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EX-32.1 - EXHIBIT 32.1 - BROADVIEW NETWORKS HOLDINGS INCc00545exv32w1.htm
EX-31.2 - EXHIBIT 31.2 - BROADVIEW NETWORKS HOLDINGS INCc00545exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - BROADVIEW NETWORKS HOLDINGS INCc00545exv31w1.htm
EX-32.2 - EXHIBIT 32.2 - BROADVIEW NETWORKS HOLDINGS INCc00545exv32w2.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
Mark One
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2010
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     
Commission File Number 333-142946
Broadview Networks Holdings, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware   11-3310798
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification Number)
     
800 Westchester Avenue,    
Suite N501 Rye Brook, NY 10573   10573
(Address of principal executive offices)   (Zip code)
(914) 922-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 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.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
    (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
         
Class   Outstanding at May 10, 2010  
Class A Common Stock, $.01 par value per share
    9,333,680  
Class B Common Stock, $.01 par value per share
    360,050  
 
 

 

 


 

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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains both historical and “forward-looking statements.” All statements other than statements of historical fact included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements with words like “believe,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate” or “continue” and other words and terms of similar meaning. These forward-looking statements may be contained throughout this report, including but not limited to statements under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control and could cause our actual results to differ materially from those matters expressed or implied by forward-looking statements. Many factors mentioned in our discussion in this report will be important in determining future results. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements (including oral representations) are only predications or statements of current plans, which we review continuously. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including, among other things, risks associated with:
   
servicing our substantial indebtedness;
 
   
our history of net losses;
 
   
the elimination or relaxation of certain regulatory rights and protections;
 
   
billing and other disputes with vendors;
 
   
failure to maintain interconnection and service agreements with incumbent local exchange and other carriers;
 
   
the loss of customers in an adverse economic environment;
 
   
regulatory uncertainties in the communications industry;
 
   
system disruptions or the failure of our information systems to perform as expected;
 
   
the failure to anticipate and keep up with technological changes;
 
   
inability to provide services and systems at competitive prices;
 
   
difficulties associated with collecting payment from incumbent local exchange carriers, interexchange carriers and wholesale customers;
 
   
the highly competitive nature of the communications market in which we operate including competition from incumbents, cable operators and other new market entrants, and declining prices for communications services;
 
   
continued industry consolidation;
 
   
restrictions in connection with our indenture governing the notes and credit agreement governing the credit facility;
 
   
government regulation;
 
   
increased regulation of Internet-protocol-based service providers;
 
   
vendor bills related to past periods;
 
   
the ability to maintain certain real estate leases and agreements;

 

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interruptions in the business operations of third party service providers;
 
   
limits on our ability to seek indemnification for losses from individuals and entities from whom we have acquired assets and operations;
 
   
disruption and instability in the financial markets;
 
   
the financial difficulties by others in our industry;
 
   
the solvency and liquidity of the administrative agent and primary creditor under our revolving credit facility;
 
   
the failure to retain and attract management and key personnel;
 
   
the failure to manage and expand operations effectively;
 
   
the failure to successfully engage in future acquisitions, if any;
 
   
misappropriation of our intellectual property and proprietary rights;
 
   
the possibility of incurring liability for information disseminated through our network;
 
   
service network disruptions due to software or hardware bugs of the network equipment; and
 
   
fraudulent usage of our network and services.
Because our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, we cannot give any assurance that any of the events anticipated by these forward-looking statements will occur or, if any of them do, what impact they will have on our business, results of operations and financial condition. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to update these forward-looking statements to reflect new information, future events or otherwise, except as may be required under federal securities laws.

 

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Broadview Networks Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
                 
    December 31,     March 31,  
    2009     2010  
            (Unaudited)  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 21,975     $ 9,856  
Certificates of deposit
    1,878       1,881  
Investment securities
    23,549       23,548  
Accounts receivable, less allowance for doubtful accounts of $7,942 and $9,963
    41,388       38,684  
Other current assets
    10,976       9,997  
 
           
Total current assets
    99,766       83,966  
 
     
Property and equipment, net
    86,875       86,696  
Goodwill
    98,238       98,238  
Intangible assets, net of accumulated amortization of $51,728 and $55,233
    27,484       23,979  
Other assets
    14,965       14,245  
 
           
Total assets
  $ 327,328     $ 307,124  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
               
Current liabilities:
               
Accounts payable
  $ 9,196     $ 8,703  
Accrued expenses and other current liabilities
    35,630       22,201  
Taxes payable
    12,768       11,223  
Deferred revenues
    8,965       8,814  
Current portion of capital lease obligations and equipment notes
    3,080       2,645  
 
           
Total current liabilities
    69,639       53,586  
 
           
 
               
Long-term debt
    326,510       326,165  
Deferred rent payable
    3,343       3,438  
Deferred revenues
    1,445       1,440  
Capital lease obligations and equipment notes, net of current portion
    1,776       1,301  
Deferred income taxes payable
    3,040       3,282  
Other
    721       736  
 
           
Total liabilities
    406,474       389,948  
 
           
 
               
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 $161,635
    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 $186,547
    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 $168,921
    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 $119,731
    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 $19,243
           
Additional paid-in capital
    140,752       140,811  
Accumulated deficit
    (219,836 )     (223,573 )
Treasury stock, at cost
    (177 )     (177 )
 
           
Total stockholders’ deficiency
    (79,146 )     (82,824 )
 
           
Total liabilities and stockholders’ deficiency
  $ 327,328     $ 307,124  
 
           
See notes to unaudited condensed consolidated financial statements.

