established by the Company. The Executive agrees that this Agreement shall serve as written notice of resignation in this circumstance.
(f) Reduction of Payments if Reduction Would Result in Greater After-Tax Amount. Notwithstanding anything herein to the contrary, in the event that the Executive receives any payments or distributions, whether payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, that constitute "parachute payments" within the meaning of Section 280G of the Code, and the net after-tax amount of the parachute payment is less than the net after-tax amount if the aggregate payment to be made to the Executive were three times the Executive's "base amount" (as defined in Section 280G(b)(3) of the Code) less $1.00, then the aggregate of the amounts constituting the parachute payment shall be reduced to an amount that shall equal three times the Executive's base amount, less $1.00. The determinations to be made with respect to this Section 4(f) shall be made by a certified public accounting firm designated by the Company and reasonably acceptable to the Executive.
5. Confidentiality. (a) Confidential Information. The Executive agrees to enter into and be subject to the Company's Employee Confidentiality and Innovations Agreement substantially in the form attached hereto as Exhibit B.
(b) Exclusive Property. The Executive confirms that all Confidential Information (as defined in the Employee Confidentiality and Innovations Agreement) is and shall remain the exclusive property of the Company Group. All business records, papers and documents kept or made by the Executive relating to the business of the Company Group shall be and remain the property of the Company Group. Upon the request and at the expense of the Company Group, the Executive shall promptly make all disclosures, execute all instruments and papers and perform all acts reasonably necessary to vest and confirm in the Company Group, fully and completely, all rights created or contemplated by this Section 5(b).
6. Noncompetition. The Executive agrees to enter into and be subject to the Company's Noncompete Agreement substantially in the form attached as Exhibit C.
7. Non-Solicitation. The Executive agrees that for a period commencing on the Effective Date and ending 12 months following the Executive's termination of employment with the Company (the " Restricted Period "), the Executive shall not, directly or indirectly, (a) interfere with or attempt to interfere with the relationship between any person who is, or was during the then most recent 12-month period, an employee, officer, representative or agent of the Company Group, or solicit, induce or attempt to solicit or induce any of them to leave the employ of any member of the Company Group or violate the terms of their respective contracts, or any employment arrangements, with such entities; or (b) induce or attempt to induce any customer, client, supplier, licensee or other business relation of any member of the Company Group to cease doing business with any member of the Company Group, or in any way interfere with the relationship between any member of the Company Group and any customer, client, supplier, licensee or other business relation of any member of the Company Group. As used herein, the term " indirectly " shall include, without limitation, the Executive's permitting the use of the Executive's name by any competitor of any member of the Company Group to induce or interfere with any employee or business relationship of any member of the Company Group.
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8. Certain Remedies. (a) Injunctive Relief. Without intending to limit the remedies available to the Company Group, including, but not limited to, those set forth in Section 12 hereof, the Executive agrees that a breach of any of the covenants contained in Sections 5 through 7 of this Agreement may result in material and irreparable injury to the Company Group for which there is no adequate remedy at law, that it shall not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, any member of the Company Group shall be entitled to seek a temporary restraining order or a preliminary or permanent injunction, or both, without bond or other security, restraining the Executive from engaging in activities prohibited by the covenants contained in Sections 5 through 7 of this Agreement or such other relief as may be required specifically to enforce any of the covenants contained in this Agreement. Such injunctive relief in any court shall be available to the Company Group in lieu of, or prior to or pending determination in, any arbitration proceeding.
(b) Extension of Restricted Period. In addition to the remedies the Company may seek and obtain pursuant to Section 12, the Restricted Period shall be extended by any and all periods during which the Executive shall be found by a court possessing personal jurisdiction over her to have been in violation of the covenants contained in Sections 5 through 7 of this Agreement.
9. Defense of Claims. The Executive agrees that, during the Term, and for a period of six months after termination of the Executive's employment, upon request from the Company, the Executive shall cooperate with the Company in connection with any matters the Executive worked on during her employment with the Company and any related transitional matters. In addition, the Executive agrees to cooperate with the Company in the defense of any claims or actions that may be made by or against the Company Group that affect the Executive's prior areas of responsibility, except if the Executive's reasonable interests are adverse to the Company Group in such claim or action. The Company agrees to promptly reimburse the Executive for all of the Executive's reasonable travel and other direct expenses incurred, or to be reasonably incurred, to comply with the Executive's obligations under this Section 9.
10. Nondisparagement. The Executive agrees to refrain from (i) making, directly or indirectly, any derogatory comments concerning the Company Group or any current or former officers, directors, employees or shareholders thereof or (ii) taking any other action with respect to the Company Group which is reasonably expected to result, or does result in, damage to the business or reputation of the Company Group or any of its current or former officers, directors, employees or shareholders.
11. Source of Payments. All payments provided under this Agreement, other than payments made pursuant to a plan which provides otherwise, shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets shall be made, to assure payment. The Executive shall have no right, title or interest whatsoever in or to any investments which the Company may make to aid the Company in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company.
12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement or otherwise in connection with the Executive's employment by the Company that cannot be mutually resolved by the parties to this Agreement and their respective advisors and representatives shall be settled exclusively by arbitration in New Jersey in accordance with the rules of the American Arbitration Association before one arbitrator of exemplary qualifications and stature, who shall be selected jointly by an individual to be designated by the Company and an individual to be selected by the Executive, or if such two individuals cannot promptly agree on the selection of the arbitrator, who shall be selected by the American Arbitration Association.
13. Nonassignability; Binding Agreement. (a) By the Executive. This Agreement and any and all rights, duties, obligations or interests hereunder shall not be assignable or delegable by the Executive.
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(b) By the Company. This Agreement and all of the Company's rights and obligations hereunder shall not be assignable by the Company except as incident to a reorganization, merger or consolidation, or transfer of all or substantially all of the Company's assets.
(c) Binding Effect. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto, any successors to or assigns of the Company and the Executive's heirs and the personal representatives of the Executive's estate.
14. Withholding. Any payments made or benefits provided to the Executive under this Agreement shall be reduced by any applicable withholding taxes or other amounts required to be withheld by law or contract.
15. Amendment; Waiver. This Agreement may not be modified, amended or waived in any manner, except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement.
16. Governing Law. All matters affecting this Agreement, including the validity thereof, are to be governed by, and interpreted and construed in accordance with, the laws of the State of New Jersey applicable to contracts executed in and to be performed in that State.
17. Survival of Certain Provisions. The rights and obligations set forth in Sections 5 through 12 hereof shall survive any termination or expiration of this Agreement.
18. Entire Agreement Supersedes Previous Agreements. This Agreement, together with the (i) Employee Confidentiality and Innovations Agreement and (ii) Noncompete Agreement, contains the entire agreement and understanding of the parties hereto with respect to the matters covered herein and supersedes all prior or contemporaneous negotiations, commitments, agreements and writings with respect to the subject matter hereof, all such other negotiations, commitments, agreements and writings shall have no further force or effect, and the parties to any such other negotiation, commitment, agreement or writing shall have no further rights or obligations thereunder.
19. Counterparts. This Agreement may be executed by either of the parties hereto in counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.
20. Headings. The headings of sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
21. Notices. All notices or communications hereunder shall be in writing, addressed as follows:
To the Company:
2147
Route 27
Edison, N.J. 08817 or
23
Main Street
Holmdel, N.J. 07722, whichever is the last address on record for the Company
Attention: Jeffrey Citron, Chief Executive Officer
With a copy to:
Shearman
& Sterling LLP
599 Lexington Avenue
New York, New York 10022
Attention: John J. Cannon, III
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To the Executive:
5014
S. Perry Park Road
Sedalia, CO 80135 or the Executive's last address on record with the Company
All such notices shall be conclusively deemed to be received and shall be effective (i) if sent by hand delivery, upon receipt or (ii) if sent by electronic mail or facsimile, upon confirmation of receipt by the sender of such transmission.
