UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Mark One
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Fiscal Year Ended December 31, 2009
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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)
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Delaware
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11-3310798 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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800 Westchester Avenue,
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10573 |
Suite N501 Rye Brook, NY 10573
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(Zip Code) |
(Address of principal executive offices) |
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(914) 922-7000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
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Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes þ No o
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 such shorter period that the registrant was required to submit and post such files). Yes o
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the last business day of the registrants
most recently completed second fiscal quarter.
NOT APPLICABLE because no public equity market exists for such shares, the aggregate market
value of the common stock held by non-affiliates of the Company is not determinable.
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Class |
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Outstanding at March 29, 2010 |
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Series A common stock, $.01 par value |
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9,333,680 |
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Series B common stock, $.01 par value |
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360,050 |
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DOCUMENTS INCORPORATED BY REFERENCE
NONE.
TABLE OF CONTENTS
In this report, references to Broadview, the Company, we, us and our refer to
Broadview Networks Holdings, Inc. and its subsidiaries unless the context indicates otherwise. For
periods prior to January 14, 2005, all references to Broadview, we, us, the Company or
our are to Bridgecom Holdings, Inc. and its subsidiaries. In connection with the Bridgecom merger
that occurred on January 14, 2005, Bridgecom Holdings, Inc. was deemed the accounting acquirer.
Except as the context otherwise requires, references to Eureka Acquisition are to Eureka
Acquisition Corporation, references to InfoHighway are to Eureka Broadband Corporation doing
business as InfoHighway Communications, references to ATX are to ATX Communications, Inc.,
references to Bridgecom are to Bridgecom Holdings, Inc. and its subsidiaries, references to MCG
are to MCG Capital Corporation, references to Baker are to Baker Communications Fund, L.P. and
Baker Communications Fund II (QP) L.P., collectively, and references to NEA are to New Enterprise
Associates VII, L.P., NEA Presidents Fund, New Enterprise Associates 9, L.P., NEA Ventures 1998,
L.P. and New Enterprise Associates 10, L.P., collectively. References to fiscal year mean the
year ending or ended December 31. For example, fiscal year 2009 means the period from January 1,
2009 to December 31, 2009.
References to 2006 notes are to the August 23, 2006 offering of $210.0 million aggregate
principal amount of our 113/8% senior secured notes due 2012. References to
2007 notes are to the May 14, 2007 offering of $90.0 million aggregate principal amount of our
113/8% senior secured notes due 2012. References to notes are to the 2006
notes and the 2007 notes. References to 2006 Transactions are to (i) the offering of the 2006
notes and (ii) the ATX acquisition and the related 2006 financings, including (a) entry into our
credit facility on August 23, 2006, (b) the repayment and termination of our senior secured credit
facility then in effect, (c) the repayment of approximately $1.0 million of principal of our
outstanding senior unsecured subordinated notes due 2009 and (d) the conversion of the remaining
$73.8 million of principal outstanding under our senior unsecured subordinated notes due 2007 and
2009 into shares of convertible preferred stock and common stock. References to 2007 Transactions
are to (i) the offering of the 2007 notes and (ii) the InfoHighway merger. References to the
Transactions are to the 2006 Transactions and 2007 Transactions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This 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:
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servicing our substantial indebtedness; |
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our history of net losses; |
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the elimination or relaxation of certain regulatory rights and protections; |
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billing and other disputes with vendors; |
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failure to maintain interconnection and service agreements with incumbent local exchange
and other carriers; |
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the loss of customers in an adverse economic environment; |
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regulatory uncertainties in the communications industry; |
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system disruptions or the failure of our information systems to perform as expected; |
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the failure to anticipate and keep up with technological changes; |
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inability to provide services and systems at competitive prices; |
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difficulties associated with collecting payment from incumbent local exchange carriers,
interexchange carriers and wholesale customers; |
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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; |
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continued industry consolidation; |
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restrictions in connection with our indenture governing the notes and credit agreement
governing the credit facility; |
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increased regulation of Internet-protocol-based service providers; |
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vendor bills related to past periods; |
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the ability to maintain certain real estate leases and agreements; |
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interruptions in the business operations of third party service providers; |
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limits on our ability to seek indemnification for losses from individuals and entities
from whom we have acquired assets and operations; |
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disruption and instability in the financial markets; |
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the solvency and liquidity of the administrative agent and primary creditor under our
revolving credit facility; |
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the financial difficulties by others in our industry; |
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the failure to retain and attract management and key personnel; |
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the failure to manage and expand operations effectively; |
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the failure to successfully integrate future acquisitions, if any; |
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misappropriation of our intellectual property and proprietary rights; |
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the possibility of incurring liability for information disseminated through our network; |
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service network disruptions due to software or hardware bugs of the network equipment;
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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.
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PART I
Item 1. Business
Company Overview
We are a leading competitive communications solutions provider, in terms of revenue, offering
innovative services and applications to meet the evolving requirements of small and medium sized
enterprise customers spanning numerous industry sectors. We offer many of our services on a
national basis, with a focused network presence 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. Our network architecture pairs the strength
of a traditional infrastructure with an Internet-Protocol (IP) platform, enabling the industrys
dynamic shift to integrated IP services. While offering traditional voice and data services, our
flagship products integrate traditional voice services, including local and long distance, with
high speed data services over our IP infrastructure, encompassing Voice Over Internet Protocol
(VoIP), hosted IP PBX services, Multiprotocol Label Switching (MPLS), unified messaging,
managed services, cabling, hardware, professional services and other value-added services,
delivered via T1 and unbundled network element loops. In addition, our network topology
incorporates metro Ethernet access technology, enabling us to provide multi-megabit Ethernet
services via unbundled network element loops to customers served from selected major metropolitan
collocations. These service offerings are provided to a wide array of industries including
professional services, manufacturing, real estate, retail, automotive, non-profit groups and many
others.
For the year ended December 31, 2009, we generated revenues of $456.5 million. For the year
ended December 31, 2009, revenues from retail end-users represented 87.0% of our total revenues,
revenues from wholesale end-users represented 4.4% of our total revenues and revenues from carrier
access and reciprocal compensation represented 5.2% of our total revenues. We recorded net losses
of, $65.5 million in 2007, $42.9 million in 2008, and $13.9 million in 2009. In addition, as of
December 31, 2009, we had $331.4 million of total outstanding indebtedness.
We target small and medium sized business or enterprise customers located primarily within the
footprint of our switching centers and our 260 collocations in 20 Northeast and Mid-Atlantic
regional markets. We focus our sales efforts on communications-intensive business customers who
require multiple products that can be cost-effectively delivered on our network. These customers
generally purchase higher margin services in multi-year contracts resulting in higher customer
retention rates. As of December 31, 2009, we provided services to approximately 54,000 business
customers and had approximately 75% of our total lines provisioned on-net.
The Company, doing business as Broadview since its acquisition in 2005, was founded in 1996 as
Bridgecom International, Inc. to take advantage of the competitive opportunities in the local
exchange communications market created by the Telecommunications Act of 1996 (the
Telecommunications Act). Since then, management has responded to market and regulatory changes by
strategically deploying facilities and merging with or acquiring companies with the necessary
footprint, facilities and customer base to sustain and grow our business. We merged with Broadview
Networks on January 14, 2005 to transfer our small and medium enterprise customers clustered in the
New York metropolitan area to our own switches, gaining improved margins, more control over service
delivery and more comprehensive customer care.
On September 29, 2006, we acquired ATX, which has provided us with broader opportunities in
our existing markets and access to new markets and larger business customers. ATX delivered voice
and data services, as well as hosted and managed communications solutions, to business customers
throughout the Mid-Atlantic, including Southeastern Pennsylvania, with a concentration in the
Philadelphia metro market. ATXs market, combined with Broadviews existing market strength in the
New York metro area, made us one of the market leaders in the Northeast and Mid-Atlantic corridor.
The ATX acquisition also enabled us to extend our geographic footprint within the Mid-Atlantic
region and to serve additional cities such as Baltimore and Washington, D.C. ATXs advanced data
and managed service offerings enhanced our suite of products and services. In addition, ATXs
ability to provide high-capacity voice and data services to business customers complemented our
focus on providing integrated T-1-based services to new and existing customers.
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On May 31, 2007, we acquired InfoHighway. InfoHighway delivered voice and data services, as
well as hosted and managed communications solutions, to business customers in the Northeastern
United States. InfoHighways network-based solutions include a wide range of hosted private branch
exchange solutions (HPBX), converged services based on VoIP technology and high-bandwidth
Internet access products. InfoHighway had large concentrations of customers in the New York
metropolitan market, including northern New Jersey. In addition, InfoHighways approximately 500
lit buildings allowed us access to customers over a cost-effective shared infrastructure. The
acquisition of InfoHighway has resulted in greater business density and network utilization.
On September 18, 2008, we acquired the assets of Lightwave Communications, LLC (Lightwave)
and its affiliate Adera, LLC (Adera). Lightwave was a competitive local exchange carrier
operating primarily in the Mid-Atlantic region of the United States. This acquisition complemented
our acquisition of ATX and enabled us to further penetrate into the Mid-Atlantic region.
We believe our network assets and facilities have the breadth and flexibility to address the
complex voice and data demands of our target customers. Our network is comprised of Nortel DMS-500
and Lucent 5ESS multi-service switches, an Alcatel DEX switch, MetaSwitch Internet-Protocol
softswitch Call Agents and media gateways, a Lucent Compact Switch, Juniper M-Series and Cisco
Internet-Protocol routers, Actelis ML Series and Hatteras Networks Ethernet access systems, 260
collocations in the central offices of Verizon Communications, Inc. and its affiliates
(collectively, Verizon) and approximately 3,000 route miles of metro and long-haul fiber. By
providing services utilizing our own and leased facilities, we believe we can (i) enhance service
quality and reliability, (ii) maintain attractive margins and cash flow, (iii) provide advanced
services, (iv) have greater control over customer care and service delivery and (v) reduce exposure
to regulatory risks. We access our customers using unbundled network elements (including unbundled
network element loops), special access circuits and digital T-1 and DS3 transmission lines for our
on-net end-users. In addition, we have commercial agreements with Verizon and AT&T Inc. (AT&T),
under which we offer off-net alternatives.
We purchase and install our own switching and collocation equipment and use our owned metro
and long-haul fiber or lease the required transmission capacity. We occasionally purchase fiber
transmission capacity, but only after achieving high utilization of our leased transmission
capacity. We generally deploy capital after reaching a sufficient critical mass of customers,
reducing the risk of stranding assets in under-utilized markets thereby recouping our investment in
a shorter period of time.
Finally, we have cost-effectively developed a scalable, proprietary integrated operational
support system (OSS) that seamlessly integrates real-time management and reporting of sales
activities, automated sales proposal generation, order entry and tracking, network inventory and
service provisioning/delivery, billing, customer care, network management and trouble reporting and
automated testing and repair. In addition, our OSS delivers sophisticated on-line tools to our
direct, agent and wholesale sales executives, as well as to our customers, to directly input,
manage and control their orders, bills and services in real time. Our integrated OSS is a core
component of our success, enabling us to efficiently and effectively operate our existing business,
evolve to integrate new technologies and service offers and integrate acquisitions.
Industry Overview
The market for communications services, particularly local voice, is dominated by the
incumbent local exchange carriers in the United States. These carriers consist primarily of the
Regional Bell Operating Companies (RBOCs), which include Verizon, AT&T, Inc. (AT&T) and Qwest.
While the RBOCs own substantially all of the local exchange networks in their respective operating
regions, competitive communications providers hold significant market share. According to data from
the Federal Communication Commission (FCC), as of June 30, 2008, competitive communications
providers served 30 million, or 19.4%, of end-user lines in the United States. In addition, the
number of competitive communications providers in the United States has been reduced as the
industry continues to consolidate. Since June 2005, we believe over 60 mergers and acquisitions
have been completed. While the RBOCs provide a broad range of communications services, we believe
that they have largely neglected the small and medium sized business segment due to an increased
focus on the global enterprise business segments of the market, increased competitive pressures in
the residential market and the integration of recent mergers and acquisitions. We believe this lack
of focus from the RBOCs has created an increased demand for alternatives in the small and medium
sized business communications market. Consequently, we view the market as a sustainable growth
opportunity and have therefore focused our strategies on providing small and medium sized
businesses with a competitive communications solution.
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Our Strengths
We believe that we have the following competitive strengths:
Significant Growth Potential of Our Newer Product Offerings. We believe that our current
market penetration and ability to deliver a complete end-to-end communications solution to small
and medium sized business customers, including access, voice and data services, equipment,
applications and professional services, provides us with significant growth potential. According to
data prepared by the FCC, as of December 31, 2007 there are approximately 16.5 million business
lines in our target market. We focus our sales efforts on communications intensive business
customers who require multiple services and complex communications solutions. We believe these
organizations have historically been underserved by the Regional Bell Operating Companies and have
limited alternatives for high quality integrated communications products and services. We believe
that this demand, combined with our current product and service offerings, presents us with
significant growth opportunities which will enable us to increase our market penetration within our
operating footprint. As of December 31, 2009, we served approximately 54,000 business customers and
more than 750,000 line equivalents in 20 markets across 10 states throughout the Northeast and
Mid-Atlantic United States, including major metropolitan cities such as New York, Philadelphia,
Baltimore, Washington, D.C. and Boston.
Experience Integrating Companies and Providing New Services. Since our inception, we have
acquired and successfully integrated companies and assets into our operations. We have
cost-effectively migrated off-net customers to our network, integrated OSS infrastructure and
aligned cost structures. For example, our experience and operating platform allowed us to
successfully integrate the operations and customers of ATX, InfoHighway and Lightwave in a timely
and cost-efficient manner. The scalability and breadth of our network and integrated OSS
infrastructure enables us to increase our customer base with minimal incremental capital and
personnel investment.
Unique Integrated OSS Infrastructure. We believe that our integrated OSS differentiates our
operations in the market and provides us with a sustainable advantage over our competition. Our
integrated OSS seamlessly combines and automates the order entry and provisioning process in
real-time. The system delivers customer- and sales channel-facing web portals, extensive sales
automation tools, efficient electronic order entry, flow-through network service provisioning, high
volume and multi-location billing, alarm and event surveillance, performance management, trouble
ticketing and automated service testing and repair. Our customers have the ability to customize and
transform their bills into effective management reports for monitoring costs and usage. The summary
billing information and the detailed billing data are available on our e-Care customer web portal
and can be downloaded into data processing formats for further analyses. We have also developed a
user-friendly and fully automated platform for our direct and indirect sales forces, which allows
them to enter and track orders, trouble tickets and commissions online, thereby allowing them to
effectively service and manage our customers. Since our OSS is developed in-house, using scalable
software languages such as Java and .net, we continually expand and enhance the capabilities of our
systems driven by the needs of our business and our customers, providing ever more sophisticated
tools for our direct and indirect sales executives and customers to order, monitor and manage their
services and billing information, extending our advantage.
Award Winning Customer Service. Our highly personalized approach to customer service is one
of the primary contributors to our customer retention. We closely monitor key operating and
customer service performance metrics. Capturing and analyzing this information allows us to improve
our internal operating functions, drive increased profitability and quickly respond to changes in
demographics, customer behavior and industry trends. Our customer service and account management
personnel continually monitor and analyze customer service trends, identify at-risk customers and
develop and implement retention strategies and Company-wide programs that address the changing
needs of our customer base. As a result of our customer service initiatives, we received numerous
quality awards, including being certified as a Center of Excellence by the Center for Customer
Driven Quality at Purdue University, being awarded the American Business Award for Best Customer
Service Organization and winning the Stevie® Award for Best Sales Support Team.
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Facilities-Based Network Infrastructure. Our network has the ability to deliver traditional
services, such as Plain Old Telephone Service (POTS) and T-1 lines, as well as Digital Subscriber
Line (DSL) and next generation services, such as dynamic VoIP integrated T-1s, hosted VoIP
solutions, Ethernet in the First Mile and MPLS Virtual Private Networks. We provide services to our
customers primarily through our network of owned telecommunications switches, data routers,
application servers and related equipment and owned and leased communications lines and transport
facilities. As of December 31, 2009, approximately 75% of our total lines were on-net. We have
deployed an IP-based platform that facilitates the development and delivery 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. Contrary to many providers
of VoIP and IP-based services, we do not rely on the public internet and therefore are able to
ensure quality of service and differentiated services by exercising direct control of our IP
infrastructure.
Experienced and Proven Senior Management Team. Our team of senior executives and operating
managers has significant experience in the communications industry and extensive knowledge of our
local markets. Members of our executive management team have an average of 20 years of experience
in managing communications companies. In addition to industry knowledge, members of our management
team have public company operational experience and expertise in integrating acquired facilities
with our existing facilities. In connection with our many mergers and acquisitions, our senior
management team successfully consolidated back-office systems and processes into a single OSS,
integrated operations and cultures, combined products, strategies and sales channels, and migrated
more than 115,000 off-net lines to our network in a timely and cost-efficient manner.
Our Markets
We have focused our network deployment and marketing efforts in markets throughout the
Northeast and Mid-Atlantic United States, where Verizon and AT&T are the Regional Bell Operating
Companies. According to data prepared by the FCC as of December 31, 2007, there are approximately
16.5 million business lines in our target geographic market. We target small and medium sized
business or enterprise customers located within the footprint of our switching centers and our
approximately 260 collocations. We believe small and medium sized business customers have
historically been underserved by the RBOCs. In addition, we believe our next generation services
will allow us to continue to gain market share and enter into new markets without abandoning our
core installed base. We serve the following markets:
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Market |
New York Metro |
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New York City |
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Long Island |
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Westchester |
Pennsylvania |
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Allentown |
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Harrisburg |
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Philadelphia |
Upstate New York |
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Buffalo |
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Syracuse |
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Albany |
Massachusetts |
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Boston Metro |
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Western MA |
New Jersey |
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Northern NJ |
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Southern NJ |
Rhode Island |
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Rhode Island |
New Hampshire |
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New Hampshire |
Maryland |
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Baltimore |
Delaware |
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Delaware |
District of Columbia |
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District of Columbia |
Northern Virginia |
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Northern Virginia |
Connecticut |
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Connecticut |
OfficeSuite Nationwide |
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Nationwide |
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Our Customers
Our customer base consists primarily of 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. We now
offer our hosted IP product, OfficeSuite, on a nationwide basis. We utilize nationwide partners for
last mile and transport access back to our network. We also provide services to residential
customers, although we no longer actively market to new residential accounts. Approximately 87% of
our revenues are generated from retail end-user billing.
Our retail business customers represent a wide variety of industries, including healthcare
services, education, personal services, retail, auto (dealers/service/repair), real estate,
non-profits, associations and professional services. As of December 31, 2009, no single retail
customer represented more than 1% of our total revenue.
Our wholesale line of business serves other communications providers with voice and data
services, data collocation and other value-added products and services.
Products and Services
We provide our customers with a comprehensive array of circuit-switched and IP-based voice and
data communications services, including local and long-distance voice services, integrated voice
and data services, Internet services and private data networking as well as value-added products
and services, such as telecommunications hardware, hosted services and managed network solutions.
Our business is to deliver end-to-end communications solutions to our target customers, with a
focus on helping them solve their critical and complex infrastructure, productivity and security
needs through a combination of products and services.
We leverage the scalability and broad technology base of our network architecture to deliver
products that address the increasingly complex communications needs of our customers. MPLS and
softswitch equipment deployed throughout the network allows us to deliver IP-based services and
provide our customers with cost-effective alternatives to traditional products. Our products and
services are offered with a range of alternatives and customized packages, allowing us to meet the
specific requirements and objectives of a larger number of potential business customers. Our sales
and marketing initiatives focus on bundling our products and services into a single competitively
priced solution for each customer. This bundling adds value for our business customers and
increases the overall profitability of our operations.
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The following table summarizes our product and service offerings:
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Value-Added Products and Services |
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Data Services |
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Voice Services |
Hosted VoIP solutions
Automated attendant
Unified messaging
Telecommuting
Integrated services
Traditional and converged telephone systems
Enhanced e-mail security
Managed firewall
Content filtering
Managed Wide Area Network
Local Area Network/Wide Area Network integration
Inside wiring
Data backup and recovery
Disaster recovery services
Unified Communications solutions
Fixed-Mobile Convergence solutions
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Dedicated Internet T-1 access
Broadband Internet access
Dial-up, DSL data service and Symmetric DSL Internet access
E-mail
Collocation
IP Virtual Private Networks (MPLS and Remote Access Switching)
Metro Ethernet Services
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Local, regional, domestic and international services
T-1 Primary rate interface and Session Initiation Protocol services
Private line
Voicemail
Caller identification
Call waiting
Call forwarding
Conference calling
VoIP
Toll free services |
Value-Added Products and Services
Leveraging our infrastructure, systems, technology, applications and vision, we provide
advanced integrated product suites that deliver the most value to our customers, simplifying their
businesses and providing many operational and economic benefits.
Hosted VoIP Solutions. One of our fastest growing product lines, our hosted VoIP solutions,
packages business-grade VoIP with advanced telephone equipment and managed network security into
innovative and feature-rich solutions for unified communications. Built on redundant, carrier-grade
platforms for better reliability, security, flexibility and scalability, our hosted VoIP solutions
leverage advanced VoIP functionality and QoS management while covering all service, equipment and
management. Our customers gain productivity, bridging telephone and computer communications through
a converged IP network, resulting in more efficient use of bandwidth, intuitive management tools,
24×7 expert network monitoring, and ongoing product upgrades and enhancements that are all included
in the solution. Our hosted VoIP offering also enables centralized control for administrators,
including streamlined implementation of everyday configuration needs through a secure and
user-friendly Internet-based web portal. Disaster avoidance and recovery capabilities are also
integrated into the service package, providing for business continuity in the event of customer
location outages and other scenarios. Successful implementation, whether to retire an older system
or to prepare an organization for migration to next generation services, is enhanced by a thorough
process of gathering detailed requirements, evaluating network readiness, assessing quality based
on qualitative and quantitative measurements, and conducting administrator and end-user training
for each customer deployment.
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Integrated Services. We offer integrated voice and data packages to small and medium sized
businesses, including a variety of service options designed to accommodate our customers needs.
Our integrated offerings result in significant performance and cost efficiencies compared to
discrete services purchased from separate competitive carriers. We also offer multiple products in
a bundle offering delivery over a common circuit. These integrated packages are our primary product
offerings, driving increased revenue per customer and higher customer retention. We offer a dynamic
IP-based Integrated T-1 service leveraging our MetaSwitch IP-based Call Agents and softswitch
gateways and our MPLS network to deliver highly flexible voice and data services over an IP-based
T-1.
Managed Services. Our managed services include web hosting services, managed IP Virtual
Private Networks, managed firewalls, managed Wide Area Network services, managed e-mail security,
content filtering and online data backup and recovery. These solutions are designed to allow IT
organizations and leaders within companies to outsource certain day-to-day management and ongoing
maintenance of these mission critical applications, without sacrificing vision or control, in order
to enable typically over-extended internal resources to focus on the core objectives of the
business. While improving security and productivity and simultaneously lowering total cost of
ownership for the customer, these services enhance the depth and profitability of our customer
relationships.
Data Services
Our data service offerings are designed to provide a full range of services targeted at
businesses that require single or multipoint high-speed, dedicated data connections. We provide
dedicated transmission capacity on our networks to customers that desire high bandwidth data links
between locations, or to the Internet. Internet connections are provided via DSLs, T-1, DS3 or
Ethernet, depending on our customers bandwidth and security needs. Point-to-point services include
MPLS, which is often used as a frame relay replacement. In addition, our IP Virtual Private Network
data network services include multiple classes of service for differentiated levels of quality of
service (QoS), service level agreements and security. In addition, through arrangements with
national IP network providers, we offer these services on a nationwide basis to those of our
business customers who have locations outside of our network footprint. These services enable
customers to deploy tailored, IP-based business applications for secure internal enterprise,
business-to-business and business-to-customer data communications among geographically dispersed
locations, while also affording high-speed access to the Internet.
Voice Services
We provide customized packages of voice services to meet our customers voice communication
needs. We offer local telephone services, including basic voice services and vertical features such
as call forwarding, call waiting, call transfer, calling number identification/calling name
identification plus enhanced services such as voice mail and direct inward dialing. Our services
are provided by leveraging our circuit-switched and IP-based network infrastructure. We utilize
unbundled network element loops, digital T-1 lines and, in certain instances, our commercial
agreements with Verizon and AT&T to access our customers. In addition to our local service
offerings, we offer a range of dedicated long distance services to customers connected to our
network. These include services that originate and terminate within the same local transport area
and in different local transport areas, international services, one plus outbound services and
inbound toll-free services. We also offer ancillary long distance services such as operator
assistance, calling cards and conference calling. In instances where a customer may have locations
outside our network footprint, preventing us from connecting directly to our network, we resell
long distance services of other communications carriers through agreements we have with those
carriers. We generally provide our long distance services as part of a bundle that includes one or
more of our other service offerings.
Sales and Marketing
Our retail sales organization consists of two separate sales channels: direct sales and agent
partners. Each channel enables us to provide a bundled product offering of voice and data
communications, hardware and managed network services through a consultative analysis of each
customers specific needs. By developing a detailed proposal based on each customers individual
requirements for network configuration, service reliability, future expansion and budget
constraints, we deliver the quality, reliability and value that customers demand. Our pricing and
sales commission plans provide significant incentives for sales of higher-margin T-1-based products
in our on-net territories for two- and three-year terms.
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Our largest sales channel is our direct sales division. As of December 31, 2009, this group
consisted of approximately 190 quota-bearing sales representatives. This group focuses primarily on
selling to new small and medium sized business end-user customers using vertical marketing and
networking strategies to maximize their results. This group also leverages our knowledge of our
existing customers business needs to up-sell additional services and applications, enhancing and
further strengthening the relationships with our customers and increasing revenue per customer.
Our agent divisions main objective is to leverage our strengths to specific market segments
through independent contractors. The agent division focuses on customers who are already aligned
with a communications consultant that may not provide many of the services we provide and who are
looking to their consultant for a solution. We have also selected the agent division as our primary
distribution channel for our nationwide OfficeSuite offering. Currently, our agent division
maintains approximately 300 relationships.
In early 2009, we suspended the use of a third sales channel. The inside sales channel
consisted of third-party marketing firms and internal telemarketing sales representatives acquired
in connection with the Lightwave acquisition who focused on smaller customers. These customers were
slightly outside of our target market, had lower customer retention, had higher bad debt and it was
no longer cost-effective to maintain efforts to acquire more of them.
In addition to our retail channels, we offer services to other carriers and resellers through
our Wholesale division. The Wholesale division leverages our network strength and our leading back
office automation systems to deliver a reseller-branded suite of voice, data, IP and integrated
services for resale, where the reseller retains the customer relationship and is responsible for
sales, customer care and billing.
Marketing support is provided to our sales channels in many forms. In addition to printed
materials and sales promotions, our sales professionals are provided with qualified leads and
vertical marketing programs. There are two referral programs to generate leads for our direct sales
channels. The Business Community Partnership program enables individuals and businesses to earn
upfront and residual payments by providing leads that result in sales by the direct sales force. We
are also a sponsor of various associations. Brand recognition is developed through press releases,
media advertising, and editorial coverage in industry publications. We also participate in both
national and local trade shows and various other events. We build rapport and goodwill with both
customers and prospects through a sports marketing program.
Customer Service and Retention
Our customer relationship management division uses a multi-tiered, multi-channel level of
support to target specific levels of service to our retail and wholesale customers as well as our
multiple sales distribution channels. Our inbound contact center, 1-800-BROADVIEW, is staffed
24 hours per day, 7 days per week, 365 days per year with customer care representatives, staffed
both internally and through third party agencies, who handle all aspects of a customers
communications including billing questions, payments, repairs, changes of service, and new service
requests. Redundant internal physical facilities are staffed and operated in Pennsylvania and New
York with automatic cut-over capabilities, along with fully redundant facilities through our third
party agencies. All facilities are staffed by specialists who are trained to handle all of our
customers requests.
Our customer relationship management division also provides dedicated personalized support to
our larger customers through our Enterprise Service Group. Dedicated representatives are assigned
to each customer and the customers invoice has the name of their representative and direct
toll-free number on it. In addition, our Enterprise team is staffed with Enterprise Project
Managers who are dedicated to delivery of new products and services to these customers. Our largest
accounts also have field support from the total solutions management team. Our total solutions
management teams call on customers in person to address service issues and provide consultation and
to market additional products and services.
The direct and agent sales distribution channels are supported by a dedicated team of
individuals focused on the success of their assigned sales channel. Sales regions have dedicated
service representatives who handle service requests from the field direct sales and agent sales
forces. In 2009, we won the 2009 Stevie Award for Best Sales Support Team. The award specifically
recognized the achievements of Broadviews commission team, which supports multiple sales channels
including direct, agent and affinity partners. In 2008, the team overhauled Broadviews legacy
commissioning systems resulting in expedited payment schedules, reduced processing times, and
enhanced reporting capabilities. The teams outstanding performance contributed to greater
employee, agent and partner satisfaction.
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Providing a superior customer experience is a major focus of our customer relationship
management team. We collect statistical and direct feedback from customers regarding their recent
service experience and use the information to refine and improve our processes as well as measure
the effectiveness of the organization. We conduct in-depth customer disconnect and satisfaction
studies to understand key drivers of our customers satisfaction, loyalty, and reasons for
canceling their service. We also use a cross-functional churn analysis task force that analyzes
customer churn and patterns and makes recommendations to senior operations management on ways to
improve our customers experience.
Our customer relationship management division utilizes various technologies to gain
efficiencies and improve the level of service and options for customers. In addition to having the
option to speak to a representative 24 hours per day, 7 days per week, customers also have several
self-service options. Our interactive voice response system, known as Express Care, provides
automated telephone billing and collections options as well as network outage notifications. The
system also utilizes value based routing to prioritize high value customers as first priority
response. Our e-Care web-based options allow customers the same billing and payment options as well
as the ability to download and analyze billing detail and copies of their bill. Our new eCare
Enterprise web-based application provides even more customer self serve capabilities, including the
ability to enter and track trouble tickets, and to perform toll free and DID number rerouting, all
in real time. Customers can also contact customer relationship management through the contact
manager application on the e-Care site. Customer relationship management also utilizes a fully
automated system that continually updates customers about ongoing repair issues via e-mail or
outbound phone call.
Network Deployment
Our network architecture pairs the strength of a traditional infrastructure with an IP
platform, built into our core and extended to the edge, to support dynamic growth of VoIP, MPLS and
other next generation technologies. In addition, our network topology incorporates metro Ethernet
access in key markets, enabling high bandwidth first-mile connectivity directly to strategically
located business opportunities.
Voice and Data Switches
We currently have Nortel DMS-500 and Lucent 5ESS multi-service switches, an Alcatel DEX
switch, MetaSwitch IP call agents and softswitch gateways and a Lucent Compact Switch serving
multiple markets in ten states. Our switches offer a complete suite of voice services, delivering
local, long distance, Centrex services and a full suite of Class services that our customers
currently utilize. We deploy Cisco MGX/BPX ATM switches, Cisco and Juniper core and provider edge
IP and Ethernet routers, and switches from Cisco, Juniper, Foundry Networks and Extreme Networks.
Collocations and Edge Equipment
We are currently collocated in approximately 260 Verizon end offices in the New York City
metro area, Upstate New York (including Syracuse, Albany, Buffalo), Massachusetts, Rhode Island,
New Hampshire, New Jersey, Pennsylvania, Maryland, Delaware and Washington, D.C. The Zhone
Universal Edge UE9000, the CTDI Intelligent Multi-service Access System (IMAS), the Lucent
AnyMedia Access System and Force10 TraverseEdge and WideBank multiplexers deployed in incumbent
local exchange carrier collocations, allow us to deliver POTS, T-1 voice, Primary Rate Interface
T-ls, integrated voice and data T-ls and a full suite of DSL high speed data services using
incumbent local exchange carrier unbundled network element loops. We have deployed Actelis ML
Series and Hatteras Networks Ethernet access systems in certain major metropolitan collocations
allowing us to provide multi-megabit Ethernet access services. We will continue to expand this
technology in other service areas.
On-Net (Lit) Buildings
With the acquisition of InfoHighway, we have approximately 500 commercial buildings in metro
New York and Washington, D.C., which have Ethernet switches and routers, as well as integrated
access devices. Voice, data and Internet services are provided directly to customers within the
buildings over in-building wiring and optical fiber, which allows for rapid installation of
services. We manage the riser plant within some of these buildings on behalf of the landlords under
contracts.
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ATM Backbone Network and IP Network Equipment
We have deployed Cisco Systems MGX/BPX family of ATM edge/core switches to power our regional
and inter-city ATM backbone network. The MGX/BPX product family provides multi-service switching
capability to support voice, data, and video applications. We use various Cisco and Juniper core
and edge aggregation routers to support our various IP-based services. Our current offering of IP
services include dedicated Internet access and site to site Virtual Private Networks, including
MPLS based services providing multiple classes of services. We deploy the Redback SMS-1800
Broadband Access Termination system to support Symmetric DSL and DSL data services.
Fiber Network and Fiber Equipment
We operate a multi-state fiber network consisting of local metropolitan fiber rings and
interstate long haul fiber systems. The fiber network consists of our owned fiber, dark fiber,
Indefeasible Rights to Use, and light-wave Indefeasible Rights to Use from multiple providers. We
have approximately 3,000 route fiber miles consisting of both our owned fiber and dark fiber,
pursuant to Indefeasible Rights to Use. We currently have Lucent FT2000 OC48, Lucent OLS 40G DWDM
systems and Force10 Networks optical transport systems in operation on the fiber network.
Feature/Application Servers
We have deployed Hosted VoIP solutions, encompassing Hosted IP Key and Hosted IP private
branch exchange feature/application servers from Natural Convergence and Broadsoft, respectively.
These platforms provide enhanced applications to our business customers and are a highly desirable
alternative to purchasing and operating their own key systems or private branch exchanges. In
conjunction with these hosted services, we offer our customers advanced Mitel and Polycom IP
station sets. For those customers who want to own and operate their own IP private branch
exchanges, we offer the Nortel BCM product line, Mitel 3300 IP PBX products and the Cisco Call
Manager product line. In addition, we provide Unified Messaging services through our Common Voices
NowMessage and Broadsoft Messaging platforms.
In September 2009, we acquired the intellectual property and source code for the enabling
technology behind our hosted internet protocol phone service from Natural Convergence, Inc.
(NCI). This technology was previously being used under a license agreement with NCI. We also
hired the key NCI development, test and support resources. As a result, we are now positioned to
directly control the ongoing development and enhancement of the NCI platform, and to make available
to our hosted VoIP customers unique and differentiated applications and services.
Customer Access Methods
Our strategy for acquiring new customers and expanding our market share is designed to
generate revenues from targeted customers before we deploy significant network capital. Thus, we
acquire customers in targeted geographic areas using off-net access methods, and then build out
collocations based on our penetration in specific Regional Bell Operating Company central offices.
This strategy enables us to take advantage of the pre-existing switching and transport facilities
of the Regional Bell Operating Company and/or other access providers, thus minimizing our need to
spend capital in advance of orders and reducing our risk of inefficient capital investments or
stranded plant. Once we reach sufficient customer density within a Verizon central office, we
generally deploy the necessary equipment and facilities to allow us to provide on-net service in
that Verizon central office.
When constructing our network, we retained ownership of the intelligent components such as
switches, network electronics and software, but lease the readily available transport elements.
This strategy provides us with significant cost and time-to-market advantages. By owning our
switches, we can configure our network to provide high performance, high reliability and
cost-effective solutions for our customers needs. By leasing our transport lines, we can reduce
upfront capital expenditures, and offer service ubiquitously within a collocation, which leads to a
larger addressable market than business models that are based solely and largely on building
dedicated facilities to specific customer locations.
The deployment of on-net facilities allows us to improve margins, provides the greatest
flexibility in offering product solutions and provides us with greater control over surveillance
and repair of facilities. As of December 31, 2009, we had approximately 260 collocations that
allowed us to serve approximately 75% of our total lines through an on-net arrangement, either T-1
or unbundled network element loops.
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We serve our customers through one or more of the following access methods:
On-net T-1: On-net T-1 is a leased high capacity connection directly from our collocation
equipment to the customers location. This T-1 can provide voice, data or integrated communications
services to our customers. This access method is the fastest growing segment of our business.
On-net unbundled network element loops: To provide voice lines to residential and small
business accounts, we collocate our access equipment in a Verizon central office and lease
unbundled network element loops from our collocation to the customer premise. These on-net loops
can provide residential or business POTS, or DSL data service, which can deliver voice and data
over a single network loop. In addition, through the use of our Actelis ML-series and Hatteras
Networks Ethernet access systems, we are providing T-1 equivalent and multi-megabit Ethernet access
services via unbundled network element loops to customers served from selected major metropolitan
collocations, significantly increasing our margins and expanding our service offerings.
Off-Net: Off-net access methods are used to implement our strategy by acquiring customers
located in Verizon central offices in which there is not yet sufficient density to build a
collocation. Off-net access is also used to serve off-net locations of a multi-location account.
There are two major forms of off-net access. The first is utilizing the transport and/or loops and
facilities of a communications provider other than the RBOC. We have contracts with multiple
providers of access and transport. The second is provided through RBOCs. We have entered into
commercial agreements with Verizon and AT&T, which provide availability and predictable pricing for
the required access and associated features needed to provide off-net services to our end-users.
Service Agreements with Carriers
We obtain services from Verizon through state-specific interconnection agreements, commercial
agreements, local wholesale tariffs and interstate contract tariffs. We currently have
interconnection agreements in effect with Verizon for, among others, New York, Massachusetts, New
Jersey, Pennsylvania, Virginia, Maryland, Delaware, Rhode Island and Washington, D.C. Though the
initial terms of all of our interconnection agreements have expired, each of these agreements
contains an evergreen provision that allows the agreement to continue in effect until terminated.
We are in the process of renegotiating with Verizon the terms of our multiple New York
interconnection agreements. While our principle commercial agreement
expires at the end of April, 2010 and our secondary commercial
agreement has expired, we have reached an agreement in principle with Verizon as to the
economic terms of an amended and restated commercial agreement. This amended and restated
commercial agreement, which we anticipate will be signed within a matter of weeks, will extend into
2013 and will continue to allow us to purchase off-net services from Verizon at unbundled network
element (UNE) - platform rates subject to a tiered surcharge reflective of the number of lines we
place under the agreement. We will be required under our amended and restated commercial agreement
with Verizon to maintain a certain volume of lines on a
take-or-pay basis. Our remaining commercial agreement
with Verizon expires at the end of June 2010. Our Verizon interstate
contract tariffs allow us to purchase high capacity loops and transport at discounted rates. The
interstate contract tariffs require us to maintain a certain number of channel terminations on a
take-or-pay basis. We have entered into five- and seven-year interstate contract tariffs for
Verizons southern and northern territories, as well as an additional five-year interstate contract
tariff, which further incentivizes our use of Verizon special access services. For Connecticut, we
have both an interconnection and a commercial agreement with Southern New England Telephone
Company, a subsidiary of AT&T. For Maine, New Hampshire and Vermont, we maintain interconnection
and commercial agreements with Fairpoint Communications, Inc. (Fairpoint). We are currently
negotiating agreements with ILECs outside the Verizon Northeast and Mid-Atlantic service areas to
support our nation wide service offering.
We maintain agreements with a number of other carriers for the provision of network
facilities, including fiber routes and high capacity loops and transport, internet service
providers, and local voice and data services. These agreements often provide cost-effective
alternatives to ILEC-provided services. We also maintain agreements with a number of different long
distance carriers. Under the terms of these long distance contracts, after meeting certain minimum
purchasing requirements, we are able to choose which services and in what volume we wish to obtain
the services from each carrier. Finally, we maintain agreements with various entities for ancillary
services such as out-of-band signaling, directory assistance and 9-1-1.
For more information, see Risk Factors Our ability to provide our services and systems at
competitive prices is dependent on our ability to negotiate and enforce favorable interconnection
and other agreements.
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Integrated OSS
We have developed and continue to improve and update our integrated sales automation, order
processing, service provisioning, billing, payment, collection, customer service, network
surveillance, testing, repair and information systems that enable us to offer and deliver
high-quality, competitively priced telecommunication services to our customers. Through dedicated
electronic data connections with the Regional Bell Operating Companies, from which we purchase
local access services including unbundled network element loops, and our commercial agreements,
resale services and T-1, as well as connections to our long distance carriers, we have designed our
systems to process information on a real time basis.
