Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - BROADVIEW NETWORKS HOLDINGS INC | c92197exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - BROADVIEW NETWORKS HOLDINGS INC | c92197exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - BROADVIEW NETWORKS HOLDINGS INC | c92197exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - BROADVIEW NETWORKS HOLDINGS INC | c92197exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Quarterly Period Ended September 30, 2009
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 333-142946
Broadview Networks Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
11-3310798 (IRS Employer Identification Number) |
|
800 Westchester Avenue, | ||
Suite N501 Rye Brook, NY 10573 (Address of principal executive offices) |
10573 (Zip code) |
(914) 922-7000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for shorter period that the registrant was required to submit and post such files). Yes o
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date,
Class | Outstanding at November 6, 2009 | |
Class A Common Stock, $.01 par value per share | 9,342,880 | |
Class B Common Stock, $.01 par value per share | 360,050 |
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION |
||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
12 | ||||||||
23 | ||||||||
23 | ||||||||
PART II OTHER INFORMATION |
||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
24 | ||||||||
25 | ||||||||
26 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains both historical and forward-looking statements. All
statements other than statements of historical fact included in this report that address
activities, events or developments that we expect, believe or anticipate will or may occur in the
future are forward-looking statements including, in particular, the statements about our plans,
objectives, strategies and prospects regarding, among other things, our financial condition,
results of operations and business. We have identified some of these forward-looking statements
with words like believe, may, will, should, expect, intend, plan, predict,
anticipate, estimate or continue and other words and terms of similar meaning. These
forward-looking statements may be contained throughout this report, including but not limited to
statements under the caption Managements Discussion and Analysis of Financial Condition and
Results of Operations. These forward-looking statements are based on current expectations about
future events affecting us and are subject to uncertainties and factors relating to our operations
and business environment, all of which are difficult to predict and many of which are beyond our
control and could cause our actual results to differ materially from those matters expressed or
implied by forward-looking statements. Many factors mentioned in our discussion in this report will
be important in determining future results. Although we believe that the expectations reflected in
these forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Forward-looking statements (including oral representations)
are only predications or statements of current plans, which we review continuously. They can be
affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties,
including, among other things, risks associated with:
| servicing our substantial indebtedness; |
||
| our history of operating losses; |
||
| the elimination or relaxation of certain regulatory rights and protections; |
||
| billing and other disputes with vendors; |
||
| failure to maintain interconnection and service agreements with incumbent local exchange
and other carriers; |
||
| the loss of customers in an adverse economic environment; |
||
| regulatory uncertainties in the communications industry; |
||
| system disruptions or the failure of our information systems to perform as expected; |
||
| the failure to anticipate and keep up with technological changes; |
||
| inability to provide services and systems at competitive prices; |
||
| difficulties associated with collecting payment from incumbent local exchange carriers,
interexchange carriers and wholesale customers; |
||
| the highly competitive nature of the communications market in which we operate including
competition from incumbents, cable operators and other new market entrants, and declining
prices for communications services; |
||
| continued industry consolidation; |
||
| restrictions in connection with our indenture governing the notes and credit agreement
governing the credit facility; |
||
| government regulation; |
||
| increased regulation of Internet-protocol-based service providers; |
||
| vendor bills related to past periods; |
||
| the ability to maintain certain real estate leases and agreements;
|
3
Table of Contents
| interruptions in the business operations of third party service providers; |
||
| limits on our ability to seek indemnification for losses from individuals and entities
from whom we have acquired assets and operations; |
||
| disruption and instability in the financial markets; |
||
| solvency and liquidity of the administrative agent and primary creditor under our
revolving credit facility; |
||
| the financial difficulties by others in our industry; |
||
| the failure to retain and attract management and key personnel; |
||
| the failure to manage and expand operations effectively; |
||
| the failure to successfully engage in future acquisitions; |
||
| misappropriation of our intellectual property and proprietary rights; |
||
| the possibility of incurring liability for information disseminated through our network; |
||
| service network disruptions due to software or hardware bugs of the network equipment;
and |
||
| fraudulent usage of our network and services. |
Because our actual results, performance or achievements could differ materially from those
expressed in, or implied by, these forward-looking statements, we cannot give any assurance that
any of the events anticipated by these forward-looking statements will occur or, if any of them do,
what impact they will have on our business, results of operations and financial condition. You are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date of this report. We do not undertake any obligation to update these forward-looking
statements to reflect new information, future events or otherwise, except as may be required under
federal securities laws.
4
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Broadview Networks Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
December 31, | September 30, | |||||||
2008 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 24,070 | $ | 12,980 | ||||
Investment securities |
23,533 | 23,549 | ||||||
Accounts receivable, less allowance for doubtful accounts of $11,934 and $15,056 |
53,486 | 46,319 | ||||||
Other current assets |
12,614 | 10,098 | ||||||
Total current assets |
113,703 | 92,946 | ||||||
Property and equipment, net |
85,248 | 85,308 | ||||||
Goodwill |
98,111 | 98,238 | ||||||
Intangible assets, net of accumulated amortization of $150,556 and $164,107 |
45,220 | 31,669 | ||||||
Other assets |
16,746 | 16,344 | ||||||
Total assets |
$ | 359,028 | $ | 324,505 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIENCY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 17,044 | $ | 27,464 | ||||
Accrued expenses and other current liabilities |
42,699 | 11,897 | ||||||
Taxes payable |
10,680 | 12,196 | ||||||
Deferred revenues |
11,967 | 10,663 | ||||||
Current portion of capital lease obligations and equipment notes |
4,142 | 3,909 | ||||||
Total current liabilities |
86,532 | 66,129 | ||||||
Long-term debt |
327,424 | 326,748 | ||||||
Deferred rent payable |
2,400 | 2,200 | ||||||
Capital lease obligations and equipment notes, net of current portion |
5,212 | 2,735 | ||||||
Deferred income taxes payable |
2,071 | 2,798 | ||||||
Other |
655 | 706 | ||||||
Total liabilities |
424,294 | 401,316 | ||||||
Stockholders deficiency: |
||||||||
Common stock A $.01 par value; authorized 80,000,000, issued and outstanding 9,342,880 shares |
107 | 107 | ||||||
Common stock B $.01 par value; authorized 10,000,000, issued and outstanding 360,050 shares |
4 | 4 | ||||||
Series A Preferred stock $.01 par value; authorized 89,526 shares, designated, issued and
outstanding
87,254 shares entitled in liquidation to $139,428 and $152,357 |
1 | 1 | ||||||
Series A-1 Preferred stock $.01 par value; authorized 105,000 shares, designated, issued and
outstanding 100,702 shares, entitled in liquidation to $160,917 and $175,839 |
1 | 1 | ||||||
Series B Preferred stock $.01 par value; authorized 93,180 shares, designated, issued and
outstanding
91,202 shares entitled in liquidation to $145,737 and $159,250 |
1 | 1 | ||||||
Series B-1 Preferred stock $.01 par value; authorized 86,000 shares, designated, issued and
outstanding 64,986 shares entitled in liquidation to $103,845 and $113,474 |
1 | 1 | ||||||
Series C Preferred stock $.01 par value; authorized 52,332 shares, designated, issued and
outstanding
14,402 shares entitled in liquidation to $15,577 and $17,711 |
| | ||||||
Additional paid-in capital |
140,563 | 140,737 | ||||||
Accumulated deficit |
(205,966 | ) | (217,665 | ) | ||||
Accumulated other comprehensive income |
22 | 2 | ||||||
Total stockholders deficiency |
(65,266 | ) | (76,811 | ) | ||||
Total liabilities and stockholders deficiency |
$ | 359,028 | $ | 324,505 | ||||
See notes to unaudited condensed consolidated financial statements.