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its officer pursuant to the authority of its Board, and the Executive has executed this Agreement, as of the day and year first written above.
VONAGE HOLDINGS CORP. | |||
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By: |
/s/ JOHN S. REGO Name: John S. Rego Title: Chief Financial Officer |
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August 8, 2005 |
ACCEPTED AND AGREED: | ||||
/s/ SHARON O'LEARY Sharon O'Leary |
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Dated: |
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August 8, 2005 |
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Exhibit 10.14
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated as of December 16, 2005 by and among Vonage Holdings Corp., a Delaware corporation (the "Company"), and the investors listed on the Schedule of Investors attached hereto and any additional investors that execute an Addendum pursuant to Section 2.1(c) of the Subscription Agreement (as defined below) and are made parties thereto and hereto (individually, an "Investor" and collectively, the "Investors").
WHEREAS:
A. On December 15, 2005, the Company and the Investors entered into a Subscription Agreement (the " Subscription Agreement "), pursuant to which, the Company is issuing, and the Investors are purchasing, convertible notes of the Company (the " Notes ").
B. The Notes are convertible into shares of Common Stock (as defined below).
C. In order to induce the Investors to enter into the Subscription Agreement, the Company has agreed to provide certain registration rights on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Investor hereby agrees as follows:
1. DEFINITIONS. As used in this agreement, the following terms shall have the following meanings:
" Agents " has the meaning set forth in Section 4.1.
" Agreement " has the meaning set forth in the Preamble.
" Blackout Notice " has the meaning set forth in Section 2.7.
" Blackout Period " has the meaning set forth in Section 2.7.
" Blue Sky Filing " has the meaning set forth in Section 4.1.
" Business Day " has the meaning set forth in the Notes.
" Claims " has the meaning set forth in Section 4.1.
" Common Stock " has the meaning set forth in the Notes.
" Company " has the meaning set forth in the Preamble.
" Conversion Shares " has the meaning set forth in the Subscription Agreement.
" Effectiveness Deadline " has the meaning set forth in Section 2.1(a).
" Effectiveness Failure " has the meaning set forth in Section 2.5(a).
" Effectiveness Period " has the meaning set forth in Section 2.5.
" Effective Registration " has the meaning set forth in the Notes.
" Exchange Act " has the meaning set forth in the Notes.
" Filing Deadline " has the meaning set forth in Section 2.1(a).
" Filing Failure " has the meaning set forth in Section 2.5(a).
" Holders " means the Investors and any other holder of Registrable Securities to whom the registration rights set forth in this Agreement have been assigned in accordance with the terms of this Agreement. For purposes of this Agreement, a Person will be deemed to be a Holder whenever such Person holds any Notes (or securities issued by the Company with respect to, in
exchange for, or in substitution of the Notes) convertible into or exercisable or exchangeable for, Registrable Securities, whether or not such conversion, exercise or exchange has actually been effected and disregarding any legal restrictions upon the exercise of such rights, and Registrable Securities issuable upon conversion, exchange or exercise of any such security shall be deemed outstanding for the purposes of this Agreement.
" Holders' Counsel " means one firm of counsel (per registration) to the Holders of Registrable Securities participating in such registration, which counsel shall be selected by the Majority Holders of the Registration.
" Initial Public Offering " means the first public offering of any class of securities of the Company pursuant to a registration statement filed with and declared effective by the SEC.
" Inspectors " has the meaning set forth in Section 3.1(g).
" Investors " has the meaning set forth in the Preamble.
" Maintenance Failure " has the meaning set forth in Section 2.5(a).
" Majority Holders " means the Holders of at least a majority of the outstanding Registrable Securities.
" Majority Holders of the Registration " means, with respect to a particular registration, one or more Holders of Registrable Securities who would hold a majority of the Registrable Securities to be included in such registration.
" NASD " means the National Association of Securities Dealers, Inc.
" Notes " has the meaning set forth in the Preamble.
" Person " has the meaning set forth in the Notes.
" Prospectus " means the prospectus included in a Registration Statement (including, without limitation, any preliminary prospectus and any prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), and any such Prospectus as amended or supplemented by any prospectus supplement, and all other amendments and supplements to such Prospectus, including post-effective amendments, and in each case including all material incorporated by reference (or deemed to be incorporated by reference) therein.
" Qualified IPO " has the meaning set forth in the Notes.
" Records " has the meaning set forth in Section 3.1(g).
" Registrable Securities " means (i) the Conversion Shares, and (ii) any other securities of the Company (or any successor or assign of the Company, whether by merger, consolidation, sale of assets or otherwise) which may be issued or issuable with respect to, in exchange for, or in substitution of, Registrable Securities referenced in clause (i) above by reason of any dividend or stock split, combination of shares, merger, consolidation, recapitalization, reclassification, reorganization, sale of assets or similar transaction. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (A) a registration statement with respect to the sale of such securities shall have been declared effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (B) such securities have been otherwise transferred, a new certificate or other evidence of ownership for them not bearing the legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not require registration under the Securities Act, (C) such securities shall have ceased to be outstanding, (D) two years from the date of original issuance of the Notes has passed, or (E) such securities shall be eligible for resale
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pursuant to Rule 144(k) of the Securities Act (or any successor provision thereof having similar effect).
" registration " refers to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the Securities Act and pursuant to Rule 415 and the declaration or ordering of effectiveness of such Registration Statement(s) by the SEC.
" Registration Default Payments " has the meaning set forth in Section 2.5(a).
" Registration Expenses " means any and all expenses incident to performance of or compliance with this Agreement by the Company and its Subsidiaries, including, without limitation, (i) all SEC, stock exchange, NASD and other registration, listing and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or "blue sky" laws and compliance with the rules of any stock exchange (including fees and disbursements of counsel in connection with such compliance and the preparation of a "blue sky" memorandum and legal investment survey), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing, distributing, mailing and delivering any Shelf Registration Statement, any Prospectus, transmittal letters, securities certificates and other documents relating to the performance of or compliance with this Agreement, (iv) the fees and disbursements of counsel for the Company and (v) the fees and disbursements of Holders' Counsel, which amount shall be limited to $20,000.
" Registration Statement " means any registration statement of the Company which covers any Registrable Securities and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference (or deemed to be incorporated by reference) therein.
" SEC " means the United States Securities and Exchange Commission.
" Securities Act " has the meaning set forth in the Notes.
" Shelf Registration " means the registration to be effected by the Company pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous or delayed basis.
" Shelf Registration Statement " means a Registration Statement required to be filed by the Company pursuant to Section 2.1.
" Subscription Agreement " has the meaning set forth in the Preamble.
" Transaction Document " has the meaning set forth in the Subscription Agreement.
" Underwriters " means the underwriters, if any, of the offering being registered under the Securities Act.
" Underwritten Offering " means a sale of securities of the Company to an Underwriter or Underwriters for reoffering to the public.
" Violation " has the meaning set forth in Section 4.1.
2. REGISTRATION UNDER THE SECURITIES ACT.
2.1 Shelf Registration.
(a) Within ninety (90) calendar days of the Effective Registration (the " Filing Deadline "), the Company shall be required to file a Shelf Registration Statement (the " Shelf Registration Statement ") on Form S-1, or any successor form thereto, for a public offering of the resale of all Registrable
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Securities held by all Holders. The Company shall use its reasonable best efforts to have such Shelf Registration Statement declared effective by the SEC as soon as practicable thereafter, but in any event within one hundred eighty (180) calendar days after the consummation of the Effective Registration (the " Effectiveness Deadline "), and to keep such Shelf Registration Statement continuously effective for the period specified in Section 2.1(b).