Our core OSS combines extensive internal developments with our superior licensed software and
applications, all internally integrated through in-house development resources. Software supporting
business processes and operations has been developed in-house largely in Java, with some front end
systems written in Microsofts .net, supporting both portability and scalability. Systems
supporting network management and operation are composed of licensed core applications platforms
that have been extensively customized and integrated by in-house software developers. Process
automation is achieved through various applications, which are integrated with workflow to track,
report on and drive work orders through from start to finish. Our systems are designed to require
single data entry and maximum flow-through from the initial contact with prospective customers,
through order entry and on to service provisioning. We use BEA Weblogic to develop and extend our
workflows across the various applications, driving automation of processes and the flow of orders
and repair throughout the organization. Our applications include the following:
Sales, Order Entry and Provisioning Systems
Our sales automation, order entry and provisioning systems enable us to shorten the customer
provisioning time cycle and reduce associated costs. The sales management toolset begins with
SalesTrak, a unified portal offering an extensive array of sales tools and capabilities. Among the
sales tools available within SalesTrak is iLead, a web-based sales process and funnel management
application. iLead manages the sales process from initial prospecting through to close, and
includes a hierarchical set of reports and dashboards designed to provide extensive oversight and
sales forecasting accuracy. Information entered into iLead flows through the entire sales and order
entry process, augmented along the way as additional information is obtained or required. The
progression from lead to opportunity, proposal, signed deal and order entry is seamlessly managed
through a tightly coupled software system thus ensuring single data entry and data consistency.
Central to our sales system support environment is an application called eSales Enterprise. eSales
Enterprise uses the information gathered by the Sales Rep to construct clean, professional
proposals. eSales Enterprise is also the online vehicle Sales and Marketing use to approve the
terms and conditions of any proposal extended to a customer and, upon closing a deal, is the
application used to invoke the order fulfillment process. Prior to submitting an order for access
services to the Regional Bell Operating Company, we perform customer credit approval and
automatically obtain and process the customers service record detailing the customers existing
phone service to establish their data records in our centralized customer records database. This
has enabled us to deliver a highly automated flow-through customer provisioning process for
qualified and verified orders.
Our order entry system has been extended, through a dedicated web portal, AgentTrak, to
provide these same capabilities to our indirect sales forces. Through our SalesTrak and AgentTrak
portals, our sales team, agents and other indirect sales teams can track provisioning status,
trouble reports and commissions in real-time.
In addition to automating the ordering and provisioning of new services, our provisioning
system automates the addition of customer lines to existing customer accounts, as well as the
changing of the features associated with that particular customers service. Recently added
functionality also provides for the automation of many of the functions of customer service moves,
further reducing manual work and providing increased operating efficiency.
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Customer Relationship Management System
Our customer relationship management systems include e-Care, e-Care Enterprise and OpenCafe.
e-Care and e-Care Enterprise allow our customers to directly monitor and manage their accounts
online. E-Care Enterprise, our newest customer portal, provides customers with the ability to
repoint toll free and DID numbers in real time or on a defined schedule, to enter and track trouble
tickets, to track service orders and to view, analyze, download and pay bills, with many other
enhancements and extensions under development. OpenCafe provides our customer service
representatives with real time access to all information pertinent to the customer, in an organized
and easy to use front-end system. In addition, OpenCafe is directly coupled with our trouble
ticketing and repair tracking systems, allowing instant access to repair status and reporting. We
also have a repair system that allows our customer service representatives to analyze customer
troubles and repair service issues in real-time, while the customer is on the phone. This system
leverages extensive analysis and repair logic developed in-house, providing a simple and highly
intuitive front end portal to the service representative. We continue to develop and implement
improvements to OpenCafe, delivering more front-line capabilities to our customer service
representatives, reducing the length of customer service calls and improving the customer
experience. In addition, as stated above, our SalesTrak and AgentTrak portals allow our sales
representatives and agents to have direct visibility into our systems to better serve our customers
by monitoring customer accounts.
Network Management Systems
Our network management systems include: TTI Netrac, our network alarm surveillance, analysis
and reporting system; TTI NeTkT, our integrated trouble ticketing and repair tracking system;
Syndesis NetProvision Activator, our DSL provisioning automation system; JDSUs NetOptimize, our
traffic data collection and analysis system; JDSUs NetAnalyst, our T-1 integrated testing
management system; Harris TAC, our copper loop integrated testing system; Whats Up Professional
and Whats Up Gold, our customer premise equipment monitoring systems and Telcordia Xpercom, our
network inventory records system. With these core licensed applications, our in-house software
developers have, through Application Program Interfaces, developed overarching control and
management software applications to leverage these systems, and integrated the functionality to our
business support applications to deliver seamless service, provisioning and billing. Through these
systems, we have automated many key trouble management and resolution functions, including fault
isolation, service testing, trouble ticket generation, forwarding, tracking and escalation,
automated reporting to our customers and automated close-out of tickets upon customer-acknowledged
completions. In addition, we have leveraged these applications to deliver Web-D, our work force
management, assignment and tracking application, maximizing the efficiency of our field workforce.
Billing System
Our in house developed billing system enables us to preview and run each of our multiple bill
cycles for the many different, tailored service packages, increasing customer satisfaction while
minimizing revenue leakage. Our full color, multi-location bill provides the flexibility for
customers to customize the arrangement of lines by location, while offering extensive and intuitive
management reports that allow customers the insight to manage their communications costs and usage.
All billing information is available on-line via our e-Care customer web portals, for viewing,
analysis, downloading and on-line payment. And all billing information, including a pdf image of
the actual bill, is available on demand in real-time to our customers and customer care
representatives for review or discussion with our customers, increasing customer satisfaction. Our
customer invoice includes management reports and graphical representations of customer billing
information, particularly useful for multi-location customers. We have successfully evolved and
enhanced our billing system to support our continually growing suite of services and the
dramatically increasing volumes of customers since its initial development. Our billing system
capabilities have been a key strength in support of our successful mergers and acquisitions
strategy and ability to successfully integrate companies and customer bases while avoiding customer
disruption. We have leveraged the capabilities of our billing system to develop enhanced account
profitability tools for sales, marketing and customer care, for use in account management and
competitive bidding scenarios.
Cost Assurance System
We utilize the services of Contact Telecom to analyze the multiple incumbent local exchange
carrier and long distance carrier bills that we receive on a monthly basis, performing
comprehensive audits and identifying inconsistencies and charging irregularities. In conjunction
with Contact Telecom, we automatically identify discrepancies and generate the appropriate reports
and paperwork required for filing with the incumbent local exchange carrier or long distance
carriers to pursue our claims and ensure timely processing.
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Collections Management System
Our automated collections management system is integrated with our billing and customer
relationship management systems, which increases the efficiency of our collections process,
accelerates the collection of accounts receivable and assists in the retention of valuable
customers.
Competition
The communications industry is highly competitive. We believe we compete principally by
offering superior customer service, accurate billing, a broad set of services and systems and
competitive pricing. We compete with the Regional Bell Operating Companies, other competitive local
exchange carriers and new market entrants (including cable TV companies, VoIP providers and
wireless companies), interexchange carriers, data/Internet service providers and vendors,
installers and communication management companies.
Regional Bell Operating Companies
In each of our existing markets, we face, and expect to continue to face, significant
competition from RBOCs, which currently dominate their local communications markets as a result of
their historic monopoly position. The RBOCs also offer long distance, data and Internet services.
The RBOCs have long-standing relationships and strong reputations with their customers, as
well as financial, technical, marketing, personnel and other resources substantially greater than
ours. In addition, the RBOCs have the potential to subsidize competitive services with revenues
from a variety of businesses and currently benefit from existing regulations that favor them over
us in some respects. We expect that the RBOCs will continue to be the beneficiaries of increased
pricing flexibility and relaxed regulatory oversight, which may provide them with additional
competitive advantages.
Competitive Local Exchange Carriers and New Market Entrants
We face competition from other competitive local exchange carriers, operating both on a
facilities and non-facilities basis. Some of these carriers have competitive advantages over us,
including substantially greater financial, personnel and other resources, brand name recognition
and long-standing relationships with customers. In addition, the industry has seen a number of
mergers and consolidations among competitive local exchange carriers in an effort to gain a
competitive advantage in the sector, while some have entered and subsequently emerged from
bankruptcy with dramatically altered business plans and financial structures. Both of these groups
may have the ability to offer more competitive rates than we can offer.
In addition, we face competition from new and potential market entrants such as cable
television companies, wireless service providers, electric utilities and providers using VoIP over
the public Internet or private networks. Cable television companies have entered the communications
market by upgrading their networks with hybrid fiber coaxial lines and installing facilities to
provide fully interactive transmission of broadband voice, video and data communications. While
many competitive local exchange carriers have always targeted small and medium size enterprises and
multi-location customers, cable television companies are increasingly targeting these customers and
are often doing so at rates lower than we generally offer. Wireless services providers are
providing not only voice, but also broadband, substitutes for traditional wireline local
telephones. Electric utility companies have existing assets and low cost access to capital that
could allow them to enter a market and accelerate network development. Many VoIP providers operate
down-market from our target audience and are offering a lower quality service, with little or no
QoS, primarily to residential customers. Many incumbent local exchange carriers and interexchange
carriers have deployed VoIP technology for business customers by offering higher quality,
QoS-supported, services. VoIP providers are currently subject to substantially less regulation than
traditional local telephone companies and do not pay certain taxes and regulatory charges that we
are required to pay.
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Interexchange Carriers
Interexchange carriers that provide long distance and other communications services offer or
have the capability to offer switched local, long distance, data and Internet services. Some of
these carriers have vast financial resources and a much larger service footprint than us. In
addition, there have been a number of mergers and consolidations among interexchange carriers and
between incumbent local exchange carriers and interexchange carriers that have allowed carriers to
expand dramatically the reach of their services and, thus, to gain a significant competitive
advantage. These consolidated entities may have the ability to offer more services and more
competitive rates than we can offer.
Data/Internet Services Providers
The Internet services market is highly competitive, and we expect that competition will
continue to intensify. Internet service, including both Internet access and on-line content
services, is provided by Internet services providers, incumbent local exchange carriers,
satellite-based companies, interexchange carriers and cable television companies. Many of these
companies provide direct access to the Internet and a variety of supporting services to businesses
and individuals. In addition, many of these companies, such as AOL and MSN, offer online content
services consisting of access to closed, proprietary information networks. Interexchange carriers,
among others, are aggressively entering the Internet access markets. Long distance providers have
substantial transmission capabilities, traditionally carry data to large numbers of customers and
have an established billing system infrastructure that permits them to add new services. Satellite
companies are offering broadband access to Internet from desktop PCs. Cable companies are providing
Internet services using cable modems to customers in major markets. Many of these competitors have
substantially greater financial, technological, marketing, personnel, brand recognition and other
resources than those available to us.
Vendors, Installers and Communication Management Companies
We compete with numerous equipment vendors and installers and communications management
companies for business telephone systems and related services. We generally offer our products at
prices consistent with other providers and differentiate our service through our product packages
and customer service.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret laws, as well as
licensing agreements, third party non-disclosure agreements and other contractual provisions and
technical measures to protect our intellectual property rights. No individual patent, trademark or
copyright is material to our business. Generally, our licensing agreements are perpetual in
duration.
We have granted security interests in our trademarks, copyrights and patents to our lenders
pursuant to our credit agreement governing the credit facility and the indenture governing the
notes.
Employees
As of December 31, 2009, we had approximately 1,170 employees, including approximately 190
quota-bearing sales representatives. Our employees are not members of any labor unions. We believe
that relations with our employees are good. We have not experienced any work stoppage due to labor
disputes.
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Available Information
All periodic and current reports, registration statements, and other filings that we are
required to file with the Securities and Exchange Commission (SEC), including our annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 15(d) of the Securities Exchange Act of 1934, as
amended, are available free of charge from the SECs website (http://www.sec.gov) or public
reference room at 100 F. Street N.E., Washington, D.C. 20549 (1-800-SEC-0330) or through our
website at http://www.broadviewnet.com. Such documents are available as soon as reasonably
practicable after electronic filing of the material with the SEC. Copies of these reports
(excluding exhibits) may also be obtained free of charge, upon written request to: Investor
Relations, Broadview Networks Holdings, Inc., 800 Westchester Avenue, Suite N501, Rye Brook, NY
10573.
Our website address is included in this report for information purposes only. Our website and
the information contained therein or connected thereto are not incorporated into this Annual Report
on Form 10-K.
See also Directors, Executive Officers and Corporate Governance Code of Business Conduct
and Ethics for more information regarding our Code of Business Conduct and Ethics.
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Regulation
Overview
We are subject to federal, state, local and foreign laws, regulations, and orders affecting
the rates, terms, and conditions of certain of our service offerings, our costs, and other aspects
of our operations, including our relations with other service providers. Regulation varies from
jurisdiction to jurisdiction, and may change in response to judicial proceedings, legislative and
administrative proposals, government policies, competition, and technological developments. We
cannot predict what impact, if any, such changes or proceedings may have on our business, financial
condition or results of operations, and we cannot guarantee that regulatory authorities will not
raise material issues regarding our compliance with applicable regulations.
The FCC has jurisdiction over our facilities and services to the extent they are used in the
provision of interstate or international communications services. State regulatory public utility
commissions generally have jurisdiction over facilities and services to the extent they are used in
the provision of intrastate services. Local governments may regulate aspects of our business
through zoning requirements, permit or right-of-way procedures, and franchise fees. Foreign laws
and regulations apply to communications that originate or terminate in a foreign country.
Generally, the FCC and state public utility commissions do not regulate Internet, video
conferencing, or certain data services, although the underlying communications components of such
offerings may be regulated. Our operations also are subject to various environmental, building,
safety, health, and other governmental laws and regulations.
Federal law generally preempts state statutes and regulations that restrict the provision of
competitive local, long distance and enhanced services. Because of this preemption, we are
generally free to provide the full range of local, long distance and data services in every state.
While this federal preemption greatly increases our potential for growth, it also increases the
amount of competition to which we may be subject. In addition, the cost of enforcing federal
preemption against certain state policies and programs may be large and may involve considerable
delay.
Federal Regulation
The Communications Act grants the FCC authority to regulate interstate and foreign
communications by wire or radio. The FCC imposes extensive regulations on common carriers that have
some degree of market power such as incumbent local exchange carriers. The FCC imposes less
regulation on common carriers without market power, such as us. The FCC permits these non-dominant
carriers to provide domestic interstate services (including long distance and access services)
without prior authorization; but it requires carriers to receive an authorization to construct and
operate telecommunications facilities and to provide or resell communications services, between the
United States and international points. Further, we remain subject to numerous requirements of the
Communications Act, including certain provisions of Title II applicable to all common carriers
which require us to offer service upon reasonable request and pursuant to just and reasonable
charges and terms, and which prohibit any unjust or unreasonable discrimination in charges or
terms. The FCC has authority to impose additional requirements on non-dominant carriers.
The Telecommunications Act amended the Communications Act to eliminate many barriers to
competition in the U.S. communications industry. Under the Telecommunications Act, any entity,
including cable television companies and, electric and gas utilities, may enter any communications
market, subject to reasonable state certification requirements and regulation of safety, quality
and consumer protection. Because implementation of the Telecommunications Act remains subject to
numerous federal and state policy rulemaking proceedings and judicial review, there is still
ongoing uncertainty as to the impact it will have on us. The Telecommunications Act is intended to
increase competition. Among other things, the Telecommunications Act opened the local exchange
services market by requiring incumbent local exchange carriers to permit competitive carriers to
interconnect to their networks at any technically feasible point and requires them to utilize
certain parts of their networks at FCC-regulated (generally cost based) rates; it also established
requirements applicable to all local exchange carriers. Examples include:
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Reciprocal Compensation. Requires all incumbent local exchange carriers and competitive
local exchange carriers to complete calls originated by competing carriers under reciprocal
arrangements at prices based on a reasonable approximation of incremental cost or through
mutual exchange of traffic without explicit payment. |
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Resale. Requires all incumbent local exchange carriers and competitive local exchange
carriers to permit resale of their communications services without unreasonable or
discriminatory restrictions or conditions. In addition, incumbent local exchange carriers
are required to offer for resale, wholesale versions of all communications services that the
incumbent local exchange carrier provides at retail to subscribers that are not
telecommunications carriers at discounted rates, based on the costs avoided by the incumbent
local exchange carrier in the wholesale offering. |
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Access to Rights-of-Way. Requires all incumbent local exchange carriers and competitive
local exchange carriers and any other public utility that owns or controls poles, conduits,
ducts, or rights-of-way used in whole or in part for wire communications, to permit
competing carriers (and cable television systems) access to those poles, ducts, conduits and
rights-of-way at regulated prices. Competitive local exchange carrier rates for access to
its poles, ducts, conduits and rights-of-way, however, are not regulated. |
The Telecommunications Act also codifies the incumbent local exchange carriers equal access
and nondiscrimination obligations and preempts inconsistent state regulation.
Legislation. Congress is considering various measures that would impact telecom laws in the
United States. The prospects and timing of potential legislation remain unclear, and as such, we
cannot predict the outcome of any such legislation upon our business.
Unbundled Network Elements. The Telecommunications Act requires incumbent local exchange
carriers to provide requesting telecommunications carriers with nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point on rates, terms and conditions
that are just, reasonable and non-discriminatory, in accordance with the other requirements set
forth in Sections 251 and 252 of the Telecommunications Act. The Telecommunications Act gives the
FCC authority to determine which network elements must be made available to requesting carriers
such as us. The FCC is required to determine whether the failure to provide access to such network
elements would impair the ability of the carrier seeking access to provide the services it seeks to
offer. Based on this standard, the FCC developed an initial list of Regional Bell Operating Company
network elements that must be unbundled on a national basis in 1996. Those initial rules were set
aside by the U.S. Supreme Court and the FCC subsequently developed revised unbundling rules, which
also were set aside on appeal.
In August 2003, in the Triennial Review Order (TRO), the FCC substantially modified its
rules governing access to unbundled network elements. The FCC limited requesting carrier access to
certain aspects of the loop, transport, switching and signaling/databases unbundled network
elements but continued to require some unbundling of these elements. In the TRO, the FCC also
determined that certain broadband elements, including fiber-to-the-home loops in greenfield
situations, broadband services over fiber-to-the-home loops in overbuild situations, packet
switching, and the packetized portion of hybrid loops, are not subject to unbundling obligations.
On March 2, 2004, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit)
vacated certain portions of the TRO and remanded to the FCC for further proceedings.
In December 2004, the FCC issued an Order on Remand of the TRO (TRRO), which became
effective on March 11, 2005. The TRRO further modified the unbundling obligations of incumbent
local exchange carriers. Under certain circumstances, the FCC removed the incumbent local exchange
carriers unbundling obligations with regard to high capacity local loops and dedicated transport
and eliminated the obligation to provide local switching. Under the FCCs new rules, the
availability of high capacity loops and transport depends upon new tests based on the capacity of
the facility, the business line density of incumbent wire centers, and the existence of collocated
fiber providers in incumbent wire centers. Subsequent to the release of the TRRO, we entered into
commercial agreements with Verizon, under which we continued to have access to local switching from
Verizon during the terms of the agreements. We have replaced delisted unbundled network element
loops and transport with special access, generally at prices significantly higher than unbundled
network element rates, unless we can locate alternative suppliers offering more favorable rates.
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FCC rules implementing the local competition provisions of the Telecommunications Act permit
competitive local exchange carriers to lease unbundled network elements at rates determined by
State public utility commissions employing the FCCs Total Element Long Run Incremental Cost
forward-looking, cost-based pricing model. On September 15, 2003, the FCC opened a proceeding
reexamining the Total Element Long Run Incremental Cost methodology and wholesale pricing rules for
communications services made available for resale by incumbent local exchange carriers in
accordance with the Telecommunications Act. This proceeding will comprehensively reexamine whether
the Total Element Long Run Incremental Cost pricing model produces unpredictable pricing
inconsistent with appropriate economic signals; fails to adequately reflect the real-world
attributes of the routing and topography of an incumbent local exchange carriers network; and
creates disincentives to investment in facilities by understating forward-looking costs in pricing
Regional Bell Operating Company network facilities and overstating efficiency assumptions. The
application and effect of a revised Total Element Long Run Incremental Cost pricing model on the
communications industry generally and on our business activities cannot be determined at this time.
In orders released in August 2004, the FCC extended the unbundling relief it had previously
provided to fiber-to-the-home loops to fiber-to-the-curb. On October 27, 2004, the FCC issued an
order granting requests by the Regional Bell Operating Companies that the FCC forbear from
enforcing the independent unbundling requirements of Section 271 of the Communications Act with
regard to the broadband elements that the FCC had previously determined were not subject to
unbundling obligations (fiber-to-the-home loops, fiber-to-the-curb loops, the packetized
functionality of hybrid loops, and packet switching).
On September 23, 2005, the FCC issued an order (the Order) that largely deregulates
wireline broadband Internet access service. The FCC refers to wireline broadband Internet access
service as a service that uses existing or future wireline facilities of the telephone network to
provide subscribers with access to the Internet, including by means of both next generation
fiber-to-the-premises services and all digital subscriber lines. This decision by the FCC follows
the decision by the United States Supreme Court in the Brand X case, issued June 27, 2005, in which
the Court held that cable systems are not legally required to lease access to competing providers
of Internet access service. Consistent with the FCCs previous classification of cable modem
service as an information service, the FCC classified broadband Internet access service as an
information service because it intertwines transmission service with information processing and is
not, therefore, a pure transmission service such as frame relay or ATM, which remain classified
as communications services. The FCC required that existing transmission arrangements between
broadband Internet access service providers and their customers be made available for a one year
period from the effective date of the Order. This Order does not affect competitive local exchange
carriers ability to obtain unbundled network elements, but does relieve the incumbent local
exchange carriers of any duty to offer Digital Subscriber Line transmission services subject to
regulatory oversight. We cannot predict the effect of the Order on our business.
On September 16, 2005, the FCC partially granted Qwests petition seeking forbearance from the
application of the FCCs dominant carrier regulation of interstate services, and Section 251(c)
requirements throughout the Omaha, Nebraska Metropolitan Statistical Area. The FCC granted Qwest
the requested relief in nine of its 24 Omaha central offices where it determined that competition
from intermodal (cable) service providers was extensive. Although the FCC required that Qwest
continue to make unbundled network elements available, in the nine (9) specified central offices,
Qwest will only have to do so at non- Total Element Long Run Incremental Cost rates. The FCC did
not grant Qwest the requested relief regarding its collocation and interconnection obligations. On
January 30, 2007, the FCC partially granted ACS of Anchorage, Inc.s petition seeking forbearance
from the application of the FCCs dominant carrier regulation of interstate services, and
Section 251(c) requirements throughout the Anchorage, Alaska local exchange carrier study area. The
FCC granted ACS the requested relief in five of its 11 Anchorage central offices where it
determined that competition by the local cable operator . . . ensures that market forces will
protect the interests of consumers. Although the FCC required that ACS continue to make unbundled
network elements available in the five (5) central offices in which the requested relief was
granted, ACS will only have to do so at commercially-negotiated rates. Because we do not operate in
either the Omaha, Nebraska or Anchorage, Alaska Metropolitan Statistical Areas, these decisions
will not have a direct impact on us.
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In December 2007, the FCC denied a Verizon petition for relief comparable to that accorded
Qwest and ACS forbearance from the application of the FCCs dominant carrier regulation of
interstate services, and Section 251(c) unbundling requirements in six Metropolitan Statistical
Areas, including the New York-Northern New Jersey-Long Island, NY-NJ-PA Metropolitan Statistical
Area, the Philadelphia-Camden-Wilmington PA-NJ-DE-MD Metropolitan Statistical Area and the
Boston-Cambridge-Quincy, MA-NH Metropolitan Statistical Area three of our largest markets. On
June 19, 2009, the D.C. Circuit remanded the Verizon forbearance decision to the FCC for further
consideration and explanation. On August 20, 2009, the FCC initiated a proceeding to address the
remand of the Verizon forbearance decision, as well as the remand of another order denying Qwest
UNE-forbearance relief in four of its largest markets. In this proceeding, the FCC will likely
adopt a generally applicable UNE-forbearance standard. We cannot predict the outcome of this
proceeding or other pending or future UNE-forbearance proceedings or appeals or the effect that
these proceedings may have on our business or operations.
On March 19, 2006, the FCC, by inaction, granted Verizons Petition for Forbearance from the
application of the FCCs Computer II and Title II requirements to Verizons Broadband service
offerings. Arguably, the grant of Verizons petition permits Verizon to offer DSL, ATM, Frame Relay
and T-1 services on a non-common carrier basis, free from unbundling and Total Element Long Run
Incremental Cost pricing requirements. Through various ex parte filings, however, Verizon appeared
to narrow its petition to ask for far more limited relief, arguably limiting the requested relief
to a select group of service offerings. Other incumbent local exchange carriers have sought and
been granted similar relief. On October 12, 2007, the FCC agreed that AT&Ts existing
packet-switched broadband telecommunications services and existing optical transmission services
could be treated as non-dominant and would no longer be subject to certain regulatory requirements.
Other incumbent local exchange carriers have sought and been granted similar relief. We cannot
predict the effect, if any, on our business of the deemed grant of the Verizon petition.
In June 2009, the FCC adopted new rules governing forbearance requests. The rules require,
among other things, that forbearance petitions be complete when filed, state explicitly the scope
of the relief requested, identify any other relevant proceedings and comply with certain format
requirements. The rules also limit the petitioners right to withdraw the petition or narrow its
scope. We cannot predict the effect, if any, of these new rules on the FCCs review and
determination of forbearance petitions.
Special Access. The FCC is undertaking a comprehensive review of rules governing the pricing
of special access service offered by incumbent local exchange carriers subject to price cap
regulation. Special access pricing by these carriers currently is subject to price cap rules, as
well as pricing flexibility rules which permit these carriers to offer volume and term discounts
and contract tariffs (Phase I pricing flexibility) and/or remove from price caps regulation special
access service in a defined geographic area (Phase II pricing flexibility) based on showings of
competition. In its Notice of Proposed Rulemaking (NPRM), the FCC tentatively concludes to
continue to permit pricing flexibility where competitive market forces are sufficient to constrain
special access prices, but undertakes an examination of whether the current triggers for pricing
flexibility accurately assess competition and have worked as intended. The NPRM also asks for
comment on whether certain aspects of incumbent local exchange carrier special access tariff
offerings (e.g., basing discounts on previous volumes of service; tying nonrecurring charges and
termination penalties to term commitments; and imposing use restrictions in connection with
discounts) are unreasonable. By Public Notice dated July 9, 2007, the FCC invited parties to update
the record in its special access rulemaking to address, among other things, the impact of industry
consolidation on the availability of alternative facilities. We cannot predict the impact, if any,
the NPRM will have on our network cost structure.
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Interconnection Agreements. Pursuant to FCC rules implementing the Telecommunications Act, we
negotiate interconnection agreements with incumbent local exchange carriers to obtain access to
unbundled network element services, generally on a state-by-state basis. These agreements typically
have three-year terms. We currently have interconnection agreements in effect with Verizon for,
among others, New York, Massachusetts, New Jersey, Pennsylvania, Maryland, Virginia, Delaware,
Rhode Island and Washington, D.C. We have an interconnection agreement with Southern New England
Telephone Company, a subsidiary of AT&T, in Connecticut. In the states of Vermont, New Hampshire
and Maine, we have interconnection agreements with Fairpoint following its acquisition of Verizons
network assets in these states. As we enter new markets, we expect to establish interconnection
agreements with incumbent local exchange carriers on an individual state basis. Changes to our
agreements based upon recent FCC orders ultimately will be incorporated into our interconnection
agreements, but whether these changes will be affected by state public utility commission order,
tariff, negotiation or arbitration is uncertain.
We are in the process of renegotiating our interconnection agreement with Verizon in New York.
If the negotiation process does not produce, in a timely manner, an interconnection agreement that
we find acceptable, we may petition the New York public utility commission to arbitrate any
disputed issues. Arbitration decisions in turn may be appealed to federal courts. We cannot predict
how successful we will be in negotiating terms critical to our provision of local network services
in New York, and we may be forced to arbitrate certain provisions of our New York agreements.
Interconnection agreement arbitration proceedings before other state commissions may result in
decisions that could affect our business, but we cannot predict the extent of any such impact. As
an alternative to negotiating an interconnection agreement, we may adopt, in its entirety, another
carriers approved agreement.
Collocation. FCC rules generally require incumbent local exchange carriers to permit
competitors to collocate equipment used for interconnection and/or access to unbundled network
elements. Changes to those rules, upheld in 2002 by the D.C. Circuit, allow competitors to
collocate multifunctional equipment and require incumbent local exchange carriers to provision
crossconnects between collocated carriers. We cannot determine the effect, if any, of future
changes in the FCCs collocation rules on our business or operations.
Regulation of Internet Service Providers. To date, the FCC has treated Internet service
providers as enhanced service providers, which are generally exempt from federal and state
regulations governing common carriers. Nevertheless, regulations governing the disclosure of
confidential communications, copyright, excise tax and other requirements may apply to our Internet
access services. In addition, the FCC released an NPRM in September 2005 seeking comment on a broad
array of consumer protection regulations for broadband Internet access services, including rules
regarding the protection of Customer Proprietary Network Information slamming, truth in billing,
network outage reporting, service discontinuance notices, and rate-averaging requirements. We
cannot predict whether the FCC will adopt new rules regulating broadband Internet access services
and, if it does so, how such rules would affect us, except that new obligations could increase the
costs of providing DSL service.
Moreover, Congress has passed a number of laws that concern the Internet and Internet users.
Generally, these laws limit the potential liability of Internet service providers and hosting
companies that do not knowingly engage in unlawful activity. We expect that Congress will continue
to consider various bills concerning the Internet and Internet users, some of which, if signed into
law, could impose additional obligations on us.
Long Distance Competition. Section 271 of the Communications Act, enacted as part of the
Telecommunications Act, established a process by which an RBOC could obtain authority to provide
long distance service in a state within its region. Each Regional Bell Operating Company was
required to demonstrate that it had satisfied a 14-point competitive checklist and that granting
such authority would be in the public interest. All of the Regional Bell Operating Companies or
RBOCs have received FCC approval to provide in-state long distance service within their respective
regions. Receipt of Section 271 authority by the RBOCs has resulted in increased competition in
certain markets and services.
The RBOCs have a continuing obligation to comply with the 14-point competitive checklist, and
are subject to continuing oversight by the FCC and state public utility commissions. Each Regional
Bell Operating Company must provide unbundled access to unbundled network elements at just and
reasonable rates and comply with state-specific Performance Assurance Plans pursuant to which a
Regional Bell Operating Company that fails to provide access to its facilities in a timely and
commercially sufficient manner must provide to affected competitive local exchange carriers
compensation in the form of cash or service credits. Our ability to obtain adequate interconnection
and access to unbundled network elements on a timely basis and at cost effective rates could be
adversely affected by an RBOCs failure to comply with its Section 271 obligations.
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Detariffing. The FCC has largely eliminated carriers obligations to file with the FCC
tariffs containing prices, terms and conditions of service and has required carriers to withdraw
all of their federal tariffs other than those relating to access services. Our interstate and
international rates nonetheless must still be just and reasonable and nondiscriminatory. Our state
tariffs remain in place. Detariffing precludes our ability to rely on filed rates, terms, and
conditions as a means of providing notice to customers of prices, terms and conditions under which
we offer services, and requires us instead to rely on individually negotiated agreements with
end-users. We have, however, historically relied primarily on our sales force and marketing
activities to provide information to our customers regarding the rates, terms, and conditions of
service and expect to continue to do so. Further, in accordance with the FCCs orders we maintain a
schedule of our rates, terms and conditions for our domestic and international private line
services on our web site.
Intercarrier Compensation. The FCCs intercarrier compensation rules include rules governing
access charges, which govern the payments that interexchange carriers and commercial mobile radio
service providers make to local exchange carriers to originate and terminate long distance calls,
and reciprocal compensation rules, which generally govern the compensation between
telecommunications carriers for the transport and termination of local traffic. We purchase long
distance service on a wholesale basis from interexchange carriers who pay access fees to local
exchange carriers for the origination and termination of our long distance communications traffic.
Generally, intrastate access charges are higher than interstate access charges. Therefore, to the
degree access charges increase or a greater percentage of our long distance traffic is intrastate
our costs of providing long distance services will increase. As a local exchange provider, we bill
long distance providers access charges for the origination and termination of those providers long
distance calls. Accordingly, in contrast with our long distance operations, our local exchange
business benefits from the receipt of intrastate and interstate long distance traffic. As an entity
that collects and remits access charges, we must properly track and record the jurisdiction of our
communications traffic and remit or collect access charges accordingly. The result of any changes
to the existing regulatory scheme for access charges or a determination that we have been
improperly recording the jurisdiction of our communications traffic could have a material adverse
effect on our business, financial condition and results of operations.
The FCC has stated that existing intercarrier compensation rules constitute transitional
regimes and has promised to reform them. On March 3, 2005, the FCC released a further NPRM seeking
comment on a variety of proposals to replace the current system of intercarrier payments, under
which the compensation rate depends on the type of traffic at issue, the type of carriers involved,
and the end points of the communication, with a unified approach for access charges and reciprocal
compensation. In connection with the FCCs rulemaking proceeding, a number of industry groups
attempted to negotiate a plan that would bring all intercarrier compensation and access charges to
a unified rate over a negotiated transition period. The FCC called for public comment on one such
plan designated the Missoula Plan. In November 2008, the FCC issued a Further Notice of Proposed
Rulemaking, setting forth various proposals for the reform of its intercarrier compensation regime.
In its National Broadband Plan, released on March 16, 2010, the FCC recommended that per-minute
intercarrier compensation charges be eliminated over time: first by moving intrastate switched
access charges to interstate levels over a period of two to four years, second by moving switched
access charge rates to reciprocal compensation levels and third by phasing out per-minute
intercarrier compensation rates altogether. Because we both make payments to and receive payments
from other carriers for the exchange of local and long distance calls, we will be affected by
changes in the FCCs intercarrier compensation rules. We cannot predict the impact that any such
changes may have on our business.
On October 2, 2007, the FCC issued a Notice of Proposed Rulemaking to address the issue of
traffic pumping. The Notice was prompted by allegations by interexchange carriers that certain
local exchange carriers had greatly increased their switched access traffic by deploying chat
lines, conference bridges and other similar high call volume operations and that the volume of
traffic resulted in inflated returns which in turn brought into question the justness and
reasonableness of the tariffed access charges being imposed on interexchange carriers. While we
cannot predict the outcome of this proceeding, it could impact the access charges we are allowed to
bill interexchange carriers.
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On April 18, 2001, the FCC issued a new order regarding intercarrier compensation for Internet
service provider-bound traffic. In that Order, the FCC established a new intercarrier compensation
mechanism for Internet service provider-bound traffic with declining rates over a three year
period. In addition to establishing a new rate structure, the FCC capped the amount of Internet
service provider bound traffic that would be compensable and prohibited payment of intercarrier
compensation for Internet service provider-bound traffic to carriers entering new markets. The
April 2001 order was appealed to the D.C. Circuit. On May 3, 2002, the D.C. Circuit found that the
FCC had not provided an adequate legal basis for its ruling, and therefore remanded the matter to
the FCC. In the interim, the court let the FCCs rules stand. In November 2008, the FCC issued
revised rules governing the intercarrier compensation regime that would govern ISP-bound traffic.
These rules have been upheld on appeal. On October 8, 2004, the FCC issued an order in response to
a July 2003 Petition for Forbearance filed by Core Communications (Core Petition) asking the FCC
to forbear from enforcing the rate caps, growth cap, and new market and mirroring rules of the
remanded April 2001 order. The FCC granted the Core Petition with respect to the growth cap and the
new market rules, but denied the Core Petition as to the rate caps and mirroring rules.
Verizon/MCI Merger. On October 31, 2005, the FCC unanimously approved the Verizon-MCI merger
with relatively limited conditions in certain areas. The FCCs conditions took the form of
voluntary conditions offered by the merging parties, as follows: Verizon agreed to (i) freeze
unbundled network element rates for a period of two years, and (ii) freeze certain high-capacity
special access rates for existing in-region MCI customers for 30 months, both of which have now
expired. Although the Department of Justice, in its consent decrees approving the merger concluded
that the merger would reduce competition in certain markets for special access, primarily for
business customers, it required only that Verizon sell or divest, at market rates, ten-year leases
for loops into certain buildings along with leases for dark fiber transport necessary to connect
the loops to the facility of the purchaser of the lease. The end result is that Verizon must sell
dark fiber leases to 350 buildings. Other than the benefits derived from the merger conditions, we
cannot predict the impact of the Verizon/MCI merger on our business.
CALEA. The Communications Assistance for Law Enforcement Act (CALEA) requires
communications providers to provide law enforcement officials with call content and/or call
identifying information under a valid electronic surveillance warrant, and to reserve a sufficient
number of circuits for use by law enforcement officials in executing court-authorized electronic
surveillance. Because we provide facilities-based services, we incur costs in meeting these
requirements. Noncompliance with these requirements could result in substantial fines. Although we
attempt to comply with these requirements, we cannot assure that we would not be subject to a fine
in the future.
In August 2005, the FCC extended CALEA obligations to facilities-based providers of broadband
Internet access service and to interconnected VoIP services. The current compliance deadline is set
for May 2007. Several parties have appealed the FCCs order imposing new requirements. Unless the
decision is overturned on appeal, we could face increased compliance costs, which are uncertain in
nature because the specific assistance-capability requirements for providers of broadband Internet
access service have not yet been established.
Customer Proprietary Network Information. FCC rules protect the privacy of certain
information about customers that communications carriers, including us, acquire in the course of
providing communications services. Customer Proprietary Network Information includes information
related to the quantity, technological configuration, type, destination and the amount of use of a
communications service. The FCCs initial Customer Proprietary Network Information rules initially
prevented a carrier from using Customer Proprietary Network Information to market certain services
without the express approval of the affected customer, referred to as an opt-in approach. In July
2002, the FCC revised its opt-in rules in a manner that limits our ability to use the Customer
Proprietary Network Information of our subscribers without first engaging in extensive customer
service processes and record keeping. Recently, the FCC further modified its Customer Proprietary
Network Information requirements to, among other things, extend Customer Proprietary Network
Information regulations to interconnected VoIP providers, require annual carrier certifications and
to impose additional limitations on the release of Customer Proprietary Network Information without
express customer approval. We use our subscribers Customer Proprietary Network Information in
accordance with applicable regulatory requirements. However, if a federal or state regulatory body
determines that we have implemented those guidelines incorrectly, we could be subject to fines or
penalties. In addition, correcting our internal customer systems and Customer Proprietary Network
Information processes could generate significant administrative expenses.
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Universal Service. Section 254 of the Communications Act and the FCCs implementing rules
require all communications carriers providing interstate or international communications services
to periodically contribute to the Universal Service Fund (USF). The USF supports several programs
administered by the Universal Service Administrative Company with oversight from the FCC,
including: (i) communications and information services for schools and libraries,
(ii) communications and information services for rural health care providers, (iii) basic telephone
service in regions characterized by high communications costs, (iv) basic telephone services for
low income consumers, and (v) interstate access support. Based on the total funding needs for these
programs, the FCC determines a contribution factor, which it applies to each contributors
interstate and international end-user communications revenues. We measure and report our revenues
in accordance with rules adopted by the FCC. The contribution rate factors are calculated and
revised quarterly and we are billed for our contribution requirements each month based on projected
interstate and international end-user communications revenues, subject to periodic true up. USF
contributions may be passed through to consumers on an equitable and nondiscriminatory basis either
as a component of the rate charged for communications services or as a separately invoiced line
item.
A proceeding pending before the FCC has the potential to significantly alter our USF
contribution obligations. The FCC is considering changing the basis upon which our USF
contributions are determined from a revenue percentage measurement to a connection or telephone
number measurement. Adoption of this proposal could have a material adverse affect on our costs,
our ability to separately list USF contributions on end-user bills, and our ability to collect
these fees from our customers. In addition, the Federal-State Joint Board on high-cost universal
service support has recently announced that it intended to take a fresh look at high-cost
universal service support.
In its National Broadband Plan, released on March 16, 2010, the FCC offered a series of
ambitious proposals to transform the current universal voice service mandate into one directly
supporting universal access to broadband services, phasing out support for voice-only telephone
services and replacing it with support for voice-enabled broadband platforms. To accomplish this,
the FCC proposes to replace the USF fund with a new Connect America Fund (CAF) over the next ten
years and to fund the CAF by broadening the universal service contribution base. We cannot predict
the outcome of any of these initiatives or their impact on our business.
