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 |
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For The Fiscal Year Ended December 31, 2010 |
OR
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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
(State or other jurisdiction of
incorporation or organization)
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11-3310798
(I.R.S. Employer
Identification No.) |
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800 Westchester Avenue, Suite N501
Rye Brook, NY 10573
(Address of principal executive offices)
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10573
(Zip Code) |
(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 o 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
Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 18, 2011 |
Series A common stock, $.01 par value
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9,333,680 |
Series B common stock, $.01 par value
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360,050 |
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 2010 means the period from January 1,
2010 to December 31, 2010.
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. actions 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 and refinancing 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 revolving 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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the financial difficulties faced 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 in 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.
4
PART I
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 private branch exchange (PBX) services, Multiprotocol Label Switching
(MPLS), unified messaging, managed services, cabling, hardware, professional services and other
value-added services, delivered via T-1 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, 2010, we generated revenues of $407.7 million. For the year
ended December 31, 2010, revenues from retail end-users represented 87.5% of our total revenues,
revenues from wholesale end-users represented 5.3% of our total revenues and revenues from carrier
access and reciprocal compensation represented 5.2% of our total revenues. We recorded net losses
of $42.9 million in 2008, $13.9 million in 2009 and $18.8 million in 2010. In addition, as of
December 31, 2010, we had $324.1 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 approximately 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, 2010, we provided services to approximately
44,000 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.
5
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 2,900 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 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. In addition, the number of
competitive communications providers in the United States has been reduced as the industry
continues to consolidate. 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.
6
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. 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, 2010, we
served approximately 44,000 business customers and over 700,000 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.
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.
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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, 2010, 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 (QoS) 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.
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. 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.
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. 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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New York Metro
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New York City Long Island Westchester |
Pennsylvania
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Allentown Harrisburg Philadelphia |
Upstate New York
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Buffalo Syracuse Albany |
Massachusetts
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Boston Metro Western MA |
New Jersey
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Northern NJ 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 87.5%
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, 2010, 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 cloud-based hosted telecommunications
and IT services, including hosted IP phone systems, virtual and dedicated servers, software as a
service and infrastructure as a service, as well as 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. We also provide value-added products
and services, such as telecommunications hardware, professional 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 our network allows us to deliver IP-based services and
provide our customers with cost-effective alternatives to traditional products while maintaining
quality of service. 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 large 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.
9
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 IP solutions (OfficeSuite)
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Dedicated Internet T-1 access
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Local, regional, domestic and international services |
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Switched Ethernet-delivered High Bandwidth access
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T-1 Primary rate interface and Session Initiation Protocol services |
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Broadband Internet access
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Private line |
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Telecommuting
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DSL data service and Symmetric DSL Internet access
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Voicemail |
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Automatic Call Distribution (ACD)
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E-mail
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Caller identification |
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Collocation
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Call waiting |
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Traditional and converged telephone systems
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IP Virtual Private Networks (MPLS and Remote Access Switching)
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Call forwarding |
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Enhanced e-mail security
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Metro Ethernet services |
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Conference calling |
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VoIP |
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Toll free services |
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Managed Wide Area Network |
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Local Area Network/Wide Area Network integration |
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Data backup and recovery |
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Disaster recovery services |
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Unified Communications solutions |
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Fixed-Mobile Convergence solutions |
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Software as a Service (SaaS) |
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Infrastructure as a Service (IaaS) |
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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 IP Phone Solutions (OfficeSuite). One of our fastest growing product lines, our hosted
IP phone solution, packages business-grade IP telephony with advanced telephone equipment and
managed network security into innovative and feature-rich solutions for unified communications and
is available nationwide. Built on redundant, carrier-grade platforms for better reliability,
security, flexibility and scalability, our hosted IP phone solutions leverage advanced IP
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. Customers can choose from a range of different connectivity options at various
price points. Our hosted IP phone 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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OfficeSuite ACD is a full-featured hosted application integrated with OfficeSuite. It
provides robust call center capabilities for business customers, including advanced call routing,
queuing, call recording, out-of-the-box reporting and dashboard functionality. OfficeSuite ACD
delivers the advanced call center features of a PBX or stand-alone ACD without the need to invest
capital in on-site equipment or intensive IT support. It provides a suite of highly flexible
capabilities that enable quick and easy prioritization and distribution of incoming business calls,
customized hold treatments and advanced routing options that factor in agent skills, location,
experience or other parameters.
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 competing carriers. We also provide multiple products in
a bundle to increase utilization of 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 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 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
overextended 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.
Software as a Service/Infrastructure as a Service. Our cloud-based services target the growing
opportunities for SaaS and IaaS nationwide. Both SaaS and IaaS allow companies to move software,
applications, storage and server hardware that support critical business operations off site, which
can improve the availability and security of their data and applications while reducing
their total ownership cost. In addition, SaaS and IaaS allow customers to focus their efforts on
their own mission-critical business needs instead of dealing with software and hardware upgrades
and maintenance. Our product offerings include individual and bundled packages of subscription-based
software and infrastructure services. Businesses will be able to access not only the most popular
productivity software, including hosted versions of Microsoft Exchange®, Microsoft Office®
and other Microsoft products over the Internet, but also thousands of other
business applications. We provide packages that incorporate a robust set of mobility and teleworker
features. Our product offerings include a full suite of backup tools for desktop and server data, enabling
a complete solution for disaster avoidance and rapid recovery. Both virtualized and dedicated
server solutions are available and capable of supporting most business applications.
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 who desire high bandwidth data links
between locations or to the Internet. Internet connections are provided via DSL, T-1, DS3, or
Switched Ethernet, depending on our customers bandwidth and security needs. Point-to-point and
point-to-multipoint 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 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 providing high-speed access to the Internet.
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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 and enhanced services such as voice mail and direct inward dialing. We provide these
services by leveraging our circuit-switched and IP-based network infrastructure. We use unbundled
network element loops, digital T-1 lines and, in certain instances, our commercial agreements with
Verizon and AT&T to service our customers. In addition to our local service portfolio, 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 and IP-based
products in our on-net territories for multi-year terms. Additionally, we offer incentives for
sales of our hosted IP products on a nationwide basis.
Our largest sales channel is our Direct Sales division. As of December 31, 2010, this group
consisted of approximately 180 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 upsell 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 350 active relationships.
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 three 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. Affinity Partners co-market Broadview products and services to association members. We also
sponsor various organizations including non-profits. 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.
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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 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.
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 Direct Inbound Dialing
(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.
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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
We have approximately 475 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.
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 2,900 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. In 2009, we acquired the intellectual property and
source code for the enabling technology behind our hosted internet protocol phone service. We also
hired key development, test and support resources. As a result, we now directly control the ongoing
development and enhancement of our hosted IP phone service platform, and are able to make available
to our hosted VoIP customers unique and differentiated applications and services. 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.
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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, 2010, 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.
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.
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. We have entered into an amended and restated commercial agreement with
Verizon. This amended and restated commercial agreement extends into 2013 and allows 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 are required
under our amended and restated commercial agreement with Verizon to maintain a certain volume of
lines on a take-or-pay basis. 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 have entered into a multi-state interconnection agreement
with AT&T and are currently negotiating agreements with other incumbent local exchange carriers
(ILECs) to support our nationwide service offering outside the Verizon Northeast and Mid-Atlantic
service areas.
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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.
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 representatives 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.
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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.
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.
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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.
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 other market participants (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 Other Market Participants
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 other existing and potential market participants 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, 2010, we had approximately 950 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 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 of 1934 (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 of 1996 (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 DSL 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 did 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. Both Verizon and Qwest withdrew their
UNE-forbearance petitions following denial by the FCC of Qwests Phoenix UNE-forbearance request.
In denying the Qwest Phoenix UNE-forbearance petition, the FCC established a new market-power
analytical framework for assessing future forbearance petitions. Qwest has appealed the FCCs
denial of its Phoenix UNE-forbearance petition. We cannot predict the outcome of this appeal 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. We have entered into a multi-state interconnection agreement with
AT&T and are currently negotiating agreements with other ILECs to support our nationwide service
offering outside the Verizon Northeast and Mid-Atlantic service areas. Our agreements will be
amended to reflect recent FCC orders, 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. The FCC has recently issued a new Notice of Proposed
Rulemaking in which it proposes once again to phase out the current per-minute intercarrier
compensation system, replacing it with explicit support from a new Connect America Fund. The FCC
also proposes to address the issues of phantom traffic, traffic stimulation and the role of VoIP
traffic in the intercarrier compensation system. 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.
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.
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. The FCC has
recently issued a Notice of Proposed Rulemaking by which it proposes to effect these changes. 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 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.
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.
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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., 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 PSTN; 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.
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 we own or operate 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.
31
Our business faces many risks. Accordingly, existing and 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, 2010, we had $324.1 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 $17.1 million in the form of
our revolving credit facility is due in 2012. 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 $42.9 million, $13.9
million and $18.8 million in 2008, 2009 and 2010, 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.
32
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 $20.7 million as of December 31, 2010. 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, Verizon has sought,
albeit without success, 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
Business 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 existing and potential
market participants, 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 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 depends 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, 2010, we required
approximately $68.3 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 $1.0 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.
During 2010 we entered into an amended and restated commercial agreement with Verizon pursuant
to which we will 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 will continue in effect into
2013.
If our amended and restated agreement 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 $20.7 million as of December 31, 2010. 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 the USF 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.
36
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. We have entered into an amended and restated commercial agreement with Verizon pursuant
to which we will 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 will continue in effect into 2013. We are required
under our amended and restated commercial agreement with Verizon to maintain a certain volume of
lines on a take-or-pay basis. Expiration or termination of our current 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
Business 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.
37
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) 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, (ii) it is unclear which intercarrier
compensation regime applies to VoIP services and (iii) 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 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/Cavalier, Earthlink/ITCDeltaCom and Earthlink/One Communications. 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.
We and other 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 and been resolved
through settlements. 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.
38
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.
39
A discussion of legal and regulatory developments is included in the section entitled
Business 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 USF, to provide emergency 9-1-1 services
and/or to comply with the CALEA. 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 continues. 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 approximately 475 commercial buildings in metro New York and
Washington, D.C. 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.
40
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 recovering from a period of significant disruption and instability in the financial markets.
U.S. and global credit and equity markets are recovering from significant disruption in the
financial markets following which a number of financial institutions and insurance companies
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.
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.
41
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.
42
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.
43
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. 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. |
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Unresolved Staff Comments |
None.
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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Lease |
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Square |
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Location |
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Expiration |
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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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April 2011 |
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14,637 |
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Melville, NY |
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March 2011 |
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13,152 |
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Switches: |
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New York, NY |
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May 2012 |
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38,500 |
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Philadelphia, PA |
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July 2023 |
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16,617 |
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Long Island City, NY |
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October 2019 |
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12,144 |
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Charlestown, MA |
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April 2020 |
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12,490 |
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Philadelphia, PA |
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Month to month |
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21,000 |
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Syracuse, NY |
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October 2014 |
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8,000 |
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Philadelphia, PA |
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January 2013 |
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5,928 |
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Herndon, VA |
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June 2020 |
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5,000 |
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44
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Item 3. |
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Legal Proceedings |
We are not currently a party to a material legal action.
We are, however, party to certain legal actions 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.
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Item 4. |
|
(Removed and Reserved) |
45
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 18, 2011:
|
|
|
|
|
|
|
Holders |
|
|
|
of |
|
Class of Equity Security |
|
Record |
|
Common stock A |
|
|
206 |
|
Common stock B |
|
|
36 |
|
Series A Preferred stock |
|
|
1 |
|
Series A-1 Preferred stock |
|
|
1 |
|
Series B Preferred stock |
|
|
133 |
|
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, 2008, 2009 and
2010 and as of December 31, 2009 and 2010 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, 2006 and 2007 and as of December 31, 2006, 2007 and 2008 have been derived
from our audited consolidated financial statements not included elsewhere in this report. 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.