5
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Broadview Networks Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Revenues |
$ | 125,535 | $ | 112,718 | $ | 377,391 | $ | 352,243 | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenues (exclusive of
depreciation and amortization) |
65,026 | 54,844 | 196,474 | 173,972 | ||||||||||||
Selling, general and administrative
(includes share-based
compensation of $63, $59, $242 and $174) |
41,467 | 37,841 | 127,150 | 119,677 | ||||||||||||
Software development |
414 | 487 | 1,229 | 1,418 | ||||||||||||
Depreciation and amortization |
17,828 | 12,111 | 54,525 | 37,913 | ||||||||||||
Total operating expenses |
124,735 | 105,283 | 379,378 | 332,980 | ||||||||||||
Income (loss) from operations |
800 | 7,435 | (1,987 | ) | 19,263 | |||||||||||
Interest expense |
(10,019 | ) | (10,043 | ) | (29,474 | ) | (30,143 | ) | ||||||||
Interest income |
167 | 10 | 598 | 104 | ||||||||||||
Other income (expense) |
(3 | ) | | (10 | ) | 16 | ||||||||||
Loss before provision for income taxes |
(9,055 | ) | (2,598 | ) | (30,873 | ) | (10,760 | ) | ||||||||
Provision for income taxes |
(118 | ) | (240 | ) | (913 | ) | (939 | ) | ||||||||
Net loss |
(9,173 | ) | (2,838 | ) | (31,786 | ) | (11,699 | ) | ||||||||
Dividends on preferred stock |
(16,202 | ) | (18,235 | ) | (47,203 | ) | (53,127 | ) | ||||||||
Loss available to common shareholders |
$ | (25,375 | ) | $ | (21,073 | ) | $ | (78,989 | ) | $ | (64,826 | ) | ||||
Loss available per common share basic
and diluted |
$ | (2.62 | ) | $ | (2.17 | ) | $ | (8.16 | ) | $ | (6.69 | ) | ||||
Weighted average common shares
outstanding basic and diluted |
9,679,455 | 9,691,230 | 9,674,728 | 9,686,529 | ||||||||||||
See notes to unaudited condensed consolidated financial statements.
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Broadview Networks Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended September 30, | ||||||||
2008 | 2009 | |||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (31,786 | ) | $ | (11,699 | ) | ||
Adjustments to reconcile net loss to net cash provided
by operating activities: |
||||||||
Depreciation |
23,430 | 24,311 | ||||||
Amortization of deferred financing costs |
1,983 | 1,969 | ||||||
Amortization of intangible assets |
31,045 | 13,551 | ||||||
Amortization of bond premium |
(603 | ) | (676 | ) | ||||
Provision for doubtful accounts |
4,205 | 5,256 | ||||||
Share-based compensation |
242 | 174 | ||||||
Deferred income taxes |
685 | 727 | ||||||
Other |
50 | 51 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(3,429 | ) | 1,911 | |||||
Other current assets |
(1,898 | ) | 2,516 | |||||
Other assets |
(933 | ) | (1,567 | ) | ||||
Accounts payable |
679 | 10,420 | ||||||
Accrued expenses and other current liabilities |
(15,339 | ) | (30,802 | ) | ||||
Taxes payable |
(2,526 | ) | 1,516 | |||||
Deferred revenues |
1,729 | (1,304 | ) | |||||
Deferred rent payable |
(299 | ) | (200 | ) | ||||
Net cash provided by operating activities |
7,235 | 16,154 | ||||||
Cash flows from investing activities |
||||||||
Acquisition, net of cash acquired |
(4,953 | ) | (127 | ) | ||||
Purchases of property and equipment |
(31,452 | ) | (24,371 | ) | ||||
Purchases of investment securities |
| (98,664 | ) | |||||
Sales of investment securities |
| 98,628 | ||||||
Other |
(379 | ) | | |||||
Net cash used in investing activities |
(36,784 | ) | (24,534 | ) | ||||
Cash flows from financing activities |
||||||||
Drawdowns on revolving credit facility |
10,123 | 1,964 | ||||||
Repayments of revolving credit facility |
(123 | ) | (1,964 | ) | ||||
Proceeds from capital lease financing and equipment notes |
3,192 | 373 | ||||||
Payments on capital lease obligations and equipment notes |
(2,700 | ) | (3,083 | ) | ||||
Other |
(63 | ) | | |||||
Net cash provided by (used in) financing activities |
10,429 | (2,710 | ) | |||||
Net decrease in cash and cash equivalents |
(19,120 | ) | (11,090 | ) | ||||
Cash and cash equivalents at beginning of period |
41,998 | 24,070 | ||||||
Cash and cash equivalents at end of period |
$ | 22,878 | $ | 12,980 | ||||
See notes to unaudited condensed consolidated financial statements.
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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share information)
(in thousands, except share information)
1. Organization and Description of Business
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared
based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for
interim periods. These financial statements reflect all adjustments necessary for a fair
presentation of the results of operations and financial condition for the interim periods shown,
including normal recurring accruals and other items. The results for interim periods are not
necessarily indicative of results for the full year. For a more complete discussion of significant
accounting policies and certain other information, the Companys interim unaudited financial
statements should be read in conjunction with its audited financial statements as of and for the
year ended December 31, 2008 included in the Companys Form 10-K. The condensed consolidated
interim financial statements include both the Companys accounts and the accounts of its
wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in
consolidation. The Company has evaluated the impact of subsequent events through November 6, 2009,
which is the date the condensed consolidated financial statements were issued and filed with the
SEC.
The preparation of the condensed consolidated financial statements in conformity with U.S.
Generally Accepted Accounting Principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the condensed consolidated financial statements and the
reported amount of revenues and expenses during the reporting period. Management periodically
reviews such estimates and assumptions as circumstances dictate. Actual results could differ from
those estimates.
The Company is an integrated communications company whose primary interests consist of
wholly-owned subsidiaries Broadview Networks, Inc. (BNI), Bridgecom Holdings, Inc. (BH),
Corecomm-ATX, Inc. (ATX) and Eureka Broadband Corporation (Eureka, InfoHighway or IH). The
Company also provides phone systems and other customer service offerings through its subsidiary,
Bridgecom Solutions Group, Inc. (BSG). The Company was founded in 1996 to take advantage of the
deregulation of the U.S. telecommunications market following the Telecommunications Act of 1996.
The Company has one reportable segment providing domestic wireline telecommunications services
consisting of local and long distance voice services, Internet, and data services to commercial and
residential customers in the northeast United States.
2. Investment Securities
Investment securities represent the Companys investment in short-term U.S. Treasury notes.
The Companys primary objectives for purchasing these investment securities are liquidity and
safety of principal. The Company considers these investment securities to be available-for-sale.
Accordingly, these investments are recorded at their fair value of $23,549 as of September 30,
2009. The fair value of these investment securities are based on publicly quoted market prices,
which are Level 1 inputs. All of the Companys investment securities mature in less than one year.
The cost of these investment securities is $23,547. During the nine months ended September 30,
2009, the Company purchased $98,664 and sold $98,628 of U.S. Treasury notes. During the nine months
ended September 30, 2009, the Company realized a gain of $36 upon the sale of its investment
securities, which is included in interest income. All unrealized and realized gains are determined
by specific identification.
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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
3. Comprehensive Loss
Comprehensive loss represents the change in net assets of a business enterprise during a
period from non-ownership sources. The Companys other comprehensive income is comprised
exclusively of unrealized gains on the Companys investments in U.S. Treasury notes. The
comprehensive loss for the three and nine months ended September 30, 2008 and 2009 is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Net loss |
$ | (9,173 | ) | $ | (2,838 | ) | $ | (31,786 | ) | $ | (11,699 | ) | ||||
Unrealized gains on investment securities |
| 2 | | 2 | ||||||||||||
Reclassification adjustments for
realized gains included in net income |
| | | (22 | ) | |||||||||||
Comprehensive loss |
$ | (9,173 | ) | $ | (2,836 | ) | $ | (31,786 | ) | $ | (11,719 | ) | ||||
4. Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, the
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (as
codified in the FASB Accounting Standards Codification (ASC) under subtopic 105-10-05), which
names the ASC as the source of authoritative accounting and reporting standards in the United
States, in addition to guidance issued by the SEC. The ASC is a restructuring of accounting and
reporting standards designed to simplify user access to all authoritative GAAP by providing the
authoritative literature in a topically organized structure. The ASC reduces the GAAP hierarchy to
two levels, one that is authoritative and one that is not. The ASC is not intended to change GAAP
or any requirements of the SEC. The ASC became authoritative upon its release on July 1, 2009 and
is effective for interim and annual periods ending after September 15, 2009.