The application and effect of changes to the USF contribution requirements and similar state
requirements on the communications industry generally and on certain of our business activities
cannot be predicted. If our collection procedures result in over collection, we could be required
to make reimbursements of such over collection and be subject to penalty, which could have a
material adverse affect on our business, financial condition and results of operations. If a
federal or state regulatory body determines that we have incorrectly calculated or remitted any USF
contribution, we could be subject to the assessment and collection of past due remittances as well
as interest and penalties thereon.
Telephone Numbering. The FCC oversees the administration and the assignment of local
telephone numbers, an important asset to voice carriers, by NeuStar, Inc., in its capacity as North
American Numbering Plan Administrator. Extensive FCC regulations govern telephone numbering, area
code designation, and dialing procedures. Since 1996, the FCC has permitted businesses and
residential customers to retain their telephone numbers when changing local telephone companies,
referred to as local number portability. The availability of number portability is important to
competitive carriers like us, because customers, especially businesses, may be less likely to
switch to a competitive carrier if they cannot retain their existing telephone numbers.
AT&T and Verizon have asked the FCC to revise the system by which the costs of implementing
local number portability (LNP) are recovered. Generally, these carriers have asked the FCC to
move from a system in which cost recovery is allocated according to a carriers proportion of
overall industry revenue to a cost recovery mechanism based on usage. If adopted, the
modifications could increase our LNP charges.
On May 14, 2009, the FCC issued an order that requires carriers to complete simple wireline
and simple intermodal number ports within one business day. The order requires the North American
Numbering Council (NANC) to develop new process flows that take into account the shortened
porting interval. Once NANC releases the new process flows, large carriers will have nine months
and small carriers will have fifteen months to implement the new procedures. In a related Notice
of Proposed Rulemaking, the FCC requested comment on whether it should modify the definition of a
simple port. While we cannot predict the outcomes of these proceedings, certain outcomes could
increase our LNP costs.
28
Slamming. A customers choice of local or long distance communications company is encoded in
the customers record, which is used to route the customers calls so that the customer is served
and billed by the desired company. A customer may change service providers at any time, but the FCC
and some states regulate this process and require that specific procedures be followed. Slamming
occurs when these specific procedures are not followed, such as when a customers service provider
is changed without proper authorization or as a result of fraud. The FCC has levied substantial
fines for slamming. The risk of financial damage, in the form of fines, penalties and legal fees
and costs and to business reputation from slamming is significant. We maintain internal procedures
designed to ensure that our new subscribers are switched to us and billed in accordance with
federal and state regulations. Because of the volume of service orders that we may process, it is
possible that some carrier changes inadvertently may be processed without authorization. Therefore,
we cannot guarantee that we will not be subject to slamming complaints in the future.
Taxes and Regulatory Fees. We are subject to numerous local, state and federal taxes and
regulatory fees, including but not limited to a three percent federal excise tax on local, FCC
regulatory fees and public utility commission regulatory fees. We have procedures in place to
ensure that we properly collect taxes and fees from our customers and remit such taxes and fees to
the appropriate entity pursuant to applicable law and/or regulation. If our collection procedures
prove to be insufficient or if a taxing or regulatory authority determines that our remittances
were inadequate, we could be required to make additional payments, which could have a material
adverse effect on our business, financial condition and results of operations.
State Regulation
The Communications Act maintains the authority of individual states to impose their own
regulation of rates, terms and conditions of intrastate services, so long as such regulation is not
inconsistent with the requirements of federal law or has not been preempted. Because we provide
communications services that originate and terminate within individual states, including both local
service and in-state long distance toll calls, we are subject to the jurisdiction of the public
utility commission and other regulators in each state in which we provide such services. For
instance, we must obtain a Certificate of Public Convenience and Necessity (CPCN), or similar
authorization before we may commence the provision of communications services in a state. We have
obtained CPCNs to provide facilities-based service and resold competitive local and interexchange
service throughout the Verizon Northeast and Mid-Atlantic service areas. We are currently engaged
in an initiative to obtain authority to provide competitive local and interexchange service
throughout the contiguous United States and have secured authority in all but a handful of states.
There can be no guarantee that we will receive authorizations we may seek in other states in the
future.
In addition to requiring certification, state regulatory authorities may impose tariff and
filing requirements and obligations to contribute to state universal service and other funds. State
public utility commissions also regulate, to varying degrees, the rates, terms and conditions upon
which we and our competitors conduct retail business. In general, state regulation of incumbent
local exchange carrier retail offerings is greater than the level of regulation applicable to
competitive local exchange carriers. In a number of states, however, Verizon either has obtained or
is actively seeking some level of increased pricing flexibility or deregulation, either through
amendment of state law or through proceedings before state public utility commissions. Such
increased pricing flexibility could have an adverse effect on our competitive position in those
states because it could allow Verizon to reduce retail rates to customers while wholesale rates
that we pay to it stay the same or increase. We cannot predict whether these efforts will
materially affect our business.
We also are subject to state laws and regulations regarding slamming, cramming, and other
consumer protection and disclosure regulations. These rules could substantially increase the cost
of doing business in any particular state. State commissions have issued or proposed substantial
fines against competitive local exchange carriers for slamming or cramming. The risk of financial
damage, in the form of fines, penalties and legal fees and costs and to business reputation from
slamming is significant. A slamming complaint before a state commission could generate substantial
litigation expenses. In addition, state law enforcement authorities may use their consumer
protection authority against us if we fail to meet applicable state law requirements.
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States also retain the right to sanction a service provider or to revoke certification if a
service provider violates relevant laws or regulations. If any regulatory agency were to conclude
that we are or were providing intrastate services without the appropriate authority or otherwise in
violation of law, the agency could initiate enforcement actions, which could include the imposition
of fines, a requirement to disgorge revenues, or refusal to grant regulatory authority necessary
for the future provision of intrastate services. We may be subject to requirements in some states
to obtain prior approval for, or notify the state commission of, any transfers of control, sales of
assets, corporate reorganizations, issuance of stock or debt instruments and related transactions.
Although we believe such authorizations could be obtained in due course, there can be no assurance
that state commissions would grant us authority to complete any of these transactions, or that such
authority would be granted on a timely basis.
Rates for intrastate switched access services, which we provide to long-distance companies to
originate and terminate in-state toll calls, are subject to the jurisdiction of the state in which
the call originated and/or terminated. Such regulation by states could have a material adverse
affect on our revenues and business opportunities within that state. State public utility
commissions also regulate the rates incumbent local exchange carriers charge for interconnection,
access to network elements, and resale of services by competitors. State public utility commissions
may initiate cost cases to re-price unbundled network elements and to establish rates for wholesale
services that are no longer required to be provided as unbundled network elements under the TRRO.
Any such proceedings may affect the rates, terms, and conditions contained in our interconnection
agreements or in other wholesale agreements with incumbent local exchange carriers. We cannot
predict the outcome of these proceedings. The pricing, terms and conditions under which the
incumbent local exchange carriers in each of the states in which we currently operate offers such
services may preclude or reduce our ability to offer a competitively viable and profitable product
within these and other states on a going forward basis.
State regulators establish and enforce wholesale service quality standards that Regional Bell
Operating Companies must meet in providing network elements to competitive local exchange carriers
like us. These plans sometimes require payments from the incumbent local exchange carriers to the
competitive local exchange carriers if quality standards are not met. Verizon is asking various
state commissions where we operate to modify the state wholesale quality plans in ways that would
reduce or eliminate certain wholesale quality standards. Changes in performance standards could
result in a diminution of the service quality we receive. We cannot predict how state commissions
will respond to such requests, nor the ultimate impact of such decisions on our business, financial
condition or results of operations.
Local Regulation
In some municipalities where we have installed facilities, we are required to pay license or
franchise fees based on a percentage of our revenues generated from within the municipal
boundaries. We cannot guarantee that fees will remain at their current levels following the
expiration of existing franchises or that other local jurisdictions will not impose similar fees.
Regulation of VoIP
Federal and State
The use of the public Internet and private Internet protocol networks to provide voice
communications services, including VoIP, has been largely unregulated within the United States. To
date, the FCC has not imposed regulatory surcharges or most forms of traditional common carrier
regulation upon providers of Internet communications services, although it has ruled that VoIP
providers must contribute to the USF. The FCC has also imposed obligations on providers of two-way
interconnected VoIP services to provide E911 service, and it has extended CALEA obligations to such
VoIP providers. The FCC has also imposed on VoIP providers the obligation to port customers
telephone numbers when customers switch carriers and desire to retain their numbers. As a provider
of interconnected VoIP services, we will bear costs as a result of these various mandates.
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On February 12, 2004, the FCC adopted an NPRM to address, in a comprehensive manner, the
future regulation of services and applications making use of Internet protocol, including VoIP. In
the absence of federal legislation, we expect that through this proceeding the FCC will resolve
certain regulatory issues relating to VoIP services and develop a regulatory framework that is
unique to IP telephony providers or that subjects VoIP providers to minimal regulatory
requirements. We cannot predict when, or if, the FCC may take such actions. The FCC may determine
that certain types of Internet telephony should be regulated like basic interstate communications
services, rendering VoIP calls subject to the access charge regime that permits local telephone
companies to charge long distance carriers for the use of the local telephone networks to originate
and terminate long-distance calls, generally on a per minute basis. The FCCs pending review of
intercarrier compensation policies (discussed above) also may have an adverse impact on enhanced
service providers.
On October 23, 2007, Feature Group IP, a provider of VoIP, petitioned the FCC to either rule
that access charges do not apply to VoIP service or to forbear from applying access charges to VoIP
service. Embarq (now known as Century Link) filed a petition seeking essentially the opposite
result. The FCC denied the Feature Group IP petition and Embarq has withdrawn its petition. Feature
Group IP has petitioned the FCC for reconsideration of its action and appealed the FCCs denial to
the D.C. Circuit. Also pending before the FCC is a petition filed by Blue Casa Communications that
asks the FCC to rule that calls to ISPs which appear to be local calls, based on the telephone
number called, but are in fact long distance calls, because the party called is in fact located
outside of the local exchange, should be subject to access charges. We cannot predict the outcome
of these proceedings or their impact on our business or operations.
The FCC is also considering several petitions filed by individual companies concerning the
regulatory rights and obligations of providers of IP-based voice services, and networks that handle
IP-based voice traffic or that exchange that traffic with operators of Public Switched Telephone
Network (PSTN) facilities We cannot predict the outcome of any of these petitions and regulatory
proceedings or any similar petitions and regulatory proceedings pending before the FCC or state
public utility commissions. Moreover, we cannot predict how their outcomes may affect our
operations or whether the FCC or state public utility commissions will impose additional
requirements, regulations or charges upon our provision of services related to IP communications.
In a series of decisions issued in 2004, the FCC clarified that the FCC, not the state public
utility commissions, has jurisdiction to decide the regulatory status of IP-enabled services,
including VoIP. On November 12, 2004, in response to a request by Vonage Holdings Corp. (Vonage),
a VoIP services provider, the FCC issued an order preempting traditional telephone company
regulation of VoIP service by the Minnesota public utility commission, finding that the service
cannot be separated into interstate and intrastate communications without negating federal rules
and policies. In April 2004, the FCC issued an order concluding that, under current rules, AT&Ts
phone-to-phone IP telephony service is a telecommunications service upon which interstate access
charges may be assessed. This decision, however, is limited to interexchange service that: (1) uses
ordinary customer premises equipment with no enhanced functionality; (2) originates and terminates
on the public switched telephone network; and (3) undergoes no net protocol conversion and provides
no enhanced functionality to end-users due to the providers use of IP technology. The FCC made no
determination regarding retroactive application of its ruling, and stated that the decision does
not preclude it from adopting a different approach when it resolves the IP-enabled services or
intercarrier compensation rulemaking proceedings.
Other aspects of VoIP and Internet telephony services, such as regulations relating to the
confidentiality of data and communications, copyright issues, taxation of services, and licensing,
may be subject to federal or state regulation. Similarly, changes in the legal and regulatory
environment relating to the Internet connectivity market, including regulatory changes that affect
communications costs or that may increase the likelihood of competition from Regional Bell
Operating Companies or other communications companies could increase our costs of providing
service.
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Other Domestic Regulation
We are subject to a variety of federal, state, local, and foreign environmental, safety and
health laws, and governmental regulations. These laws and regulations govern matters such as the
generation, storage, handling, use, and transportation of hazardous materials, the emission and
discharge of hazardous materials into the atmosphere, the emission of electromagnetic radiation,
the protection of wetlands, historic sites, and endangered species and the health and safety of
employees. We also may be subject to laws requiring the investigation and cleanup of contamination
at sites it owns or operates or at third-party waste disposal sites. Such laws often impose
liability even if the owner or operator did not know of, or was not responsible for, the
contamination. We operate numerous sites in connection with our operations. We are not aware of any
liability or alleged liability at any operated sites or third-party waste disposal sites that would
be expected to have a material adverse effect on our business, financial condition or results of
operations. Although we monitor our compliance with environmental, safety and health laws and
regulations, we cannot give assurances that it has been or will be in complete compliance with
these laws and regulations. We may be subject to fines or other sanctions by federal, state and
local governmental authorities if we fail to obtain required permits or violate applicable laws and
regulations.
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Our business faces many risks. Accordingly, prospective investors and shareholders should
carefully consider the risks and uncertainties described below and the other information in this
report, including the consolidated financial statements and notes to consolidated financial
statements. If any of the following risks or uncertainties actually occurs, our business, financial
condition or results of operations would likely suffer. Additional risks and uncertainties not
presently known to us or that are not currently believed to be important to you also may adversely
affect our company.
Our substantial indebtedness may restrict our operating flexibility, could adversely affect our
financial health and could prevent us from fulfilling our financial obligations.
As of December 31, 2009, we had $331.4 million of total outstanding indebtedness. Our
indebtedness could significantly affect our financial health and our ability to fulfill our
financial obligations. For example, a high level of indebtedness could:
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make it more difficult for us to satisfy our current and future debt obligations; |
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make it more difficult for us to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes; |
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require us to dedicate a substantial portion of our cash flows from operating activities
to the payment of principal and interest on our indebtedness, thereby reducing the funds
available to us for our operations and other purposes, including investments in service
development, capital spending and acquisitions; |
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place us at a competitive disadvantage to our competitors who are not as highly leveraged
as we are; |
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make us vulnerable to interest rate fluctuations, if we incur any indebtedness that bears
interest at variable rates; |
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impair our ability to adjust to changing industry and market conditions; and |
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make us more vulnerable in the event of a further downturn in general economic conditions
or in our business or changing market conditions and regulations. |
Although the indenture governing the notes and the credit agreement governing our credit
facility will limit our ability and the ability of our subsidiaries to incur additional
indebtedness, these restrictions are subject to a number of qualifications and exceptions and,
under certain circumstances, debt incurred in compliance with these restrictions could be
substantial. In addition, the indenture governing the notes and the credit agreement governing our
credit facility will not prevent us from incurring obligations that do not constitute indebtedness.
See the section entitled, Managements Discussion and Analysis of Financial Condition and Results
of Operations Liquidity and Capital Resources. To the extent that we incur additional
indebtedness or such other obligations, the risks associated with our substantial leverage,
including our possible inability to service our debt, would increase.
Our outstanding indebtedness of $300.0 million in the form of 113/8%
senior secured notes are due in 2012 and outstanding indebtedness of $23.5 million in the form of
our revolving credit facility is due in 2011. We cannot assure you that we will be able to
refinance or repay these notes or this facility on or prior to their respective maturity dates.
We have a history of net losses and we may not be profitable in the future.
We have experienced significant net losses. We recorded net losses of $65.5 million, $42.9
million and $13.9 million in 2007, 2008 and 2009, respectively. We expect to continue to have
losses for the foreseeable future. We cannot assure you that our revenues will grow or that we will
become profitable in the future.
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Our current billing disputes with our vendors may cause us to pay our vendors certain amounts of
money, which could materially adversely affect our business, financial condition, results of
operations and cash flows and which may cause us to be unable to meet certain financial covenants
related to our senior indebtedness.
We are involved in a variety of disputes with multiple carrier vendors relating to billings of
approximately $23.6 million as of December 31, 2009. When we identify an error in a vendors bill,
we dispute the amount that we believe to be incorrect and often withhold payment for that portion
of the invoice. Errors we routinely identify on bills include, but are not limited to, vendors
billing us for services we did not consume, vendors billing us for services we did not order,
vendors billing us for services that should have been billed to another carrier, vendors billing us
for services using incorrect rates or incorrect tariff, and vendors failing to provide the
necessary supporting detail to allow us to bill our customers or verify the accuracy of the bill.
These problems are exacerbated because vendors periodically bill for services months or years after
the services are provided. While we hope to resolve these disputes through negotiation, we may be
compelled to arbitrate these matters. The resolution of these disputes may require us to pay the
vendor an amount that is greater than the amount for which we have planned or even the amount the
vendor claims is owed if late payment charges are assessed, which could materially adversely affect
our business, financial condition, results of operations and cash flows and which may cause us to
be unable to meet certain financial covenants related to our senior indebtedness, which would
result in a default under such indebtedness. In the event that disputes are not resolved in our
favor and we are unable to pay the vendor charges in a timely manner, the vendor may deny us access
to the network facilities that we require to serve our customers. If the vendor notifies us of an
impending embargo of this nature, we may be required to notify our customers of a potential loss
of service, which may cause a substantial loss of customers. It is not possible at this time to
predict the outcome of these disputes.
Elimination or relaxation of regulatory rights and protections could harm our business, results of
operations and financial condition.
Section 10 of the Communications Act requires the FCC to forbear from applying individual
provisions of the Communications Act or its various enabling regulations upon a showing that a
statutory provision or a regulation is unnecessary to ensure that rates and practices remain just,
reasonable and non-discriminatory and to otherwise protect consumers and that forbearance is
generally in the public interest and would promote competition. Pursuant to Section 10, the FCC has
effectively deregulated Verizons provision of certain broadband services provided to enterprise
customers and has more recently extended similar relief to other incumbent local exchange carriers.
Exercising its forbearance authority, the FCC has also relieved certain incumbent local exchange
carriers in certain markets of their obligation to provide other competitive local exchange
carriers, or competitive local exchange carriers, with unbundled access to network elements at
rates mandated by state regulatory commissions. Although we do not provide service in any of the
impacted markets and hence are not directly affected by these latter rulings, the FCC is currently
reviewing the remand by the D.C. Circuit of the FCCs denial of its request for forbearance from
the application of the FCCs dominant carrier regulation of interstate services, and Section 251(c)
unbundling requirements in six Metropolitan Statistical Areas, including the New York-Northern New
Jersey-Long Island, NY-NJ-PA Metropolitan Statistical Area, the Philadelphia-Camden-Wilmington
PA-NJ-DE-MD Metropolitan Statistical Area and the Boston-Cambridge-Quincy, MA-NH Metropolitan
Statistical Area three of our largest markets.
FCC rules currently allow Verizon and other incumbent local exchange carriers to unilaterally
retire copper loop facilities that provide the last mile connection to certain customers with
limited regulatory oversight. Verizon has filed hundreds of notices of copper plant retirement with
the FCC and has announced its intention to retire its copper network over the next six years. While
we, in conjunction with other competitive local exchange carriers, have petitioned the FCC to
strengthen the rules governing copper plant retirement, there are no assurances that we will be
successful in this effort. Because it would limit the availability of facilities necessary to
provide certain services to our customers, wide scale retirement of copper loops by Verizon could
have an adverse impact on our business and operations.
A discussion of legal and regulatory developments is included in the section entitled
Regulation.
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The communications market in which we operate is highly competitive, and we may not be able to
compete effectively against companies that have significantly greater resources than we do, which
could cause us to lose customers and impede our ability to attract new customers.
The communications industry is highly competitive and is affected by the introduction of new
services and systems by, and the market activities of, major industry participants. We have not
achieved, and do not expect to achieve, a major share of the local access lines for any of the
communications services we offer. In each of our markets we compete with the incumbent local
exchange carrier serving that area. Large competitors have the following advantages over us:
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long-standing relationships and strong brand reputation with customers; |
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financial, technical, marketing, personnel and other resources substantially greater than
ours; |
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more funds to deploy communications services and systems that compete with ours; |
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the potential to subsidize competitive services with revenue from a variety of
businesses; |
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anticipated increased pricing flexibility and relaxed regulatory oversight; |
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benefits from existing regulations that favor the incumbent local exchange carriers. |
We also face, and expect to continue to face, competition from other current and potential
market entrants, such as other competitive local exchange carriers cable television companies,
wireless service providers and electric utility companies. While many competitive local exchange
carriers have always targeted small and medium sized enterprises and multi-location customers,
cable television companies are increasingly targeting these customers and are doing so at rates
lower than we generally offer. We are also increasingly subject to competition from providers using
VoIP over the public Internet or private networks. VoIP providers are currently subject to
substantially less regulation than traditional local telephone companies and do not pay certain
taxes and regulatory charges that we are required to pay. In addition, the development of new
technologies could give rise to significant new competitors in the local market.
In the long distance communications market, we face competition from the incumbent local
exchange carriers, large and small interexchange carriers, wireless carriers and IP-based service
providers. Long distance prices have decreased substantially in recent years and are expected to
continue to decline in the future as a result of increased competition. If this trend continues, we
anticipate that revenues from our network services and other service offerings will likely be
subject to significant price pressure.
Our customers are impacted by conditions in the economy as a whole. As conditions in the
economy worsen, our customers may experience increasing business downturns or bankruptcies. Such
adverse economic impacts may result in reduced sales, higher churn and greater bad debt for us. Any
combination of these factors could adversely impact our operating results and financial
performance.
To service our indebtedness, including our notes and credit facility, we will require a significant
amount of cash. The ability to generate cash depends on many factors beyond our control.
Our ability to repay or to refinance our obligations with respect to our indebtedness,
including our notes and credit facility and to fund planned capital expenditures will depend on our
future financial and operating performance. This, to a certain extent, is subject to general
economic, financial, competitive, business, legislative, regulatory and other factors that are
beyond our control. These factors could include operating difficulties, diminished access to
necessary network facilities, increased operating costs, significant customer churn, pricing
pressures, the response of competitors, regulatory developments and delays in implementing
strategic initiatives.
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We cannot assure you that our business will generate sufficient cash flow from operations or
that future borrowings will be available to us in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs. As of December 31, 2009, we required
approximately $102.4 million in cash to service the interest due on our notes throughout the
remaining life of the notes. Additionally, at our current interest rate and amount outstanding, we
require approximately $2.0 million in cash to service the interest due on our revolving credit
facility through maturity. We may need to refinance all or a portion of our indebtedness, including
the notes and our credit facility, 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.
System disruptions or the failure of our information systems to perform as expected could result in
increased capital expenditures, customer and vendor dissatisfaction, loss of business or the
inability to add new customers or additional services.
Our success ultimately depends on providing reliable service. Although our network has been
designed to minimize the possibility of service disruptions or other outages, it may be disrupted
by problems in the network, such as equipment failures and problems with a competitors or vendors
system, such as physical damage to telephone lines or power surges and outages. In addition, our
engineering and operations organizations continually monitor and analyze the utilization of our
network. As a result, they may develop projects to modify or eliminate network circuits that are
underutilized. This ongoing process may result in limited network outages for a subset of our
customers. Any disruption in our network could cause the loss of customers and result in additional
expenses.
Disruptions caused by security breaches, terrorism or for other reasons, could harm our future
operating results. The day-to-day operation of our business is highly dependent on our ability to
protect our communications and information technology systems from damage or interruptions by
events beyond our control. Sabotage, computer viruses or other infiltration by third parties could
damage or disrupt our service, damage our facilities, damage our reputation, and cause us to lose
customers, among other things. A catastrophic event could materially harm our operating results and
financial condition. Catastrophic events could include a terrorist attack in markets where we
operate or a major earthquake, fire, or similar event that would affect our central offices,
corporate headquarters, network operations center or network equipment.
Our ability to provide our services and systems at competitive prices is dependent on our ability
to negotiate and enforce favorable interconnection and other agreements.
Our ability to continue to obtain favorable interconnection, unbundling, service provisioning
and pricing terms, and the time and expense involved in negotiating interconnection agreements and
amendments, can be adversely affected by ongoing legal and regulatory activity. All of our
interconnection agreements provide either that a party is entitled to demand renegotiation of
particular provisions or of the entire agreement based on intervening changes in law resulting from
ongoing legal and regulatory activity, or that a change of law is immediately effective in the
agreement and set out a dispute resolution process if the parties do not agree upon the change of
law. The initial terms of all of our interconnection agreements with incumbent local exchange
carriers have expired; however, each of our agreements contains an evergreen provision that
allows the agreement to continue in effect until terminated. If we were to receive a termination
notice from an incumbent local exchange carrier, we may be able to negotiate a new agreement or
initiate an arbitration proceeding at the relevant state commission before the agreement expired.
In addition, the Telecommunications Act, gives us the right to opt into interconnection agreements,
which have been entered into by other carriers, provided the agreement is still in effect and
provided that we adopt the entire agreement. We are in the process of renegotiating the terms of
our New York interconnection agreements with Verizon. We cannot assure you that we will be able to
successfully renegotiate these agreements or any other interconnection agreement on terms favorable
to us or at all.
As noted above,
we have reached an agreement in principle with Verizon as to the
economic terms of an amended and restated commercial agreement pursuant to which we would continue to
purchase a product called Verizon Wholesale Advantage Service at UNE-platform rates subject to a
tiered surcharge reflective of the number of lines that we maintain under the agreement. This
amended and restated commercial agreement, which we anticipate will be signed within a matter of
weeks, will continue in effect into 2013. Our principle commercial
agreement with Verizon expires at the end of April, 2010 and our
secondary commercial agreement has expired. Our remaining commercial
agreement expires at the end of June 2010.
If we fail to execute the current proposed amended and restated commercial agreement with
Verizon or our amended and restated agreement, once executed, were to be terminated or expire, we
would be required to convert all of the lines thereunder to resale, which would be substantially
less favorable to us. We cannot assure you that we will execute an amended and restated commercial
agreement with Verizon or that our amended and restated agreement, once executed, will be renewed
at the end of its term or that it will not be terminated before the end of its term.
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We have also entered into a commercial agreement with AT&T pursuant to which we serve a
significant percentage of our customers in Connecticut. This agreement will expire at the end of
2011. If our AT&T commercial agreement were to expire, we would be required to convert all of the
lines thereunder to resale, which would likely be substantially less favorable to us. We cannot
assure you that our commercial agreement with AT&T will be renewed at the end of its terms.
We have entered into amendments of our various interconnection and commercial agreements with
Verizon, which provide for assurance of timely payment. Under these amendments, we could be
compelled to provide letters of credit in an amount of up to two months anticipated billings if in
any two months of a consecutive 12 month period, we fail to pay when due undisputed amounts that in
total exceed 5% of the total amount invoiced by Verizon during the month and fail to cure such
nonpayment within five business days of Verizons written notice of nonpayment. The provision of
such letters of credit could adversely impact our liquidity position. The amendments also
substantially limit the time period within which both we and Verizon can (i) backbill for services
rendered to the other and (ii) dispute charges for services rendered to the other.
We are also currently involved in a variety of disputes with vendors relating to billings of
approximately $23.6 million as of December 31, 2009. For more information, see the risk factor
entitled Our current billing disputes with our vendors may cause us to pay our vendors certain
amounts of money, which could materially adversely affect our business, financial condition,
results of operations and cash flows and which may cause us to be unable to meet certain financial
covenants related to our senior indebtedness.
If the incumbent local exchange carriers with which we have interconnection agreements engage in
anticompetitive practices or we experience difficulties in working with the incumbent local
exchange carriers, our ability to offer services on a timely and cost-effective basis will be
materially and adversely affected.
Our business depends on our ability to interconnect with incumbent local exchange carrier
networks and to lease from them certain essential network elements. We obtain access to these
network elements and services under terms established in interconnection agreements that we have
entered into with incumbent local exchange carriers. Like many competitive communications services
providers, from time to time, we have experienced difficulties in working with incumbent local
exchange carriers with respect to obtaining information about network facilities, ordering and
maintaining network elements and services, interconnecting with incumbent local exchange carrier
networks and settling financial disputes. These difficulties can impair our ability to provide
local service to customers on a timely and competitive basis. If an incumbent local exchange
carrier refuses to cooperate or otherwise fails to support our business needs for any other reason,
including labor shortages, work stoppages, cost-cutting initiatives or disruption caused by
mergers, other organizational changes or terrorist attacks, our ability to offer services on a
timely and cost-effective basis will be materially and adversely affected.
We are subject to substantial government regulation that may restrict our ability to provide local
services and may increase the costs we incur to provide these services.
We are subject to varying degrees of federal, state and local regulation. Pursuant to the
Communications Act, the FCC exercises jurisdiction over us with respect to interstate and
international services. We must comply with various federal regulations, such as the duty to
contribute to Universal Service Fund and other subsidies. If we fail to comply with federal
reporting and regulatory requirements, we may incur fines or other penalties, including loss of our
authority to provide services.
37
The FCCs Triennial Review Order, subsequent Triennial Review Remand Order and related
decisions have reduced our ability to access certain elements of incumbent local exchange carrier
telecommunications platforms in several ways that have affected our operations. First, we no longer
have the right to require incumbent local exchange carriers to sell us unbundled network platforms.
Because of this, we entered into commercial agreements with Verizon to purchase a product called
Verizon Wholesale Advantage Service at UNE-platform rates subject to a surcharge, which increased
over time. These agreements have expired or will expire within a
matter of months. We have, however, recently reached an agreement
with Verizon as to the economic terms of an
amended and restated commercial agreement pursuant to which we would continue to purchase Verizon
Wholesale Advantage Service at UNE-platform rates subject to a tiered surcharge reflective of the
number of lines that we place under the agreement. This amended and restated commercial agreement,
which we anticipate will be signed within a matter of weeks, will continue in effect into 2013. We
will be required under our amended and restated commercial agreement with Verizon to maintain
certain volumes of lines on a take-or-pay basis. Failure to execute our current proposed amended
and restated Verizon commercial agreement, or once executed, expiration or termination of that
amended and restated commercial agreement would result in a substantial increase in our
cost of service. Second, in certain central offices, we no longer have the right to require
incumbent local exchange carriers to sell to us as unbundled network elements, or have limited
access rights to unbundled network element high capacity circuits that connect our central
switching office locations to customers premises. Third, we no longer have the right to require
incumbent local exchange carriers to sell to us unbundled network element transport between our
switches and incumbent local exchange carrier switches. Fourth, we have only limited or no access
to unbundled network element DS1 or DS3 transport on certain interoffice routes. Petitions
currently pending before the FCC could, if granted, further reduce our access to unbundled network
element loops and transport. In these instances where we lose unbundled access to high capacity
circuits or interoffice transport, we must either find alternative suppliers or purchase substitute
circuits from the incumbent local exchange carrier as special access, which increases our costs.
Finally, our access to certain broadband elements of the incumbent local exchange carrier network
has been limited or eliminated in certain circumstances.
State regulatory commissions also exercise jurisdiction over us to the extent we provide
intrastate services. We are required to obtain regulatory authorization and/or file tariffs with
regulators in most of the states in which we operate. State regulatory commissions also often
regulate the rates, terms and conditions at which we offer service. We have obtained the necessary
certifications to provide service, but each commission retains the authority to revoke our
certificate if that commission determines that we have violated any condition of our certification
or if it finds that doing so would be in the public interest. While we believe we are in compliance
with regulatory requirements, our interpretation of our obligations may differ from those of
regulatory authorities.
Both federal and state regulators require us to pay various fees and assessments, file
periodic reports and comply with various rules regarding the contents of our bills, protection of
subscriber privacy, service quality and similar consumer protection matters on an ongoing basis. If
we fail to comply with these requirements, we may be subject to fines or potentially be asked to
show cause as to why our certificate of authority to provide service should not be revoked.
A discussion of legal and regulatory developments is included in the section entitled
Regulation.
Difficulties we may experience with incumbent local exchange carriers, interexchange carriers, and
wholesale customers over payment issues may harm our financial performance.
We have at times experienced difficulties collecting amounts due to us for services that we
provide to incumbent local exchange carriers and interexchange carriers. These balances due to us
can be material. We generally have been able to reach mutually acceptable settlements to collect
overdue and disputed payments, but we cannot assure you that we will be able to do so in the
future.
Our interconnection agreements allow incumbent local exchange carriers to decrease order
processing, disconnect customers and increase our security deposit obligations for delinquent
payments. If an incumbent local exchange carrier makes an enforceable demand for an increased
security deposit, we could have less cash available for other expenses. If an incumbent local
exchange carrier were to cease order processing or disconnect customers our business and operations
would be materially and adversely affected.
Periodically, our wholesale customers experience financial difficulties. To the extent that
the credit quality of our wholesale customers deteriorates or they seek bankruptcy protection, we
may have difficulty collecting amounts due for services that we have provided to them. While we
maintain security deposits and often retain the right to solicit end-user customers, we cannot
assure you that such mechanisms will provide us adequate protection.
38
We periodically have disagreements with incumbent local exchange carriers and interexchange
carriers regarding the interpretation and application of laws, rules, regulations, tariffs and
agreements. Adverse resolution of these disagreements may impact our revenues and our costs of
service, both prospectively and retroactively. For example, we and often other competitive local
exchange carriers believe that (i) incumbent local exchange carrier tandem transit charges are not
applicable to traffic terminated to wireless carriers because Verizon tariffs in key states do not
provide for such application, (ii) dedicated port charges are not chargeable to competitive local
exchange carriers because such charges are associated with switched access services and incumbent
local exchange carriers do not provide such services to competitive local exchange carriers and
competitive local exchange carriers do not purchase such services from incumbent local exchange
carriers, (iii) the level of access charges due to local exchange carriers or payable by
interexchange carriers and the amounts chargeable for network services or facilities may be in
different instances either understated or overstated, (iv) it is unclear which intercarrier
compensation regime applies to VoIP services and (v) VoIP providers, as providers of information
services, are deemed end-users for purposes of the FCCs access charge regime. Certain local
exchange carriers and interexchange carriers may disagree with the interpretations we and other
competitive local exchange carriers hold. Some of the disagreements, such as those involving tandem
transit and dedicated port charges, can be quantified and are included among our outstanding
billing disputes with Verizon and other carriers, (see Risk Factors Risks Related to Our
Industry and Business Our current billing disputes with our vendors may cause us to pay our
vendors certain amounts of money and could materially adversely affect our business, financial
condition, results of operations and cash flows and which may cause us to be unable to meet certain
financial covenants related to our senior indebtedness),while others, such as those involving VoIP
services and access charges, cannot be quantified because their resolution will depend upon public
policy determinations not yet made by the FCC. If one or more of such disagreements were resolved
through litigation or arbitration against us, such adverse resolution could have a material adverse
effect on our business, results of operations and financial condition.
Continued industry consolidation could further strengthen our competitors, and could adversely
affect our prospects.
Consolidation in the telecommunications industry is occurring at a rapid pace. In addition to
the combinations of Verizon and MCI and SBC, AT&T and BellSouth, numerous competitive local
exchange carrier combinations have occurred, including several which directly impact our markets
such as Paetec/US LEC, Cavalier/Talk America and Choice One/CTC/Conversent. This consolidation
strengthens our competitors and poses increased competitive challenges for us. The incumbent local
exchange carrier/interexchange carrier combinations not only provide the incumbent local exchange
carriers with national and international networks, but eliminate the two most effective and well
financed opponents of the incumbent local exchange carriers in federal and state legislative and
regulatory forums and potentially reduce the availability of non-incumbent local exchange carrier
network facilities. The competitive local exchange carrier combinations will provide direct
competitors with greater financial, network and marketing assets.
Providers of VoIP service have been the target of recent intellectual property infringement
litigation that may materially and adversely affect our ability and/or the ability of other
providers to continue to sell or provide VoIP service.
Certain providers of VoIP service have been and may in the future continue to be the target of
intellectual property infringement litigation with respect to their provision of VoIP service. Some
of these actions have been resolved in a manner adverse to the VoIP providers. Vonage America,
Inc., for example, has been found to have violated certain patents held by Verizon and Sprint
Nextel in providing its VoIP service. Other actions have been brought against competitive local
exchange carriers, including us, and cable television providers of VoIP. These and similar actions
may materially and adversely affect our ability and/or the ability of other providers to continue
to sell or provide VoIP service. While we have no reason to believe that our provision of VoIP
service infringes any third party intellectual property, if it were to be so found, our business
could be adversely impacted. It can also be adversely impacted if any of our wholesale customers
that are providing VoIP service were to be unable to continue to provide such service as a result
of infringement of intellectual property held by others.
We license certain software to certain other carriers for the provision of VoIP service. We
are contractually bound to indemnify these other carriers in the event that a third party alleges
that our software infringes its intellectual property rights. While we have no reason to believe
that our provision of VoIP service infringes any third party intellectual property, if it were to
be so found, our financial position could be adversely impacted.
39
The indenture governing the notes and the credit agreement governing our credit facility contain
restrictive and operating covenants that limit our operating flexibility, and we may obtain a
credit facility in the future that may include similar or additional restrictions.
The indenture and credit agreement contain covenants that, among other things, restrict our
ability to take specific actions, even if we believe them to be in our best interest, including
restrictions on our ability to:
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incur or guarantee additional indebtedness or issue preferred stock; |
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pay dividends or distributions on, or redeem or repurchase, capital stock; |
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create liens with respect to our assets; |
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make investments, loans or advances; |
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prepay subordinated indebtedness; |
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enter into transactions with affiliates; |
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merge, consolidate or sell our assets; and |
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engage in any business other than activities related or complementary to communications. |
In addition, any future credit facility may impose financial covenants that require us to
comply with specified financial ratios and tests, including minimum quarterly earnings before
interest, taxes, depreciation and amortization (EBITDA), senior debt to total capitalization,
maximum capital expenditures, maximum leverage ratios and minimum interest coverage ratios. We
cannot assure you that we will be able to meet these requirements or satisfy these covenants in the
future. If we fail to do so, our indebtedness thereunder could become accelerated and payable at a
time when we are unable to pay them. This could adversely affect our ability to carry out our
business plan and would have a negative effect on our financial condition.
The communications industry faces significant regulatory uncertainties and the adverse resolution
of these uncertainties could harm our business, results of operations and financial condition.
If current or future regulations change, we cannot assure you that the FCC or state regulators
will grant us any required regulatory authorization or refrain from taking action against us if we
are found to have provided services without obtaining the necessary authorizations, or to have
violated other requirements of their rules and orders. Delays in receiving required regulatory
approvals or the enactment of new adverse regulation or regulatory requirements may slow our growth
and have a material adverse effect upon our business, results of operations and financial
condition. The Telecommunications Act remains subject to judicial review and ongoing proceedings
before the FCC and state regulators, including proceedings relating to interconnection pricing,
access to and pricing for unbundled network elements and special access services and other issues
that could result in significant changes to our business and business conditions in the
communications industry generally. Recent decisions by the FCC have eliminated or reduced our
access to certain elements of incumbent local exchange carrier telecommunications platforms that we
use to serve our customers and increased the rates that we pay for such elements. Other proceedings
are pending before the FCC that could potentially further limit our access to these network
elements or further increase the rates we must pay for such elements. Likewise, proceedings before
the FCC could impact the availability and price of special access facilities. Other proceedings
before the FCC could result in an increase in the amount we pay to other carriers or a reduction in
the revenues we derive from other carriers in, or retroactive liability for, access charges and
reciprocal compensation. Still other proceedings before the FCC could result in increases in the
cost of regulatory compliance. A number of states also have proceedings pending that could impact
our access to and the rates we pay for network elements. Other state proceedings could limit our
pricing and billing flexibility. Our business would be substantially impaired if the FCC, the
courts, or state commissions eliminated our access to the facilities and services we use to serve
our customers, substantially increased the rates we pay for facilities and services or adversely
impacted the revenues we receive from other carriers or our customers. In addition, congressional
legislative efforts to rewrite the Telecommunications Act or enact other telecommunications
legislation, as well as various state legislative initiatives, may cause major industry and
regulatory changes. We cannot predict the outcome of these proceedings or legislative initiatives
or the effects, if any, that these proceedings or legislative initiatives may have on our business
and operations.
40
A discussion of legal and regulatory developments is included in the section entitled
Regulation.
The effects of increased regulation of IP-based service providers are unknown.
While the FCC has to date generally subjected Internet service providers to less stringent
regulatory oversight than traditional common carriers, it has recently imposed certain regulatory
obligations on providers of Interconnected VoIP and/or facilities based broadband Internet access
providers, including the obligations to contribute to the Universal Service Fund, to provide
emergency 9-1-1 services and/or to comply with the Communications Assistance for Law Enforcement
Act. Some states have imposed taxes, fees and/or surcharges on VoIP telephony services. The
imposition of additional regulations on Internet service providers could have a material adverse
effect on our business.