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.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Statements of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
272,653 |
|
|
$ |
448,774 |
|
|
$ |
496,922 |
|
|
$ |
456,452 |
|
|
$ |
407,704 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (1) |
|
|
130,841 |
|
|
|
234,166 |
|
|
|
257,883 |
|
|
|
225,431 |
|
|
|
193,860 |
|
Selling, general and administrative (2)(3) |
|
|
107,805 |
|
|
|
166,231 |
|
|
|
168,421 |
|
|
|
154,722 |
|
|
|
148,917 |
|
Depreciation and amortization |
|
|
49,781 |
|
|
|
75,980 |
|
|
|
73,608 |
|
|
|
49,922 |
|
|
|
44,085 |
|
Impairment charges |
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger integration costs |
|
|
1,430 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
289,857 |
|
|
|
480,877 |
|
|
|
499,912 |
|
|
|
430,075 |
|
|
|
386,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(17,204 |
) |
|
|
(32,103 |
) |
|
|
(2,990 |
) |
|
|
26,377 |
|
|
|
20,842 |
|
Interest expense |
|
|
(25,463 |
) |
|
|
(34,390 |
) |
|
|
(39,514 |
) |
|
|
(39,197 |
) |
|
|
(38,379 |
) |
Interest income |
|
|
1,395 |
|
|
|
1,489 |
|
|
|
702 |
|
|
|
112 |
|
|
|
73 |
|
Other income (expense) |
|
|
21 |
|
|
|
240 |
|
|
|
(8 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes |
|
|
(41,251 |
) |
|
|
(64,764 |
) |
|
|
(41,810 |
) |
|
|
(12,691 |
) |
|
|
(17,464 |
) |
Provision for income taxes |
|
|
(262 |
) |
|
|
(726 |
) |
|
|
(1,056 |
) |
|
|
(1,179 |
) |
|
|
(1,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(41,513 |
) |
|
$ |
(65,490 |
) |
|
$ |
(42,866 |
) |
|
$ |
(13,870 |
) |
|
$ |
(18,752 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activites |
|
$ |
13,296 |
|
|
$ |
(2,663 |
) |
|
$ |
26,637 |
|
|
$ |
37,867 |
|
|
$ |
30,369 |
|
Investing activities |
|
|
(115,568 |
) |
|
|
(88,935 |
) |
|
|
(68,490 |
) |
|
|
(33,894 |
) |
|
|
(20,886 |
) |
Financing activities |
|
|
129,471 |
|
|
|
89,541 |
|
|
|
23,541 |
|
|
|
(4,175 |
) |
|
|
(6,254 |
) |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Balance Sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
42,546 |
|
|
$ |
40,489 |
|
|
$ |
22,177 |
|
|
$ |
21,975 |
|
|
$ |
25,204 |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
23,533 |
|
|
|
23,549 |
|
|
|
13,554 |
|
Property and equipment, net |
|
|
61,395 |
|
|
|
77,373 |
|
|
|
85,248 |
|
|
|
86,875 |
|
|
|
85,144 |
|
Goodwill |
|
|
69,632 |
|
|
|
96,154 |
|
|
|
98,111 |
|
|
|
98,238 |
|
|
|
98,238 |
|
Total assets |
|
|
317,666 |
|
|
|
380,010 |
|
|
|
355,006 |
|
|
|
327,328 |
|
|
|
294,825 |
|
Total debt, including current portion |
|
|
217,769 |
|
|
|
313,990 |
|
|
|
336,778 |
|
|
|
331,366 |
|
|
|
324,088 |
|
Total stockholders equity (deficiency) |
|
|
20,470 |
|
|
|
(22,715 |
) |
|
|
(65,266 |
) |
|
|
(79,146 |
) |
|
|
(97,839 |
) |
|
|
|
(1) |
|
Exclusive of depreciation and amortization. |
|
(2) |
|
Includes share-based compensation of $754, $2,552, $293, $233 and $59 for the years ended
December 31, 2006, 2007, 2008, 2009 and 2010, respectively. |
|
(3) |
|
Includes software development expenses of $1,819, $2,293, $1,639, $1,843 and $1,334 for the
years ended December 31, 2006, 2007, 2008, 2009 and 2010, respectively. |
47
|
|
|
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, existing and 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 included in tables 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 business customers of all sizes throughout the
country with a concentration 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 and hosted VoIP
solutions (also known as cloud-based Communication as a Service (CaaS)). 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 an operating loss of $3.0 million for the year ended December 31, 2008. For the
years ended December 31, 2009 and 2010, we recorded operating income of $26.4 million and $20.8
million, respectively. For the years ended December 31, 2008, 2009 and 2010, we recorded net losses
of $42.9 million, $13.9 million and $18.8 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 newer 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. Although our overall revenue
has declined since 2008, we have partially mitigated the impact of the revenue decline on our
overall operating results by reducing costs of revenue and selling, general and administrative
(SG&A) costs, the achievement of operating efficiencies throughout the organization and by the
net effect of non-recurring gains and losses.
As of December 31, 2010, we had approximately 270 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 also offer our hosted IP product, OfficeSuite, on a
nationwide basis and have chosen our agent sales channel as our primary distribution channel. 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.
48
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. Revenue from the sale of T-1-based products and managed services represents approximately
49% of our total revenue and approximately 55% of our retail revenue stream, with typical
incremental gross profit margins in excess of 60%.
Our facilities-based network encompasses approximately 2,900 route miles of metro and
long-haul fiber, approximately 260 collocations and approximately 475 lit buildings. Our network
has the ability to deliver traditional services, such as POTS and T-1 lines, as well as DSL, 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. A significant portion of our customer base has been migrated to a
cost-effective and efficient IP-based infrastructure, which enhances the performance of our
network. As of December 31, 2010, 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, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Voice and data services |
|
|
86.5 |
% |
|
|
87.0 |
% |
|
|
87.5 |
% |
Wholesale |
|
|
3.8 |
% |
|
|
4.4 |
% |
|
|
5.3 |
% |
Access |
|
|
5.8 |
% |
|
|
5.2 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
Total network services |
|
|
96.1 |
% |
|
|
96.6 |
% |
|
|
98.0 |
% |
Other |
|
|
3.9 |
% |
|
|
3.4 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
|
49.5 |
% |
|
|
47.9 |
% |
|
|
46.9 |
% |
Other cost of revenues |
|
|
2.4 |
% |
|
|
1.5 |
% |
|
|
0.6 |
% |
Selling, general and administrative |
|
|
33.9 |
% |
|
|
33.9 |
% |
|
|
36.5 |
% |
Depreciation and amortization |
|
|
14.8 |
% |
|
|
10.9 |
% |
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
100.6 |
% |
|
|
94.2 |
% |
|
|
94.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(0.6 |
%) |
|
|
5.8 |
% |
|
|
5.1 |
% |
Interest expense |
|
|
(8.0 |
%) |
|
|
(8.6 |
%) |
|
|
(9.4 |
%) |
Interest income |
|
|
0.1 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes |
|
|
(8.5 |
%) |
|
|
(2.8 |
%) |
|
|
(4.3 |
%) |
Provision for income taxes |
|
|
(0.2 |
%) |
|
|
(0.3 |
%) |
|
|
(0.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(8.7 |
%) |
|
|
(3.1 |
%) |
|
|
(4.6 |
%) |
|
|
|
|
|
|
|
|
|
|
49
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 87.5% 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
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 2011 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.
50
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 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, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
(2,990 |
) |
|
$ |
26,377 |
|
|
$ |
20,842 |
|
Add back non-gross profit items included in net loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
73,608 |
|
|
|
49,922 |
|
|
|
44,085 |
|
Selling, general and administrative |
|
|
168,421 |
|
|
|
154,722 |
|
|
|
148,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
239,039 |
|
|
$ |
231,021 |
|
|
$ |
213,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue |
|
|
48.1 |
% |
|
|
50.6 |
% |
|
|
52.5 |
% |
|
|
|
|
|
|
|
|
|
|
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 regard 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 or future requirements for capital
expenditures; |
|
|
|
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. |
51
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 includes depreciation for network-related voice and
data equipment, fiber, back-office systems, third-party conversion costs, furniture, fixtures,
leasehold improvements, office equipment and computers and amortization of intangibles associated
with mergers, acquisitions and software development costs.
Adjusted EBITDA Presentation
Adjusted EBITDA as presented in this Managements Discussion and Analysis of Financial
Condition and Results of Operations, represents net loss before depreciation and amortization,
interest income and expense, provision for income taxes, share-based compensation, costs associated
with initial public offering, severance and related separation costs and professional fees related
to strategic initiatives. Adjusted EBITDA is not a measure of financial performance under GAAP.
Adjusted EBITDA is a non-GAAP financial measure used by our management, together with financial
measures prepared in accordance with GAAP such as net loss, income from operations and revenue, to
assess our historical and prospective operating performance.
The following table sets forth, for the periods indicated, a reconciliation of adjusted EBITDA
to net loss as net loss is calculated in accordance with GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(42,866 |
) |
|
$ |
(13,870 |
) |
|
$ |
(18,752 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Add back non-EBITDA items included in net
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
73,608 |
|
|
|
49,922 |
|
|
|
44,085 |
|
Interest expense, net of interest income |
|
|
38,812 |
|
|
|
39,085 |
|
|
|
38,306 |
|
Provision for income taxes |
|
|
1,056 |
|
|
|
1,179 |
|
|
|
1,288 |
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
70,610 |
|
|
|
76,316 |
|
|
|
64,927 |
|
Costs associated with initial public offering |
|
|
|
|
|
|
|
|
|
|
3,669 |
|
Severance and related separation costs |
|
|
30 |
|
|
|
552 |
|
|
|
1,121 |
|
Professional fees related to strategic
initiatives |
|
|
32 |
|
|
|
101 |
|
|
|
137 |
|
Share-based compensation |
|
|
293 |
|
|
|
233 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
70,965 |
|
|
$ |
77,202 |
|
|
$ |
69,913 |
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenues |
|
|
14.3 |
% |
|
|
16.9 |
% |
|
|
17.1 |
% |
|
|
|
|
|
|
|
|
|
|
52
Management uses adjusted EBITDA to enhance its understanding of our operating performance,
which represents managements views concerning our performance in the ordinary, ongoing and
customary course of its operations. Management historically has found it helpful, and believes that
investors have found it helpful, to consider an operating measure that excludes expenses, not
reflective of our core operations. Accordingly, the exclusion of these items in our non-GAAP
presentation should not be interpreted as implying that these items are non-recurring, infrequent
or unusual. Management believes that, for the reasons discussed below, our use of a supplemental
financial measure, which excludes these expenses, facilitates an assessment of our fundamental
operating trends and addresses concerns of management and of our investors that these expenses may
obscure such underlying trends. Management notes that each of these expenses is presented in our
financial statements and discussed in the managements discussion and analysis section of our
reports filed with the SEC, so that investors have complete information about the expenses.
The information about our operating performance provided by this financial measure is used by
management for a variety of purposes. Management regularly communicates its adjusted EBITDA results
to its board of directors and discusses with the board managements interpretation of such results.
Management also compares our adjusted EBITDA performance against internal targets as a key factor
in determining cash bonus compensation for executives and other employees, primarily because
management believes that this measure is indicative of how the business is performing and is being
managed. In addition, our management uses adjusted EBITDA to evaluate our 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 operating performance that
vary widely among similar companies.
Our management believes that adjusted EBITDA is a particularly useful comparative measurement
within our industry. The communications industry has experienced recent trends of increased merger
and acquisition activity and financial restructurings. These activities have led to significant
charges to earnings, such as those resulting from integration costs and debt restructurings, and to
significant variations among companies with respect to capital structures and cost of capital
(which affect interest expense) and differences in taxation and book depreciation of facilities and
equipment (which affect relative depreciation expense), including significant differences in the
depreciable lives of similar assets among various companies. Adjusted EBITDA facilitates
company-to-company comparisons in the communications industry by eliminating some of the foregoing
variations. Management believes that because of the variety of equity awards used by companies, the
varying methodologies for determining share-based compensation among companies and from period to
period, and the subjective assumptions involved in those determinations, excluding share-based
compensation from adjusted EBITDA, enhances company-to-company comparisons over multiple fiscal
periods. By permitting investors to review both the GAAP and non-GAAP measures, companies that
customarily use similar non-GAAP measures facilitate an enhanced understanding of historical
financial results and enable investors to make more meaningful company-to-company comparisons.
We provide information relating to our adjusted EBITDA so that analysts, investors and other
interested persons have the same data that management uses to assess our operating performance,
which permits these analysts, investors and other interested persons 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 both on a standalone
and a comparative basis. Management believes that adjusted EBITDA should be viewed only as a
supplement to the GAAP financial information.