 

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Broadview Networks Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share amounts)
                         
    Three Months Ended March 31,  
    2009             2010  
 
                       
Revenues
  $ 121,971             $ 105,706  
Operating expenses:
                       
Cost of revenues (exclusive of depreciation and amortization)
    61,651               50,060  
Selling, general and administrative (includes share-based compensation of $57 and $59)
    41,631               37,769  
Depreciation and amortization
    13,558               11,408  
 
                   
Total operating expenses
    116,840               99,237  
 
                   
 
                       
Income from operations
    5,131               6,469  
Interest expense
    (9,977 )             (9,922 )
Interest income
    82               4  
 
                   
 
                       
Loss before provision for income taxes
    (4,764 )             (3,449 )
Provision for income taxes
    (341 )             (288 )
 
                   
 
                       
Net loss
    (5,105 )             (3,737 )
Dividends on preferred stock
    (17,188 )             (18,719 )
 
                   
 
                       
Loss available to common shareholders
  $ (22,293 )           $ (22,456 )
 
                   
 
                       
Loss available per common share — basic and diluted
  $ (2.30 )           $ (2.32 )
 
                   
 
                       
Weighted average common shares outstanding — basic and diluted
    9,679,455               9,682,030  
 
                   
See notes to unaudited condensed consolidated financial statements.

 

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Broadview Networks Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
                 
    Three Months Ended March 31,  
    2009     2010  
 
Cash flows from operating activities
  $ (5,105 )   $ (3,737 )
Net loss
               
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
    8,361       7,888  
Amortization of deferred financing costs
    656       656  
Amortization of intangible assets
    5,180       3,505  
Amortization of bond premium
    (219 )     (245 )
Provision for doubtful accounts
    2,399       1,411  
Share-based compensation
    57       59  
Deferred income taxes
    242       242  
Other
    29       14  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,664 )     1,293  
Other current assets
    454       979  
Other assets
    (37 )     (53 )
Accounts payable
    7,722       (493 )
Accrued and other current liabilities
    (22,351 )     (13,312 )
Taxes payable
    1,060       (1,545 )
Deferred revenues
    (773 )     (156 )
Deferred rent payable
    (34 )     95  
 
           
Net cash used in operating activities
    (4,023 )     (3,399 )
 
               
Cash flows from investing activities
               
Purchases of property and equipment
    (5,932 )     (7,709 )
Purchases of investment securities
    (24,497 )     (38,554 )
Sales of investment securities
    33,000       38,556  
Other
    (9 )     (3 )
 
           
Net cash provided by (used in) investing activities
    2,562       (7,710 )
 
               
Cash flows from financing activities
               
Drawdowns on revolving credit facility
    305       306  
Repayments of revolving credit facility
    (305 )     (406 )
Proceeds from capital lease financing
    215       22  
Payments on capital lease obligations
    (1,027 )     (932 )
 
           
Net cash used in financing activities
    (812 )     (1,010 )
 
           
 
               
Net decrease in cash and cash equivalents
    (2,273 )     (12,119 )
Cash and cash equivalents at beginning of period
    22,177       21,975  
 
           
Cash and cash equivalents at end of period
  $ 19,904     $ 9,856  
 
           
See notes to unaudited condensed consolidated financial statements.

 

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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share information)
1. Organization and Description of Business
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. These financial statements reflect all adjustments necessary for a fair presentation of the results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited financial statements should be read in conjunction with its audited financial statements as of and for the year ended December 31, 2009 included in the Company’s Form 10-K. The condensed consolidated interim financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The Company has evaluated the impact of subsequent events through the date the condensed consolidated financial statements were filed with the SEC.
The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically reviews such estimates and assumptions as circumstances dictate. Actual results could differ from those estimates.
The Company has reclassified prior year amounts to conform to the current year presentation, the most significant of which pertain to the issuance of credits to customers. The Company issues credits in an effort to acquire, retain and incentivize its customers. The Company has historically classified these credits in its selling, general and administrative expenses. The Company has reclassified these credits from selling, general and administrative expenses and is now reflecting them as a reduction in revenue. As a result, revenues and selling, general and administrative expenses have been reduced by $736 for the three months ended March 31, 2009.
The Company is an integrated communications company whose primary interests consist of wholly-owned subsidiaries Broadview Networks, Inc. (“BNI”), Bridgecom Holdings, Inc. (“BH”), Corecomm-ATX, Inc. (“ATX”) and Eureka Broadband Corporation (“Eureka”, “InfoHighway” or “IH”). The Company also provides phone systems and other customer service offerings through its subsidiary, Bridgecom Solutions Group, Inc. (“BSG”). The Company was founded in 1996 to take advantage of the deregulation of the U.S. telecommunications market following the Telecommunications Act of 1996. The Company has one reportable segment providing domestic wireline telecommunications services consisting of local and long distance voice services, Internet, and data services to commercial and residential customers in the northeast United States.
2. Investment Securities
Investment securities represent the Company’s investment in short-term U.S. Treasury notes. The Company’s 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 $23,548 as of December 31, 2009 and March 31, 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 Company’s investment securities mature in less than one year. The cost and fair value of these investment securities were not materially different as of December 31, 2009 and March 31, 2010. During the three months ended March 31, 2009 and 2010, the Company purchased $24,497 and $38,554 and sold $33,000 and $38,556 respectively, of U.S. Treasury notes. All unrealized and realized gains are determined by specific identification.

