Vonage Files IPO

The voice over Internet phone company wants to sell $250 million in stock.
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Internet phone player

Vonage

filed to raise $250 million in an initial public offering and named a new CEO.

The Holmdel, N.J., company tapped Mike Snyder as CEO. Snyder was president of

Tyco's

(TYC)

ADT security unit. With Snyder's arrival, founder Jeffrey Citron becomes chief strategist, where he "can dedicate his time to focusing on moving the company into new product areas, technologies, growth opportunities and employee culture," Vonage said.

Vonage said the IPO will be led by Citigroup, Deutsche Bank Securities and UBS Investment Bank.

Like so many companies in the faster-growing areas of tech, Vonage has been losing money and plans to continue to do so. "Our revenues were $18.7 million in 2003, $79.7 million in 2004, and $174.0 million for the nine months ended Sept. 30, 2005," the company's prospectus says.

"While our revenues have grown rapidly, we have experienced increasing net losses, primarily driven by our increase in marketing expenses. From the period of inception through Sept. 30, 2005, our cumulative net loss was $310.0 million. Our net loss for the nine months ended Sept. 30, 2005, was $189.6 million. During the same nine-month period, our marketing expenses were $176.3 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," Vonage adds. "While this strategy will have 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."

The company also notes what it calls Citron's "past background."

  "Prior to joining Vonage, Mr. Citron was ... one of the principal executive officers and largest stockholders of Datek Online," the prospectus notes in its risk factors section. "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."

Vonage goes on to add that "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."

The news comes just months after Vonage rival Skype was acquired by

eBay

(EBAY) - Get Report

in a $2.6 billion deal widely criticized for its rich price tag. VoIP players like Skype and Vonage have grown fast in recent years, but their very success has prodded big rivals like

AT&T

(T) - Get Report

and

Verizon

(VZ) - Get Report

to roll out competing offerings, cutting into the upstarts' market opportunity.