Our adjusted EBITDA 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, adjusted EBITDA has
other limitations as an analytical financial measure. These limitations include the following:
|
|
|
adjusted EBITDA does not reflect our capital expenditures, future requirements for
capital expenditures or contractual commitments to purchase capital equipment; |
|
|
|
adjusted EBITDA 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 adjusted EBITDA does not
reflect any cash requirements for such replacements; |
|
|
|
adjusted EBITDA does not reflect the cost of equity awards to employees; and |
|
|
|
adjusted EBITDA does not reflect the effect of earnings or charges resulting from matters
that management considers not indicative of our ongoing operations.
|
53
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 adjusted EBITDA. As a result of these limitations,
adjusted EBITDA should not be considered as an alternative to net loss, as calculated in accordance
with GAAP, as a measure of operating performance or as an alternative to any other GAAP measure of
operating performance.
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2010
Set forth below is a discussion and analysis of our results of operations for the years ended
December 31, 2009 and 2010.
The following table provides a breakdown of components of our statement of operations for the
years ended December 31, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
440,928 |
|
|
|
96.6 |
% |
|
$ |
399,355 |
|
|
|
98.0 |
% |
|
|
(9.4 |
%) |
Other |
|
|
15,524 |
|
|
|
3.4 |
% |
|
|
8,349 |
|
|
|
2.0 |
% |
|
|
(46.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
456,452 |
|
|
|
100.0 |
% |
|
$ |
407,704 |
|
|
|
100.0 |
% |
|
|
(10.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
218,673 |
|
|
|
47.9 |
% |
|
$ |
191,232 |
|
|
|
46.9 |
% |
|
|
(12.5 |
%) |
Other |
|
|
6,757 |
|
|
|
1.5 |
% |
|
|
2,628 |
|
|
|
0.6 |
% |
|
|
(61.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
225,430 |
|
|
|
49.4 |
% |
|
$ |
193,860 |
|
|
|
47.5 |
% |
|
|
(14.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
222,255 |
|
|
|
48.7 |
% |
|
$ |
208,123 |
|
|
|
51.0 |
% |
|
|
(6.4 |
%) |
Other |
|
|
8,767 |
|
|
|
1.9 |
% |
|
|
5,721 |
|
|
|
1.5 |
% |
|
|
(34.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
231,022 |
|
|
|
50.6 |
% |
|
$ |
213,844 |
|
|
|
52.5 |
% |
|
|
(7.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
Revenues
Revenues for the years ended December 31, 2009 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice and data services |
|
$ |
397,274 |
|
|
|
87.0 |
% |
|
$ |
356,792 |
|
|
|
87.5 |
% |
|
|
(10.2 |
%) |
Wholesale |
|
|
19,906 |
|
|
|
4.4 |
% |
|
|
21,656 |
|
|
|
5.3 |
% |
|
|
8.8 |
% |
Access |
|
|
23,748 |
|
|
|
5.2 |
% |
|
|
20,907 |
|
|
|
5.2 |
% |
|
|
(12.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total network services |
|
|
440,928 |
|
|
|
96.6 |
% |
|
|
399,355 |
|
|
|
98.0 |
% |
|
|
(9.4 |
%) |
Other |
|
|
15,524 |
|
|
|
3.4 |
% |
|
|
8,349 |
|
|
|
2.0 |
% |
|
|
(46.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
456,452 |
|
|
|
100.0 |
% |
|
$ |
407,704 |
|
|
|
100.0 |
% |
|
|
(10.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from voice services have decreased $44.6 million, or 15.4%, between 2009 and 2010.
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. Our revenues from data
services have decreased by $2.1 million, or 2.0%, between 2009 and 2010. Our carrier access
revenues have decreased primarily due to decreasing revenue from voice services, which reduces our
revenues from access originations and terminations and reciprocal compensation. In addition,
carrier access revenues have also decreased due to lower fees charged to the carriers, government
mandated rate decreases and the impact of disputed access charges. 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 include data cabling, service installation and wiring and phone
systems sales and installation, which continue to decline due to the current economic environment.
Cost of Revenues (exclusive of depreciation and amortization)
Cost of revenues were $193.9 million for the year ended December 31, 2010, a decrease of 14.0%
from $225.4 million for the same period in 2009 as we identified and eliminated inefficiencies in
our operating platforms. The decrease is also due to our overall decline in revenue. 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 $178.1
million, or 79.0%, of our total cost of revenues for the year ended December 31, 2009 and $149.0
million, or 76.8%, for the year ended December 31, 2010. The most significant components of our
costs purchased from third party providers consist of costs related to our Verizon wholesale
advantage contract, unbundled network element loop costs and T-1 costs, which totaled $45.0
million, $24.7 million and $53.3 million, respectively, for the year ended December 31, 2009. These
costs totaled $35.5 million, $21.3 million and $48.2 million, respectively, for the year ended
December 31, 2010. Combined these costs decreased by 14.6% between 2009 and 2010. 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.
Gross Profit (exclusive of depreciation and amortization)
Gross profit was $213.8 million for the year ended December 31, 2010, a decrease of 7.4% from
$231.0 million for the same period in 2009. As a percentage of revenues gross profit increased to
52.5% in 2010 from 50.6% in 2009. The increase in gross profit percentage 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. In addition, 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.
55
Selling, General and Administrative
SG&A expenses were $148.9 million, 36.5% of revenues, for the year ended December 31, 2010, a
decrease of 3.8% from $154.7 million, 33.9% of revenues, for the same period in 2009. This decrease
in SG&A expenses between 2009 and 2010 is a result of: i) decreased employee costs of $5.6 million
primarily from reduced employee headcount; ii) decreased bad debt expenses of $1.8 million from
improved accounts receivable collections and decreased accounts receivable write-offs; iii)
decreased tax and regulatory expenses of $2.0 million due to the settlement of outstanding state
and local tax matters; and iv) decreased commission expenses of $3.2 million as a result of
declining revenue and the reduction of royalty expenses. The decrease in SG&A expenses was
partially offset by increased expenses of $2.0 million to outside service providers. Additionally,
as of December 31, 2009, our other non-current assets included $3.7 million of costs associated
with the registration statement filed with the SEC for a potential initial public offering. We have
elected not to complete the offering and have charged these costs to operations during the year
ended December 31, 2010. These costs were approximately 2.5% of the Companys total SG&A for the
year ended December 31, 2010. The increase in SG&A as a percentage of revenue is due to our overall
revenue decline. We continue to look for additional cost savings in various categories including
headcount and professional services.
Depreciation and Amortization
Depreciation and amortization costs were $44.1 million for the year ended December 31, 2010, a
decrease of 11.6% from $49.9 million for the same period in 2009. This decrease in depreciation and
amortization expense was due to fully amortizing two of our acquired customer base intangible
assets during 2009 and 2010 as well as fully amortizing an acquired trademark during 2010.
Amortization expense included in our results of operations for customer base intangible assets for
the year ended December 31, 2010 was $10.9 million, a decrease of $4.8 million from $15.7 million
included in our results of operations during the same period in 2009. Amortization expense for our
trademarks for the year ended December 31, 2010 was $1.5 million, a decrease of $0.5 million from
$2.0 million for 2009.
Interest
Interest expense was $38.4 million for the year ended December 31, 2010, a decrease of 2.1%
from $39.2 million for the same period in 2009. The decrease was primarily due to lower interest
expense as a result of having a lower average outstanding debt balance for the year ended December
31, 2010 compared to the same period in 2009. The lower average debt balance is due to reduced
borrowings under our revolving credit facility. Our effective annual interest rates for the years
ended December 31, 2009 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
Interest expense |
|
$ |
39,197 |
|
|
$ |
38,379 |
|
Weighted average debt outstanding |
|
$ |
330,711 |
|
|
$ |
322,536 |
|
Effective interest rate |
|
|
11.9 |
% |
|
|
11.9 |
% |
56
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 statement of operations for the
years ended December 31, 2008 and 2009:
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Years Ended December 31, |
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|
|
|
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
% of Total |
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|
|
|
|
% of Total |
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|
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|
|
|
Amount |
|
|
Revenues |
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|
Amount |
|
|
Revenues |
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|
% Change |
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|
|
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Revenues: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
%) |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
|
|
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Cost of revenues: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
246,019 |
|
|
|
49.5 |
% |
|
$ |
218,673 |
|
|
|
47.9 |
% |
|
|
(11.1 |
%) |
Other |
|
|
11,864 |
|
|
|
2.4 |
% |
|
|
6,757 |
|
|
|
1.5 |
% |
|
|
(43.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
257,883 |
|
|
|
51.9 |
% |
|
$ |
225,430 |
|
|
|
49.4 |
% |
|
|
(12.6 |
%) |
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|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
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Gross profit: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network services |
|
$ |
231,557 |
|
|
|
46.6 |
% |
|
$ |
222,255 |
|
|
|
48.7 |
% |
|
|
(4.0 |
%) |
Other |
|
|
7,482 |
|
|
|
1.5 |
% |
|
|
8,767 |
|
|
|
1.9 |
% |
|
|
17.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
239,039 |
|
|
|
48.1 |
% |
|
$ |
231,022 |
|
|
|
50.6 |
% |
|
|
(3.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Revenues for the years ended December 31, 2008 and 2009 were as follows:
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|
Years Ended December 31, |
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2008 |
|
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2009 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
|
% Change |
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
Revenues: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
%) |
|
|
|
|
|
|
|
|
|
|
|
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|
57
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 was slightly offset by an increased demand for our data, hosted
and managed services. Our revenues from data services 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 was also 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 decreased
primarily due to decreasing revenue from voice services, which reduced 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, 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 consisted
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 consisted 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 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.
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 was
primarily due to lower costs resulting from provisioning more lines from resale and unbundled
network platform to on-net.
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
was 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.
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.
58
Interest
Interest expense was $39.2 million for the year ended December 31, 2009, a 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 was due to the
outstanding borrowings under our revolving credit facility. Our effective annual interest rates for
the years ended December 31, 2008 and 2009 were as follows:
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|
|
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 |
% |
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 maintain standby letters of credit outstanding of $4.0 million, of which $1.3 million are
fully collateralized by the letter of credit subfacility under our revolving credit facility. We
posted cash collateral of $2.7 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 and cash equivalents will be sufficient to fund our operations and to service our
notes and our revolving credit facility for at least the next 12 months. Further, a significant
majority of our planned capital expenditures are success-based expenditures, meaning that they
are 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 acquired, which limited our ability to borrow under the lease line. As a result,
during July 2010, we entered into a new $5 million capital lease facility. As of December 31, 2010,
we had $1.4 million of capital lease obligations outstanding under our previous capital lease line
and $2.9 million under our new capital lease line. As of December 31, 2010, we had $17.1 million of
outstanding borrowings under our revolving credit facility. Additionally, we have used our
revolving credit facility to collateralize $1.3 million of outstanding letters of credit as of
December 31, 2010. Outstanding borrowings under our revolving credit facility were originally due
and payable on August 23, 2011. On November 12, 2010, the Company entered into an amendment with
its lender to extend the revolving credit facility through February 23, 2012. As a result,
outstanding borrowings under our revolving credit facility continue to be reflected as long-term
debt of the Company. The loans under the revolving credit facility bear interest on a base rate
method or LIBOR method, in each case plus an applicable margin percentage, at our option. As a
result of this amendment, the applicable margin percentage increased by 25 basis points under both
the base rate and LIBOR methods. All other significant terms and conditions of the revolving credit
facility remain unchanged. 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.
59
As of December 31, 2010, we will require approximately $68.3 million in cash to service the
interest due on our notes throughout the remaining life of the notes. Our notes and our revolving
credit facility both mature in 2012. We may need to refinance all or a portion of our indebtedness,
including the notes, at or before maturity. We cannot be assured 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.
Disputes
We are involved in a variety of disputes with multiple carrier vendors relating to billings of
approximately $20.7 million as of December 31, 2010. While we hope to resolve these disputes
through negotiation, we may be compelled to arbitrate these matters. 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 will have sufficient cash on hand to fund any
differences between our expected and actual settlement amounts. 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.
Revolving Credit Facility
On August 23, 2006, we entered into our $25.0 million five-year revolving credit facility. Our
revolving credit facility was amended on November 12, 2010 to extend the term through February 23,
2012. Our revolving credit facility has a $15.0 million letter of credit subfacility. As of
December 31, 2010, we had $17.1 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.