 

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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
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.
On June 15, 2009, the Company prospectively adopted the accounting standard regarding the accounting for, and disclosure of, events that occur after the balance sheet date but before the financial statements are issued. The adoption of this standard has not had a significant impact on its financial position or results of operations. The Company included additional disclosures in Note 1 to its condensed consolidated financial statements as a result of adopting this standard.
4. InfoHighway Acquisition
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 of the legacy InfoHighway entity during the two year period following closing of the acquisition. As certain cash flow parameters are met as calculated and agreed upon for the twelve months ended May 31, 2008 and the twelve months ended May 31, 2009, the exercise price on the warrants may decrease from $883.58 per unit to an exercise price of $0.01 per unit.
As of May 10, 2010, 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 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.
5. Fair Values of Financial Instruments
The Company’s 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 Company’s 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 Company’s 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 Company’s 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 March 31, 2010 are deemed to approximate fair value because of their liquidity and short-term nature. The carrying amounts of the Company’s investments in U.S. Treasury notes are recorded at their fair value of $23,549 and $23,548, which are based on the publicly quoted market price as of December 31, 2009 and March 31, 2010, respectively.
The fair value of the long-term debt outstanding under the Company’s revolving credit facility approximates its carrying value of $23,400 due to its variable market-based interest rate. The fair value of the Company’s senior secured notes at December 31, 2009 and March 31, 2010 was $287,250 and $291,750, 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 Company’s senior secured notes is considered to be a Level 1 input in the fair value hierarchy. The carrying value of the Company’s senior secured notes due 2012 at December 31, 2009 and March 31, 2010 was $303,010 and $302,765, respectively.

 

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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
6. Commitments and Contingencies
The Company has, in the ordinary course of its business, disputed certain billings from carriers and has recorded the estimated settlement amount of the disputed balances. The settlement estimate is based on various factors, including historical results of prior dispute settlements. The amount of such charges in dispute at March 31, 2010 was approximately $23,519. 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 March 31, 2010. It is possible that the actual settlement of such disputes may differ from these estimates and the Company may settle at amounts greater than the estimates.
The Company has entered into commercial agreements with vendors under which it purchases certain services that it had previously leased under the unbundled network platform provisions of the Telecommunications Act of 1996 as well as special access services. For the three months ended March 31, 2010, the Company met the minimum purchase obligations. The agreements, which expire in 2013, require certain minimum purchase obligations and contain fixed but escalating pricing over their term.
The Company is involved in claims and legal actions arising in the ordinary course of business. Management is of the opinion that the ultimate outcome of these matters will not have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows. For more information, see our Form 10-K for the year ended December 31, 2009.
7. Long-term Debt Guarantees
The Company’s senior secured notes are fully, unconditionally and irrevocably guaranteed on a senior secured basis, jointly and severally, by each of the Company’s 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 Company’s 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 Company’s revolving credit facility with an aggregate principal amount of $25,000 and certain other permitted indebtedness.
8. Income Taxes
The Company completed a study of its available net operating loss carryforwards (“NOLs”) resulting from previous mergers. The utilization of these NOLs are subject to restrictions pursuant to Section 382 of the Internal Revenue Code. As such, it was determined that certain NOLs recorded by the Company as deferred tax assets were limited. At December 31, 2009, the Company had NOLs available totaling $134,976, which begin to expire in 2012. The Company has provided a full valuation allowance against the net deferred tax asset because management does not believe it is more likely than not that this asset will be realized. If the Company achieves profitability, the net deferred tax assets may be available to offset future income tax liabilities.

 

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Broadview Networks Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share information)
9. Loss per share
The following is a reconciliation of the numerators and denominators of the basic and diluted net loss per share computations for the three months ended March 31, 2009 and 2010:
                 
    Three Months Ended March 31,  
    2009     2010  
 
               
Loss available to common shareholders (Numerator):
               
Net loss
  $ (5,105 )   $ (3,737 )
Dividends on preferred stock
    (17,188 )     (18,719 )
 
           
 
               
Loss available to common shareholders
  $ (22,293 )   $ (22,456 )
 
           
 
               
Shares (Denominator):
               
Weighted average common shares outstanding:
               
Class A common stock
    9,342,880       9,333,680  
Class B common stock
    336,575       348,350  
 
           
 
               
Total weighted average common shares outstanding — basic and diluted
    9,679,455       9,682,030  
 
           
 