(b) The Company shall use commercially reasonable efforts to keep the Shelf Registration continuously effective for a period (the " Effectiveness Period ") from the date the Shelf Registration Statement is declared effective by the SEC until the earliest of (x) such time as Holders are eligible to sell all of their Registrable Securities in a sale pursuant to Section 144(k) of the Securities Act (or any successor provision thereof having similar effect), (y) two years from the date of original issuance of the Notes and (z) the date that all of the Registrable Securities covered by such Shelf Registration Statement have been sold.
2.2 Registration of Other Securities . Whenever the Company shall effect a Shelf Registration, no securities other than the Registrable Securities shall be covered by such registration unless the Majority Holders of the Registration shall have consented in writing to the inclusion of such other securities.
2.3 Expenses . The Company shall pay all Registration Expenses in connection with any Shelf Registration Statement hereunder. Each Holder shall pay all discounts and commissions payable to underwriters, selling brokers, managers or other similar Persons engaged in the distribution of such Holder's Registrable Securities pursuant to any registration pursuant to this Section 2 pro rata in accordance with the number of Registrable Securities being sold in the registration by such Holder.
2.4 Underwritten Offerings .
(a) Underwriting Agreements . If requested by the sole or lead managing Underwriter for any Underwritten Offering effected pursuant to the Shelf Registration Statement, the Company shall enter into a customary underwriting agreement with the Underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to the Majority Holders of the Registration.
(b) Holders of Registrable Securities to be Parties to Underwriting Agreement . The Holders of Registrable Securities to be distributed by Underwriters in an Underwritten Offering contemplated by this Section 2.4 shall be parties to the underwriting agreement between the Company and such Underwriters and may, at such Holders' option, require that any or all of the conditions precedent to the obligations of such Underwriters under such underwriting agreement be conditions precedent to the obligations of such Holders of Registrable Securities. No Holder shall be required to make any representations or warranties to, or agreements with, the Company or the Underwriters other than representations, warranties or agreements regarding such Holder, such Holder's Registrable Securities and such Holder's intended method of disposition.
(c) Participation in Underwritten Registration . Notwithstanding anything herein to the contrary, no Person may participate in any Underwritten Offering hereunder unless such Person (i) agrees to sell its securities on the same terms and conditions provided in any underwritten arrangements approved by the Persons entitled hereunder to approve such arrangement and (ii) accurately completes and executes in a timely manner all questionnaires, powers of attorney, indemnities, custody agreements, underwriting agreements and other documents customary for such an offering and reasonably required under the terms of such underwriting arrangements.
(d) In no event shall the Company be required to effect more than two (2) Underwritten Offerings.
2.5 Registration Default Penalties .
(a) If (i) the Shelf Registration Statement covering all of the Registrable Securities required to be covered thereby and required to be filed by the Company pursuant to this Agreement is (A) not filed
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with the SEC on or before the Filing Deadline (a " Filing Failure ") or (B) not declared effective by the SEC on or before the Effectiveness Deadline (an " Effectiveness Failure ") or (ii) after the effective date of such Shelf Registration Statement, after the second (2nd) consecutive Business Day (other than during an allowable Blackout Period hereunder) on which sales of all of the Registrable Securities required to be included on such Shelf Registration Statement cannot be made pursuant to such Shelf Registration Statement or otherwise (including, without limitation, because of a failure to keep such Shelf Registration Statement effective, to disclose such information as is necessary for sales to be made pursuant to such Shelf Registration Statement or to maintain the listing of the Common Stock) (a " Maintenance Failure "), then, as relief for the damages to any Holder by reason of any such delay in or reduction of its ability to sell the Registrable Securities, the Company shall pay to each Holder of Registrable Securities relating to such Shelf Registration Statement an amount in cash equal to (A) one percent (1.0%) of the aggregate principal amount of such Investor's Notes relating to the Registrable Securities included in such Shelf Registration Statement on each of the following dates: (i) the day of a Filing Failure; (ii) the day of an Effectiveness Failure; and (iii) the initial day of a Maintenance Failure, and (B) two percent (2.0%) of the aggregate principal amount of such Investor's Notes relating to the Registrable Securities included in such Shelf Registration Statement on each of the following dates: (i) on every thirtieth (30th) day after the day of a Filing Failure and thereafter (prorated for periods totaling less than thirty (30) days) until such Filing Failure is cured; (ii) on every thirtieth (30th) day after the day of an Effectiveness Failure and thereafter (prorated for periods totaling less than thirty (30) days) until such Effectiveness Failure is cured; (iii) on every thirtieth (30th) day after the initial day of a Maintenance Failure and thereafter (prorated for periods totaling less than thirty (30) days) until such Maintenance Failure is cured. The payments to which a Holder shall be entitled pursuant to this Section 2.5 are referred to herein as " Registration Default Payments ." Registration Default Payments shall be paid on the earlier of (I) the last day of the calendar month during which such Registration Default Payments are incurred and (II) the third (3rd) Business Day after the event or failure giving rise to the Registration Default Payments is cured. In the event the Company fails to make Registration Default Payments in a timely manner, such Registration Default Payments shall bear interest at the rate of one and one-half percent (1.5%) per month (prorated for partial months) until paid in full. If the Company has declared a Blackout Period pursuant to Section 2.7 hereof, a Maintenance Failure referred to in Section 2.5(a) hereof shall be deemed not to have occurred and be continuing in relation to the Shelf Registration Statement during the period specified under Section 2.7 hereof. Registration Default Payments shall be payable from the first day any Blackout Period exceeds the period specified under Section 2.7. Registration Default Payments shall cease to accrue at the end of the Effectiveness Period; provided that the foregoing shall not affect the Company's obligation to make Registration Default Payments for any period prior to such time.
2.6 Conversions; Exercises . Notwithstanding anything to the contrary herein, in order for any Registrable Securities that are issuable upon the exercise of conversion rights, options or warrants to be included in any registration pursuant to Section 2 hereof, the exercise of such conversion rights, options or warrants must be effected no later than immediately prior to the closing of any sales under the Shelf Registration Statement pursuant to which such Registrable Securities are to be sold or such earlier time as the Underwriter, if any, the Company or the Company's transfer agent should reasonably determine is necessary so as not to delay the closing.
2.7 Suspension Period . At any time after the Shelf Registration Statement is declared effective, the Company may suspend the use of the Prospectus for the Blackout Period (as defined below) (i) if the Board of Directors of the Company determines in good faith that such use at such time would not be advisable in light of pending or anticipated corporate developments, or (ii) if the Company is in possession of material, non-public information which the Board of Directors of the Company determines in good faith it is not in the best interests of the Company to disclose in a registration statement or the Prospectus at such time; provided , however , that the Company may only suspend the use of the Prospectus pursuant to this Section 2.7 by delivery of a Blackout Notice (as defined below)
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and require the Holders of Registrable Securities to discontinue the disposition of their securities covered by a Shelf Registration Statement only for forty-five (45) days in any ninety-day (90) period (the " Blackout Period "); provided that the Company may not declare more than three (3) Blackout Periods in any ninety-day (90) period and that Blackout Periods shall not exceed an aggregate of ninety (90) days in any three-hundred-sixty-day (360) period. The Company shall promptly notify the Holders in writing (a " Blackout Notice ") of any decision to discontinue sales of Registrable Securities covered by a Shelf Registration Statement pursuant to this Section 2.7 and shall include a general statement (which statement shall not include any material, non-public information) of the reason for such postponement, an approximation of the anticipated delay and an undertaking by the Company promptly (but in any event within two (2) Business Days) to notify the Holders as soon as a Shelf Registration Statement may be filed or declared effective or sales of Registrable Securities covered by a Shelf Registration Statement may resume. In making any such determination to initiate or terminate a Blackout Period, the Company shall not be required to consult with or obtain the consent of any Holder, and any such determination shall be the Company's sole responsibility. Each Holder shall treat all notices received from the Company pursuant to this Section 2.7 in the strictest confidence and shall not disseminate such information.