In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments (as codified in the ASC under subtopic 825-10-65-1), which requires
an entity to provide interim disclosures about the fair value of financial instruments and to
include disclosures related to the methods and significant assumptions used in estimating those
instruments. This guidance is effective for all interim and annual reporting periods ending after
June 15, 2009 and shall be applied prospectively. The Company has included additional disclosures
in Notes 2 and 6, as a result of adopting this guidance.
In May 2009, the FASB issued SFAS 165, Subsequent Events (as codified in the ASC under topic
855). This guidance establishes general standards of accounting for disclosures of events that
occur after the balance sheet date but before financial statements are issued or are available to
be issued. Although there is new terminology, the standard is based on the same principles as those
that currently exist in the auditing standards. The guidance, which includes a new required
disclosure of the date through which an entity has evaluated subsequent events, is effective for
interim or annual periods ending after June 15, 2009. The adoption of this guidance has not had a
significant impact on the Companys financial position or results of operations. The Company has
included additional disclosures in Note 1 as a result of adopting this guidance.
5. InfoHighway Acquisition
In connection with the acquisition of InfoHighway in 2007, the Company issued warrants to
acquire 16,976 units, with each such unit comprised of 1 share of Series B-1 Preferred Stock and 25
shares of Class A Common Stock, which are generally exercisable for a period of up to five years,
with the exercise price of each warrant unit determined based on the cash flow generated from a
certain customer of the legacy InfoHighway entity during the two year period following closing of
the acquisition. As certain cash flow parameters are met as calculated and agreed upon for the
twelve months ended May 31, 2008 and the twelve months ended May 31, 2009, the exercise price on
the warrants may decrease from $883.58 per unit to an exercise price of $0.01 per unit.
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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
5. InfoHighway Acquisition (continued)
As of November 6, 2009, the exercise price on the warrants have not been determined.
Negotiations are occurring between the Company and the warrant holders as to how certain carrier
disputes relating specifically to InfoHighway that were in existence at the acquisition date and
arising subsequent to that date will be handled in the cash flow calculation. The Company will not
adjust the value of the warrants until an exercise price has been determined. When the exercise
price for the warrants are resolved, the Company will utilize a Black-Scholes model to determine
the aggregate value of the warrants. If the Company determines that the value of the warrants has
increased, the Company will record additional merger consideration and related goodwill at such
point of determination. The Company has determined that once the exercise price is resolved, the
warrants will be classified as equity.
6. Fair Values of Financial Instruments
The Companys financial instruments include cash and cash equivalents, investments in U.S.
Treasury notes, trade accounts receivable, accounts payable, and long-term debt. The Companys
available cash balances are invested on a short-term basis (generally overnight) and, accordingly,
are not subject to significant risks associated with changes in interest rates. All of the
Companys cash flows are derived from operations within the United States and are not subject to
market risk associated with changes in foreign exchanges rates. The carrying amounts of the
Companys cash and cash equivalents, trade accounts receivable and accounts payable reported in the
consolidated balance sheets as of December 31, 2008 and September 30, 2009 are deemed to
approximate fair value because of their liquidity and short-term nature. The carrying amounts of
the Companys investments in U.S. Treasury notes are recorded at their fair value of $23,533 and
$23,549 which are based on the publicly quoted market price as of December 31, 2008 and September
30, 2009, respectively.
The fair value of the long-term debt outstanding under the Companys revolving credit facility
approximates its carrying value of $23,500 due to its variable market-based interest rate. The fair
value of our 11 3/8% senior secured notes due 2012 at September 30, 2009 was $274,875, which was
based on the publicly quoted closing price of the notes at that date. The publicly quoted closing
price used to value the Companys senior secured notes is considered to be a Level 1 input.
7. Commitments and Contingencies
The Company has, in the ordinary course of its business, disputed certain billings from
carriers and has recorded the estimated settlement amount of the disputed balances. The settlement
estimate is based on various factors, including historical results of prior dispute settlements.
The amount of such disputes at September 30, 2009 was $20,002. The Company believes that the
ultimate settlement of these disputes will be at amounts less than the amount disputed and has
accrued the estimated settlement in accounts payable and accrued expenses and other current
liabilities at September 30, 2009. It is possible that actual settlement of such disputes may
differ from these estimates and the Company may settle at amounts greater than the estimates.
The Company has entered into commercial agreements with vendors under which it purchases
certain services that it had previously leased under the unbundled network platform provisions of
the Telecommunications Act of 1996 as well as special access services. For the nine months ended
September 30, 2009, the Company met the minimum purchase obligations. The agreements, which expire
in 2010 and 2011, require certain minimum purchase obligations and contain fixed but escalating
pricing over their term.
The Company is involved in claims and legal actions arising in the ordinary course of
business. Management is of the opinion that the ultimate outcome of these matters will not have a
material adverse impact on the Companys condensed consolidated financial position, results of
operations, or cash flows. For more information, see our Form 10-K for the year ended December 31,
2008.
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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
8. Long-term Debt Guarantees
The Companys senior secured notes are fully, unconditionally and irrevocably guaranteed on a
senior secured basis, jointly and severally, by each of the Companys existing and future domestic
restricted subsidiaries. The notes and the guarantees rank senior in right of payment to all
existing and future subordinated indebtedness of the Company and its subsidiary guarantors, as
applicable, and equal in right of payment with all existing and future senior indebtedness of the
Company and of such subsidiaries.
The notes and the guarantees are secured by a lien on substantially all of the Companys
assets, provided, however, that pursuant to the terms of an intercreditor agreement, the security
interest in those assets consisting of receivables, inventory, deposit accounts, securities
accounts and certain other assets that secure the notes and the guarantees are contractually
subordinated to a lien thereon that secures the Companys revolving credit facility with an
aggregate principal amount of $25,000 and certain other permitted indebtedness.
9. Income Taxes
At September 30, 2009, the Company had net operating loss (NOL) carryforwards available
totaling $139,198, which expire in various years through 2029. The utilization of NOL
carryforwards, resulting from previous mergers, is subject to restrictions pursuant to Section 382
of the Internal Revenue Code. As such, it was determined that certain NOLs recorded by the Company
as deferred tax assets were limited. The Company has provided a full valuation allowance against
the net deferred tax asset as of September 30, 2009 because management does not believe it is more
likely than not that this asset will be realized. If the Company achieves profitability, the net
deferred tax assets may be available to offset future income tax liabilities.
10. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted
net loss per share computations for the three and nine months ended September 30, 2008 and 2009:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Loss available to common shareholders
(Numerator): |
||||||||||||||||
Net loss |
$ | (9,173 | ) | $ | (2,838 | ) | $ | (31,786 | ) | $ | (11,699 | ) | ||||
Dividends on preferred stock |
(16,202 | ) | (18,235 | ) | (47,203 | ) | (53,127 | ) | ||||||||
Loss available to common shareholders |
$ | (25,375 | ) | $ | (21,073 | ) | $ | (78,989 | ) | $ | (64,826 | ) | ||||
Shares (Denominator): |
||||||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Class A common stock |
9,342,880 | 9,342,880 | 9,342,880 | 9,342,880 | ||||||||||||
Class B common stock |
336,575 | 348,350 | 331,848 | 343,649 | ||||||||||||
Total weighted average common shares
outstanding basic and diluted |
9,679,455 | 9,691,230 | 9,674,728 | 9,686,529 | ||||||||||||
Loss available per common share basic
and diluted |
$ | (2.62 | ) | $ | (2.17 | ) | $ | (8.16 | ) | $ | (6.69 | ) | ||||
As of September 30, 2009, the Company had outstanding options, warrants, restricted stock
units and preferred stock, which were convertible into or exercisable for common shares of
13,866,840 that were not included in the calculation of diluted loss per common share because the
effect would have been anti-dilutive.