Declining prices for communications services could reduce our revenues and profitability.
We may fail to achieve acceptable profits due to pricing. Prices in telecommunication services
have declined substantially in recent years, a trend which may continue. Accordingly, we cannot
predict to what extent we may need to reduce our prices to remain competitive or whether we will be
able to sustain future pricing levels as our competitors introduce competing services or similar
services at lower prices. Our ability to meet price competition may depend on our ability to
operate at costs equal to or lower than our competitors or potential competitors.
Certain real estate leases and agreements are important to our business and failure to maintain
such leases and agreements could adversely affect us.
Our switches are housed in facilities owned by third parties. Our use of these various
facilities is subject to multiple real estate leases. If we were to lose one or more of these
leases, the resultant relocation of one or more of our switches would be costly and disruptive to
our business and customers. We cannot assure you that we will be able to maintain all of the real
estate leases governing our multiple switch sites.
We maintain agreements which allow us to install equipment and utilize in-building wiring and,
in some cases, optical fiber in more than 500 commercial buildings in metro New York and
Washington, D.C. We owe past royalties, which could total approximately $0.7 million, on a number
of these agreements; the terms of other agreements have expired. If we were to lose some or all of
our lit-building agreements, our business could be adversely impacted.
We depend on a limited number of third party service providers for long distance and other
services, and if any of these providers were to experience significant interruptions in its
business operations, or were to otherwise cease to provide such services to us, our ability to
provide services to our customers could be materially and adversely affected.
We depend on a limited number of third party service providers for long distance, data and
other services. If any of these third party providers were to experience significant interruptions
in their business operations, terminate their agreements with us or fail to perform the services or
meet the standards of quality required under the terms of our agreements with them, our ability to
provide these services to our customers could be materially and adversely affected for a period of
time that we cannot predict. If we have to migrate the provision of these services to an
alternative provider, we cannot assure you that we would be able to timely locate alternative
providers of such services, that we could migrate such services in a short period of time without
significant customer disruption so as to avoid a material loss of customers or business, or that we
could do so at economical rates.
41
The communications industry is undergoing rapid technological changes, and new technologies may be
superior to the technologies we use. We may fail to anticipate and keep up with such changes.
The communications industry is subject to rapid and significant changes in technology and in
customer requirements and preferences. If we fail to anticipate and keep up with such changes we
could lose market share, which could reduce our revenue. We have developed our business based, in
part, on traditional telephone technology. Subsequent technological developments may reduce the
competitiveness of our network and require expensive unanticipated upgrades or additional
communications products that could be time consuming to integrate into our business and could cause
us to lose customers and impede our ability to attract new customers. We may be required to select
one technology over another at a time when it might be impossible to predict with any certainty
which technology will prove to be more economic, efficient or capable of attracting customers. In
addition, even though we utilize new technologies, such as VoIP, we may not be able to implement
them as effectively as other companies with more experience with those new technologies. In
addition, while we have recently purchased and deployed new technology including VoIP softswitches,
Ethernet in the First Mile and MPLS, or MPLS, core and edge routers, we may not be able to
implement new technology as effectively as other companies with more experience with new
technology.
Limits exist on our ability to seek indemnification for losses from individuals and entities from
whom we have acquired assets and operations.
When we acquire a company, we generally secure from the sellers indemnity protection against
certain types of liabilities. Such indemnity protection is generally subject to a deductible and a
cap, as well as a time limit. If undisclosed or unknown liabilities fall below the deductible or
over the cap or such liabilities are not discovered until after the time limit, the indemnity will
not protect us. Moreover, a seller may contest our indemnity claims or be unable to fund such
claims. As a result we may be liable for liabilities of businesses we have acquired.
We are exposed to risks associated with disruption and instability in the financial markets.
U.S. and global credit and equity markets have recently undergone significant disruption,
making it difficult for many businesses to obtain financing on acceptable terms. In addition,
equity markets are continuing to experience wide fluctuations in value. If these conditions
continue or worsen, our cost of borrowing may increase, and it may be more difficult to obtain
financing in the future. In addition, an increasing number of financial institutions and insurance
companies have reported significant deterioration in their financial condition. If any of the
significant lenders, insurance companies or other financial institutions are unable to perform
their obligations under our credit agreement, insurance policies or other contracts, and we are
unable to find suitable replacements on acceptable terms, our results of operations, liquidity and
cash flows could be adversely affected. Additionally, a substantial portion of our revenues comes
from customers whose spending patterns may be affected by prevailing economic conditions. A
sustained decline in the financial stability of the market could have a negative impact on our
business and results of operations.
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.
The financial difficulties faced by others in our industry could adversely affect our public image
and our financial results.
Certain competitive communications services providers, long distance carriers and other
communications providers have experienced substantial financial difficulties over the past few
years. To the extent that carriers in financial difficulties purchase services from us, we may not
be paid in full or at all for services we have rendered. Further, the perception of instability of
companies in our industry may diminish our ability to obtain further capital and may adversely
affect the willingness of potential customers to purchase their communications services from us.
If we are unable to retain and attract management and key personnel, we may not be able to execute
our business plan.
We believe that our success is due, in part, to our experienced management team. Losing the
services of one or more members of our management team could adversely affect our business and our
expansion efforts, and possibly prevent us from further improving our operational, financial and
information management systems and controls. We do not maintain key man life insurance on any of
our officers. As we continue to grow, we will need to retain and hire additional qualified sales,
marketing, administrative, operating and technical personnel, and to train and manage new
personnel.
42
Our ability to implement our business plan is dependent on our ability to retain and hire a
large number of qualified new employees each year. The competition for qualified technical and
sales personnel is intense in the telecommunications industry and in our markets. If we are unable
to hire sufficient qualified personnel, our customers could experience inadequate customer service
and delays in the installation and maintenance of access lines.
Our success depends on the ability to manage and expand operations effectively.
Our ability to manage and expand operations effectively will depend on the ability to:
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offer high-quality, reliable services at reasonable costs; |
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introduce new technologies; |
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install and operate telecommunications switches and related equipment; |
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lease access to suitable transmission facilities at competitive prices; |
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obtain successful outcomes in disputes and in litigation, rule-making, legislation and
regulatory proceedings; |
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successfully negotiate, adopt or arbitrate interconnection agreements with other
carriers; |
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acquire necessary equipment, software and facilities; |
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integrate existing and newly acquired technology and facilities, such as switches and
related equipment; |
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maintain effective quality controls; |
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hire, train and retain qualified personnel; |
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enhance operating and accounting systems; |
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address operating challenges; |
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adapt to market and regulatory developments; and |
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obtain and maintain required governmental authorizations. |
In order for us to succeed, these objectives must be achieved in a timely manner and on a
cost-effective basis. If these objectives are not achieved, we may not be able to compete in
existing markets or expand into new markets.
43
We may engage in future acquisitions that are not successful or fail to integrate acquired
businesses into our operations, which may adversely affect our competitive position and growth
prospects.
As part of our business strategy, we may seek to expand through the acquisition of other
businesses that we believe are complementary to our business. We may be unable to identify suitable
acquisition candidates, or if we do identify suitable acquisition candidates, we may not complete
those transactions commercially favorable to us or at all, which may adversely affect our
competitive position and growth prospects.
If we acquire another business, we may face difficulties, including:
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integrating that businesss personnel, services, products or technologies into our
operations; |
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retaining key personnel of the acquired business; |
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failing to adequately identify or assess liabilities of that business; |
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failing to achieve the forecasts we used to determine the purchase price of that
business; and |
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diverting our managements attention from the normal daily operation of our business. |
These difficulties could disrupt our ongoing business and increase our expenses. As of the
date of this report, we have no agreements to enter into any material acquisition transaction.
In addition, our ability to complete acquisitions will depend, in part, on our ability to
finance these acquisitions, including the costs of acquisition and integration. Our ability may be
constrained by our cash flow, the level of our indebtedness at the time, restrictive covenants in
the agreements governing our indebtedness, conditions in the securities markets, regulatory
constraints and other factors, many of which are beyond our control. If we proceed with one or more
acquisitions in which the consideration consists of cash, we may use a substantial portion of our
available cash to complete the acquisitions. If we finance one or more acquisitions with the
proceeds of indebtedness, our interest expense and debt service requirements could increase
materially. The financial impact of acquisitions could materially affect our business and could
cause substantial fluctuations in our quarterly and yearly operating results.
Misappropriation of our intellectual property and proprietary rights could impair our competitive
position, and defending against intellectual property infringement and misappropriation claims
could be time consuming and expensive and, if we are not successful, could cause substantial
expenses and disrupt our business.
We rely on a combination of patent, copyright, trademark and trade secret laws, as well as
licensing agreements, third party non-disclosure agreements and other contractual provisions and
technical measures to protect our intellectual property rights. There can be no assurance that
these protections will be adequate to prevent our competitors from copying or reverse-engineering
our hardware or software products, or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technology.
In addition, we cannot be sure that the products, services, technologies and advertising we
employ in our business do not or will not infringe valid patents, trademarks, copyrights or other
intellectual property rights held by third parties. We may be subject to legal proceedings and
claims from time to time relating to intellectual property of others in the ordinary course of our
business. Defending against intellectual property infringement or misappropriation claims could be
time consuming and expensive regardless of whether we are successful, and could cause substantial
expenses and disrupt our business.
44
As an Internet access provider, we may incur liability for information disseminated through our
network.
The law relating to the liability of Internet access providers and on-line services companies
for information carried on or disseminated through their networks is unsettled. As the law in this
area develops, the potential imposition of liability upon us for information carried on and
disseminated through our network could require us to implement measures to reduce our exposure to
such liability, which may require the expenditure of substantial resources or the discontinuation
of certain products or service offerings. Any costs that are incurred as a result of such measures
or the imposition of liability could harm our business.
MCG, Baker, NEA and other significant investors control us, and their interests as equity holders
may conflict with interests of noteholders.
MCG, Baker, NEA and other significant investors control us. Through their ownership of
preferred stock and common stock, they are and will be able to cause, among other things, the
election of a majority of the members of the board of directors and the approval of any action
requiring the approval of our shareholders, including a change of control, a public offering,
merger or sale of assets or stock. These interests may conflict with the interests of noteholders.
For example, if we encounter financial difficulties or are unable to pay our debts as they mature,
the interests of our equity holders may conflict with the interests of our note holders. In
addition, our equity holders may have an interest in pursuing acquisitions, divestitures,
financings or other transactions that, in their judgment, could enhance their equity investments,
even though such transactions might involve risks to holders of our
notes. In some instances, certain of our preferred stockholders can require that we use
commercially reasonable efforts to consummate a merger, sale of stock or assets, or a
Qualified Public Offering (as defined in Certain Relationships and Related Transactions,
and Director Independence - Amended and Restated Shareholders
Agreement).
Changes in control of
the Company or of some of our equity holders could trigger requirements that we repay the notes.
They may in the future own businesses that directly or indirectly compete with ours. They may also
pursue acquisition opportunities that may be complementary to our business, and as a result, those
acquisition opportunities may not be available to us. Pursuant to our charter, our significant
stockholders have no duty to present corporate opportunities to us. If a corporate opportunity is
presented to them or their affiliates, then such significant stockholder will have no liability to
us for acting upon such opportunity without presenting it to us.
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Item 1B.
Unresolved Staff Comments |
We are a non-accelerated filer. However, we note that we have received comments from the SEC
in connection with our pending initial public offering. These will be addressed by the Company once
the structure regarding the initial public offering has been finalized.
Our corporate headquarters is located in Rye Brook, New York. We do not own any facilities.
The table below lists our current material leased facilities.
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Approximate |
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Location |
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Lease
Expiration |
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Square
Footage |
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Offices: |
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King of Prussia, PA |
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January 2011 |
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102,085 |
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Rye Brook, NY |
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May 2015 |
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57,293 |
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New York, NY |
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September 2019 |
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28,567 |
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Newark, NJ |
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April 2011 |
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24,819 |
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New York, NY |
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April 2015 |
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21,111 |
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Quincy, MA |
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September 2013 |
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14,637 |
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Melville, NY |
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March 2011 |
|
|
|
13,152 |
|
Switches: |
|
|
|
|
|
|
|
|
New York, NY |
|
May 2012 |
|
|
|
38,500 |
|
Philadelphia, PA |
|
July 2023 |
|
|
|
16,617 |
|
Long Island City, NY |
|
October 2019 |
|
|
|
12,144 |
|
Charlestown, MA |
|
April 2010 |
|
|
|
12,490 |
|
Philadelphia, PA |
|
April 2010 |
|
|
|
21,000 |
|
Horsham, PA |
|
November 2010 |
|
|
|
9,244 |
|
Syracuse, NY |
|
October 2014 |
|
|
|
8,000 |
|
Philadelphia, PA |
|
January 2013 |
|
|
|
5,928 |
|
Herndon, VA |
|
June 2010 |
|
|
|
5,000 |
|
45
|
|
|
Item 3. Legal Proceedings |
We are currently a party to only one material legal action. 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 regarding our contractual disputes with our vendors, see the sections
entitled Managements Discussion and Analysis of Financial Condition and Results of Operations
and Risk Factors Our current billing disputes with our vendors may cause us to pay our vendors
certain amounts of money, which could materially adversely affect our business, financial
condition, results of operations and cash flows and which may cause us to be unable to meet certain
financial covenants related to our senior indebtedness and Our ability to provide our services
and systems at competitive prices is dependent on our ability to negotiate and enforce favorable
interconnection and other agreements.
|
|
|
Item 4. (Removed and Reserved) |
46
PART II
|
|
|
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities |
There is no established public trading market for our common stock or preferred stock. We have
not declared or paid cash dividends for the past two fiscal years and we do not anticipate that we
will pay any dividends to holders of our common stock in the foreseeable future, and our ability to
pay dividends is restricted by the instruments governing our outstanding indebtedness. Any payment
of cash dividends on our common stock in the future will be at the discretion of our board of
directors and will depend upon our results of operations, earnings, capital requirements, financial
condition, future prospects, contractual restrictions and other factors deemed relevant by our
board of directors.
The following table lists the number of record holders by each class of stock as of March 29,
2010:
|
|
|
|
|
|
|
Holders |
|
Class of Equity Security |
|
of
Record |
|
Common stock A |
|
|
206 |
|
Common stock B |
|
|
36 |
|
Series A Preferred stock |
|
|
1 |
|
Series A-1 Preferred stock |
|
|
1 |
|
Series B Preferred stock |
|
|
132 |
|
Series B-1 Preferred stock |
|
|
90 |
|
Series C Preferred stock |
|
|
36 |
|
See Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters Securities authorized for issuance under equity compensation plans for
information regarding our equity compensation plans.
|
|
|
Item 6. Selected Financial Data |
The following tables set forth our selected consolidated financial data for the periods
indicated. The selected consolidated financial data for the years ended December 31, 2007, 2008 and
2009 and as of December 31, 2008 and 2009 have been derived from our audited consolidated financial
statements included elsewhere in this report. The selected consolidated financial data for the
years ended December 31, 2005 and 2006 and as of December 31, 2005, 2006 and 2007 have been derived
from our audited consolidated financial statements not included elsewhere in this report. In
connection with the Bridgecom merger on January 14, 2005, MCG, the sole owner of Bridgecom, became
the largest owner of our capital stock and appointed the members of our board and our chief
executive officer. In addition, many of our senior management roles were filled by members of
Bridgecoms senior management team. Accordingly, Bridgecom was deemed the accounting acquirer with
Broadview becoming the surviving corporate entity. The financial data subsequent to January 14,
2005 include Bridgecom and the acquired business of Broadview. The financial data for the year
ended December 31, 2005 include 12 months of financial data for Bridgecom and 111/2 months of
financial data for the acquired business of Broadview. The financial data for the year ended
December 31, 2006 include 12 months of financial data for Broadview and three months of financial
data for ATX. The financial data for the year ended December 31, 2007 include 12 months of
financial data for Broadview and ATX and 7 months of financial data for InfoHighway.
47
The following financial information is qualified by reference to and should be read in
conjunction with the section entitled Managements Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and Notes to Consolidated
Financial Statements included elsewhere in this report. All dollar amounts are in thousands, except
per share data. For more information regarding securities authorized for issuance under equity
compensation plans, see Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Statements of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
240,396 |
|
|
$ |
272,653 |
|
|
$ |
448,774 |
|
|
|
496,922 |
|
|
|
456,452 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (1) |
|
|
115,214 |
|
|
|
130,841 |
|
|
|
234,166 |
|
|
|
257,883 |
|
|
|
225,431 |
|
Selling, general and administrative (2)(3) |
|
|
96,439 |
|
|
|
107,805 |
|
|
|
166,231 |
|
|
|
168,421 |
|
|
|
154,722 |
|
Depreciation and amortization |
|
|
45,756 |
|
|
|
49,781 |
|
|
|
75,980 |
|
|
|
73,608 |
|
|
|
49,922 |
|
Impairment charges |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Merger integration costs |
|
|
4,531 |
|
|
|
1,430 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
261,940 |
|
|
|
289,857 |
|
|
|
480,877 |
|
|
|
499,912 |
|
|
|
430,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(21,544 |
) |
|
|
(17,204 |
) |
|
|
(32,103 |
) |
|
|
(2,990 |
) |
|
|
26,377 |
|
Interest expense |
|
|
(17,842 |
) |
|
|
(25,463 |
) |
|
|
(34,390 |
) |
|
|
(39,514 |
) |
|
|
(39,197 |
) |
Interest income |
|
|
458 |
|
|
|
1,395 |
|
|
|
1,489 |
|
|
|
702 |
|
|
|
112 |
|
Other income (expense) |
|
|
|
|
|
|
21 |
|
|
|
240 |
|
|
|
(8 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes |
|
|
(38,928 |
) |
|
|
(41,251 |
) |
|
|
(64,764 |
) |
|
|
(41,810 |
) |
|
|
(12,691 |
) |
Provision for income taxes |
|
|
|
|
|
|
(262 |
) |
|
|
(726 |
) |
|
|
(1,056 |
) |
|
|
(1,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(38,928 |
) |
|
|
(41,513 |
) |
|
|
(65,490 |
) |
|
|
(42,866 |
) |
|
|
(13,870 |
) |
Dividends on preferred stock |
|
|
(22,002 |
) |
|
|
(32,996 |
) |
|
|
(55,031 |
) |
|
|
(63,890 |
) |
|
|
(71,909 |
) |
Modification of preferred stock |
|
|
|
|
|
|
|
|
|
|
(95,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders |
|
$ |
(60,930 |
) |
|
$ |
(74,509 |
) |
|
$ |
(216,143 |
) |
|
$ |
(106,756 |
) |
|
$ |
(85,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available per common share basic and diluted |
|
$ |
(9.54 |
) |
|
$ |
(10.07 |
) |
|
$ |
(23.09 |
) |
|
$ |
(11.03 |
) |
|
$ |
(8.85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
and diluted |
|
|
6,385,863 |
|
|
|
7,396,610 |
|
|
|
9,359,132 |
|
|
|
9,675,916 |
|
|
|
9,687,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activites |
|
$ |
8,151 |
|
|
$ |
13,296 |
|
|
$ |
(2,663 |
) |
|
$ |
26,637 |
|
|
$ |
37,867 |
|
Investing activities |
|
|
(20,731 |
) |
|
|
(115,568 |
) |
|
|
(88,935 |
) |
|
|
(68,490 |
) |
|
|
(33,894 |
) |
Financing activities |
|
|
25,407 |
|
|
|
129,471 |
|
|
|
89,541 |
|
|
|
23,541 |
|
|
|
(4,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Balance Sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
16,753 |
|
|
$ |
42,546 |
|
|
$ |
40,489 |
|
|
$ |
22,177 |
|
|
$ |
21,975 |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,533 |
|
|
|
23,549 |
|
Property and equipment, net |
|
|
39,547 |
|
|
|
61,395 |
|
|
|
77,373 |
|
|
|
85,248 |
|
|
|
86,875 |
|
Goodwill |
|
|
27,964 |
|
|
|
69,632 |
|
|
|
96,154 |
|
|
|
98,111 |
|
|
|
98,238 |
|
Total assets |
|
|
197,113 |
|
|
|
317,666 |
|
|
|
380,010 |
|
|
|
355,006 |
|
|
|
327,328 |
|
Total debt, including current portion |
|
|
147,204 |
|
|
|
217,769 |
|
|
|
313,990 |
|
|
|
336,778 |
|
|
|
331,366 |
|
Total stockholders equity
(deficiency) |
|
|
(12,572 |
) |
|
|
20,470 |
|
|
|
(22,715 |
) |
|
|
(65,266 |
) |
|
|
(79,146 |
) |
|
|
|
(1) |
|
Exclusive of depreciation and amortization. |
|
(2) |
|
Includes share-based compensation of $673, $754, $2,552, $293 and $233 for the years ended
December 31, 2005, 2006, 2007, 2008 and 2009, respectively. |
|
(3) |
|
Includes software development expenses of $2,301, $1,819, $2,293, $1,639 and $1,843 for the
years ended December 31, 2005, 2006, 2007, 2008 and 2009 respectively. |
48
|
|
|
Item 7.
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 Selected Financial Data and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included elsewhere in this report.
Certain information contained in the discussion and analysis set forth below and elsewhere in this
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 report that could cause results to differ materially from those expressed in such
forward-looking statements, including matters set forth in the section entitled Risk Factors.
Many of the amounts and percentages presented in this discussion and analysis have been rounded for
convenience of presentation, and all amounts are presented in thousands.
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 VoIP, 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 $32.1 million and $3.0 million for the years ended December
31, 2007 and 2008, respectively. For the year ended December 31, 2009, we recorded operating income
of $26.4 million. For the years ended December 31, 2007, 2008 and 2009, we recorded net losses of
$65.5 million, $42.9 million and $13.9 million, respectively. Although we expect to continue to
have net losses for the foreseeable future, we continue to search for ways 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 December 31, 2009, we had approximately 260 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.
49
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 remained unchanged from 2008 to 2009, and currently represents approximately 45% of our
total revenue and approximately 51% of our retail revenue stream, with typical incremental gross
profit margins in excess of 60%.
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 December 31, 2009,
approximately 75% 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Voice and data services |
|
|
87.7 |
% |
|
|
86.5 |
% |
|
|
87.0 |
% |
Wholesale |
|
|
2.8 |
% |
|
|
3.8 |
% |
|
|
4.4 |
% |
Access |
|
|
5.6 |
% |
|
|
5.8 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
Total network services |
|
|
96.1 |
% |
|
|
96.1 |
% |
|
|
96.6 |
% |
Other |
|
|
3.9 |
% |
|
|
3.9 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
|
49.9 |
% |
|
|
49.5 |
% |
|
|
47.9 |
% |
Other cost of revenues |
|
|
2.3 |
% |
|
|
2.4 |
% |
|
|
1.5 |
% |
Selling, general and administrative |
|
|
37.0 |
% |
|
|
33.9 |
% |
|
|
33.9 |
% |
Depreciation and amortization |
|
|
16.9 |
% |
|
|
14.8 |
% |
|
|
10.9 |
% |
Impairment charges |
|
|
0.9 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Merger integration costs |
|
|
0.1 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
107.1 |
% |
|
|
100.6 |
% |
|
|
94.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(7.1 |
%) |
|
|
(0.6 |
%) |
|
|
5.8 |
% |
Interest expense |
|
|
(7.7 |
%) |
|
|
(8.0 |
%) |
|
|
(8.6 |
%) |
Interest income |
|
|
0.3 |
% |
|
|
0.1 |
% |
|
|
0.0 |
% |
Other income |
|
|
0.1 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes |
|
|
(14.4 |
%) |
|
|
(8.5 |
%) |
|
|
(2.8 |
%) |
Provision for income taxes |
|
|
(0.2 |
%) |
|
|
(0.2 |
%) |
|
|
(0.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(14.6 |
%) |
|
|
(8.7 |
%) |
|
|
(3.1 |
%) |
|
|
|
|
|
|
|
|
|
|
50
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. The commercial agreements,
which expire between 2010 and 2013, 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.
51
Gross Profit (exclusive of depreciation and amortization)
Gross profit (exclusive of depreciation and amortization), referred to herein as gross
profit, as presented in this Managements Discussion and Analysis of Financial Condition and
Results of Operations, represents income (loss) from operations, before depreciation and
amortization and selling, general and administrative expenses (SG&A). Gross profit 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 to
income (loss) from operations as income (loss) from operations is calculated in accordance with
GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
(32,103 |
) |
|
$ |
(2,990 |
) |
|
$ |
26,377 |
|
Add back non-gross profit items included in net loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Merger integration costs |
|
|
500 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
75,980 |
|
|
|
73,608 |
|
|
|
49,922 |
|
Selling, general and administrative |
|
|
166,231 |
|
|
|
168,421 |
|
|
|
154,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
214,608 |
|
|
$ |
239,039 |
|
|
$ |
231,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
52
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.
Selling, General and Administrative
SG&A is comprised primarily of salaries and related expenses, software development expenses,
non-cash compensation, occupancy costs, sales and marketing expenses, commission expenses, bad debt
expense, billing expenses, professional services 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.
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2009
Set forth below is a discussion and analysis of our results of operations for the years ended
December 31, 2008 and 2009.
The following table provides a breakdown of components of our gross profit for the years ended
December 31, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
477,576 |
|
|
|
96.1 |
% |
|
$ |
440,928 |
|
|
|
96.6 |
% |
|
|
(7.7 |
%) |
Other |
|
|
19,346 |
|
|
|
3.9 |
% |
|
|
15,524 |
|
|
|
3.4 |
% |
|
|
(19.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
496,922 |
|
|
|
100.0 |
% |
|
$ |
456,452 |
|
|
|
100.0 |
% |
|
|
(8.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
246,019 |
|
|
|
49.5 |
% |
|
$ |
218,674 |
|
|
|
47.9 |
% |
|
|
(11.1 |
%) |
Other |
|
|
11,864 |
|
|
|
2.4 |
% |
|
|
6,757 |
|
|
|
1.5 |
% |
|
|
(43.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
revenues |
|
$ |
257,883 |
|
|
|
51.9 |
% |
|
$ |
225,431 |
|
|
|
49.4 |
% |
|
|
(12.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
231,557 |
|
|
|
46.5 |
% |
|
$ |
222,253 |
|
|
|
48.7 |
% |
|
|
(4.0 |
%) |
Other |
|
|
7,482 |
|
|
|
1.6 |
% |
|
|
8,767 |
|
|
|
1.9 |
% |
|
|
17.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
239,039 |
|
|
|
48.1 |
% |
|
$ |
231,021 |
|
|
|
50.6 |
% |
|
|
(3.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We issue credits in an effort to acquire, retain and incentivize our customers. We have
historically classified these credits in SG&A expenses. We have reclassified these credits from
SG&A expenses and now reflect them as a reduction in revenues. As a result, revenues and SG&A
expenses have been reduced by $3,814 for the year ended December 31, 2008.
53
Revenues
Revenues for the years ended December 31, 2008 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice and data services |
|
$ |
429,754 |
|
|
|
86.5 |
% |
|
$ |
397,274 |
|
|
|
87.0 |
% |
|
|
(7.6 |
%) |
Wholesale |
|
|
19,096 |
|
|
|
3.8 |
% |
|
|
19,906 |
|
|
|
4.4 |
% |
|
|
4.2 |
% |
Access |
|
|
28,726 |
|
|
|
5.8 |
% |
|
|
23,748 |
|
|
|
5.2 |
% |
|
|
(17.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total network services |
|
|
477,576 |
|
|
|
96.1 |
% |
|
|
440,928 |
|
|
|
96.6 |
% |
|
|
(7.7 |
%) |
Other |
|
|
19,346 |
|
|
|
3.9 |
% |
|
|
15,524 |
|
|
|
3.4 |
% |
|
|
(19.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
496,922 |
|
|
|
100.0 |
% |
|
$ |
456,452 |
|
|
|
100.0 |
% |
|
|
(8.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall, our revenues have declined 8.1% when comparing the year ended December 31, 2009
with the same period in 2008. Our overall revenue decline primarily stems from declines in voice
services revenues, which have decreased $36.5 million or 11.2% 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
services revenues decrease experienced during the year has moderately accelerated over decreases
experienced in previous years, 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 $3.4 million or 3.3% when comparing the year ended
December 31, 2009 with the same period in 2008. 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 $225.4 million for the year ended December 31, 2009, a
decrease of 12.6%
from $257.9 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 $204.2 million,
or 79.2% of our total cost of revenues for the year ended December 31, 2008 and $178.1 million, or
79.0% in the year ended December 31, 2009. The most significant components of our costs purchased
from third-party providers consist of costs related to our Verizon wholesale advantage contract
(formerly unbundled network elements platform (UNE-P)), unbundled network elements loop (UNE-L)
and T-1 costs, which totaled $52.3 million, $26.4 million and $54.2 million, respectively, for the
year ended December 31, 2008. These costs totaled $45.0 million, $24.7 million and $53.3 million,
respectively, for the year ended December 31, 2009. Combined, these costs decreased by 7.4% 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. During
2008, we finalized a settlement with Verizon which extinguished virtually all outstanding disputes
between the parties as of March 31, 2008. In addition, the Company evaluated all outstanding
disputes and adjusted dispute liabilities accordingly. The net impact of adjustments to dispute
liabilities from the Verizon settlement and for other existing disputes did not result in a
significant impact to the balance sheet or statement of operations.
54
Gross Profit (exclusive of depreciation and amortization)
Gross profit
was $231.0 million for the year ended December 31, 2009, a
decrease of 3.4% from
$239.0 million for the same period in 2008. As a percentage of revenues gross profit increased to
50.6% in 2009 from 48.1% 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 continue to improve.
Selling, General and Administrative
SG&A expenses were $154.7 million, 33.9% of revenues, for the year ended December 31, 2009, a
decrease of 8.1% from $168.4 million, 33.9% of revenues, for the same period in 2008. This decrease
is primarily due to decreased employee costs of $7.2 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 $1.9 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 year ended
December 31, 2009. We continue to look for additional cost savings in various categories throughout
the organization.
Depreciation and Amortization
Depreciation and amortization costs were $49.9 million for the year ended December 31, 2009, a
decrease of 32.2% from $73.6 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 year ended December 31, 2009 was $15.7 million, a decrease of $23.1
million from $38.8 million included in our results of operations during the same period in 2008.
Interest
Interest expense was $39.2 million for the year ended December 31, 2009, an decrease of 0.8%
from $39.5 million for the same period in 2008. The decrease was primarily a result of having paid
down capital leases throughout 2009. The outstanding balance in our capital leases decreased to
$4.9 million as of December 31, 2009 from $9.4 million as of December 31, 2008. Additionally, the
interest rates for outstanding balances due under our revolving credit facility ranged from a high
of 6.75% to a low of 5.00% during 2008. The interest rate for outstanding balances due under our
revolving credit facility was 5.00% throughout 2009. The higher average debt balance is due to the
outstanding borrowings under our revolving credit facility. Our effective annual interest rates for
the years ended December 31, 2008 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
39,514 |
|
|
$ |
39,197 |
|
Weighted average debt outstanding |
|
$ |
315,988 |
|
|
$ |
330,711 |
|
Effective interest rate |
|
|
12.5 |
% |
|
|
11.9 |
% |
|
|
|
|
|
|
|
|
|
55
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2008
Set forth below is a discussion and analysis of our results of operations for the years ended
December 31, 2007 and 2008.
The following table provides a breakdown of components of our gross profit for the years ended
December 31, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
431,314 |
|
|
|
96.1 |
% |
|
$ |
477,576 |
|
|
|
96.1 |
% |
|
|
10.7 |
% |
Other |
|
|
17,461 |
|
|
|
3.9 |
% |
|
|
19,346 |
|
|
|
3.9 |
% |
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
448,775 |
|
|
|
100.0 |
% |
|
$ |
496,922 |
|
|
|
100.0 |
% |
|
|
10.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
223,745 |
|
|
|
49.9 |
% |
|
$ |
246,019 |
|
|
|
49.5 |
% |
|
|
10.0 |
% |
Other |
|
|
10,421 |
|
|
|
2.3 |
% |
|
|
11,864 |
|
|
|
2.4 |
% |
|
|
13.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
revenues |
|
$ |
234,166 |
|
|
|
52.2 |
% |
|
$ |
257,883 |
|
|
|
51.9 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
207,569 |
|
|
|
46.3 |
% |
|
$ |
231,557 |
|
|
|
46.5 |
% |
|
|
11.6 |
% |
Other |
|
|
7,040 |
|
|
|
1.6 |
% |
|
|
7,482 |
|
|
|
1.6 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
214,609 |
|
|
|
47.8 |
% |
|
$ |
239,039 |
|
|
|
48.1 |
% |
|
|
11.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We issue credits in an effort to acquire, retain and incentivize our customers. We have
historically classified these credits in SG&A expenses. We have reclassified these credits from
SG&A expenses and now reflect them as a reduction in revenues. As a result, revenues and SG&A
expenses have been reduced by $2,385 and $3,814 for the years ended December 31, 2007 and 2008,
respectively.
Revenues
Revenues for the year ended December 31, 2007 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice and data services |
|
$ |
393,269 |
|
|
|
87.7 |
% |
|
$ |
429,754 |
|
|
|
86.5 |
% |
|
|
9.3 |
% |
Wholesale |
|
|
12,693 |
|
|
|
2.8 |
% |
|
|
19,096 |
|
|
|
3.8 |
% |
|
|
50.4 |
% |
Access |
|
|
25,352 |
|
|
|
5.6 |
% |
|
|
28,726 |
|
|
|
5.8 |
% |
|
|
13.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total network
services |
|
|
431,314 |
|
|
|
96.1 |
% |
|
|
477,576 |
|
|
|
96.1 |
% |
|
|
10.7 |
% |
Other |
|
|
17,461 |
|
|
|
3.9 |
% |
|
|
19,346 |
|
|
|
3.9 |
% |
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
448,775 |
|
|
|
100.0 |
% |
|
$ |
496,922 |
|
|
|
100.0 |
% |
|
|
10.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice and data service revenue, increased primarily due to the addition of InfoHighway in
May 2007. InfoHighways voice and data revenues were $80.7 million for the year ended December 31,
2008, an increase of $29.5 million from $51.2 million included in our revenues during the year
ended December 31, 2007. Though we increased our revenue in absolute dollars, our business was
subject to several other trends. These include lower line churn than in prior years, higher revenue
per customer due to the trend toward multiple products per customer, a focus on larger customers
than our average existing base, increase in demand for data services, offset by lower usage revenue
per customer, lower price per unit for certain services and a lower number of lines and customers.
Our wholesale revenue increased primarily as a result of organic growth and the inclusion of $1.5
million of wholesale revenue from InfoHighway. The carrier access revenues increased primarily due
to the inclusion of $7.6 million in carrier access revenue through the acquisition of InfoHighway
for the year ended December 31, 2008 as compared with $5.1 million included during the year ended
December 31, 2007. The increase in other revenue is due primarily to the increased number of phone
equipment sales to customers resulting from the inclusion of the cabling division that was acquired
in the InfoHighway transaction.
56
Cost of Revenues (exclusive of depreciation and amortization)
Cost of revenues were $257.9 million for the year ended December 31, 2008, an increase of
10.1% from $234.2 million for the same period in 2007. The increase is primarily attributable to
the increase in cost of revenues from the addition of InfoHighway in May 2007, totaling $51.4
million in the aggregate for the year ended December 31, 2008 an increase of $16.0 million from
$35.4 million included in our cost of revenues during the year ended December 31, 2007. 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 $204.2
million, or 79.2% of our total costs for the year ended December 31, 2008 and $199.8 million, or
85.3% in the year ended December 31, 2007. 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 $52.3 million, $26.4 million and $54.2
million, respectively, for the year ended December 31, 2008. We have experienced a decrease in
costs where we purchased services or products from third parties as a percentage of total cost of
revenues primarily due to our effective migration of lines to lower cost platforms. During 2008, we
finalized a settlement with Verizon, which extinguished virtually all outstanding disputes between
the parties as of March 31, 2008, which resulted in a gain. In addition, the Company continued to
evaluate all outstanding disputes and adjusted dispute liabilities accordingly for those disputes.
The net impact of adjustments to dispute liabilities from the Verizon settlement and for other
existing disputes did not result in a significant impact to the balance sheet or statement of
operations.
Gross Profit (exclusive of depreciation and amortization)
Gross profit was $239.0 million for the year ended December 31, 2008, on increase of 11.4%
from $214.6 million for the same period in 2007. As a percentage of revenue gross profit increased
to 48.1% for the year ended December 31, 2008 from 47.8% for the same period in 2007. The increase
in gross profit is primarily due to increased revenue combined with lower costs resulting from
provisioning more lines from resale and unbundled network platform to on-net. Gross margin
percentages are also higher than prior periods. 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 the cost of revenues may increase at a lower rate than
their respective associated revenue.
Selling, General and Administrative
SG&A expenses were $168.4 million for the year ended December 31, 2008, an increase of 1.3%
from $166.2 million for the same period in 2007. The increase is primarily due to the addition of
InfoHighway in May 2007, which accounts for $22.0 million of our SG&A expenses for the year ended
December 31, 2008 an increase of $4.7 million from $17.3 million included in our SG&A during the
year ended December 31, 2007. This increase is partially offset by the implementation of cost
saving measures during the integration of ATX and InfoHighway.
Although costs increased in absolute dollars, SG&A expenses decreased from 37.0% to 33.9% of
revenue from the year ended December 31, 2007 to the same period in 2008. This decrease in costs as
a percentage of revenue is primarily due to the achievement of cost savings in various categories
including headcount, professional services and other costs where the Company was able to achieve
synergies due to the mergers with InfoHighway and ATX.
Depreciation and Amortization
Depreciation and amortization costs were $73.6 million for the year ended December 31, 2008, a
decrease of 3.2% from $76.0 million for the same period in 2007. This decrease in amortization and
depreciation expense was due to fully amortizing acquired intangible assets related to the
Broadview acquisition in 2005 during the quarter ended March 31, 2008. Amortization expense
included in our results for these acquired intangible assets for the year ended December 31, 2008
was $1.3 million, a decrease of $6.6 million from $7.9 million included in our results for the year
ended December 31, 2007. The decrease was partially offset by increases in amortization expense due
to the acquisition of InfoHighway in May 2007, including amortization of intangible assets of $12.3
million for the year ended December 31, 2008. InfoHighways amortization expense included in our
results for the year ended December 31, 2007 was $8.8 million.
57
Interest
Interest expense was $39.5 million for the year ended December 31, 2008, an increase of 14.8%
from $34.4 million for the same period in 2007. The increase was primarily due to higher interest
expense as a result of having a higher average outstanding debt balance for the years ended
December 31, 2008 compared to 2007. The higher average debt balance is due primarily to the $90.0
million of notes that we issued in May 2007 and $23.5 million in total borrowings from our
revolving credit facility during September and October of 2008. Our effective interest rates for
the year ended December 31, 2007 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
34,390 |
|
|
$ |
39,514 |
|
Weighted average debt outstanding |
|
$ |
276,563 |
|
|
$ |
315,988 |
|
Effective interest rate |
|
|
12.43 |
% |
|
|
12.50 |
% |
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.
We do maintain standby letters of credit outstanding of $3.0 million, of which $1.3 million
are fully collateralized by the letter of credit subfacility under the our revolving credit
facility. We posted cash collateral of $1.7 million for the remaining letters of credit. These
standby letters of credit were issued as collateral in connection with some of our leased
facilities and pursuant to state regulatory requirements.
Liquidity and Capital Resources
Our principal sources of liquidity are cash from operations, our cash, cash equivalents and
investments 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. Our
existing capital lease provider was recently acquired; we will monitor the impact, if any, of this
acquisition on our ability to borrow under the lease line. As of December 31, 2009, we had $4.2
million of capital lease obligations outstanding under our existing capital lease line. As of
December 31, 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 December 31,
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 December 31, 2009, we required 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.
58
Disputes
We are involved in a variety of disputes with multiple carrier vendors relating to billings of
approximately $23.6 million as of December 31, 2009. While we hope to resolve these disputes
through negotiation, we may be compelled to arbitrate these matters. The resolution of these
disputes may require us to pay the vendor an amount that is greater than the amount for which we
have planned or even the amount the vendor claims is owed if late payment charges are assessed,
which could materially adversely affect our business, financial condition, results of operations
and cash flows and which may cause us to be unable to meet certain covenants related to our senior
indebtedness, which would result in a default under such indebtedness. In the event that disputes
are not resolved in our favor and we are unable to pay the vendor charges in a timely manner, the
vendor may deny us access to the network facilities that we require to serve our customers. If the
vendor notifies us of an impending embargo of this nature, we may be required to notify our
customers of a potential loss of service, which may cause a substantial loss of customers. It is
not possible at this time to predict the outcome of these disputes.