2.8 Preparation, Investigation . In connection with the preparation and filing of each Shelf Registration Statement, the Company will give the Holders of Registrable Securities to be sold under such Shelf Registration Statement, the Underwriters, if any, and their respective counsel and accountants, drafts and final copies of such Shelf Registration Statement, each Prospectus included therein or filed with the SEC and each amendment thereof or supplement thereto (subject to such Holder agreeing to keep confidential any confidential information including, if applicable, the existence of such draft Shelf Registration Statement until the filing thereof), at least four (4) Business Days prior to the filing thereof with the SEC, and will give each of them reasonable access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such Holders and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act.
2.9 Termination of Registration Rights . The rights and obligations under this Agreement, other than the rights and obligations under Sections 4, 5.1 and 5.4 through 5.19 hereunder, shall terminate with respect to a Holder of Registrable Securities upon the earlier of (x) when such Holder is eligible to sell all of its Registrable Securities in a sale pursuant to Rule 144(k) of the Securities Act (or any successor provision having similar effect), (y) two years from the date of original issuance of the Notes and (z) the date that all of the Registrable Securities shall have ceased to be Registrable Securities.
3. REGISTRATION PROCEDURES .
3.1 Obligations of the Company . In connection with the registration of Registrable Securities under the Securities Act pursuant to Section 2 of this Agreement, the Company shall, as expeditiously as practicable:
(a) Prepare and file with the SEC the Shelf Registration Statement to effect such registration, which Shelf Registration Statement shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and the Company shall use its reasonable best efforts to cause such Shelf Registration Statement to become effective as soon as practicable, but in any event, subject to Section 2.7, within the time frames specified herein; provided , however , that before filing a Shelf Registration Statement or Prospectus or any amendments or supplements thereto, or comparable statements under securities or "blue sky" laws of any jurisdiction, the Company shall (i) provide Holders' Counsel with an adequate and appropriate opportunity to participate in the preparation of such Shelf Registration Statement and each Prospectus included therein (and each amendment
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or supplement thereto or comparable statement) to be filed with the SEC, which documents shall be subject to the review and comment of Holders' Counsel, and (ii) not file any such Shelf Registration Statement or Prospectus (or amendment or supplement thereto or comparable statement) with the SEC to which Holder's Counsel or any Majority Holders of the Registration shall have reasonably objected on the grounds that such filing does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder.
(b) Prepare and file with the SEC such amendments and supplements to such Shelf Registration Statement and the Prospectus used in connection therewith as may be necessary (i) to keep such Shelf Registration Statement effective, (ii) to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Shelf Registration Statement, in each case until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller(s) thereof set forth in such Shelf Registration Statement and (iii) to add promptly (but in any event within five (5) Business Days of a request), to the Shelf Registration Statement any Holder of Registrable Securities requesting to be included therein; provided that the Company shall not be required pursuant to this clause (iii) to prepare and file with the SEC any such amendments or supplements more than one (1) time in any calendar month; provided such period need not extend beyond the time periods provided herein, including as set forth in Section 2.9, and which periods, in any event, shall terminate when all Registrable Securities covered by such Shelf Registration Statement have been sold (but not before the expiration of the ninety-day (90) period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable).
(c) Furnish, without charge, to each selling Holder of such Registrable Securities and each Underwriter, if any, of the securities covered by such Shelf Registration Statement, such number of copies of such Shelf Registration Statement, each amendment and supplement thereto (in each case including all exhibits), and the Prospectus included in such Shelf Registration Statement (including each preliminary Prospectus) in conformity with the requirements of the Securities Act, and other documents, as such selling Holder and Underwriter may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such selling Holder (the Company hereby consenting to the use in accordance with applicable law of each such Shelf Registration Statement (or amendment or post-effective amendment thereto) and each such Prospectus (or preliminary prospectus or supplement thereto) by each such selling Holder of Registrable Securities and the Underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Shelf Registration Statement or Prospectus).
(d) Prior to any public offering of Registrable Securities, use its reasonable best efforts to register or qualify all Registrable Securities and other securities covered by such Shelf Registration Statement under such other securities or "blue sky" laws of such U.S. jurisdictions as any selling Holder of Registrable Securities covered by such Shelf Registration Statement or the sole or lead managing Underwriter, if any, may reasonably request to enable such selling Holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such selling Holder and to continue such registration or qualification in effect in each such jurisdiction for as long as such Shelf Registration Statement remains in effect (including through new filings or amendments or renewals), and do any and all other acts and things which may be necessary or advisable to enable any such selling Holder to consummate the disposition in such jurisdictions of the Registrable Securities owned by such selling Holder; provided, however, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3.1(d), (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction.
(e) Use its reasonable best efforts to obtain all other approvals, consents, exemptions or authorizations from such U.S. governmental agencies or authorities as may be necessary to enable
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the selling Holders of such Registrable Securities to consummate the disposition of such Registrable Securities.
(f) Promptly (but in any event within two (2) Business Days) notify Holders' Counsel, each Holder of Registrable Securities covered by such Shelf Registration Statement and the sole or lead managing Underwriter, if any: (i) when the Shelf Registration Statement, any pre-effective amendment, the Prospectus or any prospectus supplement related thereto or post-effective amendment to the Shelf Registration Statement has been filed and, with respect to the Shelf Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any state securities or "blue sky" authority for amendments or supplements to the Shelf Registration Statement or the Prospectus related thereto or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Shelf Registration Statement or the initiation or threat of any proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction or the initiation of any proceeding for such purpose, (v) of the existence of any fact of which the Company becomes aware or the happening of any event which results in (A) the Shelf Registration Statement containing an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make any statements therein not misleading, or (B) the Prospectus included in such Shelf Registration Statement containing an untrue statement of a material fact or omitting to state a material fact required to be stated therein or necessary to make any statements therein, in the light of the circumstances under which they were made, not misleading, (vi) of the Company's reasonable determination that a post-effective amendment to a Shelf Registration Statement would be appropriate or that there exist circumstances not yet disclosed to the public which make further sales under such Shelf Registration Statement inadvisable pending such disclosure and post-effective amendment and (vii) if any sales of the Registrable Securities required to be included on such Shelf Registration Statement cannot be made pursuant to such Shelf Registration Statement or otherwise; and, if the notification relates to an event described in any of the clauses (ii) through (vii) of this Section 3.1(f), the Company shall promptly (but no event later than five (5) Business Days), subject to Section 2.7, prepare a supplement or post-effective amendment to such Shelf Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that (1) such Shelf Registration Statement shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (2) as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (and shall furnish to each such Holder and each Underwriter, if any, a reasonable number of copies of such Prospectus so supplemented or amended); and if the notification relates to an event described in clause (iii) of this Section 3.1(f), the Company shall take all reasonable action required to prevent the entry of such stop order or to remove it if entered.
(g) Solely for an Underwritten Offering or if any Holder is to be named as an Underwriter in the Shelf Registration Statement and subject to receipt of acceptable confidentiality agreements, make available for inspection by any selling Holder of Registrable Securities, any sole or lead managing Underwriter participating in any disposition pursuant to such Shelf Registration Statement, Holders' Counsel and any attorney, accountant or other agent retained by any such seller or any Underwriter (each, an " Inspector " and, collectively, the " Inspectors "), all financial and other records, pertinent corporate documents and properties of the Company and any subsidiaries thereof as may be in existence at such time (collectively, the " Records ") as shall be necessary, in the reasonable opinion of such Holders' and such Underwriters' respective counsel, to
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enable them to exercise their due diligence responsibility and to conduct a reasonable investigation within the meaning of the Securities Act, and cause the Company's and any subsidiaries' officers, directors and employees, and the independent public accountants of the Company, to supply all information reasonably requested by any such Inspectors in connection with such Shelf Registration Statement.