               
Loss available per common share — basic and diluted
  $ (2.30 )   $ (2.32 )
 
           
For the three months ended March 31, 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 13,136,363 and 13,881,768, respectively, that were not included in the calculation of diluted loss per common share because the effect would have been anti-dilutive.
Dividends accumulate on the Company’s Preferred Stock. The loss available to common shareholders must be computed by adding any dividends accumulated for the period to net losses. The aggregate accumulated dividends on the Company’s Preferred Stock was $245,829 and $264,548, respectively, as of December 31, 2009 and March 31, 2010. The per share amounts of accumulated dividends on the Company’s Preferred Stock was $25.37 and $27.32, respectively, as of December 31, 2009 and March 31, 2010. The Company has not declared any dividends.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere in this quarterly report and our Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (the “SEC”). Certain information contained in the discussion and analysis set forth below and elsewhere in this quarterly report, including information with respect to our plans and strategies for our business and related financing, includes forward-looking statements that involve risk and uncertainties. In evaluating such statements, prospective investors should specifically consider the various factors identified in this quarterly report that could cause results to differ materially from those expressed in such forward-looking statements, including matters set forth in our Form 10-K for the year ended December 31, 2009 filed with the SEC.
Overview
We are a leading competitive communications provider, in terms of revenue, offering voice and data communications and managed network solutions to small and medium sized business customers in 20 markets across 10 states throughout the Northeast and Mid-Atlantic United States, including major metropolitan markets such as New York, Philadelphia, Baltimore, Washington, D.C. and Boston. To meet the demands of communications-intensive business customers, we offer dedicated local and long distance voice, high-speed data and integrated services, as well as value-added products and services such as managed services. Our network architecture pairs the strength of a traditional infrastructure with an IP platform, built into our core and extending to the edge, to support dynamic growth of Voice Over Internet Protocol (“VoIP”), Multiprotocol Label Switching (“MPLS”) and other next generation technologies. In addition, our network topology incorporates metro Ethernet access in key markets, enabling us to provide T-1 equivalent and high-speed Ethernet access services via unbundled network element loops to customers served from selected major metropolitan collocations, significantly increasing our margins while also enhancing capacity and speed of certain service offerings.
We recorded operating losses of $32.1 million and $3.0 million for the years ended December 31, 2007 and 2008, respectively. For the year ended December 31, 2009 and for the three months ended March 31 2010, we recorded operating income of $26.4 million and $6.5 million, respectively. For the years ended December 31, 2007, 2008 and 2009 and for the three months ended March 31, 2010, we recorded net losses of $65.5 million, $42.9 million, $13.9 million and $3.7 million, respectively. Although we expect to continue to have net losses for the foreseeable future, we continue to search for ways of increasing operating efficiencies that could lead to potentially more profitable net results.
Our business is subject to several macro trends, some of which negatively affect our operating performance. Among these negative trends are lower usage per customer, which translates into less usage based revenue and lower unit pricing for certain services. In addition, we continue to face other industry wide trends including rapid technology changes and overall increases in competition from existing large competitors such as Verizon and established cable operators, other competitive local exchange carriers and new entrants such as VoIP, wireless and other service providers. These factors are partially mitigated by several positive trends. These include a more stable customer base, increasing revenue per customer due to the trend of customers to buy more products from us as we deploy new technology and expand our offerings, a focus on larger customers and an overall increase in demand for data, managed and enhanced services.
As of March 31, 2010, we have approximately 260 sales, sales management and sales support employees, including approximately 190 quota-bearing sales representatives, who target small and medium sized business or enterprise customers located within the footprint of our switching centers and approximately 260 collocations. We focus our sales efforts on communications intensive business customers who purchase multiple products that can be cost-effectively delivered on our network. These customers generally purchase high margin services in multi-year contracts and result in high retention rates. We believe that a lack of focus on the small and medium sized business segment from the Regional Bell Operating Companies has created an increased demand for alternatives in the small and medium sized business communications market. Consequently, we view this market as a sustainable growth opportunity and have focused our strategies on providing small and medium sized businesses with a competitive communications solution.
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 Company’s 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 47% of our total revenue and approximately 54% of our retail revenue stream, with typical incremental gross profit margins in excess of 60%.

 

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Our facilities-based network encompasses approximately 3,000 route miles of metro and long-haul fiber, approximately 260 collocations and approximately 500 lit buildings. Our network has the ability to deliver traditional services, such as Plain Old Telephone Service (“POTS”) and T-1 lines, as well as Digital Subscriber Line, and next generation services, such as dynamic VoIP integrated T-1s, Ethernet in the first mile, hosted VoIP solutions, and MPLS Virtual Private Networks. We provide services to our customers primarily through our network of owned telecommunications switches, data routers and related equipment and owned and leased communications lines and transport facilities using a variety of access methods, including unbundled network element loops, special access circuits and digital T-1 transmission lines for our on-net customers. We have deployed an IP-based platform that facilitates the development of next generation services and the migration of our traffic and customer base to a more cost-effective and efficient IP-based infrastructure, which enhances the performance of our network. As of March 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.
                 