Dividends accumulate on the Companys Preferred Stock. The loss available to common
shareholders must be computed by adding any dividends accumulated for the period to net losses. The
Company has not declared any dividends.
11
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and
Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere in this
quarterly report and our Form 10-K for the year ended December 31, 2008 filed with the Securities
and Exchange Commission (the SEC). Certain information contained in the discussion and analysis
set forth below and elsewhere in this quarterly report, including information with respect to our
plans and strategies for our business and related financing, includes forward-looking statements
that involve risk and uncertainties. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this quarterly report that could cause
results to differ materially from those expressed in such forward-looking statements, including
matters set forth in our Form 10-K for the year ended December 31, 2008 filed with the SEC.
Overview
We are a leading competitive communications provider, in terms of revenue, offering voice and
data communications and managed network solutions to small and medium sized business customers in
20 markets across 10 states throughout the Northeast and Mid-Atlantic United States, including
major metropolitan markets such as New York, Philadelphia, Baltimore, Washington, D.C. and Boston.
To meet the demands of communications-intensive business customers, we offer dedicated local and
long distance voice, high-speed data and integrated services, as well as value-added products and
services such as managed services. Our network architecture pairs the strength of a traditional
infrastructure with an IP platform, built into our core and extending to the edge, to support
dynamic growth of Voice Over Internet Protocol (VoIP), Multiprotocol Label Switching (MPLS) and
other next generation technologies. In addition, our network topology incorporates metro Ethernet
access in key markets, enabling us to provide T-1 equivalent and high-speed Ethernet access
services via unbundled network element loops to customers served from selected major metropolitan
collocations, significantly increasing our margins while also enhancing capacity and speed of
certain service offerings.
We recorded operating losses of $17.2 million, $32.1 million, $3.0 million for the years ended
December 31, 2006, 2007 and 2008, respectively. For the nine months ended September 30, 2009, we
recorded operating income of $19.3 million. For the years ended December 31, 2006, 2007 and 2008
and for the nine months ended September 30, 2009, we recorded net losses of $41.5 million, $65.5
million, $42.9 million and $11.7 million, respectively. Although we expect to continue to have net
losses for the foreseeable future, the synergies we have effectuated through our acquisitions offer
some areas of increasing operating efficiencies that could lead to potentially more profitable net
results.
Our business is subject to several macro trends, some of which negatively affect our operating
performance. Among these negative trends are lower usage per customer, which translates into less
usage-based revenue and lower unit pricing for certain services. In addition, we continue to face
other industry wide trends including rapid technology changes and overall increases in competition
from existing large competitors such as Verizon and established cable operators, other competitive
local exchange carriers and new entrants such as VoIP, wireless and other service providers. These
factors are partially mitigated by several positive trends. These include a more stable customer
base, increasing revenue per customer due to the trend of customers to buy more products from us as
we deploy new technology and expand our offerings, a focus on larger customers and an overall
increase in demand for data, managed and enhanced services.
As of September 30, 2009, we have approximately 250 sales, sales management and sales support
employees, including approximately 190 quota-bearing sales representatives, who target small and
medium sized business or enterprise customers located within the footprint of our switching centers
and approximately 260 collocations. We focus our sales efforts on communications intensive business
customers who purchase multiple products that can be cost-effectively delivered on our network.
These customers generally purchase high margin services in multi-year contracts and result in high
retention rates. We believe that a lack of focus on the small and medium sized business segment
from the Regional Bell Operating Companies has created an increased demand for alternatives in the
small and medium sized business communications market. Consequently, we view this market as a
sustainable growth opportunity and have focused our strategies on providing small and medium sized
businesses with a competitive communications solution.
We focus our business strategy on providing services based on our T-1-based products, which we
believe offer greater value to customers, increase customer retention and provide revenue growth
opportunities for us. Historically, the Companys revenue was dominated by off-net, voice revenue
from smaller customers. We have transitioned a large percentage of our revenue base to T-1 based
products. As a result our combined revenue from T-1-based products and managed services grew by
approximately 13% from 2007 to 2008. Revenue from the sale of T-1-based products and managed
services grew by approximately 0.9% from the first nine months of 2008 to the first nine months of
2009, and currently represents approximately 43.9% of our total revenue and approximately 50.0% of
our retail revenue stream, with typical incremental gross profit margins in excess of 60%.
12
Table of Contents
Our facilities-based network encompasses approximately 3,000 route miles of metro and
long-haul fiber, approximately 260 collocations and approximately 500 lit buildings. Our network
has the ability to deliver traditional services, such as Plain Old Telephone Service (POTS) and
T-1 lines, as well as DSL, or Digital Subscriber Line, and next generation services, such as
dynamic VoIP integrated T-1s, Ethernet in the first mile, hosted VoIP solutions, and MPLS Virtual
Private Networks. We provide services to our customers primarily through our network of owned
telecommunications switches, data routers and related equipment and owned and leased communications
lines and transport facilities using a variety of access methods, including unbundled network
element loops, special access circuits and digital T-1 transmission lines for our on-net customers.
We have deployed an IP-based platform that facilitates the development of next generation services
and the migration of our traffic and customer base to a more cost-effective and efficient IP-based
infrastructure, which enhances the performance of our network. As of September 30, 2009,
approximately three-fourths of our total lines were provisioned on-net.
Results of Operations
The following table sets forth, for the periods indicated, certain financial data as a
percentage of total revenues.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Voice and data services |
86.4 | % | 87.6 | % | 86.9 | % | 87.0 | % | ||||||||
Wholesale |
3.9 | % | 4.1 | % | 3.7 | % | 4.1 | % | ||||||||
Access |
5.7 | % | 5.0 | % | 5.7 | % | 5.3 | % | ||||||||
Total network services |
96.0 | % | 96.7 | % | 96.3 | % | 96.4 | % | ||||||||
Other |
4.0 | % | 3.3 | % | 3.7 | % | 3.6 | % | ||||||||
Total revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Network services |
50.0 | % | 47.2 | % | 50.2 | % | 47.7 | % | ||||||||
Other cost of revenues |
1.8 | % | 1.5 | % | 1.8 | % | 1.7 | % | ||||||||
Selling, general and administrative |
33.0 | % | 33.6 | % | 33.7 | % | 33.9 | % | ||||||||
Software development |
0.3 | % | 0.4 | % | 0.3 | % | 0.4 | % | ||||||||
Depreciation and amortization |
14.2 | % | 10.7 | % | 14.4 | % | 10.8 | % | ||||||||
Total operating expenses |
99.3 | % | 93.4 | % | 100.4 | % | 94.5 | % | ||||||||
Income (loss) from operations |
0.7 | % | 6.6 | % | (0.4 | %) | 5.5 | % | ||||||||
Interest expense |
(7.9 | %) | (8.9 | %) | (7.8 | %) | (8.5 | %) | ||||||||
Interest income |
0.1 | % | 0.0 | % | 0.2 | % | 0.0 | % | ||||||||
Other income (expense) |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Loss before provision for income
taxes |
(7.1 | %) | (2.3 | %) | (8.0 | %) | (3.0 | %) | ||||||||
Provision for income taxes |
(0.1 | %) | (0.2 | %) | (0.2 | %) | (0.3 | %) | ||||||||
Net loss |
(7.2 | %) | (2.5 | %) | (8.2 | %) | (3.3 | %) | ||||||||
13
Table of Contents
Key Components of Results of Operations
Revenues
Our revenues, as detailed in the table above, consist primarily of network services revenues,
which consists primarily of voice and data managed and hosted services, wholesale services and
access services. Voice and data services consist of local dial tone, long distance and data
services, as well as managed and hosted services. Wholesale services consist of voice and data
services, data collocation services and transport services. Access services includes carrier access
and reciprocal compensation revenue, which consists primarily of usage charges that we bill to
other carriers to originate and terminate their calls from and to our customers. Network services
revenues represents a predominantly recurring revenue stream linked to our retail and wholesale
customers.