(h) Solely for an Underwritten Offering with anticipated gross proceeds of not less than $100 million or for other offerings for which a reasonable request is made by a Holder on the advice of counsel, obtain an opinion from the Company's counsel and a "cold comfort" letter from the Company's independent public accountants who have certified the Company's financial statements included or incorporated by reference in such Shelf Registration Statement, in each case dated the effective date of such Shelf Registration Statement (and if such registration involves an Underwritten Offering, dated the date of the closing under the related underwriting agreement), in customary form and covering such matters as are customarily covered by such opinions and "cold comfort" letters delivered to underwriters in underwritten public offerings, which opinion and letter shall be reasonably satisfactory to the sole or lead managing Underwriter, if any, and to the Majority Holders of the Registration, and furnish to each Holder participating in the offering and to each Underwriter, if any, a copy of such opinion and letter addressed to such Holder (in the case of the opinion) and Underwriter (in the case of the opinion and the "cold comfort" letter).
(i) Solely for an Underwritten Offering with anticipated gross proceeds of not less than $100 million, cause senior representatives of the Company to participate in any "road show" or "road shows" reasonably requested by any Underwriter of the Registrable Securities (taking into account the needs of the Company's businesses).
(j) Not later than the effective date of the Shelf Registration Statement provide a CUSIP number for all Registrable Securities and provide and cause to be maintained a transfer agent and registrar for all such Registrable Securities covered by such Shelf Registration Statement not later than the effectiveness of such Shelf Registration Statement.
(k) Otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC and any other governmental agency or authority having jurisdiction over the offering, and make available to its security holders, as soon as reasonably practicable but no later than ninety (90) days after the end of any twelve-month (12) period, an earnings statement (i) commencing at the end of any month in which Registrable Securities are sold to Underwriters in an Underwritten Offering and (ii) commencing with the first day of the Company's calendar month next succeeding each sale of Registrable Securities after the effective date of a Shelf Registration Statement, which statement shall cover such twelve-month (12) periods, in a manner which satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.
(l) Use its reasonable best efforts to cause all such Registrable Securities to be listed (i) on each national securities exchange on which the Company's securities are then listed or (ii) if securities of the Company are not at the time listed on any national securities exchange (or if the listing of Registrable Securities is not permitted under the rules of each national securities exchange on which the Company's securities are then listed), on a national securities exchange designated by the Majority Holders of the Registration.
(m) Keep each selling Holder of Registrable Securities reasonably advised in writing as to the initiation and progress of any registration under Section 2 hereunder.
(n) Enter into and perform customary agreements (including, if applicable, an underwriting agreement in customary form) and provide officers' certificates and, subject to Section 3.1(h), other customary closing documents.
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(o) Cooperate with each selling Holder of Registrable Securities and each Underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD and make reasonably available its employees and personnel and otherwise provide reasonable assistance to the Underwriters (taking into account the needs of the Company's businesses and the requirements of the marketing process) in the marketing of Registrable Securities in any Underwritten Offering.
(p) Furnish to each Holder participating in the offering and the sole or lead managing Underwriter, if any, without charge, (i) at least one (1) manually signed copy of the Shelf Registration Statement and any post-effective amendments thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those deemed to be incorporated by reference), (ii) upon the effectiveness of any Shelf Registration Statement, ten (10) copies of the prospectus included in such Shelf Registration Statement and all amendments and supplements thereto (or such other number of copies as such Holder may reasonably request) and (iii) such other documents, including copies of any preliminary or final prospectus, as such Holder may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Holder.
(q) Cooperate with the selling Holders of Registrable Securities and the sole or lead managing Underwriter, if any, to facilitate the timely preparation and delivery of certificates not bearing any restrictive legends representing the Registrable Securities to be sold, and cause such Registrable Securities to be issued in such denominations and registered in such names in accordance with the underwriting agreement prior to any sale of Registrable Securities to the Underwriters or, if not an Underwritten Offering, in accordance with the instructions of the selling Holders of Registrable Securities at least three (3) Business Days prior to any sale of Registrable Securities.
(r) If requested by the sole or lead managing Underwriter or any selling Holder of Registrable Securities, promptly incorporate in a prospectus supplement or post-effective amendment such information concerning such Holder of Registrable Securities, the Underwriters or the intended method of distribution as the sole or lead managing Underwriter or the selling Holder of Registrable Securities reasonably requests to be included therein and as is appropriate in the reasonable judgment of the Company, including, without limitation, information with respect to the number of shares of the Registrable Securities being sold to the Underwriters, the purchase price being paid therefor by such Underwriters and with respect to any other terms of the Underwritten Offering of the Registrable Securities to be sold in such offering; make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after being notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; and supplement or make amendments to any Shelf Registration Statement if requested by the sole or lead managing Underwriter of such Registrable Securities.
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(s) Subject to Section 2.7, submit to the SEC, within five (5) Business Days after the Company learns that no review of the Shelf Registration Statement will be made by the staff of the SEC or that the staff has no further comments on the Shelf Registration Statement, as the case may be, a request for acceleration of effectiveness of such Shelf Registration Statement to a time and date not later than forty-eight (48) hours after the submission of such request.
(t) Use its reasonable best efforts to take all other steps necessary to expedite or facilitate the registration and disposition of the Registrable Securities contemplated hereby.
3.2 Seller Information. As a condition to inclusion of the Holder's Registrable Securities, the Company may require each selling Holder of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding such Holder, such Holder's Registrable Securities and such Holder's intended method of disposition or any other information requested by the SEC as the Company may from time to time reasonably request in writing; provided that such information shall be used only in connection with such registration. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Holder that such Holder shall execute such documents in connection with such registration as the Company may reasonably request, including questionnaires, in a timely manner.
3.3 Notice to Discontinue. Each Holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3.1(f)(ii) through (vi), such Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the Shelf Registration Statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3.1(f) and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the Prospectus covering such Registrable Securities which is current at the time of receipt of such notice. If the Company shall give any such notice, the Company shall extend the period during which such Shelf Registration Statement shall be maintained effective pursuant to this Agreement (including, without limitation, the period referred to in Section 3.1(b)) by the number of days during the period from and including the date of the giving of such notice pursuant to Section 3.1(f) to and including the date when the Holder shall have received the copies of the supplemented or amended prospectus contemplated by and meeting the requirements of Section 3.1(f).
4. INDEMNIFICATION; CONTRIBUTION.
4.1 Indemnification by the Company. The Company agrees to indemnify and hold harmless, to the fullest extent permitted by law, each Holder, its officers, directors (or Persons in similar positions), partners (general or limited), members, shareholders, equity holders, employees, affiliates and agents (collectively, " Agents ") and each Person who controls such Holder (within the meaning of the Securities Act) and its Agents with respect to each registration which has been effected pursuant to this Agreement, against any and all losses, claims, judgments, fines, penalties, charges, amounts paid in settlement, damages or liabilities, joint or several, actions or proceedings (whether commenced or threatened) in respect thereof, and expenses (as incurred or suffered and including, but not limited to, any and all expenses incurred in investigating, preparing or defending any litigation or proceeding, whether commenced or threatened, and the reasonable fees, disbursements and other charges of legal counsel) in respect thereof (collectively, " Claims "), insofar as such Claims arise out of or are based upon (i) any untrue or alleged untrue statement of a material fact contained in any Shelf Registration Statement or Prospectus (including any preliminary, final or summary prospectus and any amendment or supplement thereto) related to any such registration or in any filing prepared or executed by the Company (or based upon written information furnished by or on behalf of the Company expressly for use in such filing) in connection with the qualification of the offering under the securities or other
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"blue sky" laws of any jurisdiction in which Registrable Securities are offered (" Blue Sky Filing "), or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein (in the case of any such Prospectus (including any preliminary, final or summary prospectus and any amendment or supplement thereto), in the light of the circumstances under which they were made) not misleading or (ii) any violation of this Agreement (the matters in the foregoing clauses (i) through (ii) being, collectively, " Violations "); provided, however, that the Company will not be liable in any such case to the extent that any such Claims arise out of or are based upon a Violation which occurs in reliance on any untrue statement or alleged untrue statement of a material fact or omission or alleged omission of a material fact so made in reliance upon and in conformity with written information furnished to the Company in an instrument duly executed by such Holder specifically stating that it was expressly for use therein. Notwithstanding the foregoing, the indemnification contained in this Section 4.1 shall not apply if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the final prospectus, as then amended or supplemented, if such final prospectus was timely made available by the Company pursuant to Section 3.1(c). The Company shall also indemnify any Underwriters in an Underwritten Offering of the Registrable Securities, their Agents and each Person who controls any such Underwriter (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Holders of Registrable Securities. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of any Person who may be entitled to indemnification pursuant to this Section 4 and shall survive the transfer of securities by such Holder or Underwriter and termination of this Agreement.