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 believe we have
sufficient cash on hand to fund any differences between our expected and actual settlement amounts.
Credit Facility
On August 23, 2006, we entered into our credit facility, a $25.0 million five-year revolving
credit facility. The credit facility has a $15.0 million letters of credit subfacility. As of
December 31, 2008, we had $23.5 million of outstanding borrowings and $1.3 of letters of credit
under our revolving credit facility. Any outstanding amounts under this facility are subject to a
borrowing base limitation based on an advance rate of 85% of the amount of our eligible receivables
(net of reserves established by The CIT Group/Business Credit, Inc., as administrative agent).
Eligible receivables include our existing receivables and any receivables acquired in future
acquisitions, with the eligibility criteria to be agreed upon.
The interest rates per annum applicable to the loans under our credit facility are, at our
option, equal to either a base rate or a LIBOR rate, in each case, plus an applicable margin
percentage. The base rate will be the greater of (i) prime rate; and (ii) 50 basis points over the
federal funds effective rate from time to time. The Company can choose any of the following LIBOR
rates upon choosing the LIBOR rate method: one month, two month, three month, six month, nine month
or twelve month. The applicable margin is equal to (x) 1.75% in the case of base rate loans and (y)
2.75% in the case of LIBOR loans. In the case of base rate loans, interest will be paid quarterly
in arrears. In the case of LIBOR loans, interest will be payable at the end of each interest
period, and, in any event, at least every three months.
We are required to pay certain on-going fees in connection with the credit facility, including
letter of credit fees on any letters of credit issued under the facility at a per annum rate of
2.75%, issuance fees in respect thereof and commitment fees on the unused commitments at a per
annum rate of 0.50%.
Pursuant to the terms of an intercreditor agreement, indebtedness under our credit facility is
guaranteed by all of our direct and indirect subsidiaries (other than certain immaterial
subsidiaries) that are not borrowers thereunder and is secured by a security interest in all of our
subsidiaries tangible and intangible assets (including, without limitation, intellectual property,
real property, licenses, permits and all of our and our subsidiaries capital stock (other than
voting capital stock of our subsidiaries that exceeds 65% of such voting capital stock) and all
funds and investment property on deposit therein or credited thereto and certain other excluded
assets).
Our credit facility contains financial, affirmative and negative covenants and requirements
affecting us and our subsidiaries. In general, the financial covenants provide for, among other
things, delivery of financial statements and other financial information to the lenders and notice
to the lenders upon the occurrence of certain events. The affirmative covenants include, among
other things, standard covenants relating to our operations and our subsidiaries businesses and
compliance with all applicable laws, material applicable provisions of ERISA and material
agreements. Our credit facility contains negative covenants and restrictions on our actions and our
subsidiaries, including, without limitation, incurrence of additional indebtedness, restrictions on
dividends and other restricted payments, prepayments of debt, liens, sale-leaseback transactions,
loans and investments, hedging arrangements, mergers, transactions with affiliates, changes in
business and restrictions on our ability to amend the indenture governing the notes.
59
Our credit facility contains customary representations and warranties and events of default,
including payment defaults, cross-payment defaults and cross events of default, certain events of
bankruptcy, certain events under ERISA, loss of assets, loss or expiry of license, failure to
comply with certain rules and regulations, material judgments, actual or asserted invalidity of the
guarantees, change in nature of business and change in control. Upon the occurrence of an event of
default, the credit facility may be terminated, any amounts due thereunder may be automatically due
and payable and the borrowers shall deposit in a cash collateral account an amount equal to 105% of
the aggregate then undrawn and unexpired amount of all outstanding letters of credit.
As of December 31, 2009, we were in compliance with all restrictive covenants set forth in the
credit agreement governing our credit facility.
2006 Note and 2007 Note Offerings
On August 23, 2006, we completed an offering of $210.0 million aggregate principal amount of
113/8% senior secured notes due 2012. We used the net proceeds from the
offering and sale of the 2006 notes (i) to fund the ATX acquisition, (ii) to fund the repayment of
the entire $79.0 million of principal amount outstanding under our senior secured credit facility
that was then in effect, (iii) to fund the repayment of approximately $1.0 million of principal of
our senior unsecured subordinated notes due 2009 and (iv) for general corporate purposes.
On May 14, 2007, we completed an offering of $90.0 million aggregate principal amount of
113/8% senior secured notes due 2012 at an issue price of 105.750%, totaling
gross proceeds of approximately $95.2 million. We used the net proceeds from the offering and sale
of the 2007 notes to fund the InfoHighway merger, pay related fees and expenses and for general
corporate purposes. The 2007 notes were an additional issuance of our existing
113/8% senior secured notes due 2012 and were issued under the same indenture
dated as of August 23, 2006 and supplemented as of September 29, 2006, May 14, 2007 and May 31,
2007.
In connection with the offering of the notes, we agreed to offer to exchange the notes for a
new issue of substantially identical debt securities registered under the Securities Act of 1933.
On November 14, 2007, we exchanged $300.0 million of the notes, representing 100% of the
outstanding aggregate principal amount, for an equal principal amount of
113/8% senior secured notes due 2012 that have been registered under the
Securities Act of 1933. We may, from time to time, repurchase these notes in open market purchases,
privately negotiated transactions or otherwise.
The notes are fully, unconditionally and irrevocably guaranteed on a senior secured basis,
jointly and severally, by each of our 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 us and our subsidiary guarantors, as applicable, and equal in right of payment with
all of our and our subsidiaries existing and future senior indebtedness.
The notes and the guarantees are secured by a lien on substantially all of our 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 $25.0 million five-year revolving credit facility and
certain other permitted indebtedness.
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2009
Cash Flows from Operating Activities
Cash provided by operating activities was $37.9 million for the year ended December 31, 2009,
compared to $26.6 million for the same period in 2008. The change in cash flows from our operating
activities was due primarily to improvements in our operating results as a result of factors
discussed above, which resulted in a reduction in our net loss to $14.0 million for the year ended
December 31, 2009 from $42.9 million for the same period in 2008. Cash provided by operating
activities also increased in 2009 due to improved accounts receivable collections compared with
2008, offset by payments made in connection with our 2008 settlement with Verizon. During the years
ended 2009 and 2008, respectively, we paid $38.1 million and $37.6 million in interest, primarily
to our note holders.
60
Cash Flows from Investing Activities
Cash used in investing activities was $33.9 million for the year ended December 31, 2009,
compared to cash used in investing activities of $68.5 million for the same period in 2008. The
change cash used in investing activities was primarily due to decreased capital expenditures due to
the contraction in our business that we experienced in 2009. Our capital expenditures decreased to
$33.7 million during the year ended December 31, 2009 from $39.8 million for the same period in
2008. Additionally, we purchased of $23.5 million of short-term U.S. Treasury notes and paid $5.0
million to acquire Lightwave during the year ended December 31, 2008. During the year ended
December 31, 2009 we purchased $145.8 million of U.S.Treasury notes and sold approximately the same
amount.
Cash Flows from Financing Activities
Cash flows used in financing activities was $4.2 million for the year ended December 31, 2009,
compared to cash provided by financing activities of $23.5 million for the same period in 2008. The
change in cash flows from financing activities was primarily due to reduced borrowings from our
capital lease line and revolving credit line during the year ended December 31, 2009 as compared to
the same period in 2008.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2008
Cash Flows from Operating Activities
Cash provided by operating activities was $26.6 million for the year ended December 31, 2008,
compared to cash used in operating activities of $2.7 million for 2007. The change in cash flows
from our operating activities was due primarily to improvements in our operating results as a
result of factors discussed above, which resulted in a reduction in our net loss to $42.9 million
for the year ended December 31, 2008 from $65.5 million for 2007. Cash provided by operating
activities also increased in 2008 due to improved accounts receivable collections compared with
2007. Additionally, during 2007 we paid $15.2 million to settle disputed billings, which
substantially increased our cash used in operating activities during 2007. During the years ended
2008 and 2007, we paid $37.6 million and $32.0 million, respectively in interest, primarily to our
note holders.
Cash Flows from Investing Activities
Cash used in investing activities was $68.5 million for the year ended December 31, 2008,
compared to cash used in investing activities of $88.9 million for 2007. The change in use of cash
in investing activities was primarily due to the acquisition of InfoHighway in May 2007 offset by
increased capital expenditures for the expansion of our network and back-office systems, the
purchase of $23.5 million of short-term U.S.Treasury notes and cash paid of $5.0 million to acquire
Lightwave during the year ended December 31, 2008. Our capital expenditures increased to $39.8
million during the year ended December 31, 2008 from $30.4 million for 2007. The expansion of our
Company as a result of the InfoHighway merger and ATX acquisition has resulted in an increase in
our capital expenditures due to the higher level of success based capital to support the combined
companies.
Cash Flows from Financing Activities
Cash flows provided by financing activities was $23.5 million for the year ended December 31,
2008, compared to cash provided by financing activities of $89.5 million for 2007. The change in
cash flows from financing activities was primarily due to the completion of an offering of $90.0
million aggregate principal amount of the 2007 notes in the year ended December 31, 2007 as
compared to the same period in 2008, which included $23.5 million in borrowings from our credit
facility.
61
Contractual Obligations
The following table summarizes our future contractual cash obligations as of December 31,
2009. The following numbers are presented in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 1 |
|
|
|
|
|
|
|
|
|
|
More Than 5 |
|
|
|
Total |
|
|
Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
Years |
|
|
|
113/8 senior secured notes due 2012 |
|
$ |
300,000 |
|
|
$ |
|
|
|
$ |
300,000 |
|
|
$ |
|
|
|
$ |
|
|
Cash interest for notes |
|
|
102,375 |
|
|
|
34,125 |
|
|
|
68,250 |
|
|
|
|
|
|
|
|
|
Credit facility |
|
|
23,500 |
|
|
|
|
|
|
|
23,500 |
|
|
|
|
|
|
|
|
|
Cash interest for credit facility at current
rate of 5% |
|
|
1,955 |
|
|
|
1,191 |
|
|
|
764 |
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
4,856 |
|
|
|
3,080 |
|
|
|
1,751 |
|
|
|
25 |
|
|
|
|
|
Operating leases |
|
|
45,931 |
|
|
|
12,160 |
|
|
|
14,116 |
|
|
|
8,050 |
|
|
|
11,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478,617 |
|
|
|
50,556 |
|
|
|
408,381 |
|
|
|
8,075 |
|
|
|
11,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitment obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications commitment |
|
|
43,000 |
|
|
|
22,262 |
|
|
|
20,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
521,617 |
|
|
$ |
72,818 |
|
|
$ |
429,119 |
|
|
$ |
8,075 |
|
|
$ |
11,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Accounting Standards
Several new accounting standards have been issued. None of these standards had a material
impact on our financial position, results of operations, or liquidity.
On June 15, 2009, we adopted the accounting standard that amends the requirements for
disclosures about fair value of financial instruments for annual, as well as interim, reporting
periods. This standard was effective prospectively for all interim and annual reporting periods
ending after June 15, 2009. As a result of this standard, we have included these additional
disclosures in our Form 10-Q for the quarters ended June 30, 2009 and September 30, 2009.
Additionally, we have included disclosures in Notes 2 and 15 to our Consolidated Financial
Statements, as a result of adopting this standard.
On June 15, 2009, we prospectively adopted the accounting standard regarding the accounting
for, and disclosure of, events that occur after the balance sheet date but before the financial
statements are issued. The adoption of this standard has not had a significant impact on our
financial position or results of operations. We have included additional disclosures in Note 2 to
our Consolidated Financial Statements as a result of adopting this standard.
In September 2009, the accounting standard regarding multiple deliverable arrangements was
updated to require the use of the relative selling price method when allocating revenue in these
types of arrangements. This method allows a vendor to use its best estimate of selling price if
neither vendor specific objective evidence nor third party evidence of selling price exists when
evaluating multiple deliverable arrangements. This standard update is effective January 1, 2011 and
may be adopted prospectively for revenue arrangements entered into or materially modified after the
date of adoption or retrospectively for all revenue arrangements for all periods presented. We are
currently evaluating the impact that this standard update will have on our consolidated financial
statements.
In September 2009, the accounting standard regarding arrangements that include software
elements was updated to require tangible products that contain software and non-software elements
that work together to deliver the products essential functionality to be evaluated under the
accounting standard regarding multiple deliverable arrangements. This standard update is effective
January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or
materially modified after the date of adoption or retrospectively for all revenue arrangements for
all periods presented. We are currently evaluating the impact that this standard update will have
on our consolidated financial statements.
62
Application of Critical Accounting Policies and Estimates
The preparation of the 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 consolidated financial statements and
footnotes provide a meaningful and fair perspective of our financial condition and our operating
results.
We consider an accounting estimate to be critical if it requires assumptions to be made that
were uncertain at the time the estimate was made and changes in the estimate or different estimates
that could have been selected could have a material impact on our consolidated results of
operations or financial condition. We believe the following critical accounting policies represent
the more significant judgments and estimates used in the preparation of our audited consolidated
financial statements herein.
Revenue Recognition
Our revenues consist primarily of network services revenues, which primarily includes voice
and data services, wholesale services and access services. Our network services revenues are
derived primarily from subscriber usage and fixed monthly recurring fees. Such revenue is
recognized in the month the actual services and other charges are provided. Revenues for charges
that are billed in advance of services being rendered are deferred. Services rendered for which the
customer has not been billed are recorded as unbilled revenues until the period such billings are
provided. Revenues from carrier interconnection and access are recognized in the month in which the
service is provided, but subject to our conclusion that realization of that revenue is reasonably
assured. Revenues and direct costs related to up-front service installation fees are deferred and
amortized over four years, which is based on the estimated expected life of our customer base. The
estimate of the expected life of our customer base was based in part on an analysis of customer
churn from which it was determined that our monthly churn was approximately 2% along with our
decision to extend our customers minimum contract term beyond two years. The effect of changing
the estimated expected life of our customer base by one year would result in a change in the amount
of revenue recognized on an annual basis of between $0.2 million to $0.3 million.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at their outstanding unpaid balances reduced by an allowance
for doubtful accounts. We estimate doubtful accounts based on historical bad debts, factors related
to the specific customers ability to pay, percentages of aged receivables and current economic
trends. For example, inactive and bankrupt customer balances are normally reserved at 80% to 100%,
respectively. The aggregate reserve balance is re-evaluated at each balance sheet date. A
hypothetical increase in our aggregate reserve balance of 10% would result in an increase to our
bad debt expense of $0.4 million. We reflect all carrier related receivables on our balance sheet
at the amount we expect to realize in cash.
Depreciation
Depreciation is computed using the straight-line method over the estimated useful lives of the
assets. The estimated useful life is three years for computer and office equipment, five years for
furniture and fixtures, and seven years for network equipment. Leasehold improvements are amortized
on a straight-line basis over the shorter of their estimated useful lives or the related lease
term. Capitalized software costs are amortized on a straight-line basis over the estimated useful
life of two years. Internal labor cost capitalized in connection with expanding our network are
amortized over seven years.
Impairment of Long-Lived Assets
We review our long-lived assets, including definite-lived intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In analyzing potential impairments, projections of future cash flows are used to
estimate fair value and are compared to the carrying amount of the asset. There is inherent
subjectivity involved in estimating future cash flows, which can have a material impact on the
amount of potential impairments.
63
Goodwill and Other Intangible Assets
We perform impairment tests at least annually on all goodwill and indefinite-lived intangible
assets, which are conducted at the reporting unit level. We have one reporting unit. Goodwill and
indefinite-lived intangible assets are tested for impairment using a consistent measurement date,
which for us is the fourth quarter of each year, or more frequently if impairment indicators arise.
The evaluation of goodwill and indefinite-lived intangibles for impairment is primarily based on a
discounted cash flow model that includes estimates of future cash flows. There is inherent
subjectivity involved in estimating future cash flows, which can have a material impact on the
amount of any potential impairment. Based on the goodwill impairment test we conducted, the fair
value of our reporting unit far exceeded its carrying value. We believe that it is unlikely that
our reporting unit is at risk of failing the goodwill impairment test in the foreseeable future.
Disputes
We are, in the ordinary course of business, billed certain charges from other carriers that we
believe are either erroneous or relate to prior periods. We carefully review our vendor invoices
and frequently dispute inaccurate or inappropriate charges. In cases where we dispute certain
charges, we frequently pay only undisputed amounts on vendor invoices. The amount of disputed
charges may remain outstanding for some time pending resolution or compromise.
Management does not believe a payment of the entire amount of disputed charges will occur. We
therefore account for our disputed billings from carriers based on the estimated settlement amount
of disputed balances. The settlement estimate is based on a number of factors including historical
results of prior dispute settlements. We periodically review the outstanding disputes and reassess
the likelihood of success in the event of the resolution of these disputes. 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.
Income Taxes
We recognize deferred income taxes using the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes are recognized for
differences between the financial reporting and tax bases of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the period that
includes the enactment date. In addition, valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. At December 31, 2009, we had net
operating loss carryforwards (NOLs) available totaling $135.0 million, which begin to expire in
2012. We have provided a full valuation allowance against the net deferred tax asset as of December
31, 2009 because we do not believe it is more likely than not that this asset will be realized. To
the extent that our ability to use these NOLs against any future taxable income is limited, our
cash flow available for operations and debt service would be reduced. If we achieve profitability,
the net deferred tax assets may be available to offset future income tax liabilities.
64
|
|
|
Item 7A. 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. 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 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 December 31, 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 less than one year. 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 113/8% senior secured notes due 2012 at December
31, 2009, was approximately $287.3 million and was based on publicly quoted market prices. 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 hypothetical
change in interest rates of 100 basis points would change our interest expense by $0.2 million on
an annual basis.
65
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
66
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. In connection with the preparation of our annual consolidated financial
statements, management has conducted an assessment of the effectiveness of our internal control
over financial reporting based on the framework set forth in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Managements assessment included an evaluation of the design of our internal control over financial
reporting and testing of the operational effectiveness of those controls. Based on this evaluation,
we have concluded that, as of December 31, 2009, our internal control over financial reporting was
effective to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Broadview Networks Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Broadview Networks Holdings,
Inc. and Subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders deficiency and cash flows for each of the
three years in the period ended December 31, 2009. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements and schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Broadview Networks Holdings, Inc. and Subsidiaries
at December 31, 2009 and 2008, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2009, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
New York, New York
March 29, 2010
68
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
22,177 |
|
|
$ |
21,975 |
|
Certificates of deposit |
|
|
1,894 |
|
|
|
1,878 |
|
Investment securities |
|
|
23,533 |
|
|
|
23,549 |
|
Accounts receivable, less allowance for doubtful accounts of $4,332 and $7,942 |
|
|
53,486 |
|
|
|
41,388 |
|
Other current assets |
|
|
8,898 |
|
|
|
10,976 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
109,988 |
|
|
|
99,766 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
85,248 |
|
|
|
86,875 |
|
Goodwill |
|
|
98,111 |
|
|
|
98,238 |
|
Intangible assets, net of accumulated amortization of $150,556 and $51,728 |
|
|
45,220 |
|
|
|
27,484 |
|
Other assets |
|
|
16,439 |
|
|
|
14,965 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
355,006 |
|
|
$ |
327,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIENCY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
8,230 |
|
|
$ |
9,196 |
|
Accrued expenses and other current liabilities |
|
|
47,491 |
|
|
|
35,630 |
|
Taxes payable |
|
|
10,680 |
|
|
|
12,768 |
|
Deferred revenues |
|
|
10,459 |
|
|
|
8,965 |
|
Current portion of capital lease obligations and equipment notes |
|
|
4,142 |
|
|
|
3,080 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
81,002 |
|
|
|
69,639 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
327,424 |
|
|
|
326,510 |
|
Deferred rent payable |
|
|
2,400 |
|
|
|
3,343 |
|
Deferred revenues |
|
|
1,508 |
|
|
|
1,445 |
|
Capital lease obligations and equipment notes, net of current portion |
|
|
5,212 |
|
|
|
1,776 |
|
Deferred income taxes payable |
|
|
2,071 |
|
|
|
3,040 |
|
Other |
|
|
655 |
|
|
|
721 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
420,272 |
|
|
|
406,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficiency: |
|
|
|
|
|
|
|
|
Common stock A $.01 par value; authorized 80,000,000 shares, issued 9,342,880 and 9,342,509 shares,
and outstanding 9,342,880 and 9,333,680 shares |
|
|
107 |
|
|
|
107 |
|
Common stock B $.01 par value; authorized 10,000,000 shares, 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 $156,927 |
|
|
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 $181,114 |
|
|
1 |
|
|
|
1 |
|
Series B Preferred stock $.01 par value; authorized 93,180 shares, designated,
issued and outstanding 91,202 and 91,187 shares entitled in liquidation to $145,737 and $164,001 |
|
|
1 |
|
|
|
1 |
|
Series B-1 Preferred stock $.01 par value; authorized 86,000 shares, designated,
issued 64,986 shares, and outstanding 64,986 and 64,633 shares entitled in liquidation to $103,845 and $116,243 |
|
|
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 $18,466 |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
140,563 |
|
|
|
140,752 |
|
Accumulated deficit |
|
|
(205,966 |
) |
|
|
(219,836 |
) |
Accumulated other comprehensive income |
|
|
22 |
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
(177 |
) |
|
|
|
|
|
|
|
Total stockholders deficiency |
|
|
(65,266 |
) |
|
|
(79,146 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders deficiency |
|
$ |
355,006 |
|
|
$ |
327,328 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
69
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Revenues |
|
$ |
448,774 |
|
|
$ |
496,922 |
|
|
$ |
456,452 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
234,166 |
|
|
|
257,883 |
|
|
|
225,431 |
|
Selling, general and administrative (includes share-based
compensation of $2,552, $293 and $233) |
|
|
166,231 |
|
|
|
168,421 |
|
|
|
154,722 |
|
Depreciation and amortization |
|
|
75,980 |
|
|
|
73,608 |
|
|
|
49,922 |
|
Impairment charge |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Merger integration costs |
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
480,877 |
|
|
|
499,912 |
|
|
|
430,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(32,103 |
) |
|
|
(2,990 |
) |
|
|
26,377 |
|
Interest expense |
|
|
(34,390 |
) |
|
|
(39,514 |
) |
|
|
(39,197 |
) |
Interest income |
|
|
1,489 |
|
|
|
702 |
|
|
|
112 |
|
Other income (expense) |
|
|
240 |
|
|
|
(8 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes |
|
|
(64,764 |
) |
|
|
(41,810 |
) |
|
|
(12,691 |
) |
Provision for income taxes |
|
|
(726 |
) |
|
|
(1,056 |
) |
|
|
(1,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(65,490 |
) |
|
|
(42,866 |
) |
|
|
(13,870 |
) |
Dividends on preferred stock |
|
|
(55,031 |
) |
|
|
(63,890 |
) |
|
|
(71,909 |
) |
Modification of preferred stock |
|
|
(95,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders |
|
$ |
(216,143 |
) |
|
$ |
(106,756 |
) |
|
$ |
(85,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available per common share basic and diluted |
|
$ |
(23.09 |
) |
|
$ |
(11.03 |
) |
|
$ |
(8.85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and diluted |
|
|
9,359,132 |
|
|
|
9,675,916 |
|
|
|
9,687,714 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
70
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Deficiency
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
Series A common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
8,871,427 |
|
|
$ |
102 |
|
|
|
9,342,880 |
|
|
$ |
107 |
|
|
|
9,342,880 |
|
|
$ |
107 |
|
Cancellation of shares |
|
|
(97,435 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(371 |
) |
|
|
|
|
Shares issued in InfoHighway acquistion |
|
|
568,888 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
9,342,880 |
|
|
|
107 |
|
|
|
9,342,880 |
|
|
|
107 |
|
|
|
9,333,680 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
|
|
|
|
360,050 |
|
|
|
4 |
|
|
|
360,050 |
|
|
|
4 |
|
Issuance of shares pursuant to management incentive plan |
|
|
360,050 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
360,050 |
|
|
|
4 |
|
|
|
360,050 |
|
|
|
4 |
|
|
|
360,050 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
89,521 |
|
|
|
1 |
|
|
|
87,254 |
|
|
|
1 |
|
|
|
87,254 |
|
|
|
1 |
|
Cancellation of shares pursuant to management incentive plan |
|
|
(2,267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
87,254 |
|
|
|
1 |
|
|
|
87,254 |
|
|
|
1 |
|
|
|
87,254 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
100,702 |
|
|
|
1 |
|
|
|
100,702 |
|
|
|
1 |
|
|
|
100,702 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
100,702 |
|
|
|
1 |
|
|
|
100,702 |
|
|
|
1 |
|
|
|
100,702 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
92,832 |
|
|
|
1 |
|
|
|
91,202 |
|
|
|
1 |
|
|
|
91,202 |
|
|
|
1 |
|
Cancellation of shares |
|
|
(1,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
91,202 |
|
|
|
1 |
|
|
|
91,202 |
|
|
|
1 |
|
|
|
91,187 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B-1 Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
42,231 |
|
|
|
|
|
|
|
64,986 |
|
|
|
1 |
|
|
|
64,986 |
|
|
|
1 |
|
Shares issued in InfoHighway acquistion |
|
|
22,755 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
64,986 |
|
|
|
1 |
|
|
|
64,986 |
|
|
|
1 |
|
|
|
64,633 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
|
|
|
|
14,402 |
|
|
|
|
|
|
|
14,402 |
|
|
|
|
|
Issuance of shares pursant to management incentive plan |
|
|
14,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
14,402 |
|
|
|
|
|
|
|
14,402 |
|
|
|
|
|
|
|
14,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
117,689 |
|
|
|
|
|
|
|
140,270 |
|
|
|
|
|
|
|
140,563 |
|
Stock based compensation |
|
|
|
|
|
|
2,388 |
|
|
|
|
|
|
|
293 |
|
|
|
|
|
|
|
233 |
|
Repurchase of shares |
|
|
|
|
|
|
(1,538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in InfoHighway acquisition |
|
|
|
|
|
|
17,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in InfoHighway acquisition |
|
|
|
|
|
|
4,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of warrnats |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
140,270 |
|
|
|
|
|
|
|
140,563 |
|
|
|
|
|
|
|
140,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
(97,323 |
) |
|
|
|
|
|
|
(163,100 |
) |
|
|
|
|
|
|
(205,966 |
) |
Adoption of FIN 48 |
|
|
|
|
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
(65,490 |
) |
|
|
|
|
|
|
(42,866 |
) |
|
|
|
|
|
|
(13,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
(163,100 |
) |
|
|
|
|
|
|
(205,966 |
) |
|
|
|
|
|
|
(219,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
Unrealized gain on investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains incldued in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficiency |
|
|
|
|
|
$ |
(22,715 |
) |
|
|
|
|
|
$ |
(65,266 |
) |
|
|
|
|
|
$ |
(79,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
71
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(65,490 |
) |
|
$ |
(42,866 |
) |
|
$ |
(13,870 |
) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
31,907 |
|
|
|
32,322 |
|
|
|
32,120 |
|
Amortization and write-off of deferred financing costs |
|
|
2,437 |
|
|
|
2,639 |
|
|
|
2,625 |
|
Amortization of intangible assets |
|
|
44,206 |
|
|
|
41,221 |
|
|
|
17,736 |
|
Amortization of bond premium |
|
|
(435 |
) |
|
|
(816 |
) |
|
|
(914 |
) |
Provision for doubtful accounts |
|
|
6,546 |
|
|
|
5,539 |
|
|
|
6,924 |
|
Stock-based compensation |
|
|
2,552 |
|
|
|
293 |
|
|
|
233 |
|
Deferred income taxes |
|
|
1,141 |
|
|
|
930 |
|
|
|
969 |
|
Impairment charge |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
Other |
|
|
252 |
|
|
|
55 |
|
|
|
(591 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
460 |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(12,357 |
) |
|
|
(1,887 |
) |
|
|
5,174 |
|
Other current assets |
|
|
1,854 |
|
|
|
(1,899 |
) |
|
|
(2,299 |
) |
Other assets |
|
|
(2,178 |
) |
|
|
(1,369 |
) |
|
|
(619 |
) |
Accounts payable |
|
|
(2,108 |
) |
|
|
(3,806 |
) |
|
|
966 |
|
Accrued expenses and other current liabilities |
|
|
(17,301 |
) |
|
|
(4,924 |
) |
|
|
(9,973 |
) |
Deferred revenues |
|
|
1,970 |
|
|
|
1,433 |
|
|
|
(1,557 |
) |
Deferred rent |
|
|
(119 |
) |
|
|
(228 |
) |
|
|
943 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(2,663 |
) |
|
|
26,637 |
|
|
|
37,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition, net of cash and restricted cash acquired |
|
|
(56,638 |
) |
|
|
(4,953 |
) |
|
|
(127 |
) |
Purchases of property and equipment |
|
|
(30,418 |
) |
|
|
(39,786 |
) |
|
|
(33,747 |
) |
Purchases of investment securities |
|
|
|
|
|
|
(23,500 |
) |
|
|
(145,764 |
) |
Sales of investment securities |
|
|
|
|
|
|
|
|
|
|
145,728 |
|
Merger acquisition costs |
|
|
(1,768 |
) |
|
|
(311 |
) |
|
|
|
|
Other |
|
|
(111 |
) |
|
|
60 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(88,935 |
) |
|
|
(68,490 |
) |
|
|
(33,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Drawdowns on revolving credit facility |
|
|
11,500 |
|
|
|
23,902 |
|
|
|
2,275 |
|
Repayments of revolving credit facility |
|
|
(12,005 |
) |
|
|
(402 |
) |
|
|
(2,275 |
) |
Proceeds from capital lease financing and equipment notes |
|
|
5,217 |
|
|
|
3,789 |
|
|
|
441 |
|
Payments on capital lease obligations and equipment notes |
|
|
(3,760 |
) |
|
|
(3,685 |
) |
|
|
(4,284 |
) |
Proceeds from issuance of long-term debt |
|
|
95,175 |
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees |
|
|
(4,883 |
) |
|
|
|
|
|
|
|
|
Payments for shares purchased under management incentive plan |
|
|
(1,703 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
(63 |
) |
|
|
(332 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
89,541 |
|
|
|
23,541 |
|
|
|
(4,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(2,057 |
) |
|
|
(18,312 |
) |
|
|
(202 |
) |
Cash and cash equivalents at beginning of year |
|
|
42,546 |
|
|
|
40,489 |
|
|
|
22,177 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
40,489 |
|
|
$ |
22,177 |
|
|
$ |
21,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
32,008 |
|
|
$ |
37,581 |
|
|
$ |
38,146 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for taxes |
|
$ |
164 |
|
|
$ |
151 |
|
|
$ |
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash information |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities issued in connection with acquisition |
|
$ |
21,742 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
72
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands, except share information)
1. Organization and Description of Business
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 access services, and data services
to commercial and residential customers in the northeast United States.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The
Company has evaluated the impact of subsequent events through the date the financial statements
were issued and filed with the Securities and Exchange Commission.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles 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 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.
Fair Value Measurements
The Company defines fair value as the price that would be received from the sale of an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as
quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar
securities in active markets and quoted prices for identical securities where there is little or no
activity in the market; and Level 3, defined as unobservable inputs for which little or no market
data exists, therefore requiring an entity to develop its own assumptions.
Revenue Recognition
The Companys revenue is derived primarily from the sale of telecommunication services,
including dedicated transport, local voice services, long distance voice services and high-speed
data services to end-user business and wholesale carrier customers. Revenue is principally related
to subscriber usage fees and fixed monthly recurring fees.
Usage fees consist of fees paid by customers for each call made, access fees paid by carriers
for long distance calls that the Company originates and terminates, and fees paid by the incumbent
carriers as reciprocal compensation when the Company terminates local calls made by their
customers. Revenue related to usage fees is recognized when the service is provided. Usage fees are
billed in arrears The Companys ability to generate access fee revenue, including reciprocal
compensation revenue, is subject to numerous regulatory and legal proceedings. Until these
proceedings are ultimately resolved, the Companys policy is to recognize access fee revenue,
including reciprocal compensation revenue, only when it is concluded that realization of that
revenue is reasonably assured.
73
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
2. Significant Accounting Policies (continued)
Monthly recurring fees include the fees paid for lines in service and additional features on
those lines. Monthly recurring fees are paid by end-user customers and are primarily billed in
advance. This revenue is recognized during the period in which it is earned.
Revenue for charges that are billed in advance of services being rendered is deferred.
Services rendered for which the customer has not been billed are recorded as unbilled revenues
until the period such billings are provided. Cable and wiring revenues are recognized when the
Company provides the services.
The Company also derives revenue from non-recurring service activation and installation
charges imposed on customers at the time a service is installed. Such charges become payable by the
Companys customers at the time service is initiated. Revenue and direct costs related to up-front
service activation and installation fees are deferred and amortized over the average customer life,
which generally is four years.
The Company reports taxes imposed by governmental authorities on revenue-producing
transactions between us and our customers on a net basis.
Unbilled revenue included in accounts receivable represents revenue for earned services, which
was billed in the succeeding month and totaled $8,494 and $5,710 as of December 31, 2008 and 2009,
respectively.
Revenue from carrier interconnection and access amounting to $25,352, $28,726 and $23,748 in
the years ended December 31, 2007, 2008 and 2009, respectively, is recognized in the month in which
service is provided at the amount we expect to realize in cash.
Cost of Revenues
Cost of revenues include direct costs of sales and network costs. Direct costs of sales
include the costs incurred with telecommunication carriers to render services to customers. Network
costs include the costs of fiber and access, points of presence, repairs and maintenance, rent and
utilities of the telephone, Internet data network, as well as salaries and related expenses of
network personnel. Network costs are recognized during the month in which the service is utilized.
The Company accrues for network costs incurred but not billed by the carrier.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. The Companys cash and cash equivalents are being held in several
large financial institution, which are members of the FDIC, although most of our balances do exceed
the FDIC insurance limits.
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 $23,533 and $23,549 as of
December 31, 2008 and 2009, respectively. The fair value of these investment securities are based
on publicly quoted market prices, which are Level 1 inputs under the fair value hierarchy. All of
the Companys investment securities mature in less than one year. The cost and fair value of these
investment securities were not materially different as of December 31, 2008 and 2009. During the
year ended December 31, 2009, the Company purchased $145,764 and sold $145,728 of U.S. Treasury
notes. During the year ended December 31, 2008, the Company purchased $23,500 of U.S. Treasury
notes. The Company did not sell any investment securities during 2008. All unrealized and realized
gains are determined by specific identification.
74
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
2. Significant Accounting Policies (continued)
Comprehensive Loss
Comprehensive loss represents the change in net assets of a business enterprise during a
period from non-owner sources. The Companys comprehensive loss, before related tax effects, is
comprised exclusively of unrealized gains on the Companys investments in U.S. Treasury notes. The
comprehensive loss for the years ended December 31 2007, 2008 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(65,490 |
) |
|
$ |
(42,866 |
) |
|
$ |
(13,870 |
) |
Unrealized gain on investment securities |
|
|
|
|
|
|
22 |
|
|
|
|
|
Reclassifaction adjustment for realized gains included in net loss |
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(65,490 |
) |
|
$ |
(42,844 |
) |
|
$ |
(13,892 |
) |
|
|
|
|
|
|
|
|
|
|
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are reported at their outstanding unpaid principal balances reduced by an
allowance for doubtful accounts. The Company estimates doubtful accounts based on historical bad
debts, factors related to the specific customers ability to pay, percentages of aged receivables
and current economic trends. Allowances for doubtful accounts are recorded as selling, general and
administrative expenses. The Company writes off accounts deemed uncollectible after efforts to
collect such accounts are not successful. The Company also requires security deposits in the normal
course of business if customers do not meet its criteria established for offering credit.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. The estimated useful life is three years for
computer equipment, five years for furniture and fixtures, three years for vehicles, and seven
years for network equipment. Leasehold improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or the related lease term. Capitalized software costs are
amortized on a straight-line basis over the estimated useful life of two years. Construction in
progress includes amounts incurred in the Companys expansion of its network. The amounts include
switching and co-location equipment, switching and co-location facilities design and co-location
fees. The Company has not capitalized interest to date since the construction period has been short
in duration and the related imputed interest expense incurred during that period was insignificant.
When construction of each switch or co-location facility is completed, the balance of the assets is
transferred to network equipment and depreciated in accordance with the Companys policy. Internal
labor costs capitalized in connection with expanding our network are also amortized over seven
years. Maintenance and repairs are expensed as incurred.
Impairment of Long-Lived Assets
Long-lived assets, including amortizable intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate, in managements judgment, that the carrying
amount of an asset (or asset group) may not be recoverable. In analyzing potential impairments,
projections of future cash flows from the asset group are used to estimate fair value. If the sum
of the expected future undiscounted cash flows is less than the carrying amount of the asset group,
a loss is recognized for the difference between the estimated fair value and carrying value of the
asset group.
75
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
2. Significant Accounting Policies (continued)
Goodwill
Goodwill is the excess of the purchase price over the fair value of net assets acquired in
business combinations accounted for as purchases. The Company evaluates its goodwill for impairment
annually on October 1 and when events and circumstances warrant such review. Impairment charges, if
any, are charged to operating expenses. The recoverability of goodwill is assessed at a reporting
unit level, which is the lowest asset group level for which identifiable cash flows are largely
independent of the cash flows of other asset groups, and is based on projections of discounted cash
flows. The Company has one reporting unit. The projections of future operating cash flow necessary
to conduct the impairment review, are based on assumptions, judgments and estimates of growth rates
for the related business, anticipated future economic, regulatory and political conditions, the
assignment of discount rates relative to risk and estimates of terminal values. The fair value
determinations derived in connection with the impairment analysis contains many inputs, noted
above, that would be considered Level 3 in the fair value hierarchy.
Third Party Conversion Costs
The Company currently capitalizes third party conversion costs incurred to provision customers
to its network as part of property and equipment. These costs include external vendor charges, but
exclude costs incurred internally. The Company amortizes conversion costs over four years.
Debt Issuance Costs
The costs related to the issuance of long-term debt are deferred and amortized into interest
expense, using the effective interest method, over the life of each debt issuance.
Significant Vendor
The Company purchased approximately 69% of its telecommunication services from one vendor
during the year ended December 31, 2009. Accounts payable in the accompanying consolidated balance
sheets include approximately $3,975 and $4,813 as of December 31, 2008 and December 31, 2009,
respectively, due to this vendor.
Income Taxes
The Company recognizes deferred income taxes using the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred income taxes are
recognized for differences between the financial reporting and tax bases of assets and liabilities
at enacted statutory tax rates in effect for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Uncertainty in Income Taxes
The Company uses a two-step approach for recognizing and measuring tax benefits taken or
expected to be taken in a tax return and disclosures regarding uncertainties in income tax
positions. Only tax positions that meet the more likely than not recognition threshold at the
effective date may be recognized. The Company recognizes interest and penalties, if any, related to
unrecognized tax benefits as income tax expense.
The Company has analyzed the tax positions taken on federal and state income tax returns for
all open tax years, and has concluded that no accrual for
uncertainties in income tax positions is required in the Companys
financial statements as of December 31, 2009. The Company currently has no federal or state tax
examinations in progress. As a result of the applicable statutes of limitations, the Companys
federal and state income tax returns for tax years before December 31, 2006 are no longer subject
to examination by the Internal Revenue Service and state departments of revenue.
76
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
2. Significant Accounting Policies (continued)
Stock-Based Compensation
The Company records compensation expense associated with stock options and other forms of
equity compensation based on the estimated fair value at the grant-date. The Company uses the
Black-Scholes-Merton (BSM) option-pricing model to determine the fair value of stock-based
awards.
Software Development Costs
The Company capitalizes the cost of internal use software. Costs for preliminary stage
projects are expensed as incurred while application stage projects are capitalized. The latter
costs are typically internal payroll costs of employees associated with the development of internal
use computer software. The Company commences amortization of the software on a straight-line basis
over the estimated useful life of two years, when it is ready for intended use. The Company
incurred software development expenses of $2,293, $1,639 and $1,843 for the years ended December
31, 2007 2008 and 2009, respectively.
During the years ended December 31, 2007, 2008 and 2009, the Company capitalized approximately
$2,175, $2,764 and $2,543 of software development costs, respectively, which are included in
property and equipment. Amortization expense related to these assets was approximately $2,715,
$2,270 and 2,576 for the years ended December 31, 2007, 2008 and 2009, respectively. The
unamortized balance of capitalized software development costs as of December 31, 2008 and 2009 is
$2,694 and $2,662 respectively.