    Three Months Ended March 31,  
    2009     2010  
 
               
Revenues:
               
Voice and data services
    86.5 %     87.6 %
Wholesale
    4.1 %     5.0 %
Access
    5.4 %     5.2 %
 
           
Total network services
    96.0 %     97.8 %
Other
    4.0 %     2.2 %
 
           
Total revenues
    100.0 %     100.0 %
 
           
Operating expenses:
               
Network services
    48.7 %     46.6 %
Other cost of revenues
    1.9 %     0.8 %
Selling, general and administrative
    34.1 %     35.7 %
Depreciation and amortization
    11.1 %     10.8 %
 
           
Total operating expenses
    95.8 %     93.9 %
 
           
 
               
Income from operations
    4.2 %     6.1 %
Interest expense
    (8.2 %)     (9.4 %)
Interest income
    0.1 %     0.0 %
 
           
 
               
Loss before provision for income taxes
    (3.9 %)     (3.3 %)
Provision for income taxes
    (0.3 %)     (0.3 %)
 
           
 
               
Net loss
    (4.2 %)     (3.6 %)
 
           
Key Components of Results of Operations
Revenues
Our revenues, as detailed in the table above, consist 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.

 

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We generate approximately 88% of our revenues from retail end customer voice and data products and services. Revenue from end customer data includes T-1/T-3, integrated T-1 data and other managed services trending to an increasing percentage of our overall revenue even as voice revenues, predominately POTS and long distance services, remain the core of our revenue base. Data cabling, service installation and wiring and phone systems sales and installation also form a small but growing portion of our overall business. We continue to focus on data, managed and hosted services as growth opportunities as we expect the industry to trend toward lower usage components of legacy products such as long distance and local usage. This lower usage is primarily driven by trends toward customers using more online and wireless communications.
Cost of Revenues (exclusive of depreciation and amortization)
Our network services cost of revenues consist primarily of the cost of operating our network facilities. Determining our cost of revenues requires significant estimates. The network components for our facilities-based business include the cost of:
   
leasing local loops and digital T-1 lines which connect our customers to our network;
 
   
leasing high capacity digital lines that connect our switching equipment to our collocations;
 
   
leasing high capacity digital lines that interconnect our network with the incumbent local exchange carriers;
 
   
leasing space, power and terminal connections in the incumbent local exchange carrier central offices for collocating our equipment;
 
   
signaling system network connectivity; and
 
   
Internet transit and peering, which is the cost of delivering Internet traffic from our customers to the public Internet.
The costs to obtain local loops, digital T-1 lines and high capacity digital interoffice transport facilities from the incumbent local exchange carriers vary by carrier and by state and are regulated under federal and state laws. We do not anticipate any significant changes in Verizon local loop, digital T-1 line or high capacity digital interoffice transport facility rates in the near future. Except for our lit buildings, in virtually all areas, we obtain local loops, T-1 lines and interoffice transport capacity from the incumbent local exchange carriers. We obtain interoffice facilities from carriers other than the incumbent local exchange carriers, where possible, in order to lower costs and improve network redundancy; however, in most cases, the incumbent local exchange carriers are our only source for local loops and T-1 lines.
Our off-net network services cost of revenues consists of amounts we pay to Verizon and AT&T pursuant to our commercial agreements with them. Rates for such services are prescribed in the commercial agreements and available for the term of the agreements. The commercial agreements, which expire between 2010 and 2013, require certain minimum purchase obligations, which we have met in all of the years we were under the commercial agreements.
Our network services cost of revenues also includes the fees we pay for long distance, data and other services. We have entered into long-term wholesale purchasing agreements for these services. Some of the agreements contain significant termination penalties and/or minimum usage volume commitments. In the event we fail to meet minimum volume commitments, we may be obligated to pay underutilization charges. We do not anticipate having to pay any underutilization charges in the foreseeable future.
Gross Profit (exclusive of depreciation and amortization)
Gross profit (exclusive of depreciation and amortization), referred to herein as “gross profit”, as presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, represents income from operations, before depreciation and amortization, and selling, general and administrative expenses (“SG&A”). Gross profit is a non-GAAP financial measure used by our management, together with financial measures prepared in accordance with GAAP such as revenue and cost of revenue, to assess our historical and prospective operating performance.

 

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The following table sets forth, for the periods indicated, a reconciliation of gross profit to income from operations as income from operations is calculated in accordance with GAAP:
                 
    Three Months Ended March 31,  
    2009     2010  
 
               
Income from operations
  $ 5,131     $ 6,469  
Depreciation and amortization
    13,558       11,408  
Selling, general and administrative
    41,631       37,769  
 