We generate approximately 87% of our revenues from retail end customer voice and data products
and services. Revenue from end customer data includes T-1/T-3, integrated T-1 data and other
managed services trending to an increasing percentage of our overall revenue even as voice
revenues, predominately POTS and long distance services, remain the core of our revenue base. Data
cabling, service installation and wiring and phone systems sales and installation also form a small
but growing portion of our overall business. We continue to focus on data, managed and hosted
services as growth opportunities as we expect the industry to trend toward lower usage components
of legacy products such as long distance and local usage. This lower usage is primarily driven by
trends toward customers using more online and wireless communications.
Cost of Revenues (exclusive of depreciation and amortization)
Our network services cost of revenues consist primarily of the cost of operating our network
facilities. Determining our cost of revenues requires significant estimates. The network components
for our facilities-based business include the cost of:
| leasing local loops and digital T-1 lines which connect our customers to our network; |
||
| leasing high capacity digital lines that connect our switching equipment to our
collocations; |
||
| leasing high capacity digital lines that interconnect our network with the incumbent
local exchange carriers; |
||
| leasing space, power and terminal connections in the incumbent local exchange carrier
central offices for collocating our equipment; |
||
| signaling system network connectivity; and |
||
| Internet transit and peering, which is the cost of delivering Internet traffic from our
customers to the public Internet. |
The costs to obtain local loops, digital T-1 lines and high capacity digital interoffice
transport facilities from the incumbent local exchange carriers vary by carrier and by state and
are regulated under federal and state laws. We do not anticipate any significant changes in Verizon
local loop, digital T-1 line or high capacity digital interoffice transport facility rates in the
near future. Except for our lit buildings, in virtually all areas, we obtain local loops, T-1 lines
and interoffice transport capacity from the incumbent local exchange carriers. We obtain
interoffice facilities from carriers other than the incumbent local exchange carriers, where
possible, in order to lower costs and improve network redundancy; however, in most cases, the
incumbent local exchange carriers are our only source for local loops and T-1 lines.
Our off-net network services cost of revenues consists of amounts we pay to Verizon and AT&T
pursuant to our commercial agreements with them. Rates for such services are prescribed in the
commercial agreements and available for the term of the agreements. Rates were subject to a
surcharge that increased by a predetermined amount on each of the first, second and third
anniversaries of the agreements terms and is now fixed for the duration of the agreements terms.
The commercial agreements, which expire in 2010 and 2011, require certain minimum purchase
obligations, which we have met in all of the years we were under the commercial agreements.
Our network services cost of revenues also includes the fees we pay for long distance, data
and other services. We have entered into long-term wholesale purchasing agreements for these
services. Some of the agreements contain significant termination penalties and/or minimum usage
volume commitments. In the event we fail to meet minimum volume commitments, we may be obligated to
pay underutilization charges. We do not anticipate having to pay any underutilization charges in
the foreseeable future.
14
Table of Contents
Gross Profit (exclusive of depreciation and amortization)
Gross profit (exclusive of depreciation and amortization), as presented in this Managements
Discussion and Analysis of Financial Condition and Results of Operations, represents income (loss)
from operations, before depreciation and amortization, software development expenses and selling,
general and administrative expenses (SG&A). Gross profit (exclusive of depreciation and
amortization), is a non-GAAP financial measure used by our management, together with financial
measures prepared in accordance with GAAP such as revenue and cost of revenue, to assess our
historical and prospective operating performance.
The following table sets forth, for the periods indicated, a reconciliation of gross profit
(exclusive of depreciation and amortization), to income (loss) from operations as income (loss)
from operations is calculated in accordance with GAAP:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Income (loss) from operations |
$ | 800 | $ | 7,435 | $ | (1,987 | ) | $ | 19,263 | |||||||
Depreciation and amortization |
17,828 | 12,111 | 54,525 | 37,913 | ||||||||||||
Software development |
414 | 487 | 1,229 | 1,418 | ||||||||||||
Selling, general and
administrative |
41,467 | 37,841 | 127,150 | 119,677 | ||||||||||||
Gross profit (exclusive of
depreciation and amortization) |
$ | 60,509 | $ | 57,874 | $ | 180,917 | $ | 178,271 | ||||||||
Gross profit, as a percentage
of revenue |
48.2 | % | 51.3 | % | 48.0 | % | 50.6 | % | ||||||||
Gross profit is a measure of the general efficiency of our network costs in comparison to our
revenue. As we expense the current cost of our network against current period revenue, we use this
measure as a tool to monitor our progress with regards to network optimization and other operating
metrics.
Our management also uses gross profit to evaluate performance relative to that of our
competitors. This financial measure permits a comparative assessment of operating performance,
relative to our performance based on our GAAP results, while isolating the effects of certain items
that vary from period to period without any correlation to core operating performance or that vary
widely among similar companies. Our management believes that gross profit is a particularly useful
comparative measure within our industry.
We provide information relating to our gross profit so that analysts, investors and other
interested persons have the same data that management uses to assess our operating performance,
which permits them to obtain a better understanding of our operating performance and to evaluate
the efficacy of the methodology and information used by our management to evaluate and measure such
performance on a standalone and a comparative basis.
Our gross profit may not be directly comparable to similarly titled measures reported by other
companies due to differences in accounting policies and items excluded or included in the
adjustments, which limits its usefulness as a comparative measure. In addition, gross profit has
other limitations as an analytical financial measure. These limitations include the following:
| gross profit does not reflect our capital expenditures, future requirements for capital
expenditures or contractual commitments to purchase capital equipment; |
||
| gross profit does not reflect the interest expense, or the cash requirements necessary to
service interest or principal payments, associated with our indebtedness; |
||
| although depreciation and amortization are non-cash charges, the assets being depreciated
and amortized will likely have to be replaced in the future, and gross profit does not
reflect any cash requirements for such replacements; and |
||
| gross profit does not reflect the SG&A expenses necessary to run our ongoing operations. |
Our management compensates for these limitations by relying primarily on our GAAP results to
evaluate its operating performance and by considering independently the economic effects of the
foregoing items that are or are not reflected in gross profit. As a result of these limitations,
gross profit should not be considered as an alternative to income (loss) from operations, as
calculated in accordance with GAAP, as a measure of operating performance.
15
Table of Contents
Selling, General and Administrative
SG&A is comprised primarily of salaries and related expenses, non-cash compensation, occupancy
costs, sales and marketing expenses, commission expenses, bad debt expense, billing expenses,
professional services expenses and insurance expenses.
Determining our allowance for doubtful accounts receivable requires significant estimates. In
determining the proper level for the allowance we consider factors such as historical collections
experience, the aging of the accounts receivable portfolio and economic conditions. We perform a
credit review process on each new customer that involves reviewing the customers current service
provider bill and payment history, matching customers with national databases for delinquent
customers and, in some cases, requesting credit reviews through Dun & Bradstreet Corporation.
Depreciation and Amortization
Our depreciation and amortization expense currently includes depreciation for network-related
voice and data equipment, fiber, back-office systems, third-party conversion costs, internally
developed software, furniture, fixtures, leasehold improvements, office equipment and computers and
amortization of intangibles associated with mergers, acquisitions and software development costs.
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2009
Set forth below is a discussion and analysis of our results of operations for the three months
ended September 30, 2008 and 2009.