Advertising
The Company expenses advertising costs in the period incurred and these amounts are included
in selling, general and administrative expenses. Advertising expenses totaled $1,234, $1,843 and
$2,002 for the years ended December 31, 2007, 2008 and 2009, respectively.
Disputes
The Company accounts for disputed billings from carriers based on the estimated settlement
amount of disputed balances. The estimate is based on a number of factors including historical
results of prior dispute settlements with the carriers and is periodically reviewed by management
to reassess the likelihood of success. Actual settlements may differ from estimated amounts (see
Note 16).
Reclassifications
The Company has reclassified prior year amounts to conform to the current year presentation,
the most significant of which are as follows:
On the Companys December 31, 2009 balance sheet, the Company has presented its dispute
liability entirely as part of accrued expenses. Historically, a portion of the dispute liability
was reflected in accounts payable and a portion was included in accrued expenses. The Company has
reclassified prior year amounts to conform to the current year presentation. Historically, the
Company recorded prepaid assets for accrued carrier invoices. The Company is no longer recording
prepaid assets for accrued carrier invoices and accordingly; the Company has reclassified prior year
amounts to conform to the current year presentation.
The Company issues credits in an effort to acquire, retain and incentivize its customers. The
Company has historically classified these credits in its selling, general and administrative
expenses. The Company has reclassified these credits from selling, general and administrative
expenses and is now reflecting them as a reduction in revenue. As a result, revenues and selling,
general and administrative expenses have been reduced by $2,385 and $3,814 for the years ended
December 31, 2007 and 2008, respectively.
77
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
3. Recent Accounting Pronouncements
On June 15, 2009, the Company adopted the accounting standard that amends the requirements for
disclosures about fair value of financial instruments for annual, as well as interim, reporting
periods. This standard was effective prospectively for all interim and annual reporting periods
ending after June 15, 2009. As a result of this standard, the Company has included these additional
disclosures in its Form 10-Q for the quarters ended June 30, 2009 and September 30, 2009.
Additionally, the Company included additional disclosures in Notes 2 and 15 to its Consolidated
Financial Statements, as a result of adopting this standard.
On June 15, 2009, the Company prospectively adopted the accounting standard regarding the
accounting for, and disclosure of, events that occur after the balance sheet date but before the
financial statements are issued. The adoption of this standard has not had a significant impact on
its financial position or results of operations. The Company included additional disclosures in
Note 2 to its Consolidated Financial Statements as a result of adopting this standard.
In September 2009, the accounting standard regarding multiple deliverable arrangements was
updated to require the use of the relative selling price method when allocating revenue in these
types of arrangements. This method allows a vendor to use its best estimate of selling price if
neither vendor specific objective evidence nor third party evidence of selling price exists when
evaluating multiple deliverable arrangements. This standard update is effective January 1, 2011 and
may be adopted prospectively for revenue arrangements entered into or materially modified after the
date of adoption or retrospectively for all revenue arrangements for all periods presented. The
Company is currently evaluating the impact that this standard update will have on its consolidated
financial statements.
In September 2009, the accounting standard regarding arrangements that include software
elements was updated to require tangible products that contain software and non-software elements
that work together to deliver the products essential functionality to be evaluated under the
accounting standard regarding multiple deliverable arrangements. This standard update is effective
January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or
materially modified after the date of adoption or retrospectively for all revenue arrangements for
all periods presented. The Company is currently evaluating the impact that this standard update
will have on its consolidated financial statements.
4. Acquisitions
2008 Acquisition
On June 12, 2008, the Company entered into an asset purchase agreement to acquire
substantially all of the assets of Lightwave Communications, LLC (Lightwave) and its affiliate
Adera, LLC (Adera). Lightwave was a competitive local exchange carrier operating primarily in the
Mid-Atlantic region of the United States. Lightwave filed for bankruptcy protection in February
2008. On July 11, 2008, the Bankruptcy Court granted the sale order authorizing the sale of
Lightwaves and Aderas assets to the Company. Pursuant to the sale order, the Company was required
to place $4,640 in escrow until the close of the transaction, which occurred on September 18, 2008.
Accordingly, the results of operations of Lightwave are included in these consolidated financial
statements beginning September 19, 2008.
The consolidated results of the Company reflect the acquisition under the purchase method of
accounting. The purchase price paid by the Company totaled $6,320, including the cash released from
escrow. The Company acquired assets totaling $7,065, including goodwill of $2,312 and customer
relationship intangible assets of $3,600. Additionally, the Company assumed current liabilities of
$745. The Company finalized its purchase price allocation in May 2009, which resulted in an
increase to goodwill of $127. The final installment of the purchase price, totaling $750, was to be
paid to the sellers on September 18, 2009. This installment was subject to adjustment under certain
circumstances specified in the asset purchase agreement. The Company will be paying the final
amount due in connection with this acquisition during the second quarter of 2010.
78
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
4. Acquisitions (continued)
2007 Acquisition
On February 23, 2007, the Company entered into an agreement and plan of merger to acquire all
of the outstanding capital stock of Eureka Broadband Corporation, a competitive local exchange
carrier operating primarily in the northeastern United States, in a transaction that closed on May
31, 2007 (the 2007 Merger). Accordingly, the results of InfoHighway are included in these
consolidated financial statements beginning June 1, 2007. The consolidated results of the Company
reflect the acquisition under the purchase method of accounting.
The purchase price consisted of a combination of cash and equity securities. Each share of
capital stock of InfoHighway was converted into the right to receive cash and shares of the
Companys Series B-1 Preferred Stock, shares of Class A Common Stock and warrants to purchase units
of the Companys Series B-1 Preferred Stock and Class A Common Stock. The aggregate purchase price
paid by the Company is as follows:
|
|
|
|
|
Cash paid, net of cash acquired of $7,841 |
|
$ |
56,638 |
|
Equity securities issued, including warrants |
|
|
21,742 |
|
Acquisition costs |
|
|
1,504 |
|
|
|
|
|
|
|
$ |
79,884 |
|
|
|
|
|
The Company issued 22,755 shares of Series B-1 Preferred Stock and 568,888 shares of Class A
Common Stock, with an aggregate value of $17.5 million. The shares of Series B-1 Preferred Stock
and Class A Common Stock issued in the transaction have the same voting rights as existing Series
B-1 Preferred Stock and Class A Common Stock. The warrants issued 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, 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. The aggregate value of the warrants of $4.2
million at May 31, 2007, the close of the InfoHighway acquisition, was determined utilizing the
Black-Scholes model assuming a 2.5 year expected life, a volatility based on market comparable
entities of 55%, no expected dividends, an exercise price of $883.58 per unit and a risk free rate
of 4.9%. During 2009, the Company reclaimed 353 shares of Series B-1 Preferred Stock and 8,829
shares of Class A Common Stock previously issued in connection with the InfoHighway acquisition.
The shares are reflected in treasury stock as of December 31, 2009. During 2009, the Company also
reclaimed and cancelled warrants to acquire 265 units previously issued in connection with the
InfoHighway acquisition.
The Company concluded the potential decrease in the exercise price of the warrants was
contingent consideration and accounted for the warrants as of the date of acquisition. As of the
date of acquisition, the Company concluded that any exercise price below the $883.58 was not
certain beyond a reasonable doubt and therefore would not be recorded as part of the purchase price
until the contingency period was over and the exercise price was known.
As of March 29, 2010, the exercise price of the warrants has 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 has concluded
that it will not adjust the value of the warrants until an exercise price has been determined. When
the exercise price for the of warrants is 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 the point in time of such determination. The Company has determined that once the
exercise price is resolved, the warrants will be classified in equity.
79
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
4. Acquisitions (continued)
The total purchase price has been allocated to the assets acquired and liabilities assumed
based on their respective fair value as of May 31, 2007. There is no resulting goodwill that is
expected to be deductible for tax purposes. The liabilities included in the acquisition cost
allocation for exit activities included severance costs of terminated InfoHighway employees
affected by the merger.
The purchase price of the InfoHighway transaction was allocated as follows:
|
|
|
|
|
Assets acquired, excluding cash: |
|
|
|
|
Accounts receivable |
|
$ |
9,302 |
|
Other current assets |
|
|
880 |
|
Property and equipment |
|
|
17,435 |
|
Goodwill |
|
|
26,258 |
|
Customer-based intangibles |
|
|
46,800 |
|
Other intangibles |
|
|
4,400 |
|
Other non-current assets |
|
|
495 |
|
|
|
|
|
Total assets acquired |
|
|
105,570 |
|
Liabilities assumed: |
|
|
|
|
Current liabilities |
|
|
25,686 |
|
|
|
|
|
Net assets acquired |
|
$ |
79,884 |
|
|
|
|
|
The unaudited pro forma combined results, which assumes the transaction was completed on
January 1, 2007, are as follows for the year ended December 31, 2007:
|
|
|
|
|
Revenues |
|
$ |
498,965 |
|
Net loss |
|
|
(75,703 |
) |
Loss available per common share basic and diluted |
|
|
(23.59 |
) |
|
|
|
|
Loss available per common share includes the effect of the dividends accumulated on the
Companys Preferred Stock as well as the effect of a modification to the Preferred Stock (see
Note 17).
5. Other Assets
Other current assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
Deferred carrier charges |
|
$ |
934 |
|
|
$ |
2,433 |
|
Prepaid expenses |
|
|
2,449 |
|
|
|
3,990 |
|
Other |
|
|
5,515 |
|
|
|
4,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
8,898 |
|
|
$ |
10,976 |
|
|
|
|
|
|
|
|
Other non-current assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
Deferred financing costs |
|
$ |
9,518 |
|
|
$ |
7,424 |
|
Lease security and carrier deposits |
|
|
2,274 |
|
|
|
1,811 |
|
Registration statement costs |
|
|
3,385 |
|
|
|
3,669 |
|
Other |
|
|
1,262 |
|
|
|
2,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other non-current assets |
|
$ |
16,439 |
|
|
$ |
14,965 |
|
|
|
|
|
|
|
|
80
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
5. Other Assets (continued)
The Company incurred deferred financing costs of $4,888 related to the issuance of long term
debt in 2007 (see Note 10). Amortization of deferred financing costs amounted to approximately
$2,286, $2,639 and $2,625 for the years ended December 31, 2007, 2008 and 2009, respectively.
As of December 31, 2009, other non-current assets includes $3,669 of costs associated with the
registration statement filed with the SEC for a potential initial public offering including
underwriting fees, legal fees and other costs incurred directly related to our initial public
offering. Such costs will be charged against the gross proceeds of the offering when completed or
charged to operations should the Company elect not to complete the offering.
6. Property and Equipment
Property and equipment, at cost, consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
Network equipment |
|
$ |
142,954 |
|
|
$ |
171,195 |
|
Computer and office equipment |
|
|
20,512 |
|
|
|
21,226 |
|
Capitalized software costs |
|
|
13,371 |
|
|
|
15,914 |
|
Furniture and fixtures and other |
|
|
8,923 |
|
|
|
10,002 |
|
Leasehold improvements |
|
|
5,486 |
|
|
|
6,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,246 |
|
|
|
225,050 |
|
Less accumulated depreciation and
amortization |
|
|
(105,998 |
) |
|
|
(138,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
85,248 |
|
|
$ |
86,875 |
|
|
|
|
|
|
|
|
Property and equipment includes amounts acquired under capital leases of approximately
$9,847 and $7,566 respectively, net of accumulated depreciation and amortization of approximately
$7,966 and $10,688 respectively, at December 31, 2008 and 2009. Amortization of capital leases is
included in depreciation and amortization expense in the consolidated statements of operations.
On January 1, 2008, the Company changed the estimated useful lives of certain property and
equipment acquired in the InfoHighway acquisition to conform the useful lives of this property and
equipment to their estimated useful lives as determined by the Company. The impact of this change
resulted in a reduction in depreciation expense of $1,439 for the year ended December 31, 2008.
7. Identifiable Intangible Assets and Goodwill
The Companys intangible assets, consisting primarily of customer relationships and
trademarks, obtained in connection with previous acquisitions, were valued as follows:
Customer Relationships: The Companys customer relationships are composed of subscribers to
the Companys various telecommunications services. The multi-period excess earnings method, a
variant of the income approach, was utilized to value the customer relationship intangibles.
The customer relationship intangibles are amortized on a straight line basis over the
average expected life of the customer relationships based on the Companys historical disconnect
statistics or on an accelerated method over their useful lives in proportion to the expected
benefits to be received. The initial lives range from four to eleven years and the weighted
average remaining useful life is 5.93 years. The unamortized balances are evaluated for potential
impairment based on future estimated cash flows when an impairment indicator is present.
81
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
7. Identifiable Intangible Assets and Goodwill (continued)
Trademark: The Companys trademarks were valued using a variant of the income approach,
referred to as the relief from royalty method.
The Companys ATX trademark was considered to have an indefinite life at the date it was
acquired. During the fourth quarter of 2007, the Company began the process of rebranding its
operations following the acquisitions of InfoHighway and ATX. As a result of the rebranding
process, the Company believed that the remaining useful life of the ATX trademark was three years
to be amortized on a straight-line basis. The Company considered this change in the estimated
useful life to be an indication that the carrying amount of the ATX trademark may not be
recoverable and required the Company to evaluate the ATX trademark for impairment. As a result of
the evaluation, the Company incurred an impairment charge of $4.0 million during the fourth quarter
of 2007, which was the excess of the carrying value over the estimated fair value of the ATX
trademark.
The InfoHighway trademark intangible asset is amortized on an accelerated method over its
useful life in proportion to the expected benefits to be received. The useful life of this
intangible asset is four years. The unamortized balance is evaluated for impairment based on future
estimated cash flows when an impairment indicator is present.
The weighted average remaining useful life for the trademark intangibles is 1.13 years.
The components of intangible assets at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Value |
|
|
Amortization |
|
|
Value |
|
|
Value |
|
|
Amortization |
|
|
Value |
|
Customer relationships |
|
$ |
187,467 |
|
|
$ |
(146,012 |
) |
|
$ |
41,455 |
|
|
$ |
71,812 |
|
|
$ |
(46,064 |
) |
|
$ |
25,748 |
|
Trademarks |
|
|
7,400 |
|
|
|
(3,635 |
) |
|
|
3,765 |
|
|
|
7,400 |
|
|
|
(5,664 |
) |
|
|
1,736 |
|
Other |
|
|
909 |
|
|
|
(909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
195,776 |
|
|
$ |
(150,556 |
) |
|
$ |
45,220 |
|
|
$ |
79,212 |
|
|
$ |
(51,728 |
) |
|
$ |
27,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets for the years ended December 31, 2007, 2008 and 2009
amounted to $44,206, $41,221 and $17,736 respectively. During the year ended December 31, 2009, the
Company wrote-off its fully amortized customer relationships intangible assets and other fully
amortized intangible assets totaling $115,655 and $909, respectively. Overall, the weighted average
remaining useful life for the Companys intangible assets is 5.63 years as of December 31, 2009.
Future projected amortization expense for the years ending December 31 is as follows:
|
|
|
|
|
2010 |
|
$ |
12,431 |
|
2011 |
|
|
5,305 |
|
2012 |
|
|
3,487 |
|
2013 |
|
|
2,194 |
|
2014 |
|
|
1,569 |
|
Thereafter |
|
|
2,498 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,484 |
|
|
|
|
|
82
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
7. Identifiable Intangible Assets and Goodwill (continued)
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
Balance at December 31, 2007 |
|
$ |
96,154 |
|
Effects of 2008 acquisition |
|
|
2,185 |
|
Other |
|
|
(228 |
) |
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
98,111 |
|
Finalization of purchase price allocation
in connection with 2008 acquisition |
|
|
127 |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
98,238 |
|
|
|
|
|
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
Recurring network costs |
|
$ |
23,651 |
|
|
$ |
8,510 |
|
Recurring operating accruals |
|
|
4,937 |
|
|
|
6,212 |
|
Accrued interest (a) |
|
|
11,485 |
|
|
|
11,480 |
|
Payroll related liabilities |
|
|
6,234 |
|
|
|
6,701 |
|
Other |
|
|
1,184 |
|
|
|
2,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current
liabilities |
|
$ |
47,491 |
|
|
$ |
35,630 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Primarily represents accrued interest on the Senior Secured Notes and
the Revolving Credit Facility. Interest on the Senior Secured Notes is
paid semi-annually on March 1 and September 1 of each year. |
9. Obligations Under Capital and Operating Leases
Capital Leases
In March 2006, the Company entered into a capital lease facility, as amended in October 2006,
with a third party that allows the Company to finance the acquisition of up to $12,500, or as
otherwise limited by our indenture (see Note 10), of network related equipment through December 31,
2009. The Company is obligated to repay the borrowings in thirteen quarterly installments. The
lease facility specifies that at the end of the final installment period, the Company has the
option of renewing, returning or purchasing the equipment at a
mutually agreed fair value. The Company had
borrowings of $4,232 outstanding on the existing facility at December 31, 2009.
83
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
9. Obligations Under Capital and Operating Leases (continued)
The future minimum lease payments under all capital leases at December 31, 2009 are as
follows:
|
|
|
|
|
2010 |
|
$ |
3,635 |
|
2011 |
|
|
1,599 |
|
2012 |
|
|
347 |
|
2013 |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,608 |
|
Less amounts representing interest |
|
|
(752 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
4,856 |
|
Less current portion |
|
|
(3,080 |
) |
|
|
|
|
|
|
|
|
|
Capital lease obligations, net of current portion |
|
$ |
1,776 |
|
|
|
|
|
Operating Leases
The Company rents office space, switch locations and equipment under various operating leases.
Some of the Companys operating leases have free or escalating rent payment provisions and the
option to renew for an additional five years. The future minimum lease payments under operating
leases at December 31, 2009 are as follows:
|
|
|
|
|
2010 |
|
$ |
12,160 |
|
2011 |
|
|
8,281 |
|
2012 |
|
|
5,835 |
|
2013 |
|
|
4,170 |
|
2014 |
|
|
3,880 |
|
Thereafter |
|
|
11,605 |
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
45,931 |
|
|
|
|
|
Future minimum lease payments are net of sublease rentals as follows:
|
|
|
|
|
2010 |
|
$ |
(549 |
) |
2011 |
|
|
(109 |
) |
|
|
|
|
|
|
|
|
|
Total sublease rentals |
|
$ |
(658 |
) |
|
|
|
|
Total rent expenses under these operating leases totaled $11,979, $11,324 and $11,991 for the
years ended December 31, 2007, 2008 and 2009, respectively. The Companys sublease rental income
was $706, $566 and $420 for the years ended December 31, 2007, 2008 and 2009, respectively. Rent
expense is charged to operations ratably over the terms of the leases, which results in deferred
rent payable.
84
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
10. Debt
Senior Secured Notes
On August 23, 2006, the Company issued $210,000 principal amount of
113/8% Senior Secured Notes due 2012 (the Senior Secured Notes). The net
proceeds from the Senior Secured Notes were used to fund the ATX acquisition, repay indebtedness
under the Companys senior secured credit facility and senior unsecured subordinated notes due
2009, and for general corporate purposes. On May 14, 2007, we completed an additional offering of
$90,000 aggregate principal amount of 113/8% Senior Secured Notes due 2012 at
an issue price of 1053/4%, generating gross proceeds of $95,175. We used such proceeds from the
offering to fund the InfoHighway merger, which closed on May 31, 2007, pay related fees and
expenses and for general corporate purposes. The unamortized bond premium of $3,924 and $3,010 at
December 31, 2008 and 2009, respectively, is included in long term debt. For the years ended
December 31, 2007, 2008 and 2009, bond premium amortization amounted to $435, $816 and $914,
respectively.
The Company is required to pay cash interest on the principal amount of the notes at a rate of
113/8% per annum, which is due semi-annually on March 1 and September 1 of
each year, commencing on March 1, 2007. The Senior Secured Notes mature on September 1, 2012. The
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 five-year senior revolving credit
facility with an aggregate principal amount of $25,000 and certain other permitted indebtedness.
The Senior Secured Note Indenture contains covenants limiting the Companys ability to, among
other things: incur or guarantee additional indebtedness or issue certain preferred stock; pay
dividends; redeem or purchase equity interests; redeem or purchase subordinated debt; make certain
acquisitions or investments; create liens; enter into transactions with affiliates; merge or
consolidate; make certain restricted payments; and transfer or sell assets, including equity
interests of existing and future restricted subsidiaries. The Company was in compliance with all
covenants at December 31, 2009.
Revolving $25,000 Senior Credit Facility
On August 23, 2006, the Company entered into a five year, revolving $25,000 Senior Credit
Facility (Revolving Credit Facility). Any outstanding amounts under this facility are subject to
a borrowing base limitation based on an advance rate of 85% of the amount of eligible receivables,
as defined. The borrowing base eligibility calculation exceeds the amount required to draw on the
entire Revolving Credit Facility; therefore the remaining availability under the Revolving Credit
Facility and the letter of credit sublimit are fully available for borrowing. The loans bear
interest on a base rate method or LIBOR method, in each case plus an applicable margin percentage,
at the option of the Company. Interest on the LIBOR loans is paid on a monthly or quarterly basis,
and interest on the base rate loans is paid on a quarterly basis. The Company borrowed $10,000 from
the Revolving Credit Facility during September 2008 and due to continuing uncertainty in the credit
markets, the Company borrowed an additional $13,500 million from the Revolving Credit Facility
during October 2008.
The Revolving Credit Facility also has a sublimit of $15,000 for the issuance of letters of
credit. During the years ended December 31, 2008 and 2009, the Company issued $80 and $1,218 of
letters of credit to regulatory bodies and landlords, all of which are outstanding against this
facility at December 31, 2009.
85
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
10. Debt (continued)
Indebtedness under the Revolving Credit Facility is guaranteed by all of our direct and
indirect subsidiaries that are not borrowers thereunder and is secured by a security interest in
all of our and our subsidiaries tangible and intangible assets.
The Revolving Credit Facility contains negative covenants and restrictions on our assets and
our subsidiaries actions, including, without limitation, incurrence of additional indebtedness,
restrictions on dividends and other restricted payments, prepayments of debt, liens, sale-leaseback
transactions, loans and investments, hedging arrangements, mergers, transactions with affiliates,
changes in business and restrictions on our ability to amend the indenture. The Company is in
compliance with all covenants and restrictions as of December 31, 2009.
Certain of our assets have been pledged to the above creditors pursuant to the debt
agreements. Each of our subsidiaries has guaranteed the outstanding debt. The parent company of
these subsidiaries has no independent assets or operations and the guarantees are full and
unconditional and joint and several.
11. Shareholders Deficiency
In July 2006, in anticipation of the acquisition of ATX and the refinancing of the existing
senior unsecured subordinated notes, the Company authorized two new series of preferred stock,
Series A-1 Preferred Stock, and Series B-1 Preferred Stock. At the refinancing, holders of the
senior unsecured subordinated notes were offered the option to convert their existing notes into
shares of either Series A-1 Preferred Stock and Class A Common Stock or Series B-1 Preferred Stock
and Class A Common Stock at a conversion price per preferred share of $516.35. Each converting note
holder also received a number of shares of Class A Common Stock equal to twenty-five times the
number of shares of preferred stock purchased. The Series A-1 and Series B-1 preferred stock are
pari passu with the existing Series A and Series B preferred stock.
As of December 31, 2008 and 2009, there were 87,254 shares of Series A Preferred Stock
outstanding. Each share of Series A Preferred Stock is non redeemable, but carries a liquidation
preference of $1,798.51 per share, with an aggregate liquidation preference of the Series A
Preferred Stock of $156.9 million as of December 31, 2009. The liquidation preference increases at
an annual rate of 12%, compounded quarterly. To realize a liquidation preference, the holder must
simultaneously surrender 25 shares of common stock for each share of preferred stock liquidated.
Each share of Series A Preferred Stock is convertible for a $50 conversion price at the option of
the holder or upon a qualifying initial public offering (IPO) event into that number of common
shares equal to the liquidation preference at the date of conversion divided by fifty dollars. The
Series A Preferred Stock votes together with the Series A-1 Preferred Stock on certain matters
requiring a class specific vote and is entitled to 30 votes per Series A Preferred Share on all
matters requiring a vote of all shareholders.
As of December 31, 2008 and 2009, there were 100,702 shares of Series A-1 Preferred Stock
outstanding. Each Share of Series A-1 Preferred Stock is non redeemable, but carries a liquidation
preference identical to the Series A Preferred Stock of $1,798.51 per share, with an aggregate
liquidation preference of the Series A-1 Preferred Stock of $181.1 million as of December 31, 2009.
The liquidation preference increases at an annual rate of 12%, compounded quarterly. In order to
realize a liquidation preference, the holder must simultaneously surrender 25 shares of common
stock for each share of preferred stock liquidated. Each share of Series A-1 Preferred Stock is
convertible for a $50 conversion price at the option of the holder or upon a qualifying IPO event
into that number of common shares equal to the liquidation preference at the date of conversion
divided by fifty dollars. The Series A-1 Preferred Stock votes together with the Series A Preferred
Stock on certain matters requiring a class specific vote and is entitled to 30 votes per Series A-1
Preferred Share on all matters requiring a vote of all shareholders.
86
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
11. Shareholders Deficiency (continued)
As of December 31, 2008 and 2009, there were 91,202 and 91,187 shares of Series B Preferred
Stock outstanding, respectively. Each share of Series B Preferred Stock is non redeemable, but
carries a liquidation preference of $1,798.51 per share with an aggregate liquidation preference of
the Series B Preferred Stock of $164.0 million as of December 31, 2009. The liquidation preference
increases at an annual rate of 12%, compounded quarterly. In order to realize a liquidation
preference, the holder must simultaneously surrender 25 shares of common stock for each share of
preferred stock liquidated. Each share of Series B Preferred Stock is convertible for a $50
conversion price at the option of the holder or upon a qualifying IPO event into that number of
common shares equal to the liquidation preference at the date of conversion divided by fifty
dollars. The Series B Preferred Stock votes together with the Series B-1 Preferred Stock on certain
matters requiring a class specific vote and is entitled to 20 votes per Series B Preferred Share on
all matters requiring a vote of all shareholders.
As of December 31, 2008 and 2009, there were 64,986 and 64,633 shares of Series B-1 Preferred
Stock outstanding, respectively. Each Share of Series B-1 Preferred Stock is non redeemable, but
carries a liquidation preference identical to the Series B Preferred Stock of $1,798.51 per share
with an aggregate liquidation preference of the Series B-1 Preferred Stock of $116.9 million as of
December 31, 2009. The liquidation preference increases at an annual rate of 12%, compounded
quarterly. In order to realize a liquidation preference, the holder must simultaneously surrender
25 shares of common stock for each share of preferred stock liquidated. Each share of Series B-1
Preferred Stock is convertible for a $50 conversion price at the option of the holder or upon a
qualifying IPO event into that number of common shares equal to the liquidation preference at the
date of conversion divided by fifty dollars. The Series B-1 Preferred Stock votes together with the
Series B Preferred Stock on certain matters requiring a class specific vote and is entitled to 20
votes per Series B-1 Preferred Share on all matters requiring a vote of all shareholders.
As of December 31, 2008 and 2009, there were 14,402 shares of Series C Preferred Stock
outstanding. Each share of Series C Preferred Stock is non redeemable, but carries a liquidation
preference equal to the Series A Preferred Share liquidation preference less $516.35 or $1,282.16
per share as of December 31, 2009. At December 31, 2009, the aggregate liquidation preference of
the Series C Preferred Stock is $18.5 million. To realize a liquidation preference, the holder must
simultaneously surrender 25 shares of common stock for each share of preferred stock liquidated.
Each share of Series C Preferred Stock is convertible for a $50 conversion price at the option of
the holder or upon a qualifying IPO event into that number of common shares equal to the
liquidation preference at the date of conversion divided by fifty dollars. The Series C Preferred
Stock is non voting.
The Companys Charter provides that if any of the following events occur (defined in the
Charter as Liquidations), the holders of preferred stock shall be entitled to be paid the
liquidation preference associated with the preferred stock prior to any payment or distribution to
holders of junior securities: (1) the Company (i) commences a voluntary bankruptcy, (ii) consents
to an involuntary bankruptcy, (iii) makes an assignment for the benefit of its creditors, or
(iv) admits in writing its inability to pay its obligations; (2) an order of involuntary bankruptcy
is commenced in respect of the Company and the order is unstayed and in effect for 60 consecutive
days and on account of such event the Company liquidates, dissolves or winds-up; (3) the Company
otherwise liquidates, dissolves or winds-up; and (4) the Company (i) merges or consolidates and the
Company is not the surviving entity of such merger or consolidation, (ii) merges or consolidates
and the Company is the surviving entity of such merger or consolidation, though the pre-merger or
pre-consolidation holders of the Companys capital stock cease to maintain control of the Company,
(iii) sells substantially all of the assets of the Company, or (iv) sells a majority of the voting
stock of the Company. Neither the Charter nor any other agreement contains a contractual redemption
feature relating to the preferred stock. There are no provisions in the Charter that explicitly or
contractually permit the preferred shareholders to trigger a liquidation payment or distribution
upon the occurrence of any of the Liquidation events.
87
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
11. Shareholders Deficiency (continued)
As of December 31, 2008 and 2009, there were 9,342,880 and 9,333,680 shares of Class A common
stock outstanding, respectively. The Class A common stock is entitled to 1 vote per share on all
matters requiring a vote of all shareholders.
As of December 31, 2008 and 2009, there were 360,050 shares of Class B common stock
outstanding. Upon a qualifying IPO event, each share of Class B common stock is automatically
converted into one share of Series A common stock.
As of December 31, 2009, stock options to acquire 136 shares of Series B Preferred Stock and
3,445 shares of common stock are outstanding under the Companys 1997 and 2000 Stock Option Plans.
The Company is no longer authorized to issue any additional awards under the Companys 1997 and
2000 Stock Option Plans.
As of December 31, 2009, a warrant to acquire 46 shares of Series B Preferred Stock and
1,151 shares of Class A common stock is outstanding.
12. Stock Based Compensation
Restricted Stock Awards
In February 2007, the Companys board adopted and its shareholders subsequently approved the
Companys Management Incentive Plan (the MIP), pursuant to which the Company is authorized to
grant stock options and restricted stock to certain of its employees. Pursuant to the MIP, there
are 52,332 shares of Series C Preferred Stock and 1,308,297 shares of non-voting Class B Common
Stock reserved for issuance. In April 2007, grants of restricted stock representing 14,402 shares
of Series C Preferred Stock and 360,050 shares of Class B Common Stock were completed. As a
condition and in conjunction with the MIP grants, all vested share-based awards then outstanding
and held by participants in the MIP were repurchased for cash consideration of $1.7 million and all
unvested share-based awards then outstanding and held by participants in the MIP were cancelled in
exchange for the issuance of new awards under the MIP. All of the awards, including modified
awards required to be remeasured and new awards issued, were valued at the grant date at fair
market value using public company comparables, recent comparable transactions and discounted cash
flow valuation methodologies.
Grants under the MIP consisted of both vested and unvested securities. Unvested securities
will generally vest in ratable annual installments over the three-year period following the grant
based on service requirements. The incremental value of the fair value of the MIP awards over the
fair value of the awards repurchased or cancelled and the fair value of all vested MIP awards not
representing grants for repurchased and cancelled securities were expensed immediately at the grant
date, totaling $1.7 million.
88
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
12. Stock Based Compensation (continued)
The following table summarizes the Companys restricted stock award activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date |
|
|
|
Series A and B |
|
|
Series C |
|
|
Series A and B |
|
|
Fair Value |
|
|
|
Preferred |
|
|
Preferred |
|
|
Common |
|
|
Per Unit |
|
Outstanding December 31, 2006 |
|
|
2,650 |
|
|
|
|
|
|
|
66,250 |
|
|
$ |
502.43 |
|
Grants |
|
|
|
|
|
|
14,402 |
|
|
|
360,050 |
|
|
|
137.50 |
|
Forfeit/Cancel/Repurchase |
|
|
(2,650 |
) |
|
|
|
|
|
|
(66,250 |
) |
|
|
502.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007 |
|
|
|
|
|
|
14,402 |
|
|
|
360,050 |
|
|
|
137.50 |
|
Grants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeit/Cancel/Repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008 |
|
|
|
|
|
|
14,402 |
|
|
|
360,050 |
|
|
|
137.50 |
|
Grants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeit/Cancel/Repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009 |
|
|
|
|
|
|
14,402 |
|
|
|
360,050 |
|
|
$ |
137.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense for the new restricted stock awards and the unvested portion of the
modified awards for the year ended December 31, 2007, 2008 and 2009 was $2,173 and $84 and $31,
respectively. During the year ended December 31, 2009, 471 shares of the Series C Preferred Stock
and 11,775 shares of the Series B Common Stock vested. As of December 31, 2009, 468 shares of the
Series C Preferred Stock and 11,700 shares of the Series B Common Stock are not vested. The total
compensation cost related to unvested awards not yet recognized is $8 and will be recognized during
the three months ended March 31, 2010.
Stock Option Awards
In April 2007 pursuant to the MIP, grants of options to acquire 21,599 units comprised of
1 share of Series C Preferred Stock and 25 shares of Class B Common Stock were completed. Options
under the MIP were granted with an exercise price equal to the fair market value of a unit
determined as of the grant date. The fair market value of $56.31 was determined utilizing the Black-Scholes
model with an exercise price equal to the assumed fair market value of an underlying unit of
$137.50, a three year expected life of the option, a volatility based on market comparable entities
of 55%, no dividend yield and a risk free rate of 4.5%.
The following table summarizes the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
Series C |
|
|
Average |
|
|
|
Preferred |
|
|
Exercise Price |
|
Outstanding December 31, 2006 |
|
|
|
|
|
$ |
|
|
Grants |
|
|
21,599 |
|
|
|
137.50 |
|
Forfeit/Cancel/Repurchase |
|
|
(699 |
) |
|
|
137.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007 |
|
|
20,900 |
|
|
|
137.50 |
|
Grants |
|
|
|
|
|
|
|
|
Forfeit/Cancel/Repurchase |
|
|
(696 |
) |
|
|
137.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008 |
|
|
20,204 |
|
|
|
137.50 |
|
Grants |
|
|
|
|
|
|
|
|
Forfeit/Cancel/Repurchase |
|
|
(146 |
) |
|
|
137.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009 |
|
|
20,058 |
|
|
$ |
137.50 |
|
|
|
|
|
|
|
|
89
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
12. Stock Based Compensation (continued)
Total compensation expense for stock options for the years ended December 31, 2007, 2008 and
2009 was $378, $209 and $201 respectively. During the year ended December 31, 2009, options to
acquire 5,831 Series C Preferred units vested. As of December 31, 2009 options to acquire 14,244 of
the 20,099 Series C Preferred units are vested, but none of the options are currently exercisable.
The remaining contractual term of the outstanding options is approximately one year. At
December 31, 2009, the total compensation cost related to unvested awards not yet recognized is $51
and will be recognized during the three months ended March 31, 2010.
13. Income Taxes
The components of the provision for income taxes for the years ended December 31, 2007, 2008
and 2009 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(293 |
) |
|
$ |
(25 |
) |
|
$ |
|
|
State |
|
|
164 |
|
|
|
151 |
|
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129 |
) |
|
|
126 |
|
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
743 |
|
|
|
808 |
|
|
|
843 |
|
State |
|
|
112 |
|
|
|
122 |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
855 |
|
|
|
930 |
|
|
|
969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
726 |
|
|
$ |
1,056 |
|
|
$ |
1,179 |
|
|
|
|
|
|
|
|
|
|
|
The following table shows the principal reasons for the difference between the effective
income tax rate and the statutory federal income tax rate during the years ended December 31, 2007,
2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Statutory federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income tax, net of federal tax benefits |
|
|
(0.3 |
%) |
|
|
(0.4 |
%) |
|
|
(1.8 |
%) |
Permanent items |
|
|
0.3 |
% |
|
|
(1.2 |
%) |
|
|
(3.6 |
%) |
Valuation allowance |
|
|
(36.2 |
%) |
|
|
(35.9 |
%) |
|
|
(39.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
(1.1 |
%) |
|
|
(2.5 |
%) |
|
|
(9.4 |
%) |
|
|
|
|
|
|
|
|
|
|
90
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
13. Income Taxes (continued)
Deferred taxes reflect the net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the amounts used for tax
purposes. The components of the net deferred tax assets (liabilities) consist of the following at
December 31, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
4,565 |
|
|
$ |
6,301 |
|
Deferred revenue |
|
|
4,577 |
|
|
|
3,961 |
|
Other |
|
|
789 |
|
|
|
1,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets-current |
|
|
9,931 |
|
|
|
11,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
|
|
Net operating loss carry forwards |
|
|
52,157 |
|
|
|
51,628 |
|
Customer lists |
|
|
5,008 |
|
|
|
6,724 |
|
Trademark |
|
|
1,607 |
|
|
|
1,811 |
|
Other |
|
|
990 |
|
|
|
2,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets-noncurrent |
|
|
59,762 |
|
|
|
62,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
69,693 |
|
|
$ |
74,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
|
|
Customer Lists |
|
$ |
11,098 |
|
|
$ |
7,637 |
|
Other current liabilities |
|
|
|
|
|
|
716 |
|
Trademark |
|
|
670 |
|
|
|
276 |
|
Goodwill |
|
|
2,071 |
|
|
|
3,040 |
|
Accelerated Depreciation |
|
|
13,282 |
|
|
|
16,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities-noncurrent |
|
$ |
27,121 |
|
|
$ |
27,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets current: |
|
|
|
|
|
|
|
|
Deferred tax assets-current |
|
$ |
9,931 |
|
|
$ |
11,657 |
|
Valuation allowance |
|
|
(9,931 |
) |
|
|
(11,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities noncurrent: |
|
|
|
|
|
|
|
|
Deferred tax assets-noncurrent |
|
$ |
59,762 |
|
|
$ |
62,797 |
|
Deferred tax liabilities-noncurrent |
|
|
(27,121 |
) |
|
|
(27,757 |
) |
Valuation allowance |
|
|
(34,712 |
) |
|
|
(38,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax liabilities |
|
$ |
(2,071 |
) |
|
$ |
(3,040 |
) |
|
|
|
|
|
|
|
The Company completed a study of its available net operating loss carryforwards (NOLs)
resulting from the 2005 Merger and the InfoHighway merger. The utilization of these NOL carryovers
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. At
December 31, 2009, the Company had net operating loss carryforwards available totaling $134,976
which begin to expire in 2012. The Company has provided a full valuation allowance against the net
deferred tax asset as of December 31, 2008 and 2009 because management does not believe it is more
likely than not that this asset will be realized. The net change in the Companys valuation
allowance was an increase of $5,094 between 2008 and 2009. If the Company achieves profitability,
the net deferred tax assets may be available to offset future income tax liabilities.
91
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
14. Employee Savings and Retirement Plan
During 2007, the Company had three active contributory defined contribution plans under
Section 401(k) of the Internal Revenue Code (the Code) covering all qualified employees. Two of
these plans, which historically covered the employees of ATX and InfoHighway, have been terminated
effective December 31, 2007. Assets of the participants covered under these plans were transferred
into the Companys remaining plan. Participants may elect to defer up to 20% of their annual
compensation, subject to an annual limitation as provided by the Code. The Companys matching
contribution to this plan is discretionary. For the year ended December 31, 2007, the Company made
contributions of approximately $144 to the terminated plans. For the years ended December 31, 2008
and 2009, the company did not make any contributions to the plan.
15. Fair Values of Financial Instruments
The Companys financial instruments include cash and cash equivalents, certificates of
deposit, 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, certificates of deposit, trade
accounts receivable and accounts payable reported in the consolidated balance sheets as of December
31, 2008 and December 31, 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 December 31, 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 the Companys senior secured notes at December 31, 2008 and 2009 was $207,000 and
$287,250, respectively, which was based on the publicly quoted closing price of the notes at those
dates. The publicly quoted closing price used to value the Companys senior secured notes is
considered to be a Level 1 input. The carrying value of the Companys senior secured notes due 2012
at December 31, 2008 and 2009 was $303,924 and $303,010, respectively.
16. Commitments and Contingencies
The Company has employment agreements with certain key executives at December 31, 2009. These
agreements provide for base salaries and performance bonuses over periods ranging from one to two
years. These employment agreements also provide for severance compensation for a period of up to
12 months after termination.
The Company has standby letters of credit outstanding of $2,983, which are fully
collateralized by either domestic certificates of deposit or the letter of credit subfacility under
the Companys revolving credit facility.
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 charges in dispute at December 31, 2009 was approximately $23.6 million. 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 accrued expenses and other current
liabilities at December 31, 2009. It is possible that actual settlements of such disputes may
differ from these estimates and the Company may settle at amounts greater than the estimates.