           
Gross profit
  $ 60,320     $ 55,646  
 
           
Gross profit is a measure of the general efficiency of our network costs in comparison to our revenue. As we expense the current cost of our network against current period revenue, we use this measure as a tool to monitor our progress with regards to network optimization and other operating metrics.
Our management also uses gross profit to evaluate performance relative to that of our competitors. This financial measure permits a comparative assessment of operating performance, relative to our performance based on our GAAP results, while isolating the effects of certain items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. Our management believes that gross profit is a particularly useful comparative measure within our industry.
We provide information relating to our gross profit so that analysts, investors and other interested persons have the same data that management uses to assess our operating performance, which permits them to obtain a better understanding of our operating performance and to evaluate the efficacy of the methodology and information used by our management to evaluate and measure such performance on a standalone and a comparative basis.
Our gross profit may not be directly comparable to similarly titled measures reported by other companies due to differences in accounting policies and items excluded or included in the adjustments, which limits its usefulness as a comparative measure. In addition, gross profit has other limitations as an analytical financial measure. These limitations include the following:
   
gross profit does not reflect our capital expenditures, future requirements for capital expenditures or contractual commitments to purchase capital equipment;
 
   
gross profit does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, associated with our indebtedness;
 
   
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will likely have to be replaced in the future, and gross profit does not reflect any cash requirements for such replacements; and
 
   
gross profit does not reflect the SG&A expenses necessary to run our ongoing operations.
Our management compensates for these limitations by relying primarily on our GAAP results to evaluate its operating performance and by considering independently the economic effects of the foregoing items that are or are not reflected in gross profit. As a result of these limitations, gross profit should not be considered as an alternative to income (loss) from operations, as calculated in accordance with GAAP, as a measure of operating performance.
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 expenses and insurance expenses.
Determining our allowance for doubtful accounts receivable requires significant estimates. In determining the proper level for the allowance we consider factors such as historical collections experience, the aging of the accounts receivable portfolio and economic conditions. We perform a credit review process on each new customer that involves reviewing the customer’s 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.

 

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Depreciation and Amortization
Our depreciation and amortization expense currently includes depreciation for network related voice and data equipment, fiber, back-office systems, third party conversion costs, furniture, fixtures, leasehold improvements, office equipment and computers and amortization of intangibles associated with mergers, acquisitions and software development costs.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2010
Set forth below is a discussion and analysis of our results of operations for the three months ended March 31, 2009 and 2010.
The following table provides a breakdown of components of our statements of operations for the three months ended March 31, 2009 and 2010:
                                         
    Three Months Ended March 31,  
    2009     2010        
            % of             % of        
            Total             Total        
    Amount     Revenues     Amount     Revenues     % Change  
 
                                       
Revenues:
                                       
Network services
  $ 117,084       96.0 %   $ 103,389       97.8 %     (11.7 %)
Other
    4,887       4.0 %     2,317       2.2 %     (52.6 %)
 
                             
Total revenues
    121,971       100.0 %     105,706       100.0 %     (13.3 %)
 
                             
 
                                       
Cost of revenues:
                                       
Network services
    59,368       48.7 %     49,255       46.6 %     (17.0 %)
Other
    2,283       1.9 %     805       0.8 %     (64.7 %)
 
                             
Total cost of revenues
    61,651       50.6 %     50,060       47.4 %     (18.8 %)
 
                             
 
                                       
Gross profit:
                                       
Network services
    57,716       47.3 %     54,134       51.2 %     (6.2 %)
Other
    2,604       2.1 %     1,512       1.4 %     (41.9 %)
 
                             
Total gross profit
  $ 60,320       49.4 %   $ 55,646       52.6 %     (7.7 %)
 
                             
Revenues
Revenues for the three months ended March 31, 2009 and 2010 were as follows:
                                         
    Three Months Ended March 31,        
    2009     2010        
            % of             % of        
            Total             Total        
    Amount     Revenues     Amount     Revenues     % Change  
 
                                       
Revenues:
                                       
Voice and data services
  $ 105,444       86.5 %   $ 92,625       87.6 %     (12.2 %)
Wholesale
    4,999       4.1 %     5,236       5.0 %     4.7 %
Access
    6,641       5.4 %     5,528       5.2 %     (16.8 %)
 
                             
Total network services
    117,084       96.0 %     103,389       97.8 %     (11.7 %)
Other
    4,887       4.0 %     2,317       2.2 %     (52.6 %)
 
                             
Total revenues
  $ 121,971       100.0 %   $ 105,706       100.0 %     (13.3 %)
 
                             

 