The following table provides a comparison of components of our gross profit (exclusive of
depreciation and amortization) for the three months ended September 30, 2008 and 2009:
Three Months Ended September 30, | ||||||||||||||||||||
2008 | 2009 | |||||||||||||||||||
% of Total | % of Total | |||||||||||||||||||
Amount | Revenues | Amount | Revenues | % Change | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Network services |
$ | 120,570 | 96.0 | % | $ | 109,053 | 96.7 | % | (9.6 | %) | ||||||||||
Other |
4,965 | 4.0 | % | 3,665 | 3.3 | % | (26.2 | %) | ||||||||||||
Total revenues |
125,535 | 100.0 | % | 112,718 | 100.0 | % | (10.2 | %) | ||||||||||||
Cost of revenues: |
||||||||||||||||||||
Network services |
62,742 | 50.0 | % | 53,162 | 47.2 | % | (15.3 | %) | ||||||||||||
Other |
2,284 | 1.8 | % | 1,682 | 1.5 | % | (26.4 | %) | ||||||||||||
Total cost of
revenues |
65,026 | 51.8 | % | 54,844 | 48.7 | % | (15.7 | %) | ||||||||||||
Gross profit: |
||||||||||||||||||||
Network services |
57,828 | 46.1 | % | 55,891 | 49.5 | % | (3.3 | %) | ||||||||||||
Other |
2,681 | 2.1 | % | 1,983 | 1.9 | % | (26.0 | %) | ||||||||||||
Total gross profit |
$ | 60,509 | 48.2 | % | $ | 57,874 | 51.3 | % | (4.4 | %) | ||||||||||
16
Table of Contents
Revenues
Revenues for the three months ended September 30, 2008 and 2009 were as follows:
Three Months Ended September 30, | ||||||||||||||||||||
2008 | 2009 | |||||||||||||||||||
% of Total | % of Total | |||||||||||||||||||
Amount | Revenues | Amount | Revenues | % Change | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Voice and data
services |
$ | 108,446 | 86.4 | % | $ | 98,814 | 87.6 | % | (8.9 | %) | ||||||||||
Wholesale |
4,926 | 3.9 | % | 4,637 | 4.1 | % | (5.9 | %) | ||||||||||||
Access |
7,198 | 5.7 | % | 5,602 | 5.0 | % | (22.2 | %) | ||||||||||||
Total network
services |
120,570 | 96.0 | % | 109,053 | 96.7 | % | (9.6 | %) | ||||||||||||
Other |
4,965 | 4.0 | % | 3,665 | 3.3 | % | (26.2 | %) | ||||||||||||
Total revenues |
$ | 125,535 | 100.0 | % | $ | 112,718 | 100.0 | % | (10.2 | %) | ||||||||||
Overall our revenues have declined 10.2% when comparing the three months ended September 30,
2008 with the same period in 2009. Our overall revenue decline primarily stems from declines in
voice services revenues, which have decreased $10.7 million or 13.2% between 2008 and 2009. This
decrease is due to increased line churn, lower usage revenue per customer, lower prices per unit
for certain services and a lower number of lines and customers. Part of the decrease was also
attributable to our decision to discontinue the use of telemarketing as a sales channel for new
sales. The voice service revenue decrease experienced during the current quarter has moderately
accelerated over decreases experienced in previous quarters, which we attribute to the current
economic conditions. Historically, our data services revenues have increased on a quarter over
quarter basis and have partially mitigated our declines in voice services, however, data services
revenues were unchanged when comparing the three months ended September 30, 2008 with the same
period in 2009. Our carrier access revenues have decreased primarily due to decreasing revenue from
voice services, which reduces our revenues from access originations and terminations and reciprocal
compensation. In terms of absolute dollars, our wholesale revenues from our T-1 and data products
as well as from voice terminations showed only modest declines. Our other revenues, which include
data cabling, service installation and wiring and phone systems sales and installation, have
declined due to current economic conditions.
Cost of Revenues (exclusive of depreciation and amortization)
Cost of revenues were $54.8 million for the three months ended September 30, 2009, a decrease
of 15.7% from $65 million for the same period in 2008. As part of our continual improvement
efforts, we were able to improve the efficiency of our network and improve our margins. Our costs
consist primarily of those incurred from other providers and those incurred from the cost of our
network. Costs where we purchased services or products from third party providers comprised $51.5
million, or 79.2% of our total cost of revenues for the three months ended September 30, 2008 and
$44.2 million, or 80.5% in the three months ended September 30, 2009. The most significant
components of our costs purchased from third party providers consist of costs related to our
Verizon wholesale advantage contract (formerly UNE-P), UNE-L and T-1 costs, which totaled $13.3
million, $6.8 million and $13.5 million, respectively, for the three months ended September 30,
2008. These costs totaled $11.2 million, $6.0 million and $13.3 million, respectively, for the
three months ended September 30, 2009. Combined these costs decreased by 9.2% between 2008 and
2009. We have experienced a decrease in costs where we purchased services or products from third
parties primarily due to our effective migration of lines to lower cost platforms.
Gross Profit (exclusive of depreciation and amortization)
Gross profit was $57.9 million for the three months ended September 30, 2009, a decrease of
4.4% from $60.5 million for the same period in 2008. As a percentage of revenues gross profit
increased to 51.3% in 2009 from 48.2% in 2008. The increase in gross profit as a percentage of
revenues is primarily due to lower costs resulting from provisioning more lines from resale and
unbundled network platform to on-net. We are focusing sales initiatives towards increasing the
amount of data and integrated T-1 lines sold, as we believe that these initiatives will produce
incrementally higher margins than those currently reported from POTS services. In addition, as we
continue to drive additional cost saving initiatives, including provisioning customers to our
on-net facilities,
identifying additional inaccuracies in billing from existing carriers, renegotiating existing
agreements and executing new agreements with additional interexchange carriers, we believe that our
gross profit will improve.
17
Table of Contents
Selling, General and Administrative
SG&A expenses were $37.8 million, 33.6% of revenues, for the three months ended September 30,
2009, a decrease of 8.9% from $41.5 million, 33.0% of revenues, for the same period in 2008. This
decrease is primarily due to decreased employee costs of $2.3 million, which reflects cost savings
achieved through reduced headcount, and decreased commission expenses of $1.2 million due to
declining revenues. We continue to look for additional cost savings in various categories
throughout the organization.
Depreciation and Amortization
Depreciation and amortization costs were $12.1 million for the three months ended September
30, 2009, a decrease of 32.0% from $17.8 million for the same period in 2008. This decrease in
depreciation and amortization expense was due to fully amortizing some of our acquired customer
base intangible assets during 2008. Amortization expense included in our results of operations for
customer base intangible assets for the three months ended September 30, 2009 was $3.7 million, a
decrease of $5.6 million, from $9.3 million included in our results of operations during the same
period in 2008.
Interest
Interest expense was $10.0 million for the three months ended September 30, 2009 and was
unchanged from the same period in 2008. Our effective annual interest rates for the three months
ended September 30, 2008 and 2009 is as follows:
Three Months Ended September 30, | ||||||||
2008 | 2009 | |||||||
Interest expense |
$ | 10,019 | $ | 10,043 | ||||
Weighted average debt outstanding |
$ | 310,882 | $ | 330,105 | ||||
Effective annual interest rate |
12.89 | % | 12.17 | % |
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Table of Contents
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2009
Set forth below is a discussion and analysis of our results of operations for the nine months
ended September 30, 2008 and 2009.