92
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
16. Commitments and Contingencies (continued)
In December 2008, the Company finalized a settlement with the local exchange carrier operating
subsidiaries of our major telecommunications supplier, which extinguished virtually all outstanding
disputes between the parties as of March 31, 2008. Additionally, the settlement included a
comprehensive mutual release between the parties effective as of that date.
In February 2007, the Company finalized a settlement with its major telecommunications
supplier and paid $15.2 million to extinguish approximately $39.0 million of outstanding disputes.
The Company has entered into a commercial agreement with its principal vendor 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. The
agreements, which expire in 2013, require certain minimum purchase obligations. The future
obligations under this agreement are $22,262 and $20,738 for the years ended December 31, 2010 and
2011, respectively.
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 consolidated financial position, results of operations, or
cash flows.
17. Loss per share
The following is a reconciliation of the numerators and denominators of the basic and diluted
net loss per share computations for the years ended December 31, 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Loss available to common shareholders (Numerator): |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(65,490 |
) |
|
$ |
(42,866 |
) |
|
$ |
(13,870 |
) |
Dividends on preferred stock |
|
|
(55,031 |
) |
|
|
(63,890 |
) |
|
|
(71,909 |
) |
Modification of preferred stock |
|
|
(95,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders |
|
$ |
(216,143 |
) |
|
$ |
(106,756 |
) |
|
$ |
(85,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (Denominator): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
|
9,131,327 |
|
|
|
9,342,880 |
|
|
|
9,342,880 |
|
Class B common stock |
|
|
227,805 |
|
|
|
333,036 |
|
|
|
344,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
and diluted |
|
|
9,359,132 |
|
|
|
9,675,916 |
|
|
|
9,687,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available per common share basic and diluted |
|
$ |
(23.09 |
) |
|
$ |
(11.03 |
) |
|
$ |
(8.85 |
) |
|
|
|
|
|
|
|
|
|
|
93
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
17. Loss per share (continued)
For the years ended December 31, 2007, 2008 and 2009, the Company had outstanding options,
warrants, restricted stock units and preferred stock as disclosed in Notes 11 and 12, which were
convertible into or exercisable for common shares of 11,578,004, 12,819,500 and 14,216,984,
respectively, 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
aggregate accumulated dividends on the Companys Preferred Stock was $110,030, $173,920 and
$245,829, respectively, as of December 31, 2007, 2008 and 2009. The per share amounts of
accumulated dividends on the Companys Preferred Stock was $11.38, $17.97 and $25.37, respectively,
as of December 31, 2007, 2008 and 2009. The Company has not declared any dividends.
In February 2007, the Company added a provision to the Series A, A-1, B and B-1 Preferred
Stock providing for an Absolute Liquidation Preference (ALP). The ALP concept was added to the
Companys Charter in anticipation of a management incentive plan implemented by the Company in
March 2007, under which management would receive options and restricted stock awards of Series C
Preferred Stock. Before adding an ALP concept, the Series A, A-1, B and B-1 Preferred Stock shared
pro rata in any distributions made by the Company up to their stated value of $1,000 plus accrued
dividends. The ALP ensured that before any distribution is provided to any other stockholders, such
as the Series C Preferred Stockholders, the Series A, A-1, B and B-1 Preferred Stockholders will
receive $516.35 per share and then all series of preferred stock, including the Series C Preferred
Stock will share pro rata.
The Company considered the change to the preferred stock provisions to be a modification,
which required extinguishment accounting. As a result, $95.6 million, which is the difference
between the fair value of these preferred shares at the time of the modification and their carrying
value, was added to the Companys net loss to arrive at a loss available to common shareholders for
the year ended December 31, 2007. This event had no impact on the Companys balance sheet as it has
no net effect on the Companys preferred share balances or on its additional paid-in capital
balance.
18. Unaudited Quarterly Results of Operations
The following is the unaudited quarterly results of operations for the years ended
December 31, 2008 and 2009. We believe that the following information reflects all normal recurring
adjustments necessary for a fair presentation of the information for the period presented. The
operating results for any quarter are not necessarily indicative of full year results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30 |
|
|
December 31, |
|
Revenues (2) |
|
$ |
122,782 |
|
|
$ |
127,339 |
|
|
$ |
124,405 |
|
|
$ |
122,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
66,021 |
|
|
|
65,427 |
|
|
|
65,026 |
|
|
|
61,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(3,981 |
) |
|
|
1,196 |
|
|
|
800 |
|
|
|
(1,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(13,581 |
) |
|
|
(9,030 |
) |
|
|
(9,173 |
) |
|
|
(11,082 |
) |
Dividends on preferred stock |
|
|
(15,352 |
) |
|
|
(15,730 |
) |
|
|
(16,202 |
) |
|
|
(16,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders |
|
$ |
(28,933 |
) |
|
$ |
(24,760 |
) |
|
$ |
(25,375 |
) |
|
$ |
(27,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available per common share basic and diluted (1) |
|
$ |
(2.99 |
) |
|
$ |
(2.56 |
) |
|
$ |
(2.62 |
) |
|
$ |
(2.87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and diluted |
|
|
9,667,680 |
|
|
|
9,676,996 |
|
|
|
9,679,455 |
|
|
|
9,679,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
18. Unaudited Quarterly Results of Operations (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30 |
|
|
December 31, |
|
Revenues (2) |
|
$ |
121,971 |
|
|
$ |
116,050 |
|
|
$ |
111,761 |
|
|
$ |
106,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
61,651 |
|
|
|
57,477 |
|
|
|
54,844 |
|
|
|
51,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
5,131 |
|
|
|
6,699 |
|
|
|
7,435 |
|
|
|
7,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(5,105 |
) |
|
|
(3,755 |
) |
|
|
(2,838 |
) |
|
|
(2,172 |
) |
Dividends on preferred stock |
|
|
(17,188 |
) |
|
|
(17,704 |
) |
|
|
(18,235 |
) |
|
|
(18,782 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common shareholders |
|
$ |
(22,293 |
) |
|
$ |
(21,459 |
) |
|
$ |
(21,073 |
) |
|
$ |
(20,954 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available per common share basic and diluted (1) |
|
$ |
(2.30 |
) |
|
$ |
(2.21 |
) |
|
$ |
(2.17 |
) |
|
$ |
(2.16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and diluted |
|
|
9,679,455 |
|
|
|
9,688,771 |
|
|
|
9,691,230 |
|
|
|
9,691,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The sum of quarterly per share amounts may not equal per share
amounts reported for year-to-date periods. This is due to changes
in the number of weighted-average shares outstanding and the
effects of rounding for each period. |
|
(2) |
|
The Company issues credits in an effort to acquire, retain and
incentivize its customers. The Company has historically
classified these credits in its selling, general and
administrative expenses. The Company has reclassified these
credits from selling, general and administrative expenses and is
now reflecting them as a reduction in revenue. As a result,
revenues and selling, general and administrative expenses have
been reduced by $761, $974, $1,130 and $948 for the quarters
ended March 31, June 30, September 30 and December 31, 2008,
respectively. Revenues and selling, general and administrative
expenses have been reduced by $736, $768 and $957 for the
quarters ended March 31, June 30 and September 30, 2009,
respectively. There has been no impact on the Companys income
(loss) from operations or net loss as a result of this change. As
of December 31, 2009, the Company recorded a $1,419 liability for
the estimated amount of credits to be issued in 2010, which
pertain to 2009. This liability was recorded a reduction in
revenue during the quarter ended December 31, 2009. |
95
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A (T). Controls and Procedures
(a) 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
(the Exchange Act), 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 Companys management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In designing and
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 our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures
as of December 31, 2009. Based on the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as of December 31,
2009.
(b) Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. As defined in SEC Rules 13a-15(f) and 15d-15(f), internal control over
financial reporting is a process designed by, or under the supervision of, the companys principal
executive and principal financial officers, or persons performing similar functions, and effected
by the companys board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated
financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
Our internal control over financial reporting includes those policies and procedures that:
1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the Companys transactions and the dispositions of assets of the Company;
2. Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of our management and Board of Directors; and
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect on the
financial statements.
96
Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance with respect to financial statement preparation and presentation
and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Managements report on internal control over financial reporting is set forth above under the
heading Managements Report on Internal Control over Financial Reporting in Item 8 of this annual
report on Form 10-K.
(c) Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm pursuant to the temporary rules of the SEC
that permit us to provide only managements report in this annual report.
(d) Changes in Internal Control Over Financial Reporting
During our fourth fiscal quarter of 2009, there has been no change in our internal control
over financial reporting (as defined in SEC Rules 13a-15(f) or 15d-15(f)) that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
97
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Our board of directors is currently comprised of the following ten members: Steven F. Tunney,
as Chairman of the Board; Samuel F. Rubenstein; John S. Patton, Jr.; B. Hagen Saville; David C.
Ruberg; Robert Manning; Peter J. Barris; Raul Martynek; Richard W. Roedel; and Michael K. Robinson.
Mr. Tunney, Mr. Rubenstein, Mr. Patton and Mr. Saville were appointed by MCG, Mr. Ruberg and
Mr. Manning were appointed by Baker, Mr. Barris was appointed by NEA and Mr. Martynek was appointed
by InfoHighways legacy shareholders.
Set forth below are the names and positions of our executive officers and directors as of
December 31, 2009.
|
|
|
Name |
|
Position |
Michael K. Robinson
|
|
Chief Executive Officer, President and Director |
|
|
|
Brian P. Crotty
|
|
Chief Operating Officer |
|
|
|
Corey Rinker
|
|
Chief Financial Officer, Treasurer and Assistant Secretary |
|
|
|
Charles C. Hunter
|
|
Executive Vice President, General Counsel and Secretary |
|
|
|
Kenneth A. Shulman
|
|
Chief Technology Officer and Chief Information Officer |
|
|
|
Terrence J. Anderson
|
|
Executive Vice President Corporate Development and Assistant Treasurer |
|
|
|
Steven F. Tunney
|
|
Chairman of the Board |
|
|
|
Richard W. Roedel
|
|
Director and Chairman of the Audit Committee |
|
|
|
Samuel G. Rubenstein
|
|
Director |
|
|
|
John S. Patton, Jr.
|
|
Director |
|
|
|
B. Hagen Saville
|
|
Director |
|
|
|
David C. Ruberg
|
|
Director |
|
|
|
Robert Manning
|
|
Director |
|
|
|
Peter J. Barris
|
|
Director |
|
|
|
Raul Martynek
|
|
Director |
All directors have served on our board of directors since at least the time of the Bridgecom
merger in January 2005 except Mr. Saville, who joined subsequent to that event to replace another
director designated by MCG who had resigned from the board, Mr. Martynek, who was appointed to our
board of directors following his nomination from the former InfoHighway stockholders pursuant to
our amended and restated shareholders agreement, and Mr. Roedel and Mr. Robinson who were appointed
to our board on January 8, 2009. All directors are elected to serve until their successors are
elected and qualified, until such directors death, or until such director shall have resigned or
shall have been removed. Likewise all executive officers are appointed to serve until their
successors are appointed and qualified, until such officers death, or until such officer shall
have resigned or shall have been removed.
98
Biographies of Executive Officers
Michael
K. Robinson, Chief Executive Officer, President and Director (53). Mr. Robinson joined
the Company as the Chief Executive Officer in March 2005 and is responsible for all operations and
strategy for the Company. Mr. Robinson was appointed to our board of directors on January 8, 2009
given his role as Chief Executive Officer and his particular industry experience. Prior to March
2005, Mr. Robinson had been with US LEC Corp., a publicly traded competitive communications
provider, as executive vice president and chief financial officer since July 1998, responsible for
all financial operations including treasury, general accounting and internal controls, investor
relations, billing and information systems development, information technology, human resources and
real estate. Prior to joining US LEC, Mr. Robinson spent 10 years in various management positions
with the telecommunications division of Alcatel, including executive vice president and chief
financial officer of Alcatel Data Networks and the worldwide financial operations of the enterprise
and data networking division of Alcatel. Prior to these roles, Mr. Robinson was chief financial
officer of Alcatel Network Systems. Before joining Alcatel, Mr. Robinson held various management
positions with Windward International and Siecor Corp. (now Corning). Mr. Robinson participates in
various industry associations. Mr. Robinson holds a masters degree in business administration from
Wake Forest University.
Brian P. Crotty, Chief Operating Officer (39). Mr. Crotty, Chief Operating Officer, has over
15 years of senior management experience in the telecom industry. In his role with Broadview, he is
responsible for all operational aspects of the Company including sales, marketing, provisioning,
billing, network operations, repair, field services and customer service. Mr. Crotty formerly
served as Bridgecoms Chief Operating Officer prior to its merger with Broadview. Prior to joining
Bridgecom in 2000, he held a succession of positions with CoreComm Ltd., a publicly traded
integrated communications provider with facilities throughout the Northeast and Midwest, most
recently acting as Director of Operations. Mr. Crotty joined CoreComm Ltd., through the acquisition
of USN Communications Inc. where he held a succession of senior management roles in both sales and
operations, most recently as Vice President of Operations. Prior to that, Mr. Crotty was the
co-founder and served as Executive Vice President of The Millennium Group, one of the first
competitive local exchange carriers in the state of Wisconsin. In addition, Mr. Crotty has also
served in a managerial position with CEI Communications, which he founded. Mr. Crotty obtained a
degree in Business Administration from St. Norbert College.
Corey Rinker, Chief Financial Officer, Treasurer and Assistant Secretary (51). Mr. Rinker, a
certified public accountant and attorney, joined the Company (originally with Bridgecom) as Chief
Financial Officer in January 2001 following seven years of experience serving in similar positions
with both privately held and publicly traded corporations including The Intellisource Group, a
Safeguard Scientifics, Inc. partnership company (NYSE:SFE). Mr. Rinker also possesses nearly a
decade of cumulative experience with predecessors of the Big Four accounting firms of Deloitte &
Touche LLP and Ernst & Young LLP, serving in senior managerial positions in the tax and consulting
areas. Mr. Rinker also serves as the Treasurer and Assistant Secretary of Broadview. He has an
accounting degree, with honors, from the University of Massachusetts at Amherst and a J.D. degree
from Yeshiva Universitys Cardozo School of Law.
Charles C. Hunter, Executive Vice President, General Counsel and Secretary (57). Mr. Hunter
has served as Executive Vice President, Secretary, and General Counsel of Broadview since 2003
(originally with Bridgecom), where he continues to be responsible for the corporate and legal
affairs of the Company, including federal and state public policy advocacy. He is a 25-year veteran
of telecommunications law and policy who has been involved in the competitive communications
industry for nearly two decades. Prior to joining Broadview, Mr. Hunter headed the Hunter
Communications Law Group P.C., a District of Columbia based boutique telecommunications law firm
with a nationwide clientele. He began his legal career as a trial attorney with the Federal
Maritime Commission and afterwards was a partner specializing in telecommunications matters at the
Chicago-based law firm of Gardner, Carton and Douglas and the Washington, D.C. based law firm of
Herron, Burchette, Ruckert and Rothwell. Mr. Hunter received his J.D. from the Duke University
School of Law and his undergraduate degree from the University of Michigan at Ann Arbor. He is a
member of the bars of the State of New York, the District of Columbia, the U.S. Supreme Court and
numerous Federal Appellate Courts.
99
Kenneth A. Shulman, Chief Technology Officer and Chief Information Officer (56). Mr. Shulman
joined Broadview Networks in 1999 as Chief Technology Officer. In this role, he is responsible for
the architecture, technology, standards and evolution plans for the companys integrated
communications networks and services. As Chief Information Officer, Mr. Shulman is also responsible
for the Companys patented integrated provisioning, billing and customer relationship management
systems, software and IT infrastructure. Mr. Shulman has over 30 years of leadership experience in
communications technology. He previously served as vice president of local network technology for
AT&T, a position he assumed when AT&T acquired Teleport Communications Group (TCG) in 1998. From
1987 to 1998, Mr. Shulman held officer positions with TCG, including as senior vice president and
chief technology officer. Earlier, he was director of systems engineering for MCI International.
Before that, Mr. Shulman specialized in network planning with Bell Communications Research Inc.
(Bellcore) and Bell Laboratories. He holds a B.S. in electrical engineering from the State
University of New York at Stony Brook, an M.S. in electrical engineering from the University of
Rochester, and an M.B.A. from The Wharton School of Business at the University of Pennsylvania. Mr.
Shulman has served on many technical advisory boards, and currently serves on advisory boards of
Baker Capital, Vonair and T3 Communications.
Terrence J. Anderson, Executive Vice President Corporate Development and Assistant
Treasurer (43). Mr. Anderson was a co-founder of Broadview Networks in 1996 and has served as
Executive Vice President, Finance, since the Companys inception. His current role includes
corporate development, business planning and financial analysis. He has led efforts to raise
capital. Previously, as a vice president in the media and telecommunications finance group of
Chemical Banking Corp. from 1988 to 1995, Mr. Anderson was responsible for originating and
executing transactions and financing for diverse customers, including several large cable
operators. Mr. Anderson holds a bachelors degree in economics from Princeton University and an
M.B.A. with honors from Columbia University.
Biographies of Directors
Steven F. Tunney, Sr. (49). Mr. Tunney has served as the President of MCG since May 2001 and
as its Chief Executive Officer since 2006. Prior to that, he served as MCGs Chief Operating
Officer from 1998 to 2006, its Chief Financial Officer and Secretary from 1998 to 2000 and its
Treasurer from 1998 to 2002. Mr. Tunney also serves on MCGs board of directors, as well as the
Investment and Valuation Committees. Prior to co-founding MCG, Mr. Tunney was a Vice President at
First Union Corp. and Signet Banking Corp. From 1989 to 1995, Mr. Tunney was the Chief Financial
Officer of Cambridge Information Group, Inc. From 1986 to 1989, Mr. Tunney was the Financial
Manager of Legent Corporation, an international software development firm. From 1982 to 1986, Mr.
Tunney was an auditor with PricewaterhouseCoopers. Mr. Tunney earned a B.S. in Business
Administration from Towson State University in 1982 and is a certified public accountant. He also
serves on the board of directors of Jet Plastica Investors, LLC, JetBroadband Holdings, LLC, MCG
Capital Corporation, Solutions Capital G.P., LLC and Superior Industries Investors, LLC. Mr.
Tunney serves as one of our directors as a designee of MCG pursuant to the terms of our amended and
restated shareholders agreement.
Richard W. Roedel (60). Mr. Roedel spent much of his career with BDO Seidman LLP, an
international accounting and consulting firm, where he ultimately served as Chairman and Chief
Executive Officer. Mr Roedel currently serves as director of Brightpoint, Inc., IHS Inc., Sealy
Corporation, Lorillard, Inc. and Luna Innovations Incorporated. Mr Roedel is chairman of the audit
committees of Brightpoint, Sealy, Lorillard, Inc. and Luna Innovations Incorporated. Mr Roedel is
also a board member of the Association of Audit Committee Members, Inc., a not-for-profit
organization dedicated to strengthening audit committees. Mr. Roedel was on the board and chairman
of the audit committee of Dade Behring Holdings, Inc. from October 2002 until November 2007 when
Dade was acquired by Siemens AG. Mr. Roedel served in various capacities at Take-Two Interactive
Software, Inc. from 2002 until 2005, including Chairman and Chief Executive Officer. From 1971
through 2000, he was employed by BDO Seidman LLP, becoming an audit partner in 1980, later being
promoted in 1990 to Managing Partner in Chicago and then Managing Partner in New York in 1994 and
finally in 1999 to Chairman and Chief Executive Officer. Mr Roedel is a graduate of The Ohio State
University and a C.P.A. Mr. Roedel was nominated and elected to the board to serve as our
independent director and the chairman of our audit committee.
100
Samuel G. Rubenstein (48). Mr. Rubenstein has served as an executive vice president and the
general counsel of MCG since 2000 and served as the corporate secretary of MCG from 2000 to 2007.
Mr. Rubenstein is responsible for the corporate and legal affairs of MCG. Prior to joining MCG,
Mr. Rubenstein was partner in the Washington, D.C. office of Bryan Cave LLP, where his practice
focused primarily on commercial and corporate finance transactions. He began his career practicing
law as an attorney in the Washington, D.C. office of the law firm of Pepper Hamilton, LLP. Mr.
Rubenstein received his J.D. from the George Washington University National Law Center and his
B.B.A. from the University of Texas at Austin. He also serves on the board of directors of Coastal
Sunbelt Real Estate, Inc., GMC Television Broadcasting Holdings, Inc., Jet Plastica Investors, LLC,
Jet Broadband Holdings, LLC, NPS Holding Group, LLC, RadioPharmacy Investors, LLC, Solutions
Capital G.P., LLC, Superior Industries Investors, LLC, and Total Sleep Holdings, Inc. Mr.
Rubenstein serves as one of our directors as a designee of MCG pursuant to the terms of our amended
and restated shareholders agreement.
B. Hagen Saville (48). Mr. Saville is Executive Vice President and co-founder of MCG and a
member of its Board of Directors. He is responsible for MCGs business development activities and
management of portfolio investments and sits on the firms Investment committee. Mr. Saville has
been employed by MCG and its predecessors since January, 1994. Earlier in his career, Mr. Saville
was employed in commercial and investment banking. Mr. Saville also serves on the board of
directors of Coastal Sunbelt, LLC, Jet Plastica Industries, Inc., National Product Services, Inc.,
Radiopharmacy Investors, LLC, Solutions Capital G.P., LLC, Superior Industries Investors, LLC, TNR
Entertainment Corp., and Total Sleep Holdings, Inc. Mr. Saville serves as one of our directors as
a designee of MCG pursuant to the terms of our amended and restated shareholders agreement.
John S. Patton, Jr. (51). Mr. Patton is a managing director and vice president of MCG. He is
responsible for investment decisions and relationship management in MCGs telecommunications
practice, which focuses on competitive local exchange, long distance, data, Internet, wireless and
communications support, including tower ownership and management. Using MCGs flexible approach to
funding and structuring capital, Mr. Patton has managed transactions that have allowed his
customers to expand their product lines and distribution channels and make the necessary capital
investments in provisioning capacity to support growth. Prior to joining MCG, Mr. Patton was a Vice
President at First Union Corp. and Signet Banking Corp. He also serves on the board of directors of
Cleartel Communications, Inc. Mr. Patton serves as one of our directors as a designee of MCG
pursuant to the terms of our amended and restated shareholders agreement.
Peter J. Barris (56). Mr. Barris is the managing general partner of NEA. He has been with NEA
since 1992, and he serves as the general partner of New Enterprise Associates VII, L.P., New
Enterprise Associates 9, L.P., New Enterprise Associates 10, L.P. and NEA Presidents Fund. Mr.
Barris specializes in information technology companies. His current board memberships include
Boingo Wireless Inc., eCommerce Industries Inc., eZiba Inc., Hillcrest Communications Inc.,
Mainstream Data Inc., Megisto Systems Inc. and Neutral Tandem Inc. He also serves on the board of
directors of the Mid-Atlantic Venture Association Inc., the National Venture Capital Association
Inc. and Venture Philanthropy Partners. His prior board memberships include UUNET Technologies Inc.
(sold to MCI), AMISYS (acquired by HBO), CareerBuilder (acquired by Knight Ridder/Tribune Co.),
Mobius Management Systems Inc., SALIX Technologies (acquired by Tellabs) and Tripod Inc. (acquired
by Lycos, Inc.). Mr. Barris is a member of the Board of Trustees of Northwestern University, the
Board of Overseers of the Tuck School at Dartmouth College and the Board of Advisors of the Tucks
Center for Private Equity and Entrepreneurship at Dartmouth. Before joining NEA, Mr. Barris was
President and Chief Operating Officer at Legent Corporation and Senior Vice President and General
Manager of the Systems Software Division at UCCEL Corp. He also held various management positions
between 1977 and 1985 at General Electric Company, including Vice President and General Manager at
GE Information Services. He received a Masters in Business Administration from Dartmouth College
and a Bachelor of Science in Electrical Engineering from Northwestern University. Mr. Barris
serves as one of our directors as a designee of NEA pursuant to the terms of our amended and
restated shareholders agreement.
101
David C. Ruberg (63). Mr. Ruberg is the CEO of InterXion, NV, a privately held European
carrier neutral collocation data center provider. Prior to joining InterXion, Mr. Ruberg was a
General Partner of Baker Capital. He joined Baker in 2001 as the Chief Executive Officer in
residence and became a General Partner in 2003. Prior to joining Baker, Mr. Ruberg was the Chief
Executive Officer of Intermedia Communications Inc., a publicly traded competitive communications
services provider, as well as Chairman of its majority-owned subsidiary, Digex, Inc, a web hosting
company. Prior to Intermedia Communications, Inc., he was general manager of Data General
Corporations PC and Systems Integration Division and also led the companys Wide Area Network
Products Division. Before Data General Corp., Mr. Ruberg ran design and development software
organizations for database and data communications companies. He began his career as a scientist at
AT&T Bell Labs, specializing in the development of compilers, operating systems, and communications
systems. Mr. Ruberg serves on the boards of Adaptix Inc. and QSC AG. Mr. Ruberg holds a Bachelors
Degree from Middlebury College and received his Masters in Computer and Communication Sciences from
the University of Michigan. Mr. Ruberg serves as one of our directors as a designee of Baker
Capital pursuant to the terms of our amended and restated shareholders agreement.
Robert Manning (50). Mr. Manning is a manager of the general partner of Baker Capital. Prior
to joining Baker Capital in 2002, Mr. Manning was CFO of Intermedia Communications, Inc., an
integrated communications services provider, and a director of its majority-owned subsidiary,
Digex, Inc., a provider of complex, managed, web hosting services. Prior to Intermedia, he was an
investment banker to the cable television and communications industries for nine years acting as
both agent and principal. Mr. Manning left investment banking in 1991 to become one of the founding
executives of DMX, Inc., a digital audio cable network that was sold to Liberty Media in 1996. Mr.
Manning serves on the board of directors of Adaptix Inc. (Chairman), InterXion, N.V., DigiTV Plus
Inc. and Wine.com (Chairman). Mr. Manning also serves on the Board of Trustees of the Maritime
Aquarium in Norwalk, Connecticut. Mr. Manning is a graduate of Williams College. Mr. Manning
serves as one of our directors as a designee of Baker Capital pursuant to the terms of our amended
and restated shareholders agreement.
Raul K. Martynek (44). Mr. Martynek has served as a director of Broadview since August 2007.
He served as a Senior Advisor to Plainfield Asset Management, a hedge fund, where he advised on
investment opportunities in the telecommunications sector and advised the boards of portfolio
companies on strategic and tactical initiatives, from May 2008 to December 2009. Mr. Martynek
served as the Chief Restructuring Officer of Smart Telecom, a Dublin, Ireland-based fiber
competitive local exchange carrier, or CLEC, from January 2009 to December 2009 and has served as a
director since December 2009. He was President and Chief Executive Officer and a director of
InfoHighway Communications Inc. (InfoHighway), a CLEC, from November 2003 to July 2007.
InfoHighway was acquired by Broadview in May 2007. From March 1998 to November 2003, Mr. Martynek
was Chief Operating Officer of Eureka Networks (Eureka), a telecommunications company, which
acquired InfoHighway in August 2005. From December 1995 to March 1998, he served as an Executive
Vice President of Gillette Global Network, a non-facilities based telecommunications carrier that
merged with Eureka in 2000. Mr. Martynek received a B.A. in Political Science from SUNY-Binghamton
and a Master in International Finance from Columbia University School of International and Public
Affairs. Mr. Martynek serves as one of our directors as a designee of the legacy shareholders of
InfoHighway pursuant to the terms of our amended and restated shareholders agreement.
Code of Business Conduct and Ethics
We have adopted a code of business conduct and ethics that is applicable to our principal
executive officer and principal financial and accounting officer, as well as all our other
employees. A copy of the code of business conduct and ethics may be found on our website at
www.broadviewnet.com. Our website is not incorporated by reference into this report. At any time
that the code of ethics is not available on our website, we will provide a copy upon written
request made to Office of the General Counsel, Broadview Networks Holdings, Inc., 800 Westchester
Avenue, Rye Brook, NY 10573. We caution you that any information that is included in our website is
not part of this report. If we amend the code of ethics, or grant any waiver from a provision of
the code of ethics that applies to our executive officers or directors, we will publicly disclose
such amendment or waiver as required by applicable law, including by posting such amendment or
waiver on our website at www.broadviewnet.com or by filing a Form 8-K with the SEC.
102
Board of Directors and Committees of the Board of Directors
Pursuant to our certificate of incorporation, our board of directors must be comprised of
between one and eleven members. We currently have ten members on our board of directors. Pursuant
to our charter and our amended and restated shareholders agreement, currently four directors have
been designated by MCG, two directors have been designated by Baker and one director has been
designated by NEA. For more information, see above and the section entitled Certain Relationships
and Related Transactions, and Director Independence.
At this time, we have not formed any committees of the board of directors other than our audit
committee, as discussed below. Instead, our board of directors acts as a group to perform the
functions of a compensation committee and from time to time, our board appoints ad hoc committees.
In 2007, the board of directors appointed an ad hoc compensation committee, comprising of Steven F.
Tunney and David C. Ruberg, for the purposes of reviewing the documentation, construction and
administration of the MIP pursuant to which our named executive officers (and other members of our
management team) may be granted equity.
In addition, our board of directors reviews and approves compensation and benefit plans for
executive officers and reviews general compensation policies with the objective to attract and
retain superior talent and to achieve our strategic and financial goals. The board also administers
our stock option plans and grants; and evaluates and assesses executive performance. Pursuant to
our amended and restated shareholders agreement, we have agreed to take all actions necessary to
allow at least two directors designated by MCG and one director designated by Baker to be appointed
to each committee of the board of directors.
In March 2009, we formed an audit committee of the board of directors consisting of Richard W.
Roedel, Steven F. Tunney, Jr. and Raul Martynek. Prior to this time, our board of directors acted
as a group to perform the functions of an audit committee and reviewed the work products of our
independent auditors and were involved in the process of confirming that our auditors were
independent. Our board of directors determined that its members demonstrated the capability of
analyzing and evaluating our financial statements.
Our audit committee will appoint, determine the compensation for and supervise our independent
auditors, review our internal accounting procedures, systems of internal controls and financial
statements, review and approve the services provided by our internal and independent auditors,
including the results and scope of their audit, and resolve disagreements between management and
our independent auditors. Richard W. Roedel is the chairman of the committee and is designated as
the audit committee financial expert as that term is defined in the rules and regulations
promulgated under the Exchange Act.
Our audit committee has adopted a charter to govern its membership and function. A copy of the
audit committee charter may be found on our website at www.broadviewnet.com.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a member of a compensation committee or the board
of directors (or other committee serving an equivalent function or, in the absence of any such
committee, the entire board of directors) of any other entity whose executive officers serve as a
director of our Company.
No officer or employee of the Company, or former officer of the Company, has participated in
deliberations of our board of directors concerning executive compensation in the year ended
December 31, 2009.
103
Indemnification
We intend to maintain directors and officers liability insurance. We expect to enter into
indemnification agreements with our directors to provide our directors and certain of their
affiliated parties with additional indemnification and related rights.
Compensation Committee Report
The Board of Directors has reviewed and discussed the Compensation Discussion and Analysis
with the Companys management. Based on this review and these discussions, the Board of Directors
recommended that the Compensation Discussion and Analysis be included in the Companys Annual
Report on Form 10-K.
The Board of Directors
Steven F. Tunney Chairman of the Board
Richard W. Roedel Chairman of Audit Committee
Samuel G. Rubenstein
John S. Patton, Jr.
B. Hagen Saville
David C. Ruberg
Robert Manning
Peter J. Barris
Raul Martynek
Michael K. Robinson
104
Item 11. Executive Compensation
COMPENSATION DISCUSSION & ANALYSIS
Compensation decisions with respect to our named executive officers have primarily been based
on the goal of recruiting, retaining and motivating individuals who can help us meet and exceed our
strategic financial and operational goals. We evaluate the amount of total compensation paid to
each of our named executive officers during any fiscal year and primarily consider corporate,
financial and operating goals, individual performance and industry trends in setting individual
compensation levels for our named executive officers. Our compensation programs have historically
been weighted toward cash compensation, but we have also placed emphasis on equity-based
compensation in order to better align the interests of our named executive officers with those of
our stakeholders.
Determination of Compensation
Our board of directors is responsible for establishing and making decisions with respect to
the compensation and benefit plans applicable to our named executive officers. Each year, our board
reviews, modifies, and approves proposals prepared by our ad hoc compensation committee to
determine the adjustments, if any, that need to be made to each element of our named executive
officers compensation, including base salary, annual bonus and long-term equity awards. Mr. Tunney
and Mr. Ruberg continue to serve as our ad hoc compensation committee. Based upon recommendations
from the Chief Executive Officer (other than with respect to his own compensation), the ad hoc
compensation committee reviews, modifies and makes final recommendations with respect to base
salaries, annual bonuses and long-term equity awards for each of our named executive officers.
In determining the levels and mix of compensation, the Chief Executive Officer, the ad hoc
compensation committee, and the board have generally not relied on formulaic guidelines, but rather
sought to maintain a flexible compensation program which allowed the company to adapt components
and levels of compensation to motivate and reward individual executives within the context of our
desire to attain certain strategic and financial goals. In addition to any objective criteria,
subjective factors considered in compensation determinations include an executives skills and
capabilities, contributions as a member of the executive management team, contributions to our
overall performance, and whether the total compensation potential and structure is sufficient to
ensure the retention of an executive when considering the compensation potential that may be
available elsewhere. We also seek to reward our named executive officers for the successful
completion or implementation of discrete projects, including projects relating to mergers and
acquisitions, integration and strategic initiatives. Our general goal is to provide a total
compensation package (irrespective of the individual components) that is competitive with our peer
companies.
In making compensation decisions in 2009, our board and ad hoc compensation committee did not
undertake any formal benchmarking or review any formal surveys of compensation for our peer
companies but rather relied on the members general knowledge of our industry, supplemented by
advice from our Chief Executive Officer based on his knowledge of our industry in markets in which
we participate.
Components of Compensation
For 2009, the compensation provided to our named executive officers consisted of the same
elements generally available to our non-executive employees, including base salary, annual bonus
and other perquisites and benefits, each of which is described in more detail below. We believe
that the mix of cash- and equity-based compensation over the long-term, as well as the ratio of
fixed to performance-based compensation, provides us with an effective means to attract, motivate,
and retain our named executive officers. Since equity grants were initiated under our Management
Incentive Plan (MIP) in 2007, the Board did not make additional grants in 2009, as the majority of
the 2007 grants had a 3-year vesting period. The Board will continue to review the potential for
MIP grants periodically.
Although 2009 was again a difficult year for the general business and capital markets, our
board determined that no significant changes to our compensation programs were required.
105
Base Salary
The base salary payable to each named executive officer is intended to provide a fixed
component of compensation reflecting the executives skill set, experience, role and
responsibilities. Additionally, the company intends to be competitive with its peer companies and
in the telecommunications sector generally. Base salary is reviewed periodically by our board, with
our Chief Executive Officer and ad hoc compensation committee providing recommendations to the
board for each named executive officer (other than the Chief Executive Officer). In determining
base salary, the board considers individual performance during the prior year, the mix of fixed to
overall compensation, and subjective considerations relating to individual contributions, including
contributions to the successful completion of discrete projects, as discussed above under
Determination of Compensation. Our named executive officers did not receive an increase in their
base salaries during 2009.
Annual Bonuses
Annual bonuses are intended to compensate executives for achieving our annual financial and
strategic goals, including overall company performance, growth, achievement of synergies from
acquisitions, and exceptional individual performance during the year. The amount of the annual
bonus earned by each of our named executive officers with respect to our 2009 fiscal year, if any,
has not been determined by our board as of the date of this disclosure. We expect such
determination, if any, to be made in the second quarter of 2010 and will disclose the payment basis
of such bonuses on a Form 8-K promptly following the boards determination. Based upon a
preliminary review of various operating metrics, including EBITDA margin and revenue metrics, an
accrual relating to bonuses to be paid to certain eligible employees of $2.0 million was included
in our annual results.
401(k) Savings Plan
We maintain a tax-qualified employee savings and retirement plan covering all of our full-time
employees, including our named executive officers. Under the 401(k) plan, employees may elect to
reduce their current compensation up to the statutorily prescribed annual limit and have the amount
of such reduction contributed to the plan. From time to time, we match contributions, up to certain
pre-established limits, made by our employees. Our named executive officers participate in the
401(k) plan on the same basis as our other employees, except for rules that govern 401(k) plans
with regard to highly compensated employees which may limit our named executive officers from
achieving the maximum amount of contributions under the plan.
Perquisites and Other Benefits
Our named executive officers are eligible to receive the same benefits, including life and
health insurance benefits, which are available to all employees. Our Chief Executive Officer
receives temporary housing near the company headquarters and transportation to and from his
principal place of residence. Any personal tax liability created by this reimbursement or for items
paid for directly by the company will be grossed up by the Company to cover the Chief Executive
Officers estimated income tax liability. The board determined that these benefits were necessary
to attract our Chief Executive Officer to join the company in 2005 and believe that these benefits
continue to be essential elements of his compensation package.
Severance Benefits
Certain of our named executive officers are entitled to receive severance benefits upon
certain qualifying terminations of employment, pursuant to the provision of such executives
employment agreements. These severance arrangements are primarily intended to retain our named
executives, and do not apply upon a voluntary termination except for our Chief Executive Officer
whose compensation arrangement includes provisions allowing for voluntary termination for good
reason.
106
SUMMARY COMPENSATION TABLE
The following table shows information regarding the compensation earned during the fiscal year
ended December 31, 2009, 2008 and 2007 by our named executive officers (Chief Executive Officer,
Chief Financial Officer and our four other most highly compensated executive officers who were
employed by us as of December 31, 2009, and whose total compensation exceeded $100,000 during that
fiscal year).
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonus |
|
|
Stock Awards |
|
|
Option Awards |
|
|
All Other |
|
|
|
|
Name and Principal Position |
|
Year |
|
|
Salary |
|
|
(1) |
|
|
(2) |
|
|
(3) |
|
|
Compensation |
|
|
Total |
|
Michael K. Robinson |
|
|
2009 |
|
|
$ |
450,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
95,843 |
|
|
$ |
545,843 |
|
President and Chief |
|
|
2008 |
|
|
|
436,264 |
|
|
|
230,000 |
|
|
|
|
|
|
|
|
|
|
|
120,446 |
|
|
|
786,710 |
|
Executive Officer |
|
|
2007 |
|
|
|
400,000 |
|
|
|
400,000 |
|
|
|
506,413 |
|
|
|
330,314 |
|
|
|
91,955 |
|
|
|
1,728,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corey Rinker |
|
|
2009 |
|
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
Executive Vice President, Chief |
|
|
2008 |
|
|
|
268,242 |
|
|
|
80,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348,242 |
|
Financial Officer, Treasurer and |
|
|
2007 |
|
|
|
260,000 |
|
|
|
90,000 |
|
|
|
149,600 |
|
|
|
43,584 |
|
|
|
80,898 |
|
|
|
624,082 |
|
Assistant Secretary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian P. Crotty |
|
|
2009 |
|
|
|
335,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335,000 |
|
Chief Operating Officer |
|
|
2008 |
|
|
|
328,736 |
|
|
|
140,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468,736 |
|
|
|
|
2007 |
|
|
|
310,000 |
|
|
|
205,000 |
|
|
|
367,538 |
|
|
|
121,010 |
|
|
|
77,417 |
|
|
|
1,080,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles C. Hunter |
|
|
2009 |
|
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
Executive Vice President, |
|
|
2008 |
|
|
|
265,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000 |
|
General Counsel and Secretary |
|
|
2007 |
|
|
|
250,000 |
|
|
|
100,000 |
|
|
|
139,975 |
|
|
|
43,584 |
|
|
|
|
|
|
|
533,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terrence J. Anderson |
|
|
2009 |
|
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
Executive Vice President, Finance |
|
|
2008 |
|
|
|
265,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000 |
|
and Corporate Development |
|
|
2007 |
|
|
|
250,000 |
|
|
|
165,000 |
|
|
|
315,288 |
|
|
|
94,376 |
|
|
|
|
|
|
|
824,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken A. Shulman |
|
|
2009 |
|
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
Executive Vice President, Chief |
|
|
2008 |
|
|
|
265,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,000 |
|
Technology Officer and Chief |
|
|
2007 |
|
|
|
250,000 |
|
|
|
125,000 |
|
|
|
200,888 |
|
|
|
72,584 |
|
|
|
|
|
|
|
648,472 |
|
Information Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2010, the ad hoc compensation committee of the board of directors
approved a $2.0 million discretionary bonus pool that will be
allocated among our named executive officers and other employees. This
pool was established to reward these individuals for their efforts in
connection with continued progress with respect to improvement of
various operating metrics, including EBITDA margin and revenue
metrics. As of the date of this report, the portion of the pool that
will be allocated to each of our named executive officers as their
2009 annual bonuses has not been determined. We expect such amounts to
be determined in the second quarter of 2010 and will file a Form 8-K
promptly after this information is determined. |
|
(2) |
|
Represents the aggregate grant date fair value of awards granted to
our named executive officers, determined under FASB ASC Topic 718.