The interest rates per annum applicable to the loans under our revolving 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) 2.00% in the case of base rate loans and (y)
3.00% 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
3.00%, issuance fees in respect thereof and commitment fees on the unused commitments at a per
annum rate of 0.50%. In the event that our revolving credit facility is completely terminated or
availability under our revolving credit facility is permanently reduced prior to the maturity date,
we are required to pay a prepayment fee of 0.75% multiplied by (i) the total credit commitment at
the date of termination or (ii) the amount by which the credit commitment has been permanently
reduced.
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 revolving 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
revolving 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.
60
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, 2010, 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. Interest on these notes is due and payable on March
1 and September 1 of each year.
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, 2009 Compared to Year Ended December 31, 2010
Cash Flows from Operating Activities
Cash provided by operating activities was $37.9 million for the year ended December 31, 2009,
compared to $30.4 million for the same period in 2010. During each of the years ended December 31,
2009 and 2010, we paid $34.1 million in interest on our notes. We experienced a decline in our
income from operations from $26.4 million for the year ended December 31, 2009 to $20.8 million in
2010, which impacted our cash flow from operations. We incurred a non-cash charge of $3.7 million
during the year
ended December 31, 2010 in connection with our decision to not complete our initial public
offering. During the year ended December 31, 2010 we settled several outstanding state and local
sales and use tax matters, which contributed to the reduction in cash provided by operating
activities between 2009 and 2010.
61
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 $20.9 million for the same period in 2010. During
2010, we generated $10.0 million in cash flow from the sales of investment securities in excess of
the investment securities we purchased during the same period. Our capital expenditures for
property and equipment were $3.9 million lower during 2010 than for the same period in 2009.
Cash Flows from Financing Activities
Cash flows used in financing activities were $4.2 million for the year ended December 31,
2009, compared to $6.3 million for the same period in 2010. The change in cash flows from financing
activities was primarily due to a repayment of borrowings under our revolving credit facility of
$2.3 million during the year ended December 31, 2009 as compared to $7.7 million during the same
period in 2010. Additionally, we had proceeds from capital lease financing of $0.4 million during
the year ended December 31, 2009 as compared to $3.5 million during the same period in 2010.
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2009
Cash Flows from Operating Activities
Cash provided by operating activities was $26.6 million for the year ended December 31, 2008,
compared to $37.9 million for the same period in 2009. The change in cash flows from our operating
activities was due primarily to improvements in our operating results as a result of factors
discussed previously, which resulted in a reduction in our net loss from $42.9 million for the year
ended December 31, 2008 to $14.0 million for the same period in 2009. 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 December 31, 2008 and 2009, respectively, we paid $37.6 million and $38.1 million 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 $33.9 million for the same period in 2009. The
change in 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
from $39.8 million during the year ended December 31, 2008 to $33.7 million for the same period in
2009. Additionally, we purchased $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 provided by financing activities was $23.5 million for the year ended December 31, 2008
compared to cash used in financing activities of $4.2 million for the year ended December 31, 2009.
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.
62
Contractual Obligations
The following table summarizes our future contractual cash obligations as of December 31,
2010. The following numbers are presented in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More Than 5 |
|
|
|
Total |
|
|
Less Than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
Years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 3/8 senior secured notes due 2012 |
|
$ |
300,000 |
|
|
$ |
|
|
|
$ |
300,000 |
|
|
$ |
|
|
|
$ |
|
|
Cash interest for notes |
|
|
68,250 |
|
|
|
34,125 |
|
|
|
34,125 |
|
|
|
|
|
|
|
|
|
Credit facility |
|
|
17,122 |
|
|
|
|
|
|
|
17,122 |
|
|
|
|
|
|
|
|
|
Cash interest for credit facility at current
rate of 5.25% |
|
|
1,046 |
|
|
|
911 |
|
|
|
135 |
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
4,980 |
|
|
|
2,298 |
|
|
|
2,368 |
|
|
|
314 |
|
|
|
|
|
Operating leases |
|
|
51,975 |
|
|
|
7,709 |
|
|
|
13,295 |
|
|
|
10,738 |
|
|
|
20,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443,373 |
|
|
|
45,043 |
|
|
|
367,045 |
|
|
|
11,052 |
|
|
|
20,233 |
|
Purchase commitment obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications commitments |
|
|
61,337 |
|
|
|
40,859 |
|
|
|
20,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
504,710 |
|
|
$ |
85,902 |
|
|
$ |
387,523 |
|
|
$ |
11,052 |
|
|
$ |
20,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Accounting Standards
The following accounting standards have been issued, which we will need to adopt in the
future.
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 for
us 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 adoption of this standard update is not expected to have a significant impact 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 for us 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 adoption of this standard update is not expected to have a significant
impact on our consolidated financial statements.
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.
63
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 $0.4 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 customer balances are normally reserved at 80%. 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 $1.1 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 generally 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 costs 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.
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.
64
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, 2010, we had net
operating loss carryforwards (NOLs) available totaling $200.4 million, which begin to expire in
2012. We have provided a full valuation allowance against the net deferred tax asset as of December
31, 2010 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.
65
|
|
|
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 and our revolving credit facility with a variable interest rate. We are not exposed
to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold
any derivative financial instruments nor do we hold any securities for trading or speculative
purposes.
We continually monitor the collectability of our accounts receivable and 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, 2010. 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, 2010, was approximately $293.3 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 $17.1 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.
66
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
67
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.
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, 2010, 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.
68
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, 2010 and 2009, and the related
consolidated statements of operations, stockholders deficiency and cash flows for each of the
three years in the period ended December 31, 2010. 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, 2010 and 2009, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2010, 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 18, 2011
69
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
21,975 |
|
|
$ |
25,204 |
|
Certificates of deposit |
|
|
1,878 |
|
|
|
2,894 |
|
Investment securities |
|
|
23,549 |
|
|
|
13,554 |
|
Accounts receivable, less allowance for doubtful accounts of $7,942 and $10,664 |
|
|
41,388 |
|
|
|
35,945 |
|
Other current assets |
|
|
10,976 |
|
|
|
10,718 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
99,766 |
|
|
|
88,315 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
86,875 |
|
|
|
85,144 |
|
Goodwill |
|
|
98,238 |
|
|
|
98,238 |
|
Intangible assets, net of accumulated amortization of $51,728 and $39,747 |
|
|
27,484 |
|
|
|
15,053 |
|
Other assets |
|
|
14,965 |
|
|
|
8,075 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
327,328 |
|
|
$ |
294,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIENCY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
9,196 |
|
|
$ |
12,431 |
|
Accrued expenses and other current liabilities |
|
|
35,630 |
|
|
|
29,232 |
|
Taxes payable |
|
|
12,768 |
|
|
|
9,361 |
|
Deferred revenues |
|
|
8,965 |
|
|
|
8,555 |
|
Current portion of capital lease obligations |
|
|
3,080 |
|
|
|
2,298 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
69,639 |
|
|
|
61,877 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
326,510 |
|
|
|
319,108 |
|
Deferred rent payable |
|
|
3,343 |
|
|
|
3,086 |
|
Deferred revenues |
|
|
1,445 |
|
|
|
1,133 |
|
Capital lease obligations, net of current portion |
|
|
1,776 |
|
|
|
2,682 |
|
Deferred income taxes payable |
|
|
3,040 |
|
|
|
4,009 |
|
Other |
|
|
721 |
|
|
|
769 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
406,474 |
|
|
|
392,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficiency: |
|
|
|
|
|
|
|
|
Common stock A $.01 par value; authorized 80,000,000 shares, issued 9,342,509
shares,
and outstanding 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 $156,927
and $176,623 |
|
|
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 $181,114 and $203,845 |
|
|
1 |
|
|
|
1 |
|
Series B Preferred stock $.01 par value; authorized 93,180 shares, designated,
issued and outstanding 91,187 shares entitled in liquidation to $164,001
and $184,585 |
|
|
1 |
|
|
|
1 |
|
Series B-1 Preferred stock $.01 par value; authorized 86,000 shares, designated and
issued 64,986 shares and outstanding 64,633 shares entitled in
liquidation to $116,243 and $130,834 |
|
|
1 |
|
|
|
1 |
|
Series C Preferred stock $.01 par value; authorized 52,332 shares, designated,
issued and outstanding 14,402 shares entitled in liquidation to $18,466 and $21,717 |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
140,752 |
|
|
|
140,811 |
|
Accumulated deficit |
|
|
(219,836 |
) |
|
|
(238,588 |
) |
Treasury stock, at cost |
|
|
(177 |
) |
|
|
(177 |
) |
|
|
|
|
|
|
|
Total stockholders deficiency |
|
|
(79,146 |
) |
|
|
(97,839 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders deficiency |
|
$ |
327,328 |
|
|
$ |
294,825 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
70
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
496,922 |
|
|
$ |
456,452 |
|
|
$ |
407,704 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
257,883 |
|
|
|
225,431 |
|
|
|
193,860 |
|
Selling, general and administrative (includes share-based
compensation of $293, $233 and $59) |
|
|
168,421 |
|
|
|
154,722 |
|
|
|
148,917 |
|
Depreciation and amortization |
|
|
73,608 |
|
|
|
49,922 |
|
|
|
44,085 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
499,912 |
|
|
|
430,075 |
|
|
|
386,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(2,990 |
) |
|
|
26,377 |
|
|
|
20,842 |
|
Interest expense |
|
|
(39,514 |
) |
|
|
(39,197 |
) |
|
|
(38,379 |
) |
Interest income |
|
|
702 |
|
|
|
112 |
|
|
|
73 |
|
Other income (expense) |
|
|
(8 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes |
|
|
(41,810 |
) |
|
|
(12,691 |
) |
|
|
(17,464 |
) |
Provision for income taxes |
|
|
(1,056 |
) |
|
|
(1,179 |
) |
|
|
(1,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(42,866 |
) |
|
$ |
(13,870 |
) |
|
$ |
(18,752 |
) |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
71
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Deficiency
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
9,342,880 |
|
|
$ |
107 |
|
|
|
9,342,880 |
|
|
$ |
107 |
|
|
|
9,333,680 |
|
|
$ |
107 |
|
Cancellation of shares |
|
|
|
|
|
|
|
|
|
|
(371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired |
|
|
|
|
|
|
|
|
|
|
(8,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
9,342,880 |
|
|
|
107 |
|
|
|
9,333,680 |
|
|
|
107 |
|
|
|
9,333,680 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
360,050 |
|
|
|
4 |
|
|
|
360,050 |
|
|
|
4 |
|
|
|
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 |
|
|
87,254 |
|
|
|
1 |
|
|
|
87,254 |
|
|
|
1 |
|
|
|
87,254 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
91,202 |
|
|
|
1 |
|
|
|
91,202 |
|
|
|
1 |
|
|
|
91,187 |
|
|
|
1 |
|
Cancellation of shares |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
91,202 |
|
|
|
1 |
|
|
|
91,187 |
|
|
|
1 |
|
|
|
91,187 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B-1 Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
64,986 |
|
|
|
1 |
|
|
|
64,986 |
|
|
|
1 |
|
|
|
64,633 |
|
|
|
1 |
|
Treasury shares acquired |
|
|
|
|
|
|
|
|
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
64,986 |
|
|
|
1 |
|
|
|
64,633 |
|
|
|
1 |
|
|
|
64,633 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
14,402 |
|
|
|
|
|
|
|
14,402 |
|
|
|
|
|
|
|
14,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
14,402 |
|
|
|
|
|
|
|
14,402 |
|
|
|
|
|
|
|
14,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
140,270 |
|
|
|
|
|
|
|
140,563 |
|
|
|
|
|
|
|
140,752 |
|
Stock-based compensation |
|
|
|
|
|
|
293 |
|
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
59 |
|
Cancellation of warrnats |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
140,563 |
|
|
|
|
|
|
|
140,752 |
|
|
|
|
|
|
|
140,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