The following table provides a comparison of components of our gross profit (exclusive of
depreciation and amortization) for the nine months ended September 30, 2008 and 2009:
Nine Months Ended September 30, | ||||||||||||||||||||
2008 | 2009 | |||||||||||||||||||
% of Total | % of Total | |||||||||||||||||||
Amount | Revenues | Amount | Revenues | % Change | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Network services |
$ | 363,458 | 96.3 | % | $ | 339,653 | 96.4 | % | (6.5 | %) | ||||||||||
Other |
13,933 | 3.7 | % | 12,590 | 3.6 | % | (9.6 | %) | ||||||||||||
Total revenues |
377,391 | 100.0 | % | 352,243 | 100.0 | % | (6.7 | %) | ||||||||||||
Cost of revenues: |
||||||||||||||||||||
Network services |
189,307 | 50.2 | % | 167,883 | 47.7 | % | (11.3 | %) | ||||||||||||
Other |
7,167 | 1.8 | % | 6,089 | 1.7 | % | (15.0 | %) | ||||||||||||
Total cost of
revenues |
196,474 | 52.0 | % | 173,972 | 49.4 | % | (11.5 | %) | ||||||||||||
Gross profit: |
||||||||||||||||||||
Network services |
174,151 | 46.1 | % | 171,770 | 48.8 | % | (1.4 | %) | ||||||||||||
Other |
6,766 | 1.9 | % | 6,501 | 1.8 | % | (3.9 | %) | ||||||||||||
Total gross profit |
$ | 180,917 | 48.0 | % | $ | 178,271 | 50.6 | % | (1.5 | %) | ||||||||||
Revenues
Revenues for the nine months ended September 30, 2008 and 2009 were as follows:
Nine Months Ended September 30, | ||||||||||||||||||||
2008 | 2009 | |||||||||||||||||||
% of Total | % of Total | |||||||||||||||||||
Amount | Revenues | Amount | Revenues | % Change | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Voice and data
services |
$ | 327,822 | 86.9 | % | $ | 306,519 | 87.0 | % | (6.5 | %) | ||||||||||
Wholesale |
13,944 | 3.7 | % | 14,519 | 4.1 | % | 4.1 | % | ||||||||||||
Access |
21,692 | 5.7 | % | 18,615 | 5.3 | % | (14.2 | %) | ||||||||||||
Total network
services |
363,458 | 96.3 | % | 339,653 | 96.4 | % | (6.5 | %) | ||||||||||||
Other |
13,933 | 3.7 | % | 12,590 | 3.6 | % | (9.6 | %) | ||||||||||||
Total revenues |
$ | 377,391 | 100.0 | % | $ | 352,243 | 100.0 | % | (6.7 | %) | ||||||||||
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Overall, our revenues have declined 6.7% when comparing the nine months ended September 30,
2008 with the same period in 2009. Our overall revenue decline primarily stems from declines in
voice services revenues, which have decreased $25.0 million or 10.1% between 2008 and 2009. This
decrease is due to increased line churn, lower usage revenue per customer, lower prices per unit
for certain services and a lower number of lines and customers. Part of the decrease was also
attributable to our decision to discontinue the use of telemarketing as a sales channel for new
sales. The voice services revenues decrease experienced during the current quarter has moderately
accelerated over decreases experienced in previous quarters, which we attribute to the current
economic conditions. This decrease has been slightly offset by an increased demand for our data,
hosted and managed services. Our revenues from data services have increased by $3.7 million or 4.8%
when comparing the nine months ended September 30, 2008 with the same period in 2009. The decrease
in our voice services have also been partially offset by higher revenue per customer due to the
trend toward multiple products per customer and a focus on larger customers. Our carrier access
revenues have decreased primarily due to decreasing revenue from voice services, which reduces our
revenues from access originations and terminations and reciprocal compensation. Our wholesale
revenue increased primarily as a result of organic growth of our T-1 and data products as well as
from voice terminations. Our other revenues, which include data cabling, service installation and
wiring and phone systems sales and installation, have declined due to current economic conditions.
Cost of Revenues (exclusive of depreciation and amortization)
Cost of revenues was $174.0 million for the nine months ended September 30, 2009, a decrease
of 11.5% from $196.5 million for the same period in 2008. As part of our continual improvement
efforts, we were able to improve the efficiency of our network and improve our margins. Our costs
consist primarily of those incurred from other providers and those incurred from the cost of our
network. Costs where we purchased services or products from third-party providers comprised $155.3
million, or 79.0% of our total cost of revenues for the nine months ended September 30, 2008 and
$138.1 million, or 79.4% in the nine months ended September 30, 2009. The most significant
components of our costs purchased from third-party providers consist of costs related to our
Verizon wholesale advantage contract (formerly UNE-P), UNE-L and T-1 costs, which totaled $40.1
million, $19.7 million and $41.1 million, respectively, for the nine months ended September 30,
2008. These costs totaled $34.9 million, $19.0 million and $40.4 million, respectively, for the
nine months ended September 30, 2009. Combined, these costs decreased by 6.5% between 2008 and
2009. We have experienced a decrease in costs where we purchased services or products from third
parties primarily due to our effective migration of lines to lower cost platforms.
Gross Profit (exclusive of depreciation and amortization)
Gross profit was $178.3 million for the nine months ended September 30, 2009, a decrease of
1.5% from $180.9 million for the same period in 2008. As a percentage of revenues gross profit
increased to 50.6% in 2009 from 48.0% in 2008. The increase in gross profit as a percentage of
revenues is primarily due to lower costs resulting from provisioning more lines from resale and
unbundled network platform to on-net. We are focusing sales initiatives towards increasing the
amount of data and integrated T-1 lines sold, as we believe that these initiatives will produce
incrementally higher margins than those currently reported from POTS services. In addition, as we
continue to drive additional cost saving initiatives, including provisioning customers to our
on-net facilities, identifying additional inaccuracies in billing from existing carriers,
renegotiating existing agreements and executing new agreements with additional interexchange
carriers, we believe that our gross profit will improve.
Selling, General and Administrative
SG&A expenses were $119.7 million, 33.9% of revenues, for the nine months ended September 30,
2009, a decrease of 5.9% from $127.2 million, 33.7% of revenues, for the same period in 2008. This
decrease is primarily due to decreased employee costs of $3.7 million due to cost savings achieved
through reduced headcount, decreased commission expenses of $3.5 million due to declining revenues,
and decreased professional and consulting fees of $0.9 million due to the reduced use of outside
professional and temporary help. These decreases were partially offset by increased bad debt
expenses of $1.1 million from increased accounts receivable write-offs during the nine months ended
September 30, 2009. We continue to look for additional cost savings in various categories
throughout the organization.
Depreciation and Amortization
Depreciation and amortization costs were $37.9 million for the nine months ended September 30,
2009, a decrease of 30.5% from $54.5 million for the same period in 2008. This decrease in
depreciation and amortization expense was due to fully amortizing some of our acquired customer
base intangible assets during 2008. Amortization expense included in our results of operations for
customer base intangible assets for the nine months ended September 30, 2009 was $12.0 million, a
decrease of $17.3 million from $29.3 million included in our results of operations during the same
period in 2008.
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Interest
Interest expense was $30.1 million for the nine months ended September 30, 2009, an increase
of 2.0% from $29.5 million for the same period in 2008. The increase was primarily a result of
having a higher average outstanding debt balance for the nine months ended September 30, 2009
compared to 2008. The higher average debt balance is due to the outstanding borrowings on our
revolving credit facility. Our effective annual interest rates for the nine months ended September
30, 2008 and 2009 are as follows:
Nine Months Ended September 30, | ||||||||
2008 | 2009 | |||||||
Interest expense |
$ | 29,474 | $ | 30,143 | ||||
Weighted average debt outstanding |
$ | 310,105 | $ | 331,202 | ||||
Effective annual interest rate |
12.67 | % | 12.13 | % |
Off-Balance Sheet Arrangements
We have no special purpose or limited purpose entities that provide off-balance sheet
financing, liquidity, or market or credit risk support, and we do not currently engage in hedging,
research and development services, or other relationships that expose us to any liabilities that
are not reflected on the face of our financial statements.
Liquidity and Capital Resources
Our principal sources of liquidity are cash from operations, our cash, cash equivalents and
investments and access to undrawn portions of our $25.0 million credit facility and our capital
lease line. Our short-term liquidity requirements consist of interest on our notes, capital
expenditures and working capital. Our long-term liquidity requirements consist of the principal
amount of our notes and our outstanding borrowings under our revolving credit facility. Based on
our current level of operations and anticipated growth, we believe that our existing cash, cash
equivalents and available borrowings under our credit facility will be sufficient to fund our
operations and to service our notes for at least the next 12 months. Further, a significant
majority of our planned capital expenditures are success-based expenditures, meaning that it is
directly linked to new revenue, and if they are made, they will be made only when it is determined
that they will directly lead to more profitable revenue. As of September 30, 2009, we have $6.0
million of capital lease obligations outstanding under our capital lease line. As of September 30,
2009, we had $23.5 million of outstanding borrowings under our revolving credit facility, all of
which we have invested in U.S. Treasury notes. Additionally, we have used our credit facility to
collateralize $1.3 million of outstanding letters of credit as of September 30, 2009. Our cash and
cash equivalents are being held in several large financial institutions, although most of our
balances exceed the Federal Deposit Insurance Corporation insurance limits.
