Real-World Case Following the cash
Vonage Holding Corporation provides telecommunication services using voice over internet
technology. It began operations in 2002 and has never made a profit. By the end of 2008 it had
cumulative losses of $1 billion. Vonage’s statements of cash flows for 2006, 2007, and 2008 follow.
VONAGE HOLDING CORP. Statements of cash flows (amount in thousand) |
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| For the Years Ended | ||
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| 2008 | 2007 | ; 2006 |
Cash Flows from Operating Activities Net income (loss) Depreciation and amortization and impairment charges Amortization of intangibles |
| $ (64,576)) 45,796 33,574 2,816 | $(267,428 33,574 2,144 | $(338,573) 22,709 968 |
| FOR the Years Ended | ||
| 2008 | 2007 | 2006 |
Loss on early extinguishment of notes | 30,570 | — | — |
Beneficial conversion on interest in kind on convertible notes | 108 | 42 | 32 |
Amortization of discount on debt | 882 | — | — |
Accrued interest | 3,014 | 846 | 4,002 |
Allowance for doubtful accounts | 207 | 1,852 | 266 |
Allowance for obsolete inventory | 1,519 | 2,799 | 1,441 |
Amortization of deferred financing costs | — | 4,689 | 1,999 |
Amortization of debt-related costs | 3,237 | — | — |
Loss (gain) on disposal of fixed assets | 12 | 283 | 320 |
Share-based expense | 12,238 | 7,542 | 26,980 |
Other adjustments | — | — | (49) |
Accounts receivable | 2,028 | (5,296) | (10,196) |
Inventory | 7,472 | 2,196 | (10,133) |
Prepaid expenses and other current assets | (282) | (6,185) | (6,218) |
Deferred customer acquisition costs | 13,322 | (10,796) | (21,053) |
Due from related parties | 2 | 74 | 32 |
Other assets | (7,498) | (81) | (294) |
Accounts payable | (22,029) | (2,966) | 42,407 |
Accrued expenses | (12,738) | (77,770) | 62,281 |
Deferred revenue | (10,124) | 20,509 | 34,181 |
Other liability | (5,321) | 23,046 | — |
Net cash flows from operating activities | 855 | (270,926) | (188,898) |
Cash Flows from Investing Activities |
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Capital expenditures | (11,386) | (20,386) | (48,601) |
Purchase of intangible assets | (560) | (5,500) | (5,268) |
Purchase of marketable securities | (21,375) | (236,875) | (639,707) |
Maturities and sales of marketable securities | 101,317 | 446,949 | 484,116 |
Acquisition and development of software assets | (26,530) | (21,346) | (4060) |
Decrease (increase) in restricted cash | (980) | (31,385) | (543) |
Net cash flows from investing activities | 40,486 | 131,457 | (210,798) |
Cash Flows from Financing Activities |
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Principal payments on capital lease obligations | (1,036) | (1,020) | (826) |
Principal payments on debt | (326) | — | — |
Proceeds from issuance of debt | 223,200 | — | 2,047 |
Discount on notes payable | (7,167) | — | — |
Early extinguishment of notes | (253,460) | — | — |
Debt-related costs | (26,799) | — | (283) |
Proceeds from subscription receivable, net | 9 | 279 | 169 |
Proceeds from common stock issuance, net | — | — | 493,040 |
Purchase of treasury stock | — | — | (11,723) |
Proceeds (payments) for directed-share program, net | 62 | 169 | (5,426) |
Proceeds from exercise of stock options | 47 | 817 | 431 |
Net cash flows from financing activities | (65,470) | 245 | 477,429 |
Effect of exchange rate changes on cash | (1,079) | 513 | (29) |
Net change in cash and cash equivalents | (25,408) | (138,711) | 77,704 |
Cash and cash equivalents, beginning of period | 71,542 | 210,253 | 132,549 |
Cash and cash equivalents, end of period | $ 46,134 | $ 71,542 | $ 210,253 |
Required
a. This chapter explained that many companies that report net losses on their earnings statements report positive cash flows from operating activities. How does Vonage’s net income for each year compare to its cash flows from operating activities?
b. Based only on the information in the statements of cash flows, does Vonage appear to be improving its position in the telecommunications business? Explain.
c. In 2008 Vonage paid off over $250 million in debt. Where did it get the funds to repay this debt?
d. All things considered, based on the information in its statements of cash flows, did Vonage’s cash position appear to be improving or deteriorating?
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