(163,100 |
) |
|
|
|
|
|
|
(205,966 |
) |
|
|
|
|
|
|
(219,836 |
) |
Net loss |
|
|
|
|
|
|
(42,866 |
) |
|
|
|
|
|
|
(13,870 |
) |
|
|
|
|
|
|
(18,752 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
(205,966 |
) |
|
|
|
|
|
|
(219,836 |
) |
|
|
|
|
|
|
(238,588 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
Unrealized gain on investment securities |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
realized gains included in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177 |
) |
Treasury shares acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177 |
) |
|
|
|
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders deficiency |
|
|
|
|
|
$ |
(65,266 |
) |
|
|
|
|
|
$ |
(79,146 |
) |
|
|
|
|
|
$ |
(97,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
72
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(42,866 |
) |
|
$ |
(13,870 |
) |
|
$ |
(18,752 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
32,322 |
|
|
|
32,120 |
|
|
|
31,606 |
|
Amortization of deferred financing costs |
|
|
2,639 |
|
|
|
2,625 |
|
|
|
2,660 |
|
Amortization of intangible assets |
|
|
41,221 |
|
|
|
17,736 |
|
|
|
12,431 |
|
Amortization of bond premium |
|
|
(816 |
) |
|
|
(914 |
) |
|
|
(1,024 |
) |
Provision for doubtful accounts |
|
|
5,539 |
|
|
|
6,924 |
|
|
|
5,100 |
|
Write-off of costs incurred in connection with initial public offering |
|
|
|
|
|
|
|
|
|
|
3,669 |
|
Stock-based compensation |
|
|
293 |
|
|
|
233 |
|
|
|
59 |
|
Deferred income taxes |
|
|
930 |
|
|
|
969 |
|
|
|
969 |
|
Other |
|
|
55 |
|
|
|
(591 |
) |
|
|
38 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,887 |
) |
|
|
5,174 |
|
|
|
343 |
|
Other current assets |
|
|
(1,899 |
) |
|
|
(2,299 |
) |
|
|
258 |
|
Other assets |
|
|
(1,369 |
) |
|
|
(619 |
) |
|
|
561 |
|
Accounts payable |
|
|
(3,806 |
) |
|
|
966 |
|
|
|
3,235 |
|
Accrued expenses and other current liabilities |
|
|
(4,924 |
) |
|
|
(9,973 |
) |
|
|
(9,805 |
) |
Deferred revenues |
|
|
1,433 |
|
|
|
(1,557 |
) |
|
|
(722 |
) |
Deferred rent payable |
|
|
(228 |
) |
|
|
943 |
|
|
|
(257 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
26,637 |
|
|
|
37,867 |
|
|
|
30,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition, net of cash and restricted cash acquired |
|
|
(4,953 |
) |
|
|
(127 |
) |
|
|
|
|
Purchases of property and equipment |
|
|
(39,786 |
) |
|
|
(33,747 |
) |
|
|
(29,879 |
) |
Purchases of investment securities |
|
|
(23,500 |
) |
|
|
(145,764 |
) |
|
|
(116,325 |
) |
Sales of investment securities |
|
|
|
|
|
|
145,728 |
|
|
|
126,334 |
|
Merger acquisition costs |
|
|
(311 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
60 |
|
|
|
16 |
|
|
|
(1,016 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(68,490 |
) |
|
|
(33,894 |
) |
|
|
(20,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Drawdowns on revolving credit facility |
|
|
23,902 |
|
|
|
2,275 |
|
|
|
1,276 |
|
Repayments of revolving credit facility |
|
|
(402 |
) |
|
|
(2,275 |
) |
|
|
(7,654 |
) |
Proceeds from capital lease financing and equipment notes |
|
|
3,789 |
|
|
|
441 |
|
|
|
3,479 |
|
Payments on capital lease obligations and equipment notes |
|
|
(3,685 |
) |
|
|
(4,284 |
) |
|
|
(3,355 |
) |
Other |
|
|
(63 |
) |
|
|
(332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
23,541 |
|
|
|
(4,175 |
) |
|
|
(6,254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(18,312 |
) |
|
|
(202 |
) |
|
|
3,229 |
|
Cash and cash equivalents at beginning of year |
|
|
40,489 |
|
|
|
22,177 |
|
|
|
21,975 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
22,177 |
|
|
$ |
21,975 |
|
|
$ |
25,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
37,581 |
|
|
$ |
38,146 |
|
|
$ |
35,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for taxes |
|
$ |
151 |
|
|
$ |
210 |
|
|
$ |
319 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
73
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.
74
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. Revenue from carrier interconnection and access is recognized in
the month in which service is provided at the amount we expect to realize in cash, based on
estimates of disputed amounts and collectibility.
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
of 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 $5,710 and $4,763 as of December 31, 2009 and 2010,
respectively.
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 switch locations, 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 $23,549 and $13,554 as of
December 31, 2009 and 2010, 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 of these investment
securities approximated their fair value as of December 31, 2009 and 2010. During the year ended
December 31, 2008, 2009 and 2010, the Company purchased $23,500, $145,764 and $116,325 and sold $0,
$145,728 and $126,334, respectively, of U.S. Treasury notes. All unrealized and realized gains are
determined by specific identification.
75
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 is comprised exclusively of
unrealized gains on the Companys investments in U.S. Treasury notes. The comprehensive loss for
the years ended December 31, 2008, 2009 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(42,866 |
) |
|
$ |
(13,870 |
) |
|
$ |
(18,752 |
) |
Unrealized gain on investment securities |
|
|
22 |
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized gains included in net loss |
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(42,844 |
) |
|
$ |
(13,892 |
) |
|
$ |
(18,752 |
) |
|
|
|
|
|
|
|
|
|
|
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, four years for vehicles, and generally
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.
76
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 or about 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 (income approach) and the fair value of comparable telecommunication
companies (market approach). 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, anticipated future economic, regulatory and political conditions,
the assignment of discount rates relative to risk and estimates of a terminal value. We believe
these assumptions and estimates provide a reasonable basis for our conclusion. 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, 2010. Accounts payable in the accompanying consolidated balance
sheets include approximately $4,813 and $7,583 as of December 31, 2009 and 2010, 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.
77
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
2. Significant Accounting Policies (continued)
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 provision for uncertain income tax positions are
required in the Companys financial statements as of December 31, 2010. 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,
2007 are no longer subject to examination by the Internal Revenue Service and state departments of
revenue.
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 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 incurred during the
preliminary stage are expensed as incurred while costs incurred during the application stage 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 $1,639, $1,843 and $1,334 for the years
ended December 31, 2008, 2009 and 2010, respectively.
During the years ended December 31, 2008, 2009 and 2010, the Company capitalized approximately
$2,764, $2,543 and $2,820 of software development costs, respectively, which are included in
property and equipment. Amortization expense related to these assets was approximately $2,270,
$2,576 and $2,741 for the years ended December 31, 2008, 2009 and 2010, respectively. The
unamortized balance of capitalized software development costs as of December 31, 2009 and 2010 is
$2,662 and $2,740 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 $1,843, $2,002 and
$1,713 for the years ended December 31, 2008, 2009 and 2010, 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 15).
Reclassifications
The Company has reclassified prior year amounts to conform to the current year presentation.
78
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
3. Recent Accounting Pronouncements
On January 1, 2010, the Company adopted the accounting standard that amends the requirements
for disclosures regarding fair value measures for annual, as well as interim, reporting periods.
This standard was effective prospectively for all interim and annual reporting periods ending after
December 15, 2009. The Company was not required to include any significant additional disclosures
to its condensed consolidated financial statements, as a result of adopting this standard.
4. Other Assets
Other current assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Deferred carrier charges |
|
$ |
2,433 |
|
|
$ |
4,430 |
|
Prepaid expenses |
|
|
3,990 |
|
|
|
1,875 |
|
Other |
|
|
4,553 |
|
|
|
4,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
10,976 |
|
|
$ |
10,718 |
|
|
|
|
|
|
|
|
Other non-current assets consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Deferred financing costs |
|
$ |
7,424 |
|
|
$ |
5,179 |
|
Lease security and carrier deposits |
|
|
1,811 |
|
|
|
1,912 |
|
Registration statement costs |
|
|
3,669 |
|
|
|
|
|
Other |
|
|
2,061 |
|
|
|
984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other non-current assets |
|
$ |
14,965 |
|
|
$ |
8,075 |
|
|
|
|
|
|
|
|
The Company incurred deferred financing costs of $144 in November 2010 related to the
amendment of the Companys $25,000 Senior Credit Facility (Revolving Credit Facility).
Amortization of deferred financing costs amounted to approximately $2,639, $2,625 and $2,660 for
the years ended December 31, 2008, 2009 and 2010, respectively.
As of December 31, 2009, other non-current assets included $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. We have elected not to complete the offering and have charged these costs to operations
during the year ended December 31, 2010.
79
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information
5. Property and Equipment
Property and equipment, at cost, consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Network equipment |
|
$ |
171,658 |
|
|
$ |
184,145 |
|
Computer and office equipment |
|
|
21,226 |
|
|
|
20,844 |
|
Capitalized software costs |
|
|
15,914 |
|
|
|
18,662 |
|
Furniture and fixtures and other |
|
|
9,539 |
|
|
|
8,540 |
|
Leasehold improvements |
|
|
6,713 |
|
|
|
6,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,050 |
|
|
|
238,867 |
|
Less accumulated depreciation and amortization |
|
|
(138,175 |
) |
|
|
(153,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,875 |
|
|
$ |
85,144 |
|
|
|
|
|
|
|
|
Property and equipment includes amounts acquired under capital leases of approximately $7,566
and $6,319 respectively, net of accumulated depreciation and amortization of approximately $10,688
and $12,955, respectively, at December 31, 2009 and 2010. Amortization of capital leases is
included in depreciation and amortization expense in the consolidated statements of operations.
6. 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 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 6.1 years. The unamortized
balances are evaluated for potential impairment based on future estimated cash flows when an
impairment indicator is present.
Trademark: The Companys trademarks were valued using a variant of the income approach,
referred to as the relief from royalty method.
The 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 0.4 years.
80
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
6. Identifiable Intangible Assets and Goodwill (continued)
The components of intangible assets at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Value |
|
|
Amortization |
|
|
Value |
|
|
Value |
|
|
Amortization |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
71,812 |
|
|
$ |
(46,064 |
) |
|
$ |
25,748 |
|
|
$ |
50,400 |
|
|
$ |
(35,577 |
) |
|
$ |
14,823 |
|
Trademarks |
|
|
7,400 |
|
|
|
(5,664 |
) |
|
|
1,736 |
|
|
|
4,400 |
|
|
|
(4,170 |
) |
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
79,212 |
|
|
$ |
(51,728 |
) |
|
$ |
27,484 |
|
|
$ |
54,800 |
|
|
$ |
(39,747 |
) |
|
$ |
15,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets for the years ended December 31, 2008, 2009 and 2010
amounted to $41,221, $17,736 and $12,431 respectively. During the year ended December 31, 2010, the
Company wrote-off its fully amortized customer relationships and trademark intangible assets of
$21,412 and $3,000, respectively. Overall, the weighted average remaining useful life for the
Companys intangible assets is 6.0 years as of December 31, 2010.
Future projected amortization expense for the years ending December 31 is as follows:
|
|
|
|
|
2011 |
|
$ |
5,305 |
|
2012 |
|
|
3,486 |
|
2013 |
|
|
2,194 |
|
2014 |
|
|
1,569 |
|
2015 |
|
|
1,123 |
|
Thereafter |
|
|
1,376 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,053 |
|
|
|
|
|
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
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 |
|
2010 activity |
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
98,238 |
|
|
|
|
|
81
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Recurring network costs |
|
$ |
8,510 |
|
|
$ |
6,368 |
|
Recurring operating accruals |
|
|
6,212 |
|
|
|
4,690 |
|
Accrued interest (a) |
|
|
11,480 |
|
|
|
11,459 |
|
Payroll-related liabilities |
|
|
6,701 |
|
|
|
5,576 |
|
Other |
|
|
2,727 |
|
|
|
1,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities |
|
$ |
35,630 |
|
|
$ |
29,232 |
|
|
|
|
|
|
|
|
|
|
|
(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. |
8. 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 allowed 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. The Company is
obligated to repay the borrowings in thirteen quarterly installments. This capital lease provider
was acquired, which limited the Companys ability to borrow under the lease line. In July 2010, the
Company entered into a new capital lease facility with another third party. The new capital lease
facility allows the Company to finance $5,000 of equipment. The Company is obligated to repay the
borrowings in twelve quarterly installments. Both lease facilities specify 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 $4,980 outstanding on the existing facilities at December 31,
2010.