4.2 Indemnification by Holders. Each Holder, if Registrable Securities held by it are included in the securities as to which a registration is being effected, agrees to, severally and not jointly, indemnify and hold harmless, to the fullest extent permitted by law, the Company, its directors and officers, each other Person who participates as an Underwriter in the offering or sale of such securities and its Agents and each Person who controls the Company or any such Underwriter (within the meaning of the Securities Act) and its Agents against any and all Claims, insofar as such Claims arise out of or are based upon any untrue or alleged untrue statement of a material fact contained in any Shelf Registration Statement or Prospectus (including any preliminary, final or summary prospectus and any amendment or supplement thereto) related to such registration, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of any such Prospectus (including any preliminary, final or summary prospectus and any amendment or supplement thereto), in the light of the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company in an instrument duly executed by such Holder specifically stating that it was expressly for use therein; provided, however, that the aggregate amount which any such Holder shall be required to pay pursuant to this Section 4.2 shall in no event be greater than the amount of the net proceeds received by such Holder upon the sale of the Registrable Securities pursuant to the Shelf Registration Statement giving rise to such Claims less all amounts previously paid by such Holder with respect to any such Claims. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such indemnified party and shall survive the transfer of such securities by such Holder or Underwriter and termination of this Agreement.
4.3 Conduct of Indemnification Proceedings. Promptly after receipt by an indemnified party of notice of any Claim or the commencement of any action or proceeding involving a Claim under this Section 4, such indemnified party shall, if a Claim in respect thereof is to be made against the indemnifying party pursuant to this Section 4, (i) notify the indemnifying party in writing of the Claim or the commencement of such action or proceeding; provided, that the failure of any indemnified party to provide such notice shall not relieve the indemnifying party of its obligations under this Section 4, except to the extent the indemnifying party is materially and actually prejudiced thereby and shall not
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relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under this Section 4, and (ii) permit such indemnifying party to assume the defense of such Claim with counsel reasonably satisfactory to the indemnified party; provided, however, that any indemnified party shall have the right to employ separate counsel and to participate in the defense of such Claim, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (A) the indemnifying party has agreed in writing to pay such fees and expenses, (B) the indemnifying party shall have failed to assume the defense of such Claim and employ counsel reasonably satisfactory to such indemnified party within ten (10) days after receiving notice from such indemnified party that the indemnified party believes it has failed to do so, (C) in the reasonable judgment of any such indemnified party, based upon advice of counsel, a conflict of interest may exist between such indemnified party and the indemnifying party with respect to such Claims (in which case, if the indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such Claim on behalf of such indemnified party) or (D) such indemnified party is a defendant in an action or proceeding which is also brought against the indemnifying party and reasonably shall have concluded that there may be one or more legal defenses available to such indemnified party which are not available to the indemnifying party. No indemnifying party shall be liable for any settlement of any such claim or action effected without its written consent, which consent shall not be unreasonably withheld. In addition, without the consent of the indemnified party (which consent shall not be unreasonably withheld), no indemnifying party shall be permitted to consent to entry of any judgment with respect to, or to effect the settlement or compromise of any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim), unless such settlement, compromise or judgment (1) includes an unconditional release of the indemnified party from all liability arising out of such action or claim, (2) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party, and (3) does not provide for any action on the part of any party other than the payment of money damages which is to be paid in full by the indemnifying party.
4.4 Contribution. If the indemnification provided for in Section 4.1 or 4.2 from the indemnifying party for any reason is unavailable to (other than by reason of exceptions provided therein), or is insufficient to hold harmless, an indemnified party hereunder in respect of any Claim, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such Claim in such proportion as is appropriate to reflect the relative fault of the indemnifying party, on the one hand, and the indemnified party, on the other hand, in connection with the actions which resulted in such Claim, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. If, however, the foregoing allocation is not permitted by applicable law, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative faults but also the relative benefits of the indemnifying party and the indemnified party as well as any other relevant equitable considerations.
The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by a party as a result of any Claim referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth in Section 4.3, any legal or other fees, costs or expenses reasonably incurred by such party in connection with any investigation or
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proceeding. Notwithstanding anything in this Section 4.4 to the contrary, no indemnifying party (other than the Company) shall be required pursuant to this Section 4.4 to contribute any amount in excess of the net proceeds received by such indemnifying party from the sale of the Registrable Securities pursuant to the Shelf Registration Statement giving rise to such Claims, less all amounts previously paid by such indemnifying party with respect to such Claims. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
4.5 Other Indemnification. Indemnification similar to that specified in the preceding Sections 4.1 and 4.2 (with appropriate modifications) shall be given by the Company and each selling Holder of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority, other than the Securities Act. The indemnity agreements contained herein shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract.
4.6 Indemnification Payments. The indemnification and contribution required by this Section 4 shall be made by periodic payments of the amount thereof during the course of any investigation or defense, as and when bills are received or any expense, loss, damage or liability is incurred; provided that if a final nonappealable determination is made that the party receiving such expense payments was not entitled to such payments pursuant to the provisions of this Section 4, then the party receiving such expense payments shall return such expense payments to the party that made such payments.
5. GENERAL.
5.1 Adjustments Affecting Registrable Securities. The Company agrees that it shall not effect or permit to occur any combination or subdivision of shares which would, in the Company's reasonable judgment, adversely affect the ability of the Holder of any Registrable Securities to include such Registrable Securities in a registration contemplated by this Agreement or the marketability of such Registrable Securities in such registration.
5.2 Registration Rights to Others. If the Company shall at any time hereafter provide to any holder of any securities of the Company rights with respect to the registration of such securities under the Securities Act, (i) such rights shall not be in conflict with or adversely affect any of the rights provided in this Agreement to the Holders and (ii) if such rights are provided on terms or conditions more favorable to such holder than the terms and conditions provided in this Agreement, the Company shall provide (by way of amendment to this Agreement or otherwise) such more favorable terms or conditions to the Holders.
5.3 Reports Under the 1934 Act. With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration (" Rule 144 "), for so long as the Company is required to file reports with the SEC pursuant to Section 13(a) or 15(d) of the 1934 Act the Company agrees to:
(a) file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and
(b) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual report of the Company and such other reports and documents so filed by the Company with the SEC, and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration.
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5.4 Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election in writing delivered to the Company, be treated as the Holder of such Registrable Securities for purposes of any request or other action by any Holder or Holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any Holder or Holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities.
5.5 No Inconsistent Agreements. The Company will not hereafter enter into any agreement which is inconsistent with the rights granted to the Holders in this Agreement.
5.6 Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile; (iii) three days after being sent by U.S. certified mail, return receipt requested; or (iv) one Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:
If
to the Company, to:
Vonage Holdings Corp.
23 Main Street
Holmdel, New Jersey 07333-2136
Telephone: (732) 528-2600
Facsimile: (732) 202-5221
Attention: Sharon O'Leary, Esq.
with a copy (for informational purposes only) to:
Shearman & Sterling LLP
599 Lexington Avenue
New York, New York 10022
Telephone: (212) 848-4000
Facsimile: (212) 848-7179
Attention: James S. Scott, Sr., Esq.