As of September 30, 2009, we require approximately $102.4 million in cash to service the
interest due on our notes throughout the remaining life of the notes. We may need to refinance all
or a portion of our indebtedness, including the notes, at or before maturity. We cannot assure you
that we will be able to refinance any of our indebtedness, including the notes and our credit
facility, on commercially reasonable terms or at all. However, we continuously evaluate and
consider all financing opportunities. Any future acquisitions or other significant unplanned costs
or cash requirements may also require that we raise additional funds through the issuance of debt
or equity.
For information regarding our revolving credit facility and senior secured notes, see our Form
10-K for the year ended December 31, 2008.
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Disputes
During December 2008, we finalized a settlement with Verizon, which extinguished virtually all
outstanding disputes between the parties as of March 31, 2008. The settlement included a
comprehensive mutual release of any liability or potential liability between the parties effective
as of that date. We nonetheless continue to be involved in a variety of disputes with multiple
carrier vendors relating to billings of approximately $20 million as of September 30, 2009. We
believe we have accrued an amount appropriate to settle all remaining disputed charges. However, it
is possible that the actual settlement of any remaining disputes may differ from our reserves and
that we may settle at amounts greater than the estimates. We have sufficient cash on hand to fund
any differences between our expected and actual settlement amounts.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2009
Cash Flows from Operating Activities
Cash provided by operating activities was $7.2 million for the nine months ended September 30,
2008, compared to cash provided by operating activities of $16.2 million for 2009. During the nine
months ended September 30, 2009 and 2008, we paid $34.1 million in interest expense on our notes
and $0.9 million in interest expense on our credit facility. The change in cash provided by
operations was due to the improvement in our income from operations partially offset by payments
made in connection with our settlement with Verizon.
Cash Flows from Investing Activities
Cash used in investing activities was $36.8 million for the nine months ended September 30,
2008, compared to $24.5 million for 2009. The change in cash flow from investing activities was
primarily due to decreased capital expenditures during the nine months ended September 30, 2009.
Additionally, we used $5.0 million during the nine months ended September 30, 2008 to acquire
Lightwave.
Cash Flows from Financing Activities
Cash flows provided by financing activities were $10.4 million for the nine months ended
September 30, 2008, compared to cash used in financing activities of $2.7 million for 2009. The
change in cash flows from financing activities was primarily due to a reduced amount of borrowing
from our capital lease line and revolving line of credit in the nine months ended September 30,
2009 as compared to the same period in 2008.
New Accounting Standards
See Note 4 to this Item 1 for accounting standards that were issued since the filing of our
Form 10-K for the year ended December 31, 2008. These new accounting standards are not expected to
have a material impact on our financial position, results of operations or liquidity.
Application of Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP
requires us to make judgments, estimates and assumptions regarding uncertainties that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. We use historical experience and all available
information to make these judgments and estimates and actual results could differ from those
estimates and assumptions that are used to prepare our financial statements at any given time.
Despite these inherent limitations, management believes that Managements Discussion and Analysis
of Financial Condition and Results of Operations and the accompanying condensed consolidated
financial statements and footnotes provide a meaningful and fair perspective of our financial
condition and operating results for the current period. For more information, see our Form 10-K for
the year ended December 31, 2008.
Other Matters
At September 30, 2009, we had NOL carryforwards for federal and state income tax purposes. The
amount of such available NOL carryforwards which may be available to offset future taxable income
was approximately $139.2 million. The Company has provided a full valuation allowance against the
net deferred tax assets as of September 30, 2009 because management does not believe it is more
likely than not that this asset will be realized.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our financial position is subject to a variety of risks,
such as the collectability of our accounts receivable and the recoverability of the carrying values
of our long-term assets. Our long-term obligations consist primarily of long-term debt with fixed
interest rates and our revolving credit facility with a variable interest rate. We are not exposed
to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold
any derivative financial instruments nor do we hold any securities for trading or speculative
purposes.
We continually monitor the collectability of our accounts receivable and although our
write-offs have increased during the nine months ended September 30, 2009, we have not noted any
significant changes in our collections as a result of the current economic and market conditions.
We believe that our allowance for doubtful accounts is adequate as of September 30, 2009. Should
the market conditions continue to worsen or should our customers ability to pay decrease, we may
be required to increase our allowance for doubtful accounts, which would result in a charge to our
SG&A expenses.
Our available cash balances are invested on a short-term basis (generally overnight) and,
accordingly, are not subject to significant risks associated with changes in interest rates.
Substantially all of our cash flows are derived from our operations within the United States and we
are not subject to market risk associated with changes in foreign exchange rates.
Our investment securities are classified as available for sale, and consequently, are recorded
on the balance sheet at fair value with unrealized gains and losses reflected in stockholders
deficiency. Our investment securities are comprised solely of short-term U.S. Treasury notes with
original maturity dates of three to nine months. These investment securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if market interest rates
increase.
The fair value of our 11 3/8% senior secured notes due 2012 was approximately $274.9 million
at September 30, 2009. Our senior secured notes, like all fixed rate securities are subject to
interest rate risk and will fall in value if market interest rates increase.
The fair value of the long-term debt outstanding under our revolving credit facility
approximates its carrying value of $23.5 million due to its variable interest rate. A change in
interest rates of 100 basis points would change our interest expense by $0.2 million on an annual
basis.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure. In evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and
with the participation of our management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the operation of our disclosure controls and procedures as of the
end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
September 30, 2009. For information regarding the Companys internal control over financial
reporting, see our Form 10-K for the year ended December 31, 2008.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Companys internal control over financial reporting during
the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are currently a party to several legal actions. AT&T Communications of New York, Inc. and
Teleport Communications Group, Inc. commenced an action against us in the U.S. District Court for
the Southern District of New York in March, 2008. Plaintiffs seek monetary relief, including
recovery of amounts billed for switched access service. This matter has been referred to the New
York Public Service Commission.
We are also a party to certain legal actions and regulatory investigations and enforcement
proceedings arising in the ordinary course of business. We are also involved in certain billing and
contractual disputes with our vendors. We do not believe that the ultimate outcome of any of the
foregoing actions will result in any liability that would have a material adverse effect on our
financial condition, results of operations or cash flows.
For more information, see the section entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations and our Form 10-K for the year ended December 31,
2008.
Item 1A. Risk Factors
CIT Group, Inc. (CIT), an affiliate of one of our lenders under our credit facility filed
for bankruptcy on November 1, 2009. We do not expect that CITs bankruptcy filing will have a
negative impact on us, but there can be no such assurances. We will continue to monitor the
situation.
Other than the risk factor noted above, there have been no material changes in our risk
factors from those set forth in our Form 10-K for the year ended December 31, 2008, which should be
read in conjunction with this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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Item 6. Exhibits
The following exhibits are filed herewith:
Exhibit No. | Description | |||
31.1 | Certification of the Companys Chief Executive Officer
pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|||
31.2 | Certification of the Companys Chief Financial Officer
pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|||
32.1 | Certification of the Companys Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of the Companys Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
25
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on November 6, 2009.
BROADVIEW NETWORKS HOLDINGS, INC. |
||||
By: | /s/ Michael K. Robinson | |||
Name: | Michael K. Robinson | |||
Title: | Chief Executive Officer, President and Assistant Treasurer |
|||
By: | /s/ Corey Rinker | |||
Name: | Corey Rinker | |||
Title: | Chief Financial Officer, Treasurer and Assistant Secretary |
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Table of Contents
EXHIBIT INDEX
Exhibit No. | Description | |||
31.1 | Certification of the Companys Chief Executive Officer
pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|||
31.2 | Certification of the Companys Chief Financial Officer
pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|||
32.1 | Certification of the Companys Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of the Companys Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
27