The future minimum lease payments under all capital leases at December 31, 2010 are as
follows:
|
|
|
|
|
2011 |
|
$ |
2,872 |
|
2012 |
|
|
1,621 |
|
2013 |
|
|
1,251 |
|
2014 |
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6,072 |
|
Less amounts representing interest |
|
|
(1,092 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
4,980 |
|
Less current portion |
|
|
(2,298 |
) |
|
|
|
|
|
|
|
|
|
Capital lease obligations, net of current portion |
|
$ |
2,682 |
|
|
|
|
|
82
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
8. Obligations Under Capital and Operating Leases (continued)
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, 2010 are as follows:
|
|
|
|
|
2011 |
|
$ |
7,709 |
|
2012 |
|
|
7,046 |
|
2013 |
|
|
6,249 |
|
2014 |
|
|
5,875 |
|
2015 |
|
|
4,863 |
|
Thereafter |
|
|
20,233 |
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
51,975 |
|
|
|
|
|
Total rent expenses under these operating leases totaled $11,324, $11,991 and $11,613 for the
years ended December 31, 2008, 2009 and 2010, respectively. The Companys sublease rental income
was $566, $420 and $635 for the years ended December 31, 2008, 2009 and 2010, respectively. Rent
expense is charged to operations ratably over the terms of the leases, which results in deferred
rent payable.
9. 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 $3,010 and $1,986, at
December 31, 2009 and 2010, respectively, is included in long term debt. For the years ended
December 31, 2008, 2009 and 2010, bond premium amortization amounted to $816, $914 and $1024,
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.
83
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
9. Debt (continued)
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, 2010.
$25,000 Revolving Credit Facility
On August 23, 2006, the Company entered into the five year revolving credit facility. The
revolving credit facility was amended on November 12, 2010 to extend the term of facility through
February 23, 2012. 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. As a result of this amendment, the applicable margin percentage increased by 25 basis
points under both the base rate and LIBOR methods. 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
interest rate on the revolving credit facility was 5.25% at December 31, 2010.
The Company paid a one-time fee of $125 in connection with the amendment. Additionally,
in the event that the credit facility is completely terminated or availability under the credit
facility is permanently reduced prior to the maturity date, we are required to pay a prepayment fee
of 0.75% multiplied by (i) the credit commitment at the date of termination or (ii) the amount by
which the credit commitment has been permanently reduced.
As of December 31, 2009 and 2010, the Company had $23,500 and $17,122, respectively,
outstanding under its revolving credit facility. The revolving credit facility also has a sublimit
of $15,000 for the issuance of letters of credit. As of December 31, 2010, the Company had $1,298
of letters of credit outstanding against this facility.
Indebtedness under the revolving credit facility is guaranteed by all of our direct and
indirect subsidiaries that are not borrowers there under 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, 2010.
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.
10. 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.
84
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
10. Shareholders Deficiency (continued)
As of December 31, 2009 and 2010, 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 $2,024.24 per share, with an aggregate liquidation preference of the Series A
Preferred Stock of $176,623 as of December 31, 2010. 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, 2009 and 2010, 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 $2,024.24 per share, with an aggregate
liquidation preference of the Series A-1 Preferred Stock of $203,845 as of December 31, 2010. 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.
As of December 31, 2009 and 2010, there were 91,187 shares of Series B Preferred Stock
outstanding. Each share of Series B Preferred Stock is non redeemable, but carries a liquidation
preference of $2,024.24 per share with an aggregate liquidation preference of the Series B
Preferred Stock of $184,585 as of December 31, 2010. 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, 2009 and 2010, there were 64,633 shares of Series B-1 Preferred Stock
outstanding. Each Share of Series B-1 Preferred Stock is non redeemable, but carries a liquidation
preference identical to the Series B Preferred Stock of $2,024.24 per share with an aggregate
liquidation preference of the Series B-1 Preferred Stock of $130,834 as of December 31, 2010. 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, 2009 and 2010, 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 $1,507.89 per share.
At December 31, 2010, the aggregate liquidation preference of the Series C Preferred Stock is
$21,717. 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.
85
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
10. Shareholders Deficiency (continued)
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.
For the years ended December 31, 2008, 2009 and 2010, the Company had outstanding options,
warrants, restricted stock units and preferred stock, which were convertible into or exercisable
for common shares of 12,819,500, 14,216,984 and 15,112,291, respectively.
Dividends accumulate on the Companys Preferred Stock. The aggregate accumulated dividends on
the Companys Preferred Stock was $173,920, $245,829 and $326,018, respectively, as of December 31,
2008, 2009 and 2010. The Company has not declared any dividends.
As of December 31, 2009 and 2010, there were 9,333,680 shares of Class A common stock
outstanding. 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, 2009 and 2010, 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, 2010, 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, 2010, a warrant to acquire 46 shares of Series B Preferred Stock and 1,151
shares of Class A common stock is outstanding.
InfoHighway Warrants
In connection with the acquisition of InfoHighway in 2007, warrants to acquire 16,711 units,
with each such unit comprised of 1 share of Series B-1 Preferred Stock and 25 shares of Class A
Common Stock, remain outstanding. The warrants 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 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 May 31, 2009, the exercise price on the warrants may decrease from $883.58 per unit to $0.01
per unit.
86
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
10. Shareholders Deficiency (continued)
As of March 18, 2011, the exercise price on 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 will not adjust
the value of the warrants until an exercise price has been determined. When the exercise price for
the warrants is resolved, the Company will utilize a Black-Scholes-Merton model to determine the
aggregate value of the warrants. If the Company determines that the value of the warrants has
increased, the Company will record additional merger consideration and related goodwill at such
point of determination.
11. 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. During the
three years ended December 31, 2010, the Company did not grant any additional shares of restricted
stock nor were any shares forfeited, cancelled or repurchased.
Total compensation expense for the restricted stock awards for the years ended December 31,
2008, 2009 and 2010 was $84, $31 and $8, respectively. During the year ended December 31, 2010, all
shares of the Series C Preferred Stock and shares of the Series B Common Stock fully vested.
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 was determined utilizing the Black-Scholes-Merton 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%.
87
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
11. Stock-Based Compensation (continued)
The following table summarizes the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
Series C |
|
|
Average |
|
|
|
Preferred |
|
|
Exercise Price |
|
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 |
|
Grants |
|
|
|
|
|
|
|
|
Forfeit/Cancel/Repurchase |
|
|
(20,058 |
) |
|
|
137.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Total compensation expense for stock options for the years ended December 31, 2008, 2009 and
2010 was $209, $201 and $51 respectively. During the year ended December 31, 2010, options to
acquire 5,831 Series C Preferred Stock vested. As of March 31, 2010 all of the vested options
expired and were cancelled without being exercised.
12. Income Taxes
The components of the provision for income taxes for the years ended December 31, 2008, 2009
and 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(25 |
) |
|
$ |
|
|
|
$ |
45 |
|
State |
|
|
151 |
|
|
|
210 |
|
|
|
274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126 |
|
|
|
210 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
808 |
|
|
|
843 |
|
|
|
843 |
|
State |
|
|
122 |
|
|
|
126 |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930 |
|
|
|
969 |
|
|
|
969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,056 |
|
|
$ |
1,179 |
|
|
$ |
1,288 |
|
|
|
|
|
|
|
|
|
|
|
88
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information
12. Income Taxes (continued)
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, 2008,
2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income tax, net of federal tax benefits |
|
|
(0.4 |
%) |
|
|
(1.8 |
%) |
|
|
(1.5 |
%) |
Permanent items |
|
|
(1.2 |
%) |
|
|
(3.6 |
%) |
|
|
(0.8 |
%) |
Valuation allowance |
|
|
(35.9 |
%) |
|
|
(39.0 |
%) |
|
|
(40.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
(2.5 |
%) |
|
|
(9.4 |
%) |
|
|
(7.4 |
%) |
|
|
|
|
|
|
|
|
|
|
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, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2010 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
6,301 |
|
|
$ |
6,890 |
|
Deferred revenue |
|
|
3,961 |
|
|
|
3,706 |
|
Other |
|
|
1,395 |
|
|
|
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets-current |
|
|
11,657 |
|
|
|
11,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
|
|
Net operating loss carry forwards |
|
|
71,193 |
|
|
|
76,662 |
|
Customer lists |
|
|
6,724 |
|
|
|
7,778 |
|
Trademark |
|
|
1,811 |
|
|
|
2,007 |
|
Other |
|
|
2,634 |
|
|
|
2,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets-noncurrent |
|
|
82,362 |
|
|
|
88,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
94,019 |
|
|
$ |
100,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
|
|
Customer Lists |
|
$ |
7,637 |
|
|
$ |
5,241 |
|
Other current liabilities |
|
|
716 |
|
|
|
570 |
|
Trademark |
|
|
276 |
|
|
|
|
|
Goodwill |
|
|
3,040 |
|
|
|
4,009 |
|
Accelerated Depreciation |
|
|
16,088 |
|
|
|
17,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities-noncurrent |
|
$ |
27,757 |
|
|
$ |
27,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets current: |
|
|
|
|
|
|
|
|
Deferred tax assets-current |
|
$ |
11,657 |
|
|
$ |
11,624 |
|
Valuation allowance |
|
|
(11,657 |
) |
|
|
(11,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities noncurrent: |
|
|
|
|
|
|
|
|
Deferred tax assets-noncurrent |
|
$ |
82,361 |
|
|
$ |
88,774 |
|
Deferred tax liabilities-noncurrent |
|
|
(27,757 |
) |
|
|
(27,205 |
) |
Valuation allowance |
|
|
(57,644 |
) |
|
|
(65,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax liabilities |
|
$ |
(3,040 |
) |
|
$ |
(4,009 |
) |
|
|
|
|
|
|
|
89
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
12. Income Taxes (continued)
The Company completed a study of its available net operating loss carryforwards (NOLs)
resulting from mergers occurring in 2005 and 2007. The utilization of these NOL carryovers is
subject to restrictions pursuant to Section 382 of the Internal Revenue Code. As a result of the
study, it was determined that certain NOLs recorded by the Company as deferred tax assets were
limited. The 382 study included a Net Unrealized Built in Gain (NUBIG) analysis. NUBIG is an
exception to the general loss limitation rules of IRC section 382 and occurs when a built-in gain
is recognized following an ownership change. This increases the annual amount of NOLs that can be
utilized.
At December 31, 2010, the Company had net operating loss carryforwards available totaling
$200,425 which begin to expire in 2019. The Company has provided a full valuation allowance against
the net deferred tax asset as of December 31, 2009 and 2010 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 $7,901 between 2009 and 2010. If the Company achieves profitability,
the net deferred tax assets may be available to offset future income tax liabilities.
13. Employee Savings and Retirement Plan
The Company has an active contributory defined contribution plans under Section 401(k) of the
Internal Revenue Code (the Code) covering all qualified employees. 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 years ended
December 31, 2008, 2009 and 2010, the Company did not make any contributions to the plan.
14. 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, 2009 and 2010 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 $23,549 and $13,554 which are based on the publicly quoted market price as of
December 31, 2009 and 2010, respectively.
As of December 31, 2009 and 2010, the fair value of the long-term debt outstanding under the
Companys Revolving credit facility approximated its carrying value of $23,500 and $17,122,
respectively, due to its variable market-based interest rate. The fair value of the Companys
senior secured notes at December 31, 2009 and 2010 was $287,250 and $293,250, 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, 2009 and 2010 was
$303,010 and $301,986, respectively.
90
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
15. Commitments and Contingencies
The Company has employment agreements with certain key executives as of December 31, 2010.
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 $1,298, 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, 2010 was approximately $20,670. 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, 2010. 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.
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.
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 $40,859, $18,914 and $1,564 for the years ending December 31,
2011, 2012 and 2013, 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.
91
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
(in thousands, except share information)
16. Unaudited Quarterly Results of Operations
The following are the unaudited quarterly results of operations for the years ended December
31, 2009 and 2010. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
Revenues |
|
$ |
105,706 |
|
|
$ |
102,907 |
|
|
$ |
100,423 |
|
|
$ |
98,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization) |
|
|
50,060 |
|
|
|
49,605 |
|
|
|
47,214 |
|
|
|
46,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
6,469 |
|
|
|
2,258 |
|
|
|
5,234 |
|
|
|
6,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(3,737 |
) |
|
|
(7,412 |
) |
|
|
(4,650 |
) |
|
|
(2,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
Revenues |
|
$ |
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 |
) |
92
|
|
|
Item 9. |
|
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
|
|
|
Item 9A. |
|
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.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures as of December 31, 2010. 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, 2010.
(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.
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.
93
(c) Attestation Report of the Registered Public Accounting Firm
This annual report on Form 10-K does not include an attestation report of the Companys
independent registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys independent registered public
accounting firm pursuant to the rules of the SEC applicable to non-accelerated filers, which only
requires the Company to provide managements report in this annual report.