If to an Investor, to its address and facsimile number set forth on the Schedule of Investors to this Agreement, with copies (for informational purposes only) to such Investor's representatives as set forth on the Schedule of Investors, or to such other address and/or facsimile number and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission, (C) contained in a return receipt when delivery is by U.S. certified mail or (D) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile, receipt by U.S. certified mail or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii), (iii) or (iv) above, respectively.
5.7 No Waiver. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.
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5.8 Governing Law; Jurisdiction; Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
5.9 Entire Agreement. This Agreement, the other Transaction Documents (as defined in the Subscription Agreement) and the instruments referenced herein and therein constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the other Transaction Documents and the instruments referenced herein and therein supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.
5.10 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors and permitted assigns (including any permitted transferee of Registrable Securities). Any Holder may assign its rights and obligations under this Agreement to any transferee of Registrable Securities; provided, however, if any such transferee shall take and hold Registrable Securities, such transferee shall promptly notify the Company and by taking and holding such Registrable Securities such permitted transferee shall automatically be entitled to receive the benefits of and be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement as if it were a party hereto (and shall, for all purposes, be deemed a Holder under this Agreement). Except as provided above or otherwise permitted by this Agreement, neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by any Holder or by the Company without the consent of the other parties hereto.
5.11 Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
5.12 Counterparts. This Agreement may be executed in two (2) or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature.
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5.13 Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
5.14 Consents. All consents and other determinations required to be made by the Investors pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by the Majority Holders.
5.15 No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party.
5.16 No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.
5.17 Amendments and Waivers. The provisions of this Agreement may not be amended, modified, supplemented or terminated, and waivers or consents to departures from the provisions hereof may not be given without the written consent of the Company and the Majority Holders; provided, however, that no such amendment, modification, supplement, waiver or consent to departure shall reduce the aforesaid percentage of Registrable Securities without the written consent of all of the Holders of Registrable Securities; and provided further that nothing herein shall prohibit any amendment, modification, supplement, termination, waiver or consent to departure the effect of which is limited only to those Holders who have agreed in writing to such amendment, modification, supplement, termination, waiver or consent to departure.
5.18 Remedies; Specific Performance. The parties hereto acknowledge that money damages would not be an adequate remedy at law if any party fails to perform in any material respect any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to seek to compel specific performance of the obligations of any other party under this Agreement, without the posting of any bond, in accordance with the terms and conditions of this Agreement in any court of the United States or any state thereof having jurisdiction, and if any action should be brought in equity to enforce any of the provisions of this Agreement, none of the parties hereto shall raise the defense that there is an adequate remedy at law. Except as otherwise provided by law, a delay or omission by a party hereto in exercising any right or remedy accruing upon any such breach shall not impair the right or remedy or constitute a waiver of or acquiescence in any such breach. No remedy shall be exclusive of any other remedy. All available remedies shall be cumulative.
5.19 Independent Nature of Investors' Obligations and Rights. The obligations of each Investor under any Transaction Document are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Investor pursuant hereto or thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Investor confirms that it has independently participated in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors. Each Investor shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Investor to be joined as an additional party in any proceeding for such purpose.
[Signature Page Follows]
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IN WITNESS WHEREOF , each Investor and the Company have caused this Registration Rights Agreement to be duly executed as of the date first written above.
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COMPANY: |
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VONAGE HOLDINGS CORP. |
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By: |
/s/ JOHN S. REGO Name: John S. Rego Title: Executive Vice President and Chief Financial Officer |
IN WITNESS WHEREOF , each Investor and the Company have caused this Registration Rights Agreement to be duly executed as of the date first written above.
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INVESTORS: |
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AMARANTH LLC |
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By: |
Amaranth Advisors L.L.C., its Trading Advisor |
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By: |
/s/ KARL J. WACHTER Name: Karl J. Wachter Title: Authorized Signatory |
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BAUPOST LIMITED PARTNERSHIP 1983 A-1
BAUPOST LIMITED PARTNERSHIP 1983 B-1 BAUPOST LIMITED PARTNERSHIP 1983 C-1 HB INSTITUTIONAL LIMITED PARTNERSHIP PB INSTITUTIONAL LIMITED PARTNERSHIP YB INSTITUTIONAL LIMITED PARTNERSHIP BAUPOST VALUE PARTNERS, L.P.-I BAUPOST VALUE PARTNERS, L.P.-II BAUPOST VALUE PARTNERS, L.P.-III |
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By: |
The Baupost Group, L.L.C., their general partner |
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By: |
/s/ REUBEN MUNGER Name: Reuben Munger Title: Managing Director |
CANYON VALUE REALIZATION FUND, L.P.
FINVEST CAPITAL LIMITED CANYON BALANCED EQUITY MASTER FUND, LTD. CITI CANYON LTD. CANYON VALUE REALIZATION MAC-18 LTD. INSTITUTIONAL BENCHMARKS SERIES (MASTER FEEDER) LTD. IN RESPECT OF CENTAUR SERIES |
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By: |
CANYON CAPITAL ADVISORS LLC, their investment advisor |
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By: |
/s/ JOSHUA S. FRIEDMAN Name: Joshua S. Friedman Title: Managing Partner |
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CITICORP NORTH AMERICA, INC. |
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By: |
/s/ CRAIG FARR Name: Craig Farr Title: Managing Director |
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By: |
/s/ JONATHAN TURNBULL Name: Jonathan Turnbull Title: Managing Director |
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EMPYREAN CAPITAL FUND, LP |
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By: |
/s/ ANTHONY HYNES Name: Anthony Hynes Title: Authorized Signer |
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EMPYREAN CAPITAL OVERSEAS FUND, LTD |
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By: |
/s/ ANTHONY HYNES Name: Anthony Hynes Title: Authorized Signer |
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EMPYREAN CAPITAL OVERSEAS BENEFIT PLAN FUND, LTD |
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By: |
/s/ ANTHONY HYNES Name: Anthony Hynes Title: Authorized Signer |
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ETON PARK FUND, L.P. |
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By: |
its investment manager, Eton Park Capital Management, L.P. |
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By: |
/s/ MARCY ENGEL Name: Marcy Engel Title: General Counsel |
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ETON PARK MASTER FUND, LTD. |
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By: |
its investment manager, Eton Park Capital Management, L.P. |
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By: |
/s/ MARCY ENGEL Name: Marcy Engel Title: General Counsel |
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GLG MARKET NEUTRAL FUND |
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By: |
/s/ TIM KUSCHILL Name: Tim Kuschill Title: Legal Counsel, GLG Partners LP |
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By: |
/s/ VICTORIA PARRY Name: Victoria Parry Title: Senior Legal Counsel, GLG Partners LP |
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GREYWOLF CAPITAL PARTNERS II LP |
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By: |
/s/ BILL TROY Name: Bill Troy Title: Partner |
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GREYWOLF CAPITAL OVERSEAS FUND |
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By: |
/s/ BILL TROY Name: Bill Troy Title: Partner |
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HIGHBRIDGE INTERNATIONAL LLC |
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By: |
Highbridge Capital Management, LLC |
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By: |
/s/ ADAM J. CHILL Name: Adam J. Chill Title: Managing Director |
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JEFFREY A. CITRON |
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By: |
/s/ JEFFREY A. CITRON Name: Jeffrey A. Citron |
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KFN PEI II, LLC |
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By: |
/s/ DAVID A. NETJES Name: David A. Netjes Title: Authorized Signatory |
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KINGS ROAD INVESTMENTS LTD. |
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By: |
/s/ BRANDON L. JONES Name: Brandon L. Jones Title: Authorized Signatory |
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LEONARDO, L.P. |
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By: |
Leonardo Capital Management, Inc., its General Partner |