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Revenues from voice services have decreased $13.7 million or 17.4% 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 $0.7 million or 2.4% 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. 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 $50.1 million for the three months ended March 31, 2010, a decrease of 18.8% from $61.7 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 $48.7 million, or 79.0% of our total cost of revenues for the three months ended March 31, 2009 and $38.7 million, or 77.3% in the three months ended March 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 $12.5 million, $6.6 million and $13.6 million, respectively, for the three months ended March 31, 2009. Combined these costs decreased by 16.2% between 2009 and 2010. These costs totaled $9.6 million, $5.8 million and $12.0 million, respectively, for the three months ended March 31, 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 $55.6 million for the three months ended March 31, 2010, a decrease of 7.7% from $60.3 million for the same period in 2009. As a percentage of revenues gross profit increased to 52.6% in 2010 from 49.4% in 2009. The increase in gross profit is primarily due lower costs resulting from provisioning more lines from resale and unbundled network platform to on-net. We are focusing sales initiatives towards increasing the amount of data and integrated T-1 lines sold, as we believe that these initiatives will produce incrementally higher margins than those currently reported from POTS services. In addition, as we continue to drive additional cost saving initiatives, including provisioning customers to our on-net facilities, identifying additional inaccuracies in billing from existing carriers, renegotiating existing agreements and executing new agreements with additional interexchange carriers, we believe that our gross profit will continue to improve.
Selling, General and Administrative
SG&A expenses were $37.8 million, 35.7% of revenues, for the three months ended March 31, 2010, a decrease of 9.1% from $41.6 million, 34.1% of revenues, for the same period in 2009. This decrease is primarily due to decreased bad debt expenses of $1.0 million from decreased accounts receivable write-offs during the three months ended March 31, 2010, and decreased commission expenses of $1.0 million between 2009 and 2010 as a result of declining revenue. As a percentage of revenue our SG&A expenses have increased due to our overall revenue decline. We continue look for additional cost savings in various categories including headcount and professional services.
Depreciation and Amortization
Depreciation and amortization costs were $11.4 million for the three months ended March 31, 2010, a decrease of 16.2% from $13.6 million for the same period in 2009. This decrease in depreciation and amortization expense was due to fully amortizing one of our acquired customer base intangible assets during 2009. Amortization expense included in our results of operations for customer base intangible assets for the three months ended March 31, 2010 was $3.1 million, a decrease of $1.6 million from $4.7 million included in our results of operations during the same period in 2009.

 

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Interest
Interest expense was $9.9 million for the three months ended March 31, 2010, a decrease of 1.0% from $10 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 three months ended March 31, 2010 compared to the same period in 2009. The lower average debt balance is due to reduced borrowings under capital leases. The decrease was offset by interest accrued in connection with a state gross receipts tax matter. Our effective annual interest rates for the three months ended March 31, 2009 and 2010 are as follows:
                 
    Three Months Ended March 31,  
    2009     2010  
 
               
Interest expense
  $ 9,977     $ 9,922  
Weighted average debt outstanding
  $ 332,448     $ 327,852  
Effective interest rate
    12.00 %     12.11 %
Off-Balance Sheet Arrangements
We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support, and we do not currently engage in hedging, research and development services, or other relationships that expose us to any liabilities that are not reflected on the face of our financial statements.
We do maintain standby letters of credit outstanding of $3.0 million, of which $1.3 million are fully collateralized by the letter of credit subfacility under the our revolving credit facility. We posted cash collateral of $1.7 million for the remaining letters of credit. These standby letters of credit were issued as collateral in connection with some of our leased facilities and pursuant to state regulatory requirements.
Liquidity and Capital Resources
Our principal sources of liquidity are cash from operations, our cash, cash equivalents and investments and our capital lease line. Our short-term liquidity requirements consist of interest on our notes, capital expenditures and working capital. Our long-term liquidity requirements consist of the principal amount of our notes and our outstanding borrowings under our revolving credit facility. Based on our current level of operations and anticipated growth, we believe that our existing cash, cash equivalents and available borrowings under our credit facility will be sufficient to fund our operations and to service our notes for at least the next 12 months. Further, a significant majority of our planned capital expenditures are “success-based” expenditures, meaning that it is directly linked to new revenue, and if they are made, they will be made only when it is determined that they will directly lead to more profitable revenue. Our existing capital lease provider was recently acquired; we will monitor the impact, if any, of this acquisition on our ability to borrow under the lease line. As of March 31, 2010, we had $3.4 million of capital lease obligations outstanding under our existing capital lease line. As of March 31, 2010, we had $23.4 million of outstanding borrowings under our revolving credit facility, all of which we have invested in U.S. Treasury notes. Additionally, we have used our credit facility to collateralize $1.3 million of outstanding letters of credit as of March 31, 2010. Our cash and cash equivalents are being held in several large financial institutions, although most of our balances exceed the Federal Deposit Insurance Corporation insurance limits.
As of March 31, 2010, we required approximately $85.3 million in cash to service the interest due on our notes throughout the remaining life of the notes. We may need to refinance all or a portion of our indebtedness, including the notes, at or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the notes and our credit facility, on commercially reasonable terms or at all. However, we continuously evaluate and consider all financing opportunities. Any future acquisitions or other significant unplanned costs or cash requirements may also require that we raise additional funds through the issuance of debt or equity.

 