For information on the valuation assumptions with respect to awards
made, refer to note 12 of our consolidated financial
statements. The amounts above reflect the Companys aggregate
expense for these awards and do not necessarily correspond
to the actual value that will be recognized by the named executive
officers. We did not grant any new stock awards since 2007. |
|
(3) |
|
Represents the aggregate grant date fair value of awards granted to
our named executive officers, determined under FASB ASC Topic 718.
For information on the valuation assumptions with respect to awards
made, refer to note 12 of our consolidated financial
statements. The amounts above reflect the Companys aggregate
expense for these awards and do not necessarily correspond
to the actual value that will be recognized by the named executive
officers. We did not grant any new option awards since 2007. |
|
(4) |
|
Represents company paid travel expenses of $21,000 and lodging
expenses of $31,110 incurred by Mr. Robinson during 2009, which were
grossed up by $43,733 to make him whole for taxes he was required to
pay. |
107
Narrative Disclosure Relating to Summary Compensation Tables
Chief Executive Officer Employment Agreement
On February 10, 2005, we entered into an employment agreement with Mr. Robinson, pursuant to
which he agreed to serve as our Chief Executive Officer for a three-year term with automatic
one-year renewals. Mr. Robinson is entitled to a minimum base salary and is eligible to receive an
annual bonus, as determined by our board, with a target bonus of between 30% and 100% of his annual
base salary. If Mr. Robinsons employment is terminated by us other than for cause, death or
disability, by Mr. Robinson for good reason, or if we fail to extend the employment agreement, Mr.
Robinson is entitled to (i) an amount equal to 100% of the sum of (a) his annual base salary and
(b) the average of the annual cash performance bonus paid to Mr. Robinson over the previous three
fiscal years, such amount to be paid in equal installments over 12 months, and (ii) immediate
vesting of any unvested equity. Additionally, if any amounts payable to Mr. Robinson following a
change in control become subject to an excise tax under Section 280G of the Internal Revenue Code,
he will be entitled to a gross up payment to make him whole for any excise tax he is required to
pay.
Under the employment agreement, Mr. Robinson has agreed to a non-compete provision pursuant to
which he cannot compete with us for a period of one year following any termination of his
employment. Mr. Robinson is also subject to a non-solicit covenant which prohibits him from
soliciting, among others, our officers and employees for a period of two years following the
termination of his employment. The employment agreement also contains customary confidentiality
provisions.
Employment Agreements with Other Named Executive Officers
We are currently a party to substantially similar employment agreements with Messrs. Rinker,
Crotty, Hunter, Anderson and Shulman. Pursuant to these employment agreements, each executive
agreed to serve as an executive officer for a one-year term with automatic one-year renewals. Each
executive is entitled to a minimum base salary and is eligible to receive an annual bonus with the
target bonus and actual cash bonus amount to be determined by the board each fiscal year. Upon a
termination of employment (i) by us other than for cause, death or disability, (ii) as a result of
our failure to renew his employment agreement, or (iii) in the case of Mr. Anderson and Mr. Shulman
only, the executives resignation for good reason (as defined in the employment agreement), the
executive will be entitled to continue to receive his base salary for a period of one year
following termination.
Messrs. Crotty, Rinker, Hunter and Shulman are barred from competing with us for a period of
one year following any termination of employment. Mr. Andersons employment agreement contains a
non-compete provision pursuant to which he cannot compete with us until the earlier of the date on
which his severance payments cease or the date which is one year following the termination of his
employment. Each employment agreement also contains non-solicit provisions, which prohibit the
executive from soliciting, among others, our officers and employees for a period of two years
following the termination of his employment. The employment agreements also contain customary
confidentiality provisions.
108
Management Incentive Plan
In February 2007, our board adopted the MIP, pursuant to which we may grant options and
restricted stock to our named executive officers and certain other key management employees. Grants
of shares or options under the plan are be valued at the fair market value at the time of grant and
approval by our board. Each option granted pursuant to the MIP is designed to comply with Section
409A of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, in order to
avoid the imposition of a 20% penalty tax to our named executive officers and other participants.
If a participating employee is terminated by us or our successor without cause following a change
in control of the company, all options and shares of restricted stock granted to the named
executive officer pursuant to the MIP will immediately vest. An initial public offering will not
constitute a change in control.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards(1) |
|
|
Stock Awards(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market |
|
|
|
Number of |
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
|
|
Units |
|
|
Units |
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
of Units |
|
|
|
Underlying |
|
|
Underlying |
|
|
|
|
|
|
|
|
|
|
Units That |
|
|
That |
|
|
|
Unexercised |
|
|
Unexercised |
|
|
Option |
|
|
Option |
|
|
Have Not |
|
|
Have Not |
|
|
|
Options |
|
|
Options |
|
|
Exercise |
|
|
Expiration |
|
|
Vested |
|
|
Vested |
|
Name |
|
Vested |
|
|
Unvested(2) |
|
|
Price |
|
|
Date |
|
|
(2) |
|
|
(3) |
|
Michael K. Robinson |
|
|
4,061 |
|
|
|
1,805 |
|
|
$ |
137.50 |
|
|
|
3/30/2010 |
|
|
|
|
|
|
$ |
|
|
Corey Rinker |
|
|
516 |
|
|
|
258 |
|
|
|
137.50 |
|
|
|
3/30/2010 |
|
|
|
51 |
|
|
|
7,013 |
|
Brian P. Crotty |
|
|
1,432 |
|
|
|
717 |
|
|
|
137.50 |
|
|
|
3/30/2010 |
|
|
|
144 |
|
|
|
19,800 |
|
Charles C. Hunter |
|
|
516 |
|
|
|
258 |
|
|
|
137.50 |
|
|
|
3/30/2010 |
|
|
|
51 |
|
|
|
7,013 |
|
Terrence J. Anderson |
|
|
1,118 |
|
|
|
558 |
|
|
|
137.50 |
|
|
|
3/30/2010 |
|
|
|
111 |
|
|
|
15,263 |
|
Kenneth A. Shulman |
|
|
860 |
|
|
|
429 |
|
|
|
137.50 |
|
|
|
3/30/2010 |
|
|
|
86 |
|
|
|
11,825 |
|
|
|
|
(1) |
|
Securities granted under the MIP have been presented as units for
purposes of this table only. Each unit represents 1 share of Series C
preferred stock and 25 shares of Class B common stock. However, while
presented as a unit for convenience, the actual grants represent
separate and distinct securities for accounting and securities law
purposes. |
|
(2) |
|
The unvested portion of the award will vest at the end of March of 2010. |
|
(3) |
|
The market value of the shares assumes a price of $137.50 per unit,
which represents the fair market value of a unit as of December 31,
2009. Determined in reliance on a valuation performed in April 2007,
which was the last valuation performed by the Company. |
109
OPTION EXERCISES AND STOCK VESTED DURING FISCAL YEAR
The following table provides information for each named executive officer with respect to the
shares of restricted stock which vested during 2009 and with respect to the stock option award
exercises during 2009 including the number of shares acquired upon exercise and the resulting value
realized from the exercise.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards |
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Class or |
|
|
Units |
|
|
Value |
|
|
|
Series |
|
|
Acquired on |
|
|
Realized |
|
Name |
|
of Stock |
|
|
Vesting |
|
|
on Vesting |
|
Michael K. Robinson |
|
|
|
|
|
|
|
|
|
$ |
|
|
Corey Rinker |
|
|
(1 |
) |
|
|
52 |
|
|
|
7,150 |
|
Brian P. Crotty |
|
|
(1 |
) |
|
|
143 |
|
|
|
19,663 |
|
Charles C. Hunter |
|
|
(1 |
) |
|
|
52 |
|
|
|
7,150 |
|
Terrence J. Anderson |
|
|
(1 |
) |
|
|
112 |
|
|
|
15,400 |
|
Kenneth A. Shulman |
|
|
(1 |
) |
|
|
86 |
|
|
|
11,825 |
|
|
|
|
(1) |
|
Securities granted under the MIP have been presented as units for
purposes of this table only. Each unit represents 1 share of Series C
preferred stock and 25 shares of Class B common stock. However, while
presented as a unit for convenience, the actual grants represent
separate and distinct securities for accounting and securities law
purposes. The market value of the units acquired upon vesting is based
on a unit price of $137.50 per unit. The amounts shown in the Value
Realized on Vesting column is calculated by multiplying the number of
units by the fair value of the underlying shares on the vesting date. |
110
Potential Payments Upon Termination Or Change In Control
Pursuant to the employment agreements with our named executive officers, the material terms of
which have been summarized above in the Narrative Disclosure Relating to the Summary Compensation
Table, upon certain terminations of employment, our named executive officers are entitled to
payments of compensation and benefits. The table below reflects the amount of compensation and
benefits payable to each named executive officer in the event of (i) termination for cause or, in
the case of our Chief Executive Officer only, without good reason prior to a change in control
(voluntary termination), (ii) termination other than for cause or with good reason (involuntary
termination), (iii) termination by reason of an executives death or disability, and (iv) an
involuntary termination following a change in control (change in control termination). The
amounts shown assume that the applicable triggering event occurred on December 31, 2009, and
therefore, are estimates of the amounts that would be paid to the named executive officers upon the
occurrence of such triggering event. For purposes of the MIP, change in control means (i) the
sale or disposition of the assets of the Company; or (ii) any person or group becomes the
beneficial owner of more than 50% of the total voting power of the voting stock of the Company
pursuant to a transaction where the investors (as defined in the MIP) cease to control the board.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
Value of |
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
Acceleration |
|
|
Tax |
|
|
|
|
Name |
|
Event |
|
|
Severance |
|
|
(1) |
|
|
Gross-Up |
|
|
Total |
|
Michael K. Robinson |
|
Voluntary Termination |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Involuntary Termination |
|
|
765,000 |
|
|
|
101,640 |
|
|
|
|
|
|
|
866,640 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
765,000 |
|
|
|
101,640 |
|
|
|
|
|
|
|
866,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corey Rinker |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
270,000 |
|
|
|
21,540 |
|
|
|
|
|
|
|
291,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian P. Crotty |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
335,000 |
|
|
|
|
|
|
|
|
|
|
|
335,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
335,000 |
|
|
|
60,174 |
|
|
|
|
|
|
|
395,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles C. Hunter |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
270,000 |
|
|
|
21,540 |
|
|
|
|
|
|
|
291,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terrence J. Anderson |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
270,000 |
|
|
|
46,683 |
|
|
|
|
|
|
|
316,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ken A. Shulman |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
270,000 |
|
|
|
35,982 |
|
|
|
|
|
|
|
305,982 |
|
|
|
|
(1) |
|
The calculation of the value of the equity acceleration is determined
by calculating the number of units that would vest in connection with
the applicable event (each unit representing 1 share of Series C
preferred stock and 25 shares of Class B common stock) and multiplying
it by $56.31 in the case of an option award or $137.50 in the case of
a stock award, which represents the fair market value of a unit as of
the date of grant in April 2007. For additional information on the
calculation of the fair market value of stock award units or option
award units, please refer to note 12 of our consolidated
financial statements. |
|
(2) |
|
Pursuant to the terms of Mr. Robinsons employment agreement, in the
event that any payment under the agreements constitutes an excess
parachute payment under Section 280G of the Internal Revenue Code, he
will be entitled to a gross-up payment to cover the 20% excise tax
which may be imposed on such payment pursuant to Section 4999 of the
Internal Revenue Code (amount shown is estimate). |
111
DIRECTOR COMPENSATION
During 2009, Mr. Roedel received $120,000 in annual cash compensation for his role as a
director and chairman of the audit committee of the board. During 2009, no compensation was paid to
any of the Companys other directors, primarily due to their status as representatives of
significant shareholders. In the event that new directors are elected to the Companys board who
are neither executives, nor represent significant shareholders, the Company may compensate such
individual for their role on the board and board committees. It is anticipated that the
compensation for such members of the board would be approved by the Companys board that may be in
place at that time. The Companys directors are reimbursed for normal and customary expenses
submitted in association with their participation at board meetings and committee meetings.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The following table and footnotes set forth, as of December 31, 2009, certain information
regarding the beneficial ownership of our capital stock by:
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each stockholder known by us to beneficially own more than 5% of each class of our
outstanding stock; |
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each of our directors and executive officers; and |
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all directors and executive officers as a group. |
Unless otherwise indicated, the address for each shareholder listed is c/o Broadview Networks
Holdings, Inc., 800 Westchester Avenue, Suite 501, Rye Brook, NY 10573. Except as otherwise
indicated, each of the persons named in this table has sole voting and investment power with
respect to all the shares indicated. For purposes of calculations in the following chart, as of
December 31, 2009, there were 9,333,680 shares outstanding of Class A Common Stock, 348,350 shares
outstanding of Class B Common Stock, 87,254 shares outstanding of Series A Preferred Stock, 100,702
shares outstanding of Series A-1 Preferred Stock, 91,187 shares outstanding of Series B Preferred
Stock, 64,633 shares outstanding of Series B-1 Preferred Stock and 13,934 shares outstanding of
Series C Preferred Stock. Beneficial ownership is determined in accordance with SEC rules and
generally represents voting or investment power with respect to securities. Shares of common stock
subject to issuance upon conversion of our preferred stock, exercise of options and warrants within
60 days of December 31, 2009 are deemed outstanding for computing the percentage of the person
holding such securities, but are not deemed outstanding for computing the percentage of any other
person. Warrants issued in connection with the InfoHighway merger are not exercisable within 60
days of December 31, 2009.
112
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Class A |
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Class B |
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Class A |
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Common Stock on an |
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Class B |
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Common Stock on an |
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Common Stock |
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As-Converted Basis(1) |
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Common Stock |
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As-Converted Basis(1) |
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Amount |
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Amount |
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Amount |
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Amount |
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and |
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Percent of |
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and |
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Percent of |
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and |
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Percent of |
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and |
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Percent of |
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Nature of |
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Outstanding |
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Nature of |
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Outstanding |
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Nature of |
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Outstanding |
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Nature of |
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Outstanding |
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Beneficial |
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Shares |
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Beneficial |
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Shares |
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Beneficial |
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Shares |
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Beneficial |
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Shares |
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Ownership |
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of Class |
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Ownership |
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of Class |
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Ownership |
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of Class |
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Ownership |
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of Class |
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Steven F. Tunney(2) |
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4,698,987 |
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50.3 |
% |
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11,459,788 |
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71.2 |
% |
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B. Hagen Saville(2) |
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4,698,987 |
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50.3 |
% |
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11,459,788 |
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71.2 |
% |
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Samuel G. Rubenstein(2) |
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4,698,987 |
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50.3 |
% |
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11,459,788 |
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71.2 |
% |
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John S. Patton, Jr(2) |
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4,698,987 |
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50.3 |
% |
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11,459,788 |
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71.2 |
% |
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Robert Manning(3) |
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1,508,506 |
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16.2 |
% |
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3,678,957 |
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32.0 |
% |
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Peter J. Barris(4) |
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821,345 |
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8.8 |
% |
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2,003,102 |
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19.0 |
% |
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Michael Robinson(5) |
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92,075 |
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26.4 |
% |
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186,519 |
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42.1 |
% |
Brian Crotty(6) |
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63,225 |
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18.1 |
% |
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128,077 |
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31.0 |
% |
Terrence J. Anderson(7) |
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54,550 |
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15.7 |
% |
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110,503 |
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27.3 |
% |
Kenneth A. Shulman(8) |
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34,375 |
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9.9 |
% |
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69,634 |
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18.2 |
% |
Corey Rinker(9) |
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25,925 |
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7.4 |
% |
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52,517 |
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14.0 |
% |
Charles Hunter(10) |
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24,175 |
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6.9 |
% |
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48,972 |
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13.1 |
% |
Directors and Executive
Officers as a Group(11) |
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7,028,838 |
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75.3 |
% |
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17,141,847 |
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88.1 |
% |
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294,325 |
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84.5 |
% |
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596,222 |
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91.7 |
% |
MCG(2) |
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4,698,987 |
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50.3 |
% |
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11,459,788 |
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71.2 |
% |
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Baker(3) |
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1,508,506 |
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16.2 |
% |
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3,678,957 |
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32.0 |
% |
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NEA(4) |
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821,345 |
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8.8 |
% |
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2,003,102 |
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19.0 |
% |
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Com Ventures(12) |
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360,109 |
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3.9 |
% |
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878,236 |
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8.9 |
% |
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WPG(13) |
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224,072 |
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2.4 |
% |
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546,469 |
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5.7 |
% |
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Apollo(14) |
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163,161 |
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1.7 |
% |
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397,918 |
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4.2 |
% |
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Trimaran(15) |
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127,499 |
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1.4 |
% |
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310,944 |
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3.3 |
% |
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(1) |
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The calculation of Class A Common Stock on an As-Converted Basis includes all shares of Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock
and Series B-1 Preferred Stock and warrants and options convertible or exercisable into Class A Common Stock within 60 days of December 31, 2009. This does not include
shares of capital stock, warrants or options that are convertible or exercisable into Class A Common Stock upon a change of control or qualifying initial public
offering. |
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|
The calculation of Class B Common Stock on an As-Converted Basis includes all shares of Series C Preferred Stock, warrants and options convertible or exercisable into
Class B Common Stock within 60 days of December 31, 2009. This does not include shares of capital stock, warrants or options that are convertible or exercisable into
Class B Common Stock upon a change of control or qualifying initial public offering. |
|
(2) |
|
MCG beneficially owns (i) 87,254 shares of our Series A Preferred Stock, which represents 100.0% of the outstanding shares of our Series A Preferred Stock and (ii)
100,702 shares of our Series A-1 Preferred Stock, which represents 100% of the outstanding shares of our Series A-1 Preferred Stock. Each of Mr. Tunney, Mr. Saville, Mr.
Rubenstein and Mr. Patton are officers of MCG Capital Corporation. By virtue of such relationship, each of Mr. Tunney, Mr. Saville, Mr. Rubenstein and Mr. Patton, may be
deemed to beneficially own the shares listed as beneficially owned by MCG. Each of Mr. Tunney, Mr. Saville, Mr. Rubenstein and Mr. Patton disclaims beneficial ownership
of such shares. |
|
(3) |
|
Baker beneficially owns (i) 38,119 shares of our Series B Preferred Stock, which represents 41.8% of the outstanding shares of our Series B Preferred Stock and (ii)
22,221 shares of our Series B-1 Preferred Stock, which represents 34.4% of the outstanding shares of our Series B-1 Preferred Stock. Mr. Manning is a manager of the
general partners of Baker Communications Fund, L.P. and Baker Communications Fund II (QP) L.P. By virtue of such relationship, Mr. Manning may be deemed to beneficially
own the shares listed as beneficially owned by Baker. Mr. Manning disclaims beneficial ownership of such shares. |
|
(4) |
|
NEA beneficially owns (i) 20,838 shares of our Series B Preferred Stock, which represents 22.9% of the outstanding shares of our Series B Preferred Stock and (ii) 12,016
shares of our Series B-1 Preferred Stock, which represents 18.6% of the outstanding shares of our Series B-1 Preferred Stock. Mr. Barris is the managing general partner
of New Enterprise Associates VII, L.P., New Enterprise Associates 9, L.P., New Enterprise Associates 10, L.P. and NEA Presidents Fund. By virtue of such relationship,
Mr. Barris may be deemed to beneficially own the shares listed as beneficially owned by NEA. Mr. Barris disclaims beneficial ownership of such shares. |
113
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(5) |
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Mr. Robinson beneficially owns 3,683 shares of our Series C Preferred Stock, which represents 26.4% the outstanding shares of our Series C Preferred Stock. |
|
(6) |
|
Mr. Crotty beneficially owns 2,529 shares of our Series C Preferred Stock, which represents 18.1% of the outstanding shares of our Series C Preferred Stock. |
|
(7) |
|
Mr. Anderson beneficially owns 2,182 shares of our Series C Preferred Stock, which represents 15.7% of the outstanding shares of our Series C Preferred Stock. |
|
(8) |
|
Mr. Shulman beneficially owns 1,375 shares of our Series C Preferred Stock, which represents 9.9% of the outstanding shares of our Series C Preferred Stock. |
|
(9) |
|
Mr. Rinker beneficially owns 1,037 shares of our Series C Preferred Stock, which represents 7.4% of the outstanding shares of our Series C Preferred Stock. |
|
(10) |
|
Mr. Hunter beneficially owns 967 shares of our Series C Preferred Stock, which represents 6.9% of the outstanding shares of our Series C Preferred Stock. |
|
(11) |
|
The Directors and Executive Officers as a group beneficially own (i) 87,254 shares of our Series A Preferred Stock, which represents 100.0% of the outstanding shares of
our Series A Preferred Stock, (ii) 100,702 shares of our Series A-1 Preferred Stock, which represents 100% of the outstanding shares of our Series A-1 Preferred Stock,
(iii) 58,957 shares of our Series B Preferred Stock, which represents 64.7% of the outstanding shares of our Series B Preferred Stock, (iv) 34,237 shares of our Series
B-1 Preferred Stock, which represents 53.0% of the outstanding shares of our Series B-1 Preferred Stock and (v) 11,773 shares of our Series C Preferred Stock, which
represents 84.5% of the outstanding shares of our Series C Preferred Stock. |
|
(12) |
|
References to Com Ventures are to Communications Ventures II, L.P., ComVentures IV, L.P., Communications Ventures II Affiliates Fund, L.P., ComVentures IV CEO Fund,
L.P., and ComVentures IV Entrepreneurs Fund, L.P. Com Ventures beneficially owns (i) 10,191 shares of our Series B Preferred Stock, which represents 11.2% of the
outstanding shares of our Series B Preferred Stock and (ii) 4,213 shares of our Series B-1 Preferred Stock, which represents 6.5% of the outstanding shares of our Series
B-1 Preferred Stock. |
|
(13) |
|
References to WPG are to Weiss, Peck & Greer Venture Associates IV, L.L.C., WPG Enterprise Fund III, L.L.C., Weiss, Peck & Greer Venture Associates IV Cayman, L.P., and
WPG Information Sciences Entrepreneur Fund, L.P. WPG beneficially owns (i) 6,418 shares of our Series B Preferred Stock, which represents 7.0% of the outstanding shares
of our Series B Preferred Stock and (ii) 2,545 shares of our Series B-1 Preferred Stock, which represents 3.9% of the outstanding shares of our Series B-1 Preferred
Stock. |
|
(14) |
|
References to Apollo are to APEUREKAGGN, LLC. Apollo beneficially owns 6,526 shares of our Series B-1 Preferred Stock, which represents 10.1% of the outstanding shares
of our Series B-1 Preferred Stock. |
|
(15) |
|
References to Trimaran are to CIBC Capital Corporation, CIBC Employee Private Equity Fund, Trimaran Capital, LLC, Trimaran Fund II, LLC, and Trimaran Parallel Fund II,
LLC. Trimaran beneficially owns 5,100 shares of our Series B-1 Preferred Stock, which represents 7.9% of the outstanding shares of our Series B-1 Preferred Stock. |
114
The Company has filed a registration statement on Form S-1 (File No. 333-147720) in connection
with its initial public offering. An initial public offering may result in a change of control of
the Company.
Securities authorized for issuance under equity compensation plans
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Equity Compensation Plan Information |
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Number of |
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Remaining |
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Units Available |
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|
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for Future |
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Number of |
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Number |
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Exercise Price |
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Issuance |
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Restricted |
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of |
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of |
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under Equity |
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Stock |
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Options |
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Outstanding |
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Compensation |
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Plan Category |
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Units(1) |
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Units(1) |
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Option Units |
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Plans |
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Equity compensation plans approved by security holders(2) |
|
|
14,402 |
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|
|
20,058 |
|
|
$ |
137.50 |
|
|
|
17,872 |
|
|
|
|
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|
|
|
|
|
|
|
|
|
Total |
|
|
14,402 |
|
|
|
20,058 |
|
|
$ |
137.50 |
|
|
|
17,872 |
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(1) |
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Securities granted under the MIP have been presented as units for
purposes of this table only. Each unit represents 1 share of Series C
preferred stock and 25 shares of Class B common stock. However, while
presented as a unit for convenience, the actual grants represent
separate and distinct securities for accounting and securities law
purposes. |
|
(2) |
|
For a description of the material features of the MIP, see the section
entitled Executive Compensation Compensation Discussion &
Analysis. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Amended and Restated Shareholders Agreement
We are party to an amended and restated shareholders agreement with MCG, Baker, NEA,
ComVentures, WPG, and certain other shareholders of Broadview. The agreement governs certain rights
of such shareholders as set forth below. This summary is not a complete description of all the
terms of the agreement.
The agreement imposes certain transfer restrictions on our securities and grants certain
rights to the parties to the agreement, including, among other things, rights of first offer,
drag-along rights and tag-along rights. Those participation rights, and certain other rights
granted under the agreement, will terminate following an initial public offering of common stock,
if the common stock so offered nets proceeds to us of not less than $50 million (Qualified Public
Offering). Certain shareholders also have the right to participate in the issuance or sale of our
shares on a pro-rata basis under the agreement.
The agreement, and our charter, provide that prior to a Qualified Public Offering, MCG will
have the right to elect up to four directors to our board of directors; Baker will have the right
to elect up to two directors; NEA will have the right to elect up to one director; and the
InfoHighway stockholders will have the right to elect up to one director. If we do not consummate
an exit transaction within six months from and after the date of an exit transaction notice from
the holders of Series B Preferred Stock exercising the rights set forth in the preceding paragraph,
the number of directors serving on the board of directors will increase by three. In that case, MCG
will have the right to elect up to four directors, Baker will have the right to elect up to two
directors, NEA will have the right to elect up to one director, the InfoHighway stockholders will
have the right to elect up to one director and MCG, Baker, NEA and the InfoHighway stockholders
will jointly select the remaining three directors.
The rights and obligations of each shareholder party to the agreement, except for the
drag-along rights and registration rights of the parties, will terminate upon the earliest of: (i)
such shareholder ceases to own our securities; (ii) a Qualified Public Offering; and (iii) any
sale, lease, or other disposition of all or substantially all of our assets or any merger,
reorganization, consolidation, or recapitalization transaction or any transaction in which the
holders of our capital stock immediately prior to such transaction do not continue to own more than
50% of the voting power of the entity surviving such transaction.
115
Pursuant to the agreement, certain corporate action also requires the approval by holders of
our Series A Preferred Stock, Series A-1 Preferred Stock, Series B Preferred Stock, Series B-1
Preferred Stock and/or the Series C-1 Preferred Stock. The agreement also contains certain
registration rights pursuant to which certain shareholders received piggyback registration rights,
demand registration rights and Form S-3 registration rights.
Employment Agreements
We have employment agreements with certain of our executive officers, which are described in
the section entitled Executive Compensation.
Policies and Procedures Regarding Transactions with Related Persons
Any transaction of the Company that is required to be reported under Item 404(a) of Regulation
S-K is disclosed to the full board of directors and is reviewed and approved in accordance with
applicable law. In addition, our shareholders agreement and the indenture governing our notes
contains provisions restricting our ability to enter into transactions with affiliates. Any such
transaction must be made on terms no less favorable to us than it would be if we entered into a
similar relationship with an unaffiliated third party. Other than the provisions in the
shareholders agreement and the indenture governing our notes we do not have written policies and
procedures evidencing the foregoing. The entire board is responsible for overseeing the application
of these polices and procedures.
Director Independence
At this time the independence requirements of Rule 4200 of NASDAQ and SEC Rule 10A-3 are not
applicable to the Company. As a result, we have not assessed the independence of the members of the
board of directors.
Item 14. Principal Accounting Fees and Services
Fees for professional services provided by our independent auditors Ernst & Young LLP, in each
of the following categories for the years ended December 31, 2008 and 2009 (in thousands):
|
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|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
Audit Fees |
|
$ |
1,666 |
|
|
$ |
815 |
|
Audit-Related Fees |
|
|
|
|
|
|
|
|
Tax Fees |
|
|
|
|
|
|
|
|
All Other Fees |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Total Fees |
|
$ |
1,666 |
|
|
$ |
817 |
|
|
|
|
|
|
|
|
Fees for audit services include fees associated with the annual audit and reviews of the
Companys quarterly reports on Form 10-Q, accounting consultation and work incurred in connection
with the filing of our registrations statements. Audit related fees principally include fees
associated with audits and due diligence completed in connection with acquisitions. Tax fees
included tax compliance, tax advice and tax planning. All fees charged by Ernst & Young LLP, our
independent registered public accounting firm, were reviewed and approved by the Board of
Directors.
116
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Financial Statements and Schedules
The following financial statements and schedules listed below are included in this Form 10-K.
Financial Statements (See Item 8)
Managements Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders Deficiency for the Years Ended December 31, 2009, 2008, and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008, and 2007
Notes to Consolidated Financial Statements
Financial Statement Schedules
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
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Balance at |
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Beginning of |
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Charges to |
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Other |
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Balance at |
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Period |
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Expenses |
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Accounts |
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Deductions (b) |
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End of Period |
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Allowance for uncollectible accounts
receivable: |
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Year Ended December 31, 2007 |
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$ |
7,971 |
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$ |
6,546 |
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$ |
2,344 |
a |
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$ |
(9,815 |
) |
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$ |
7,046 |
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Year Ended December 31, 2008 |
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7,046 |
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5,539 |
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3,740 |
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(12,003 |
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4,332 |
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Year Ended December 31, 2009 |
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4,332 |
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6,924 |
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2,936 |
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(6,240 |
) |
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7,942 |
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Valuation allowance for deferred tax assets: |
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Year Ended December 31, 2007 |
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$ |
974 |
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$ |
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$ |
27,106 |
c |
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$ |
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$ |
28,080 |
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Year Ended December 31, 2008 |
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28,080 |
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16,563 |
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44,643 |
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Year Ended December 31, 2009 |
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44,643 |
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5,094 |
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49,737 |
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(a) |
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Allowance for Uncollectible Accounts Receivable includes $1,273 of allowances for
uncollectible accounts receivable as of acquisition dates from business combinations
occurring during the year ended December 31, 2007 and recoveries of amounts previously
written off. |
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(b) |
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Allowance for Uncollectible Accounts Receivable includes amounts written off as uncollectible. |
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(c) |
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Net effect of purchase accounting in relation to 2007 merger and current year activity. |
(b) Exhibits
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Exhibit |
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No. |
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Description |
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2.1 |
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Stock Purchase Agreement, dated as of June 26, 2006, by and among Broadview Networks Holdings, Inc., ATX
Communications, Inc., the stockholders of ATX Communications, Inc. and, for the limited purposes set forth
therein, Leucadia National Corporation.(a) |
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2.2 |
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Agreement and Plan of Merger, dated as of February 23, 2007, by and among Broadview Networks Holdings, Inc.,
Eureka Acquisition Corporation, Eureka Broadband Corporation, the significant stockholders of Eureka Broadband
Corporation set forth therein and Jeffrey Ginsberg, as agent for the stockholders of Eureka Broadband
Corporation.(a) |
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3.1 |
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Tenth Amended and Restated Certificate of Incorporation, dated May 31, 2007, of Broadview Networks Holdings,
Inc.* |
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3.2 |
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Second Amended and Restated Bylaws of Broadview Networks Holdings, Inc.(a) |
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4.1 |
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Indenture, dated as of August 23, 2006, by and among Broadview Networks Holdings, Inc., the Guarantors named
therein and The Bank of New York, as trustee.(a) |
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4.2 |
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Supplemental Indenture, dated as of September 29, 2006, by and among Broadview Networks Holdings, Inc., the
Guarantors named therein and The Bank of New York, as trustee.(a) |
117
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Exhibit |
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No. |
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Description |
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4.3 |
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Form of Exchange 113/8% Senior Secured Note due 2012.(a) |
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4.4 |
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Form of Guarantee of Exchange 113/8% Senior Secured Note due 2012.(a) |
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4.5 |
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Second Supplemental Indenture, dated as of May 14, 2007, by and among Broadview Networks Holdings, Inc., the
Guarantors named therein and The Bank of New York, as trustee.(a) |
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4.6 |
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Third Supplemental Indenture, dated as of May 31, 2007, by and among Broadview Networks Holdings, Inc., the
Guarantors named therein and The Bank of New York, as trustee.(a) |
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4.7 |
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Security Agreement, dated as of August 23, 2006, by and among by and among Broadview Networks Holdings, Inc,
the subsidiaries of Broadview Networks Holdings, Inc. named therein and The Bank of New York, as collateral
agent.(a) |
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4.8 |
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Supplement to the Security Agreement, dated as of September 29, 2006, by and among Broadview Networks Holdings,
Inc, the subsidiaries of Broadview Networks Holdings, Inc. named therein and The Bank of New York, as
collateral agent.(a) |
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4.9 |
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Second Supplement to the Security Agreement, dated as of May 31, 2007, by and among Broadview Networks
Holdings, Inc, the subsidiaries of Broadview Networks Holdings, Inc. named therein and The Bank of New York, as
collateral agent.(a) |
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10.1 |
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Management Incentive Plan, dated as of February 9, 2007, of Broadview Networks Holdings, Inc.(a) |
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10.2 |
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Employment Agreement, dated as of February 10, 2005, by and between Broadview Networks Holdings, Inc. and
Michael K. Robinson.(a)(c) |
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10.3 |
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Employment Agreement, dated as of March 3, 1994, by and between Bridgecom Holdings, Inc. and Brian Crotty.(a)(c) |
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10.4 |
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Employment Agreement, dated as of January 14, 2004, by and between Broadview Networks Holdings, Inc. and
Terrence J. Anderson.(a)(c) |
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10.5 |
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Employment Agreement, dated as of January 14, 2005, by and between Broadview Networks Holdings, Inc. and
Kenneth Shulman.(a)(c) |
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10.6 |
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Employment Agreement, dated as of March 3, 1994, by and between Bridgecom Holdings, Inc. and Charles
Hunter.(a)(c) |
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10.7 |
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Employment Agreement, dated as of March 3, 2994, by and between Bridgecom Holdings, Inc. and Corey Rinker.(a)(c) |
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10.8 |
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Credit Agreement, dated as of August 23, 2006, by and among Broadview Networks Holdings, Inc., Broadview
Networks, Inc., Broadview Networks of Massachusetts, Inc., Broadview Networks of Virginia, Inc., the Lenders
named therein, Jefferies & Company, Inc., as syndication agent, and The CIT Group/Business Credit, Inc., as
administrative agent, collateral agent and documentation agent.(a) |
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10.9 |
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Collateral Agreement, dated as of August 23, 2006, by and among Broadview Networks Holdings, Inc., the
Subsidiary Grantors named therein and The CIT Group/Business Credit, Inc., as administrative agent.(a) |
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10.10 |
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Supplement to the Collateral Agreement, dated as of October 20, 2006, by and among Broadview Networks Holdings,
Inc., the Subsidiary Grantors named therein and The CIT Group/Business Credit, Inc., as administrative
agent.(a) |
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10.11 |
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Second Supplement to the Collateral Agreement, dated as of June 26, 2007, by and among Broadview Networks
Holdings, Inc., the Subsidiary Grantors named therein and The CIT Group/Business Credit, Inc., as
administrative agent.(a) |
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10.12 |
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Guaranty Agreement, dated as of August 23, 2006, by and among the Subsidiary Grantors named therein and The CIT
Group/Business Credit, Inc., as administrative agent.(a) |
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10.13 |
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Supplement to the Guaranty Agreement, dated as of October 20, 2006, by and among the Subsidiary Grantors named
therein and The CIT Group/Business Credit, Inc., as administrative agent.(a) |
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10.14 |
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Second Supplement to the Guaranty Agreement, dated as of June 26, 2007, by and among the Subsidiary Grantors
named therein and The CIT Group/Business Credit, Inc., as administrative agent.(a) |
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118
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Exhibit |
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No. |
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Description |
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10.15 |
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Intercreditor Agreement, dated as of August 23, 2006, by and among The CIT Group/Business Credit, Inc., as
administrative agent, The Bank of New York, as trustee, collateral agent and second priority agent, Broadview
Networks Holdings, Inc. and the Subsidiary Grantors named therein.(a) |
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10.16 |
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Joinder to the Intercreditor Agreement, dated as of October 20, 2006, by and among The CIT Group/Business
Credit, Inc., as administrative agent, The Bank of New York, as trustee, collateral agent and second priority
agent, Broadview Networks Holdings, Inc. and the Subsidiary Grantors named therein.(a) |
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10.17 |
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Amendment No. 1 to the Intercreditor Agreement, dated as of May 10, 2007, by and among The CIT Group/Business
Credit, Inc., as administrative agent, The Bank of New York, as trustee, collateral agent and second priority
agent, Broadview Networks Holdings, Inc. and the Subsidiary Grantors named therein.(a) |
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10.18 |
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Joinder No. 2 to the Intercreditor Agreement, dated as of June 26, 2007, by and among The CIT Group/Business
Credit, Inc., as administrative agent, The Bank of New York, as trustee, collateral agent and second priority
agent, Broadview Networks Holdings, Inc. and the Subsidiary Grantors named therein.(a) |
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10.19 |
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Third Amended and Restated Shareholders Agreement, by and among Broadview Networks Holdings, Inc. and the
shareholders named therein, dated as of May 31, 2007.(b) |
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10.20 |
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Indemnity Escrow Agreement, dated May 31, 2007, between Broadview Networks Holdings, Inc., the agent for the
former stockholders of Eureka Broadband Corporation and JP Morgan Chase Bank, N.A.(b) |
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10.21 |
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Escrow Agreement, dated September 29, 2006, by and among ATX Communications, Inc., LUK CLEC LLC, Broadview
Networks Holdings, Inc. and JPMorgan Chase Bank, N.A. (d) |
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10.22 |
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1997 Stock Option Plan.(c)(d) |
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10.23 |
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2000 Stock Option Plan.(c)(d) |
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12.1 |
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Ratio of Earnings to Fixed Charges.* |
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21.1 |
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Subsidiaries of Broadview Networks Holdings, Inc.* |
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31.1 |
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Certification pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.* |
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31.2 |
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Certification pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.* |
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32.1 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.* |
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32.2 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.* |
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* |
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Filed herewith. |
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(a) |
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Incorporated by reference to Broadview Networks Holdings, Inc.s Form
S-4/A filed on October 16, 2007 (File No. 333-142946). |
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(b) |
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Incorporated by reference to Broadview Networks Holdings, Inc.s Form
8-K filed on November 19, 2007 (File No. 333-142946). |
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(c) |
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Management contract or compensatory plan or arrangement. |
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(d) |
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Incorporated by reference to Broadview Networks Holdings, Inc.s Form
10-K filed on March 25, 2009 (File No. 333-147720). |
119
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 the 29th day of March, 2010.
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BROADVIEW NETWORKS HOLDINGS, INC.
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By: |
/s/ Michael K. Robinson
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Name: |
Michael K. Robinson |
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Title: |
Chief Executive Officer, President and Director |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities indicated and on the
dates indicated.
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Signature |
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Title |
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Date |
/s/ Michael K. Robinson
Michael K. Robinson
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President, Chief Executive Officer, and Director
(Principal Executive Officer)
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March 29, 2010 |
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/s/ Corey Rinker
Corey Rinker
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Chief Financial Officer, Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
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March 29, 2010 |
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/s/ Steven F. Tunney
Steven F. Tunney
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Director
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March 29, 2010 |
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/s/ Richard W. Roedel
Richard W. Roedel
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Director
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March 29, 2010 |
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/s/ Samuel G. Rubenstein
Samuel G. Rubenstein
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Director
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March 29, 2010 |
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/s/ John S. Patton, Jr.
John S. Patton, Jr.
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Director
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March 29, 2010 |
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/s/ B. Hagen Saville
B. Hagen Saville
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Director
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March 29, 2010 |
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/s/ David C. Ruberg
David C. Ruberg
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Director
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March 29, 2010 |
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/s/ Robert Manning
Robert Manning
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Director
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March 29, 2010 |
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/s/ Peter J. Barris
Peter J. Barris
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Director
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March 29, 2010 |
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/s/ Raul Martynek
Raul Martynek
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Director
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March 29, 2010 |
120
SUPPLEMENTAL INFORMATION TO BE FURNISHED
WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS
WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy material has been sent to security holders.
121