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By: |
Angelo, Gordon & Co., L.P., its Director |
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By: |
/s/ FRED BERGER Name: Fred Berger Title: Chief Administrative Officer |
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MAGNETAR CAPITAL MASTER FUND, LTD |
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By: |
Magnetar Financial LLC, its Investment Manager |
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By: |
/s/ PAUL SMITH Name: Paul Smith Title: General Counsel |
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MERITECH CAPITAL PARTNERS II L.P. |
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By: |
Meritech Capital Associates II L.L.C. its General Partner |
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By: |
Meritech Management Associates II L.L.C. a managing member |
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By: |
/s/ MICHAEL B. GORDON Name: Michael B. Gordon Title: |
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MERITECH CAPITAL AFFILIATES II L.P. |
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By: |
Meritech Capital Associates II L.L.C. its General Partner |
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By: |
Meritech Management Associates II L.L.C. a managing member |
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By: |
/s/ MICHAEL B. GORDON Name: Michael B. Gordon Title: |
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MCP ENTREPRENEUR PARTNERS II L.P. |
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By: |
Meritech Capital Associates II L.L.C. its General Partner |
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By: |
Meritech Management Associates II L.L.C. a managing member |
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By: |
/s/ MICHAEL B. GORDON Name: Michael B. Gordon Title: |
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MILLENNIUM PARTNERS, L.P. |
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By: |
Millennium Management, L.L.C. |
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By: |
/s/ TERRY FEENEY Name: Terry Feeney Title: Chief Operating Officer |
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NEW ENTERPRISE ASSOCIATES 10, L.P. |
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By: |
NEA Partners 10, L.P., its General Partner |
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By: |
/s/ EUGENE A. TRAINOR, III Name: Eugene A. Trainor, III Title: General Partner |
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NEW ENTERPRISE ASSOCIATES 11, L.P. |
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By: |
NEA Partners 11, L.P., its General Partner |
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By: |
NEA 11 GP, LLC, its General Partner |
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By: |
/s/ EUGENE A. TRAINOR, III Name: Eugene A. Trainor, III Title: Manager |
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OAK HILL SECURITIES FUND, L.P. |
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By: |
Oak Hill Securities GenPar, L.P., its General Partner |
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By: |
Oak Hill Securities MGP, Inc., its General Partner |
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By: |
/s/ SCOTT D. KRASE Name: Scott D. Krase Title: Authorized Person |
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OAK HILL CREDIT ALPHA FUND, L.P. |
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By: |
Oak Hill Credit Alpha GenPar, L. P., its General Partner |
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By: |
Oak Hill Credit Alpha MGP, LLC, its General Partner |
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By: |
/s/ SCOTT D. KRASE Name: Scott D. Krase Title: Authorized Person |
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OAK HILL SECURITIES FUND II, L.P. |
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By: |
Oak Hill Securities GenPar II L.P., its General Partner |
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By: |
Oak Hill Securities MGP II, Inc., its General Partner |
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By: |
/s/ SCOTT D. KRASE Name: Scott D. Krase Title: Authorized Person |
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OAK HILL CREDIT ALPHA FUND (OFFSHORE), L.P. |
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By: |
/s/ SCOTT D. KRASE Name: Scott D. Krase Title: Authorized Person |
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LERNER ENTERPRISES, L.P. |
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By: |
Oak Hill Advisors, L.P. as Investment Manager for Lerner Enterprises, L.P. |
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By: |
/s/ SCOTT D. KRASE Name: Scott D. Krase Title: Authorized Person |
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OAK HILL CREDIT OPPORTUNITIES FINANCING, LTD. |
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By: |
/s/ SCOTT D. KRASE Name: Scott D. Krase Title: Authorized Person |
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BROOKSIDE CAPITAL PARTNERS FUND, L.P. |
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By: |
/s/ DOMENIC FERRANTE Name: Domenic Ferrante Title: Managing Director |
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SANKATY CREDIT OPPORTUNITIES, LP |
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By: |
/s/ JONATHAN LAURIE Name: Jonathan Laurie Title: Managing Director |
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SANKATY CREDIT OPPORTUNITIES II, LP |
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By: |
/s/ JONATHAN LAURIE Name: Jonathan Laurie Title: Managing Director |
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PROSPECT HARBOR CREDIT PARTNERS, LP |
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By: |
/s/ JONATHAN LAURIE Name: Jonathan Laurie Title: Managing Director |
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SANKATY HIGH YIELD PARTNERS II, LP |
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By: |
/s/ JONATHAN LAURI Name: Jonathan Laurie Title: Managing Director |
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SANKATY HIGH YIELD PARTNERS III, LP |
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By: |
/s/ JONATHAN LAURIE Name: Jonathan Laurie Title: Managing Director |
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SHEPHERD INVESTMENTS INTERNATIONAL, LTD. |
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By: |
Stark Offshore Management, LLC, its Investment Manager |
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By: |
/s/ MICHAEL A. ROTH Name: Michael A. Roth Title: Managing Member |
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STANFIELD OFFSHORE LEVERAGED ASSETS LTD. |
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By: |
/s/ CHRIS PUCILLO Name: Chris Pucillo Title: Portfolio Manager |
Exhibit 16.1
April 6, 2006
Securities
and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Commissioners:
We have read the statements made by Vonage Holdings Corp., in its Registration Statement on Amendment No. 1 to Form S-1, under the caption "Changes in Accountants". We agree with the statements concerning our Firm contained therein. However, we make no comment whatsoever regarding the statement made subsequent to our dismissal.
Very truly yours,
/s/ Amper, Politziner & Mattia, P.C.
Exhibit 21.1
Vonage Holdings Corp.
List of Subsidiaries
Name
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Jurisdiction of Incorporation
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Vonage Worldwide Inc. |
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Delaware |
Vonage Network Inc. |
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Delaware |
Vonage America Inc. |
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Delaware |
Vonage Marketing Inc. |
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Delaware |
Novega Venture Partners, Inc. |
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Delaware |
Vonage International Inc. |
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Delaware |
Vonage Canada Corp. |
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Canada |
Vonage A/S |
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Denmark |
Vonage B.V. |
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The Netherlands |
Vonage Limited |
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United Kingdom |
Vonage Singapore Pte. Ltd. |
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Singapore |
Vonage Limited |
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Hong Kong |
Vonage Australia Pty. Ltd. |
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Australia |
Vonage India Pvt. Ltd. |
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India |
Exhibit 23.2
Vonage
Holdings Corp.
23 Main Street
Holmdel, N.J. 07733
We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated March 24, 2006, relating to the consolidated financial statements of Vonage Holdings Corp., which is contained in that Prospectus, and of our report dated March 24, 2006, relating to the schedule, which is contained in Part II of the Registration Statement.
We also consent to the reference to us under the caption "Experts" in the Prospectus.
/s/ BDO
Seidman, LLP
New York, NY
April 7, 2006
Exhibit 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statement (No. 333-131659) on Amendment No. 1 to Form S-1 of our report dated October 6, 2004, with respect to the financial statements and financial statement schedule of Vonage Holdings Corp. for the year ended December 31, 2003, which appears in such registration statement. We also consent to the reference to us under the heading "Experts" in such registration statement.
/s/ AMPER, POLITZINER & MATTIA P.C.
April 7, 2006
Edison, New Jersey
Exhibit 24.2
I, Michael Snyder, Chairman and Chief Executive Officer of Vonage Holdings Corp., hereby constitute and appoint John S. Rego and Sharon A. O'Leary, and each of them acting alone, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for me and in my name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to the Registration Statement on Form S-1 (Registration No. 333-131659) (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended) and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and any applicable securities exchange or securities self-regulatory body, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.
/s/
MICHAEL SNYDER
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Name: | Michael Snyder | |||
Title: | Director and Chief Executive Officer |