(d) Changes in Internal Control Over Financial Reporting
During our fourth fiscal quarter of 2010, 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.
94
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 G. Rubenstein; John S. Patton, Jr.; B. Hagen Saville; Kerri Ford;
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, Ms. Ford 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
March 18, 2011.
|
|
|
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, Sr.
|
|
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 |
|
|
|
Kerri Ford
|
|
Director |
|
|
|
Robert Manning
|
|
Director |
|
|
|
Peter J. Barris
|
|
Director |
|
|
|
Raul K. 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, Mr. Roedel and Mr. Robinson who were appointed to
our board on January 8, 2009 and Ms. Ford, who was elected on March 9, 2011 to replace another
director designated by Baker who had resigned from the board. 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.
95
Biographies of Executive Officers
Michael K. Robinson, Chief Executive Officer, President and Director (54). 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. Mr. Robinson also serves on the board of
directors of FairPoint (NASDAQ:FRP), a publicly traded telecommunications
company. 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 (40). 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 (52). 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 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 (58). 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.
96
Kenneth A. Shulman, Chief Technology Officer and Chief Information Officer (57). 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 (44). 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. (50). 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, MCG Capital Corporation, Radio
Pharmacy Investors, LLC, and Solutions Capital G.P., 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 (61). 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.
97
Samuel G. Rubenstein (49). 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,
NPS Holding Group, LLC, RadioPharmacy Investors, LLC, Solutions Capital G.P., 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 (49). 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, 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. (52). 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. 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 (57). 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.
98
Kerri Ford (39). Ms. Ford joined Baker Capital in 2003. Prior to joining Baker Capital, Ms.
Ford was an investment banker at Goldman Sachs Group, Inc., advising both public and private
companies. Previously, she held several positions at Cabletron Systems, a publicly traded computer
networking hardware and enterprise management software company that is now a privately held company
known as Enterasys Networks, Inc., where she held international financial management, government
contracting, and other operational roles. Ms. Ford currently serves on the board of directors of
MediaNet Digital, Inc. Ms. Ford earned her Masters in Business Administration from The Wharton
School at the University of Pennsylvania and a Bachelor of Science from the University of New
Hampshire.
Robert Manning (51). 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 in 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 (45). Mr. Martynek has served as a director of Broadview since August 2007.
Mr. Martynek is currently the President and Chief Executive Officer of Voxel Dot Net, a cloud and
managed services provider which he joined in January 2011. 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.
99
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 for the purposes of
reviewing the documentation, construction and administration of the management incentive plan
pursuant to which our named executive officers (and other members of our management team) may be
granted equity. Our ad hoc compensation committee currently consists of Steven F. Tunney, Sr. and
Robert Manning.
In addition, our board of directors reviews and approves compensation and benefit plans for
executive officers and reviews general compensation policies with the objective of attracting and
retaining superior talent and achieving 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, Sr. 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, 2010.
Indemnification
We intend to maintain directors and officers liability insurance. We expect to enter into
indemnification agreements with our directors and certain employees to provide our directors and
certain of their affiliated parties with additional indemnification and related rights.
100
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, Sr. Chairman of the Board
Richard W. Roedel Chairman of the Audit Committee
Samuel G. Rubenstein
John S. Patton, Jr.
B. Hagen Saville
Kerri Ford
Robert Manning
Peter J. Barris
Raul K. Martynek
Michael K. Robinson
101
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Item 11. |
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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.
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 and annual bonus. Mr. Tunney and Mr. Manning
currently 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 and
annual bonuses 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 2010, 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 2010, 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. Although 2010
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.
102
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, we intend to be competitive with our 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 2010.
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
discretionary annual bonus that will be paid to each of our named executive officers with respect
to our 2010 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 2011 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, our ad hoc compensation committee approved an accrual relating to
bonuses to be paid to certain eligible employees (including our named executive officers) of $1.5
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.
103
SUMMARY COMPENSATION TABLE
The following table shows information regarding the compensation earned during the fiscal
years ended December 31, 2010, 2009 and 2008 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, 2010, and whose total compensation exceeded $100,000 during
that fiscal year).
|
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Name and Principal |
|
|
|
|
|
|
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|
|
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|
All Other |
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|
|
|
Position |
|
Year |
|
|
Salary |
|
|
Bonus (1) |
|
|
Compensation (2) |
|
|
Total |
|
|
Michael K. Robinson |
|
|
2010 |
|
|
$ |
450,000 |
|
|
$ |
|
|
|
$ |
105,588 |
|
|
$ |
555,588 |
|
President and Chief Executive Officer |
|
|
2009 |
|
|
|
450,000 |
|
|
|
240,000 |
|
|
|
95,843 |
|
|
|
785,843 |
|
|
|
|
2008 |
|
|
|
436,264 |
|
|
|
230,000 |
|
|
|
120,446 |
|
|
|
786,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corey Rinker |
|
|
2010 |
|
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
Executive Vice President, Chief Financial Officer, Treasurer and Assistant Secretary |
|
|
2009 |
|
|
|
270,000 |
|
|
|
90,000 |
|
|
|
|
|
|
|
360,000 |
|
|
|
|
2008 |
|
|
|
268,242 |
|
|
|
80,000 |
|
|
|
|
|
|
|
348,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian P. Crotty |
|
|
2010 |
|
|
|
335,000 |
|
|
|
|
|
|
|
|
|
|
|
335,000 |
|
Chief Operating Officer |
|
|
2009 |
|
|
|
335,000 |
|
|
|
150,000 |
|
|
|
|
|
|
|
485,000 |
|
|
|
|
2008 |
|
|
|
328,736 |
|
|
|
140,000 |
|
|
|
|
|
|
|
468,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles C. Hunter |
|
|
2010 |
|
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
Executive Vice President, General Counsel and Secretary |
|
|
2009 |
|
|
|
270,000 |
|
|
|
90,000 |
|
|
|
|
|
|
|
360,000 |
|
|
|
|
2008 |
|
|
|
265,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terrence J. Anderson |
|
|
2010 |
|
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
Executive Vice President,
Finance and Corporate Development |
|
|
2009 |
|
|
|
270,000 |
|
|
|
90,000 |
|
|
|
|
|
|
|
360,000 |
|
|
|
|
2008 |
|
|
|
265,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth A. Shulman |
|
|
2010 |
|
|
|
270,000 |
|
|
|
|
|
|
|
|
|
|
|
270,000 |
|
Executive Vice President, Chief Technology Officer and Chief
Information Officer |
|
|
2009 |
|
|
|
270,000 |
|
|
|
90,000 |
|
|
|
|
|
|
|
360,000 |
|
|
|
|
2008 |
|
|
|
265,000 |
|
|
|
80,000 |
|
|
|
|
|
|
|
345,000 |
|
|
|
|
(1) |
|
In 2011, the ad hoc compensation committee of the board of directors
approved a $1.5 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
2010 annual bonuses has not been determined. We expect such amounts to
be determined in the second quarter of 2011 and will file a Form 8-K
promptly after this information is determined. |
|
(2) |
|
Represents company paid travel expenses and lodging expenses of
$58,571 incurred by Mr. Robinson during 2010, which were grossed up by
$47,017 to make him whole for taxes he was required to pay. |
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.
104
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.
105
Management Incentive Plan
In February 2007, our board adopted the MIP, pursuant to which we granted options and
restricted stock to our named executive officers and certain other key management employees. Grants
of shares and options under the plan were valued at the fair market value at the time of grant and
approved by our board. All options granted under the MIP expired unexercised on March 30, 2010.
All restricted stock granted under the MIP was fully vested as of March 31, 2010.
STOCK VESTED AT FISCAL YEAR-END
The following table provides information for each named executive officer with respect to the
shares of restricted stock which vested during 2010.
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|
Stock Awards |
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|
Number of |
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|
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|
Class or |
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|
Units |
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|
Value |
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|
|
Series |
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|
Acquired on |
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|
Realized |
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Name |
|
of Stock |
|
|
Vesting |
|
|
on Vesting |
|
Michael K. Robinson |
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|
|
|
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|
$ |
|
|
Corey Rinker |
|
|
(1 |
) |
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|
51 |
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|
7,013 |
|
Brian P. Crotty |
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|
(1 |
) |
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|
144 |
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|
|
19,800 |
|
Charles C. Hunter |
|
|
(1 |
) |
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|
51 |
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|
7,013 |
|
Terrence J. Anderson |
|
|
(1 |
) |
|
|
111 |
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|
|
15,263 |
|
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. |
106
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, 2010, 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.
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Cash |
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|
Value of Tax |
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|
Name |
|
Event |
|
Severance |
|
|
Gross-Up(1) |
|
|
Total |
|
Michael K. Robinson |
|
Voluntary Termination |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Involuntary Termination |
|
|
685,000 |
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|
|
|
|
|
|
685,000 |
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|
|
Death or Disability |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
685,000 |
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|
|
|
|
|
|
685,000 |
|
Corey Rinker |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
270,000 |
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|
|
|
|
|
|
270,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
270,000 |
|
|
|
|
|
|
|
270,000 |
|
Brian P. Crotty |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
335,000 |
|
|
|
|
|
|
|
335,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
335,000 |
|
|
|
|
|
|
|
335,000 |
|
Charles C. Hunter |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
270,000 |
|
|
|
|
|
|
|
270,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
270,000 |
|
|
|
|
|
|
|
270,000 |
|
Terrence J. Anderson |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
270,000 |
|
|
|
|
|
|
|
270,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
270,000 |
|
|
|
|
|
|
|
270,000 |
|
Kenneth A. Shulman |
|
Voluntary Termination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary Termination |
|
|
270,000 |
|
|
|
|
|
|
|
270,000 |
|
|
|
Death or Disability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Control Termination |
|
|
270,000 |
|
|
|
|
|
|
|
270,000 |
|
|
|
|
(1) |
|
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. |
107
DIRECTOR COMPENSATION
During 2010, 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 2010, 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.
|
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|
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, 2010, 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 |
|
|
|
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 N501, 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, 2010, there were 9,333,680 shares outstanding of Class A Common Stock, 360,050 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 14,402 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, 2010 are deemed outstanding for computing the ownership percentage of the
person holding such securities, but are not deemed outstanding for computing the ownership
percentage of any other person. Warrants issued in connection with the InfoHighway merger are not
exercisable within 60 days of December 31, 2010.