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Disputes
We are involved in a variety of disputes with multiple carrier vendors relating to billings of approximately $23.5 million as of March 31, 2010. While we hope to resolve these disputes through negotiation, we may be compelled to arbitrate these matters. The resolution of these disputes may require us to pay the vendor an amount that is greater than the amount for which we have planned or even the amount the vendor claims is owed if late payment charges are assessed, which could materially adversely affect our business, financial condition, results of operations and cash flows and which may cause us to be unable to meet certain covenants related to our senior indebtedness, which would result in a default under such indebtedness. In the event that disputes are not resolved in our favor and we are unable to pay the vendor charges in a timely manner, the vendor may deny us access to the network facilities that we require to serve our customers. If the vendor notifies us of an impending “embargo” of this nature, we may be required to notify our customers of a potential loss of service, which may cause a substantial loss of customers. It is not possible at this time to predict the outcome of these disputes.
We believe we have accrued an amount appropriate to settle all remaining disputed charges. However, it is possible that the actual settlement of any remaining disputes may differ from our reserves and that we may settle at amounts greater than the estimates. We believe we have sufficient cash on hand to fund any differences between our expected and actual settlement amounts.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2010
Cash Flows from Operating Activities
Cash used in operating activities was $4.0 million for the three months ended March 31, 2009, compared to $3.4 million for the same period in 2010. During each of the three months ended March 31, 2010 and 2009, we paid $17.1 million in interest expense on our notes. The reduction in cash used in operations was due to the improvement in our income from operations.
Cash Flows from Investing Activities
Cash provided by investing activities was $2.6 million for the three months ended March 31, 2009, compared to cash used in investing activities of $7.7 million for the same period in 2010. The change in cash flow from investing activities was due to increased capital expenditures. Additionally, during 2009, we generated $8.5 million in cash flow from the sales of investment securities in excess of the investment securities we purchased during the same period.
Cash Flows from Financing Activities
Cash flows used in financing activities was $0.8 million for the three months ended March 31, 2009, compared to $1.0 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 $0.1 million during the three months ended March 31, 2010 as compared to the same period in 2009.
New Accounting Standards
The following accounting standard has been issued, which the company 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 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented. We are currently evaluating the impact that this standard update will have on our consolidated financial statements.
In September 2009, the accounting standard regarding arrangements that include software elements was updated to require tangible products that contain software and non-software elements that work together to deliver the products essential functionality to be evaluated under the accounting standard regarding multiple deliverable arrangements. This standard update is effective January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all periods presented. We are currently evaluating the impact that this standard update will have on our consolidated financial statements.

 

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Application of Critical Accounting Policies and Estimates
The preparation of the condensed consolidated financial statements in accordance with GAAP requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. We use historical experience and all available information to make these judgments and estimates and actual results could differ from those estimates and assumptions that are used to prepare our financial statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the accompanying condensed consolidated financial statements and footnotes provide a meaningful and fair perspective of our financial condition and our operating results for the current period. For more information, see our Form 10-K for the year ended December 31, 2009.
Other Matters
At December 31, 2009, we had NOLs available totaling $135.0 million, which begin to expire in 2012. 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. We have provided a full valuation allowance against the net deferred tax assets because we do not believe it is more likely than not that this asset will be realized. If we achieve profitability, the net deferred tax assets may be available to offset future income tax liabilities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our financial position is subject to a variety of risks, such as the collectability of our accounts receivable and the recoverability of the carrying values of our long-term assets. Our long-term obligations consist primarily of long-term debt with fixed interest rates and our revolving credit facility with a variable interest rate. We are not exposed to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold any derivative financial instruments nor do we hold any securities for trading or speculative purposes.
We continually monitor the collectability of our accounts receivable and 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 March 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 11 3/8% senior secured notes due 2012 at March 31, 2010, was approximately $291.8 million. Our senior secured notes, like all fixed rate securities are subject to interest rate risk and will fall in value if market interest rates increase.
The fair value of the long-term debt outstanding under our revolving credit facility approximates its carrying value of $23.4 million due to its variable interest rate. A change in interest rates of 100 basis points would change our interest expense by $234 on an annual basis.

 

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Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2010. For information regarding the Company’s internal control over financial reporting, see our Form 10-K for the year ended December 31, 2009.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We are currently a party to only one material legal action. AT&T Communications of New York, Inc. and Teleport Communications Group, Inc. commenced an action against us in the U.S. District Court for the Southern District of New York in March 2008. Plaintiffs seek monetary relief, including recovery of amounts billed for switched access service. This matter has been referred to the New York Public Service Commission.
We are also a party to certain legal actions and regulatory investigations and enforcement proceedings arising in the ordinary course of business. We are also involved in certain billing and contractual disputes with our vendors. We do not believe that the ultimate outcome of any of the foregoing actions will result in any liability that would have a material adverse effect on our financial condition, results of operations or cash flows.
For more information, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Form 10-K for the year ended December 31, 2009.

 

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Item 1A. Risk Factors
There have been no material changes in our risk factors from those set forth in our Form 10-K for the year ended December 31, 2009, which should be read in conjunction with this report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. (Removed and Reserved)
Item 5. Other Information
None.

 

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Item 6. Exhibits
The following exhibits are filed herewith:
         
Exhibit No.   Description
  31.1    
Certification of the Company’s Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2    
Certification of the Company’s Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  32.1    
Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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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 May 10, 2010.
         
  BROADVIEW NETWORKS HOLDINGS, INC.
 
 
  By:   /s/ Michael K. Robinson    
    Name:   Michael K. Robinson   
    Title:   Chief Executive Officer, President and Assistant Treasurer   
     
  By:   /s/ Corey Rinker    
    Name:   Corey Rinker   
    Title:   Chief Financial Officer, Treasurer and Assistant Secretary   

 

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EXHIBIT INDEX
         
Exhibit    
No.   Description
  31.1    
Certification of the Company’s Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  31.2    
Certification of the Company’s Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
       
 
  32.1    
Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
       
 
  32.2    
Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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