108
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|
Class A |
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|
Class B |
|
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|
Class A |
|
|
Common Stock on an |
|
|
Class B |
|
|
Common Stock on an |
|
|
|
Common Stock |
|
|
As-Converted Basis(1) |
|
|
Common Stock |
|
|
As-Converted Basis(1) |
|
|
|
Amount |
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
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 |
|
|
Percent of |
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|
and |
|
|
Percent of |
|
|
|
Nature of |
|
|
Outstanding |
|
|
Nature of |
|
|
Outstanding |
|
|
Nature of |
|
|
Outstanding |
|
|
Nature of |
|
|
Outstanding |
|
|
|
Beneficial |
|
|
Shares |
|
|
Beneficial |
|
|
Shares |
|
|
Beneficial |
|
|
Shares |
|
|
Beneficial |
|
|
Shares |
|
|
|
Ownership |
|
|
of Class |
|
|
Ownership |
|
|
of Class |
|
|
Ownership |
|
|
of Class |
|
|
Ownership |
|
|
of Class |
|
|
Steven F. Tunney, Sr.(2) |
|
|
4,371,031 |
|
|
|
50.7 |
% |
|
|
12,392,268 |
|
|
|
72.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B. Hagen Saville(2) |
|
|
4,371,031 |
|
|
|
50.7 |
% |
|
|
12,392,268 |
|
|
|
72.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Samuel G. Rubenstein(2) |
|
|
4,371,031 |
|
|
|
50.7 |
% |
|
|
12,392,268 |
|
|
|
72.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John S. Patton, Jr.(2) |
|
|
4,371,031 |
|
|
|
50.7 |
% |
|
|
12,392,268 |
|
|
|
72.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Manning(3) |
|
|
1,508,506 |
|
|
|
16.2 |
% |
|
|
3,951,369 |
|
|
|
33.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter J. Barris(4) |
|
|
821,345 |
|
|
|
8.8 |
% |
|
|
2,151,424 |
|
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael K. Robinson(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,075 |
|
|
|
25.6 |
% |
|
|
203,146 |
|
|
|
43.1 |
% |
Brian P. Crotty(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,825 |
|
|
|
18.6 |
% |
|
|
147,437 |
|
|
|
33.5 |
% |
Terrence J. Anderson(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,325 |
|
|
|
15.9 |
% |
|
|
126,477 |
|
|
|
29.5 |
% |
Kenneth A. Shulman(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,525 |
|
|
|
10.1 |
% |
|
|
80,586 |
|
|
|
19.9 |
% |
Corey Rinker(9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,200 |
|
|
|
7.6 |
% |
|
|
60,012 |
|
|
|
15.3 |
% |
Charles C. Hunter(10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,450 |
|
|
|
7.1 |
% |
|
|
56,151 |
|
|
|
14.4 |
% |
Directors and Executive
Officers as a Group(11) |
|
|
7,060,882 |
|
|
|
75.6 |
% |
|
|
18,495,060 |
|
|
|
89.1 |
% |
|
|
305,400 |
|
|
|
84.8 |
% |
|
|
673,808 |
|
|
|
92.5 |
% |
MCG(2) |
|
|
4,731,031 |
|
|
|
50.7 |
% |
|
|
12,392,268 |
|
|
|
72.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baker(3) |
|
|
1,508,506 |
|
|
|
16.2 |
% |
|
|
3,951,369 |
|
|
|
33.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEA(4) |
|
|
821,345 |
|
|
|
8.8 |
% |
|
|
2,151,424 |
|
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Com Ventures(12) |
|
|
328,065 |
|
|
|
3.5 |
% |
|
|
859,331 |
|
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPG(13) |
|
|
224,072 |
|
|
|
2.4 |
% |
|
|
586,933 |
|
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apollo(14) |
|
|
163,161 |
|
|
|
1.7 |
% |
|
|
427,382 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trimaran(15) |
|
|
127,499 |
|
|
|
1.4 |
% |
|
|
333,969 |
|
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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, 2010. 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. |
|
|
|
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, 2010. 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, (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 and (iii) 1,282 shares of our Series B
Preferred Stock, which represents 1.4% of the outstanding shares of
our Series B Preferred Stock. Each of Mr. Tunney, Mr. Saville, Mr.
Rubenstein and Mr. Patton is an officer 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 22.8% 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. |
109
|
|
|
(5) |
|
Mr. Robinson beneficially owns 3,683 shares of our Series C Preferred
Stock, which represents 25.6% of the outstanding shares of our Series
C Preferred Stock. |
|
(6) |
|
Mr. Crotty beneficially owns 2,673 shares of our Series C Preferred
Stock, which represents 18.6% of the outstanding shares of our Series
C Preferred Stock. |
|
(7) |
|
Mr. Anderson beneficially owns 2,293 shares of our Series C Preferred
Stock, which represents 15.9% of the outstanding shares of our Series
C Preferred Stock. |
|
(8) |
|
Mr. Shulman beneficially owns 1,461 shares of our Series C Preferred
Stock, which represents 10.1% of the outstanding shares of our Series
C Preferred Stock. |
|
(9) |
|
Mr. Rinker beneficially owns 1,088 shares of our Series C Preferred
Stock, which represents 7.6% of the outstanding shares of our Series
C Preferred Stock. |
|
(10) |
|
Mr. Hunter beneficially owns 1,018 shares of our Series C Preferred
Stock, which represents 7.1% 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) 60,239 shares of our Series B Preferred Stock, which
represents 66.1% 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) 12,217 shares of our Series C Preferred
Stock, which represents 87.7% 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) 8,910
shares of our Series B Preferred Stock, which represents 9.8% 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. |
110
Securities authorized for issuance under equity compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Remaining |
|
|
|
Number of |
|
|
Units Available |
|
|
|
Restricted |
|
|
for Future Issuance |
|
|
|
Stock |
|
|
under Equity |
|
Plan Category |
|
Units(1) |
|
|
Compensation Plans |
|
Equity compensation plans approved by security holders(2) |
|
|
14,402 |
|
|
|
17,872 |
|
Total |
|
|
14,402 |
|
|
|
17,872 |
|
|
|
|
(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) |
|
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.
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 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.
111
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
contain 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, 2009 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Audit Fees |
|
$ |
836 |
|
|
$ |
820 |
|
Audit-Related Fees |
|
|
|
|
|
|
|
|
Tax Fees |
|
|
|
|
|
|
45 |
|
All Other Fees |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees |
|
$ |
838 |
|
|
$ |
867 |
|
|
|
|
|
|
|
|
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.
112
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 2010 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2009 and 2010 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Stockholders Deficiency for the Years Ended December 31, 2008, 2009 and 2010 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2009 and 2010 |
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
Financial Statement Schedules |
|
|
|
|
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BROADVIEW NETWORKS HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of |
|
|
Charges to |
|
|
Other |
|
|
|
|
|
|
Balance at |
|
|
|
Period |
|
|
Expenses |
|
|
Accounts |
|
|
Deductions (a) |
|
|
End of Period |
|
|
Allowance for uncollectible accounts
receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
$ |
7,046 |
|
|
$ |
5,539 |
|
|
$ |
3,740 |
|
|
$ |
(12,003 |
) |
|
$ |
4,322 |
|
Year Ended December 31, 2009 |
|
|
4,322 |
|
|
|
6,924 |
|
|
|
2,936 |
|
|
|
(6,240 |
) |
|
|
7,942 |
|
Year Ended December 31, 2010 |
|
|
7,942 |
|
|
|
5,100 |
|
|
|
1,922 |
|
|
|
(4,300 |
) |
|
|
10,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
$ |
47,643 |
|
|
$ |
|
|
|
$ |
16,563 |
|
|
$ |
|
|
|
$ |
64,206 |
|
Year Ended December 31, 2009 |
|
|
64,206 |
|
|
|
|
|
|
|
5,095 |
|
|
|
|
|
|
|
69,301 |
|
Year Ended December 31, 2010 |
|
|
69,301 |
|
|
|
|
|
|
|
7,901 |
|
|
|
|
|
|
|
77,202 |
|
|
|
|
(a) |
|
Allowance for Uncollectible Accounts Receivable includes amounts
written off as uncollectible. |
(b) Exhibits
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
2.1 |
|
|
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) |
|
|
|
|
|
|
2.2 |
|
|
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) |
|
|
|
|
|
|
3.1 |
|
|
Tenth Amended and Restated Certificate of Incorporation, dated May 31, 2007, of Broadview Networks Holdings,
Inc.* |
|
|
|
|
|
|
3.2 |
|
|
Second Amended and Restated Bylaws of Broadview Networks Holdings, Inc.(a) |
|
|
|
|
|
|
4.1 |
|
|
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) |
|
|
|
|
|
|
4.2 |
|
|
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) |
113
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
4.3 |
|
|
Form of Exchange 113/8% Senior Secured Note due 2012.(a) |
|
|
|
|
|
|
4.4 |
|
|
Form of Guarantee of Exchange 113/8% Senior Secured Note due 2012.(a) |
|
|
|
|
|
|
4.5 |
|
|
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) |
|
|
|
|
|
|
4.6 |
|
|
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) |
|
|
|
|
|
|
4.7 |
|
|
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) |
|
|
|
|
|
|
4.8 |
|
|
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) |
|
|
|
|
|
|
4.9 |
|
|
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) |
|
|
|
|
|
|
10.1 |
|
|
Management Incentive Plan, dated as of February 9, 2007, of Broadview Networks Holdings, Inc.(a)(c) |
|
|
|
|
|
|
10.2 |
|
|
Employment Agreement, dated as of February 10, 2005, by and between Broadview Networks Holdings, Inc. and
Michael K. Robinson.(a)(c) |
|
|
|
|
|
|
10.3 |
|
|
Employment Agreement, dated as of March 3, 1994, by and between Bridgecom Holdings, Inc. and Brian Crotty.(a)(c) |
|
|
|
|
|
|
10.4 |
|
|
Employment Agreement, dated as of January 14, 2004, by and between Broadview Networks Holdings, Inc. and
Terrence J. Anderson.(a)(c) |
|
|
|
|
|
|
10.5 |
|
|
Employment Agreement, dated as of January 14, 2005, by and between Broadview Networks Holdings, Inc. and
Kenneth Shulman.(a)(c) |
|
|
|
|
|
|
10.6 |
|
|
Employment Agreement, dated as of March 3, 1994, by and between Bridgecom Holdings, Inc. and Charles
Hunter.(a)(c) |
|
|
|
|
|
|
10.7 |
|
|
Employment Agreement, dated as of March 3, 2994, by and between Bridgecom Holdings, Inc. and Corey Rinker.(a)(c) |
|
|
|
|
|
|
10.8 |
|
|
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) |
|
|
|
|
|
|
10.9 |
|
|
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) |
|
|
|
|
|
|
10.10 |
|
|
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) |
|
|
|
|
|
|
10.11 |
|
|
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) |
|
|
|
|
|
|
10.12 |
|
|
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) |
|
|
|
|
|
|
10.13 |
|
|
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) |
|
|
|
|
|
|
10.14 |
|
|
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) |
|
|
|
|
|
|
10.15 |
|
|
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) |
|
|
|
|
|
|
10.16 |
|
|
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) |
|
|
|
|
|
|
10.17 |
|
|
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) |
114
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
10.18 |
|
|
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) |
|
|
|
|
|
|
10.19 |
|
|
Third Amended and Restated Shareholders Agreement, dated as of May 31, 2007, by and among Broadview Networks
Holdings, Inc. and the shareholders named therein.(b) |
|
|
|
|
|
|
10.20 |
|
|
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) |
|
|
|
|
|
|
10.21 |
|
|
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) |
|
|
|
|
|
|
10.22 |
|
|
1997 Stock Option Plan.(c)(d) |
|
|
|
|
|
|
10.23 |
|
|
2000 Stock Option Plan.(c)(d) |
|
|
|
|
|
|
10.24 |
|
|
Amendment No. 2 to the Credit Agreement, dated as of November 12, 2010, 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.(e) |
|
|
|
|
|
|
10.25 |
|
|
Form
of Indemnification Agreement.* |
|
|
|
|
|
|
12.1 |
|
|
Ratio of Earnings to Fixed Charges.* |
|
|
|
|
|
|
21.1 |
|
|
Subsidiaries of Broadview Networks Holdings, Inc.* |
|
|
|
|
|
|
31.1 |
|
|
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.* |
|
|
|
|
|
|
31.2 |
|
|
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.* |
|
|
|
|
|
|
32.1 |
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.* |
|
|
|
|
|
|
32.2 |
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.* |
|
|
|
* |
|
Filed herewith. |
|
(a) |
|
Incorporated by reference to Broadview Networks Holdings, Inc.s Form
S-4/A filed on October 16, 2007 (File No. 333-142946). |
|
(b) |
|
Incorporated by reference to Broadview Networks Holdings, Inc.s Form
8-K filed on November 19, 2007 (File No. 333-142946). |
|
(c) |
|
Management contract or compensatory plan or arrangement. |
|
(d) |
|
Incorporated by reference to Broadview Networks Holdings, Inc.s Form
10-K filed on March 25, 2009 (File No. 333-147720). |
|
(e) |
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Incorporated by reference to Broadview Networks Holdings, Inc.s Form
10-Q filed on November 15, 2010 (File No. 333-142946). |
115
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 18th day of March, 2011.
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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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Chief Executive Officer, President, and Director
(Principal
Executive Officer)
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March 18, 2011 |
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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 18, 2011 |
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/s/ Steven F. Tunney
Steven F. Tunney
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Director
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March 18, 2011 |
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/s/ Richard W. Roedel
Richard W. Roedel
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Director
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March 18, 2011 |
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/s/ Samuel G. Rubenstein
Samuel G. Rubenstein
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Director
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March 18, 2011 |
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/s/ John S. Patton, Jr.
John S. Patton, Jr.
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Director
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March 18, 2011 |
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/s/ B. Hagen Saville
B. Hagen Saville
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Director
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March 18, 2011 |
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/s/ Kerri Ford
Kerri Ford
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Director
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March 18, 2011 |
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/s/ Robert Manning
Robert Manning
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Director
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March 18, 2011 |
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/s/ Peter J. Barris
Peter J. Barris
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Director
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March 18, 2011 |
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/s/ Raul K. Martynek
Raul Martynek
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Director
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March 18, 2011 |
116
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.
117